FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2008
OR
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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 No. 0-51149
(Exact Name of Registrant as Specified in Its Charter)
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Delaware |
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63-1240138 |
(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)
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 |
Securities registered pursuant to Section 12(g) of the Act:
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act.
Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section
13 or Section 15(d) of the Act.
Yes o No þ
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K is not contained herein and will not be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, 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):
Large accelerated filer o |
Accelerated filer o |
Non-accelerated filer o (Do not check if a smaller reporting company) |
Smaller reporting
company þ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act).
Yes o No þ
The aggregate market value of the common stock held by non-affiliates of the registrant
(which, for purposes hereof, are all holders other than executive officers, directors, and holders
of 10% or more of the outstanding common stock of the registrant) as of June 30, 2008, the last
business day of the registrants most recently completed second fiscal quarter, was approximately
$27,209,000 based on the closing sale price of such stock as reported by the NASDAQ Global Market
on June 30, 2008. 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 6, 2009 there were 21,449,718 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 2009 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 within the meaning of the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995, as amended. These forward-looking statements
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 and, as a result, our actual results could differ materially from
those indicated in these statements. Factors that could cause actual results to differ materially
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, except as may be required by law, we
undertake no obligation to review or to update publicly the risks or uncertainties described herein.
We also undertake no obligation to review or to update publicly any of the forward-looking statements
made in this Annual Report, whether as a result of new information, future developments or
otherwise, other than as may be required by law.
ITEM 1. BUSINESS
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 teleradiology
services companies. 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, 2008, we had $126.7 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 $149.1 million at December 31, 2007. From our current contracted
backlog, we expect to recognize revenue of
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approximately $56.3 million during fiscal year 2009, $32.9 million during fiscal year 2010,
and substantially all of the remaining $37.5 million by 2014.
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.
Recent Developments
On February 12, 2009, we terminated our amended merger agreement with Health Systems
Solutions, Inc. and HSS Acquisition Corp. The merger agreement was terminated pursuant to Sections
7.4(a) and 7.4(c) thereof as a result of the failure by Health Systems Solutions to receive all
necessary financing on or before the designated closing date of February 11, 2009. In connection
therewith, on February 13, 2009, we received the $9 million that had been placed in escrow by
Health Systems Solutions in connection with the transactions contemplated by the merger agreement.
On
February 23, 2009, we entered into a merger agreement with AMICAS, Inc. and its wholly owned
subsidiary AMICAS Acquisition Corp. Under the terms of the merger agreement, AMICAS commenced a
tender offer on March 5, 2009 to purchase all of our issued and outstanding shares of common stock
at a purchase price of $1.82 per share in cash. Unless extended in accordance with the terms and
conditions of the merger agreement, the tender offer is scheduled to expire on April 1, 2009. The
tender offer is conditioned upon, among other things, at least a majority of our shares outstanding
being tendered. Assuming that the tender offer is successful, the merger agreement provides that
the tender offer will be followed by a merger pursuant to which
AMICAS Acquisition Corp. would be
merged with and into Emageon, and Emageon would become a wholly owned subsidiary of AMICAS. We
expect the merger to be completed in second quarter of 2009.
The merger agreement contains customary representations and covenants, and the merger is
subject to customary closing conditions. In addition, we have agreed to use commercially
reasonable efforts to operate our business in the ordinary course until the tender offer is
completed, and the merger agreement contains certain restrictions on the conduct of our business
pending completion of the merger. We have further agreed not to solicit or initiate discussions
with third parties regarding other proposals to acquire our business and to certain restrictions on
our ability to respond to any such proposals. There are no assurances that the proposed
transaction with AMICAS will be consummated on the expected timetable, or at all, and under
specified circumstances we will be required to pay AMICAS a termination fee of $1.6 million in
connection with the termination of the merger agreement.
Copies
of the merger agreement and joint press release announcing the
transaction with AMICAS were filed
as exhibits to a Current Report on Form 8-K filed by us with the
Securities and Exchange Commission, or SEC, on
February 24, 2009, and on March 5, 2009, we filed a
Solicitation/Recommendation Statement on Schedule 14D-9 with the SEC
regarding the tender offer.
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.
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We believe that our solutions 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, one CT vendor has announced a new 320 slice CT which has yielded file sizes significantly
larger than previous CT scanners. 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.
Need for Vendor Neutral Content Management. As hospitals have upgraded from earlier generation
PACS solutions, they have become acutely aware of the high cost associated with proprietary
solutions. Hospitals are now actively seeking more standard solutions that preserve the clinical
annotations, overlays, and key image markings in a manner that is portable for the future.
Need for Outside Study Management. Hospitals seeking to increase referrals need tools that
make it fast, easy, secure, and reliable to digitally transport imagery to other facilities over
the Internet, edit demographic information, visualize the imagery, and interoperate with their
existing hospital-based image management systems. Bi-directional communication of a patient study
ensures that the full patient image record is available at multiple facilities. In the case of
emergencies, timely reviews of the images may provide a diagnosis that avoids unnecessary transport
of patients. If emergency patients are transported, they no longer have to wait for an image to be
reduced to a physical copy. Instead, an electronic copy can be forwarded to another facility while
they are in transit, thus reducing the time to care.
Our Solutions
Overview
We provide enterprise-level information technology solutions for the clinical analysis and
management of digital medical images within healthcare provider organizations.
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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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Benefits from our Solutions |
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Administration
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Demonstrable return on investment |
(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 |
(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 |
(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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Improved management of outside studies |
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Treating Physicians
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Availability of easy-to-use, specialty specific visualization tools |
(Cardiologists, Surgeons, etc.)
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Faster turnaround of information for treatment planning |
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Facilitation of collaborative analysis with diagnostic physicians |
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Improved treatment planning |
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Benefits from our Solutions |
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Improved management of outside studies |
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Robust integration with clinical information systems |
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Payor
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Ability to avoid duplicate exams through cross-enterprise access |
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Ability to avoid unnecessary transports by leveraging remote
diagnostics for triage |
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, orthopedics, 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 and reporting software to further meet the needs of other clinical
specialties.
Management of Outside Studies. We have a robust solution to standardize and improve
productivity for management of imaging studies from other facilities. Our solution enables outside
facilities to perform direct DICOM transfers of encrypted studies to an Emageon OSG (outside study
gateway) system in the receiving hospital. This OSG provides for
quality control and demographic edits as
well as auto-forwarding of the exam into the receiving hospitals PACS. The OSG
allows treating clinicians to rapidly review the images and provide annotations, measurements, and
key images. Optionally, new exams or updated clinical information may be sent back to the
originating hospital in order to maintain a complete digital image record.
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
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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, orthopedics, 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 CardioIMS. 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. CardioIMS integrates all
clinical and operational information from multiple systems and locations into one system.
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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 replicated content
managers 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 Teracon as an option 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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3D Ultrasound. We offer a 3D Ultrasound visualization and analysis package
from TomTec to complement our HeartSuite VERICIS visualization software. |
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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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Continuous Success 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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Professional Services is our services program for managing custom engineering such
as customized integrations with dictation systems, electronic medical record systems,
radiology information solutions, and third-party PACS. |
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Migration Services is our offering to assist customers with migration of data from
legacy PACS or hardware platforms to our software system. These services may include data
cleansing services to ensure proper compliance with the DICOM standard. |
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 multisite 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 development efforts to build solutions
that will allow us to pursue new customers. We also believe there are extensions to our current
product offerings that will allow us to service data elements other than DICOM as well as provide a
further enhanced platform for teleradiology services.
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 Product Placement with Existing Multi-Facility Customers. As of
December 31, 2008, we had customer relationships with multi-facility healthcare
providers that control 287 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 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
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advanced visualization software and other products and additional functionality to
radiologists, cardiologists and other specialty groups within the organization. |
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 strengthen our position in the market. Further enhancements to our
software and services should assist us in selling our solution to hospitals and multihospital
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 inexpensive
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
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 clinical and financial 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 relatively 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 at the entire application level. |
Customers
Our customers range in size from imaging centers to large, multi-facility healthcare networks.
As of December 31, 2008, we had installed our EVMS solution in 249 hospitals or other healthcare
facilities, 202 of which are members of multi-facility networks. At December 31, 2008, we had
implemented our RadSuite advanced visualization solution in 72% of our current installed EVMS
customer base. There are also 293 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 14% of our contracted backlog as
of December 31, 2008, compared to 22% as of December 31, 2007.
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, 2008, we had 63 employees who were primarily dedicated to research and
development activities. In addition to our employees, we also utilize outside contractors on a
routine basis to 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; |
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developing integrated reporting solutions for cardiology and radiology; and |
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extending imaging tools to referring physicians in multiple specialties. |
We follow a formal product development process and employ dedicated product development
personnel. Under our formal product development process, internal and 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 $18.4 million, $18.5 million, and $13.9 million in research and development in
2008, 2007, and 2006, 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 PACS or specialty
visualization tools. |
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; |
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price, product and policy decisions announced by competitors; and
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adequate financial and other resources. |
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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 U.S. patents have been issued.
In the U.S., Europe, and Japan, we have patents and a patent application generally related to
DICOM-type image transmission and, in particular, to methods and apparatus for streaming DICOM-type
images via a network.
We have device and method patents related to improved quantitative coronary artery analysis
that have issued in the U.S. and Canada. These patents, while enforceable, have limited use in our
current product offerings and product development efforts.
We have an exclusive, worldwide, royalty-bearing license from the UAB Research Foundation of
the University of Alabama at Birmingham 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®, CardioIMS, EchoIMS, 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, 2008, we had 306 employees, 63 of whom were primarily engaged in research
and development, 58 of whom were primarily engaged in sales and marketing, 138 of whom were
primarily engaged in providing technical installation and support services, and 47 of whom were
primarily engaged in administration and finance. With respect to location, 90 of these employees
are located at our corporate headquarters in Birmingham, Alabama; 132 of these employees are
located at our offices in Hartland, Wisconsin; 19 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 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.
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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.
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
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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 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 $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
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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 thirdparty payor, including commercial payors. Many of
these laws vary significantly from state to state, rendering compliance a costly and
uncertain endeavor. |
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 SEC.
ITEM 1A. RISK FACTORS
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 10K 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.
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 has lengthened the
sales cycle for our PACS radiology systems. In addition, replacing a legacy system offers less
potential return on investment as compared to installing a new system, and return on investment has
historically been a significant motivating factor for large hospitals and large hospital networks
to purchase our PACS radiology systems. These factors resulted in a
significant decline in demand for our PACS radiology systems, and
sales of those systems, in 2007 and 2008. We expect these conditions in the large
system radiology market and, consequently, the decline in our PACS
radiology system sales, to continue at least into 2010, which could have an adverse impact on our
revenue and financial condition.
Our
business is subject to the cyclical nature of our industry and
changes in consumer confidence and in economic and market
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 changes in consumer
confidence and in economic
and market conditions in general, and by other factors that are beyond our control. The current
global financial crisis and disruption in domestic and international
capital and credit markets has caused significant erosion in consumer confidence. These factors
have a strong effect on sales of our software and related services. As a result, the overall
demand for our products and services has been materially and negatively affected, and the level of
future sales of our products and services is uncertain. A prolonged economic downturn, and slow or
negative
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growth in the domestic and global economy, may continue to have a material adverse effect on
our business, financial condition and results of operations for the foreseeable future.
The
ability of our customers to purchase and to pay for our products and
services is affected by the availability of capital and access to
credit.
The ability of our customers to purchase our products and services is affected by the
availability of capital and credit to them. 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. Recent volatility and disruption in the capital
and credit markets has decreased the availability of liquidity and credit capacity for certain of
our customers. Moreover, many hospitals and healthcare networks rely in part on donations and
investment earnings, and are experiencing significant reductions in donations and substantial
investment losses rather than gains. This reduced availability of capital and credit has caused
many customers to reduce their information technology spending, which
has negatively impacted sales
for our products and services.
Volatility in the capital and
credit markets also may impair the ability of our customers to
pay for our software and services for which they have already contracted. As a result, reserves for
doubtful accounts and write-offs of accounts receivable may increase. If our customers are unable
to access capital or credit, it could materially and adversely affect
their ability to pay for our
products and services and, as a result, could negatively affect our business and operating results.
If we are unable to develop new products, or if we are unable to upgrade the performance,
features, and reliability of our existing products, our business and operating results could be
adversely affected.
Our
future success depends upon, among other things, our ability to
develop and introduce next generation software, new software products and
upgrades, and enhancements to existing software products on a timely basis. The development and
introduction of new software and software upgrades is a complex process that involves a significant
commitment of time and resources. Both new products and upgrades can require long development and
testing periods, and are subject to a number of risks and challenges including effectively managing
the length of the development cycle and extending the operation of the software products to new
platforms and operating systems. In addition, we may seek to release next generation software
products in conjunction with the replacement by customers of existing software systems, but if we
miss a key selling period for any reason, including product development delays, our sales will
suffer disproportionately. If we are unable to develop new and next generation software products
or to enhance and improve our existing software products in a timely
manner, or to position and/or
price those products to meet market and customer demand, customers may not buy or renew software
licenses, and our business and operating results could be adversely affected.
If the merger contemplated by the Agreement and Plan of Merger entered into on February 23,
2009 with AMICAS, Inc. and AMICAS Acquisition Corp. does not occur, it could have a material
adverse effect on our business, results of operations, and financial condition.
On February 23, 2009, we entered into an Agreement and Plan of Merger with AMICAS, Inc. and
AMICAS Acquisition Corp., a wholly owned subsidiary of AMICAS. Under the terms of this merger
agreement, AMICAS and AMICAS Acquisition Corp. have commenced a tender offer to purchase all
outstanding shares of our common stock at a price of $1.82 per share in cash. The tender offer is
conditioned upon, among other things, at least a majority of our outstanding shares being tendered.
Assuming that the tender offer is successful, the merger agreement provides that the tender offer
will be followed by the merger of AMICAS Acquisition Corp. with and into Emageon. The tender offer
commenced on March 5, 2009 and the merger is expected to be completed in the second quarter of
2009.
However, we cannot predict whether the closing conditions for the tender offer set forth in
the merger agreement will be satisfied, and the transactions contemplated by the merger agreement
may be delayed or even abandoned before completion if certain events occur. The merger agreement
may be terminated by us, on one hand, or AMICAS, on the other hand, under certain circumstances,
and termination of the merger agreement may require us to pay a break-up fee of $1.6 million to
AMICAS. In addition, on March 13, 2009, a putative shareholder class action lawsuit was filed
against us and members of our board in the Circuit Court of Jefferson County, Alabama. The action,
which is described in greater detail under Item 3 of this Annual Report on Form 10-K, alleges,
among other things, breaches of fiduciary duty by the members of our board and seeks, among other
things, to enjoin the acquisition of Emageon by AMICAS. While we believe that the allegations are
entirely without merit, even a meritless lawsuit may carry with it potential to delay consummation
of the tender offer and merger.
Until the closing of the tender offer and merger, it is possible that the focus of our
management team may be diverted, and that there may be a negative reaction to the tender offer and
merger on the part of our customers, employees, suppliers, or other third-party relationships. In
addition, if the closing conditions for the tender offer set forth in the merger agreement are not
satisfied or waived pursuant to the merger agreement, or if the transactions are not completed for
any other reason, (i) the market price of our common stock could significantly decline, (ii) we
will remain liable for the significant expenses that we have incurred related to the transaction,
including legal and banking fees, and (iii) we may experience substantial disruption in our sales,
research and development, and operating activities, and the loss of key personnel, customers,
suppliers and other third-party relationships, any of which could materially and adversely affect
us and our business, operating results and financial condition.
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Our prolonged investigation of strategic alternatives and the terms and conditions of our
merger agreements with Health Systems Solutions and AMICAS have had and may continue to have
adverse effects on our customers, personnel and other relationships as well as our operations and financial
condition.
In April 2007 we began an investigation of strategic alternatives aimed at identifying and
evaluating available strategic alternatives, including potential divestitures or a sale of Emageon.
As a result of this process, we entered into an Agreement and Plan of Merger with Health Systems
Solutions, Inc. in October 2008 that contained, among other things, certain restrictions on the
conduct of our business between the signing of the agreement and the closing of the acquisition.
That agreement was terminated in February 2009 due to Health Systems Solutions failure to receive
all necessary financing on or before the designated closing date. Subsequently, in February 2009,
we entered into an Agreement and Plan of Merger with AMICAS, Inc., pursuant to which AMICAS
commenced a tender offer for all outstanding shares of our common stock. The agreement with AMICAS
contains similar restrictions on the conduct of our business before the closing of the acquisition.
The pendency of our strategic alternatives process and the restrictions on our business imposed by
these merger agreements have had a significant effect on the day-to-day conduct of our business.
For example, in some cases our customers have reacted negatively to perceived uncertainties as to our future direction and strategy in
light of, among other things, the prolonged nature of the strategic alternatives process and the
restrictions placed on the operation of our business by these merger
agreements. In addition, this process and the restrictions on our
business have at times diverted certain of our management resources.
We expect these effects to continue, and they could have a material
and adverse effect on our operating results and financial condition.
The termination of our merger agreement with Health Systems Solutions may have a material
adverse effect on our business, results of operations, and financial condition.
We
entered into an Agreement and Plan of Merger with Health Systems
Solutions, Inc. in October 2008, which was subsequently amended in
December 2008. On February 12, 2009, we terminated
the merger agreement due to Health Systems Solutions failure to receive all necessary financing on
or before the designated closing date of February 11, 2009. We incurred significant transaction
costs and expenses in connection with the proposed merger transaction, and following the public
announcement of the termination of the merger agreement, our stock price declined substantially.
Even though we recently entered into an Agreement and Plan of Merger with AMICAS, Inc., we cannot
assure you that we will not continue to experience negative reactions from the financial markets,
our stockholders and other constituencies as a result of the termination of the proposed merger
transaction with Health Systems Solutions.
In addition, the $9 million in escrowed funds that we received in connection with the
termination of the Health Systems Solutions merger agreement were provided to Health Systems
Solutions by Stanford International Bank Limited, its majority stockholder. Because of charges against,
and ongoing investigations of, Stanford International Bank by the SEC and other federal agencies, all or a portion of
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those
funds could become the subject of a claim or other proceeding. If we are required to surrender these funds, or are otherwise involved in any
proceedings with respect thereto, it could have a material adverse effect on our business, results
of operations or financial condition.
We depend on highly specialized personnel, and the loss of, or failure to identify, hire,
motivate and retain these highly specialized personnel could adversely affect our ability to
manage our business.
Our
future success depends in part 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. In addition, the uncertainties resulting from the
pendency of our strategic alternatives process and our merger
agreements with AMICAS and Health Systems Solutions have made it
difficult to retain certain of our key personnel. As a result, we may
not be able to identify and hire new personnel in a
timely manner, and may not be able to motivate and retain our
existing personnel. If we are unable to do so, it could significantly
impact our ability to execute our strategy and manage our business.
We
may not be able to raise additional capital on acceptable terms to
fund our operations, which could adversely affect our business.
We expect
our cash resources, future cash flows, and amounts available, if any, under our line of credit to be sufficient to meet our working capital and capital
expenditure needs for the next twelve months. If our cash resources
are not sufficient to meet our future cash requirements, we may need to raise
additional funds through public or private debt or equity financings, the sale of
assets, or other arrangements. Alternatively, we may be required to
limit growth or curtail operations to levels consistent with the
constraints imposed by available cash and cash flow.
The ability to raise additional funds or obtain additional financing is limited by the
tightening of the global credit markets and may be further limited by the substantial decline in
our stock price over the past two years. In addition, there can be no
assurance that any reductions in planned expenditures or in
operations would be sufficient to cover any shortfalls in available cash.
If our cash resources are inadequate and we are unable to identify additional
sources of capital on acceptable terms, or to scale back our
operations and expenditures to an appropriate level, our ability to
successfully operate our business could be adversely affected.
Recent modifications may make it difficult to access our line of credit.
As
of September 30 and December 31, 2008, we were in default under our existing line of credit agreement by
failing to meet the tangible net worth requirement thereunder. On
November 10, 2008 and March 24, 2009, respectively, we
agreed to modifications of the line of credit agreement in which the
bank waived our defaults. Pursuant to the
modifications, future advances under the agreement, if any, will be conditioned on our being in
compliance with certain financial covenants under the agreement, including the minimum tangible net
worth requirement, as of the end of the preceding calendar quarter, otherwise being in compliance
with the terms of the agreement, and delivering a compliance certificate, signed by our Chief
Financial Officer, certifying our compliance with these conditions. There can be no assurance that
we will be in compliance with these covenants, including the minimum tangible net worth covenant,
as of the end of any future calendar quarter, or at such time, if any, as we determine to make a
request for an advance under the agreement.
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 $106.8 million at December
31, 2008. 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, create
19
new
product offerings and product upgrades, respond to competitive developments, and attract and retain qualified
sales, technical, and management employees. Even if we achieve profitability, we may not be
able to maintain profitable operations on an annual basis.
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,
extensions and upgrades, 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. Although we endeavor to
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.
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 $18.0
million, or 14%, of our contracted backlog at December 31, 2008. In addition, our future revenue
and growth significantly depend on our ability to sell add-on functionality and new products to
existing multi-facility customers such as Ascension Health. As a result, the loss of Ascension
Health or any other 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.
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 business effectively.
Our success depends largely on the continued service of our senior executive management,
including Charles A. Jett, Jr., our President and Chief Executive
Officer; John Wilhoite, our Chief
Financial Officer, Secretary and Treasurer; and Keith Stahlhut, our Chief Operating Officer
(Interim) and Senior Vice President, Sales. 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, Mr. Wilhoite, and Mr. Stahlhut are two years, one year, and six months,
respectively, with automatic renewal on a day-to-day basis thereafter unless we or they give notice
to stop
20
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.
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, wellcapitalized, 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 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 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 |
21
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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. |
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 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 have been subject to third-party infringement claims, and expect that digital image
visualization software, image management software, and open source software products will continue
to be subject to third-party infringement or other claims as the number of competitors grows and
the functionality of products increases. Any claims, with or without merit, could have the
following negative consequences:
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costly litigation and damage awards; |
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diversion of management attention and resources; |
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product sales and distribution delays or suspensions, either temporary or permanent;
and |
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the need to enter into royalty or licensing agreements, which may not be available
on terms acceptable to us, if at all. |
A successful infringement or other claim against us could result in a substantial damage award
and materially harm our financial condition. Our failure or inability to license the infringed or
similar technology could prevent us from selling our products and adversely affect our business and
financial results.
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 recordkeeping 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) premarket 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 preexisting
approved devices.
Furthermore, it is possible that even if we receive required regulatory clearances and
approvals from the FDA to market a given product, these clearances and approvals may include
limitations on the indicated uses of the product. Also, the FDA can withdraw product clearances
and approvals due to failure to comply with regulatory standards, quality system manufacturing
regulations, unapproved manufacturing changes, or, if unforeseen problems arise after
22
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 thirdparty 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. Relationships between medical device companies and physician
consultants have been under increasing scrutiny by the government. 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 AntiKickback 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. |
If our operations are found to violate any of these laws or other governmental regulations, we
may be subject to penalties, including civil and criminal penalties, damages, fines, and the
curtailment or restructuring of our operations. Any such occurrences could adversely affect our
ability to operate our business and our financial results. Determining such risk is complicated by
the fact that many of these laws and regulations have not been fully interpreted by governing
regulatory authorities or the courts, and many of the provisions of such laws and regulations are
open to a wide range of interpretations. Any action against us for violating such laws or
regulations, even if we successfully defend such an action, could cause us to incur significant
legal expenses and divert our managements attention from the operation of our business. Moreover,
compliance with applicable federal and state
23
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 thirdparty
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.
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
24
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 antitakeover 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,
threeyear 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. |
These provisions could also discourage bids for our common stock at a premium and cause the
market price of our common stock to decline. In addition, these provisions may also entrench our
management by preventing or frustrating any attempt by our stockholders to replace or remove our
current management.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2. PROPERTIES
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 6,000 square feet of
leased office space located in Ottawa, Ontario, under a lease that expires in January 2014; 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 2010; and a research and
25
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 the operations of
Camtronics Medical Systems, Ltd. (Camtronics), which we acquired in November 2005, 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 $0.5 million at
December 31, 2008 ($0.6 million at December 31, 2007) and is included in our balance sheet in other
longterm liabilities. The facility has been subleased to another entity.
ITEM 3. LEGAL PROCEEDINGS
On
November 21, 2008, Hospital Systems Corporation, or HSC, filed a Second Amended Complaint in
the United States District Court for the Eastern District of Texas adding Emageon and multiple
other companies as defendants to a patent infringement lawsuit first filed by HSC in September,
2007. HSC seeks unspecified damages as well as injunctive relief from each defendant for alleged
infringement of two patents related to picture archiving and communications systems. Specifically,
HSC has alleged that the Companys RadSuite and related products infringe upon HSCs patents. We
answered the complaint in January, 2009, among other things denying any infringement, and discovery
between HSC and the Company has not yet begun. We intend to vigorously defend ourselves in these
proceedings.
On
March 13, 2009, a putative shareholder class action lawsuit was
filed against us and the members
of our board of directors in the Circuit Court of Jefferson County,
Alabama (Case No. 01-CV-2009-900927.00). The action, styled Philip Fishman v.
Emageon, Inc., et. al., alleges, among other things, that
the members of our board violated their fiduciary duties by failing to maximize value for our
stockholders when negotiating and entering into our merger agreement with AMICAS. The complaint
also alleges that Emageon aided and abetted those purported breaches. The plaintiff seeks, among
other things, to enjoin the acquisition of Emageon by AMICAS or, in the alternative, to rescind the
acquisition should it occur before the lawsuit is resolved. The
plaintiff also has made motions for expedited proceedings and
discovery. We believe that the allegations of the plaintiffs
complaint are entirely without merit, and we and our board intend to
vigorously defend this action. A similar lawsuit was filed by the
plaintiff in the Superior Court
Department, Suffolk County, Massachusetts, with AMICAS as an
additional defendant, but that lawsuit was withdrawn by the
plaintiff without prejudice on March 16, 2009.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
A special meeting of our stockholders was held on December 17, 2008, at 9:00 AM local time, at
1200 Corporate Drive, Suite 200, Birmingham, Alabama, for the following purposes:
1)
to consider and vote upon the adoption of the Agreement and Plan of Merger, dated October
13, 2008, by and among the Company, Health Systems Solutions, Inc.,
and HSS Acquisition Corp. (Proposal One); and
2) to consider and vote upon any proposal to adjourn the special meeting to a later date, if
necessary or appropriate, to solicit additional proxies if there were insufficient votes in favor of
the foregoing proposal (Proposal Two).
The following votes were cast at the special meeting:
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Votes For |
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Votes Against |
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Abstentions |
Proposal One |
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17,896,906 |
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166,034 |
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25,233 |
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Proposal Two |
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17,553,472 |
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505,757 |
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28,944 |
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On February 12, 2009, we terminated the merger agreement with Health Systems Solutions and HSS
Acquisition Corp. as a result of the failure by Health Systems Solutions to receive all necessary
financing on or before the designated closing date of February 11, 2009.
26
PART II
ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES
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 6, 2009, the 21,449,718 outstanding shares of our common stock were held by 75 holders
of record. The closing price per share of our common stock on the NASDAQ Global Market on March 6,
2009 was $1.79.
The following table presents the range of share prices for each quarter in the two year period
ended December 31, 2008:
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2008 Quarter Ended |
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High |
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Low |
March 31, 2008 |
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$ |
4.05 |
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$ |
1.87 |
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June 30, 2008 |
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2.91 |
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2.06 |
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September 30, 2008 |
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2.55 |
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|
1.80 |
|
December 31, 2008 |
|
$ |
2.74 |
|
|
$ |
0.89 |
|
|
|
|
|
|
|
|
|
|
2007 Quarter Ended |
|
High |
|
Low |
March 31, 2007 |
|
$ |
15.58 |
|
|
$ |
9.75 |
|
June 30, 2007 |
|
|
11.89 |
|
|
|
7.42 |
|
September 30, 2007 |
|
|
10.25 |
|
|
|
7.90 |
|
December 31, 2007 |
|
$ |
8.66 |
|
|
$ |
3.08 |
|
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-1 (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, 2008, we have spent
approximately $14.6 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.
27
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, 2008.
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, 2008. 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
ASSUMES $100 INVESTED ON FEB. 9, 2005
ASSUMES DIVIDEND REINVESTED
FISCAL YEAR ENDING DEC. 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2/9/05 |
|
6/30/05 |
|
12/31/05 |
|
6/30/06 |
|
12/31/06 |
|
6/30/07 |
|
12/31/07 |
|
6/30/08 |
|
12/31/08 |
EMAGEON INC. |
|
|
100.00 |
|
|
|
107.62 |
|
|
|
122.31 |
|
|
|
112.23 |
|
|
|
118.15 |
|
|
|
69.38 |
|
|
|
31.00 |
|
|
|
16.54 |
|
|
|
14.23 |
|
HEMSCOTT GROUP INDEX |
|
|
100.00 |
|
|
|
99.98 |
|
|
|
108.04 |
|
|
|
114.28 |
|
|
|
127.86 |
|
|
|
137.80 |
|
|
|
134.68 |
|
|
|
120.36 |
|
|
|
89.98 |
|
NASDAQ MARKET INDEX |
|
|
100.00 |
|
|
|
100.49 |
|
|
|
107.95 |
|
|
|
106.88 |
|
|
|
119.14 |
|
|
|
128.54 |
|
|
|
130.99 |
|
|
|
112.98 |
|
|
|
77.69 |
|
28
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following consolidated statements of operations data for the years ended December 31,
2006, 2007 and 2008 and consolidated balance sheet data as of December 31, 2007 and 2008 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, 2004
and 2005 and the balance sheet data as of December 31, 2004, 2005 and 2006 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, |
|
|
2004 |
|
2005 |
|
2006 |
|
2007 |
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Statements of Operations Data(1)(2): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
System sales |
|
$ |
33,441 |
|
|
$ |
50,041 |
|
|
$ |
75,340 |
|
|
$ |
51,140 |
|
|
$ |
19,920 |
|
Support services |
|
|
13,059 |
|
|
|
25,023 |
|
|
|
48,165 |
|
|
|
53,485 |
|
|
|
49,408 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
|
46,500 |
|
|
|
75,064 |
|
|
|
123,505 |
|
|
|
104,625 |
|
|
|
69,328 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
System sales |
|
|
21,452 |
|
|
|
28,316 |
|
|
|
43,333 |
|
|
|
28,551 |
|
|
|
14,740 |
|
Support services |
|
|
11,426 |
|
|
|
15,921 |
|
|
|
27,772 |
|
|
|
29,469 |
|
|
|
24,352 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenue |
|
|
32,878 |
|
|
|
44,237 |
|
|
|
71,105 |
|
|
|
58,020 |
|
|
|
39,092 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
13,622 |
|
|
|
30,827 |
|
|
|
52,400 |
|
|
|
46,605 |
|
|
|
30,236 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
|
6,197 |
|
|
|
11,652 |
|
|
|
13,927 |
|
|
|
18,529 |
|
|
|
18,408 |
|
Sales and marketing |
|
|
9,377 |
|
|
|
12,238 |
|
|
|
18,459 |
|
|
|
18,285 |
|
|
|
14,128 |
|
General and administrative |
|
|
7,498 |
|
|
|
10,945 |
|
|
|
17,028 |
|
|
|
13,430 |
|
|
|
11,944 |
|
Amortization and write-off of intangible assets |
|
|
|
|
|
|
993 |
|
|
|
3,540 |
|
|
|
1,381 |
|
|
|
22,958 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other operating expenses |
|
|
|
|
|
|
244 |
|
|
|
5,806 |
|
|
|
2,874 |
|
|
|
5,547 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
23,072 |
|
|
|
36,072 |
|
|
|
58,760 |
|
|
|
54,499 |
|
|
|
72,985 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss |
|
|
(9,450 |
) |
|
|
(5,245 |
) |
|
|
(6,360 |
) |
|
|
(7,894 |
) |
|
|
(42,749 |
) |
Interest (expense) income, net |
|
|
(1,022 |
) |
|
|
248 |
|
|
|
328 |
|
|
|
809 |
|
|
|
478 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(10,472 |
) |
|
$ |
(4,997 |
) |
|
$ |
(6,032 |
) |
|
$ |
(7,085 |
) |
|
$ |
(42,271 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share, basic and diluted |
|
$ |
(4.07 |
) |
|
$ |
(0.28 |
) |
|
$ |
(0.29 |
) |
|
$ |
(0.33 |
) |
|
$ |
(1.97 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares, basic and diluted |
|
|
2,590 |
|
|
|
17,975 |
|
|
|
20,936 |
|
|
|
21,385 |
|
|
|
21,470 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected Cash Flow Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by (used in) operations |
|
$ |
4,959 |
|
|
$ |
(1,881 |
) |
|
$ |
7,263 |
|
|
$ |
(3,177 |
) |
|
$ |
(1,698 |
) |
29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
2004 |
|
2005 |
|
2006 |
|
2007 |
|
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Balance Sheet Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
5,995 |
|
|
$ |
15,520 |
|
|
$ |
23,008 |
|
|
$ |
17,034 |
|
|
$ |
13,511 |
|
Marketable securities |
|
|
|
|
|
|
4,951 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets, net |
|
|
6,873 |
|
|
|
34,277 |
|
|
|
30,090 |
|
|
|
27,604 |
|
|
|
3,777 |
|
Total assets |
|
|
41,768 |
|
|
|
117,944 |
|
|
|
113,012 |
|
|
|
99,294 |
|
|
|
50,274 |
|
Total debt and capital lease obligations |
|
|
9,489 |
|
|
|
3,749 |
|
|
|
961 |
|
|
|
89 |
|
|
|
43 |
|
Redeemable preferred stock |
|
|
30,348 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total (deficit) stockholders equity |
|
$ |
(32,370 |
) |
|
$ |
63,639 |
|
|
$ |
65,107 |
|
|
$ |
62,296 |
|
|
$ |
23,475 |
|
|
|
|
(1) |
|
On November 1, 2005, we acquired Camtronics Medical Systems, Ltd. The acquisition was
accounted for as a purchase under Statement of Financial Accounting Standards No. 141,
Business Combinations. Accordingly, the results of operations of Camtronics have been
included in the accompanying consolidated financial statements since the date of acquisition. |
|
(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 healthcare provider organizations. Our solutions
consist of advanced 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 advanced visualization software, which is hosted by the customer,
provides physicians across the enterprisein multiple medical specialties and at any network
access pointwith dynamic tools to manipulate and analyze images in both a 2D and a 3D
perspective. 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.
Our fiscal year ends on December 31. References below to annual periods or years refer to the
fiscal years ended December 31.
Strategic Alternatives Process and Agreements with Health Systems Solutions and AMICAS
In April 2007, our board of directors, acting upon the recommendation of management, commenced
a formal review of potential strategic alternatives for the benefit of our stockholders. In
connection therewith, the board established a strategic alternatives committee comprised of
independent, disinterested directors, and the committee engaged legal and financial advisors to
assist in its evaluation of strategic alternatives. From May 2007 through October 2007, the
strategic alternatives committee, through its financial advisors, contacted, met and discussed with
multiple strategic parties and financial sponsors their interest in pursuing a transaction with
Emageon. However, agreement could not be reached regarding a transaction that would be in the best
interest of our stockholders, and the committee ceased its activities at the end of October 2007.
Following our third quarter 2007 earnings release and ensuing significant decline in our stock
price, our board determined that further analysis of strategic alternatives was required, and the
strategic alternatives committee was reconvened in November 2007. Through its financial advisors,
the committee again contacted numerous parties
30
regarding a transaction with Emageon, but did not receive any executable offers in the
process. As a result, in April 2008 the strategic alternatives committee concluded its evaluation
of strategic alternatives.
In
May 2008, Oliver Press Partners LLC, or Oliver Press, a significant stockholder of the
Company, filed a preliminary proxy statement with the SEC indicating
it would seek stockholder support for election at our 2008 annual
stockholders meeting of a slate
of three directors in opposition to the slate recommended by us. Over the ensuing weeks we engaged
in a proxy contest with Oliver Press. In June 2008, we reached agreement with Oliver Press to
terminate the proxy contest and to reconstitute our board of directors. In connection with the
settlement, the strategic alternatives committee was reconstituted and recommenced its evaluation
of strategic alternatives. From July 2008 through September 2008, the strategic alternatives
committee, through its financial advisors, contacted numerous parties regarding a potential
business combination involving Emageon, and we engaged in various levels of negotiation with
several interested parties. These efforts culminated in the execution of a merger agreement with
Health Systems Solutions, Inc., or HSS, in October 2008.
Our
stockholders adopted the merger agreement with Health Systems
Solutions at a special meeting held on December 17, 2008,
and, having satisfied the other conditions to closing in the merger agreement, the merger was
scheduled to close in late December 2008. However, prior to the closing, we were notified by
Health Systems Solutions that its lender and majority shareholder,
Stanford International Bank Limited, or SIBL, would not provide
funding to consummate the merger at that time. After further negotiation, the merger agreement was
amended to, among other things, extend the closing date to February 11, 2009 and increase the
amount of the deposit escrow account established in connection with the merger from $5.0 million to
$9.0 million. On February 11, 2009, SIBL again did not fulfill its obligations to provide the financing
necessary to fund the merger, and the merger with HSS was not consummated. On February 12, 2009,
we terminated the amended merger agreement with Health Systems Solutions and HSS Acquisition
Corp. pursuant to Sections 7.4(a) and 7.4(c) thereof as a result of the failure by Health Systems
Solutions to receive all necessary financing on or before the designated closing date of February
11, 2009. In connection therewith, on February 13, 2009, we received the $9 million that had been
placed in escrow by Health Systems Solutions in connection with the transactions contemplated by
the merger agreement.
Over
the next several days, our board, through its financial advisor, held discussions with
several parties regarding a possible acquisition of Emageon, and on February 23, 2009 we entered
into a merger agreement with AMICAS, Inc. and its wholly owned subsidiary AMICAS Acquisition Corp.
Under the terms of the merger agreement, AMICAS commenced a tender offer on March 5, 2009 to
purchase all of our issued and outstanding shares of common stock at a purchase price of $1.82 per
share in cash. Unless extended in accordance with the terms and conditions of the merger
agreement, the tender offer is scheduled to expire on April 1, 2009. The tender offer is
conditioned upon, among other things, at least a majority of our shares outstanding being tendered.
Assuming that the tender offer is successful, the merger agreement provides that the tender offer
will be followed by a merger pursuant to which AMICAS Acquisition Corp would be merged with and
into Emageon, and Emageon would become a wholly owned subsidiary of AMICAS. We expect the merger
to be completed in second quarter of 2009. On March 5, 2009, we
filed a Solicitation/Recommendation Statement on Schedule 14D-9 with
the SEC regarding the tender offer. This Schedule 14D-9 includes
additional details regarding our stragetic alternatives process, the
tender offer, and the proposed merger with AMICAS.
The $9.0 million in escrowed funds received by the Company upon termination of the merger
agreement with Health Systems Solutions were provided to Health
Systems Solutions by SIBL. Because of charges against and ongoing
investigations of SIBL by the
Securities and Exchange Commission and other federal agencies, it is
possible that all or a portion of those funds could become the
subject of a claim or other proceeding.
Results Overview
Total revenue for 2008 was $69.3 million, a 33.7% decrease from total 2007 revenue. This
decline in total revenue in 2008 followed a 15.3% decline in total revenue from 2006 to 2007. The
2008 decline was comprised of a 61.0% decrease in system sales revenue and a 7.6% decrease in
support services revenue. The decline in system
31
sales revenue was the result of a substantial decline in sales orders, primarily for our large
hospital and hospital network radiology products, and a combination of the following additional
factors and conditions:
|
|
|
Slow overall market demand for medical imaging software, hardware, and support
services; |
|
|
|
|
Maturity in our primary picture archiving and communications radiology (PACS)
market, which has made that market primarily a replacement systems market; |
|
|
|
|
A high level of penetration of our primary radiology market and consequent delay in
the timing of our customers system replacement cycle; |
|
|
|
|
Disruption in our base of existing and potential customers as a result of our
prolonged investigation of strategic alternatives and our 2008 proxy contest with
Oliver Press; |
|
|
|
|
The ongoing deterioration in general economic conditions; |
|
|
|
|
The ongoing negative lending environment, which has negatively affected the capital
spending plans of our existing and potential customers, many of whom are nonprofit
organizations; and |
|
|
|
|
Our difficulties in development, marketing, and sale of next generation imaging
software to replace our current software offerings. |
Our total gross margin percentage declined by 0.9 percentage points in 2008 compared to 2007,
consisting of an 18.2 percentage point decline in system sales gross margin, offset by a 5.8
percentage point increase in support services gross margin. Our total research and development,
sales and marketing, and general and administrative expenses for 2008 were $44.5 million, down $5.8
million from the 2007 level. Our net loss was $42.3 million in 2008, which included a goodwill
impairment charge of $21.6 million, strategic alternative investigation expenses of $3.2 million,
employee severance expenses of $1.3 million, and a litigation settlement charge of $1.0 million.
The net loss of $42.3 million in 2008 compares to a net loss of $7.1 million in 2007, which
included $2.0 million in costs of employee severance and related expenses.
Our bookings of new orders for system sales and support services for 2008 were $46.9 million,
down by $45.8 million from the 2007 level. At December 31, 2008 we had $126.7 million in contracted
orders backlog, of which $104.0 million were support services orders, compared to $149.1 million at
December 31, 2007, of which $131.4 million were support services orders. We expect to recognize
revenue from our December 31, 2008 backlog of $56.3 million in 2009, $32.9 million in 2010, and the
remainder by 2014. Our sales orders backlog increases as we enter into new contracts, and decreases
as we earn and recognize revenue from those orders.
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 software 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 maintenance and 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 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
32
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 primarily as perpetual licenses with maintenance and support relating to the software. 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 support
services under these agreements ranges 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 16% of our total revenue in 2008, and accounted for 14% of our total contracted
backlog at December 31, 2008. 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
Gross profit from system sales varies based on several factors, including:
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sales prices negotiated in the contracting process; |
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|
costs associated with purchasing and assembly or integration of third-party
components; |
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|
fluctuations in prices received from third-party component manufacturers and
distributors relative to the mark-up percentages provided for in customer contracts; |
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|
the relative mix of the hardware and software components comprising system
sales in a given period; and |
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|
|
the volume of systems sales in a given period relative to the semi-fixed costs of
procurement and assembly. |
33
Gross profit from support services varies based on several factors, including:
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services fees negotiated during the contracting process; |
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|
productivity of our professional service team; |
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|
costs of service agreements related to third-party components included in our
solution; |
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|
costs associated with the use of outside contractors; and |
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|
the level of support services revenue relative to the semi-fixed costs of support. |
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 fluctuate with the level of third-party research and
development activities undertaken.
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. We
expect that general and administrative expenses will remain relatively stable due to economies of
scale available in most administrative areas.
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 position 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 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; |
34
|
|
|
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; and |
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|
Term licenses: which we use to a lesser extent and consist of software licensed
on a term basis according to a fixed number of users and/or estimates of annual study
volumes. |
Generally, our software license arrangements do not include significant modification or
customization of the underlying software and, as a result, we recognize license revenue when: (1)
persuasive evidence of an arrangement exists: (2) delivery has occurred; (3) customer payment is
deemed fixed or determinable; and (4) collection is probable. We assess each of the four criteria
as follows:
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|
Persuasive evidence of an arrangement exists: It is our customary practice to
have a written contract, which is signed by both the customer and us, or a purchase
order from those customers that have previously negotiated a standard end-user license
arrangement, prior to recognizing revenue on an arrangement. |
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|
Delivery has occurred: It is our customary practice to obtain acceptance of 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. |
We account for software license and nonrecurring 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 nonrecurring 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 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 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.
35
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 agreements and our related
accounting policies:
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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 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, 2008. |
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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, 2008 we have a liability of $0.3 million in our
balance sheet for these obligations. |
Billings may not coincide with the recognition of revenue. Unbilled revenue, which is included
in accounts receivable in the consolidated balance sheet, occurs when revenue recognition precedes
billing to the customer, and arises primarily from sales with predetermined billing schedules.
Billings in excess of sales (deferred revenue) occur when billing to the customer precedes revenue
recognition, and arise primarily from sales with partial prepayments upon contract execution and
from maintenance revenue billed in advance of performance of the maintenance activity. 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.
36
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. 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. 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.
We experienced significant declines in sales order bookings and revenues during 2007 and 2008
resulting from, among other things, slower industry demand for medical imaging software, hardware
and support services; a high customer penetration level in our primary radiology market; economic
conditions that have tightened credit availability and affected our customers capital spending
plans; and uncertainty among customers in our existing and potential customer base during the
pendency of our 2008 proxy contest and our 2007 and 2008 search for strategic alternatives for the
Company. These conditions and their effects on our current and future financial performance and
financial condition indicated a possible impairment of our recorded goodwill balance as of June 30,
2008, and required us to determine whether actual impairment of our goodwill had occurred. Our
goodwill evaluation utilized various valuation techniques, primarily an estimation of the present
value of our 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.
Our evaluation indicated a full impairment of the amount of goodwill recorded in our balance sheet,
and accordingly we recorded an impairment charge of $21.6 million in our statement of operations
for the three months ended June 30, 2008.
37
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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|
|
|
|
|
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|
Year Ended December 31, |
|
Year Ended December 31, |
|
|
2008 |
|
2007 |
|
Change |
|
Change (%) |
|
2007 |
|
2006 |
|
Change |
|
Change (%) |
|
|
(In thousands except percentages) |
|
(In thousands except percentages) |
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
System sales |
|
$ |
19,920 |
|
|
$ |
51,140 |
|
|
$ |
(31,220 |
) |
|
|
(61.0 |
)% |
|
$ |
51,140 |
|
|
$ |
75,340 |
|
|
$ |
(24,200 |
) |
|
|
(32.1 |
)% |
Support services |
|
|
49,408 |
|
|
|
53,485 |
|
|
|
(4,077 |
) |
|
|
(7.6 |
)% |
|
|
53,485 |
|
|
|
48,165 |
|
|
|
5,320 |
|
|
|
11.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
69,328 |
|
|
$ |
104,625 |
|
|
$ |
(35,297 |
) |
|
|
(33.7 |
)% |
|
$ |
104,625 |
|
|
$ |
123,505 |
|
|
$ |
(18,880 |
) |
|
|
(15.3 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue for 2008 was $69.3 million, a 33.7% decrease from 2007 revenue of $104.6
million. As further discussed below and in the preceding Results Overview section , total revenue
declined significantly in 2008 as a result of conditions in the market segments of the medical
imaging industry in which we compete, general economic conditions, and as a result of certain
conditions particular to the Company.
System sales revenue declined by $31.2 million, or 61.0%, in 2008 compared to 2007, including
declines in both our radiology and cardiology system product sales. Radiology system sales,
primarily software sales, declined by 68.4% for the year, while cardiology system sales were down
by 48.0% compared to 2007. These revenue declines are the direct result of declines in system sales
order bookings of 24.0% in 2007 and 48.9% in 2008. The decline in our system sales order bookings
in 2008 results primarily from those factors and conditions discussed above under Results
Overview.
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 first entered a mature phase in
2007, causing demand in that market to consist largely of replacement of legacy radiology systems,
lengthening the sales cycle and making the timing of large orders more difficult to anticipate. In
addition, our commencement of a search for strategic alternatives for the Company in April 2007
caused some of our customers to delay purchase decisions, negatively impacting 2007 sales order
bookings and revenue.
Support services revenue was $49.4 million in 2008, a decrease of $4.1 million, or 7.6%, from
the 2007 level. Support services revenue consists of professional
services and installation revenue and of
maintenance revenue from customers who subscribe to our ongoing maintenance services. Professional
and installation services are ancillary to system sales revenue, and thus will grow or decline as
the number of new system installations or system additions fluctuates year to year, and maintenance
revenue will grow as the number of customers who subscribe to maintenance services increases.
During 2008, professional and installation services revenue declined by $8.2 million, or 50.0%, in
line with the decline in system sales revenue, and maintenance revenue increased only marginally,
by $4.1 million, or 11.1%, as the result of the decline in system sales revenue.
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
38
and cardiology product upgrades distributed in 2007. Support services revenue in our radiology
business grew only marginally in 2007 as the result of the decline in our radiology system sales
revenue.
Gross Margin
The following table sets forth gross margin earned on our revenues for the three years in the
period ended December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
2008 |
|
2007 |
|
2006 |
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
System Sales |
|
$ |
19,920 |
|
|
$ |
51,140 |
|
|
$ |
75,340 |
|
Support Services |
|
|
49,408 |
|
|
|
53,485 |
|
|
|
48,165 |
|
|
|
|
|
|
|
|
Total |
|
|
69,328 |
|
|
|
104,625 |
|
|
|
123,505 |
|
|
|
|
|
|
|
|
Cost of Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
System Sales |
|
|
14,740 |
|
|
|
28,551 |
|
|
|
43,333 |
|
Support Services |
|
|
24,352 |
|
|
|
29,469 |
|
|
|
27,772 |
|
|
|
|
|
|
|
|
Total |
|
|
39,092 |
|
|
|
58,020 |
|
|
|
71,105 |
|
|
|
|
|
|
|
|
Gross Profit: |
|
|
|
|
|
|
|
|
|
|
|
|
System Sales |
|
|
5,180 |
|
|
|
22,589 |
|
|
|
32,007 |
|
Support Services |
|
|
25,056 |
|
|
|
24,016 |
|
|
|
20,393 |
|
|
|
|
|
|
|
|
Total |
|
$ |
30,236 |
|
|
$ |
46,605 |
|
|
$ |
52,400 |
|
|
|
|
|
|
|
|
Gross Margin: |
|
|
|
|
|
|
|
|
|
|
|
|
System Sales |
|
|
26.0 |
% |
|
|
44.2 |
% |
|
|
42.5 |
% |
Support Services |
|
|
50.7 |
% |
|
|
44.9 |
% |
|
|
42.3 |
% |
Total |
|
|
43.6 |
% |
|
|
44.5 |
% |
|
|
42.4 |
% |
System sales gross margin was 26.0% in 2008, a decrease of 18.2 percentage points compared to
2007. The relative mix of the software and hardware components of our system sales, the relative
mix of radiology to cardiology sales, and the volume of system sales relative to the semi-fixed
costs of procurement and assembly of our systems can have a significant impact on the level of
gross margin earned on system sales in a given period. We purchase hardware from third parties for
purposes of filling the system orders of our customers, and therefore earn a relatively low gross
margin on those sales compared to software sales, which generally carry higher gross margins.
Cardiology products in general earn slightly lower gross margins than radiology products. In 2008,
both hardware and software systems revenue was lower than in 2007, but software sales declined in
greater proportion than hardware sales, causing low margin hardware sales to represent a greater
percentage of total system sales revenue than in 2007. In addition, cardiology system sales
represented a higher percentage of total system sales revenue than in 2007, and fixed procurement
and assembly costs were spread over a lower base of system sales revenue in 2008 compared to 2007,
both of which contributed to the lower level of system sales gross margin earned in 2008.
System sales gross margin was 44.2% in 2007, an increase of 1.7 percentage points over the
2006 level. 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.
39
Support services gross margin was 50.7% in 2008, an increase of 5.8 percentage points over the
2007 level. Both professional services revenue and maintenance revenue can provide significant cost
leverage with respect to the level of gross margin earned in periods of increasing professional
services and maintenance revenue, or can adversely affect gross margin in periods of slower growth
or declining revenue because of the generally fixed nature of the costs of support services,
primarily labor and overhead. The increase in support services gross margin in 2008 was the result
of cost reductions that included reduced employee headcount, which contributed $2.3 million in
salary and benefit reductions, a decline in utilization of third-party call center support that
contributed $0.7 million in savings, reduced travel and related expenses resulting from reduced
employee headcount and fewer system installations than in 2007, and a decline in depreciation
charges on equipment relevant to customer service activities. These positive factors were partially
offset by the negative leverage effects of spreading the remaining level of fixed service costs
over a lower base of support revenue than in 2007.
Support services gross margin was 44.9% in 2007, an increase of 2.6 percentage points compared
to 2006. In 2007, we benefitted from the cost leverage described above as costs were spread over an
increasing base of revenue-providing customers in both the professional and installation services
and maintenance services areas, and from our reduction in support services workforce in May 2007.
Partially offsetting these efficiencies was an increased level of utilization of third-party
consultants in the support area in 2007.
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. We 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, 2008 were $44.5 million compared to $50.2 million in the
corresponding prior year period, a decrease of $5.7 million, or 11.4%, the result primarily of
reduced employee headcount and reduced activity levels in line with adverse industry and economic
conditions and the resulting declines in our sales order bookings and revenue. The decline of 11.4%
in these expenses in 2008 compares to a total revenue decline over the same period of 33.7%.
We expect our research and development expenses to fluctuate with the level of third-party
research and development activities undertaken, while general and administrative expenses should
remain relatively stable. Sales and marketing expenses may increase as the result of our efforts to
seek new customers and further penetrate our existing markets and customer base, and will increase
in periods of higher sales volume due primarily to our sales commission structure.
Research and Development (R&D)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
Year Ended December 31, |
|
|
2008 |
|
2007 |
|
Change |
|
Change (%) |
|
2007 |
|
2006 |
|
Change |
|
Change (%) |
|
|
(In thousands except percentages) |
|
(In thousands except percentages) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
R&D Expense |
|
$ |
18,408 |
|
|
$ |
18,529 |
|
|
$ |
(121 |
) |
|
|
(0.1 |
)% |
|
$ |
18,529 |
|
|
$ |
13,927 |
|
|
$ |
4,602 |
|
|
|
33.0 |
% |
% of Revenue |
|
|
26.6 |
% |
|
|
17.7 |
% |
|
|
|
|
|
|
|
|
|
|
17.7 |
% |
|
|
11.3 |
% |
|
|
|
|
|
|
|
|
Research and development expense was relatively flat in 2008 with the level of expense in
2007. During 2008, we increased the level of utilization, and thus the expense, of third-party
research and development and related services, as we continued our efforts to improve our software
product offerings and their delivery to customers. Offsetting this cost increase was a reduction in
employee headcount and related salaries, benefits, and travel costs, which reduced our research and
development expenses by approximately $2.8 million, reduced facilities costs, including
depreciation expense, and reduced general overhead items.
40
The increase in research and development expenses in 2007 of $4.6 million, or 33.0%, compared
to 2006 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. 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 salaries and benefits expense resulting
from our reduction in engineering workforce in May 2007.
Sales and Marketing (S&M)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
Year Ended December 31, |
|
|
2008 |
|
2007 |
|
Change |
|
Change (%) |
|
2007 |
|
2006 |
|
Change |
|
Change (%) |
|
|
(In thousands except percentages) |
|
(In thousands except percentages) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
S&M Expense |
|
$ |
14,128 |
|
|
$ |
18,285 |
|
|
$ |
(4,157 |
) |
|
|
(22.7 |
)% |
|
$ |
18,285 |
|
|
$ |
18,459 |
|
|
$ |
(174 |
) |
|
|
(1.0 |
)% |
% of Revenue |
|
|
20.4 |
% |
|
|
17.5 |
% |
|
|
|
|
|
|
|
|
|
|
17.5 |
% |
|
|
14.9 |
% |
|
|
|
|
|
|
|
|
Sales and marketing expense, which consists primarily of employee salaries and related
benefits, sales commissions, travel, trade show and exhibit expenses, and general marketing
expenses, declined by $4.2 million, or 22.7%, in 2008 compared to 2007. Employee headcount
reductions in 2008 and corresponding salaries, benefits, and travel expenses were responsible for
$1.2 million of the decline year to year. Sales commissions declined by $2.2 million in 2008
compared to 2007 on the lower level of sales order bookings and revenue we experienced in 2008. The
remainder of the decline was the result of a generally lower level of sales and marketing activity
in 2008, including expenses for advertising, trade shows, and other marketing expenses. This lower
level of activity was in part the result of the expense savings endeavors of the company and in
part the result of difficult market conditions in the industry previously described.
Sales and marketing expense 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.
General and Administrative (G&A)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
Year Ended December 31, |
|
|
2008 |
|
2007 |
|
Change |
|
Change (%) |
|
2007 |
|
2006 |
|
Change |
|
Change (%) |
|
|
(In thousands except percentages) |
|
(In thousands except percentages) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
G&A Expense |
|
$ |
11,944 |
|
|
$ |
13,430 |
|
|
$ |
(1,486 |
) |
|
|
(11.1 |
)% |
|
$ |
13,430 |
|
|
$ |
17,028 |
|
|
$ |
(3,598 |
) |
|
|
(21.1 |
)% |
% of Revenue |
|
|
17.2 |
% |
|
|
12.8 |
% |
|
|
|
|
|
|
|
|
|
|
12.8 |
% |
|
|
13.8 |
% |
|
|
|
|
|
|
|
|
41
General and administrative expense declined by $1.5 million, or 11.1%, in 2008 compared to
2007. Employee headcount in administrative areas declined by ten during 2008, as the result
primarily of our expense savings efforts. The related salaries, benefits, and travel expenses of
these employees contributed approximately $0.9 million of the decline year to year. Other items
contributing to the decline included a decline in standard corporate, non-strategic alternative
legal fees of approximately $0.2 million and recovery in 2008 of customer accounts receivable that
had been fully reserved against in prior years, which lowered our bad debts expense.
General and administrative expense declined by $3.6 million, or 21.1%, 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 performed administrative duties in 2007 and therefore their
costs were 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, were 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.
We expect a future rate of growth in general and administrative expenses of less than that of
our other operating expenses largely due to economies of scale available in most
administrative areas.
Amortization and Write-off of Intangible Assets
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.
In the year ended December 31, 2008 we recorded a $21.6 million goodwill impairment charge.
The impairment charge is described under the heading Intangible and Other Long-Lived Assets of
the Critical Accounting Policies and Estimates section preceding in this Managements Discussion
and Analysis of Financial Condition and Results of Operations.
Other Operating Expenses
Other operating expenses in our statements of operations for the years ended December 31,
2008, 2007, and 2006 consist of the following, in thousands. These expenses are described
individually below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
|
2008 |
|
2007 |
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Integration costs, Camtronics acquisition |
|
|
|
|
|
|
|
|
|
$ |
5,369 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee severance and related expenses |
|
$ |
1,287 |
|
|
$ |
2,001 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Strategic alternative expenses |
|
|
3,243 |
|
|
|
320 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Litigation settlement |
|
|
1,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on disposal, property and equipment |
|
|
17 |
|
|
|
553 |
|
|
|
437 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
5,547 |
|
|
$ |
2,874 |
|
|
$ |
5,806 |
|
|
|
|
|
|
|
|
42
Integration Costs Related to Camtronics Acquisition
We incurred costs of $5.4 million in 2006 in connection with the integration into our
operations of Camtronics, which we acquired in November 2005. Integration costs were comprised
primarily of employee travel and relocation expenses, severance and related expenses of redundant
employees, and the costs of facility closure. Camtronics was fully integrated into our business as
of December 31, 2006.
Employee Severance and Related Expenses
In
first quarter 2008, our former Chief Financial Officer resigned his
positions with us, and we entered into a severance and general release agreement with that former officer
under which, in accordance with the terms of his employment agreement, we made a severance payment
and all previously unvested stock options and restricted stock unit awards of that former officer
became vested. In connection with that agreement, we incurred a charge of $0.8 million, including
the cash cost of the severance payment and the non-cash cost of acceleration of vesting of the
officers previously unvested stock options and restricted stock unit awards. In addition, in the
second and fourth quarters of 2008, we acted to further align our operating expenses with the
current level of actual and expected revenue through elimination of approximately twenty positions,
primarily in the sales and marketing and support services areas, including the position of a senior
level sales and marketing executive. In connection therewith, we incurred a charge of $0.5 million,
including the cash costs of severance pay and the non-cash costs of acceleration of vesting of
previously unvested stock option and restricted stock unit awards to these employees.
In second quarter 2007 we acted to align our operating expenses with the current and expected
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
non-cash expense of immediate vesting of unvested stock options and restricted stock unit awards.
Strategic
Alternative Expenses
Strategic
alternative expenses included in other operating expenses in our statements of operations for the years ended December
31, 2008 and 2007 represent expenses we incurred in connection with our 2007 and 2008 investigation
of strategic alternatives and our 2008 proxy contest. These amounts consist primarily of legal
fees, fees paid to outside financial advisors and investment bankers, employee retention payments
made to key employees in 2008 to ensure continued employment with the Company as the strategic
process proceeded, and fees paid members of our board of directors for time devoted to both the
strategic alternatives process and proxy contest.
The strategic alternatives process and proxy contest are described in further detail under the
heading Strategic Alternatives Process and Agreements With Health Systems Solutions and AMICAS
in this Managements Discussion and Analysis of Financial Condition and Results of
Operations, and the expenses related thereto are further described in
Note 14 to our consolidated financial statements.
Litigation Settlement
On September 22, 2008, DR Systems, Inc. filed a lawsuit in the United States District Court
For The Southern District of California against us and others alleging patent infringement and
seeking, among other things, unspecified damages, attorneys fees and costs, and a permanent
injunction prohibiting further infringement. The lawsuit related to our and others alleged
infringing manufacture, use, and sale of automated medical imaging and archival systems, and the
inducement of and contribution to the similar infringement of others, in violation of DR Systems
patent titled Automated System and Method for Organizing, Presenting, and Manipulating Medical
Images. We entered into a settlement, release, and license agreement with DR Systems on November
10, 2008, pursuant to which we paid DR Systems the sum of $1.0 million in full settlement of the
lawsuit, which was
43
dismissed with prejudice, and under which we and users of our technology, as defined in the
agreement, were granted a perpetual, fully paid-up, non-exclusive license to practice the patent
that was the subject of the lawsuit. We recorded this charge during the three month period ended
September 30, 2008.
Loss on Disposal of Property and Equipment
We dispose of items of property and equipment in the normal course of business as needed and
as replacement items are obtained. In addition, we perform periodic physical counts of these items
and adjust our records in accordance with the results of those counts. Amounts shown above for
2008, 2007, and 2006 reflect that normal course activity and the results of physical counts of the
items.
Operating Loss
For the year ended December 31, 2008, our operating loss increased by $34.9 million as
compared to the year ended December 31, 2007. Operations were negatively impacted by our decline in
revenue and by employee severance, goodwill impairment, a litigation settlement, and strategic
alternative expenses in 2008, by our decline in revenue and employee severance in 2007, and by
Camtronics integration costs in 2006. Excluding these expense charges, our operating loss increased
from $1.0 million in 2006 to $5.6 million in 2007 and to $15.7 million in 2008, the result
primarily of declines in revenue.
Interest Income, Net of Interest Expense
Interest income, net of interest expense, was $0.5 million, $0.8 million, and $0.3 million in
the years ended December 31, 2008, 2007, and 2006, respectively. Interest income is earned on the
short-term investment of available cash balances, and interest expense results from our debt
obligations, primarily capitalized lease obligations.
For the year ended December 31, 2008, our interest income declined by $0.4 million, to $0.5
million, from its 2007 level on lower average cash balances and investment rates during the year.
Interest expense was minimal in both 2008 and 2007 as existing debt obligations were paid down
according to scheduled maturities and no new debt was incurred.
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.
44
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 |
|
|
Dec. 31, |
|
Sept. 30, |
|
June 30, |
|
March 31, |
|
Dec. 31, |
|
Sept. 30, |
|
June 30, |
|
March 31, |
|
|
2008 |
|
2008 |
|
2008 |
|
2008 |
|
2007 |
|
2007 |
|
2007 |
|
2007 |
|
|
(Dollars in thousands, except per share data) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
System sales |
|
$ |
3,869 |
|
|
$ |
4,232 |
|
|
$ |
5,999 |
|
|
$ |
5,820 |
|
|
$ |
15,531 |
|
|
$ |
10,706 |
|
|
$ |
11,235 |
|
|
$ |
13,668 |
|
Support services |
|
|
12,129 |
|
|
|
11,717 |
|
|
|
12,115 |
|
|
|
13,447 |
|
|
|
13,440 |
|
|
|
12,022 |
|
|
|
14,341 |
|
|
|
13,682 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
|
15,998 |
|
|
|
15,949 |
|
|
|
18,114 |
|
|
|
19,267 |
|
|
|
28,971 |
|
|
|
22,728 |
|
|
|
25,576 |
|
|
|
27,350 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of
revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
System sales |
|
|
3,393 |
|
|
|
3,245 |
|
|
|
3,830 |
|
|
|
4,272 |
|
|
|
7,192 |
|
|
|
6,327 |
|
|
|
6,310 |
|
|
|
8,722 |
|
Support services |
|
|
5,368 |
|
|
|
5,845 |
|
|
|
6,463 |
|
|
|
6,676 |
|
|
|
6,903 |
|
|
|
7,681 |
|
|
|
7,204 |
|
|
|
7,681 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenue |
|
|
8,761 |
|
|
|
9,090 |
|
|
|
10,293 |
|
|
|
10,948 |
|
|
|
14,095 |
|
|
|
14,008 |
|
|
|
13,514 |
|
|
|
16,403 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
7,237 |
|
|
|
6,859 |
|
|
|
7,821 |
|
|
|
8,319 |
|
|
|
14,876 |
|
|
|
8,720 |
|
|
|
12,062 |
|
|
|
10,947 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
|
4,472 |
|
|
|
4,883 |
|
|
|
4,727 |
|
|
|
4,326 |
|
|
|
4,356 |
|
|
|
5,197 |
|
|
|
4,358 |
|
|
|
4,618 |
|
Sales and marketing |
|
|
3,509 |
|
|
|
3,143 |
|
|
|
3,691 |
|
|
|
3,785 |
|
|
|
5,272 |
|
|
|
4,121 |
|
|
|
4,500 |
|
|
|
4,392 |
|
General and administrative |
|
|
2,150 |
|
|
|
3,023 |
|
|
|
3,105 |
|
|
|
3,666 |
|
|
|
4,088 |
|
|
|
3,136 |
|
|
|
2,752 |
|
|
|
3,454 |
|
Amortization and
write-off of intangible
assets |
|
|
345 |
|
|
|
346 |
|
|
|
21,922 |
|
|
|
345 |
|
|
|
345 |
|
|
|
346 |
|
|
|
345 |
|
|
|
345 |
|
Other operating expenses |
|
|
2,677 |
|
|
|
1,643 |
|
|
|
299 |
|
|
|
928 |
|
|
|
1,670 |
|
|
|
413 |
|
|
|
622 |
|
|
|
169 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
13,153 |
|
|
|
13,038 |
|
|
|
33,744 |
|
|
|
13,050 |
|
|
|
15,731 |
|
|
|
13,213 |
|
|
|
12,577 |
|
|
|
12,978 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss |
|
|
(5,916 |
) |
|
|
(6,179 |
) |
|
|
(25,923 |
) |
|
|
(4,731 |
) |
|
|
(855 |
) |
|
|
(4,493 |
) |
|
|
(515 |
) |
|
|
(2,031 |
) |
Interest income, net of
interest expense |
|
|
101 |
|
|
|
116 |
|
|
|
120 |
|
|
|
141 |
|
|
|
173 |
|
|
|
213 |
|
|
|
227 |
|
|
|
196 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(5,815 |
) |
|
$ |
(6,063 |
) |
|
$ |
(25,803 |
) |
|
$ |
(4,590 |
) |
|
$ |
(682 |
) |
|
$ |
(4,280 |
) |
|
$ |
(288 |
) |
|
$ |
(1,835 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share-basic
and diluted |
|
$ |
(0.27 |
) |
|
$ |
(0.28 |
) |
|
$ |
(1.20 |
) |
|
$ |
(0.21 |
) |
|
$ |
(0.03 |
) |
|
$ |
(0.20 |
) |
|
$ |
(0.01 |
) |
|
$ |
(0.09 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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. We at times experience 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 software components of systems sales revenue, the mix of cardiology revenue to
radiology revenue, changes in the productivity of support services personnel, and the level of
revenue earned relative to the fixed portion of our costs of revenue.
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.
45
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, 2008 and 2007, our liquidity and net cash position was as follows (in
thousands, except ratios):
|
|
|
|
|
|
|
|
|
|
|
December 31 |
|
|
2008 |
|
2007 |
|
|
|
|
|
|
|
|
|
Working capital* |
|
$ |
7,571 |
|
|
$ |
21,304 |
|
Current ratio** |
|
|
1.32:1.0 |
|
|
|
1.66:1.0 |
|
Cash and cash equivalents |
|
$ |
13,511 |
|
|
$ |
17,034 |
|
Short-term borrowings and long-term debt |
|
$ |
43 |
|
|
$ |
89 |
|
|
|
|
* |
|
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 2008 was the result primarily of our net loss for
the year less the effects of noncash expenses, and investing
activities consisting primarily of purchases of property and equipment. The decrease in short-term borrowings and long-term debt from December 31, 2007 to
December 31, 2008 is a result of scheduled debt retirement.
Operating Activities
During the year ended December 31, 2008, net cash used in operating activities was $1.7
million, compared to $3.2 million in 2007. Our net loss for 2008 of $42.3 million, including our
cash expenses for employee severance, strategic alternative expenses, and litigation settlement,
and adverse changes in some of our working capital accounts, in particular trade accounts payable
and deferred revenue, were primarily responsible for the 2008 negative contribution to cash from
operations. Offsetting those effects was a positive contribution to cash from a $17.3 million
decline in our trade accounts receivable, which was the result of lower 2008 revenues.
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.
46
Investing Activities
We
used cash of $1.9 million, $2.9 million, and $0.9 million for investing activities during
2008, 2007 and 2006, respectively.
We used $1.2 million, $2.7 million, and $5.2 million for property and equipment purchases
during 2008, 2007 and 2006, respectively. Purchases in 2008 and 2007 were primarily investments in
computer equipment and software for internal use and in equipment leased to customers. Capital
purchases for 2006 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
development efforts and staffing levels.
Financing Activities
Net
cash used in financing activities in 2008 consisted of scheduled payment of
capital lease obligations of less than $0.1 million. Net cash
provided by financing activities was $0.1 million in 2007 and $1.1
million in 2006. 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.
The following table summarizes, as of December 31, 2008, 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 |
|
$ |
44 |
|
|
$ |
35 |
|
|
$ |
9 |
|
|
|
|
|
|
|
|
|
Operating leases |
|
|
3,605 |
|
|
|
1,428 |
|
|
|
1,425 |
|
|
$ |
752 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual cash obligations |
|
$ |
3,649 |
|
|
$ |
1,463 |
|
|
$ |
1,434 |
|
|
$ |
752 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our April 2004 loan and security agreement with a bank, as amended, provides for borrowing of
up to $15.0 million, subject to certain restrictions, including the level of our eligible accounts
receivable. Interest accrues at the banks prime rate of interest. This agreement is for a term of
one year, 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, 2008 and 2007, we had no outstanding balances under
this line of credit.
The loan and security agreement contains various requirements and covenants of the Company,
including a requirement that we maintain a minimum tangible net worth, as defined in the agreement,
of $25.0 million, measured as of the end of each quarter. As of September 30, 2008, we were in
violation of the tangible net worth requirement of the agreement. On November 10, 2008 the bank and
the Company agreed to a modification of the line of credit agreement in which the bank waived our
default of the agreement. In addition, pursuant to the modification, future advances under the
agreement, if any, will be conditioned on our compliance with certain financial covenants under the
agreement, including the minimum tangible net worth requirement, as of the end of the preceding
calendar quarter, and otherwise being in compliance with the terms of the agreement, and delivering
a compliance certificate, signed by our Chief Financial Officer, certifying our compliance with
these conditions. We continued in default of the minimum tangible net worth requirement of the
agreement as of December 31, 2008, and the bank again waived our
default of the agreement on March 24, 2009 under the same conditions as at November 10, 2008. There can be no assurance that we
will be in compliance with the covenants contained in the amended
47
agreement
as of the end of any future calendar quarter, or at such time, if
any, as we determine to make a request for an advance under the agreement.
We
believe that our existing cash, together with future cash flows and
amounts available, if any, under
our line of credit agreement will be sufficient to execute our
business plan for the next twelve months. However, any projections of cash flow are subject to uncertainties, including
the level of our revenues, the expansion of our sales and marketing activities, the timing and
extent of spending in support of product development efforts, the timing and success of new product
introductions, market acceptance of our products, expenses incurred in connection with our
strategic alternatives process and merger agreement with AMICAS, our compliance with the terms and
conditions of our bank line of credit agreement, and the extent and duration of the current
economic downturn and deteriorating credit conditions. If existing cash, future cash flows and amounts available under our line of credit agreement are
not sufficient to meet future cash requirements, we would need to seek financing (through debt
financing, the sale of equity securities or otherwise), sell assets or limit growth or curtail
operations to levels consistent with the constraints imposed by available cash and cash flow. Our
ability to secure debt or equity financing, or to sell assets, could be limited by economic and
financial conditions, particularly the credit market conditions that have existed in recent fiscal
quarters. We cannot assure you that debt or equity financing or asset sales will be available on
acceptable terms or at all, or that any reductions in planned expenditures or in operations would
be sufficient to cover shortfalls in available cash. In
addition, 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.
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, were 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 adopted the provisions of SFAS 157 for its financial
assets and liabilities as of January 1, 2008, and will adopt its provisions for its nonfinancial
assets and liabilities as of January 1, 2009. The adoption of SFAS 157 did not have a material
effect on our reported financial position or results of operations for the year ended December 31,
2008, and is not expected to materially affect reported financial position or results of operations
for the year ended December 31, 2009.
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. 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, 2008.
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.
48
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 13a15(e) and 15d15(e) under the Securities Exchange Act of 1934, as amended
(the Exchange Act)) as of December 31, 2008. Based on this evaluation, our principal executive
officer and principal financial officer concluded that, as of December 31, 2008, 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 13a15(f) and 15d15(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, 2008. In making this assessment, our management used the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission in Internal ControlIntegrated
Framework.
49
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, 2008. 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 13a15(f) and
15d15(f) under the Exchange Act) occurred during the fourth quarter of 2008 that has materially
affected, or is reasonably likely to materially affect, our internal control over financial
reporting.
ITEM 9B. OTHER INFORMATION
Not applicable.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information called for by this Item will be contained in our definitive Proxy Statement
for our 2009 Annual Meeting of Stockholders 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 Securities and
Exchange Commission 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 2009 Annual Meeting of Stockholders 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 2009 Annual Meeting of Stockholders 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 2009 Annual Meeting of Stockholders and is incorporated herein by reference.
50
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information called for by this Item will be contained in our definitive Proxy Statement
for our 2009 Annual Meeting of Stockholders 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 |
2. |
|
Financial Statement Schedules |
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:
51
|
|
|
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) |
|
|
|
2.2A
|
|
Agreement and Plan of Merger, dated as of October 13, 2008, by
and among the Company, Health Systems Solutions, Inc., and HSS
Acquisition Corp. (incorporated by reference to Exhibit 2.1 of
the Companys Form 8-K filed October 14, 2008) |
|
|
|
2.2B
|
|
Amendment No. 1 to Agreement and Plan of Merger, dated as of
December 29, 2008, by and among the Company, Health Systems
Solutions, Inc. and HSS Acquisition Corp. (incorporated by
reference to Exhibit 2.1 of the Companys Form 8-K filed
December 30, 2008) |
|
|
|
2.3
|
|
Agreement and Plan of Merger, dated as of February 23, 2009,
by and among the Company, AMICAS, Inc. and AMICAS Acquisition
Corp. (incorporated by reference to Exhibit 2.1 of the
Companys Form 8-K filed February 24, 2009) |
|
|
|
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) |
52
|
|
|
Exhibit No. |
|
Description |
10.9#
|
|
Employment Agreement of Noel D. Gartman (incorporated by
reference to Exhibit 10.9 to the Companys Registration
Statement on Form S-1, Registration No. 333-120621, filed on
November 19, 2004) |
|
|
|
10.10
|
|
Form of Indemnification Agreement between the Registrant and
each of its directors and executive officers (incorporated by
reference to Exhibit 10.10 to the Companys Registration
Statement on Form S-1, Registration No. 333-120621, filed on
November 19, 2004) |
|
|
|
10.11
|
|
Amended and Restated Registration Rights Agreement, dated as
of October 2, 2001, by and among Emageon UV, Inc. and certain
stockholders, as amended and joined on May 30, 2003 and June
25, 2003 (incorporated by reference to Exhibit 10.11 to the
Companys Registration Statement on Form S-1, Registration No.
333-120621, filed on November 19, 2004) |
|
|
|
10.12
|
|
Enterprise Agreement, dated as of May 5, 2004, by and between
Emageon UV, Inc. and Ascension Health (incorporated by
reference to Exhibit 10.12 to the Companys Registration
Statement on Form S-1/A, Registration No. 333-120621, filed on
February 8, 2005) |
|
|
|
10.13
|
|
Lease Agreement, dated as of December 20, 2001, by and between
Meadow Brook North, L.L.C. and Emageon UV, Inc. (incorporated
by reference to Exhibit 10.13 to the Companys Registration
Statement on Form S-1, Registration No. 333-120621, filed on
November 19, 2004) |
|
|
|
10.13A
|
|
Sixth Amendment to Lease Agreement, dated as of July 23, 2004,
by and between Meadow Brook North, L.L.C. and Emageon UV, Inc.
(incorporated by reference to Exhibit 10.13A to the Companys
Registration Statement on Form S-1, Registration No.
333-120621, filed on November 19, 2004) |
|
|
|
10.14
|
|
Note and Warrant Purchase Agreement, dated as of June 25,
2004, among Emageon UV, Inc. and Whitecap Alabama Growth Fund
I, LLC, Enhanced Alabama Issuer, LLC and Advantage Capital
Alabama Partners I, L.P. (incorporated by reference to Exhibit
10.14 to the Companys Registration Statement on Form S-1/A,
Registration No. 333-120621, filed on January 25, 2005) |
|
|
|
10.15
|
|
Emageon Inc. Amended and Restated Stockholders Agreement,
dated as of October 2, 2001, among Emageon, Inc. and the
stockholders signatory thereto (incorporated by reference to
Exhibit 10.15 to the Companys Registration Statement on Form
S-1/A, Registration No. 333-120621, filed on January 25, 2005) |
|
|
|
10.15A
|
|
Emageon Inc. First Amendment and Joinder to Amended and
Restated Stockholders Agreement, dated as of May 30, 2003,
among Emageon, Inc and the stockholders signatory thereto
(incorporated by reference to Exhibit 10.15A to the Companys
Registration Statement on Form S-1/A, Registration No.
333-120621, filed on January 25, 2005) |
|
|
|
10.15B
|
|
Emageon Inc. Second Amendment and Joinder to Amended and
Restated Stockholders Agreement, dated as of June 25, 2003,
among Emageon, Inc. and the stockholders signatory thereto
(incorporated by reference to Exhibit 10.15B to the Companys
Registration Statement on Form S-1/A, Registration No.
333-120621, filed on January 25, 2005) |
|
|
|
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) |
|
|
|
10.18#
|
|
Employment Agreement, dated April 29, 2008, between Emageon
Inc. and John W. Wilhoite (incorporated by reference to
Exhibit 10.1 of the Companys Form 8-K filed May 1, 2008) |
|
|
|
10.19#
|
|
Employment Agreement, dated May 8, 2008, between Emageon Inc.
and Keith Stahlhut (incorporated by reference to Exhibit
(e)(6) of the Companys Schedule 14D-9 filed March 5, 2009) |
|
|
|
10.20
|
|
Agreement, dated June 22, 2008, by and among the Company,
Charles A. Jett, Jr., Oliver Press Partners, LLC, and certain
of its affiliates party thereto (incorporated by reference to
Exhibit 10.1 of the Companys Form 8-K filed June 23, 2008) |
53
|
|
|
Exhibit No. |
|
Description |
10.21#
|
|
Amendment No. 1 to Employment Agreement, dated July 8, 2008,
between Emageon Inc. and Charles A. Jett, Jr. (incorporated by
reference to Exhibit 10.1 of the Companys Form 8-K filed July
11, 2008) |
|
|
|
10.22
|
|
Deposit Escrow Agreement, dated as
of October 21, 2008, by and among The Bank of New York Mellon,
Health Systems Solutions, Inc., and the Company (incorporated by
reference to Annex D to the Companys definitive proxy statement
filed November 14, 2008) |
|
|
|
10.23
|
|
Amendment No. 1 to Deposit Escrow Agreement, dated as of
December 29, 2008, by and among The Bank of New York Mellon,
Health Systems Solutions, Inc. and the Company (incorporated
by reference to Exhibit 10.1 of the Companys Form 8-K filed
December 30, 2008) |
|
|
|
10.24#
|
|
Severance Agreement and General Release, dated as of February
23, 2009, by and between the Company and Charles A. Jett, Jr.
(incorporated by reference to Exhibit 10.1 of the Companys
Form 8-K filed February 24, 2009) |
|
|
|
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. |
54
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 25, 2009.
|
|
|
|
|
|
Emageon Inc.
|
|
|
By: |
/s/ Charles A. Jett, Jr.
|
|
|
|
Charles A. Jett, Jr. |
|
|
|
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 25, 2009.
|
|
|
Signature |
|
Title |
|
|
|
/s/ Charles A. Jett, Jr.
Charles A. Jett, Jr.
|
|
President and Chief Executive Officer
(Principal Executive Officer) |
|
|
|
/s/ John W. Wilhoite
John W. Wilhoite
|
|
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/ Fred C. Goad, Jr.
Fred C. Goad, Jr.
|
|
Director |
|
|
|
/s/ Bradley S. Karro
Bradley S. Karro
|
|
Director |
|
|
|
/s/ Mylle H. Mangum
Mylle H. Mangum
|
|
Director |
|
|
|
/s/ Augustus K. Oliver
Augustus K. Oliver
|
|
Director |
|
|
|
/s/ John W. Thompson
John W. Thompson
|
|
Director |
|
|
|
/s/ Benner Ulrich
Benner Ulrich
|
|
Director |
|
|
|
/s/ Hugh H. Williamson, III
Hugh H. Williamson, III
|
|
Director |
55
EMAGEON INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
CONTENTS
|
|
|
|
|
|
|
|
F-2 |
|
|
|
|
F-3 |
|
|
|
|
F-4 |
|
|
|
|
F-5 |
|
|
|
|
F-6 |
|
|
|
|
F-7 |
|
|
|
|
F-8 |
|
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. as
of December 31, 2008 and 2007, and the related consolidated statements of operations, stockholders
equity, and cash flows for each of the three years in the period ended December 31, 2008. Our
audits also included 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, 2008 and
2007, and the consolidated results of its operations and its cash flows for each of the three years in the
period ended December 31, 2008, in conformity with U.S. generally accepted accounting principles.
Also, in our opinion, the related consolidated 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.
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, 2008, 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
25, 2009 expressed an unqualified opinion thereon.
/s/ Ernst &Young LLP
Birmingham, Alabama
March 25, 2009
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 Inc.s internal control over financial reporting as of December 31,
2008, 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 Inc. maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2008, 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,
2008 and 2007, and the related consolidated statements of operations, stockholders equity, and
cash flows for each of the three years in the period ended December 31, 2008, and our report dated
March 25, 2009 expressed an unqualified opinion thereon.
Birmingham, Alabama
March 25, 2009
/s/ Ernst & Young LLP
F-3
EMAGEON INC.
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
|
(In thousands, except |
|
|
|
for share data) |
|
ASSETS |
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
13,511 |
|
|
$ |
17,034 |
|
Trade accounts receivable, net of allowance for doubtful accounts
of $400 and $910 at December 31, 2008 and 2007, respectively |
|
|
9,976 |
|
|
|
26,796 |
|
Inventories |
|
|
4,881 |
|
|
|
6,249 |
|
Prepaid expenses and other current assets |
|
|
3,179 |
|
|
|
3,398 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
31,547 |
|
|
|
53,477 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net |
|
|
11,952 |
|
|
|
15,143 |
|
Other noncurrent assets |
|
|
2,998 |
|
|
|
3,070 |
|
Intangible assets: |
|
|
|
|
|
|
|
|
Goodwill |
|
|
|
|
|
|
21,667 |
|
Customer relationships, net |
|
|
3,636 |
|
|
|
5,017 |
|
Acquired technology, net |
|
|
|
|
|
|
645 |
|
Capitalized software development costs, net |
|
|
141 |
|
|
|
275 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets |
|
|
3,777 |
|
|
|
27,604 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
50,274 |
|
|
$ |
99,294 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
4,715 |
|
|
$ |
9,581 |
|
Accrued payroll and related costs |
|
|
2,070 |
|
|
|
2,877 |
|
Deferred revenue |
|
|
15,400 |
|
|
|
16,382 |
|
Other accrued expenses |
|
|
1,757 |
|
|
|
3,297 |
|
Current portion of capital lease obligations |
|
|
34 |
|
|
|
36 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
23,976 |
|
|
|
32,173 |
|
Long-term deferred revenue |
|
|
2,475 |
|
|
|
4,306 |
|
Other long-term liabilities |
|
|
339 |
|
|
|
466 |
|
Long-term capital lease obligations |
|
|
9 |
|
|
|
53 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
26,799 |
|
|
|
36,998 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity: |
|
|
|
|
|
|
|
|
Common
stock, $0.001 par value; 66,000,000 shares authorized;
21,665,624 shares and 21,626,155 shares issued; and 21,489,867
shares and 21,450,398 shares outstanding at December 31, 2008
and 2007, respectively |
|
|
22 |
|
|
|
22 |
|
Additional paid in capital |
|
|
129,804 |
|
|
|
126,332 |
|
Accumulated other comprehensive income |
|
|
719 |
|
|
|
741 |
|
Accumulated deficit |
|
|
(106,795 |
) |
|
|
(64,524 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,750 |
|
|
|
62,571 |
|
Treasury stock: 175,757 shares |
|
|
(275 |
) |
|
|
(275 |
) |
|
|
|
|
|
|
|
Total stockholders equity |
|
|
23,475 |
|
|
|
62,296 |
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
50,274 |
|
|
$ |
99,294 |
|
|
|
|
|
|
|
|
F-4
EMAGEON INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
(In thousands, except share amounts) |
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
System sales |
|
$ |
19,920 |
|
|
$ |
51,140 |
|
|
$ |
75,340 |
|
Support services |
|
|
49,408 |
|
|
|
53,485 |
|
|
|
48,165 |
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
|
69,328 |
|
|
|
104,625 |
|
|
|
123,505 |
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
System sales |
|
|
14,740 |
|
|
|
28,551 |
|
|
|
43,333 |
|
Support services |
|
|
24,352 |
|
|
|
29,469 |
|
|
|
27,772 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenue |
|
|
39,092 |
|
|
|
58,020 |
|
|
|
71,105 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
30,236 |
|
|
|
46,605 |
|
|
|
52,400 |
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
|
18,408 |
|
|
|
18,529 |
|
|
|
13,927 |
|
Sales and marketing |
|
|
14,128 |
|
|
|
18,285 |
|
|
|
18,459 |
|
General and administrative |
|
|
11,944 |
|
|
|
13,430 |
|
|
|
17,028 |
|
Amortization and write-off of intangible assets |
|
|
22,958 |
|
|
|
1,381 |
|
|
|
3,540 |
|
Other operating expenses |
|
|
5,547 |
|
|
|
2,874 |
|
|
|
5,806 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
72,985 |
|
|
|
54,499 |
|
|
|
58,760 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss |
|
|
(42,749 |
) |
|
|
(7,894 |
) |
|
|
(6,360 |
) |
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
518 |
|
|
|
908 |
|
|
|
655 |
|
Interest expense |
|
|
(40 |
) |
|
|
(99 |
) |
|
|
(327 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(42,271 |
) |
|
$ |
(7,085 |
) |
|
$ |
(6,032 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share basic and diluted |
|
$ |
(1.97 |
) |
|
$ |
(0.33 |
) |
|
$ |
(0.29 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common stock outstanding basic and diluted |
|
|
21,469,868 |
|
|
|
21,385,487 |
|
|
|
20,935,685 |
|
|
|
|
|
|
|
|
|
|
|
F-5
EMAGEON INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
(In thousands) |
|
Operating activities |
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(42,271 |
) |
|
$ |
(7,085 |
) |
|
$ |
(6,032 |
) |
Adjustments to reconcile net loss to net cash (used in) provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation |
|
|
3,864 |
|
|
|
5,941 |
|
|
|
6,990 |
|
(Recoveries)
provision for doubtful accounts, net |
|
|
(510 |
) |
|
|
633 |
|
|
|
|
|
Amortization of intangible assets |
|
|
2,322 |
|
|
|
3,013 |
|
|
|
4,969 |
|
Goodwill impairment charge |
|
|
21,577 |
|
|
|
|
|
|
|
|
|
Stock-based compensation expense |
|
|
3,472 |
|
|
|
3,212 |
|
|
|
3,430 |
|
Loss on disposal of property and equipment |
|
|
17 |
|
|
|
553 |
|
|
|
702 |
|
Other operating activities |
|
|
|
|
|
|
|
|
|
|
129 |
|
Changes in operating assets and liabilities |
|
|
9,831 |
|
|
|
(9,444 |
) |
|
|
(2,925 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by operating activities |
|
|
(1,698 |
) |
|
|
(3,177 |
) |
|
|
7,263 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment |
|
|
(1,205 |
) |
|
|
(2,693 |
) |
|
|
(5,229 |
) |
Proceeds from maturities of marketable securities |
|
|
|
|
|
|
|
|
|
|
5,000 |
|
Capitalized software development costs |
|
|
(162 |
) |
|
|
(70 |
) |
|
|
(652 |
) |
Other investing activities |
|
|
(500 |
) |
|
|
(125 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(1,867 |
) |
|
|
(2,888 |
) |
|
|
(881 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock, net of issuance costs |
|
|
|
|
|
|
582 |
|
|
|
3,892 |
|
Payment of debt and capital lease obligations |
|
|
(46 |
) |
|
|
(941 |
) |
|
|
(2,788 |
) |
Decrease in restricted cash |
|
|
|
|
|
|
445 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities |
|
|
(46 |
) |
|
|
86 |
|
|
|
1,104 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash |
|
|
88 |
|
|
|
5 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash |
|
|
(3,523 |
) |
|
|
(5,974 |
) |
|
|
7,488 |
|
Cash at beginning of year |
|
|
17,034 |
|
|
|
23,008 |
|
|
|
15,520 |
|
|
|
|
|
|
|
|
|
|
|
Cash at end of year |
|
$ |
13,511 |
|
|
$ |
17,034 |
|
|
$ |
23,008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid |
|
$ |
40 |
|
|
$ |
104 |
|
|
$ |
357 |
|
|
|
|
|
|
|
|
|
|
|
F-6
EMAGEON INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
Other |
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
Common Stock |
|
|
Paid in |
|
|
Comprehensive |
|
|
Treasury |
|
|
Accumulated |
|
|
Stockholders |
|
|
|
Shares |
|
|
Par Value |
|
|
Capital |
|
|
Income |
|
|
Stock |
|
|
Deficit |
|
|
Equity |
|
|
|
(In thousands, except for share data) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
Stock-based compensation |
|
|
|
|
|
|
|
|
|
|
3,472 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,472 |
|
Vesting of restricted stock |
|
|
39,469 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency
translation adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(22 |
) |
|
|
|
|
|
|
|
|
|
|
(22 |
) |
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(42,271 |
) |
|
|
(42,271 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2008 |
|
|
21,665,624 |
|
|
$ |
22 |
|
|
$ |
129,804 |
|
|
$ |
719 |
|
|
$ |
(275 |
) |
|
$ |
(106,795 |
) |
|
$ |
23,475 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-7
EMAGEON INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2008, 2007, and 2006
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 in North America. 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
The Company 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.
Strategic Alternatives Process and Agreements with Health Systems Solutions and AMICAS
In April 2007, the Companys Board of Directors (the Board), acting upon the recommendation
of management, commenced a formal review of potential strategic alternatives for the benefit of the
Companys stockholders. In connection therewith, the Board established a Strategic Alternatives
Committee (the Committee) comprised of independent, disinterested directors, and the Committee
engaged legal and financial advisors to assist in its evaluation of strategic alternatives. From
May 2007 through October 2007, the Committee, through its financial advisors, contacted, met and
discussed with multiple strategic parties and financial sponsors their interest in pursuing a
transaction with the Company. However, agreement could not be reached regarding a transaction that
would be in the best interest of the Companys stockholders, and the Committee ceased its
activities at the end of October 2007.
Following the Companys third quarter 2007 earnings release and ensuing significant decline in
the Companys stock price, the Board determined that further analysis of strategic alternatives was
required, and the Committee was reconvened in November 2007. Through its financial advisors, the
Committee again contacted numerous parties regarding a transaction with the Company, but did not
receive any executable offers in the process. As a result, in April 2008 the Committee concluded
its evaluation of strategic alternatives.
In May 2008, Oliver Press Partners LLC (Oliver Press), a significant stockholder of the
Company, filed a preliminary proxy statement with the Securities and Exchange Commission indicating
it would seek stockholder support for election at the Companys 2008 Annual Meeting of Stockholders
of a slate of three directors in opposition to the slate recommended by the Company. Over the
ensuing weeks the Company engaged in a proxy contest with Oliver Press. In June 2008, the Company
reached agreement with Oliver Press to terminate the proxy contest and to reconstitute the Board.
In connection with the settlement, the Committee was
F-8
reconstituted and recommenced its evaluation of strategic alternatives. From July 2008
through September 2008, the Committee, through its financial advisors, contacted numerous parties
regarding a potential business combination involving the Company, and the Company engaged in
various levels of negotiation with several interested parties. These efforts culminated in
execution of a merger agreement with Health Systems Solutions, Inc. (HSS) in October 2008.
The
Companys stockholders adopted the HSS merger agreement at a special meeting held on December
17, 2008, and, having satisfied the other conditions to closing in the merger agreement, the merger
was scheduled to close in late December 2008. However, prior to the closing, the Company was
notified by HSS that its lender and majority shareholder, Stanford
International Bank Limited (SIBL), would not provide funding to
consummate the merger at that time. After further negotiation, the merger agreement was amended
to, among other things, extend the closing date to February 11, 2009 and increase the amount of the
deposit escrow account established in connection with the merger from $5,000 to $9,000. On
February 11, 2009, SIBL again did not fulfill its obligations to provide the financing necessary to fund
the merger, and the merger with HSS was not consummated. On February 12, 2009, the Company
terminated the amended merger agreement with HSS pursuant to Sections 7.4(a) and 7.4(c) thereof as
a result of the failure by HSS to receive all necessary financing on or before the designated
closing date of February 11, 2009. In connection therewith, on February 13, 2009, the Company
received the $9 million that had been placed in escrow by HSS in connection with the transactions
contemplated by the merger agreement.
Over the next several days, the Board, through its financial advisor, held discussions with
several parties regarding a possible acquisition of the Company, and on February 23, 2009 the
Company entered into a merger agreement with AMICAS, Inc. (AMICAS) and its wholly owned
subsidiary AMICAS Acquisition Corp. Under the terms of the merger agreement, AMICAS commenced a
tender offer on March 5, 2009 to purchase all of the Companys issued and outstanding shares of
common stock at a purchase price of $1.82 per share in cash. Unless extended in accordance with
the terms and conditions of the merger agreement, the tender offer is scheduled to expire on April
1, 2009. The tender offer is conditioned upon, among other things, at least a majority of the
Companys outstanding shares being tendered. Assuming that the tender offer is successful, the
merger agreement provides that the tender offer will be followed by a merger pursuant to which
AMICAS Acquisition Corp would be merged with and into the Company, and the Company would become a
wholly owned subsidiary of AMICAS. The merger agreement contains
customary representations and covenants of the Company, including
restrictions on the payment of dividends, and places
certain restrictions on the conduct of the business of the Company
between signing of the merger agreement and the closing of the
acquisition. The Company expects the merger to be completed in second
quarter of 2009. On March 5, 2009, the Company filed a Solicitation/Recommendation Statement on Schedule 14D-9 with
the SEC regarding the tender offer. This Schedule 14D-9 contains
additional details regarding the Companys stragetic alternatives process, the
tender offer, and the proposed merger with AMICAS.
The $9,000 in escrowed funds received by the Company in connection with termination of the HSS
merger agreement were provided to HSS by SIBL.
Because of charges against and ongoing investigations of SIBL by the
Securities and Exchange Commission and other federal agencies, it is possible that all or a portion of those funds could become the
subject of a claim or other proceeding.
Note 2. Summary of Significant Accounting Policies
Presentation
Unless otherwise noted, all amounts included in the financial statements and notes, except
share and per
F-9
share data, are expressed in thousands.
Reclassification
Certain items relating to prior years have been reclassified to conform to the current year
presentation.
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.
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, were 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 adopted the provisions of SFAS 157 as of
January 1, 2008 for its financial assets and liabilities, and will adopt its provisions for
nonfinancial assets and liabilities as of January 1, 2009. Adoption of the provisions of SFAS 157
did not have a material effect on the Companys financial position or results of operations for the
year ended December 31, 2008, and is not expected to have a material effect on the Companys
financial position or results of operations for the year ended December 31, 2009.
F-10
EMAGEON INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Cash and Cash Equivalents
For purposes of financial statement presentation, investments with remaining maturities at
acquisition of three months or less are considered to be cash equivalents.
Restricted Cash
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 an other non-current asset in its balance sheets at December 31, 2008
and 2007, and has deferred $1,000 in associated revenue pending expiration of the liquidated
damages provision of the amended agreement.
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 failure 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.
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 a charge to cost of revenue for 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 sheets 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.
F-11
EMAGEON INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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; Goodwill Impairment Charge In 2008
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 as of October 1, or more often if
circumstances exist that may indicate impairment. Impairment is the condition that
exists when the carrying amount of goodwill exceeds its implied fair value. The Company identifies
potential impairment by utilization of various techniques, including a comparison of the fair value
of the Company, defined as the amount at which the Company could be bought or sold in a current
transaction between willing parties, to the carrying amount, or net book value, of the Company in
our financial statements, including amounts recorded as goodwill.
The Company experienced significant declines in sales order bookings and revenues during 2007
and 2008 resulting from, among other things, slower industry demand for medical imaging software,
hardware, and support services; a high customer penetration level in our primary radiology market;
economic conditions that have tightened credit availability and affected our customers capital
spending plans; and uncertainty among customers in our existing and potential customer base during
the pendency of our 2008 proxy contest and our 2007 and 2008 search for strategic alternatives for
the Company. These conditions and their effects on the Companys current and estimated future financial
performance and financial condition indicated a possible impairment
of the recorded goodwill
balance as of June 30, 2008, and required a determination as to whether actual impairment of goodwill
had occurred. The goodwill evaluation utilized various valuation techniques, primarily an
estimation of the present value of 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 evaluation indicated a full impairment of the amount of goodwill
recorded in the balance sheet, and accordingly an impairment charge
of $21,577 was recorded in the
statement of operations for the three months ended June 30, 2008.
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 and discount
rates. Managements estimates of fair value are based upon
assumptions believed to be reasonable. However, actual future results
may materially differ from those based on current estimates.
F-12
EMAGEON INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 maintenance support services.
Software licenses are sold under both perpetual and, to a lesser extent, 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 sheets.
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 collectability 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
renewal rates or other objective criteria for maintenance and support services, which
F-13
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, such as 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-14
EMAGEON INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Customer Indemnity and Warranty Costs
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, 2008.
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 provides for the estimated cost of product warranties at the time revenue is
recognized if the customer does not purchase a service contract. If a
service contract is purchased, service costs are recognized as
incurred during the period of warranty service. The Companys 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
had a $309 liability recorded for these provisions as of
December 31, 2008 ($440 at December 31, 2007).
Income Taxes
The Company accounts for income taxes using the liability method. Deferred income tax assets
and liabilities are determined based on differences between the 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, 2008, 2007, and 2006 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 9.
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 statements 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-15
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 or 2008
statements of operations or on the balance of its accumulated deficit as of January 1, 2007.
Other Comprehensive Income or Loss
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, 2008, 2007, and 2006 were $42,293, $6,606 and
$5,855, 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 consist
of stock options, common stock warrants, and restricted stock unit awards. 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
Net loss allocable to common stockholders |
|
$ |
(42,271 |
) |
|
$ |
(7,085 |
) |
|
$ |
(6,032 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock outstanding at beginning of period |
|
|
21,450,398 |
|
|
|
21,283,372 |
|
|
|
20,453,156 |
|
Weighted average effect of: |
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock pursuant to stock option exercises,
warrant exercises, and restricted stock vesting |
|
|
19,470 |
|
|
|
102,115 |
|
|
|
482,529 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares of common stock basic and
diluted |
|
|
21,469,868 |
|
|
|
21,385,487 |
|
|
|
20,935,685 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share basic and diluted |
|
$ |
(1.97 |
) |
|
$ |
(0.33 |
) |
|
$ |
(0.29 |
) |
Options and warrants to purchase 2,490,004, 2,300,250, and 1,812,426 shares of common stock
for the years ended December 31, 2008, 2007 and 2006, respectively, were not included in the
computation of diluted earnings per share because their effect on earnings per share would have
been anti-dilutive.
F-16
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.
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.
See Note 12 for additional information related to the Companys
stock-based compensation plans.
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 entitys 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.
Advertising Expense
The Company expenses advertising costs as they are incurred. Advertising expense for the years
ended December 31, 2008, 2007 and 2006 was $189, $362, and $307, respectively.
F-17
EMAGEON INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 3. Intangible Assets
Summarized below are the Companys intangible assets, which include those arising from
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 was not amortized but was tested for impairment at
least annually or as circumstances arose that indicated possible impairment. See Note 2 for a
description of the goodwill impairment charge recognized by the Company in 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
December 31, 2008 |
|
|
December 31, 2007 |
|
|
|
Amortization |
|
|
Gross Carrying |
|
|
Accumulated |
|
|
Gross Carrying |
|
|
Accumulated |
|
|
|
Period (Years) |
|
|
Amount |
|
|
Amortization |
|
|
Amount |
|
|
Amortization |
|
Acquired technology |
|
|
4.6 |
|
|
$ |
5,240 |
|
|
$ |
(5,240 |
) |
|
$ |
5,240 |
|
|
$ |
(4,595 |
) |
Goodwill |
|
|
n/a |
|
|
|
|
|
|
|
|
|
|
|
21,667 |
|
|
|
|
|
Customer relationships |
|
|
5.8 |
|
|
|
8,010 |
|
|
|
(4,374 |
) |
|
|
8,010 |
|
|
|
(2,993 |
) |
Capitalized software
development costs |
|
|
1.5 |
|
|
|
169 |
|
|
|
(28 |
) |
|
|
1,521 |
|
|
|
(1,246 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
13,419 |
|
|
$ |
(9,642 |
) |
|
$ |
36,438 |
|
|
$ |
(8,834 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense was $2,322, $3,013, and $4,969 for the years ended December 31, 2008,
2007 and 2006, respectively. Estimated aggregate future amortization expense is as follows:
|
|
|
|
|
2009 |
|
$ |
1,461 |
|
2010 |
|
|
1,397 |
|
2011 |
|
|
919 |
|
|
|
|
|
Total |
|
$ |
3,777 |
|
|
|
|
|
Note 4. Inventories
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, |
|
|
|
2008 |
|
|
2007 |
|
Third-party components |
|
$ |
2,485 |
|
|
$ |
3,086 |
|
Work-in-process |
|
|
154 |
|
|
|
447 |
|
Completed systems |
|
|
2,242 |
|
|
|
2,716 |
|
|
|
|
|
|
|
|
|
|
$ |
4,881 |
|
|
$ |
6,249 |
|
|
|
|
|
|
|
|
F-18
EMAGEON INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 5. Supplementary Cash Flow Information
Changes
in operating assets and liabilities of the Company in reconciling net loss to net cash provided by or used in operations are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
(Increase) decrease in: |
|
|
|
|
|
|
|
|
|
|
|
|
Trade accounts receivable, net |
|
$ |
17,330 |
|
|
$ |
(723 |
) |
|
$ |
1,659 |
|
Inventories |
|
|
1,368 |
|
|
|
2,330 |
|
|
|
(548 |
) |
Prepaid expenses and other current assets |
|
|
219 |
|
|
|
1,061 |
|
|
|
(1,407 |
) |
Other noncurrent assets |
|
|
72 |
|
|
|
(1,082 |
) |
|
|
(389 |
) |
Increase (decrease) in: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable |
|
|
(4,371 |
) |
|
|
(652 |
) |
|
|
(4,120 |
) |
Accrued payroll and related costs |
|
|
(807 |
) |
|
|
(893 |
) |
|
|
(334 |
) |
Other accrued expenses |
|
|
(1,167 |
) |
|
|
(369 |
) |
|
|
792 |
|
Deferred revenue |
|
|
(2,813 |
) |
|
|
(9,116 |
) |
|
|
1,422 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net changes in operating assets and liabilities |
|
$ |
9,831 |
|
|
$ |
(9,444 |
) |
|
$ |
(2,925 |
) |
|
|
|
|
|
|
|
|
|
|
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 cash in January 2008.
Note 6. Property and Equipment
The Companys major classes of property and equipment are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated |
|
|
December 31, |
|
|
|
Useful Lives |
|
|
2008 |
|
|
2007 |
|
Land |
|
Indefinite |
| |
$ |
791 |
|
|
$ |
791 |
|
Buildings and improvements |
|
15 to 39 years |
| |
|
7,170 |
|
|
|
7,170 |
|
Machinery and equipment |
|
|
5 to 7 years |
|
|
|
1,031 |
|
|
|
1,028 |
|
Computers, software and other |
|
|
3 to 7 years |
|
|
|
11,934 |
|
|
|
11,768 |
|
Furniture and fixtures |
|
|
3 to 7 years |
|
|
|
2,273 |
|
|
|
2,247 |
|
Leasehold improvements |
|
|
4 to 5 years |
|
|
|
556 |
|
|
|
572 |
|
Third-party components leased to customers
under operating leases |
|
|
5 to 7 years |
|
|
|
3,181 |
|
|
|
2,971 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26,936 |
|
|
|
26,547 |
|
Less accumulated depreciation and amortization |
|
|
|
|
|
|
(14,984 |
) |
|
|
(11,404 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
11,952 |
|
|
$ |
15,143 |
|
|
|
|
|
|
|
|
|
|
|
|
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, 2008, the cost of
this equipment and related accumulated amortization was $251 and
$125, respectively, ($251 and $87,
respectively, at December 31, 2007). 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 7. Major Customers
Revenue associated with hospitals controlled by Ascension Health accounted for approximately
16%, 17%, and 27% of total revenue during 2008, 2007 and 2006, respectively. Hospitals controlled
by Ascension Health owed the Company $1,152 at December 31, 2008 ($4,875 at December 31, 2007). As
of December 31, 2008, Ascension Health held warrants to purchase 10,869 shares of the Companys
common stock at an exercise price of $5.52 per share.
Note 8. 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. 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 contributions to the Plan for the years
ended December 31, 2008, 2007, and 2006 were $254, $288, and $487, respectively.
Note 9. Income Taxes
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, 2008 and 2007 are as
follows:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
2008 |
|
2007 |
|
|
|
|
|
|
|
|
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
Net operating loss carryforward |
|
$ |
29,512 |
|
|
$ |
21,700 |
|
Intangible assets |
|
|
2,114 |
|
|
|
1,842 |
|
Deferred revenue |
|
|
2,575 |
|
|
|
5,821 |
|
Reserves and accrued liabilities |
|
|
496 |
|
|
|
452 |
|
Stock-based compensation |
|
|
2,020 |
|
|
|
1,285 |
|
Goodwill |
|
|
3,647 |
|
|
|
|
|
Depreciation |
|
|
41 |
|
|
|
|
|
Other |
|
|
311 |
|
|
|
145 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
40,716 |
|
|
|
31,245 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
Depreciation |
|
|
|
|
|
|
(1,912 |
) |
Developed technology |
|
|
(267 |
) |
|
|
(1,638 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
(267 |
) |
|
|
(3,550 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets |
|
|
40,449 |
|
|
|
27,695 |
|
Valuation allowance |
|
|
(40,449 |
) |
|
|
(27,695 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax liability |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
Because the majority of the deferred tax assets relate to net operating loss 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 becomes 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 2028. 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 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, 2008, the Company had federal and state net operating loss
carryforwards of approximately $79,800.
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, |
|
|
2008 |
|
2007 |
|
2006 |
Tax benefit computed at the statutory federal rate |
|
$ |
(14,362 |
) |
|
$ |
(2,409 |
) |
|
$ |
(2,051 |
) |
State taxes, net of federal tax benefit |
|
|
(928 |
) |
|
|
(171 |
) |
|
|
(168 |
) |
Increase in tax from: |
|
|
|
|
|
|
|
|
|
|
|
|
Change in deferred tax valuation allowance |
|
|
12,753 |
|
|
|
1,544 |
|
|
|
2,076 |
|
Permanent differences |
|
|
3,848 |
|
|
|
468 |
|
|
|
143 |
|
True-up of deferred taxes |
|
|
(1,350 |
) |
|
|
592 |
|
|
|
|
|
Other |
|
|
39 |
|
|
|
(24 |
) |
|
|
|
|
|
|
|
|
|
|
|
Benefit for income taxes |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
In 2008, a true-up adjustment was recorded to deferred taxes to adjust the deferred tax asset
related to depreciation, goodwill and intangible assets, and various accrued liabilities and
reserves. In 2007, 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, |
|
|
2008 |
|
2007 |
|
2006 |
Balance at beginning of period |
|
$ |
27,695 |
|
|
$ |
26,151 |
|
|
$ |
19,761 |
|
Income tax expense |
|
|
11,404 |
|
|
|
1,544 |
|
|
|
2,076 |
|
Other |
|
|
1,350 |
|
|
|
|
|
|
|
4,314 |
|
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
40,449 |
|
|
$ |
27,695 |
|
|
$ |
26,151 |
|
|
|
|
|
|
|
|
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, 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 any significant amount of interest or penalties related to
unrecognized tax benefits.
F-21
EMAGEON INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 10. Capital Lease Obligations; Line Of Credit Agreement
Capital lease obligations consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
Capital leases of third-party computer hardware
and software at a customer site and of certain
office and computer equipment |
|
$ |
43 |
|
|
$ |
89 |
|
Current portion |
|
|
(34 |
) |
|
|
(36 |
) |
|
|
|
|
|
|
|
Long-term portion of capital lease obligations |
|
$ |
9 |
|
|
$ |
53 |
|
|
|
|
|
|
|
|
The Company entered into a loan and security agreement with a bank in April, 2004, as amended,
under which it may borrow up to $15,000, subject to certain restrictions, including maintenance of
certain levels of eligible accounts receivable. 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 one year, at the end of which
all amounts borrowed become due and payable. There were no amounts outstanding under this agreement
at December 31, 2008 and 2007.
The agreement contains various requirements and covenants of the Company, including a
requirement that the Company maintain a minimum tangible net worth, as defined in the agreement, of
$25,000, measured as of the end of each quarter. As of September 30, 2008, the Company was in
violation of the tangible net worth covenant of the agreement. On November 10, 2008, the bank and
the Company agreed to a modification of the line of credit agreement in which the bank waived the
Companys default of the agreement. In addition, pursuant to the modification, future advances
under the agreement, if any, will be conditioned on the Companys compliance with certain financial
covenants under the agreement, including the minimum tangible net worth requirement, as of the end
of the preceding calendar quarter, and otherwise being in compliance with the terms of the
agreement, and the Company delivering a compliance certificate, signed by the Companys Chief
Financial Officer, certifying the Companys compliance with these conditions. The Company
continued in default of the tangible net worth covenant of the agreement as of December 31, 2008,
and the bank again waived default of the agreement on March 24, 2009 under the same conditions as
at November 10, 2008. There can be no assurance that the Company will be in compliance with these
covenants, including the minimum tangible net worth covenant, as of the end of any future calendar
quarter, or at such time, if any, as it determines to make a request for an advance under the
agreement.
Note 11. Common Stock Warrants
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 originally recorded at fair
value and classified in prepaid expenses and other current assets in the balance sheet.
Amortization of this amount was recorded as a sales discount
recognized over the life of the agreement, and this balance was fully
amortized as of December 31, 2008 and 2007.
F-22
EMAGEON INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
A summary of warrant activity and related information is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
Exercise |
|
|
|
|
|
|
Exercise |
|
|
|
Shares |
|
|
Price |
|
|
Shares |
|
|
Price |
|
Common stock warrants at beginning of period |
|
|
10,869 |
|
|
$ |
5.52 |
|
|
|
10,869 |
|
|
$ |
5.52 |
|
Forfeited or canceled |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2008, common stock warrants outstanding had a remaining contractual life of
0.33 years. The aggregate intrinsic value of warrants outstanding at December 31, 2008 was zero.
The total intrinsic value of warrants exercised in the year ended December 31, 2006 was $267. No
warrants were exercised in 2008 or 2007.
Note 12. 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 the Company and non-employee directors and consultants. The Plans provide for the
award of incentive stock options, non-qualified stock options, and restricted stock units.
Generally, options granted under the Plans vest over three to four years and are exercisable for a
period of ten years. Restricted stock units granted under the Plans vests over a four year period.
Shares available for future stock option grants to employees and to directors under the Plans were
1,915,045 and 309,750, respectively, at December 31, 2008.
The Company recognized total share-based compensation of $3,472, $3,212, and $3,430 during the
years ended December 31, 2008, 2007, and 2006, respectively.
F-23
EMAGEON INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
2008 |
|
2007 |
|
2006 |
Dividend yield |
|
|
0.00 |
% |
|
|
0.00 |
% |
|
|
0.00 |
% |
Expected volatility |
|
|
50.00 |
% |
|
|
50.00 |
% |
|
|
70.87 |
% |
Risk-free interest rate |
|
|
2.53 |
% |
|
|
4.44 |
% |
|
|
4.87 |
% |
Expected life of options, in years |
|
|
5.0 |
|
|
|
5.0 |
|
|
|
5.0 |
|
Weighted average grant date fair value |
|
$ |
1.14 |
|
|
$ |
4.70 |
|
|
$ |
10.09 |
|
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%. In making this
revision 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, and its historical and anticipated operating performance. This change in assumption
resulted in a reduction of stock-based compensation expense of $321 for the year ended December 31,
2007. This assumption remained appropriate during 2008 for the
periods in which stock option grants occurred.
F-24
EMAGEON INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
At December 31, 2008, there was $3,351 of unrecognized compensation cost related to stock
options. The Company expects this compensation cost to be recognized over a weighted
average period of 2.1 years.
Cash proceeds from exercise of stock options were $0, $582, and $3,772 for the years ended
December 31, 2008, 2007, and 2006, respectively.
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, 2007, and 2008, 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
2007 |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Average |
|
|
|
|
|
Average |
|
|
|
|
|
|
Exercise |
|
|
|
|
|
Exercise |
|
|
Shares |
|
Price |
|
Shares |
|
Price |
Options at beginning of period |
|
|
2,289,381 |
|
|
$ |
9.36 |
|
|
|
1,750,543 |
|
|
$ |
9.27 |
|
Forfeited |
|
|
(672,246 |
) |
|
|
7.01 |
|
|
|
(147,129 |
) |
|
|
12.35 |
|
Exercised |
|
|
|
|
|
|
|
|
|
|
(108,683 |
) |
|
|
7.52 |
|
Granted |
|
|
862,000 |
|
|
|
2.47 |
|
|
|
794,650 |
|
|
|
9.53 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of period |
|
|
2,479,135 |
|
|
$ |
7.36 |
|
|
|
2,289,381 |
|
|
$ |
9.36 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at end of period |
|
|
1,482,061 |
|
|
$ |
7.84 |
|
|
|
1,320,187 |
|
|
$ |
8.23 |
|
Further information relating to stock option plans outstanding at December 31, 2008 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 $2.52 |
|
|
836,215 |
|
|
8.30 years |
|
$ |
2.38 |
|
|
|
286,229 |
|
|
6.65 years |
|
$ |
2.26 |
|
$4.52 to $7.17 |
|
|
597,420 |
|
|
3.46 years |
|
|
5.29 |
|
|
|
582,010 |
|
|
3.39 years |
|
|
5.24 |
|
$7.93 to $12.46 |
|
|
584,650 |
|
|
8.42 years |
|
|
10.32 |
|
|
|
274,319 |
|
|
8.40 years |
|
|
10.16 |
|
$12.72 to $14.90 |
|
|
163,288 |
|
|
6.93 years |
|
|
13.13 |
|
|
|
140,371 |
|
|
6.95 years |
|
|
13.19 |
|
$15.05 to $17.79 |
|
|
297,562 |
|
|
7.27 years |
|
|
16.52 |
|
|
|
199,132 |
|
|
7.28 years |
|
|
16.52 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
2,479,135 |
|
|
6.96 years |
|
$ |
7.36 |
|
|
|
1,482,061 |
|
|
5.81 years |
|
$ |
7.84 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value of options outstanding at December 31, 2008 was $10, and the
aggregate intrinsic value of options exercisable was $10. The total intrinsic value of options
exercised in the years ended December 31, 2008, 2007, and 2006 was $0, $388 and $9,025,
respectively.
Restricted Stock Units
The Companys plans allow for the issuance of restricted stock unit 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 stockholder rights until issuance of the shares. The stock-based
compensation related to these awards is being amortized on a straight-line basis to compensation
expense over the four year service-based vesting period in which the
restrictions lapse or at the occurrence of any of the events described
above.
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 unit activity and related information is detailed
below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
2007 |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Average |
|
|
|
|
|
Average |
|
|
|
|
|
|
Fair |
|
|
|
|
|
Fair |
|
|
Shares |
|
Value |
|
Shares |
|
Value |
Restricted stock units at beginning of period |
|
|
103,864 |
|
|
$ |
11.20 |
|
|
|
57,250 |
|
|
$ |
16.41 |
|
Granted |
|
|
58,049 |
|
|
$ |
2.49 |
|
|
|
94,833 |
|
|
$ |
9.82 |
|
Vested |
|
|
(39,469 |
) |
|
$ |
10.33 |
|
|
|
(33,829 |
) |
|
$ |
8.76 |
|
Forfeited |
|
|
(52,385 |
) |
|
$ |
4.92 |
|
|
|
(14,390 |
) |
|
$ |
14.03 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock units at end of period |
|
|
70,059 |
|
|
$ |
9.16 |
|
|
|
103,864 |
|
|
$ |
11.20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock units granted in 2008 had an aggregate grant date fair value of $144 ($931 in
2007). Total restricted stock compensation expense for the year ended December 31, 2008 was $527
($417 for the year ended December 31, 2007). Total unrecognized compensation expense at December
31, 2008 was $593.
Note 13. 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, 2008, 2007, and
2006 of $1,272, $1,175, and $2,572, respectively. As of December 31, 2008, the amount of operating
lease payments in each of the next five years and beyond is as follows:
|
|
|
|
|
2009 |
|
$ |
1,428 |
|
2010 |
|
|
832 |
|
2011 |
|
|
593 |
|
2012 |
|
|
558 |
|
2013 and Beyond |
|
|
194 |
|
|
|
|
|
|
|
$ |
3,605 |
|
|
|
|
|
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 other operating expenses 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, |
|
|
|
2008 |
|
|
2007 |
|
Beginning liability balance |
|
$ |
600 |
|
|
$ |
1,057 |
|
Lease payments, net |
|
|
(134 |
) |
|
|
(282 |
) |
Reduction in estimated liability |
|
|
|
|
|
|
(175 |
) |
|
|
|
|
|
|
|
Ending liability balance |
|
$ |
466 |
|
|
$ |
600 |
|
|
|
|
|
|
|
|
F-26
EMAGEON INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The reduction in estimated liability in 2007 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
$2,490, $1,283, and $2,489 for the years ended December 31, 2008, 2007, and 2006, respectively, and
is included in support services revenue. At December 31, 2008, the cost and accumulated
depreciation of computer equipment leased to others and included in property and equipment in the
consolidated balance sheet was $3,181 and $2,816, respectively ($2,971 and $2,510, respectively, at
December 31, 2007).
The following is a schedule by year of minimum future rental income under noncancelable
operating leases of computer hardware as of December 31, 2008:
|
|
|
|
|
2009 |
|
$ |
563 |
|
2010 |
|
|
160 |
|
2011 |
|
|
41 |
|
|
|
|
|
Total minimum future rentals |
|
$ |
764 |
|
|
|
|
|
Note 14. Other Operating Expenses
Other operating expenses in the statements of operations for the years ended December 31,
2008, 2007, and 2006 consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
Integration costs, Camtronics acquisition |
|
$ |
|
|
|
$ |
|
|
|
$ |
5,369 |
|
Employee severance and related expenses |
|
|
1,287 |
|
|
|
2,001 |
|
|
|
|
|
Strategic alternative expenses |
|
|
3,243 |
|
|
|
320 |
|
|
|
|
|
Litigation settlement |
|
|
1,000 |
|
|
|
|
|
|
|
|
|
Loss on disposal of property and equipment |
|
|
17 |
|
|
|
553 |
|
|
|
437 |
|
|
|
|
|
|
|
|
|
|
|
Total other operating expenses |
|
$ |
5,547 |
|
|
$ |
2,874 |
|
|
$ |
5,806 |
|
|
|
|
|
|
|
|
|
|
|
Integration Costs, Camtronics Acquisition. The Company incurred costs of $5,369 in 2006 in
connection with integration into the operations of the Company of Camtronics, which was acquired in
November 2005. Integration costs were comprised primarily of employee travel and relocation
expenses, severance and related expenses of redundant employees, and the costs of facility closure.
Camtronics was fully integrated into the operations of the Company as of December 31, 2006.
Employee Severance and Related Expenses. In first quarter 2008, the Companys chief financial
officer resigned his positions and entered into a severance agreement and general release with the
Company under which, in accordance with the terms of the employment agreement between the officer
and the Company, a lump sum severance payment was made and all previously unvested stock option and
restricted stock unit awards of the officer became vested. The total charge incurred by the Company
in connection with these severance arrangements was $819, consisting of the cash cost of the
severance payment and the non-cash expense of acceleration of vesting of the previously unvested
stock option and restricted stock unit awards of this employee. In addition, in the second and
fourth quarters of 2008, the Company acted to further align operating expenses with the current and
expected level of revenue through elimination of approximately twenty positions, primarily in the
sales and marketing and support services areas, including the position of a senior level sales and
marketing executive. In connection with that action, the Company incurred a charge of $468,
including the cash cost of severance pay and the non-cash expense of acceleration of vesting of the
previously unvested stock option and restricted stock awards of these employees.
F-27
In
the second quarter of 2007, the Company acted to better align its operating expenses with the
current and expected level of revenue by reducing its workforce through elimination of certain
positions and normal attrition, eliminating approximately thirty positions, primarily in the
support services and engineering areas. In addition, in the second and third quarters of 2007 the
Company terminated the employment of three senior level engineering and sales and marketing
executives, and in the fourth quarter accepted the resignation of the chief operating officer of
the Company, and incurred expenses for amounts due these executives under their employment
agreements including, where applicable, the non-cash expense of immediate vesting of previously
unvested stock options and restricted stock unit awards.
Strategic
Alternative Expenses. Strategic alternative expenses
included in other operating expenses in the statements of
operations for the years ended December 31, 2008 and 2007 represent expenses incurred in connection
with the Companys 2007 and 2008 investigation of strategic alternatives and the Companys 2008
proxy contest. These amounts consist primarily of legal fees, fees paid to outside financial
advisors and investment bankers, employee retention payments made to key employees in 2008 to
ensure continued employment with the Company as the strategic process proceeded, and fees paid
members of the Board of Directors for time devoted to both the strategic alternatives process and
proxy contest.
The strategic alternatives process and proxy contest are described in further detail in Note
1.
Litigation Settlement. On September 22, 2008, DR Systems, Inc. filed a lawsuit in the United
States District Court For The Southern District of California against the Company and others
alleging patent infringement and seeking, among other things, unspecified damages, attorneys fees
and costs, and a permanent injunction prohibiting further infringement. The lawsuit related to the
Companys and others alleged infringing manufacture, use, and sale of automated medical imaging
and archival systems, and the inducement of and contribution to the similar infringement of others,
in violation of DR Systems patent titled Automated System and Method for Organizing, Presenting,
and Manipulating Medical Images. The Company and DR Systems entered into a settlement, release,
and license agreement on November 10, 2008, pursuant to which the Company paid DR Systems the sum
of $1,000 in full settlement of the lawsuit, which was dismissed with prejudice, and under which
the Company and users of the Companys technology, as defined in the agreement, were granted a
perpetual, fully paid-up, non-exclusive license to practice the patent that was the subject of the
lawsuit. The Company recorded this charge during the quarter ended September 30, 2008.
Loss on Disposal of Property and Equipment. The Company disposes of items of property and
equipment in the normal course of business as needed and as replacement items are obtained. In
addition, the Company performs periodic physical counts of these items and adjusts its records in
accordance with the results of those counts. Amounts shown above for 2008, 2007, and 2006 reflect
that normal course activity and the results of physical counts of these items.
F-28
EMAGEON INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 15. Selected Quarterly Financial Data (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended |
|
|
March 31 |
|
June 30 |
|
September 30 |
|
December 31 |
2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
19,267 |
|
|
$ |
18,114 |
|
|
$ |
15,949 |
|
|
$ |
15,998 |
|
Gross profit |
|
|
8,319 |
|
|
|
7,821 |
|
|
|
6,859 |
|
|
|
7,237 |
|
Operating loss |
|
|
(4,731 |
) |
|
|
(25,923 |
) |
|
|
(6,179 |
) |
|
|
(5,916 |
) |
Net loss |
|
$ |
(4,590 |
) |
|
$ |
(25,803 |
) |
|
$ |
(6,063 |
) |
|
$ |
(5,815 |
) |
Net loss per share basic and diluted |
|
$ |
(0.21 |
) |
|
$ |
(1.20 |
) |
|
$ |
(0.28 |
) |
|
$ |
(0.27 |
) |
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
27,350 |
|
|
$ |
25,576 |
|
|
$ |
22,728 |
|
|
$ |
28,971 |
|
Gross profit |
|
|
10,947 |
|
|
|
12,062 |
|
|
|
8,720 |
|
|
|
14,876 |
|
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 |
) |
F-29
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: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
$ |
910 |
|
|
|
291 |
|
|
|
|
|
|
|
(801 |
)(1) |
|
$ |
400 |
|
2007 |
|
|
277 |
|
|
|
635 |
|
|
|
|
|
|
|
(2 |
)(1) |
|
|
910 |
|
2006 |
|
|
126 |
|
|
|
367 |
|
|
|
|
|
|
|
(216 |
)(1) |
|
|
277 |
|
Accrued liability for product warranty included in
other accrued expenses in the balance sheet: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
$ |
440 |
|
|
|
233 |
|
|
|
|
|
|
|
(364 |
)(2) |
|
$ |
309 |
|
2007 |
|
|
700 |
|
|
|
148 |
|
|
|
|
|
|
|
(408 |
)(2) |
|
|
440 |
|
2006 |
|
|
937 |
|
|
|
254 |
|
|
|
|
|
|
|
(491 |
)(2) |
|
|
700 |
|
|
|
|
(1) |
|
Uncollectible accounts reserved, and payments received on
previously reserved accounts. |
|
(2) |
|
Expenditures in settlement of warranty claims. |
F-30