EMAGEON INC.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2008
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 0-51149
(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
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35242 |
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(Address of principal executive offices)
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(Zip Code) |
(205) 980-9222
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
þ Yes o No
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 definitions of accelerated filer,
large accelerated filer, and smaller reporting company in Rule 12b-2 of the Exchange Act.
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Large accelerated filer o
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Accelerated filer þ
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Non-accelerated filer o
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Smaller reporting company o |
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(Do not check if a smaller reporting company) |
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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
Common stock, par value $0.001 per share: 21,472,061 shares outstanding as of August 4, 2008.
PART I. FINANCIAL INFORMATION
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ITEM 1. |
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CONSOLIDATED FINANCIAL STATEMENTS |
EMAGEON INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
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(Unaudited) |
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June 30, 2008 |
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December 31, 2007 |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
19,900 |
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$ |
17,034 |
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Trade accounts receivable, net of allowance
for doubtful accounts of $530 at June 30,
2008 and $910 at December 31, 2007 |
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11,093 |
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26,796 |
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Inventories |
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6,720 |
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6,249 |
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Prepaid expenses and other current assets |
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4,212 |
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3,398 |
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Total current assets |
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41,925 |
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53,477 |
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Property and equipment, net |
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14,260 |
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15,143 |
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Other noncurrent assets |
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3,370 |
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3,070 |
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Intangible assets, net |
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4,514 |
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27,604 |
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TOTAL ASSETS |
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$ |
64,069 |
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$ |
99,294 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Current liabilities: |
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Accounts payable |
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$ |
6,084 |
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$ |
9,581 |
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Accrued payroll and related costs |
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1,141 |
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2,877 |
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Deferred revenue |
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16,477 |
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16,382 |
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Other accrued expenses |
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1,858 |
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3,297 |
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Current portion of capital lease obligations |
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27 |
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36 |
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Total current liabilities |
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25,587 |
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32,173 |
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Long-term deferred revenue |
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4,076 |
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4,306 |
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Other long-term liabilities |
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405 |
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466 |
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Capital lease obligations |
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32 |
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53 |
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TOTAL LIABILITIES |
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30,100 |
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36,998 |
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STOCKHOLDERS EQUITY: |
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Common stock, $0.001 par value, 165,050
shares authorized; 21,647 shares and 21,626
shares issued, and 21,472 shares and 21,450
shares outstanding at June 30, 2008 and
December 31, 2007, respectively |
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22 |
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22 |
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Additional paid-in capital |
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128,484 |
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126,332 |
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Accumulated other comprehensive income |
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655 |
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741 |
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Accumulated deficit |
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(94,917 |
) |
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(64,524 |
) |
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34,244 |
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62,571 |
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Treasury stock, 175 shares, at cost |
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(275 |
) |
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(275 |
) |
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Total stockholders equity |
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33,969 |
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62,296 |
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TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |
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$ |
64,069 |
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$ |
99,294 |
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The accompanying notes are an integral part of these financial statements.
3
EMAGEON INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except per share amounts)
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Three Months Ended June 30, |
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Six Months Ended June 30, |
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2008 |
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2007(1) |
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2008 |
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2007(1) |
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REVENUE: |
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System sales |
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$ |
5,999 |
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$ |
11,235 |
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$ |
11,819 |
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$ |
24,903 |
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Support services |
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12,115 |
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14,341 |
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25,562 |
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28,023 |
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Total revenue |
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18,114 |
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25,576 |
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37,381 |
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52,926 |
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COST OF REVENUE: |
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System sales |
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3,830 |
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6,310 |
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8,102 |
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15,032 |
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Support services |
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6,463 |
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7,204 |
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13,139 |
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14,885 |
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Total cost of revenue |
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10,293 |
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13,514 |
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21,241 |
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29,917 |
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GROSS PROFIT |
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7,821 |
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12,062 |
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16,140 |
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23,009 |
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OPERATING EXPENSES: |
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Research and development |
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4,727 |
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4,358 |
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9,053 |
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8,976 |
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Sales and marketing |
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3,691 |
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4,500 |
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7,476 |
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8,892 |
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General and administrative |
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3,372 |
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2,796 |
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7,147 |
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6,419 |
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Amortization of intangible assets |
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345 |
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345 |
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690 |
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690 |
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Employee severance and related expenses |
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32 |
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578 |
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851 |
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578 |
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Goodwill impairment charge |
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21,577 |
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21,577 |
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Total operating expenses |
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33,744 |
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12,577 |
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46,794 |
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25,555 |
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OPERATING LOSS |
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(25,923 |
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(515 |
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(30,654 |
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(2,546 |
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Interest income |
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129 |
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250 |
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286 |
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479 |
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Interest expense |
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(9 |
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(23 |
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(25 |
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(56 |
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NET LOSS |
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$ |
(25,803 |
) |
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$ |
(288 |
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$ |
(30,393 |
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$ |
(2,123 |
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NET LOSS PER SHARE BASIC AND DILUTED |
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$ |
(1.20 |
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$ |
(0.01 |
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$ |
(1.42 |
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$ |
(0.10 |
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WEIGHTED AVERAGE SHARES OUTSTANDING,
BASIC AND DILUTED |
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21,465 |
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21,315 |
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21,459 |
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21,294 |
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(1) |
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Certain reclassifications have been made to prior year amounts to conform with the current
year presentation. |
The accompanying notes are an integral part of these financial statements.
4
EMAGEON INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
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Six Months Ended June 30, |
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2008 |
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2007 |
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OPERATING ACTIVITIES |
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Net loss |
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$ |
(30,393 |
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$ |
(2,123 |
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Adjustments to reconcile net loss to net cash
provided by (used in) operating activities: |
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Goodwill impairment charge |
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21,577 |
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Depreciation |
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2,054 |
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3,281 |
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Amortization of intangible assets |
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1,461 |
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1,482 |
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Stock-based compensation expense |
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2,153 |
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1,340 |
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Provision for doubtful accounts |
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(380 |
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Other operating activities |
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9 |
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213 |
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Changes in operating assets and liabilities, net |
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8,625 |
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(4,491 |
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Net cash provided by (used in) operations |
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5,106 |
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(298 |
) |
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INVESTING ACTIVITIES |
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Purchases of property and equipment |
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(1,675 |
) |
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(1,631 |
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Capitalized software development costs |
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(39 |
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(120 |
) |
Other investing activities |
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(500 |
) |
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(125 |
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Net cash used in investing activities |
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(2,214 |
) |
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(1,876 |
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FINANCING ACTIVITIES |
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Proceeds of issuance of common stock |
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472 |
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Payment of debt and capital lease obligations |
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(30 |
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(866 |
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Decrease in restricted cash |
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446 |
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Net cash (used in) provided by financing activities |
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(30 |
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52 |
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Effect of exchange rate changes on cash |
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4 |
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11 |
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Net Increase (Decrease) in Cash and Cash Equivalents |
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2,866 |
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(2,111 |
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Cash and Cash Equivalents at beginning of period |
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17,034 |
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23,008 |
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Cash and Cash Equivalents at end of period |
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$ |
19,900 |
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$ |
20,897 |
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The accompanying notes are an integral part of these financial statements.
5
EMAGEON INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited condensed consolidated financial statements include the accounts of
Emageon Inc. (Emageon, or the Company) and its majority-owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation.
In the opinion of management, the accompanying financial statements contain all adjustments
(consisting of normal recurring items) necessary for a fair presentation of results for the interim
periods presented. These unaudited interim financial statements should be read in conjunction with
the audited consolidated financial statements and related notes contained in the Companys Annual
Report on Form 10-K for the year ended December 31, 2007.
Certain reclassifications have been made to the prior year amounts to provide comparability with
the current year presentation. The revisions had no effect on the Companys results of operations.
In September, 2006, the Financial Accounting Standards Board (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. SFAS 157 does
not require any new fair value measurements. The provisions of SFAS 157 for financial assets and
financial liabilities, and for nonfinancial assets and nonfinancial liabilities that are recognized
or disclosed at fair value on a recurring basis, were effective January 1, 2008, and become
effective for other nonfinancial assets and nonfinancial liabilities on January 1, 2009. The
Company adopted the provisions of SFAS 157 effective January 1, 2008. Adoption of the provisions of
SFAS 157 did not have a material impact on the Companys financial position or results of
operations for the three and six month periods ended June 30, 2008, and is not expected to
materially affect the Companys financial condition or results of operations for the year ended
December 31, 2008.
Operating results for the three and six month periods ended June 30, 2008 are not necessarily
indicative of results that may be expected for the year ending December 31, 2008.
The preparation of financial statements in conformity with accounting principles generally accepted
in the United States requires that management use judgments to make estimates and assumptions that
affect the amounts reported in the financial statements. As a result, there is some risk that
reported financial results could have been materially different had different methods, assumptions,
and estimates been used. The Company believes that of its significant accounting policies, those
related to revenue recognition, research and development costs, and intangible and other long-lived
assets may involve a higher degree of judgment and complexity than other accounting policies used
in the preparation of its consolidated financial statements. There have been no significant changes
during the six months ended June 30, 2008 to the items disclosed as Critical Accounting Policies
and Estimates in the Companys Annual Report on Form 10-K for the year ended December 31, 2007 or
in the Companys method of application of these critical accounting policies.
All numbers of shares and dollar amounts in the financial statements and footnotes, except per
share amounts, are expressed in thousands.
NOTE 2. GOODWILL IMPAIRMENT CHARGE
The Company experienced significant declines in its sales order bookings and revenues
during 2007 and the first six months of 2008 resulting from, among other things, slower
industry demand for medical imaging software, hardware and support services in general; a high
customer penetration level in its primary radiology market (with the next replacement cycle not
expected until late 2009); economic conditions that have tightened credit availability and
affected its customers capital spending plans; and uncertainty among customers in the Companys
existing and potential customer base during the pendency of the Companys recently completed proxy contest.
In addition, the strategic alternatives
committee of the Companys Board of Directors is actively engaged in an evaluation
of all possible strategic alternatives available to the Company, including possible divestitures or
a sale of the Company. At the present time, the outcome of that investigation is uncertain,
as is the probable timing of improvement in the Companys
industry and in economic conditions that have adversely
affected the Companys sales order bookings, revenue, and earnings.
6
These conditions and their effects on the Companys current and future financial performance and
financial condition indicated a possible impairment of the Companys recorded goodwill balance as
of June 30, 2008, and required the Company to determine whether actual impairment had occurred. The
Companys goodwill evaluation utilized various valuation techniques, primarily an estimation of
the present value of its future cash flows that considered the anticipated revenue and earnings
effects of the economic conditions, industry conditions, and conditions specific to the Company
described above. The Companys evaluation indicated a full impairment of the amount of
goodwill recorded in its balance sheet, and accordingly the Company recorded an impairment charge
of $21,577 in its statement of operations for the three months ended June 30, 2008.
NOTE 3. EMPLOYEE SEVERANCE AND RELATED EXPENSES
Effective March 31, 2008, W. Randall Pittman resigned his positions as Chief Financial Officer and
Treasurer of the Company and was succeeded by John W. Wilhoite. In connection therewith, the
Company and Mr. Pittman entered into a Severance Agreement and General Release, dated February 20,
2008. Under the Severance Agreement, Mr. Pittman received a severance payment, and all outstanding
stock options and restricted stock units held by Mr. Pittman became fully vested as of March 31,
2008. All of Mr. Pittmans stock options expired on June 29, 2008 in accordance with the terms of
the option agreements pursuant to which they were granted.
Included in the Companys statement of operations for the six months ended June 30, 2008 is an
expense of $819, representing the cost of amounts due Mr. Pittman under the terms of his severance
agreement and stock compensation expense incurred as the result of the full vesting of Mr.
Pittmans stock options and restricted stock units at March 31, 2008.
In May 2007, the Company acted to align its operating expenses with the current level of revenue by
reducing its workforce through elimination of certain existing positions and normal attrition. In
connection with that action, the Company eliminated thirty positions, primarily in the customer
service and engineering areas. The cost of those position eliminations of $578, consisting
primarily of employee severance pay and related benefits, is included in the Companys statement of
operations for the three months ended June 30, 2007.
NOTE 4. EXIT LIABILITY
During the third quarter of 2006 the Company vacated a leased facility and combined the operations
formerly conducted at that facility with those at a location acquired in a business combination. In
connection with that action, the Company identified and recorded a liability of $1,190 arising from
the continuing lease obligation, which extends through January 2013, and related expenses. Activity
with respect to this liability for the three and six month periods ended June 30, 2008 is as
follows:
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Three Months Ended |
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Six Months Ended |
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June 30, 2008 |
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June 30, 2008 |
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Beginning liability balance |
|
$ |
568 |
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|
Beginning liability balance |
|
$ |
600 |
|
Lease payments, net |
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(32 |
) |
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Lease payments, net |
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(64 |
) |
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Ending liability balance |
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$ |
536 |
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Ending liability balance |
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$ |
536 |
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|
The Company has entered into a sub-lease of the facility at an initial annual rental of $123, with
annual escalation thereafter through the term of the Companys primary lease of the facility.
NOTE 5. INTANGIBLE ASSETS
Summarized below are the Companys intangible assets, which include those arising from acquisitions
of 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. See Note 2 for a description of the goodwill
impairment charge recorded by the Company in the three month period ended June 30, 2008.
7
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June 30, 2008 |
|
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December 31, 2007 |
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Gross |
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Gross |
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Carrying |
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Total |
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Net Carrying |
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Carrying |
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Total |
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Net Carrying |
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Amount |
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Amortization |
|
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Amount |
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Amount |
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Amortization |
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Amount |
|
Acquired technology |
|
$ |
5,240 |
|
|
$ |
5,121 |
|
|
$ |
119 |
|
|
$ |
5,240 |
|
|
$ |
4,595 |
|
|
$ |
645 |
|
Customer relationships |
|
|
8,010 |
|
|
|
3,683 |
|
|
|
4,327 |
|
|
|
8,010 |
|
|
|
2,993 |
|
|
|
5,017 |
|
Software development
costs |
|
|
1,559 |
|
|
|
1,491 |
|
|
|
68 |
|
|
|
1,521 |
|
|
|
1,246 |
|
|
|
275 |
|
Goodwill |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,667 |
|
|
|
|
|
|
|
21,667 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
14,809 |
|
|
$ |
10,295 |
|
|
$ |
4,514 |
|
|
$ |
36,438 |
|
|
$ |
8,834 |
|
|
$ |
27,604 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average amortization periods are 4.6 years for acquired technology, 5.8 years for customer
relationships, and 1.3 years for software development costs.
Amortization
expense was $688 and $1,461 for the three and six month periods ended June 30, 2008,
respectively. Estimated amortization expense for the remainder of 2008 and beyond is as follows:
|
|
|
|
|
Remainder of 2008 |
|
$ |
837 |
|
2009 |
|
|
1,422 |
|
2010 |
|
|
1,335 |
|
2011 |
|
|
920 |
|
|
|
|
|
Total |
|
$ |
4,514 |
|
|
|
|
|
NOTE 6. INVENTORIES
Inventories consist of the following:
|
|
|
|
|
|
|
|
|
|
|
June 30, 2008 |
|
|
December 31, 2007 |
|
Third-party components |
|
$ |
3,512 |
|
|
$ |
3,086 |
|
Work-in-process |
|
|
325 |
|
|
|
447 |
|
Completed systems |
|
|
2,883 |
|
|
|
2,716 |
|
|
|
|
|
|
|
|
Total |
|
$ |
6,720 |
|
|
$ |
6,249 |
|
|
|
|
|
|
|
|
Inventories include the costs of materials, labor, and overhead. The costs of purchased third-party
hardware and software associated with customer sales contracts are included as inventory in the
consolidated balance sheet and charged to system sales cost of revenue in the statement of
operations when customer acceptance has been received and all other revenue recognition criteria
have been met.
NOTE 7. SUPPLEMENTARY CASH FLOW INFORMATION
Changes in operating assets and liabilities of the Company in reconciling net loss to net cash
provided by or used in operations are as follows:
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, |
|
|
|
2008 |
|
|
2007 |
|
(Increase) decrease in: |
|
|
|
|
|
|
|
|
Trade accounts receivable |
|
$ |
16,083 |
|
|
$ |
5,790 |
|
Inventories |
|
|
(471 |
) |
|
|
2,127 |
|
Prepaid expenses and other current assets |
|
|
(814 |
) |
|
|
(1,328 |
) |
Other noncurrent assets |
|
|
(300 |
) |
|
|
111 |
|
Increase (decrease) in: |
|
|
|
|
|
|
|
|
Accounts payable |
|
|
(3,002 |
) |
|
|
(2,379 |
) |
Accrued payroll and related costs |
|
|
(1,736 |
) |
|
|
(1,968 |
) |
Other accrued expenses |
|
|
(1,000 |
) |
|
|
(589 |
) |
Deferred revenue |
|
|
(135 |
) |
|
|
(6,255 |
) |
|
|
|
|
|
|
|
Net changes in operating assets and liabilities |
|
$ |
8,625 |
|
|
$ |
(4,491 |
) |
|
|
|
|
|
|
|
8
There were no significant non-cash investing and financing transactions in the six month periods
ended June 30, 2008 and 2007.
NOTE 8. COMPUTATION OF NET LOSS PER SHARE
Basic and diluted net loss per share is computed using the weighted average common shares
outstanding during the period. Common share equivalents consist of common stock warrants,
restricted stock awards, and stock options granted to employees and directors. All share
equivalents, consisting of 2,811 shares as of June 30, 2008 (2,137 shares as of June 30, 2007) were
excluded from the computation for these net loss periods because their inclusion would have been
anti-dilutive.
NOTE 9. STOCK BASED COMPENSATION
The Companys stock-based compensation plans are administered by the Compensation Committee of the
Board of Directors, which selects persons eligible to receive awards and determines the number of
shares and/or options subject to each award and the terms, conditions, performance measures, and
other provisions of the award. Note 13 of the Companys consolidated financial statements included
in its Annual Report on Form 10-K for the year ended December 31, 2007 contains additional
information related to these stock-based compensation plans.
The Company used the Black-Scholes option pricing model to estimate the fair value of stock-based
awards utilizing the following assumptions for the three and six month periods ended June 30, 2008
and 2007. There were no new equity grants in the three month period ended June 30, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
Six Months Ended June 30, |
|
|
2008 |
|
2007 |
|
2008 |
|
2007 |
Dividend yield |
|
|
|
|
|
|
0 |
% |
|
|
0 |
% |
|
|
0 |
% |
Expected volatility |
|
|
|
|
|
|
50.0 |
% |
|
|
50.0 |
% |
|
|
50.0 |
% |
Risk-free interest rate |
|
|
|
|
|
|
4.80 |
% |
|
|
2.53 |
% |
|
|
4.65 |
% |
Expected life of options (in years) |
|
|
|
|
|
|
5.0 |
|
|
|
5.0 |
|
|
|
5.0 |
|
The assumptions above are based on multiple factors, including historical exercise patterns of
employees in relatively homogeneous groups with respect to exercise and post-vesting employment
termination behaviors, expected future exercising patterns for these same homogeneous groups, and
the volatility of the Companys stock price.
The following table presents activity in the Companys stock option and restricted stock unit plans
for the periods shown (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
Six Months Ended June 30, |
|
|
2008 |
|
2007 |
|
2008 |
|
2007 |
Stock options: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grants, in shares |
|
|
|
|
|
|
53 |
|
|
|
804 |
|
|
|
350 |
|
Weighted average grant date fair value, per share |
|
|
|
|
|
$ |
3.89 |
|
|
$ |
1.16 |
|
|
$ |
5.78 |
|
Exercises, in shares |
|
|
|
|
|
|
34 |
|
|
|
|
|
|
|
74 |
|
Proceeds of exercises |
|
|
|
|
|
$ |
191 |
|
|
|
|
|
|
$ |
472 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock units: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grants, in shares |
|
|
|
|
|
|
|
|
|
|
48 |
|
|
|
61 |
|
Weighted average grant date fair value, per share |
|
|
|
|
|
|
|
|
|
$ |
2.52 |
|
|
$ |
12.46 |
|
Shares vested in the period |
|
|
11 |
|
|
|
8 |
|
|
|
22 |
|
|
|
15 |
|
9
Stock-based compensation expense recognized in the statement of operations for the three months
ended June 30, 2008 was $665 ($673 for the three months ended
June 30, 2007), and was $2,153 for
the six months ended June 30, 2008 ($1,340 for the six months ended June 30, 2007). At June 30,
2008 there was $5,813 of unrecognized compensation cost related to stock-based payments. The
Company expects this compensation cost to be recognized over a weighted average period of 2.63
years.
NOTE 10. COMPREHENSIVE LOSS
The Companys comprehensive loss differs from its reported net loss due to non-equity items
consisting of foreign currency translation adjustments. Comprehensive loss for the three months
ended June 30, 2008 was $25,776 ($62 for the three months ended June 30, 2007), and for the six
months ended June 30, 2008 was $30,479 ($1,868 for the six months ended June 30, 2007). Net
accumulated other comprehensive income adjustments as of June 30, 2008 were $655. See Note 2 for a description of the goodwill
impairment charge recorded by the Company in the three month period ended June 30, 2008.
NOTE 11. INCOME TAXES
The Company has not had taxable income since incorporation and therefore has not paid any income
taxes or recognized any tax benefit or tax expense in its statements of operations. At December 31,
2007, the Company had federal and state net operating loss carryforwards of approximately $58.6
million, and net deferred tax assets of $27.7 million, the majority of which relates to the tax
benefit of net operating loss carryforwards that will be realized only if the Company is profitable
in future years. Because future profitability is uncertain, the Company has provided a valuation
allowance against its net deferred tax assets in full. The valuation allowance will remain at the
full amount until it is more likely than not that the related tax benefits will be realized through
deduction against taxable income during the carryforward periods, which extend from 2019 through
2027.
The Company files income tax returns in federal jurisdictions in the United States and Canada and
in various state jurisdictions. The Companys federal income tax returns have never been examined,
and all years since the Companys incorporation in 1998 remain subject to federal and state tax
examinations. The Company believes that any adjustments resulting from tax examinations would have
an immaterial effect on its results of operations and financial position.
At June 30, 2008, the gross amount of unrecognized tax benefits and the total amount of
unrecognized tax benefits that, if recognized, would affect the Companys financial statement
effective rate of tax, were zero.
The Company has not recognized significant interest or penalties related to unrecognized tax
benefits.
NOTE 12. WARRANTY OBLIGATION
The Company provides for the estimated costs of product warranties at the time revenue is
recognized if the customer does not purchase a service contract. Its warranty obligations depend
upon product failure rates and service delivery costs incurred to correct any product failures. The
Companys estimates of warranty obligations are based on specific warranty claims, historical data,
and engineering estimates. If actual product failure rates or service delivery costs differ from
estimates, the estimated warranty liability is revised.
The Company warrants that its software products will perform in all material respects in accordance
with standard published specifications in effect at the time of delivery of the licensed products
as long as the warranty remains in effect, and warrants that its services will be performed by
qualified personnel in a manner consistent with normally accepted industry standards.
Activity in the Companys warranty liability for the three and six month periods ended June 30,
2008 follows:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, 2008 |
|
|
June 30, 2008 |
|
Beginning liability balance |
|
$ |
410 |
|
|
$ |
440 |
|
Additions charged to expense |
|
|
|
|
|
|
31 |
|
Deductions for claim resolution |
|
|
(37 |
) |
|
|
(98 |
) |
|
|
|
|
|
|
|
Ending liability balance |
|
$ |
373 |
|
|
$ |
373 |
|
|
|
|
|
|
|
|
10
|
|
|
ITEM 2. |
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
FORWARD-LOOKING STATEMENTS
Some of the statements made in this Quarterly Report on Form 10-Q contain forward-looking
statements which reflect the Companys plans, beliefs, and current views with respect to, among
other things, future events and financial performance. These statements are often identified by use
of forward-looking words such as believe, expect, potential, continue, may, will,
should, could, would, intend, plan, estimate, anticipate, and comparable words or the
negative version of these and other words. Any forward-looking statement contained in this Form
10-Q is based upon the Companys historical performance and on current plans, estimates, and
expectations. The inclusion of this forward-looking information should not be regarded as a
representation by the Company or any other person that the future plans, estimates, or expectations
contemplated by the Company will be achieved. Such forward-looking statements are subject to
various risks and uncertainties. In addition, there are or will be important factors that could
cause actual results to differ materially from those indicated in the statements. These factors
include, but are not limited to, those described in Item 1A of the Companys Annual Report on Form
10-K for the year ended December 31, 2007 under the caption Risk Factors.
This cautionary statement should not be regarded as exhaustive and should be read in
conjunction with other cautionary statements and other information contained in this Quarterly
Report on Form 10-Q and the Companys Annual Report on Form 10-K for the year ended December 31,
2007. The Company operates in a continually changing business environment, and new risks and
uncertainties emerge from time to time. Management cannot predict these new risks and
uncertainties, nor can it assess the impact, if any, that any such risks and uncertainties may have
on the Companys business or the extent to which any factor or combination of factors may cause
actual results to differ from those projected in any forward-looking statement. Accordingly, the
risks and uncertainties to which the Company is subject can be expected to change over time, and
the Company undertakes no obligation to update publicly or review the risks or uncertainties
described herein or in the Companys Annual Report on Form 10-K for the year ended December 31,
2007. The Company also undertakes no obligation to update publicly or review any of the
forward-looking statements made in this Quarterly Report on Form 10-Q, whether as a result of new
information, future developments, or otherwise.
This Managements Discussion and Analysis of Financial Condition and Results of Operations
section should be read in conjunction with the unaudited financial statements and footnotes
appearing in Part I of this Quarterly Report on Form 10-Q and the audited financial statements
included in the Companys Annual Report on Form 10-K for the year ended December 31, 2007.
COMPANY OVERVIEW
Emageon provides an enterprise-level information technology solution for the clinical analysis
and management of digital medical images within multi-hospital networks, community hospitals, and
diagnostic imaging centers. The Companys solution consists of advanced visualization and image
management software for multiple medical specialties, third-party components, and comprehensive
support services. The Companys web-enabled advanced visualization software, which is hosted by the
customer, provides physicians across the enterprise, in multiple medical specialties and at any
network access point, with dynamic tools to manipulate and analyze images in both a two dimensional
and three dimensional perspective. With these tools, physicians have the ability to better
understand internal anatomic structure and pathology, which can improve clinical diagnoses, disease
screening, and therapy planning. The Companys open standard solution is designed to help customers
improve staff productivity, enhance revenue opportunities, automate complex medical imaging
workflow, lower total cost of ownership, and provide better service to physicians and patients.
RESULTS SUMMARY
The medical imaging industry and the Companys 2007 and 2008 revenues have been adversely
affected by slower market demand for medical imaging software, hardware, and support services
relative to prior periods and, particularly in 2008, by uncertain credit market conditions that
have slowed capital expenditures by customers in the Companys target markets. In addition, the
Companys primary radiology market has become highly penetrated, with the next replacement cycle
not expected until late 2009. Those factors, together with the Companys recently completed proxy
contest and uncertainty among the Companys existing and potential
customers with respect to the outcome of the
11
Companys ongoing investigation of strategic
alternatives, have led to substantial declines in the levels of the Companys sales order bookings
and revenue, specifically:
|
|
|
The primary market for sales of the Companys PACS radiology systemslarge hospitals
and large hospital networksentered a mature phase in 2007, resulting in a shift of demand
from new systems to replacement of legacy systems, which lengthened the sales cycle and
resulted in a significant decline in radiology systems sales in 2007. Those market
conditions have continued through the first half of 2008, and the Company now expects those
conditions in the large system radiology market to continue through at least the first half
of 2009, which will adversely impact 2008 and 2009 revenues and financial condition. |
|
|
|
|
During the first half of 2008, tightening credit market conditions had a negative effect
on the spending decisions of customers of the Company. The purchase of the Companys
products involves a significant financial commitment by its customers. Credit pressures may
continue to have an adverse effect on the Companys revenues and financial condition. |
|
|
|
The Companys recently completed proxy contest required significant expenditures and
diversion of management resources. In addition, the uncertainty surrounding the outcome of
the contest, as well as the ongoing investigation of strategic alternatives, has caused an erosion of confidence among the Companys base of existing and
potential customers. The additional expenditures and the uncertainty in the Companys
customer base have resulted in delays or cancellations of customer orders, and have
negatively affected the Companys revenues. |
The Companys revenue for the three months ended June 30, 2008 was $18.1 million, a 29.2%
decrease from the comparable prior year period. For the six months ended June 30, 2008, total
revenue was $37.4 million, a 29.4% decrease from the comparable prior year period. The
Companys net loss for the second quarter 2008 was $25.8 million, or $1.20 per share ($4.2 million,
or $0.20 per share, excluding the goodwill impairment charge of $21.6 million, or $1.00 per share,
described in Note 2 of the accompanying consolidated financial statements), compared to a net loss
of $0.3 million, or $0.01 per share, for the second quarter 2007. For the six months ended June 30,
2008, the Companys net loss was $30.4 million, or $1.42 per share ($8.8 million, or $0.41 per
share, excluding the goodwill impairment charge), compared to a net loss of $2.1 million, or $0.10
per share, for the comparable prior year period.
The Companys loss from operations increased from $0.5 million in second quarter 2007 to $25.9
million ($4.3 million excluding the goodwill impairment charge) in second quarter 2008, which is the result
of the goodwill impairment charge, a $7.5 million decline in revenue, and a 4.0 percentage point
decline in gross margin. For the six months ended June 30, 2008, the Companys loss from
operations increased to $30.7 million ($9.1 million excluding the goodwill impairment charge) from
the comparable prior year level of $2.5 million, the result of the goodwill impairment charge and a
$15.5 million decline in revenue offset by a decline in total research and development, sales and
marketing, and general and administrative expenses of $0.6 million. Further increasing the
Companys loss from operations for the six months ended June 30, 2008 was a charge for employee
severance of $0.9 million, or $0.04 per share ($0.6 million, or $0.03 per share, for the six month
period ended June 30, 2007).
The Companys available cash increased by $2.9 million in the six months ended June 30, 2008,
to $19.9 million. Cash from operating activities was a positive $5.1 million for the six months
ended June 30, 2008, and the Company continues to have minimal debt.
Revenue and Gross Margin
Revenue consists of system sales and support services revenue. System sales revenue is
comprised of revenue from licenses of the Companys software and sales of third-party components,
primarily computer hardware. Costs of systems revenue consist of purchases of hardware and software
from third-party vendors for use by customers, the internal costs of purchasing, manufacturing, and
shipping third-party components, and costs related to the Companys software licenses. Software
development expenses are generally included in research and development expense in the Companys
statement of operations.
Support services revenue is comprised of revenue from recurring maintenance services and
professional services, such as system implementation and customer training relating to the
Companys software solutions. Costs of support services revenue consist of
12
labor, overhead, and associated costs of implementation, installation, and training on behalf
of customers, and the costs of providing continuous support of hardware and software sold to
customers.
The characteristics of individual system sales can vary significantly as to length of
implementation time, total value of the sale, and gross margin earned. In addition, in any given
period, the mix of system sales revenue to support services revenue and the mix of hardware and
software comprising system sales revenue can produce significant variability in the levels of
revenue and total gross margin reported.
The following table sets forth comparative revenue and gross margin data for the three and six
month periods ended June 30, 2008 and 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
System sales |
|
$ |
5,999 |
|
|
$ |
11,235 |
|
|
$ |
11,819 |
|
|
$ |
24,903 |
|
Support services |
|
|
12,115 |
|
|
|
14,341 |
|
|
|
25,562 |
|
|
|
28,023 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
18,114 |
|
|
$ |
25,576 |
|
|
$ |
37,381 |
|
|
$ |
52,926 |
|
Cost of Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
System sales |
|
$ |
3,830 |
|
|
$ |
6,310 |
|
|
$ |
8,102 |
|
|
$ |
15,032 |
|
Support services |
|
|
6,463 |
|
|
|
7,204 |
|
|
|
13,139 |
|
|
|
14,885 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
10,293 |
|
|
$ |
13,514 |
|
|
$ |
21,241 |
|
|
$ |
29,917 |
|
Gross Profit: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
System sales |
|
$ |
2,169 |
|
|
$ |
4,925 |
|
|
$ |
3,717 |
|
|
$ |
9,871 |
|
Support services |
|
|
5,652 |
|
|
|
7,137 |
|
|
|
12,423 |
|
|
|
13,138 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
7,821 |
|
|
$ |
12,062 |
|
|
$ |
16,140 |
|
|
$ |
23,009 |
|
Gross Margin: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
System sales |
|
|
36.2 |
% |
|
|
43.8 |
% |
|
|
31.4 |
% |
|
|
39.6 |
% |
Support services |
|
|
46.7 |
% |
|
|
49.8 |
% |
|
|
48.6 |
% |
|
|
46.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
43.2 |
% |
|
|
47.2 |
% |
|
|
43.2 |
% |
|
|
43.5 |
% |
Summary
Total revenue in second quarter 2008 was $18.1 million, a 29.2% decrease from second quarter
2007. For the six months ended June 30, 2008, total revenue was $37.4 million, a 29.4% decrease
from the comparable prior year period. These declines in revenue reflect soft system sales bookings
experienced by the Company and the industry in general throughout much of 2007 and extending
through first half of 2008, as further explained below. In addition to the decline in industry
demand, the Companys revenues have been adversely impacted by worsening credit conditions that have affected
customers spending decisions and by
uncertainty in the Companys existing and potential customer base with respect to the outcome of
the Companys ongoing investigation of strategic alternatives and its recently completed proxy
contest. Gross margin on total revenue declined by 4.0 percentage points for the second quarter
2008 and by 0.3 percentage points for the six months ended June 30, 2008 compared to comparable
prior year periods. The two components of the Companys revenue and gross margin are discussed
individually below in comparison to prior year periods.
Sequentially, second quarter 2008 total revenues decreased by $1.2 million from the first
quarter of 2008.
System Sales Revenue
For the second quarter 2008, system sales revenue declined by $5.2 million, or 46.6%, compared
to the second quarter 2007. For the six months ended June 30, 2008, system sales revenue declined
$13.1 million, or 52.5%, compared to the first half 2007. These declines occurred primarily in the
Companys radiology software products, though sales of both radiology and cardiology products were
below comparable prior year levels. As explained in the Summary section above, the declines are
the result of soft demand in the Companys primary markets, worsening credit conditions that have
reduced the level of customers capital expenditures, and uncertainty in the customer base relative
to the potential outcome of the Companys strategic alternatives investigation and possible change
in ownership of the Company. The Company is also experiencing an increasingly longer sales cycle
in its primary large hospital radiology market and a high penetration level among its customer base
for its core radiology products.
13
System Sales Gross Margin
The Companys system sales gross margin was 36.2% for second quarter 2008, a decline of 7.6
percentage points from second quarter 2007, and was 31.4% for the six months ended June 30, 2008,
an 8.2 percentage point decrease compared to the same period in 2007. For the three and six month
periods ended June 30, 2008, system sales gross margin was held below the expected level by lower
volumes arising from soft order patterns in the periods prior to second quarter 2008, which causes
revenue recognized in the period to absorb a greater portion of the costs of system sales, a
portion of which are fixed in nature. In addition, the software content of system sales revenue
recognized in the three and six month periods ended June 30, 2008 was lower than in prior year periods relative to
total system sales revenue, which lowers total gross margin on system sales. Gross margins on the
Companys sales of third-party components are significantly lower than gross margins on the
Companys proprietary software.
In general, the costs of third-party components tend to lower the Companys system sales gross
margin, and system sales gross margin will be higher in periods of higher volume because of the
fixed nature of a portion of system sales costs. The Companys system sales gross margin may
significantly fluctuate from period to period depending on the mix of software to hardware systems
revenue recognized in a given reporting period and the volume of system sales.
Support Services Revenue
The Companys support services revenue decreased by $2.2 million, or 15.5%, in
second quarter 2008 compared to the prior year period, and decreased by $2.5 million, or 8.8%, in
the six months ended June 30, 2008 compared to the comparable prior year period. Support services
revenue consists primarily of recurring system maintenance services, installation services, and
customer training. Installation and training revenue is ancillary to system sales revenue, and
therefore tends to increase or decrease with the level of system installations in a given period.
Maintenance services revenue tends to grow with growth in the Companys customer base as more
customers subscribe to maintenance services. During the three and six month periods ended June 30,
2008, the Companys maintenance services revenue increased over the comparable prior year period,
as expected, but was offset by a decline in installation and training revenue in line with the
decline in system sales revenue for the periods.
Support Services Gross Margin
The Companys support services gross margin was 46.7% in second quarter 2008, a 3.1 percentage
point decrease compared to the second quarter 2007 level, and was 48.6% for the six months ended
June 30, 2008, a 1.7 percentage point increase compared to the prior year period. The second
quarter 2008 decline in margin is the result of fewer system installations in the three month
period ended June 30, 2008. For the six month period ended June 30, 2008, the increase in gross
margin is the result of a decline in support services employee headcount since the beginning of
2008, which significantly reduced the costs of salary and related expenses of personnel performing
support related services. The Companys support services gross margin may decline in periods of
lower installation and training revenue as the fixed costs of support activities are spread over
system sales revenue that varies with the timing and volume of installations.
Research & Development, Sales & Marketing, and General & Administrative Expenses
Total research and development, sales and marketing, and general and administrative expenses
for the quarter ended June 30, 2008 were $11.8 million compared to $11.7 million for the second
quarter 2007. As further explained below, both research and development and general and
administrative expenses were higher in second quarter 2008 compared to second quarter 2007, while
sales and marketing expenses declined substantially between the two periods primarily as the
result of lower sales volume.
For the six months ended June 30, 2008, total research and development, sales and marketing,
and general and administrative expenses were $23.7 million compared to $24.3 million in the
comparable prior year period. Consistent with the pattern of these expenses quarter to quarter
described above and as further detailed below, both research and development and general and
administrative expenses were higher and sales and marketing expenses were lower in first half 2008
compared to first half 2007.
During the six months ended June 30, 2008 the Companys total employee headcount declined by
twenty-five employees, primarily in the support services and administrative areas.
14
The Company continues to seek to identify opportunities to reduce or limit the growth of its
operating expenses in an effort to better align these expenses with the expected level of revenue, but also expects that its expenditures for research and development and legal and related
expenses may remain at high levels as the result of its product improvement efforts and ongoing
investigation of strategic alternatives, respectively.
Research and Development Expenses
Research and development expenses for the quarter ended June 30, 2008 were $4.7 million, an
increase of $0.3 million from the comparable prior year period, and for the six months ended June
30, 2008 were $9.1 million, an increase of $0.1 million over the comparable prior year period. The
increase in both periods was the result of increased utilization and costs of outsourced research
and development and related services and expenses for product improvement.
Sales and Marketing Expenses
Sales and marketing expenses in the second quarter of 2008 were $3.7 million, a decrease of
$0.8 million, or 18.0%, from the second quarter 2007 level. The decline is the result of a slight
reduction in the number of sales and marketing personnel and lower sales commissions in second
quarter 2008 resulting from lower sales order bookings and revenue recognition.
For the six months ended June 30, 2008, sales and marketing expenses decreased by $1.4
million, or 15.9%, from the comparable prior year period, also as a result of reduced headcount and
sales commissions earned.
General and Administrative Expenses
General and administrative expenses in the second quarter of 2008 were $3.4 million, an
increase of $0.6 million, or 20.6%, from the second quarter 2007 level. The increase was primarily
the result of legal and related expenses incurred in the Companys ongoing investigation of
strategic alternatives and recently completed proxy contest, offset by a decline in bad debts expense.
For the six months ended June 30, 2008, general and administrative expenses increased by $0.7
million, or 11.3%, over the prior year period, due primarily to expenses incurred in the Companys
ongoing investigation of strategic alternatives and its recently completed proxy contest, including legal fees, investor relations expenses,
and increased Board of Directors expenses.
LIQUIDITY AND CAPITAL RESOURCES
Summary
The Companys cash and cash equivalents at June 30, 2008 totaled $19.9 million, an increase of
$2.9 million from the December 31, 2007 level. This increase is the result of changes in the
Companys working capital accounts, primarily a decline in accounts receivable due to lower sales
levels and higher collections, offset to a degree by declines in accounts payable and accrued
liabilities reflective of settlement in the first half of 2008 of liabilities incurred with the
higher activity levels of the fourth quarter 2007. Cash generated by operating activities was $5.1
million for the first half of 2008 compared to a net usage of operating cash of $0.3 million for
the first half of 2007, an improvement due in large part to the working capital changes described
above. Total debt remained minimal and the Company has not drawn on its $15.0 million line of
credit arrangement with a bank.
Cash From Operating Activities
Net cash generated by operating activities for the six months ended June 30, 2008 was $5.1
million compared to a net usage of cash in operations of $0.3 million for the comparable prior year
period. Net accounts receivable declined by $15.7 million from the December 31, 2007 level. The
accounts receivable of the Company typically are at a seasonal high at the end of its fiscal year
and may decline significantly as a result of higher collections and weaker seasonal first half
sales activity. In the six months ended June 30, 2008, this decline was particularly pronounced as
the result of the significant revenue decline described above. Declines in accounts payable and
accrued liabilities somewhat offset the effects of the accounts receivable decline, also in line
with the Companys seasonally high-activity fourth quarter periods and seasonally low-activity
first quarter levels. The net use of cash in first half 2007 was primarily the result of the
Companys net loss for the period, but also included the negative effects of declines in accounts
payable, accrued expenses, and deferred revenue (offset somewhat by decreases in accounts
receivable and inventory), all the result of the lower level of sales orders and operating activity
in the first half of 2007.
15
Cash from operating activities in a given period is most affected by the Companys net income
or loss for the period, by the timing of billings to customers versus the timing of revenue
recognition, and by the timing of receipt and delivery of sales orders, which can temporarily
affect the levels of inventory and accounts payable. The Company is closely monitoring its cash
position in view of the decline in sales orders since early 2007.
Cash Used In Investing Activities
Net cash used in investing activities for the six months ended June 30, 2008 was $2.2 million
compared to $1.9 million for the comparable prior year period. For the first half of 2008 investing
activities included $1.7 million in capital expenditures, primarily computer equipment and
third-party software licenses for internal use, and a $0.5 million minority investment in an
unrelated company engaged in business similar to that of the Company. First half of 2007 investing
activity consisted primarily of $1.6 million in purchases of computer equipment for internal use.
Cash From Financing Activities
Net cash used in financing activities for the six months ended June 30, 2008 was minimal,
consisting of less than $0.1 million in scheduled payments under capital lease obligations,
compared to a provision of cash from financing activities of $0.1 million in the first half of
2007. First half of 2007 activities consisted of payment of debt and capital lease obligations of
$0.9 million, offset by proceeds of exercise of stock options of $0.5 million and a decline in the
Companys restricted cash balance of $0.5 million. No employee stock options were exercised in the
first half of 2008. The Companys total debt at June 30, 2008 consists of less than $0.1 million in
remaining capital lease obligations.
Contractual Cash Obligations
As of June 30, 2008 the Company had total obligations for the payment of cash of approximately
$4.4 million, consisting of $0.1 million in capital lease obligations and $4.3 million in operating
lease commitments, primarily of office space. Under their present terms, these obligations come due
in the amounts of approximately $1.6 million in less than one year, $1.9 million in one to three
years, and $0.9 million in three years and beyond.
Available Credit
The Company has a line of credit agreement with a bank that provides available credit of $15.0
million, subject to reduction based on the level of the Companys eligible accounts receivable,
with interest at the banks prime rate. The agreement is for a term of one year and is renewable
annually. Security for any amounts borrowed under the agreement consists of all assets of the
Company other than its intellectual property and real estate. At June 30, 2008 there were no
amounts outstanding under the agreement.
The Company believes that existing cash, together with its future cash flows and amounts
available under its line of credit agreement, if necessary, will be sufficient to execute its
business plan for the next twelve months. However, any projections of cash flow are subject to
uncertainties, including the level of the Companys revenues, the expansion of its sales and
marketing activities, the timing and extent of spending in support of product development efforts,
the timing and success of new product introductions, and market acceptance of the Companys
products. It is possible that additional financing could be required, and that additional funds
may not be available on favorable terms or at all.
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ITEM 3. |
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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
The debt instruments of the Company do not expose the Company to material market risks
relating to changes in interest rates.
Excess funds of the Company are invested in short-term certificates of deposit and similar
instruments available through the Companys established banking relationships. The value of these
securities may be subject to interest rate risk that could cause the fair value of the principal
amount of the investments to fluctuate. The effect of a hypothetical one hundred basis point
decrease across all
16
interest rates related to the Companys investments would result in an annual decrease of
approximately $0.1 million in operating results, assuming no change in the amount of investments on
hand at June 30, 2008.
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ITEM 4. |
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CONTROLS AND PROCEDURES |
The Company maintains disclosure controls and procedures, as defined in Rules 13a-15(e) and
15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended, that are designed to
ensure that information required to be disclosed in the reports filed or submitted by the Company
under the Exchange Act is recorded, processed, summarized, and reported within the time periods
specified in the SECs rules and forms and that such information is accumulated and communicated to
management of the Company, including its Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required disclosure. Charles A. Jett, Jr., Chief
Executive Officer and President, and John W. Wilhoite, Chief Financial Officer and Treasurer,
conducted an evaluation of the effectiveness of the design and operation of the Companys
disclosure controls and procedures as of June 30, 2008 and, based on that evaluation, found the
Companys disclosure controls and procedures were effective in ensuring that information required
to be disclosed in the reports filed by the Company and submitted under the Exchange Act is
recorded, processed, summarized and reported as and when required, and that information required to
be disclosed is accumulated and communicated to them as appropriate to allow timely decisions
regarding timely disclosure. There have been no changes in the Companys internal controls over
financial reporting during the six months ended June 30, 2008 that have materially affected, or are
reasonably likely to materially affect, the Companys internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1A. RISK FACTORS
In addition to the other information set forth in this Quarterly Report on Form 10-Q, careful
consideration should be given to the risks discussed in Part I, Item 1A. Risk Factors in the
Companys Annual Report on Form 10-K for the year ended December 31, 2007, which could materially
affect the Companys business, financial condition, or future results. The risks described in the
Companys Annual Report on Form 10-K are not the only risks facing the Company. Additional risks
and uncertainties not currently known or that are currently deemed to be immaterial also may
materially adversely affect the Companys business, financial condition, and/or operating results.
The information presented below updates and should be read in conjunction with the risk
factors and information disclosed in the Companys Annual Report on Form 10-K.
The Companys consideration of strategic alternatives may adversely affect its customer and
other relationships as well as its operations and financial condition.
As
previously announced, the Companys Board of Directors has appointed a strategic
alternatives committee to investigate strategic alternatives to maximize stockholder value. That
committee is actively engaged in identifying and evaluating all possible strategic alternatives
available to the Company, including potential divestitures or a sale of the Company. However,
there can be no assurance that the investigation will result in any
transaction, and the Companys ability to
complete a transaction, if the Board of Directors determines to pursue one, will depend upon
numerous factors, some which are outside of the Companys control, including factors affecting the
availability of financing for transactions or the financial markets in general. In addition,
during this process, the Companys management resources may be
diverted, and there is a risk that customers,
employees, suppliers and business partners will react negatively to
perceived uncertainties as to the Companys future direction and strategy and to the eventual outcome of this process. Any of the
foregoing could materially and adversely affect the Companys operating results and financial condition.
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ITEM 2. |
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UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
The Companys initial public offering of its common stock was effected through a Registration
Statement on Form S-1 which was declared effective on February 8, 2005. In the offering the Company
sold 5,750,000 shares of common stock for net proceeds of approximately $67.2 million. On February
18, 2005 the Company used $4.0 million of the proceeds to repay borrowings under its subordinated
notes, and invested the remaining proceeds in short-term, investment grade securities pending
further use. Since that time and through June 30, 2008, the Company has used approximately $15.1
million of the net proceeds for capital purchases, substantially
all of which have been equipment, and an additional $40.4 million of the net proceeds to
acquire all of the outstanding stock of Camtronics Medical Systems, Ltd. on November 1, 2005.
17
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ITEM 4. |
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SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS |
The Companys annual meeting of stockholders was held July 8, 2008. The results of that
meeting follow.
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1) |
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Three directors were elected to the Board of Directors to serve for a
three year term or until their successors have been duly elected and
qualified. All nominees were serving as directors of the Company at
the time of their nomination for the current term. |
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Votes For |
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Votes Withheld |
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Arthur P. Beattie |
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12,851,206 |
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2,729,939 |
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Fred C. Goad, Jr. |
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12,782,176 |
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2,798,969 |
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Charles A. Jett, Jr. |
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12,839,266 |
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2,741,879 |
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As previously disclosed, on June 22, 2008, the Company entered into a settlement agreement
among Charles A. Jett, Jr., the Companys Chief Executive Officer, and affiliates of Oliver Press
Partners, LLC, or the OPP affiliates, terminating the pending proxy contest with respect to the
election of directors at the Companys 2008 annual meeting of stockholders. Pursuant to the terms
of the agreement, the OPP affiliates irrevocably withdrew their nominations and agreed to vote
their shares of the Companys common stock in favor of the Boards slate of nominees for the 2008
annual meeting. The Company agreed to increase the size of the Board from eight to ten members and
to appoint Augustus K. Oliver and Benner Ulrich to fill the two new seats, with terms expiring in
2010. Mr. Jett and Douglas D. French also agreed to resign from
the Board, effective immediately
following the 2008 annual meeting. Mr. Jett will continue to serve, at the discretion of the
Board, as the Companys Chief Executive Officer. Also pursuant
to the agreement, the Board
appointed Bradley S. Karro as a member of the Board effective July 29, 2008. Mr. Ulrich and Mr.
Karro were each named as members of the Boards strategic alternatives committee upon their
appointment to the Board. Mr. Karro was also named as a member
of the Boards audit committee.
Finally, pursuant to the agreement, Mylle H. Magnum resigned as a
member of the Board with a term
expiring in 2010, and was subsequently reappointed to the Board with a term expiring in 2009.
The
terms of office of the members of the Companys Board of Directors are as follows:
Terms Expiring In 2009
Roddy J. H. Clark
Mylle H. Mangum
John W. Thompson
Terms Expiring In 2010
Augustus K. Oliver
Benner Ulrich
Hugh H. Williamson, III
Terms Expiring In 2011
Arthur P. Beattie
Fred C. Goad
Bradley S. Karro
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2) |
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The ratification of the appointment of Ernst & Young LLP as the
Companys independent registered public accountants for the year
ending December 31, 2008 was approved as follows: |
Votes for15,448,694
Votes against98,098
Abstentions34,353
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ITEM 5. |
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OTHER INFORMATION |
As previously reported by the Company in a Current Report on Form 8-K filed with the
Securities and Exchange Commission on August 4, 2008, the Companys Board of Directors appointed
Bradley S. Karro as a director of the Company, and as a member of the Boards Strategic
Alternatives Committee, on July 29, 2008. On July 29, 2008, Mr. Karro also was appointed to the
Audit Committee of the Companys Board of Directors.
18
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Exhibit No. |
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Description |
31.1*
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Certification of Chief Executive Officer pursuant to Rule
13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act
of 1934 |
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31.2*
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Certification of Chief Financial Officer pursuant to Rule
13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act
of 1934 |
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32*
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Certification of the Chief Executive Officer and Chief
Financial Officer pursuant to 18U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002 |
19
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
Emageon Inc. has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized August 11, 2008.
EMAGEON INC.
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By: |
/s/ Charles A. Jett, Jr.
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Charles A. Jett, Jr. |
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Chief Executive Officer and President
(Principal Executive Officer) |
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By: |
/s/ John W. Wilhoite
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John W. Wilhoite |
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Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer) |
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20