EMAGEON INC.
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C.
20549
Form 10-K
ANNUAL
REPORT PURSUANT TO SECTIONS 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
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(Mark One)
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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, 2007
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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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(205) 980-9222
(Registrants Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the
Act:
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Title of Each Class
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Name of Each Exchange on Which Registered
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Common Stock, $0.001 Par Value Per Share
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NASDAQ Global Market
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Securities registered pursuant to Section 12(g) of the
Act:
None
(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. o Yes þ No
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. o Yes þ No
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. þ Yes o No
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, a non-accelerated
filer, or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act. (Check one):
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Large accelerated
filer o
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Accelerated
filer þ
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Non-accelerated
filer o
(Do not check if a smaller reporting company)
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Smaller reporting
company o
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Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). o Yes þ No
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 29, 2007, the last business day of
the registrants most recently completed second fiscal
quarter, was approximately $189,949,000 based on the closing
sale price of such stock as reported by the NASDAQ Global Market
on June 29, 2007. 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 3, 2008 there were 21,456,008 shares of
Emageon Inc. common stock, $0.001 par value, outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
The information called for by Part III
(Items 10,11,12,13, and 14) is incorporated herein by
reference to the registrants Proxy Statement for its 2008
Annual Meeting of Stockholders to be filed with the Securities
and Exchange Commission pursuant to Regulation 14A.
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.
Overview
We provide enterprise-level information technology solutions for
the clinical analysis and management of digital medical images
within healthcare provider organizations. Our solutions consist
of enterprise visualization and image management software for
multiple medical specialties, comprehensive reporting and
knowledge tools for cardiology, support services and third-party
components. Our web-enabled enterprise 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, individual hospitals,
physician clinics and diagnostic imaging centers. Healthcare
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 that
provide 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 healthcare providers in the United States.
As of December 31, 2007, we had $149.1 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
$158.4 million at December 31, 2006. From our current
contracted backlog, we expect to recognize revenue
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of approximately $57.6 million during fiscal year 2008,
$30.5 million during fiscal year 2009, and substantially
all of the remaining $61.0 million by 2013.
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.
Our
Opportunity
The demand for a unified platform for physicians to visualize
all relevant patient information, including medical imagery, at
the point of care is increasing as digital information becomes
more pervasive across hospitals, physicians offices and other
outpatient settings. An aging U.S. population and increase
in the sophistication of imaging devices, such as computed
tomography, or CT, magnetic resonance imaging, or MRI, positron
emission tomography, or PET, cardiac catheterization and
pathology is compounding the complexity of visualization and
content management. Existing departmental picture archiving and
communications systems, or PACS, are not sufficient to meet this
growing demand. As a result, hospitals are seeking technology
solutions that allow for reliable and cost effective
consolidation of digital information into one platform for
lifecycle management. In addition, we believe the rapid
expansion in the number and complexity of medical images and the
need to automate complex, manual workflow processes are driving
healthcare providers to invest in systems that maximize their
return on capital investments in expensive imaging devices and
clinical information technology.
We believe we are well positioned to address the technological
challenges associated with the complexity of managing and
transporting large clinical image data sets and other relevant
clinical imaging information. Our solutions facilitate the
convergence of imaging technology and clinical automation at the
enterprise level by enhancing analysis, integration,
collaboration, and automation of medical imaging workflow.
Effective image management can shorten report turnaround times,
lower the potential for manual error in data entry and filing,
increase staff efficiency, and eliminate costs associated with
traditional radiological workflow.
We believe the following factors will drive the demand for our
solutions:
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 healthcare 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, at
the end of 2007, one CT vendor announced a new 320 slice CT
which may yield file sizes significantly larger than previous CT
scanners. Pathology departments are beginning to embrace digital
PACS and these systems will create even larger data sets.
Additionally, we believe hospitals will require enterprise class
solutions capable of managing, organizing and distributing this
patient information to the point of care.
Need for Advanced Visualization Tools. The
increase in this image data is significantly impacting
visualization workflow for physicians. 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. This 3D
reconstruction improves diagnostic capabilities, treatment and
non-invasive surgical 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.
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Our
Solutions
Overview
We provide enterprise-level information technology solutions for
the clinical analysis and management of digital medical images
within healthcare 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 healthcare providers staff by automating medical image
workflow for physicians and technologists. We believe our
enterprise visual medical system, or 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 and
cross-enterprise-level / community-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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Highly available, 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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Productivity gains
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(Radiologists, Cardiologists)
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Multi-point access to visualization
tools and images
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Efficient tools for collaboration with
treating physicians
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Treating Physicians
(Cardiologists, Surgeons, etc.)
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Availability of easy-to-use, specialty
specific visualization tools
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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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Payor
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Ability to avoid duplicate exams through
cross-enterprise access
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Our solutions offer the following:
Enterprise Content Management. Our solutions
provide unified access to and storage of 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. Our solutions catalog, archive and distribute
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. 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.
Enterprise Visualization Technology. Our
solutions quickly deliver web-enabled software toolsets and
images to physicians throughout the enterprise for diagnostic
analysis and treatment planning. Our enterprise visualization
software allows physicians to see 2D and 3D views of human
anatomy and to manipulate, navigate within, and compare imaging
exams in order to better visualize internal anatomic structure
and pathology. This visualization of medical images can lead to
improved clinical diagnosis, disease screening, and treatment
planning by physicians. Physicians can access our enterprise
visualization software from any network access point, including
home, office or throughout the healthcare facility. Our
intelligent user interface automatically adjusts for the
specialty and preferences of each user, the type of imaging
device used to create the image, and the particular body part
and tissue type being examined.
Integration with Third Party Systems. Our
solutions provide integration with third-party systems such as
hospital information systems, departmental information systems,
electronic medical record systems, dictation, reporting, and
speech understanding systems, enterprise visualization
solutions, quantitative analysis and computer-aided detection
solutions, and customer managed storage. This integration
automates lifecycle workflows associated with imaging procedures
and streamlines integration of digital clinical imaging
information with the rest of a patients record.
Specialty-Specific Clinical Applications. We
have comprehensive suites of products to address digital
clinical imaging and information management for radiology,
cardiology, orthopedics, and mammography. We are focused on the
development of enhancements and additional functionality to our
existing advanced visualization software to further meet the
needs of other clinical specialties, including 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. Our commitment to open standards such as DICOM and
the standard protocol for the storage of text-based patient
information, HL7, makes our software 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.
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 to
facilitate rapid and complete adoption by our customer. After
implementation, we monitor system use and, when appropriate,
intervene to make adjustments necessary to prevent anticipated
problems from occurring. We believe our focus on implementation
and support services ensures that our customers
investments in our solutions achieve their financial and
operational objectives.
Our
Product Offerings
Our product offerings consist of the following:
Enterprise Content Manager. Our Enterprise
Content Manager solution provides unified access to and storage
of medical images that are created across multiple imaging
departments within a hospital. Whether for a single or
multi-facility enterprise, and whether from radiology,
cardiology, pathology, orthopedics, obstetrics,
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gynecology or other departments, all information comes together
in one unified platform. Our enterprise class distributed
architecture enables workflows across multiple sites and
institutions, which provides access to a unified visual patient
record. This solution catalogs, archives, and distributes these
images, combining centralized control over sensitive patient
imaging records with increased availability to physicians and
other authorized users in multiple medical specialties. Our
solution integrates with our customers existing clinical
information and administrative systems, serving as the
patients visual medical record repository.
Enterprise Visualization. Our Enterprise
Visualization solution uses web-enabled software toolsets to
provide physicians a unified view of the visual patient record
throughout the enterprise as well as enable collaboration on the
recorded images among physicians. Our enterprise visualization
software allows physicians to see two-dimensional and
three-dimensional views of human anatomy and to manipulate,
navigate within, and compare imaging exams in order to better
visualize internal anatomic structure and pathology.
Additionally, users can include annotations and notes to
collaborate with other physicians about clinical findings. This
visualization of medical images and collaborative workflow can
lead to improved clinical diagnosis, disease screening, and
treatment planning by physicians. Physicians can access our
enterprise visualization software from any network access point,
including home, office, or throughout the healthcare facility.
Our intelligent user interface automatically adjusts for the
specialty and preferences of each user, the type of imaging
device used to create the image, and the particular body part
and tissue being examined.
RadSuite. Our RadSuite solution consists of
our suite of software tools for the advanced visualization and
analysis of digital medical images, and for reporting by
radiologists. Information is presented to radiologists using
relevant multi-specialty tools through a dynamic user interface.
Physicians can manipulate two-dimensional and three-dimensional
image-related content in a variety of ways including
organization, rotation, inversion, magnification, and
enhancement of images, and can manipulate, navigate within, and
compare imaging exams in order to better visualize internal
anatomic structure and pathology. We offer RadSuite Premium
software to customers who need complex customization and
RadSuite Express software as an aggressively priced solution for
customers with standard workflows.
HeartSuite. Our HeartSuite family of products
is designed to provide a cardiology department with all of its
information needs in one enterprise system with comprehensive
solutions for adult, pediatric, and adult congenital cardiology
programs. This solution includes HeartSuite VERICIS, HeartSuite
Hemodynamics, and HeartSuite CVIS, or cardiovascular information
system. VERICIS creates a complete digital record of images and
reports for patients in the cardiac catheterization lab,
echocardiography, including pediatric echocardiography, vascular
ultrasound and nuclear cardiology. HeartSuite Hemodynamics
integrates complete functionality for hemodynamics data
collection, waveform analysis, inventory control, patient
charging, and procedure reporting in a single system. HeartSuite
CVIS integrates all clinical and operational information from
multiple systems and locations into one system.
Third-party Components. Our solutions
typically include 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
single server or a cluster of standard redundant servers.
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Data Storage. We support industry standard
storage configurations, including high-availability redundant
array of independent disks, or RAID, 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
digital medical images. We also offer an optional configuration
with mirrored archives in two locations, enabling uninterrupted
operation in the event of loss of one archive.
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Workstations and Monitors. Customers typically
implement our enterprise 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
Oracle database technology and other standard relational
database applications.
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Computed Radiography. We offer computed
radiography devices manufactured by Carestream Health. Computed
radiography devices convert analog X-ray images into digital
images.
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Advanced Three-Dimensional Analysis Tools. We
offer Vital Images and Teracon as options for advanced clinical
applications and integrated analysis tools that complement our
enterprise native visualization and workflow capabilities.
Through the desktop integration of our respective products,
physicians can access these advanced visualization and analysis
tools and review the image data seamlessly without interrupting
workflow.
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Dictation. We offer a voice recognition
dictation system from Lanier Worldwide for radiology reporting.
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OrthoSuite. We offer a software toolset for
orthopedic surgeons which is licensed from Orthocrat. Our
integration with the system provides for seamless launch from
our Enterprise Visualization software and storage of the images
in our Enterprise Content Manager.
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MammoSuite. We offer a mammography
visualization and analysis solution from Cedara. Our integration
with the system provides for seamless launch from our Enterprise
Visualization software and storage of images in our Enterprise
Content Manager.
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RadSuite RIS. We offer a radiology information
system (RIS) from Swearingen to complement our RadSuite
visualization software for customers who desire to replace their
current RIS solution.
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HeartSuite ECG. We offer an ECG solution from
Epiphany which provides seamless integration of ECG information
with our HeartSuite VERICIS solution.
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Support
Services
We offer implementation, user adoption, and support services to
meet the implementation and investment objectives of our
customers. Our programs include the following components:
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Adoption Success Management is our services program that
facilitates rapid and complete adoption by all relevant
constituents during the implementation phase, which typically
lasts several months.
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Total Solution Management is an ongoing set of support
services to ensure that our systems are highly available and
optimally configured for 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 twenty-four hour service and support for our
software and any third-party components we provide to the
customer.
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Our
Strategy
Our goal is to become the industry leader in enterprise-level
information technology solutions for the content management,
workflow, and visualization of digital medical images. Key
elements of our strategy include:
Expand Our Market Share by Attracting New
Customers. We believe a full range of healthcare
organizations, from imaging centers to multi-site hospital
systems, represent an 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. We are also focusing on developing contractual
relationships with national hospital buying groups. As we pursue
new customers, we intend to continue focusing our efforts on the
hospitals and their affiliate clinics as well as teleradiology
service providers. We believe our position as a sole source
provider of an enterprise 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.
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Increase Penetration With Existing
Customers. We believe that using our successful
relationships with existing multi-facility healthcare 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, 2007, we had customer
relationships with multi-facility healthcare providers that
control 279 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
opportunities to expand our installed base at facilities that
are part of multi-facility systems in which we have a customer
relationship with the parent company.
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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 enterprise content management,
enterprise visualization, specialty-specific clinical suites
such as RadSuite, HeartSuite, OrthoSuite, and MammoSuite, and
third-party applications and services that may not have been
part of the initial sale. As follow-on sales opportunities, we
offer our advanced visualization software and other products and
additional functionality to radiologists, cardiologists and
other specialty groups within the organization.
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Enhance Our Product Offerings. We believe
developing or acquiring additional functionality for our
existing software, including improved advanced visualization
suites of products for multiple specialties, will further
strengthen our position in the market. Further enhancements to
our software and services should assist us in selling our
solution to hospitals and multi-hospital systems and expanding
our existing customer relationships. We also plan to invest
further in workflow and integration software to further automate
workflow for physicians and improve integration with reporting
systems, quantitative and clinical analysis solutions, and
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 enterprise 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 expect to continue 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 enable us to capture increased market share and
enhance our existing customer relationships.
Maintain Our Open-Standards Focus. We believe
our commitment to open standards, lowers our development costs,
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 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 off-the-shelf hardware to visualize,
analyze and manipulate images.
Our
Technology
We believe the following technologies and strategies help us to
compete more effectively:
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Native DICOM Compatibility. Our software
conforms to the DICOM standard for medical image storage and
workflow management. 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
format. We believe our commitment to DICOM as the underlying
protocol for our software is a competitive
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advantage, delivering faster streaming, more efficient storage
of the image, and the ability to integrate our software to new
imaging devices.
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Native 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. We have developed and own a DICOM-toolkit that we
believe permits us to more rapidly integrate DICOM-based
information into our software and believe that the ownership and
continued development of our DICOM-toolkit is a core technology
strategy.
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Commitment to the IHE Technical Framework. The
Radiological Society of North America and the Healthcare
Information Management Systems Society created the Integrated
Healthcare Enterprise (IHE) technical framework. IHE 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.
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Compatibility with the OPEN GL Graphics
Standard. Our enterprise 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. Our enterprise
visualization software uses the OPEN GL graphics standard, which
permits 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 flexibility to add functionality to, and
increase the reliability of, our system because we can remedy
problems at the component rather than the entire application
level.
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Customers
Our customers range in size from single imaging centers to
large, multi-facility healthcare networks. As of
December 31, 2007, we had installed our EVMS solution in
224 hospitals or other healthcare facilities, 189 of which are
members of multi-facility networks. At December 31, 2007,
we had implemented our RadSuite advanced visualization solution
in 75% of our current installed EVMS customer base. There are
also 280 hospitals utilizing our HeartSuite solutions in their
cardiology departments. Our largest customer is Ascension
Health, the largest not-for-profit hospital in the United States.
Contracted implementations for Ascension Health constituted 22%
of our contracted backlog as of December 31, 2007, compared
to 27% as of December 31, 2006.
Sales and
Marketing
We use a direct sales model, with sales representatives who have
substantial experience in healthcare-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, the Chief Executive Officer, and
several key physicians. 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, 2007, we had 78 employees who are
primarily dedicated to research and development activities. In
addition to our employees, we also utilize outside contractors
on a routine basis to
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perform specified research and development activities, and we
utilize clinical advisory boards and end-user focus groups to
advise us on the clinical functionality of our solutions. We
have focused our research and development on the continued
evolution of an enterprise-class medical image management
solution including, specifically:
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improving physician and technologist workflow and productivity;
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expanding content management to cover medical documents beyond
DICOM data;
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expanding content management to service communities;
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integrating with other information systems and acquisition
devices;
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developing and refining visualization capabilities including new
3D and analysis applications; and
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extending imaging tools to referring physicians in multiple
specialties.
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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 product management 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 these
enhancements are approved, 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 $20.2 million, $17.4 million, and
$11.7 million in research and development in 2007, 2006,
and 2005, respectively.
Competition
The markets for the digital medical image management and
visualization systems that we offer are highly competitive. 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
Carestream Health, Inc., Agfa, and Fujifilm Medical Systems USA,
Inc.;
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companies that have traditionally sold healthcare information
technology applications such as McKesson 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 healthcare 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 content
management, workflow, 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 depends on a number of
factors both within and outside our control, including:
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product innovation, regulatory decisions, 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; and
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price, 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, four patents have
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 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®
Ultravisual, Enterprise Visual Medical System, EVMS, Mammosuite,
I-Readmammo, Enterprise Body Transparency, Studynotes, 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, 2007, we had 356 employees, 78 of
whom were primarily engaged in research and development, 64 of
whom were primarily engaged in sales and marketing, 158 of whom
were primarily engaged in providing technical installation and
support services, and 56 of whom were primarily engaged in
administration and finance. With respect to location, 118 of
these employees are located at our corporate headquarters in
Birmingham, Alabama; 161 of these employees are located at our
offices in Hartland, Wisconsin; 21 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 sales and support locations. None of our employees
is a party to a collective bargaining agreement, and we consider
our relationship with our employees to be good.
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
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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 1) EVMS visualization and infrastructure
tools, 2) the radiology PACS, 3) Heartsuite
cardiovascular tools, 4) VERICIS hardware and software,
5) the cardiology PACS, and 6) 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, there can be
no assurance 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, or 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,
or TPD, Health Canada. Health Canada is the Canadian federal
regulator 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.
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We hold licenses to market, sell, and distribute many of our
products in the Canadian health care industry. To date, we have
sold no devices in the Canadian marketplace, but our intent is
to market in the future all devices for which we hold licenses.
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 there can be no assurance 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, there can be no
assurance 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
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$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 Stark Law,
its subsequent Stark II amendment, and its implementing
regulations from referring patients for designated health
services reimbursed under the Medicare program to entities
with which they or a family member have a compensatory
relationship or an ownership or investment 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 there be assurance 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.
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.
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
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
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these customers to separate the purchase of digital imaging
devices from the selection and purchase of related software and
services. Because we may 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.
Our
business is subject to the cyclical nature of our industry and
changes in economic conditions in general. Adverse changes with
respect to these factors may reduce demand for our products,
lower our revenues and affect our financial
condition.
Our industry is cyclical in nature and is affected by overall
economic conditions in general. A general economic decline could
cause hospitals and other purchasers of our products to reduce
or delay information technology related spending. Because the
purchase of our software solutions involves a significant
financial commitment by a customer, financial pressures that
adversely affect overall spending on healthcare information
technology and services could have an adverse effect on demand
for our products and services. A reduction in such overall
demand could have a material adverse effect on our business and
financial condition.
Changes
in our primary market for PACS radiology systems have resulted
in a significant decline in PACS radiology system sales
orders.
Our historical primary market for sales of our PACS radiology
systems large hospitals and large hospital
networks entered a mature phase in 2007, resulting
in a shift of demand from new systems to replacement of existing
legacy systems. This shift in market demand lengthened the sales
cycle for our PACS radiology systems and resulted in a
significant decline in our PACS radiology system sales in 2007.
We expect these conditions in the large system radiology market
to continue at least through 2008, which could have an adverse
impact on our revenue and financial condition.
Our
operating results may fluctuate, which makes quarterly results
difficult to predict and could cause our stock price to decline
or exhibit volatility.
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.
Our
products are complex and are operated in a wide variety of
network configurations, which could result in errors or product
failures.
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.
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.
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, 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.
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.
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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There can be no assurance 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.
The
recent decline in the market price of our common stock may
impede our ability to execute our business plan and create
adverse effects on our results of operations and financial
condition.
We have recently experienced a substantial decline in our stock
price, which may make it more difficult to raise equity capital,
pursue strategic acquisitions of other businesses, and impede
our revenue growth and our ability to compete in our markets. We
may be unwilling to sell our shares or issue shares as
consideration in an acquisition transaction at low prices, and
investors or potential acquisition targets may pursue other
alternatives as a result. In addition, a low stock price may
indicate that the recorded value of our goodwill and other
assets is impaired, which would result in revaluation of those
assets and a potentially adverse impact on our results of
operations and financial condition.
One of
our largest stockholders has nominated a competing slate of
directors for election in conjunction with this years
annual meeting of stockholders.
Oliver Press Partners, LLC beneficially owns
3,030,860 shares, representing 14.2%, of our outstanding
common stock. On February 15, 2008, Oliver Press Partners
nominated a slate of three potential board members to compete
for the three seats up for election at the annual meeting, which
includes the seat held by our current Chief Executive Officer
and President. The candidates proposed by Oliver Press Partners
are currently being evaluated by our nominating committee and
board of directors. We cannot predict the outcome of any such
election, but if Oliver Press Partners slate of nominees
obtains more votes than the slate of directors that we nominate
for re-election, then the composition of our board of directors
will change substantially, which could result in a change to our
overall strategic direction. Additionally, we will incur
significant additional costs, including legal and other advisory
fees, and will experience management and employee distraction
that may negatively impact our operating results as a result of
these matters.
We may
not be successful in implementing the expansion of our sales and
marketing efforts into new market segments, which may have an
adverse impact on our growth strategy.
Historically, we have focused our sales and marketing efforts on
large, multi-site health care providers, but over the past year
we began implementation of a plan to expand our sales and
marketing efforts into the smaller hospital segment, and we may
in the future expand our sales and marketing efforts into
additional market segments.
This type of expansion is subject to many of the risks inherent
in establishing a new business enterprise, and acceptance of our
products and services in new market segments will depend on our
ability to, among other things, successfully:
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refine and adapt our products and services for new or different
applications;
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offer our products and services at price points that are
competitive in the market segment;
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create and develop demand for and market acceptance of our
products and services in the market segment;
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market, promote, and distribute our products and services, and
establish public awareness of our brand in the market segment;
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compete with other companies already in the market
segment; and
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establish and maintain sufficient internal marketing, sales, and
customer service infrastructures to support these efforts.
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Although customers in the small hospital market segment are
closely related to the large, multi-site health care providers,
there can be no assurance that we will be able to successfully
implement our expansion plans and enter this market segment.
Successful implementation of this and other expansion plans will
require considerable resources and expenditures, which could
have an adverse effect on our results of operations or financial
position. In addition, if we are unable to successfully enter
the smaller hospital market segment, it could affect the
execution of our overall growth strategy, and we may not be able
to expand our business or increase our revenues at the rates we
currently contemplate.
We
have incurred substantial operating losses in the
past.
We have incurred substantial operating losses in each fiscal
year since our inception in December 1998, and it is possible
that we will continue to incur operating losses in the future.
As a result of our operating losses, we had an accumulated
deficit of $64.5 million at December 31, 2007. If our
revenue does not grow to offset our 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, implement our plan to enter the smaller hospital
market segment, create new product offerings, respond to
competitive developments, and attract and retain qualified
sales, technical, and management employees. Even though we may
achieve profitability, we may not be able to maintain profitable
operations on an annual basis.
We may
not be able to raise additional capital on acceptable terms to
fund our operations and develop product enhancements, which
could adversely affect our growth prospects.
We expect our cash resources and our existing line of credit
arrangements 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 debt or equity financings, strategic relationships, or
other arrangements in order to, among other things:
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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; or
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hire additional personnel, particularly to expand sales,
marketing, and 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.
The
loss of Ascension Health or other 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.
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 $32.2 million, or 22%, of our
contracted backlog at December 31, 2007. 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.
17
As a result, the loss of Ascension Health or any other 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.
In the
future we may undertake additional acquisitions, which could
result in integration risks, operating difficulties, dilution,
or other adverse financial consequences.
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 approximately 300
medical facilities, and increased our employee headcount by
212 employees. We may undertake additional acquisitions if
we identify companies with desirable and compatible
applications, products, services, businesses, or technologies.
However, identification and consummation of an acquisition may
impose significant strains on our management, operating systems
and financial resources. The pursuit of an acquisition 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
an additional business, 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. In addition, an acquisition 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. Further, there can be no
assurance that a future acquisition will not have an adverse
effect upon our operating results, particularly during periods
in which the operations of the acquired business are being
integrated into our operations.
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.
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, and Chris E. Perkins, our Chief Operating Officer. We
have entered into executive employment agreements with these and
other key members of senior executive management. Terms of the
employment agreements with Mr. Jett and Mr. Perkins
are two years and one year, respectively, with automatic renewal
on a
day-by-day
basis thereafter unless we or they 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.
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.
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. The accounting for stock options
18
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.
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.
We resell third-party computer hardware components from numerous
companies, including Dell Inc., IBM Corporation, Network
Appliances, Inc., EMC Corporation and Carestream Health, Inc.,
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.
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.
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 reimbursements, 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.
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.
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
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
19
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 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.
If we
fail to comply with other potentially applicable health care
regulations, we could face substantial penalties.
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. 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
20
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.
Product
liability claims may require us to pay damages, reduce the
demand for our products, and harm our reputation.
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.
If we
fail to protect our intellectual property rights, our
competitors may take advantage of our ideas to compete more
effectively with us.
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. 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.
21
Our
operating results could suffer if we become subject to a
protracted infringement claim or litigation or a significant
damage award.
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.
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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 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:
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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;
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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;
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our board of directors can amend our bylaws without stockholder
approval;
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stockholders cannot call special meetings of stockholders;
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stockholders cannot act by written consent;
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stockholders must give advance notice to nominate directors for
election or to submit proposals at stockholder meetings;
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we may be obligated to make payments under executive employment
agreements in the event of a change in control; and
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some Delaware statutes restrict or prohibit certain transactions
with affiliated or interested parties and permit the adoption of
poison pills without stockholder approval.
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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.
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ITEM 1B.
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UNRESOLVED
STAFF COMMENTS
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Not applicable.
Our principal offices occupy approximately 43,500 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 and manufacturing space, including approximately
13 acres of land, in Hartland, Wisconsin. We also maintain
a 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 that expires 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 2010. We
believe our current facilities are adequate for our current
needs.
During the third quarter of 2006 we, as part of the integration
of Camtronics, vacated a leased facility and combined the
operations formerly at that facility with another existing
facility. In connection with that action, we identified and
recorded a liability arising from the continued lease
obligation, which extends through January, 2013. That liability
was $0.6 million at December 31, 2007
($1.1 million at December 31, 2006) and is
included in our balance sheet in other long-term liabilities.
The facility has been subleased to another entity.
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ITEM 3.
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LEGAL
PROCEEDINGS
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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.
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ITEM 4.
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SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
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Not applicable.
23
PART II
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ITEM 5.
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MARKET
FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
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Market
for Common Stock
Our common stock began trading on the NASDAQ Global 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 3, 2008, the 21,456,008
outstanding shares of our common stock were held by 63 holders
of record. The closing price per share of our common stock on
the NASDAQ Global Market on March 3, 2008 was $2.79.
The following table presents the range of share prices for each
quarter in the two year period ended December 31, 2007:
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2006 Quarter Ended
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High
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Low
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March 31, 2006
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$
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18.82
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$
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15.30
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June 30, 2006
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17.90
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12.90
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September 30, 2006
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15.96
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13.39
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December 31, 2006
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$
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16.53
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$
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13.79
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2007 Quarter Ended
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High
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Low
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March 31, 2007
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$
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15.58
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$
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9.75
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June 30, 2007
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11.89
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7.42
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September 30, 2007
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10.25
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7.90
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December 31, 2007
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$
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8.66
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$
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3.08
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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 loan and security agreement 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.
Since the initial public offering of our stock and through
December 31, 2007, we have spent approximately
$13.4 million of such net proceeds on capital purchases,
substantially all of which was spent on purchases of equipment,
and an additional $40.4 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
twelve-month period ended December 31, 2007.
24
Stock
Performance Graph
The following graph shows a comparison of the cumulative total
stockholder return on our common stock with the cumulative total
return on the NASDAQ Stock Market (U.S.) Index and the Hemscott
Business Software and Services Index (the Hemscott Group Index)
over the period February 9, 2005 (the first trading date of
our common stock) through December 31, 2007. The graph
assumes $100 invested at February 9, 2005 in our common
stock and in each of the market indices, with reinvestment of
all dividends. We have not paid or declared any cash dividends
on our common stock. Stockholder returns over the indicated
period should not be considered indicative of future stock
prices or stockholder returns.
COMPARISON
OF CUMULATIVE TOTAL RETURN
AMONG EMAGEON INC.,
NASDAQ MARKET INDEX AND HEMSCOTT GROUP INDEX
25
|
|
ITEM 6.
|
SELECTED
CONSOLIDATED FINANCIAL DATA
|
The following consolidated statements of operations data for the
years ended December 31, 2005, 2006 and 2007 and
consolidated balance sheet data as of December 31, 2006 and
2007 are derived from our audited consolidated financial
statements and related notes contained elsewhere in this
document. The consolidated statements of operations data for the
years ended December 31, 2003 and 2004 and the balance
sheet data as of December 31, 2003, 2004 and 2005 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. Amounts are
expressed in thousands, except per share data.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
Consolidated Statements of Operations Data(1)(2):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
System sales
|
|
$
|
17,234
|
|
|
$
|
33,441
|
|
|
$
|
50,041
|
|
|
$
|
75,340
|
|
|
$
|
51,140
|
|
Support services
|
|
|
6,341
|
|
|
|
13,059
|
|
|
|
25,023
|
|
|
|
48,165
|
|
|
|
53,485
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
23,575
|
|
|
|
46,500
|
|
|
|
75,064
|
|
|
|
123,505
|
|
|
|
104,625
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
System sales
|
|
|
10,227
|
|
|
|
21,452
|
|
|
|
28,316
|
|
|
|
43,333
|
|
|
|
28,551
|
|
Support services
|
|
|
7,777
|
|
|
|
11,426
|
|
|
|
15,921
|
|
|
|
24,331
|
|
|
|
27,819
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenue
|
|
|
18,004
|
|
|
|
32,878
|
|
|
|
44,237
|
|
|
|
67,664
|
|
|
|
56,370
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
5,571
|
|
|
|
13,622
|
|
|
|
30,827
|
|
|
|
55,841
|
|
|
|
48,255
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
4,875
|
|
|
|
6,197
|
|
|
|
11,652
|
|
|
|
17,368
|
|
|
|
20,179
|
|
Sales and marketing
|
|
|
6,403
|
|
|
|
9,377
|
|
|
|
12,238
|
|
|
|
18,459
|
|
|
|
18,285
|
|
General and administrative
|
|
|
4,802
|
|
|
|
7,498
|
|
|
|
10,945
|
|
|
|
17,028
|
|
|
|
13,750
|
|
Amortization and write-off of intangible assets related to
Camtronics acquisition
|
|
|
|
|
|
|
|
|
|
|
993
|
|
|
|
3,540
|
|
|
|
1,381
|
|
Integration costs related to Camtronics acquisition
|
|
|
|
|
|
|
|
|
|
|
244
|
|
|
|
5,369
|
|
|
|
|
|
Employee severance and related expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,001
|
|
Loss on disposal of property and equipment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
437
|
|
|
|
553
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
16,080
|
|
|
|
23,072
|
|
|
|
36,072
|
|
|
|
62,201
|
|
|
|
56,149
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(10,509
|
)
|
|
|
(9,450
|
)
|
|
|
(5,245
|
)
|
|
|
(6,360
|
)
|
|
|
(7,894
|
)
|
Interest (expense) income, net
|
|
|
(850
|
)
|
|
|
(1,022
|
)
|
|
|
248
|
|
|
|
328
|
|
|
|
809
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(11,359
|
)
|
|
$
|
(10,472
|
)
|
|
$
|
(4,997
|
)
|
|
$
|
(6,032
|
)
|
|
$
|
(7,085
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share, basic and diluted
|
|
$
|
(5.79
|
)
|
|
$
|
(4.07
|
)
|
|
$
|
(0.28
|
)
|
|
$
|
(0.29
|
)
|
|
$
|
(0.33
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares, basic and diluted
|
|
|
1,973
|
|
|
|
2,590
|
|
|
|
17,975
|
|
|
|
20,936
|
|
|
|
21,385
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected Cash Flow Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash (used in) provided by operations
|
|
$
|
(2,377
|
)
|
|
$
|
4,959
|
|
|
$
|
(1,881
|
)
|
|
$
|
7,263
|
|
|
$
|
(3,177
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
Consolidated Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
2,340
|
|
|
$
|
5,995
|
|
|
$
|
15,520
|
|
|
$
|
23,008
|
|
|
$
|
17,034
|
|
Marketable securities
|
|
|
|
|
|
|
|
|
|
|
4,951
|
|
|
|
|
|
|
|
|
|
Intangible assets, net
|
|
|
8,000
|
|
|
|
6,873
|
|
|
|
34,277
|
|
|
|
30,090
|
|
|
|
27,604
|
|
Total assets
|
|
|
29,050
|
|
|
|
41,768
|
|
|
|
117,944
|
|
|
|
113,012
|
|
|
|
99,294
|
|
Total debt and capital lease obligations
|
|
|
8,467
|
|
|
|
9,489
|
|
|
|
3,749
|
|
|
|
961
|
|
|
|
89
|
|
Redeemable preferred stock
|
|
|
30,282
|
|
|
|
30,348
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total (deficit) stockholders equity
|
|
$
|
(23,535
|
)
|
|
$
|
(32,370
|
)
|
|
$
|
63,639
|
|
|
$
|
65,107
|
|
|
$
|
62,296
|
|
|
|
|
(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) |
|
Certain reclassifications have been made to prior years
financial data to conform to the current year presentation. |
|
|
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.
Subsequent to its press release and related filing of its
Current Report on
Form 8-K
with the Securities and Exchange Commission regarding its 2007
earnings, the Company determined that certain adjustments were
required to be made to the financial information contained in
the press release and
Form 8-K.
The adjustments were not material to the results of operations
or financial condition of the Company, and the adjusted
financial information has been included in this Annual Report on
Form 10-K.
Our fiscal year ends on December 31. References below to
annual periods or years refer to the fiscal years ended
December 31.
Results
Overview
Total revenue for 2007 was $104.6 million, a 15.3% decrease
from total 2006 revenue. The decline was comprised of a 32.1%
decrease in system sales revenue, partially offset by an 11.0%
increase in support services revenue. The decline in system
sales revenue was the result of a substantial decline in sales
orders for
27
our large hospital and hospital network radiology products, the
market for which has entered a mature phase and which now
consists largely of replacement sales. Our gross margin
percentage was relatively stable in 2007 compared to 2006 at
46.1%, consisting of a 44.2% gross margin on system sales and a
48.0% gross margin on support services revenue, both generally
in-line with 2006 levels. Our total research and development,
sales and marketing, and general and administrative expenses for
2007 were $52.2 million, down $0.7 million from the
2006 level. Our net loss was $7.1 million in 2007, which
included $2.0 million in costs of employee severance and
related expenses, compared to a net loss of $6.0 million in
2006, which included $5.4 million in costs of integration
into our operations of Camtronics, a company we acquired in late
2005.
Our bookings of new orders for system sales and support services
for 2007 were $92.7 million, down by $29.5 million
from the 2006 level. At December 31, 2007 we had
$149.1 million in contracted orders backlog, of which
$131.4 million were support services orders, compared to
$158.4 million at December 31, 2006, of which
$121.7 million were support services orders. We expect to
recognize revenue from our backlog of $57.6 million in
2008, $30.5 million in 2009, and the remainder by 2013. Our
orders backlog increases as we enter into new contracts, and
decreases as we earn and recognize revenue from those orders.
Significant
Events in 2007
During the year ended December 31, 2007 we continued to
focus on our core set of long-term strategic goals. We believe
the following 2007 events were significant with respect to
accomplishment of those goals:
|
|
|
|
|
In the third quarter of 2007 we introduced RadSuite Express, our
standardized offering of content management, advanced
visualization and workflow tools originally aimed at the less
penetrated market of hospitals with fewer than 200 beds. As the
architecture and configuration have matured, we have come to
believe that RadSuite Express is an appropriate solution for a
larger portion of the market than originally anticipated.
|
|
|
|
We added new customers and deepened relationships with existing
customers. At December 31, 2007 we had contractual
relationships with 604 hospitals, up from 588 at the end of
2006. Of these hospitals, 504 had installed one or more of our
products, up from 460 at the end of 2006.
|
|
|
|
We converted 81 cardiology customers to five year maintenance
and support agreements in place of the historical one year
renewal agreements.
|
|
|
|
We began a systematic process to thoroughly evaluate every area
of our business and, as a part of that process, we implemented a
plan to reorganize our management team. Notably, in 2007 Chris
E. Perkins succeeded Grady O. Floyd as our Chief Operating
Officer, and on March 31, 2008 John W. Wilhoite will
succeed W. Randall Pittman as our Chief Financial Officer and
Treasurer. As a result, in 2008 there will be new leadership at
the executive levels in our operations, finance, sales, and
marketing areas with a commitment to rationalize our cost
structure, focus on product development and product management,
and improve our profitability.
|
|
|
|
In May 2007, we acted to align our operating expenses with the
current level of our revenue by reducing our workforce through
elimination of existing positions and normal attrition,
eliminating thirty positions in the customer service and
research and development areas.
|
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 for RadSuite and HeartSuite
(collectively referred to as our Enterprise Visual Medical
System, or EVMS), 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: RadSuite
Advanced Visualization, our suite of software tools for the
advanced visualization and analysis of digital medical images;
Clinical Content
28
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 RadSuite Advanced Visualization is primarily
determined by either the number of licenses based on the number
of concurrent users or on the average annual study volume.
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.
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 17% of our total revenue in
2007, and accounted for 22% of our total contracted backlog at
December 31, 2007. We anticipate that Ascension Health will
continue to be a significant customer as we continue to support
our existing installations as well as sign add-on orders and new
order addenda with additional Ascension Health facilities.
Cost of
Revenue
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 solutions. The cost of our
software licenses consists primarily of the amortization of
acquired software and the amortization of capitalized software
costs for internally developed 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.
Gross
Profit
Our overall gross profit percentage has improved during the last
three fiscal years due to an increase in the software content of
our system sales and in recurring support services revenue
derived from our growing installed base of customers. Gross
profit from system sales varies based on several factors,
including:
|
|
|
|
|
actual sales prices negotiated in the contracting process;
|
|
|
|
costs associated with purchasing and manufacturing third-party
components;
|
|
|
|
fluctuations in prices received from third-party component
manufacturers and distributors relative to the
mark-up
percentages provided for in customer contracts; and
|
|
|
|
the relative mix of the hardware and software components
comprising system sales in a given period.
|
29
Gross profit from support services varies based on several
factors, including:
|
|
|
|
|
actual services fees negotiated during the contracting process;
|
|
|
|
productivity of our professional service team;
|
|
|
|
costs of service agreements related to third-party components
included in our solution; and
|
|
|
|
costs associated with the use of outside contractors.
|
Operating
Expenses
Research and Development. Research and
development expenses consist primarily of employee-related
expenses, allocated overhead, and the costs of 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, allocated overhead, and
sales commissions. Sales and marketing expenses may increase as
we expand our selling and marketing activities associated with
existing and new product and service offerings to existing and
new customers, and build brand awareness.
General and Administrative. General and
administrative expenses consist primarily of employee-related
expenses, professional fees, other corporate expenses, and
allocated overhead. General and administrative expenses may
increase with added personnel and as we incur additional
professional fees and administrative costs related to the growth
of our business and operations, including additional compliance
costs in connection with public company corporate governance and
financial reporting requirements.
Initial
Public Offering And Camtronics Integration
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 15, 2005, our underwriters exercised the
over-allotment option to purchase an additional
750,000 shares at a price of $13.00 per share. Total
proceeds from the initial public offering, net of underwriting
discounts and offering expenses, were $67.2 million. At
December 31, 2007, we had 21,626,155 shares of common
stock issued, 21,450,398 shares of common stock
outstanding, and 10,869 warrants to purchase shares of our
common stock outstanding at an exercise price of $5.52 per share.
On November 1, 2005, we acquired all the stock of
Camtronics Medical Systems, Ltd., based in Hartland, Wisconsin,
for $40.4 million in cash. As of December 31, 2006, we
had completed the integration of Camtronics into the Company.
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 greatest 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. While the basis for software license
revenue recognition is substantially 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 to
30
determine the amount of system sales and support services
revenue to be recognized in each accounting period.
We sell software under three types of licenses:
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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.
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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.
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Term licenses: software licensed on a term
basis according to a fixed number of users
and/or
estimates of annual study volumes.
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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. 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. If it is determined from the outset of an arrangement or
at the time of add-on sales to existing customers 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
discounts offered in multiple element arrangements that would be
characterized as separate elements are infrequent and are
applied to the initial arrangement.
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
31
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. 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, we 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 we have 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. We commonly perform
services for which we do not have VSOE of fair value and,
accordingly, the software license revenue is deferred until the
services are completed.
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 or determinable, collection of the related
receivable is reasonably assured and customer acceptance
criteria, if any, have been successfully demonstrated. We
classify shipping and handling cost in cost of system sales.
Third-party component revenue, including hardware sales and
hardware maintenance, is recognized in accordance with
contractual terms. When we are responsible for installing
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. 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:
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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. Our sales
agreements with customers 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 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, 2007.
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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, 2007 we have a liability of $0.44 million
in our balance sheet for these obligations.
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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
32
(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. We
recognize 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 our 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. 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 the direct labor and related benefits of employees and the
costs of third-party consultants, if applicable.
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 or, if a shorter period, in proportion to expected
revenue from the product.
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
identify and allocate values to intangible assets 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 evaluate intangible assets for impairment on an
annual basis and also if and 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. 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.
We test the amount recorded as goodwill in our balance sheet for
possible impairment annually, in our case as of October 1 of
each year, or more often if circumstances exist that may in our
judgment indicate impairment. Impairment is the condition that
exists when the carrying amount of goodwill exceeds its implied
fair value. We identify potential impairment by comparing the
fair value of our company, which we define as the amount at
which our company could be bought or sold in a current
transaction between willing parties, to the carrying amount (net
book value) of our company in our financial statements,
including amounts recorded as goodwill. At October 1, 2007,
our common stock closed at a price of $8.08 per share on the
NASDAQ Global Market, a per share price well in excess of our
net book value per share at that date. At December 31,
2007, the end of our fiscal year, our common stock closed at a
price of $4.03 per share on the NASDAQ Global Market, again a
per share price in excess of our net book value per share. In
the periods since December 31, 2007, our common stock has
at times closed on the NASDAQ Global Market at a per share price
less than our book value per share, an event which, in the
absence of other indicators, would be considered an indicator of
possible impairment of our recorded amount of goodwill in our
balance sheet. However, during this same period the Company
determined based on objective evidence that the fair value of
the Company is such that impairment of its goodwill is not
indicated. We are continuing to monitor this
33
situation. However, should circumstances change, it is possible
that we would conclude that impairment has occurred, resulting
in a revaluation of our recorded amount for goodwill and our
other assets and liabilities, and an adverse effect on our
reported results of operations and financial condition.
Results
of Operations
Revenue
Individual radiology system sales typically are larger in terms
of both sales dollars and implementation time than individual
cardiology system sales. In any given period, the mix of total
system sales revenue to total support services revenue, the mix
of hardware to software comprising system sales revenue, and the
mix of radiology revenue to cardiology revenue can produce
significant variability in the levels of revenue and gross
margin reported. 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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2007
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|
2006
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|
|
Change
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Change (%)
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|
2006
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2005
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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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51,140
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$
|
75,340
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|
$
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(24,200
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)
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|
|
(32.1
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)%
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|
$
|
75,340
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|
$
|
50,041
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|
$
|
25,299
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|
|
|
50.6
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%
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Support services
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53,485
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|
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|
48,165
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|
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|
5,320
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|
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|
11.0
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%
|
|
|
48,165
|
|
|
|
25,023
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|
|
|
23,142
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|
|
|
92.5
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%
|
|
|
|
|
|
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|
|
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|
|
|
|
|
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|
|
|
|
|
|
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|
Total revenue
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$
|
104,625
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|
$
|
123,505
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|
|
$
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(18,880
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)
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|
(15.3
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)%
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|
$
|
123,505
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|
|
$
|
75,064
|
|
|
$
|
48,441
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|
|
|
64.5
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%
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|
|
|
|
|
|
|
|
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|
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Total revenue for 2007 was $104.6 million, a 15.3% decrease
from 2006 revenue of $123.5 million. Revenue growth in 2006
was the result of both the organic growth of our products and
our acquisition of Camtronics and its cardiology line of
products in late 2005. As further explained below, total revenue
declined significantly in 2007 as a result primarily of slow
market demand in the market segments of the medical imaging
industry in which we compete.
System sales revenue declined by $24.2 million, or 32.1%,
in 2007 compared to 2006. Sales of cardiology products were
slightly higher in 2007 compared to 2006, while sales of our
radiology products declined significantly. The decline is the
direct result of a decline in system sales orders in 2007 of
$29.5 million, or 24%, compared to 2006. Our historical
primary market for PACS radiology systems for large hospitals
and large hospital networks entered a mature phase in 2007.
Demand in that market now consists largely of replacement of
existing legacy radiology systems, which lengthens the sales
cycle and makes the timing of large orders more difficult to
anticipate. We expect these conditions in the large system
radiology market to continue at least throughout 2008, but
expect more positive market conditions in our cardiology and
small hospital markets.
System sales revenue for 2006 was $75.3 million, a 50.6%
increase over 2005 systems sales revenue of $50.0 million.
The acquisition of Camtronics on November 1, 2005 was a
contributing factor in our 2006 system sales revenue growth, but
our system sales excluding cardiology products grew as well, by
approximately 19% in 2006. This growth was the result of greater
numbers of systems installations for both existing and new
customers, and of greater acceptance of our products in the
marketplace in that period, particularly with multi-facility
health care providers. Growth in our radiology line of products
was driven in equal parts by increased sales of software and
third-party components, with our sales of software licenses
particularly strong with existing customers.
Support services revenue was $53.5 million in 2007, an
increase of $5.3 million, or 11.0%, over the 2006 level.
The increase occurred primarily in our cardiology business on an
expanded installed base with our customers and cardiology
product upgrades distributed in 2007. Support services revenue
consists primarily of professional services and of maintenance
revenue from our customers who subscribe to our ongoing
maintenance services. Professional services revenue is ancillary
to system sales revenue, and thus will grow as the number of new
system installations or system additions grows, and maintenance
revenue will grow as system installations grow and as the number
of our customers who subscribe to our maintenance services
increases. Support services revenue in our radiology business
grew only marginally in 2007 as the result of the decline in our
radiology system sales revenue.
34
Support services revenue grew by 92.5% to $48.2 million in
2006 from its 2005 level of $25.0 million. Our acquisition
of Camtronics on November 1, 2005 was a contributing factor
in our support services revenue growth in 2006, but our legacy
service offerings grew as well, by 38% in 2006 to over
$32.0 million. Both the professional services and system
maintenance components of support services revenue grew
substantially in 2006.
Gross
Margin
The following table sets forth gross margin earned on revenues
for the three years in the period ended December 31, 2007:
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|
|
|
|
|
|
|
|
|
Year Ended December 31,
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|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Revenue:
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|
|
|
|
|
|
|
|
|
|
|
|
System Sales
|
|
$
|
51,140
|
|
|
$
|
75,340
|
|
|
$
|
50,041
|
|
Support Services
|
|
|
53,485
|
|
|
|
48,165
|
|
|
|
25,023
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
104,625
|
|
|
|
123,505
|
|
|
|
75,064
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Revenue:
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|
|
|
|
|
|
|
|
|
|
|
|
System Sales
|
|
|
28,551
|
|
|
|
43,333
|
|
|
|
28,316
|
|
Support Services
|
|
|
27,819
|
|
|
|
24,331
|
|
|
|
15,921
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
56,370
|
|
|
|
67,664
|
|
|
|
44,237
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit:
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|
|
|
|
|
|
|
|
|
|
|
|
System Sales
|
|
|
22,589
|
|
|
|
32,007
|
|
|
|
21,725
|
|
Support Services
|
|
|
25,666
|
|
|
|
23,834
|
|
|
|
9,102
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
48,255
|
|
|
$
|
55,841
|
|
|
$
|
30,827
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Margin:
|
|
|
|
|
|
|
|
|
|
|
|
|
System Sales
|
|
|
44.2
|
%
|
|
|
42.5
|
%
|
|
|
43.4
|
%
|
Support Services
|
|
|
48.0
|
%
|
|
|
49.5
|
%
|
|
|
36.4
|
%
|
Total
|
|
|
46.1
|
%
|
|
|
45.2
|
%
|
|
|
41.1
|
%
|
System sales gross margin was 44.2% in 2007, an increase of 1.7
percentage points over the 2006 level. The relative mix of
software to hardware comprising our system sales and the
relative mix of radiology to cardiology sales in a given period
can have a significant impact on the level of gross margin
earned on system sales. We purchase hardware from third parties
for purposes of filling the orders of our customers, and
therefore earn a relatively low margin on these sales relative
to software sales, which generally carry high gross margins.
Cardiology products in general earn slightly lower gross margins
than radiology products. In 2007, sales of both software and
hardware were less than in 2006, but hardware sales declined by
a greater amount than did software sales, which acted to
increase our system sales gross margin. Offsetting this increase
and as explained in the revenue section above, cardiology sales
increased in 2007 while radiology sales decreased, increasing
the relative contribution of cardiology sales to total sales,
which acted to reduce our 2007 gross margin percentage. Our
radiology software gross margin was slightly down in 2007
compared to 2006, generally due to volume and pricing
considerations.
We expect system sales gross margins on an annual basis in the
mid-forty percent range going forward. However, we also expect a
continuation of competitive pressures, which could act to lower
our system sales gross margin, and we expect fluctuations in the
system sales margins we earn quarter to quarter depending on the
sales mix factors described above.
35
System sales gross margin was 42.5% in 2006 compared to 43.4% in
2005, a decline of 0.9 percentage points. This decline in
system sales margin is related primarily to our acquisition of
Camtronics on November 1, 2005 and the inclusion of a full
twelve months of cardiology product line revenue and costs in
our revenue and gross margin in 2006. This lower cardiology
margin for the year met our initial expectations, though these
margins were lower in the first half of 2006 due to one-time
acquisition accounting adjustments to revenue deferred by
Camtronics prior to the acquisition. Additionally, our gross
margin on the third-party components of radiology system sales
was approximately two percentage points lower in 2006 than in
2005 due primarily to pricing considerations. Gross margin
earned on the software component of radiology system revenue was
flat with 2005 as a percentage of software revenue, and the
relative mix of the hardware and software components of
radiology revenue was approximately the same in 2006 as in 2005.
Support services gross margin was 48.0% in 2007, a decrease of
1.5 percentage points from the 2006 level. Both
professional services revenue and maintenance revenue can
provide significant cost leverage with respect to gross margin
earned in periods of increasing support services revenue, or can
adversely affect gross margin in periods of slower growth in
revenue because of the fixed nature of the costs of support
services revenue, generally labor and overhead and third-party
consultant costs. In 2007, our support services gross margin was
adversely affected by a lower volume of system installations, by
increased use of third-party consultants in the support area,
and by the increased costs of support personnel whose duties in
2006 were primarily administrative in nature and whose costs
were charged to general and administrative expense in that
period. Somewhat offsetting these increased costs were savings
derived from our reduction in workforce in May 2007.
Support services gross margin was 49.5% in 2006, an increase of
13.1 percentage points over the 2005 margin of 36.4%. In
2006, we benefited substantially from the cost leverage
described above, as the investments made in prior years in
support services headcount and technology were spread over an
increasing base of revenue-providing customers in both the
professional services and maintenance areas, and as that labor
force increased its efficiencies in service activities.
Correspondingly, support services revenue in 2005 earned a much
lower gross margin as our increased investments in employees and
technology had just been made and we had a smaller installed
base of customers. In addition, we benefited from inclusion of a
full twelve months of cardiology support services revenue in
2006, as cardiology support services typically earn a slightly
higher gross margin than radiology support services.
The timing of completion of individual system sales
installations can significantly impact the level of support
services revenue and gross margin from period to period. With
our current mix of business, we expect support services gross
margin on an annual basis slightly in excess of our system sales
gross margin, assuming continuing efficiencies from our support
staff and assuming the cardiology business continues to deliver
support services gross margin at the present level, but we also
expect some level of timing-based variability in the level of
support services gross margin reported from period to period.
Research
and Development, Sales and Marketing, and General and
Administrative Expenses
Total research and development, sales and marketing, and general
and administrative expenses for the year ended December 31,
2007 were $52.2 million compared to $52.9 million in
the corresponding prior year period, a decrease of
$0.7 million, or 1.2%, the result primarily of reduced
general and administrative expenses due to a change in the year
to year duties of some of our personnel, offset by increased
research and development expenses caused by higher utilization
and higher costs of outsourced development activities. The
decline of 1.2% in these expenses in 2007 compares to a total
revenue decline over the same period of 15.3%. As a percentage
of revenue, these expenses in total increased to 49.9% in 2007
compared to 42.8% in 2006 as the result of a 15.3% decline in
revenue without a corresponding decline in these expenses.
36
We expect our research and development expenses to continue to
increase as we continue to seek product improvements, while
general and administrative expenses should remain relatively
stable. Sales and marketing expenses may increase as the result
of our efforts to seek new markets and customers and further
penetrate our existing markets and customer base.
Research
and Development (R&D)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
Change (%)
|
|
|
2006
|
|
|
2005
|
|
|
Change
|
|
|
Change(%)
|
|
|
|
(In thousands except percentages)
|
|
|
(In thousands except percentages)
|
|
|
R&D Expense
|
|
$
|
20,179
|
|
|
$
|
17,368
|
|
|
$
|
2,811
|
|
|
|
16.2
|
%
|
|
$
|
17,368
|
|
|
$
|
11,652
|
|
|
$
|
5,716
|
|
|
|
49.1
|
%
|
% of Revenue
|
|
|
19.3
|
%
|
|
|
14.1
|
%
|
|
|
|
|
|
|
|
|
|
|
14.1
|
%
|
|
|
15.5
|
%
|
|
|
|
|
|
|
|
|
The increase in research and development expenses in 2007 of
$2.8 million, or 16.2%, is the result of a higher level of
utilization and higher costs of outsourced research and
development and related services. We engaged additional
third-party consultants in 2007 in an effort to improve our
software product offerings and their delivery to customers, and
expect that effort to continue through 2008. In addition, in
2006 we utilized a portion of our cardiology research and
development personnel to fulfill customer obligations existing
at the date of our acquisition of Camtronics, and accordingly
charged costs related to that effort to costs of revenue rather
than research and development. Those personnel returned to
research and development activities in 2007. Partially
offsetting the effects of these increases in research and
development was a reduction in our research and development
salaries and benefits expense resulting from our reduction in
engineering workforce in May 2007.
The increase in research and development expense in 2006
compared to 2005 of $5.7 million, or 49.1%, is almost
entirely the result of the acquisition of Camtronics on
November 1, 2005 and the inclusion of the former Camtronics
research and development expenses in our financial statements
for a full twelve month period in 2006. Increased research and
development expense resulting from the Camtronics acquisition
aside, the level of increase in research and development expense
in 2006 was minimized by a decline in direct headcount and
related expenses and in the number of operations personnel
performing research and development activities as the result of
the consolidation of engineering staffs between the companies
and the efficiencies that resulted from that consolidation.
Partially offsetting the effects of the decline in headcount
were increased research and development overhead expenses,
primarily depreciation, related to the upgrade of laboratory
facilities during 2005 and 2006 and the physical consolidation
of facilities into a single location in 2006, and increased
stock-based compensation expense recognized in 2006 as the
result of initial adoption of SFAS No. 123R.
Sales
and Marketing (S&M)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
Change (%)
|
|
|
2006
|
|
|
2005
|
|
|
Change
|
|
|
Change(%)
|
|
|
|
(In thousands except percentages)
|
|
|
(In thousands except percentages)
|
|
|
S&M Expense
|
|
$
|
18,285
|
|
|
$
|
18,459
|
|
|
$
|
(174
|
)
|
|
|
(0.9
|
)%
|
|
$
|
18,459
|
|
|
$
|
12,238
|
|
|
$
|
6,221
|
|
|
|
50.8
|
%
|
% of Revenue
|
|
|
17.5
|
%
|
|
|
14.9
|
%
|
|
|
|
|
|
|
|
|
|
|
14.9
|
%
|
|
|
16.3
|
%
|
|
|
|
|
|
|
|
|
Sales and marketing expense, which consists primarily of
salaries and related benefits, sales commissions, travel, and
expenses related to exhibits and trade shows, was relatively
flat in 2007 compared to 2006. Salaries and related benefits
were down for the year on slightly reduced headcount, and sales
commissions were slightly up for the year. Sales commissions are
earned based on achievement of various milestones in completion
of individual sales, including customer payment, and are
recorded as expense over the period earned. Sales orders in 2007
were concentrated in fewer individual sales personnel than in
2006, resulting in a higher rate of commission for those
personnel, and we sold a significant number of five year service
contract renewals in our cardiology business in place of the
historical one year service contracts. These factors acted to
slightly increase commissions expense in 2007 despite a lower
level of sales orders compared to 2006. Combined travel,
exhibits and trade shows expenses were marginally higher than in
2006.
37
The increase in sales and marketing expense in 2006 compared to
2005 of $6.2 million, or 50.8%, is largely the result of
the acquisition of Camtronics on November 1, 2005 and the
reflection in the 2006 financial statements of a full twelve
months of the former Camtronics sales and marketing
expenses, and related cross-training of the sales staffs and
cross-selling activities between the radiology and cardiology
product lines. Increased sales and marketing expenses in 2006
were, however, also the result of our efforts to extend our
product base to existing and prospective customers and to
increase awareness of our products in the marketplace.
Accordingly, expenses were approximately $0.6 million
higher in 2006 than in 2005 in the combined areas of
advertising, targeted marketing and market research, customer
relations, and trade show attendance and related expenses. In
addition, stock-based compensation expense under SFAS 123R
added approximately $0.5 million to 2006 sales and
marketing expense. Partially offsetting these increases were
declines in personnel and related expenses reflecting a slight
decline in sales and marketing headcount in 2006, and in
commissions expense, which declined despite increased revenue as
the result of a higher percentage of sales to existing
customers, which result in lower commission percentage than
sales to new customers, and the effects of timing of the earning
of commissions and of differences in the types of sales closed
and installed in 2006 compared to 2005.
General
and Administrative (G&A)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Change
|
|
|
Change (%)
|
|
|
2006
|
|
|
2005
|
|
|
Change
|
|
|
Change (%)
|
|
|
|
(In thousands except percentages)
|
|
|
(In thousands except percentages)
|
|
|
G&A Expense
|
|
$
|
13,750
|
|
|
$
|
17,028
|
|
|
$
|
(3,278
|
)
|
|
|
(19.3
|
)%
|
|
$
|
17,028
|
|
|
$
|
10,945
|
|
|
$
|
6,083
|
|
|
|
55.6
|
%
|
% of Revenue
|
|
|
13.1
|
%
|
|
|
13.8
|
%
|
|
|
|
|
|
|
|
|
|
|
13.8
|
%
|
|
|
14.6
|
%
|
|
|
|
|
|
|
|
|
General and administrative expense declined by
$3.3 million, or 19.3% in 2007 compared to 2006. In 2006, a
portion of our support services personnel were temporarily
engaged in duties of an administrative nature, and accordingly
their costs were charged to general and administrative expense.
These personnel no longer perform administrative duties and
therefore their costs are no longer included in general and
administrative expense. This change in function, along with
reduced executive bonuses in 2007 based on the financial
performance of the Company, are the primary cause of reduced
2007 general and administrative expense, partially offset by
increased audit and legal expenses related to Sarbanes-Oxley
compliance and by an increase in our allowance for doubtful
accounts receivable.
The increase in general and administrative expense of
$6.1 million, or 55.6%, in 2006 compared to 2005 is the
result of the acquisition of Camtronics on November 1, 2005
and resulting inclusion of a full twelve months of Camtronics
general and administrative expense in our 2006 financial
statements, of our compliance with Sarbanes-Oxley, of
stock-based compensation expense, and of our growth in revenue
over that period. Our general and administrative staff was
augmented in 2006, adding personnel and personnel-related
expense of approximately $0.5 million in support of our
increased base of employees and public company obligations. In
addition and for the same reasons, our insurance, property taxes
and similar expenses grew significantly in 2006. The most
significant increases in expense in 2006 compared to 2005 were
our professional and consulting fees and related expenses
incurred in connection with Sarbanes-Oxley compliance
(approximately $1.2 million), and our recognition of stock-
based compensation expense in accordance with
SFAS No. 123R of approximately $1.1 million in
excess of the 2005 level.
We expect a future rate of growth in general and administrative
expenses of less than that of our other operating expenses and
revenue largely due to economies of scale available in most
administrative areas.
38
Amortization
of Intangible Assets Related to Camtronics
Acquisition
Amortization expense related to the acquisition of Camtronics
consists of straight-line amortization of the intangible assets
acquired with Camtronics over periods of one to six years. The
estimated useful lives of these 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 $5.4 million in 2006.
Integration costs were comprised primarily of employee costs
including travel and relocation expenses, severance and related
expenses of terminated employees, and the costs of facility
closure. We believe that Camtronics was fully integrated into
our business as of December 31, 2006.
Employee
Severance and Related Expenses
In second quarter 2007 we acted to align our operating expenses
with the current level of revenue by reducing our workforce
through elimination of certain positions and normal attrition,
eliminating thirty positions, primarily in the customer service
and engineering areas. In addition, in the second and third
quarters of 2007 we terminated the employment of three senior
level engineering and sales and marketing executives, and in the
fourth quarter of 2007 we accepted the resignation of the Chief
Operating Officer of the Company, and incurred expenses for
amounts due these executives under their employment agreements
with us including, where applicable, the expense of immediate
vesting of unvested stock options and restricted stock awards.
The total expense of $2.0 million related to our reduction
in workforce and termination of executives is included in
Employee severance and related expenses in the
2007 statement of operations.
Operating
Loss
For the year ended December 31, 2007, operating loss
increased by $1.5 million as compared to the year ended
December 31, 2006. Operations were negatively impacted by
our decline in revenue and by employee severance and related
costs in 2007 and by Camtronics integration costs in 2006 and
2005. Excluding employee severance and related costs and
Camtronics integration costs, our operating loss improved to
$1.0 million in 2006 from $5.0 million in 2005, and
worsened to $5.9 million in 2007, the result primarily of
our 15.3% decline in revenue.
Other
Income and Expense
For the year ended December 31, 2007, interest income
increased by $0.3 million on increased short-term
investment rates, and interest expense declined by
$0.2 million on payment of scheduled maturities of debt and
capital leases without further borrowing.
For the year ended December 31, 2006, interest income and
interest expense declined from the prior year by
$0.8 million and $0.9 million, respectively, as a
result of the decline in short-term investment balances from
their peak at completion of the initial public offering in
February 2005 and the payment of scheduled maturities of debt
and capital lease obligations during 2006.
39
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.
Certain reclassifications have been made to prior year financial
information to provide comparability with the current year
presentation.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
|
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2006
|
|
|
2006
|
|
|
2006
|
|
|
2007
|
|
|
2007
|
|
|
2007
|
|
|
2007
|
|
|
|
(Dollars in thousands, except per share data)
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
System sales
|
|
$
|
17,269
|
|
|
$
|
17,601
|
|
|
$
|
19,370
|
|
|
$
|
21,100
|
|
|
$
|
13,668
|
|
|
$
|
11,235
|
|
|
$
|
10,706
|
|
|
$
|
15,531
|
|
Support services
|
|
|
9,732
|
|
|
|
12,415
|
|
|
|
13,641
|
|
|
|
12,377
|
|
|
|
13,682
|
|
|
|
14,341
|
|
|
|
12,022
|
|
|
|
13,440
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
27,001
|
|
|
|
30,016
|
|
|
|
33,011
|
|
|
|
33,477
|
|
|
|
27,350
|
|
|
|
25,576
|
|
|
|
22,728
|
|
|
|
28,971
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
System sales
|
|
|
13,284
|
|
|
|
9,977
|
|
|
|
10,712
|
|
|
|
9,360
|
|
|
|
8,722
|
|
|
|
6,310
|
|
|
|
6,327
|
|
|
|
7,192
|
|
Support services
|
|
|
6,218
|
|
|
|
6,534
|
|
|
|
6,187
|
|
|
|
5,392
|
|
|
|
7,160
|
|
|
|
6,894
|
|
|
|
7,311
|
|
|
|
6,454
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenue
|
|
|
19,502
|
|
|
|
16,511
|
|
|
|
16,899
|
|
|
|
14,752
|
|
|
|
15,882
|
|
|
|
13,204
|
|
|
|
13,638
|
|
|
|
13,646
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
7,499
|
|
|
|
13,505
|
|
|
|
16,112
|
|
|
|
18,725
|
|
|
|
11,468
|
|
|
|
12,372
|
|
|
|
9,090
|
|
|
|
15,325
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
4,130
|
|
|
|
4,032
|
|
|
|
4,601
|
|
|
|
4,605
|
|
|
|
5,139
|
|
|
|
4,668
|
|
|
|
5,567
|
|
|
|
4,805
|
|
Sales and marketing
|
|
|
4,002
|
|
|
|
4,589
|
|
|
|
4,435
|
|
|
|
5,433
|
|
|
|
4,392
|
|
|
|
4,500
|
|
|
|
4,121
|
|
|
|
5,272
|
|
General and administrative
|
|
|
4,338
|
|
|
|
3,851
|
|
|
|
4,495
|
|
|
|
4,344
|
|
|
|
3,454
|
|
|
|
2,752
|
|
|
|
3,136
|
|
|
|
4,408
|
|
Amortization and write-off of intangible assets related to
Camtronics acquisition
|
|
|
885
|
|
|
|
885
|
|
|
|
885
|
|
|
|
885
|
|
|
|
345
|
|
|
|
345
|
|
|
|
346
|
|
|
|
345
|
|
Integration costs related to Camtronics acquisition
|
|
|
1,204
|
|
|
|
1,077
|
|
|
|
2,062
|
|
|
|
1,026
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee severance and related expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
578
|
|
|
|
298
|
|
|
|
1,125
|
|
(Gain) loss on disposal of property and equipment
|
|
|
(20
|
)
|
|
|
4
|
|
|
|
|
|
|
|
453
|
|
|
|
169
|
|
|
|
44
|
|
|
|
115
|
|
|
|
225
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
14,539
|
|
|
|
14,438
|
|
|
|
16,478
|
|
|
|
16,746
|
|
|
|
13,499
|
|
|
|
12,887
|
|
|
|
13,583
|
|
|
|
16,180
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) income
|
|
|
(7,040
|
)
|
|
|
(933
|
)
|
|
|
(366
|
)
|
|
|
1,979
|
|
|
|
(2,031
|
)
|
|
|
(515
|
)
|
|
|
(4,493
|
)
|
|
|
(855
|
)
|
Interest income, net of interest expense
|
|
|
47
|
|
|
|
76
|
|
|
|
93
|
|
|
|
112
|
|
|
|
196
|
|
|
|
227
|
|
|
|
213
|
|
|
|
173
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(6,993
|
)
|
|
$
|
(857
|
)
|
|
$
|
(273
|
)
|
|
$
|
2,091
|
|
|
$
|
(1,835
|
)
|
|
$
|
(288
|
)
|
|
$
|
(4,280
|
)
|
|
$
|
(682
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income per share-basic and diluted
|
|
$
|
(0.34
|
)
|
|
$
|
(0.04
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
0.10
|
|
|
$
|
(0.09
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.20
|
)
|
|
$
|
(0.03
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our operating results have fluctuated from quarter to quarter
and are likely to continue to fluctuate for a variety of
reasons, as explained below.
Revenue. In the past, we have at times
experienced lower bookings volume 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, may cause 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.
Gross Margin. Our gross margin fluctuates from
quarter to quarter as a result of changes in the relative
contributions to our total revenue from system sales and support
services, the mix of the hardware and
40
software components of systems sales revenue, the mix of
cardiology revenue to radiology revenue, and changes in the
productivity of support services personnel.
Operating Expenses. Our sales and marketing
expenses may fluctuate due to the timing of sales and of
individual marketing programs. 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.
Some important additional factors that could cause our revenue
and operating results to fluctuate from quarter to quarter
include the length of the sales cycle or implementation time for
our solutions, changes in our pricing policies, new product
introductions and product enhancements by us or our competitors,
technical difficulties or downtime in our solutions, 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 from quarter to quarter. 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.
Liquidity
and Capital Resources
As of December 31, 2007 and 2006, our liquidity and net
cash position was as follows (in thousands, except ratios):
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
|
2007
|
|
|
2006
|
|
|
Working
capital*
|
|
$
|
21,304
|
|
|
$
|
21,392
|
|
Current
ratio**
|
|
|
1.66:1.0
|
|
|
|
1.52:1.0
|
|
Cash and cash equivalents
|
|
$
|
17,034
|
|
|
$
|
23,008
|
|
Short-term borrowings and long-term debt
|
|
$
|
89
|
|
|
$
|
961
|
|
|
|
|
* |
|
Working capital is total current assets less total current
liabilities. |
|
** |
|
Current ratio is the ratio of current assets to current
liabilities. |
The decline in cash and cash equivalents in 2007 was the result
primarily of our net loss for the year. The decrease in
short-term borrowings and long-term debt from December 31,
2006 to December 31, 2007 is a result of scheduled debt
retirement.
Operating
Activities
During the year ended December 31, 2007, net cash used in
operations was $3.2 million, representing a decline in cash
from operations of $10.4 million from the level of net cash
provided by operations in 2006. Our net loss for the year of
$7.1 million and adverse changes in some of our working
capital accounts, primarily deferred revenue, which declined by
$9.1 million, were primarily responsible for the decline in
cash from operating activities. Our working capital is affected
by the volume of operations from time to time, which can affect
our point in time investments in accounts receivable and
inventories, by the timing of payments of our trade liabilities
and the receipt of payment from our customers, and by the timing
of receipt of acceptances of third-party components at our
customers sites.
During the year ended December 31, 2006, net cash provided
by operations was $7.3 million, representing an improvement
of $9.1 million over cash used in operations in 2005. The
improvement was due primarily to improved operations. In
addition, year to year changes in the levels of cash required to
maintain accounts receivable and inventories improved our cash
position by $12.2 million, which was offset by a decline in
cash required for accounts payable of $9.9 million.
During the year ended December 31, 2005, net cash used in
operations was $1.9 million, which primarily related to our
net loss of $5.0 million and changes in some of our working
capital accounts. We experienced significant increases in trade
accounts receivable 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
41
of new customer contracts. Our inventory increased as a result
of the timing of acceptances of third party components at
customer sites. The changes in other working capital accounts
were primarily driven by increased volume of operations and the
timing of cash payments.
Investing
Activities
We used cash of $2.9 million, $0.9 million, and
$53.3 million for investing activities during 2007, 2006
and 2005, respectively.
We used $2.7 million, $5.2 million, and
$7.7 million for property and equipment purchases during
2007, 2006 and 2005, respectively. Purchases in 2007 were
primarily investments in computer equipment and software for
internal use and in equipment leased to customers. Capital
purchases for 2006 and 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,
and to improvements to the building we own in Hartland,
Wisconsin. Future capital expenditures will be made at a level
consistent with our growth, development efforts, and staffing
levels.
In November 2005, we used $40.4 million to acquire all the
stock of Camtronics.
We used $44.2 million for the purchase of marketable
securities and received proceeds of $39.3 million upon the
maturity or sale of some of these securities during 2005. Those
marketable securities consisted of U.S. government agency
obligations and corporate commercial paper, all with maturities
of less than one year.
Financing
Activities
Net cash provided by financing activities totaled
$0.1 million in 2007, $1.1 million in 2006, and
$64.5 million in 2005. Net cash provided by financing
activities in 2007 consisted of the proceeds of exercise of
employee stock options of $0.6 million and a decrease in
our restricted cash balance, offset by payment of scheduled
maturities of debt and capital lease obligations of
$0.9 million. Net cash provided by financing activities in
2006 consisted of $3.9 million in proceeds from issuance of
common stock on the exercise of employee stock options, offset
by the payment of scheduled debt and lease obligations of
$2.8 million. Cash provided by financing activities for
2005 resulted primarily from the completion of our initial
public offering. This inflow of cash was partially offset by
repayment of our $4.0 million subordinated debt and other
payments on borrowings.
The following table summarizes, as of December 31, 2007,
the general timing of future payments (including payments of
interest) under our outstanding capital and operating lease
agreements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment Due By Period (In thousands)
|
|
|
|
|
|
|
Less than
|
|
|
|
|
|
|
|
|
More than
|
|
Contractual Cash Obligations
|
|
Total
|
|
|
1 year
|
|
|
1-3 years
|
|
|
3-5 years
|
|
|
5 years
|
|
|
|
(Dollars in thousands)
|
|
|
Capital lease obligations
|
|
$
|
89
|
|
|
$
|
36
|
|
|
$
|
53
|
|
|
|
|
|
|
|
|
|
Operating leases
|
|
|
5,085
|
|
|
|
1,616
|
|
|
|
2,344
|
|
|
$
|
1,051
|
|
|
$
|
74
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual cash obligations
|
|
$
|
5,174
|
|
|
$
|
1,652
|
|
|
$
|
2,397
|
|
|
$
|
1,051
|
|
|
$
|
74
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our April 2004 loan and security agreement with a bank, as
amended in April, 2006 and August 2007, provides for borrowing
of up to $15.0 million, subject to certain restrictions.
Interest accrues at the banks prime rate of interest. This
agreement is for a term of two years, at the end of which all
amounts borrowed become due and payable. Security for any
amounts borrowed under the agreement consists of all assets of
the Company other than our intellectual property and real
estate. As of December 31, 2007 and 2006, we had no
outstanding balances under this line of credit.
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 2008. However, any projections of future
cash inflows and outflows are subject to uncertainty. Our future
cash requirements will depend on many factors, including our
ability to generate revenue growth, the expansion of
42
our marketing and sales activities, the timing and extent of
spending to support product development efforts and expansion
into new markets, the timing of introductions of new products
and services, enhancements to existing products and services,
and the continuing market acceptance of our solutions. 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. The recent decline
in price of our common stock may make the raising of additional
equity funding on terms that are acceptable to us more
difficult. It is possible that additional funds may not be
available to us 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 purpose 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 September, 2006, the FASB issued Statement of Financial
Accounting Standards No. 157, Fair Value Measurements
(SFAS 157). This pronouncement defines fair
value, establishes a framework for measuring fair value under
generally accepted accounting principles, and expands financial
statement disclosure of fair value measurements. The Statement
does not require any new fair value measurements. The provisions
of SFAS 157, as issued, are effective for fiscal years
beginning after November 1, 2007. In February, 2008, the
FASB released a FASB Staff Position
(No. 157-2)
which delayed the effective date of SFAS 157 for all
nonfinancial assets and nonfinancial liabilities, except those
that are recognized or disclosed at fair value in the financial
statements on a recurring basis. The Company will adopt the
provisions of SFAS 157 for its financial assets and
liabilities as of January 1, 2008, and for its nonfinancial
assets and liabilities as of January 1, 2009, and does not
currently expect a material impact on its reported financial
condition 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 were invested in short-term,
interest-bearing, investment grade securities pending their
application. The value of these securities are 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, 2007.
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 short-term certificates of
deposit and similar instruments available through our
established banking relationships. These investments are
generally not collateralized and mature in less than 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. We believe we have no material exposure to interest
rate risk arising from our investments.
43
|
|
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.
|
|
ITEM 9A.
|
CONTROLS
AND PROCEDURES
|
Evaluation
of Disclosure Controls and Procedures
Our management, with the participation of our principal
executive officer and principal 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, 2007. Based
on this evaluation, our principal executive officer and
principal financial officer concluded that, as of
December 31, 2007, 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.
Managements
Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting as defined in
Rules 13a-15(f)
and
15d-15(f)
under the Securities and Exchange Act. Our internal control over
financial reporting is designed to provide reasonable assurance
regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in
accordance with U.S. generally accepted accounting
principles, or GAAP. Our internal control over financial
reporting includes those policies and procedures that:
|
|
|
|
|
pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and
dispositions of our assets;
|
|
|
|
provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in
accordance with GAAP, and that our receipts and expenditures are
being made only in accordance with authorizations of our
management and directors; and
|
|
|
|
provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition or use of our assets that
could have a material effect on our financial statements.
|
Because of inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods
are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of
compliance with the policies and procedures may deteriorate.
Our management assessed the effectiveness of our internal
control over financial reporting as of December 31, 2007.
In making this assessment, our management used the criteria set
forth by the Committee of Sponsoring Organizations of the
Treadway Commission in Internal Control-Integrated
Framework.
44
Based on our assessment and those criteria, our management
believes that we maintained effective internal control over
financial reporting.
Our independent registered public accounting firm has issued an
attestation report on our internal control over financial
reporting as of December 31, 2007. That report appears on
page F-3
of this
Form 10-K.
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 fourth quarter of
2007 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
|
|
ITEM 9B.
|
OTHER
INFORMATION
|
Not applicable.
45
PART III
|
|
ITEM 10.
|
DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
|
The information called for by this Item will be contained in our
definitive Proxy Statement for our 2008 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 and other officers,
directors, and employees in accordance with applicable rules and
regulations of the SEC and the NASDAQ Global 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 2008 Annual Meeting of
Shareholders and is incorporated herein by reference.
|
|
ITEM 12.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
|
The information called for by this Item will be contained in our
definitive Proxy Statement for our 2008 Annual Meeting of
Shareholders and is incorporated herein by reference.
|
|
ITEM 13.
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
|
The information called for by this Item will be contained in our
definitive Proxy Statement for our 2008 Annual Meeting of
Shareholders and is incorporated herein by reference.
|
|
ITEM 14.
|
PRINCIPAL
ACCOUNTING FEES AND SERVICES
|
The information called for by this Item will be contained in our
definitive Proxy Statement for our 2008 Annual Meeting of
Shareholders and is incorporated herein by reference.
PART IV
|
|
ITEM 15.
|
EXHIBITS,
FINANCIAL STATEMENT SCHEDULES
|
(a) The following documents are filed as part of this
Report:
|
|
|
|
|
|
|
Page Number
|
|
Description
|
|
in Report
|
|
|
|
|
|
F-2
|
|
|
|
|
F-3
|
|
|
|
|
F-4
|
|
|
|
|
F-5
|
|
|
|
|
F-6
|
|
|
|
|
F-7
|
|
|
|
|
F-8
|
|
46
|
|
2.
|
Financial
Statement Schedules
|
|
|
|
|
|
Page Number
|
Description
|
|
in Report
|
|
Schedule II Valuation and Qualifying Accounts
and Reserves for the three years ended December 31, 2007
|
|
Follows page
F-28
|
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 February 4, 2005)
|
|
3
|
.2
|
|
Emageon Inc. Amended and Restated Bylaws (incorporated by
reference to Exhibit 3.5 to the Companys Current
Report on
Form 8-K
filed on November 15, 2007)
|
|
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)
|
|
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)
|
47
|
|
|
|
|
Exhibit
|
|
|
No.
|
|
Description
|
|
|
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)
|
|
10
|
.16#
|
|
Employment Agreement of Grady Floyd (incorporated by reference
to Exhibit 10.1 to the Companys Current Report on
Form 8-K
filed on April 4, 2006)
|
|
10
|
.17#
|
|
Employment Agreement of Chris Perkins (incorporated by reference
to Exhibit 10.1 to the Companys Current Report on
Form 8-K
filed on December 12, 2007)
|
|
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
|
|
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
|
.1*
|
|
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. |
|
# |
|
Management contract or compensatory plan or arrangement. |
|
|
|
Confidential treatment has been granted for portions of this
exhibit. |
48
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ON FINANCIAL STATEMENTS
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, 2007 and
2006, and the related consolidated statements of operations,
stockholders equity, and cash flows for each of the three
years in the period ended December 31, 2007. Our audits
also include the financial statement schedule listed in the
Index at Item 15(a). These consolidated financial
statements and schedule are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these consolidated 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. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the
consolidated financial position of Emageon Inc. at
December 31, 2007 and 2006, and the results of its
operations and its cash flows for each of the three years in the
period ended December 31, 2007, 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.
As discussed in Note 2 of the Consolidated Financial
Statements, in 2006 the Company adopted Statement of Financial
Accounting Standards No. 123 (Revised), Share Based
Payment.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States),
Emageon Inc.s internal control over financial reporting as
of December 31, 2007, based on criteria established in
Internal Control-Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway
Commission and our report dated March 17, 2008 expressed an
unqualified opinion thereon.
Atlanta, Georgia
March 17, 2008
F-2
Report of
Independent Registered Public Accounting Firm on Internal
Control
Over Financial Reporting
To the Board of Directors and Stockholders
Emageon Inc.
We have audited Emageon Incs internal control over
financial reporting as of December 31, 2007, based on
criteria established in Internal Control
Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (the COSO
criteria). Emageon Inc.s management is responsible for
maintaining effective internal control over financial reporting,
and for its assessment of the effectiveness of internal control
over financial reporting included in the accompanying
Managements Report on Internal Control Over Financial
Reporting. Our responsibility is to express an opinion on the
Companys internal control over financial reporting based
on our audit.
We conducted our audit 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 effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material weakness exists, testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk, and performing such other procedures as we
considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, Emageon maintained, in all material respects,
effective internal control over financial reporting as of
December 31, 2007, based on the COSO criteria.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of Emageon Inc. as of
December 31, 2007 and 2006, and the related consolidated
statements of operations, stockholders equity, and cash
flows for each of the three years in the period ended
December 31, 2007, and our report dated March 17, 2008
expressed an unqualified opinion thereon.
Atlanta, Georgia
March 17, 2008
/s/ Ernst & Young LLP
F-3
EMAGEON
INC.
CONSOLIDATED
BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
(In thousands, except for share data)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
17,034
|
|
|
$
|
23,008
|
|
Trade accounts receivable, net of allowance for doubtful
accounts
of $910 and $277 at December 31, 2007 and 2006, respectively
|
|
|
26,796
|
|
|
|
26,706
|
|
Inventories
|
|
|
6,249
|
|
|
|
8,579
|
|
Prepaid expenses and other current assets
|
|
|
3,398
|
|
|
|
4,459
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
53,477
|
|
|
|
62,752
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
15,143
|
|
|
|
18,362
|
|
Other noncurrent assets
|
|
|
3,070
|
|
|
|
1,808
|
|
Intangible assets:
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
21,667
|
|
|
|
21,210
|
|
Customer relationships, net
|
|
|
5,017
|
|
|
|
6,399
|
|
Acquired technology, net
|
|
|
645
|
|
|
|
1,836
|
|
Capitalized software development costs, net
|
|
|
275
|
|
|
|
645
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets
|
|
|
27,604
|
|
|
|
30,090
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
99,294
|
|
|
$
|
113,012
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
9,581
|
|
|
$
|
9,738
|
|
Accrued payroll and related costs
|
|
|
2,877
|
|
|
|
3,770
|
|
Deferred revenue
|
|
|
16,382
|
|
|
|
23,953
|
|
Other accrued expenses
|
|
|
3,297
|
|
|
|
2,946
|
|
Current portion of long-term debt and capital lease obligations
|
|
|
36
|
|
|
|
953
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
32,173
|
|
|
|
41,360
|
|
Long-term deferred revenue
|
|
|
4,306
|
|
|
|
5,851
|
|
Other long-term liabilities
|
|
|
466
|
|
|
|
686
|
|
Long-term debt and capital lease obligations
|
|
|
53
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
36,998
|
|
|
|
47,905
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Common stock, $0.001 par value; 165,050,000 shares
authorized;
21,626,155 shares and 21,483,643 shares issued; and
21,450,398 shares and 21,307,886 shares outstanding at
December 31, 2007 and 2006, respectively
|
|
|
22
|
|
|
|
21
|
|
Additional paid in capital
|
|
|
126,332
|
|
|
|
122,538
|
|
Accumulated other comprehensive income
|
|
|
741
|
|
|
|
262
|
|
Accumulated deficit
|
|
|
(64,524
|
)
|
|
|
(57,439
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
62,571
|
|
|
|
65,382
|
|
Treasury stock: 175,757 shares
|
|
|
(275
|
)
|
|
|
(275
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
62,296
|
|
|
|
65,107
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
99,294
|
|
|
$
|
113,012
|
|
|
|
|
|
|
|
|
|
|
F-4
EMAGEON
INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands, except share amounts)
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
System sales
|
|
$
|
51,140
|
|
|
$
|
75,340
|
|
|
$
|
50,041
|
|
Support services
|
|
|
53,485
|
|
|
|
48,165
|
|
|
|
25,023
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
104,625
|
|
|
|
123,505
|
|
|
|
75,064
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
System sales
|
|
|
28,551
|
|
|
|
43,333
|
|
|
|
28,316
|
|
Support services
|
|
|
27,819
|
|
|
|
24,331
|
|
|
|
15,921
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenue
|
|
|
56,370
|
|
|
|
67,664
|
|
|
|
44,237
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
48,255
|
|
|
|
55,841
|
|
|
|
30,827
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
20,179
|
|
|
|
17,368
|
|
|
|
11,652
|
|
Sales and marketing
|
|
|
18,285
|
|
|
|
18,459
|
|
|
|
12,238
|
|
General and administrative
|
|
|
13,750
|
|
|
|
17,028
|
|
|
|
10,945
|
|
Amortization and write-off of intangible assets related to
Camtronics acquisition
|
|
|
1,381
|
|
|
|
3,540
|
|
|
|
993
|
|
Integration costs related to Camtronics acquisition
|
|
|
|
|
|
|
5,369
|
|
|
|
244
|
|
Employee severance and related expenses
|
|
|
2,001
|
|
|
|
|
|
|
|
|
|
Loss on disposal of property and equipment
|
|
|
553
|
|
|
|
437
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
56,149
|
|
|
|
62,201
|
|
|
|
36,072
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(7,894
|
)
|
|
|
(6,360
|
)
|
|
|
(5,245
|
)
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
908
|
|
|
|
655
|
|
|
|
1,497
|
|
Interest expense
|
|
|
(99
|
)
|
|
|
(327
|
)
|
|
|
(1,249
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(7,085
|
)
|
|
$
|
(6,032
|
)
|
|
$
|
(4,997
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share basic and diluted
|
|
$
|
(0.33
|
)
|
|
$
|
(0.29
|
)
|
|
$
|
(0.28
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common stock outstanding basic and
diluted
|
|
|
21,385,487
|
|
|
|
20,935,685
|
|
|
|
17,975,083
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-5
EMAGEON
INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands)
|
|
|
Operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(7,085
|
)
|
|
$
|
(6,032
|
)
|
|
$
|
(4,997
|
)
|
Adjustments to reconcile net loss to net cash (used in) provided
by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
5,941
|
|
|
|
6,990
|
|
|
|
5,628
|
|
Provision for doubtful accounts
|
|
|
633
|
|
|
|
|
|
|
|
|
|
Amortization of intangible assets
|
|
|
3,013
|
|
|
|
4,969
|
|
|
|
1,626
|
|
Write off of intangible assets related to Camtronics
acquisition,
net of tax liability
|
|
|
|
|
|
|
|
|
|
|
403
|
|
Amortization and write off of subordinated debt discount
|
|
|
|
|
|
|
|
|
|
|
646
|
|
Employee stock based compensation expense
|
|
|
3,212
|
|
|
|
3,430
|
|
|
|
1,211
|
|
Loss on disposal of property and equipment
|
|
|
553
|
|
|
|
702
|
|
|
|
|
|
Other operating activities
|
|
|
|
|
|
|
129
|
|
|
|
215
|
|
Changes in operating assets and liabilities, net of
acquired companies
|
|
|
(9,444
|
)
|
|
|
(2,925
|
)
|
|
|
(6,613
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by operating activities
|
|
|
(3,177
|
)
|
|
|
7,263
|
|
|
|
(1,881
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(2,693
|
)
|
|
|
(5,229
|
)
|
|
|
(7,680
|
)
|
Purchases of marketable securities
|
|
|
|
|
|
|
|
|
|
|
(44,198
|
)
|
Proceeds from maturities of marketable securities
|
|
|
|
|
|
|
5,000
|
|
|
|
39,335
|
|
Capitalized software development costs
|
|
|
(70
|
)
|
|
|
(652
|
)
|
|
|
(354
|
)
|
Other investing activities
|
|
|
(125
|
)
|
|
|
|
|
|
|
|
|
Purchase price of Camtronics, net of cash received
|
|
|
|
|
|
|
|
|
|
|
(40,359
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(2,888
|
)
|
|
|
(881
|
)
|
|
|
(53,256
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock, net of issuance costs
|
|
|
582
|
|
|
|
3,892
|
|
|
|
70,630
|
|
Payment of debt and capital lease obligations
|
|
|
(941
|
)
|
|
|
(2,788
|
)
|
|
|
(6,515
|
)
|
Decrease in restricted cash
|
|
|
445
|
|
|
|
|
|
|
|
|
|
Other financing activities
|
|
|
|
|
|
|
|
|
|
|
432
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
86
|
|
|
|
1,104
|
|
|
|
64,547
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash
|
|
|
5
|
|
|
|
2
|
|
|
|
116
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash
|
|
|
(5,974
|
)
|
|
|
7,488
|
|
|
|
9,526
|
|
Cash at beginning of year
|
|
|
23,008
|
|
|
|
15,520
|
|
|
|
5,994
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash at end of year
|
|
$
|
17,034
|
|
|
$
|
23,008
|
|
|
$
|
15,520
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
104
|
|
|
$
|
357
|
|
|
$
|
1,266
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-6
EMAGEON
INC.
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS EQUITY (DEFICIT)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
Preferred Stock
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Other
|
|
|
|
|
|
|
|
|
Stockholders
|
|
|
|
|
|
|
Carrying
|
|
|
Common Stock
|
|
|
Paid in
|
|
|
Comprehensive
|
|
|
Treasury
|
|
|
Accumulated
|
|
|
Equity
|
|
|
|
Shares
|
|
|
Value
|
|
|
Shares
|
|
|
Par Value
|
|
|
Capital
|
|
|
Income
|
|
|
Stock
|
|
|
Deficit
|
|
|
(Deficit)
|
|
|
|
(In thousands, except for share data)
|
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,211
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,211
|
|
Foreign currency translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
93
|
|
|
|
|
|
|
|
|
|
|
|
93
|
|
Unrealized 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
|
|
Exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
787,699
|
|
|
|
|
|
|
|
3,772
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,772
|
|
Exercise of warrants
|
|
|
|
|
|
|
|
|
|
|
38,117
|
|
|
|
|
|
|
|
46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
46
|
|
Other stock issuance
|
|
|
|
|
|
|
|
|
|
|
4,400
|
|
|
|
|
|
|
|
75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
75
|
|
Stock based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,430
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,430
|
|
Vesting of restricted stock
|
|
|
|
|
|
|
|
|
|
|
24,514
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
169
|
|
|
|
|
|
|
|
|
|
|
|
169
|
|
Realized loss on sale of marketable securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
8
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,032
|
)
|
|
|
(6,032
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
21,483,643
|
|
|
$
|
21
|
|
|
$
|
122,538
|
|
|
$
|
262
|
|
|
$
|
(275
|
)
|
|
$
|
(57,439
|
)
|
|
$
|
65,107
|
|
Exercise of stock options
|
|
|
|
|
|
|
|
|
|
|
108,683
|
|
|
|
1
|
|
|
|
582
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
583
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,212
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,212
|
|
Vesting of restricted stock
|
|
|
|
|
|
|
|
|
|
|
33,829
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
479
|
|
|
|
|
|
|
|
|
|
|
|
479
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,085
|
)
|
|
|
(7,085
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2007
|
|
|
|
|
|
$
|
|
|
|
|
21,626,155
|
|
|
$
|
22
|
|
|
$
|
126,332
|
|
|
$
|
741
|
|
|
$
|
(275
|
)
|
|
$
|
(64,524
|
)
|
|
$
|
62,296
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-7
EMAGEON
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
Years
Ended December 31, 2007, 2006, and 2005
|
|
Note 1.
|
Business
Description and Background
|
Business
Description
Emageon Inc. (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, orthopedics, comprehensive support services and
third-party components. Emageons web-enabled advanced
visualization software provides physicians with tools to
manipulate and analyze images in two dimensions and three
dimensions.
Background
Emageon Inc. was incorporated in Delaware on January 3,
2000. In May 2003, the Company acquired Ultravisual Medical
Systems Corporation (Ultravisual), and in November
2005, the Company acquired Camtronics Medical Systems, Ltd.
(Camtronics), 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.
|
|
Note 2.
|
Summary
of Significant Accounting Policies
|
Presentation
Certain adjustments to the financial statements of prior periods
were identified and recorded in 2007, the effects of which were
not material to all periods presented.
Unless otherwise noted, all amounts included in the financial
statements and notes, except share and per share data, are
expressed in thousands.
Reclassification
Certain items relating to prior years have been reclassified to
conform to the current year presentation.
In 2007, the Company revised its presentation of accounts
receivable and deferred revenue in the balance sheet.
Previously, accounts receivable and deferred revenue relating to
advance customer billings for services were recorded on a gross
basis. The effect of this revision reduced both accounts
receivable and deferred revenue by $896 at December 31,
2006. The revision had no effect on the Companys results
of operations.
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.
Use of
Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States
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.
F-8
EMAGEON
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Fair
Value of Financial Instruments
The Companys financial instruments consist primarily of
cash, cash equivalents, accounts receivable, and accounts
payable for which current carrying amounts approximate fair
market values.
Fair
Value Measurements
In September 2006, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting
Standards No. 157 (SFAS 157), Fair Value
Measurements. SFAS 157 defines fair value, establishes
a framework for measuring fair value in accordance with
generally accepted accounting principles, and expands
disclosures about fair value measurements. The Statement does
not require any new fair value measurements. The provisions of
SFAS 157, as issued, are effective for fiscal years
beginning after November 1, 2007. In February, 2008, the
FASB released a FASB Staff Position
(No. 157-2)
which delayed the effective date of SFAS 157 for all
nonfinancial assets and nonfinancial liabilities, except those
that are recognized or disclosed at fair value in the financial
statements on a recurring basis. The Company will adopt the
provisions of SFAS 157 for its financial assets and
liabilities as of January 1, 2008 and for its nonfinancial
assets and liabilities as of January 1, 2009, and does not
currently expect a material impact on its reported financial
condition or results of operations.
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
Under the terms of an amended agreement with a customer executed
in 2007, the Company is liable to that customer for liquidated
damages, capped at $1,000, should the Company discontinue its
support of the software product purchased by that customer. The
Company has segregated $1,000 of its cash representing the
amount of potential liquidated damages under the amended
agreement, has classified that cash as other non-current assets
in its balance sheet at December 31, 2007, and has deferred
$1,000 in associated revenue pending expiration of the
liquidated damages provision of the amended agreement.
In conjunction with two of the secured promissory notes
outstanding at December 31, 2006 discussed in Note 11,
the Company was required to maintain a restricted bank cash
account of approximately 20% of the note amounts. The restricted
amount was $445, and was included in other non-current assets in
the December 31, 2006 consolidated balance sheet. These
promissory notes were paid in full in 2007 and the restriction
on the Companys cash accordingly lapsed.
Trade
Accounts Receivable and Allowance for Doubtful
Accounts
Trade accounts receivable are stated net of an allowance for
doubtful accounts, which represents estimated losses resulting
from customers failing to make required payments. When
determining the allowance for doubtful accounts, management
takes several factors into consideration, including the age of
the accounts, recent payments received and contractual terms,
prior history of accounts receivable write-offs, customer type,
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. 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. The Company performs ongoing
credit evaluation of its customers financial condition and
generally does not require collateral.
F-9
EMAGEON
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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 inventories to estimated net realizable value.
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 when 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 estimated useful lives of the
assets. 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 is recorded
at cost and consists 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, Goodwill, and Intangible Assets
The Company records business combinations in accordance with
Statement of Financial Accounting Standards No. 141,
Business Combinations (SFAS 141), and
Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangible Assets
(SFAS 142). SFAS 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 141 in the allocation of the
purchase price of Camtronics and Ultravisual. Accordingly, the
Company has identified and allocated estimated fair value to the
intangibles acquired.
The Company continually evaluates whether events or changes in
circumstances have occurred that indicate the carrying value of
long-lived assets and finite life intangible assets 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 charge 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.
Goodwill is tested for impairment at least annually or more
frequently if events or changes in circumstances indicate
possible impairment. The Companys goodwill impairment test
entails calculating the aggregate fair value of the
Companys net assets, including goodwill and other
intangible assets, and consideration of any other circumstances
relevant to establishing the fair value of the Companys
net assets. Should the aggregate fair value of the
Companys outstanding equity securities plus its interest
bearing
F-10
EMAGEON
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
liabilities be less than the aggregate carrying value of the
Companys net assets, including goodwill and intangible
assets, the Company would compare the estimated fair value of
goodwill to the corresponding book value of goodwill and, absent
any other considerations to the contrary, would record an
impairment loss to the extent the book value exceeds that
estimated fair value. At October 1, 2007, the date of the
Companys annual measurement of goodwill value, and at
December 31, 2007, the Companys common stock closed
on the NASDAQ Global Market at a per share price in excess of
net book value per share. In the periods since December 31,
2007, the common stock of the Company has at times closed on the
NASDAQ Global Market at a per share price less than our net book
value per share. However, during this same period the Company
determined based on objective evidence that the fair value of
the Company is such that impairment of its goodwill is not
indicated. Should circumstances change, it is possible that the
Company would conclude that impairment has occurred, which would
result in a revaluation of the recorded amount of goodwill and
our other assets and liabilities and an adverse effect on our
results of operations and financial position.
In assessing fair value of intangibles, management must make
assumptions regarding estimated future cash flows and other
factors. Critical estimates in valuing intangible assets
include, but are not limited to, future expected cash flows from
acquired developed technologies 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 fair values
may differ from estimates.
Treasury
Stock
Treasury stock is accounted for using the cost method.
Revenue
Recognition
Revenue is derived primarily from system sales, which include
software licenses and third-party component sales, and from
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,
Software Revenue Recognition, as amended
(SOP 97-2).
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.
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
F-11
EMAGEON
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
coincide with current pricing. 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 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.
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 or 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.
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 product assembly
and overhead, third-party components, and 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, amortization of the capitalized costs of internally
developed software, and third-party fees and royalties.
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.
F-12
EMAGEON
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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 warranty obligations
depend upon product failure rates and service delivery costs
incurred to correct any 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), the estimated warranty liability is revised.
The Company offers its customers certain indemnities and
warranties related to its products as follows:
Customer Indemnity: The Company generally
agrees to indemnify, defend and hold harmless its customers in
connection with any patent, copyright or trade secret
infringement claims made by third parties with respect to the
customers authorized use of products and services, and
also provides indemnity for death, personal injury or property
damage caused by the Companys personnel or contractors in
the course of performing services for customers. 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, 2007.
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 $440 liability
recorded for these provisions as of December 31, 2007 ($700
at December 31, 2006).
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 basis 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 Companys effective tax rate for the years ended
December 31, 2007, 2006, and 2005 is zero due to an
increase in the valuation allowance in an amount equal to the
tax effect of its taxable losses during those years.
It is uncertain whether the Company will realize any tax benefit
related to its net operating loss carryforward. Accordingly, the
Company has provided a valuation allowance against its net
deferred tax assets. The valuation allowance will remain at the
full amount of the net deferred tax asset until it becomes more
likely than not that the related tax benefits will be realized
through deduction against taxable income during the statutory
carryforward periods. See Note 10.
Effective January 1, 2007 the Company adopted the
provisions of FASB Interpretation No. 48, Accounting For
Uncertainty In Income Taxes (FIN 48).
FIN 48 clarifies the accounting for uncertainty in income
taxes recognized in an enterprises financial statements in
accordance with Statement of Financial Accounting Standards
No. 109, Accounting For Income Taxes. FIN 48
requires recognition in the consolidated financial statements of
only those tax positions determined to be more likely than not
of being sustained upon examination based on the technical
merits of the positions, and also provides guidance on
derecognition, classification, interest and penalties, interim
period accounting, disclosure, and transition.
The Company has not had taxable income since incorporation and
therefore has not paid any income taxes or recognized any tax
benefit or tax expense in its statement of operations. At
January 1, 2007, the date of adoption of FIN 48, the
Company had a net deferred tax asset of $26,151, the majority of
which related to the tax benefit of net operating loss
carryforwards that will be realized only if the Company is
profitable in
F-13
EMAGEON
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
future years. Given its lack of historical taxable income and
the full amount of its deferred tax asset valuation allowance,
adoption of FIN 48 had no effect on the Companys
2007 statement of operations or on the balance of its
accumulated deficit as of January 1, 2007.
Other
Comprehensive Income
The Companys comprehensive income includes net loss as
well as all non-owner changes in equity. With respect to the
Company, such non-owner equity items include foreign currency
translation adjustments and unrealized losses on
available-for-sale marketable securities. Total comprehensive
losses for the years ended December 31, 2007, 2006, and
2005 were $(6,606), $(5,855) and $(4,912), respectively.
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 number of
common and equivalent common shares outstanding during the
period. Common share equivalents in years prior to 2006
consisted of convertible preferred stock, stock warrants, and
options to purchase common stock granted to employees and
directors of the Company (stock options). In 2006
and 2007, common share equivalents consisted of stock options,
restricted stock awards, and warrants to purchase common stock.
These common share equivalents are excluded from the computation
for periods in which the Company incurs a net loss because they
are anti-dilutive.
The computations for basic and diluted net loss per share for
each period are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Net loss
|
|
$
|
(7,085
|
)
|
|
$
|
(6,032
|
)
|
|
$
|
(4,997
|
)
|
Accretion of redemption value related to redeemable preferred
stock
|
|
|
|
|
|
|
|
|
|
|
(8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss allocable to common stockholders
|
|
$
|
(7,085
|
)
|
|
$
|
(6,032
|
)
|
|
$
|
(5,005
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock outstanding at beginning of period
|
|
|
21,283,372
|
|
|
|
20,453,156
|
|
|
|
2,709,370
|
|
Weighted average effect of:
|
|
|
|
|
|
|
|
|
|
|
|
|
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 pursuant to stock option exercises,
warrant exercises, and restricted stock vesting
|
|
|
102,115
|
|
|
|
482,529
|
|
|
|
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
|
|
|
21,385,487
|
|
|
|
20,935,685
|
|
|
|
17,975,083
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share basic and diluted
|
|
$
|
(0.33
|
)
|
|
$
|
(0.29
|
)
|
|
$
|
(0.28
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options and warrants to purchase 2,300,250, 1,812,426, and
2,171,361 shares of common stock for the years ended
December 31, 2007, 2006 and 2005, respectively, and
warrants to purchase 51,027 shares of Series D
preferred stock for the year ended December 31, 2005 were
not included in the computation of diluted earnings per share
because their effect on earnings per share would have been
anti-dilutive.
F-14
EMAGEON
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Stock-Based
Compensation
Effective January 1, 2006, the Company adopted Statement of
Financial Accounting Standards No. 123 (revised),
Share-Based Payment (SFAS 123R),
utilizing the modified prospective approach. Prior to the
adoption of SFAS 123R, the Company accounted for stock
option grants in accordance with APB Opinion No. 25,
Accounting for Stock Issued to Employees utilizing the
intrinsic value method, and accordingly recognized no
compensation expense for stock options that were granted with
exercise prices at or above the fair market value of the
Companys common stock on the date of grant.
The provisions of SFAS 123R are applied to awards granted
after its effective date and to awards outstanding at the
effective date that are subsequently modified, repurchased, or
cancelled. Under the modified prospective approach, compensation
cost to be recognized includes compensation cost for all
share-based awards granted prior to, but not yet vested as of
the effective date, based on the grant date fair value estimated
in accordance with the original provisions of SFAS 123, and
includes compensation cost for all share-based awards granted
subsequent to the effective date based on the grant date fair
value estimated in accordance with the provisions of
SFAS 123R. As allowed by SFAS 123R, the Company
elected to not restate periods prior to the effective date to
reflect the impact of adopting the new standard. The effects of
adopting SFAS 123R on the Companys statement of
operations for the year ended December 31, 2006, the pro
forma effects of applying SFAS 123R to the Companys
statement of operations for the year ended December 31,
2005, and other information related to the Companys
stock-based compensation plans are included in Note 13.
Research
and Development Costs
Research and development costs are charged to expense as
incurred. However, costs incurred after the establishment of the
technological feasibility of a product are capitalized. 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 the costs of labor and benefits
of employees and the costs of third-party consultants, if
applicable.
Capitalization of these costs ceases and amortization of
capitalized amounts 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 or, if a shorter period, in proportion to expected
revenue from the product, and is recorded as cost of system
sales.
Translation
of Foreign Currencies
The assets and liabilities of the Companys Canadian
subsidiary, whose cash flows are primarily in local currency,
have been translated into U.S. dollars using current
exchange rates at each balance sheet date. The operating results
of this subsidiary have been translated at average exchange
rates that prevailed during each reporting period. Adjustments
resulting from 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 functional currency), 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.
F-15
EMAGEON
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
Advertising
Expense
The Company expenses advertising costs as they are incurred.
Advertising expense for the years ended December 31, 2007,
2006 and 2005 was $362, $307, and $48, respectively.
|
|
Note 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, and on February 15, 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, issued
537,082 shares of common stock upon the required exercise
of common stock warrants, released the remaining escrow holdback
related to its merger with Ultravisual, and cancelled 552,661 of
common stock warrants with an exercise price of $0.00825 per
share.
The Company repaid $4,000 of its subordinated debt on
February 18, 2005 with a portion of the offering proceeds.
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.
|
|
Note 4.
|
Acquisitions
and Intangible Assets
|
On November 1, 2005, the Company acquired all the
outstanding capital stock of Camtronics, a developer and
manufacturer of cardiology image and information management
systems, for a cash purchase price, including acquisition
expenses and net of cash acquired, of $40,359. The results of
operations of Camtronics have been included in the
Companys statements of operations since the acquisition
date.
The purchase price of Camtronics was allocated to its assets and
liabilities on a fair value basis, including the identification
and valuation of its intangible assets and the assignment of
value to goodwill. Goodwill represents, among other things, the
synergistic value and potential competitive benefits that may be
realized as a result of the acquisition, any future products
that may arise from the acquired technology, and the skilled and
specialized workforce acquired. In total, intangible asset value
of $11,603 and goodwill value of $17,325 related to the
Camtronics acquisition were identified and recorded. The Company
believes that approximately $12,500 of the identified goodwill
amount is deductible for income tax purposes. As of July 1,
2006, the Company determined the purchase price of Camtronics to
be final and the period for allocation of that purchase price to
be completed.
F-16
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 November 1,
2005 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
|
|
|
|
|
|
|
In-process technology costs were 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, the identified amount of $248 was immediately
expensed in the consolidated statement of operations at the
acquisition date.
Had the acquisition occurred January 1, 2005, the
Companys revenue for the year ended December 31, 2005
would have been $111,032 and its net loss would have been
$11,689, or $0.65 per basic and diluted share, on a pro forma
basis. 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. This unaudited pro forma condensed financial
information is for comparative purposes only and is not
necessarily indicative of results that would have occurred had
the acquisition occurred January 1, 2005, nor is it
necessarily indicative of future results.
Summarized below are the Companys intangible assets, which
include those arising from the Camtronics acquisition, the
acquisitions of other businesses, and the capitalized portion of
costs of internally developed software. These assets are
amortized on a straight-line basis over lives ranging from one
to six years, with the exception of goodwill, which is not
amortized but is tested for impairment at least annually or as
circumstances arise that may indicate impairment.
F-17
EMAGEON
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
December 31, 2007
|
|
|
December 31, 2006
|
|
|
|
Amortization
|
|
|
Gross Carrying
|
|
|
Accumulated
|
|
|
Gross Carrying
|
|
|
Accumulated
|
|
|
|
Period (Years)
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Amortization
|
|
|
Acquired Technology
|
|
|
4.6
|
|
|
$
|
5,240
|
|
|
$
|
(4,595
|
)
|
|
$
|
5,240
|
|
|
$
|
(3,404
|
)
|
Goodwill
|
|
|
n/a
|
|
|
|
21,667
|
|
|
|
|
|
|
|
21,210
|
|
|
|
|
|
Customer relationships
|
|
|
4.9
|
|
|
|
8,010
|
|
|
|
(2,993
|
)
|
|
|
10,028
|
|
|
|
(3,629
|
)
|
Trade names
|
|
|
1.2
|
|
|
|
|
|
|
|
|
|
|
|
501
|
|
|
|
(501
|
)
|
Capitalized software development costs
|
|
|
1.4
|
|
|
|
1,521
|
|
|
|
(1,246
|
)
|
|
|
1,451
|
|
|
|
(806
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
36,438
|
|
|
$
|
(8,834
|
)
|
|
$
|
38,430
|
|
|
$
|
(8,340
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense was $3,013, $4,969, and $2,029 for the
years ended December 31, 2007, 2006 and 2005, respectively.
Expense for 2005 includes write-off of a trademark and write-off
of the in-process technology acquired in the Camtronics
acquisition. Estimated aggregate amortization expense for each
of the next five years and beyond is as follows:
|
|
|
|
|
2008
|
|
$
|
2,181
|
|
2009
|
|
|
1,502
|
|
2010
|
|
|
1,335
|
|
2011
|
|
|
919
|
|
2012 and thereafter
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
5,937
|
|
|
|
|
|
|
Inventories include the costs of materials, labor, and overhead.
The costs of purchased third-party hardware and software
associated with customer sales contracts are included as
inventory in the consolidated balance sheets and charged to
system sales cost of revenue in the statement of operations when
customer acceptance has been received and all other revenue
recognition criteria have been met. Inventories consist of the
following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Third party components
|
|
$
|
3,086
|
|
|
$
|
2,716
|
|
Work-in-process
|
|
|
447
|
|
|
|
336
|
|
Completed systems
|
|
|
2,716
|
|
|
|
5,527
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6,249
|
|
|
$
|
8,579
|
|
|
|
|
|
|
|
|
|
|
F-18
EMAGEON
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
Note 6.
|
Supplementary
Cash Flow Information
|
Changes in operating assets and liabilities of the Company, net
of the effects of acquisitions of other businesses, in
reconciling net loss to net cash used in or provided by
operations are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
(Increase) decrease in:
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade accounts receivable, net
|
|
$
|
(723
|
)
|
|
$
|
1,659
|
|
|
$
|
(7,659
|
)
|
Inventories, net
|
|
|
2,330
|
|
|
|
(548
|
)
|
|
|
(3,402
|
)
|
Prepaid expenses and other current assets
|
|
|
1,061
|
|
|
|
(1,407
|
)
|
|
|
(885
|
)
|
Other noncurrent assets
|
|
|
(1,082
|
)
|
|
|
(389
|
)
|
|
|
(726
|
)
|
Increase (decrease) in:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
|
(652
|
)
|
|
|
(4,120
|
)
|
|
|
5,775
|
|
Accrued payroll and related costs
|
|
|
(893
|
)
|
|
|
(334
|
)
|
|
|
348
|
|
Other accrued expenses
|
|
|
(369
|
)
|
|
|
792
|
|
|
|
(187
|
)
|
Deferred revenue
|
|
|
(9,116
|
)
|
|
|
1,422
|
|
|
|
123
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net changes in operating assets and liabilities
|
|
$
|
(9,444
|
)
|
|
$
|
(2,925
|
)
|
|
$
|
(6,613
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Significant non-cash transactions during the year ended
December 31, 2007 included incurrence of obligations in
December 2007 for a minority investment in a company in a line
of business similar to that of the Company of $500 and for
purchased software for internal use of $495. Both obligations
were settled in January 2008.
|
|
Note 7.
|
Property
and Equipment
|
The Companys major classes of property and equipment were
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
December 31,
|
|
|
|
Useful Lives
|
|
|
2007
|
|
|
2006
|
|
|
Land
|
|
|
Indefinite
|
|
|
$
|
791
|
|
|
$
|
791
|
|
Buildings and improvements
|
|
|
39 years
|
|
|
|
7,170
|
|
|
|
7,141
|
|
Machinery and equipment
|
|
|
5 to 7 years
|
|
|
|
1,028
|
|
|
|
990
|
|
Computers, software and other
|
|
|
3 to 7 years
|
|
|
|
11,768
|
|
|
|
10,918
|
|
Furniture and fixtures
|
|
|
3 to 7 years
|
|
|
|
2,247
|
|
|
|
1,973
|
|
Leasehold improvements
|
|
|
4 to 5 years
|
|
|
|
572
|
|
|
|
560
|
|
Third-party components leased to customers
under operating leases
|
|
|
5 to 7 years
|
|
|
|
2,971
|
|
|
|
11,553
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26,547
|
|
|
|
33,926
|
|
Less accumulated depreciation and amortization
|
|
|
|
|
|
|
(11,404
|
)
|
|
|
(15,564
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
15,143
|
|
|
$
|
18,362
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company has entered into agreements for certain office and
computer equipment that are treated for financial reporting
purposes as capital leases. As of December 31, 2007, the
cost of this equipment and related accumulated amortization were
$251 and $87, respectively ($571 and $324, respectively, at
December 31, 2006). Amortization of assets held under
capital leases is included in depreciation expense in the
statement of operations.
F-19
EMAGEON
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
Note 8.
|
Major
Customers and Related Party Transactions
|
Revenue associated with hospitals controlled by Ascension Health
accounted for approximately 17%, 27%, and 36% of total revenue
during 2007, 2006 and 2005, respectively. Hospitals controlled
by Ascension Health owed the Company $4,875 at December 31,
2007 ($4,623 at December 31, 2006). As of December 31,
2007, Ascension Health held warrants to purchase
10,869 shares of the Companys common stock at an
exercise price of $5.52 per share. In October, 2006 the Company
appointed Douglas D. French, a former President and Chief
Executive Officer of Ascension, to its board of directors.
|
|
Note 9.
|
Defined
Contribution Benefit Plan
|
The Company has established a 401(k) plan (the Plan)
for all eligible employees pursuant to Section 401(k) of
the Internal Revenue Code. Prior to 2006, the Company made no
contributions to the Plan. Effective January 1, 2006, the
Company began matching employee contributions to the Plan at a
rate of 50% of employee contributions up to a total of 3% of the
employees annual salary. The Companys aggregate
contribution to the Plan for the year ended December 31,
2007 was $288 and for the year ended December 31, 2006 was
$487.
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, 2007 and 2006 are as
follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss carryforward
|
|
$
|
21,700
|
|
|
$
|
21,281
|
|
Intangible assets
|
|
|
1,842
|
|
|
|
1,544
|
|
Deferred revenue
|
|
|
5,821
|
|
|
|
4,293
|
|
Reserves and accrued liabilities
|
|
|
452
|
|
|
|
428
|
|
Stock-based compensation
|
|
|
1,285
|
|
|
|
1,269
|
|
Other
|
|
|
145
|
|
|
|
158
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31,245
|
|
|
|
28,973
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
(1,912
|
)
|
|
|
(1,220
|
)
|
Developed technology
|
|
|
(1,638
|
)
|
|
|
(1,602
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,550
|
)
|
|
|
(2,822
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
|
27,695
|
|
|
|
26,151
|
|
Valuation allowance
|
|
|
(27,695
|
)
|
|
|
(26,151
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax liability
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
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 net deferred tax assets
in full. 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. Net
operating loss and research credit carryforwards expire at
various
F-20
EMAGEON
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
times from 2019 through 2027. 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. 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 financial position of the Company as a result of
offsetting changes in the deferred tax valuation allowance. At
December 31, 2007, the Company had federal and state net
operating loss carryforwards of approximately $58.6 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Tax benefit computed at the statutory federal rate
|
|
$
|
(2,409
|
)
|
|
$
|
(2,051
|
)
|
|
$
|
(1,731
|
)
|
State taxes, net of federal tax benefit
|
|
|
(171
|
)
|
|
|
(168
|
)
|
|
|
(137
|
)
|
Increase in tax from:
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in deferred tax valuation allowance
|
|
|
1,544
|
|
|
|
2,076
|
|
|
|
1,591
|
|
Permanent differences
|
|
|
468
|
|
|
|
143
|
|
|
|
184
|
|
True-up of deferred taxes
|
|
|
592
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
(24
|
)
|
|
|
|
|
|
|
93
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit for income taxes
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In the current year, a
true-up
adjustment was recorded to deferred taxes to classify the
portion of the deferred tax asset related to share-based
compensation expense on incentive stock options as permanent
rather than temporary. A portion of this balance may be
recoverable in the future to the extent the Company can
recognize a tax liability reduction in connection with
disqualifying stock dispositions. In addition, an adjustment was
recorded to the December 31, 2006 net operating loss
carryforward position, as reflected in the table below, to
properly reflect the total deferred tax asset value for
share-based compensation. That value had previously reflected
only net operating losses that were expected to reverse through
income tax expense.
A roll-forward of the Companys valuation allowance is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Balance at beginning of period
|
|
$
|
26,151
|
|
|
$
|
19,761
|
|
|
$
|
17,571
|
|
Income tax expense
|
|
|
1,544
|
|
|
|
2,076
|
|
|
|
1,582
|
|
Other
|
|
|
|
|
|
|
4,314
|
|
|
|
608
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
27,695
|
|
|
$
|
26,151
|
|
|
$
|
19,761
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company files income tax returns in the United States and
Canada federal jurisdictions, and in various state
jurisdictions. The Companys federal income tax returns
have never been examined, and all years since the Companys
incorporation in 1998 remain subject to federal and state tax
examination. The Company believes that any adjustments resulting
from tax examinations would have an immaterial effect on its
results of operations and financial position.
As of December 31, 2007, the gross amount of unrecognized
tax benefits and the total amount of unrecognized tax benefits
that, if recognized, would affect the Companys financial
statement effective rate of tax were zero.
The Company has not recognized any significant amount of
interest or penalties related to unrecognized tax benefits.
F-21
EMAGEON
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
Note 11.
|
Debt and
Capital Lease Obligations
|
Long-term debt and capital lease obligations consist of the
following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Secured promissory note payable in 60 monthly installments
of $38, including interest at 9.88%, due in March 2007, secured
by hardware and software at customer site
|
|
$
|
|
|
|
$
|
113
|
|
Secured promissory note payable 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
|
|
|
|
|
|
|
109
|
|
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
|
|
|
|
|
|
|
480
|
|
Promissory note to governmental agency payable in
57 monthly installments of $5, including interest at 4.0%,
final payment of $4 in October 2007
|
|
|
|
|
|
|
47
|
|
Capital leases of third-party computer hardware and software at
a customer site and of certain office and computer equipment
|
|
|
89
|
|
|
|
212
|
|
|
|
|
|
|
|
|
|
|
Total debt and capital lease obligations
|
|
|
89
|
|
|
|
961
|
|
Current portion
|
|
|
(36
|
)
|
|
|
(953
|
)
|
|
|
|
|
|
|
|
|
|
Long-term portion of debt and capital lease obligations
|
|
$
|
53
|
|
|
$
|
8
|
|
|
|
|
|
|
|
|
|
|
The Company entered into a loan and security agreement with a
bank in April, 2004, and amended April, 2006 and August
2007, under which it may borrow up to $15.0 million subject
to certain restrictions and covenants, including maintenance of
certain minimum levels of tangible net worth and current ratio.
Interest accrues at the banks prime rate. Any borrowings
under the agreement are secured by all of the assets of the
Company, excluding its intellectual property and real estate.
The agreement is for a term of two years, at the end of which
all amounts borrowed become due and payable. There were no
amounts outstanding under this agreement at December 31,
2007 and 2006.
|
|
Note 12.
|
Common
Stock Warrants
|
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 February 2005.
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 were recorded at a fair value of $246 and classified in
prepaid expenses and other current assets in the balance sheet.
This amount was recorded as a sales discount recognized over the
life of the agreement.
F-22
EMAGEON
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
A summary of warrant activity and related information is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Exercise
|
|
|
|
|
|
Exercise
|
|
|
|
Shares
|
|
|
Price
|
|
|
Shares
|
|
|
Price
|
|
|
Common stock warrants at beginning of period
|
|
|
10,869
|
|
|
$
|
5.52
|
|
|
|
48,986
|
|
|
$
|
5.04
|
|
Forfeited or canceled
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
(38,117
|
)
|
|
|
4.89
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of period
|
|
|
10,869
|
|
|
$
|
5.52
|
|
|
|
10,869
|
|
|
$
|
5.52
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at end of period
|
|
|
10,869
|
|
|
$
|
5.52
|
|
|
|
10,869
|
|
|
$
|
5.52
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2007, common stock warrants outstanding
had a remaining contractual life of 1.33 years. The
aggregate intrinsic value of warrants outstanding with customers
of the Company at December 31, 2007 was zero. The total
intrinsic value of warrants exercised by customers in the year
ended December 31, 2006 was $267, and in the year ended
December 31, 2005 was $5,213. No warrants were exercised by
customers in 2007.
|
|
Note 13.
|
Stock-Based
Compensation
|
The Company has established stock-based compensation 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 awards to eligible employees of Emageon and
non-employee directors and consultants. The Plans provide for
the award of incentive stock options, non-qualified stock
options, and restricted stock. Generally, options granted under
the Plans vest over three to four years and are exercisable for
a period of ten years. Restricted stock granted under the Plans
vests over a four year period. Shares available for future stock
option grants to employees and directors under the Plans were
2,117,594 and 377,250, respectively, at December 31, 2007.
As discussed in Note 2, the Company adopted SFAS 123R
effective January 1, 2006 using the modified prospective
approach. As a result, the Companys net loss and basic and
diluted loss per share for the year ended December 31, 2006
were $2,239 and $0.11 higher, respectively, than if the Company
had continued to account for stock-based compensation under APB
Opinion No. 25.
The Company recognized total share-based compensation of $3,212,
$3,430, and $1,211 during the years ended December 31,
2007, 2006, and 2005, respectively.
F-23
EMAGEON
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The following table illustrates the effect on net loss and net
loss per share had the Company accounted for stock-based
compensation in accordance with SFAS No. 123R for the
year ended December 31, 2005:
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31, 2005
|
|
|
Net loss:
|
|
|
|
|
As reported
|
|
$
|
(4,997
|
)
|
Deduct: Accretion of redemption value related to redeemable
preferred stock
|
|
|
(8
|
)
|
Add: Stock-based employee compensation reported in net loss
|
|
|
1,171
|
|
Deduct: Stock-based employee compensation under the fair value
method for all awards
|
|
|
(2,045
|
)
|
|
|
|
|
|
Pro-forma net loss
|
|
$
|
(5,879
|
)
|
|
|
|
|
|
Basic and diluted net loss per share:
|
|
|
|
|
As reported
|
|
$
|
(0.28
|
)
|
Deduct: Accretion of redemption value related to redeemable
preferred stock
|
|
|
|
|
Add: Stock-based employee compensation reported in net loss
|
|
|
0.06
|
|
Deduct: Stock-based employee compensation under the fair value
method for all awards
|
|
|
(0.11
|
)
|
|
|
|
|
|
Pro-forma net loss
|
|
$
|
(0.33
|
)
|
|
|
|
|
|
Stock
Options
The Company uses the Black-Scholes option pricing model to
estimate the fair value of stock-based awards, using the
following assumptions for the three years in the period ended
December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Dividend yield
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Expected volatility
|
|
|
50.00
|
%
|
|
|
70.87
|
%
|
|
|
70.87
|
%
|
Risk-free interest rate
|
|
|
4.44
|
%
|
|
|
4.87
|
%
|
|
|
4.11
|
%
|
Expected life of options, in years
|
|
|
5.0
|
|
|
|
5.0
|
|
|
|
5.0
|
|
Weighted average grant date fair value
|
|
$
|
4.70
|
|
|
$
|
10.09
|
|
|
$
|
8.53
|
|
These assumptions are based on multiple factors, including
historical exercise patterns of employees in relatively
homogeneous groups with respect to exercise and post-vesting
employment termination behaviors, expected future exercising
patterns for these same homogenous groups, and the volatility of
the Companys stock price. During 2007 the Company revised
its assumption for the expected volatility of the trading price
of its common stock from 70.87% to 50.00%, and revised its
assumption for the expected rate of employees forfeitures
of stock options from 3.50% to 7.00% for executive employees and
from 4.30% to 8.50% for non-executive employees. In making these
revisions the Company considered various pertinent historical
and expected trends in, among other things, its common stock
trading price, the experience and assumptions utilized by
similar companies, the rate of turnover of its executive and
non-executive employees, and its historical and anticipated
operating performance. These changes in assumptions resulted in
a reduction of stock-based compensation expense of $321 for the
year ended December 31, 2007.
F-24
EMAGEON
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
At December 31, 2007, there was $4,674 of unrecognized
compensation cost related to stock option payments. The Company
expects this compensation cost to be recognized over a weighted
average period of 2.80 years.
Cash proceeds from exercise of stock options were $582, $3,772,
and $1,292 for the years ended December 31, 2007, 2006, and
2005.
Prior to the Companys initial public offering of its stock
in February 2005, options were granted under the plans both at
exercise prices less than the market value of the Companys
stock on the date of grant, and at exercise prices equal to the
market value of the Companys stock on the date of grant.
During 2006 and 2007, all options granted were at an exercise
price equal to the market value of the Companys stock on
the date of grant.
A summary of stock option activity and related information is
detailed below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Exercise
|
|
|
|
|
|
Exercise
|
|
|
|
Shares
|
|
|
Price
|
|
|
Shares
|
|
|
Price
|
|
|
Options at beginning of period
|
|
|
1,750,543
|
|
|
$
|
9.27
|
|
|
|
2,128,560
|
|
|
$
|
5.91
|
|
Forfeited
|
|
|
(147,129
|
)
|
|
|
12.35
|
|
|
|
(125,657
|
)
|
|
|
8.99
|
|
Exercised
|
|
|
(108,683
|
)
|
|
|
7.52
|
|
|
|
(787,699
|
)
|
|
|
4.80
|
|
Granted
|
|
|
794,650
|
|
|
|
9.53
|
|
|
|
535,339
|
|
|
|
16.15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of period
|
|
|
2,289,381
|
|
|
$
|
9.36
|
|
|
|
1,750,543
|
|
|
$
|
9.27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at end of period
|
|
|
1,320,187
|
|
|
$
|
8.23
|
|
|
|
894,393
|
|
|
$
|
5.29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Further information relating to stock option plans outstanding
at December 31, 2007 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Weighted
|
|
|
|
|
|
Average
|
|
|
Weighted
|
|
|
|
|
|
|
Remaining
|
|
|
Average
|
|
|
|
|
|
Remaining
|
|
|
Average
|
|
|
|
|
|
|
Contractual
|
|
|
Exercise
|
|
|
|
|
|
Contractual
|
|
|
Exercise
|
|
Range of Exercise Prices
|
|
Number
|
|
|
Life
|
|
|
Price
|
|
|
Number
|
|
|
Life
|
|
|
Price
|
|
|
$1.73 to $2.07
|
|
|
107,243
|
|
|
|
3.52 years
|
|
|
$
|
1.82
|
|
|
|
107,243
|
|
|
|
3.52 years
|
|
|
$
|
1.82
|
|
$4.52 to $7.17
|
|
|
890,881
|
|
|
|
5.37 years
|
|
|
|
5.15
|
|
|
|
731,014
|
|
|
|
4.56 years
|
|
|
|
5.12
|
|
$7.93 to $12.46
|
|
|
644,754
|
|
|
|
9.41 years
|
|
|
|
10.47
|
|
|
|
103,815
|
|
|
|
9.28 years
|
|
|
|
11.61
|
|
$12.72 to $14.90
|
|
|
220,787
|
|
|
|
7.91 years
|
|
|
|
13.09
|
|
|
|
156,358
|
|
|
|
7.94 years
|
|
|
|
13.24
|
|
$15.05 to $17.79
|
|
|
425,716
|
|
|
|
8.30 years
|
|
|
|
16.43
|
|
|
|
221,757
|
|
|
|
8.31 years
|
|
|
|
16.46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
2,289,381
|
|
|
|
7.21 years
|
|
|
$
|
9.36
|
|
|
|
1,320,187
|
|
|
|
5.88 years
|
|
|
$
|
8.23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value of options outstanding at
December 31, 2007 was $237, and the aggregate intrinsic
value of options exercisable was $237. The total intrinsic value
of options exercised in the years ended December 31, 2007,
2006, and 2005 was $388, $9,025 and $4,225, respectively.
Restricted
Stock
The Companys plans allow for the issuance of restricted
stock awards that may not be sold or otherwise transferred until
certain restrictions have lapsed. Vesting occurs at the earliest
to occur of the end of the four year graded vesting period, one
year after a separation from service, as defined in the Plan,
thirty days after the death or disability of a recipient, or at
the effective date of a change in control of the Company, as
defined in the Plan. Recipients have no voting or other
shareholder rights until issuance of the shares. The stock-based
compensation related to these awards is being amortized
straight-line to compensation expense over the four year
service-based vesting period in which the restrictions lapse.
Stock-based expense for these
F-25
EMAGEON
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
awards in total was determined based on the market price of the
Companys stock at the date of grant applied to the total
number of shares anticipated to fully vest.
A summary of unvested restricted stock activity and related
information is detailed below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
Shares
|
|
|
Fair Value
|
|
|
Shares
|
|
|
Fair Value
|
|
|
Restricted stock at beginning of period
|
|
|
57,250
|
|
|
$
|
16.41
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
94,833
|
|
|
$
|
9.82
|
|
|
|
85,496
|
|
|
$
|
16.30
|
|
Vested
|
|
|
(33,829
|
)
|
|
$
|
8.76
|
|
|
|
(24,514
|
)
|
|
$
|
15.97
|
|
Forfeited
|
|
|
(14,390
|
)
|
|
$
|
14.03
|
|
|
|
(3,732
|
)
|
|
$
|
16.56
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock at end of period
|
|
|
103,864
|
|
|
$
|
11.20
|
|
|
|
57,250
|
|
|
$
|
16.41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock granted in 2007 had an aggregate grant date
fair value of $931 ($1,393 in 2006). Total restricted stock
compensation expense for the year ended December 31, 2007
was $417 ($412 for the year ended December 31, 2006). No
restricted stock was granted in 2005. Total unrecognized
compensation expense at December 31, 2007 was $1,049.
Note 14. Operating
Leases
Lessee Arrangements. The Company leases office
space and computer equipment under operating leases. The Company
recognized rent expense during the years ended December 31,
2007, 2006 and 2005 of $1,175, $2,572, and $1,147, respectively.
As of December 31, 2007, the amount of operating lease
payments in each of the next five years and beyond is as follows:
|
|
|
|
|
2008
|
|
$
|
1,616
|
|
2009
|
|
|
1,592
|
|
2010
|
|
|
752
|
|
2011
|
|
|
540
|
|
2012
|
|
|
511
|
|
2013 and Beyond
|
|
|
74
|
|
|
|
|
|
|
|
|
$
|
5,085
|
|
|
|
|
|
|
During the third quarter of 2006 the Company, as part of the
integration of Camtronics into the operations of the Company,
vacated a leased facility and combined the operations formerly
conducted at that facility with those at a location acquired in
the Camtronics acquisition. In connection with that action, the
Company identified and recorded a liability arising from the
continuing lease obligation, which extends through January 2013,
and related expenses. The charge was included in
Integration costs related to Camtronics acquisition
in the 2006 statement of operations, and in current and
long-term accrued expenses in the balance sheet. Activity with
respect to that liability follows:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Beginning liability balance
|
|
$
|
1,057
|
|
|
$
|
|
|
Additions to the liability
|
|
|
|
|
|
|
1,190
|
|
Lease payments, net
|
|
|
(282
|
)
|
|
|
(133
|
)
|
Reduction in estimated liability
|
|
|
(175
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending liability balance
|
|
$
|
600
|
|
|
$
|
1,057
|
|
|
|
|
|
|
|
|
|
|
F-26
EMAGEON
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
The reduction in estimated liability was made as a result of the
Companys entering into an agreement with a sublessee
earlier than anticipated. The sublease extends for the term of
the Companys primary lease of the facility at an initial
annual rental of $123, with annual escalation thereafter.
Lessor Arrangements. Revenue associated with
rentals under operating leases was approximately $1,283, $2,489,
and $2,432 for the years ended December 31, 2007, 2006 and
2005, respectively, and is included in support services revenue.
At December 31, 2007, the cost and accumulated depreciation
of computer equipment leased to others and included in property
and equipment in the consolidated balance sheet was $2,971 and
$2,510, respectively ($11,553 and $10,029, respectively, at
December 31, 2006).
The following is a schedule by year of minimum future rental
income under noncancelable operating leases of computer hardware
as of December 31, 2007:
|
|
|
|
|
2008
|
|
$
|
303
|
|
2009
|
|
|
152
|
|
|
|
|
|
|
Total minimum future rentals
|
|
$
|
455
|
|
|
|
|
|
|
|
|
Note 15.
|
Employee
Severance and Related Expenses
|
In second quarter 2007, the Company acted to align its operating
expenses with the current level of revenue by reducing its
workforce through elimination of certain existing positions and
normal attrition. In connection with that action, the Company
eliminated thirty positions, primarily in the customer service
and engineering areas. In addition, the Company terminated the
employment of two senior level engineering and sales and
marketing employees. The cost of these position eliminations and
terminations was $578, consisting primarily of employee
severance pay, related benefits, and legal and other related
expenses.
In third quarter 2007, the Company terminated the employment of
a senior vice president of the Company and paid $298 in
severance pay and related benefits due the employee under the
terms of his employment agreement.
The Company accepted the resignation of its Chief Operating
Officer in December 2007, and recorded an expense and liability
of $1,125, consisting of severance pay, related benefits, and
the expense of immediate vesting of the employees unvested
stock options and restricted stock under the terms of his
employment agreement. Under the terms of the Companys
stock option plan, employees are allowed to exercise vested
stock options within ninety days of the date of their
termination of employment.
The expenses of the Companys reduction in workforce and
other terminations as described above are included in
Employee severance and related expenses in the
statement of operations for the year ended December 31,
2007.
F-27
EMAGEON
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
|
|
Note 16.
|
Selected
Quarterly Financial Data (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended
|
|
|
|
March 31
|
|
|
June 30
|
|
|
September 30
|
|
|
December 31
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
27,350
|
|
|
$
|
25,576
|
|
|
$
|
22,728
|
|
|
$
|
28,971
|
|
Gross profit
|
|
|
11,468
|
|
|
|
12,372
|
|
|
|
9,090
|
|
|
|
15,325
|
|
Operating loss
|
|
|
(2,031
|
)
|
|
|
(515
|
)
|
|
|
(4,493
|
)
|
|
|
(855
|
)
|
Net loss
|
|
$
|
(1,835
|
)
|
|
$
|
(288
|
)
|
|
$
|
(4,280
|
)
|
|
$
|
(682
|
)
|
Net loss per share basic and diluted
|
|
$
|
(0.09
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.20
|
)
|
|
$
|
(0.03
|
)
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
27,001
|
|
|
$
|
30,016
|
|
|
$
|
33,011
|
|
|
$
|
33,477
|
|
Gross profit
|
|
|
7,499
|
|
|
|
13,505
|
|
|
|
16,112
|
|
|
|
18,725
|
|
Operating (loss) income
|
|
|
(7,040
|
)
|
|
|
(933
|
)
|
|
|
(366
|
)
|
|
|
1,979
|
|
Net (loss) income
|
|
$
|
(6,993
|
)
|
|
$
|
(857
|
)
|
|
$
|
(273
|
)
|
|
$
|
2,091
|
|
Net (loss) income per share basic and diluted
|
|
$
|
(0.34
|
)
|
|
$
|
(0.04
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
0.10
|
|
F-28
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 17, 2008.
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 17, 2008.
|
|
|
|
|
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 Financial Officer)
|
|
|
|
/s/ Arthur
P. Beattie
Arthur
P. Beattie
|
|
Director
|
|
|
|
/s/ Roddy
J.H. Clark
Roddy
J.H. Clark
|
|
Director
|
|
|
|
/s/ Douglas
D. French
Douglas
D. French
|
|
Director
|
|
|
|
/s/ Fred
C. Goad, Jr.
Fred
C. Goad, Jr.
|
|
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 II
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
|
|
|
Additions Charged To
|
|
|
|
|
|
Balance
|
|
|
|
Beginning
|
|
|
Costs and
|
|
|
Other
|
|
|
|
|
|
End of
|
|
Description
|
|
of Period
|
|
|
Expenses
|
|
|
Accounts
|
|
|
Deductions
|
|
|
Period
|
|
|
|
(In thousands)
|
|
|
Allowance for doubtful accounts deducted from accounts
receivable in the balance sheet:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
$
|
277
|
|
|
|
635
|
|
|
|
|
|
|
|
(2
|
)(1)
|
|
$
|
910
|
|
2006
|
|
|
126
|
|
|
|
367
|
|
|
|
|
|
|
|
(216
|
)(1)
|
|
|
277
|
|
2005
|
|
|
75
|
|
|
|
57
|
|
|
|
|
|
|
|
(6
|
)(1)
|
|
|
126
|
|
Accrued liability for product warranty included in other accrued
expenses in the balance sheet:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
$
|
700
|
|
|
|
148
|
|
|
|
|
|
|
|
(408
|
)(3)
|
|
$
|
440
|
|
2006
|
|
|
937
|
|
|
|
254
|
|
|
|
|
|
|
|
(491
|
)(3)
|
|
|
700
|
|
2005
|
|
|
|
|
|
|
178
|
|
|
|
844
|
(2)
|
|
|
(85
|
)(3)
|
|
|
937
|
|
|
|
|
(1) |
|
Uncollectible accounts written off, and payments received on
previously written-off accounts |
|
(2) |
|
Warranty liability of Camtronics at acquisition in November 2005. |
|
(3) |
|
Expenditures in settlement of warranty claims. |