EMAGEON INC.
UNITED STATES
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, 2006
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
EMAGEON INC.
(Exact name of registrant as specified in its charter)
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Delaware
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63-1240138 |
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(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification No.) |
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1200 Corporate Drive, Suite 200
Birmingham, Alabama
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35242 |
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(Address of principal executive offices)
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(205) 980-9222
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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Title of Each Class |
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Name of Each Exchange on Which Registered |
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Common Stock, $0.001 Par Value Per Share
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NASDAQ Global Market |
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Securities registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
o Yes þNo
Indicate by check mark if the registrant is not required to file reports pursuant to Section
13 or Section 15(d) of the Act.
o Yes þNo
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
þ Yes oNo
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K is not contained herein and will not be contained, to the best of registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer.
o Large Accelerated Filer þ Accelerated Filer o Non-Accelerated Filer
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act).
o Yes þNo
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, 2006 was
approximately $273,612,000 based on the closing sale price of such stock as reported by the NASDAQ
Global Market on June 30, 2006. 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 1, 2007 there were 21,313,333 shares of Emageon Inc. common stock, $0.001 par
value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Companys Proxy Statement for its 2007 Annual Meeting of Shareholders are
incorporated by reference into Part III.
PART I
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements made under the headings Business and Managements Discussion and
Analysis of Financial Condition and Results of Operations and elsewhere in this Annual Report on
Form 10-K contain forward-looking statements which reflect our plans, beliefs and current views
with respect to, among other things, future events and financial performance. We often identify
these forward-looking statements by the use of forward-looking words such as believe, expect,
potential, continue, may, will, should, could, would, seek, predict, intend,
plan, estimate, anticipate or the negative version of those words or other comparable words.
Any forward-looking statements contained in this Annual Report are based upon our historical
performance and on current plans, estimates and expectations. The inclusion of this
forward-looking information should not be regarded as a representation by us or any other person
that the future plans, estimates or expectations contemplated by us will be achieved. Such
forward-looking statements are subject to various risks and uncertainties. In addition, there are
or will be important factors that could cause our actual results to differ materially from those
indicated in these statements. We believe these factors include, but are not limited to, those
described in Item 1A of this Annual Report under the caption
Risk Factors.
These cautionary statements should not be construed as exhaustive and should be read in
conjunction with the other cautionary statements that are included in this Annual Report.
Moreover, we operate in a continually changing business environment, and new risks and
uncertainties emerge from time to time. Management cannot predict these new risks or
uncertainties, nor can it assess the impact, if any, that any such risks or uncertainties may have
on our business or the extent to which any factor, or combination of factors, may cause actual
results to differ from those projected in any forward-looking statement. Accordingly, the risks
and uncertainties to which we are subject can be expected to change over time, and we undertake no
obligation to update publicly or review the risks or uncertainties described herein. We also
undertake no obligation to update publicly or review any of the forward-looking statements made in
this Annual Report, whether as a result of new information, future developments or otherwise.
Overview
We provide enterprise-level information technology solutions for the clinical analysis and
management of digital medical images within health care provider organizations. Our solutions
consist of advanced visualization and image management software for multiple medical specialties,
comprehensive reporting and knowledge tools for cardiology, support services and third-party
components. Our web-enabled advanced visualization software provides physicians across the
enterprise in multiple medical specialties and at any network access point with tools to
manipulate and analyze images in two dimensions (2D) and three dimensions (3D). We enable
physicians to better understand internal anatomic structure and pathology, which can improve
clinical diagnoses, disease screening and therapy planning. We believe our solutions improve
physician productivity and patient care; enhance customer revenue opportunities; automate complex,
mission-critical medical imaging workflow; and maximize our customers return on investment in
capital equipment and clinical information systems.
We sell to multi-hospital networks, individual hospitals, physician clinics and diagnostic
imaging centers. Health care providers produce growing volumes of medical imaging data that must
be analyzed, managed and stored efficiently and cost-effectively. We focus on developing
corporate-level relationships with large multi-facility organizations 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 health care providers in the United States.
As of December 31, 2006, we had $158.4 million in contracted backlog, consisting primarily of
fees for contracted future installations and for the support of existing installations, compared
with a contracted backlog of $158.0 million at December 31, 2005. From our current contracted
backlog, we expect to recognize revenue of approximately $68.2 million during fiscal year 2007,
$31.8 million during fiscal year 2008, and substantially all of the remaining $58.4 million by
2011.
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We were founded in December 1998 as an Alabama corporation and reincorporated in Delaware in
January 2000. On February 14, 2005, we completed our initial public offering. We acquired
Camtronics Medical Systems, Ltd., or Camtronics, on November 1, 2005.
Our Opportunity
Demand for advanced visualization and image management solutions is growing as the number and
size of imaging exams increase due to accelerating physician adoption of advanced imaging, the
growing health care needs of an aging U.S. population and the increasing sophistication of imaging
devices such as computed tomography, or CT, magnetic resonance imaging, or MRI, positron emission
tomography, or PET, and cardiac catheterization. Existing film-based workflow or department-level
picture archiving and communications systems, or PACS, are not sufficient to meet this growing
demand. Health care providers need digital infrastructure, storage and image management
capabilities to alleviate the operating strain created by medical image records.
The American College of Radiology indicates that overall spending on imaging in the United
States is growing 16% annually, from approximately $100 billion in 2003 to $250 billion in 2010.
This increase makes imaging one of the fastest growing segments of overall healthcare spending, which,
according to the Center for Medicare and Medicaid Services, is growing at a compounded annual
growth rate of 7.2%, and is projected to be 20% of United States gross domestic product by 2015.
In addition, in 2005 Frost & Sullivan, a leading health care consulting and research firm,
forecasted a 16.8% compound annual growth rate in enterprise cardiology PACS from 2004 through
2011. In 2006, Frost & Sullivan forecasted an 11.3% compound annual growth rate in enterprise
radiology PACS from 2005 to 2012.
We believe the rapid expansion in the number and complexity of medical images and the need to
automate complex, manual workflow processes are driving health care providers to invest in systems
that maximize their return on capital investments in expensive imaging devices and clinical
information technology. We facilitate the convergence of imaging technology and clinical
automation at the enterprise level by enhancing analysis, integration and automation of medical
imaging data. Effective image management can shorten report turnaround times, lower the potential
for manual error in data entry and filing, increase staff efficiency, eliminate costs associated
with traditional radiological workflow and improve overall diagnostic and clinical quality. We
believe the following factors have collectively increased the demand for our 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 health care needs of an aging U.S. population. At the same
time, technological advancements are increasing the size and complexity of individual imaging
exams. For example, new CT scanners produce 20 times as much data as prior models, with exams
consisting of thousands of individual images yielding 500 to 1,000 megabytes of data per exam,
versus only 25 to 50 megabytes just three years ago. One modality manufacturer has announced
that they plan to have a 256-slice CT scanner on the market by 2008 which will produce images
that are at least ten times the size of the images produced by todays most advanced scanners.
The increasing prevalence of fusion techniques used to combine images from multiple imaging
devices increases the complexity of many exams. The rapid growth in the data size of medical
images means that medical images also consume a greater share of hospital resources.
Need for Advanced Visualization Tools. The increase in image data is significantly
impacting visualization workflow. According to Rick Morin, Ph.D., Professor of Radiology, Mayo
Clinic, Jacksonville, Florida, and Eliot Siegal, M.D., Professor of Radiology, University of
Maryland, radiologists in 2006 could review approximately 80,000 CT images per day, up from
16,000 in 2002 and 1,500 in 1994. Because the output of a cross-sectional imaging device, such
as a CT scanner, may consist of thousands of sliced 2D images, physicians need sophisticated
software tools to model those images in 3D and allow the viewing of a virtual patient at all
angles. Treating physicians can benefit from computer-created 3D images and eliminate the need
to mentally reconstruct 2D images into a single useful 3D image. This 3D reconstruction
improves diagnostic capabilities, treatment and non-invasive surgical planning. Sophisticated
new tools, such as 3D volumetric imaging and volume rendering, maximum intensity projection, or
MIP, multi-planar reformat, or MPR, and
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surface shading, are increasingly essential to present medical images in a manner that is
valuable to the physician for diagnosis and treatment planning. Moreover, some surgical
specialists will not perform a complex surgery without first performing pre-operative 3D
planning. Hospitals and hospital networks that provide these advanced visualization tools to
physicians have the advantage of attracting patient referrals from those physicians that heavily
utilize visualization technology in their practices.
Need for Complete Electronic Health Records. The need to improve clinical care and
eliminate inefficiencies in existing paper-based methods, including film-based image management,
continues to drive investment in clinical information technology. In 2004, the federal
government began several initiatives to accelerate information technology adoption rates within
the health care system, including the Presidential appointment of a national health care
information technology office and a recommitment to the Presidents Information Technology
Advisory Committee. Health care providers are implementing clinical information systems to
automate clinical documentation and integrate patient information into electronic health
records. However, these clinical information systems typically lack the sophistication or
capability to incorporate digital medical images from radiology modalities, echocardiology, or
the cardiac catheterization lab into patient health records. Incomplete electronic health
records can result in delayed diagnosis, billing errors and inefficient workflow. According to
the Global Technology Centre in its 2005 publication Reactive to Adaptive: Transforming
Hospitals With Digital Technology, one-fifth of medical errors are due to inadequate
availability of patient information. A complete electronic health record, which includes all
medical images and complete data from cardiac catheterization and echocardiology procedures,
enhances the benefits of investment in clinical information technology.
Shortcomings of Film-Based Image Management. Many health care providers still use film to
capture medical images from devices such as X-ray machines, which may produce three to four
images per typical exam, and CT scanners, which can produce 8,000 images per exam. A film-based
system has numerous inefficiencies, including complex exam scheduling, redundant patient data
entry, the possibility of misplaced or misfiled notations and case histories, physical films and
files that must be copied often or physically moved among the technologist, the specialist physician and
the treating physician, degradation in quality, and substantial storage space requirements.
Each of these inefficiencies has the potential to increase the total cost per exam.
Limitations of Current Methodologies for Managing Digital Medical Images. Current digital
medical image management systems, which correct some of the inefficiencies of film-based
imaging, have traditionally consisted of specialized services and technologies tied to specific
department-level requirements. For example, a typical PACS installation is a department-level
installation with dedicated hardware components primarily designed to address the image storage
and distribution needs of a small number of physicians in a single
department at a single location (e.g., radiology
or cardiology, but not both). While PACS installations may offer substantial automation
benefits within a single department over traditional film-based imaging workflow, they do not
offer the full potential of an integrated, enterprise-level digital image management solution.
In addition, these systems typically do not integrate with clinical and administrative systems
without expensive custom programming. Many hospitals that have embraced image automation have
had to purchase multiple PACS and software tools for various departments and imaging devices,
which presents integration challenges and requires significant investment. Many PACS were
developed prior to the recent growth in the use of 3D imaging techniques and do not easily scale
to handle the data volume of current imaging devices. PACS visualization tools are typically
limited and are not distributable across the network except in a very rudimentary manner.
Our Solutions
We provide enterprise-level information technology solutions for the clinical analysis and
management of digital medical images within health care 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 health care 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 |
Administration (CEO, CFO and COO) |
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Demonstrable return on investment |
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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 (CIO and IT Department) |
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Lower total cost of operation |
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Fault tolerant, redundant and reliable |
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Ease of integration with different clinical information systems |
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Multi-site, multi-institutional standards-based integration |
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Focused, high quality implementation services |
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Diagnostic Physicians (Radiologists) |
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Integrated and easy-to-use visualization tools |
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Multi-point access to visualization tools and images |
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Productivity gains |
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Easy access to unified visual records |
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Treating Physicians (Cardiologists, Surgeons, etc.) |
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Availability of easy-to-use, specialty-specific visualization
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Faster turnaround of information for treatment planning |
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Facilitates collaborative analysis with diagnostic physicians |
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Improved treatment planning |
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Easy access to unified visual records |
Payor |
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Ability to avoid duplicate exams through cross-enterprise access |
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Our solutions offer the following:
Enterprise-Level Image Content Management. Our solutions provide a single data repository
for medical images created by digital imaging devices and related patient data across a single
or multi-facility enterprise, whether from radiology, cardiology, pathology, orthopedics,
obstetrics, gynecology or other departments. This single repository serves as a central point
of workflow and content management for those images. Our solutions catalog, archive and route
these images through our software, combining centralized control over sensitive patient imaging
records with increased availability to physicians and other authorized users in multiple medical
specialties and at any network access point. Our solutions integrate with our customers
existing clinical information and administrative systems, serving as the patients visual
medical record repository, reducing the risk of billing errors, and lowering the average cost
per exam through automation of complex and manual film-based imaging workflow.
Advanced Visualization Technology. Our solutions quickly deliver web-enabled software
toolsets and images to physicians throughout the enterprise for diagnostic analysis and
treatment planning. Our advanced
visualization software allows physicians to 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 advanced visualization software from any network access point, including home, office
or throughout the health care facility. Our intelligent user interface automatically adjusts
for the specialty 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.
Specialty-Specific Clinical Applications. With our acquisition of Camtronics in November
2005, we added a full suite of products to enhance capabilities of specialists in the cardiology
department. These solutions manage images and clinical data relating to cardiac
catheterization, echocardiography, nuclear cardiography, vascular ultrasound, and hemodynamics.
We are focused on the development of enhancements and additional functionality to our existing
advanced visualization software to further meet the needs of other clinical specialties,
including orthopedics, oncology, pathology, obstetrics, gynecology, and neurology.
Open Standards-Based Software. We believe that our use of open standards has enabled us to
design software that stores and manages information faster and with fewer hardware resources
than competitive systems, a benefit we believe is becoming increasingly important as the data
size of many imaging exams grows. We have designed our software to make full use of the DICOM
standard for medical image data. Our commitment to open standards such as DICOM and the
standard protocol for the storage of text-based patient information, Health Level 7, or 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 which often require the purchase of additional hardware and software.
Effective Implementation, User Adoption and Support Services. We focus on delivering
effective implementation, user adoption and support services as an integral part of our
solution. During the implementation phase of our solution, we use proven project management
principles to facilitate rapid and complete adoption by our customer. After implementation, we
monitor system use and, when appropriate, intervene to make the adjustments we consider
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 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:
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Expand Our Market Share by Attracting New Customers. We believe a full range of health
care organizations, from stand-alone imaging centers to multi-site hospital systems, represent a
largely underserved market for our solution. Our current base of installed facilities
represents a small portion of the prospective customers for our solution. We are expanding our
sales and marketing efforts so that we may pursue new customers. As we pursue new customers, we
intend to continue focusing our efforts on the large, multi-site health care providers that
typically recognize the greatest benefits and fastest return on an investment in our solution
and represent the largest individual sales opportunities. However, we believe there is
additional opportunity in the smaller hospital market, and we are developing a strategy for
expansion into the smaller hospital market to address this growing segment of the U.S.
medical image management market. We believe our position as a sole source provider of an
advanced visualization and image management solution, together with our implementation expertise
and our installed base of nationally recognized reference customers will help us attract new
customers.
Increase Penetration With Existing Customers. We believe that using our successful
relationships with existing multi-facility health care customers to expand our penetration
within those organizations and selling additional functionality to our existing installed base
are effective ways to increase our operating margins by reducing the average cost of sales and
increasing the total revenue from existing customers.
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Increase Installations with Existing Multi-Facility Customers. As of December 31,
2006, we had customer relationships with 19 multi-facility health care providers that
control 263 hospitals. Our initial contracts with these customers often provide for
implementation of the content management functions and sometimes the advanced
visualization functions of our EVMS solution at only a portion of the facilities
managed by the parent company. We believe there are opportunities to expand our
installed base at facilities that are part of multi-facility systems in which we have a
customer relationship with the parent company. |
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Cross Sell to Existing Customers. We are also in a strong position to sell
additional functionality to our existing customers, including advanced visualization
tools for image-intensive medical specialties that may not have been part of the
initial sale. As follow-on sales opportunities, we offer our advanced visualization
software and other products and additional functionality to radiologists and other
specialty groups within the organization. Our offering of our HeartSuite cardiology
products gives us broader cross-selling opportunities than we had prior to the
acquisition of Camtronics. |
Enhance Our Product Offerings. We believe developing or acquiring additional functionality
for our existing software, including improved advanced visualization suites of products for
multiple specialties will further strengthen our position in the market. Further enhancements
to our RadSuite advanced visualization software and our HeartSuite cardiology products should
assist us in selling our solution to multi-hospital systems and expanding our existing customer
relationships. We also plan to invest further in workflow and integration software to speed
integration with existing clinical information systems, including electronic health record
systems.
Continue to Deliver Superior Implementation, User Adoption and Customer Support Services.
As a single-source provider of advanced visualization and image management solutions, we believe
the quality of our implementation, user adoption and support services helps to differentiate us
from our competition. We expect to continue to invest in, refine and develop new services to
provide our customers with the highest level of services available and to provide us with a base
of recurring revenue. We believe delivering superior services will enable us to capture
increased market share and enhance our existing customer relationships, thereby increasing our
competitiveness.
Maintain Our Open-Standards Focus. We believe our commitment to open standards, such as
DICOM and HL7, lowers our development costs, 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
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it enables our customers to use relatively inexpensive, off-the-shelf hardware to visualize,
analyze and manipulate images. We believe that our commitment to open standards enables our
customers to maximize their return on investment in imaging devices, computer hardware and
clinical information technology systems.
Our Product and Service Offerings
We provide an enterprise-level information technology solution for the clinical analysis and
management of digital medical images within health care provider organizations. Our solution
consists of image management and advanced visualization software, comprehensive support services
and third-party components.
Software
EVMS includes three principal software components: clinical content management, RadSuite
advanced visualization tools, and clinical workflow through a dynamic user interface.
Clinical Content Management is our image archival and distribution management software.
Clinical Content Management supports the DICOM standard for digital medical images enabling a high
level of scalability that facilitates fast, efficient access to storage and retrieval of such
images in enterprise applications.
The system includes auto-routing and predictive capabilities that improve workflow in a
clinical environment by performing time intensive tasks in anticipation of their need, thereby
minimizing network traffic and facilitating responsiveness across the enterprise.
Clinical Content Management employs a distributed architecture that enables administrative
changes without the need to shut down the system, minimizes system memory requirements, increases
the speed of access to images through a relational database and provides customized reporting
capabilities. In a distributed multi-hospital environment, the system also manages local caches
at remote sites, which provide local image acquisition and temporary storage for rapid retrieval.
Permanent image data is simultaneously stored at the centralized long-term archive. Each remote
cache also acts as a proxy server to provide a view of images throughout the enterprise, no matter
where the image was originally generated. The use of a local cache ensures that no individual
facility is dependent on the wide-area network for the sourcing of locally created images.
Additional benefits include:
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Multi-Site and Multi-Department. The system permits authorized users to access images
from any network access point, including home, office or throughout the health care
facility. It handles images created by multiple hospital departments and multiple image
devices. |
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Enterprise and Cross Enterprise-Level Scalability. We can install Clinical Content
Management as a single facility application or as an enterprise-level solution to support
the medical image management needs of large multi-facility health care providers. Our
solutions can support multiple institutions to unify the patient record. |
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Fault Tolerance. We use an advanced, fault tolerant, high availability configuration on
redundant server clusters with redundant storage systems. We support either full backup
and recovery or mirrored archives in two different locations, enabling uninterrupted
operation in the event of the loss of one archive. |
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Open Standards. Unlike many competitive image management systems, our system has been
designed using an open standards architecture that leads to better integration with imaging
devices and clinical information systems, improves the speed and reliability of transfers
of medical image data and provides a lower total cost of ownership by avoiding unnecessary
translation overhead. |
RadSuite Advanced Visualization Tools consist of our suite of software tools for the advanced
visualization and analysis of digital medical images by physicians and medical professionals.
Components include graphics and image processing modules that present information to physicians and
medical professionals using relevant multi-speciality tools through a dynamic user interface.
Physicians can manipulate 2D and 3D image-related content in a variety of ways including
organization, rotation, inversion, magnification, and enhancement of images in a
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collaborative
environment for sharing findings with other physicians or medical professionals. These tools help
physicians better visualize internal anatomic structure and pathology. Additional benefits include:
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Speed and Efficiency. The ability to improve efficiency for physicians through better
tools and reduce latency for care by access at the point of need. |
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Sophistication. The software makes use of complex processing techniques such as
multi-planar reformat, or MPR, and volumetric imaging for 3D imaging applications. |
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Integration. Imaging tools include integrated 2D and 3D viewing methods that can be used
simultaneously with the same image or images on the same computer. |
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Ease of Use. The system is intuitive and user-friendly so physicians can easily adapt
its use into their current practice patterns. |
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Application to Numerous Clinical Specialties. The user interface automatically adjusts
for the type of physician using the system, user preferences, the type of imaging device
used to create the image (such as CT, X-ray or MRI), and the particular body part and
tissue type being imaged. |
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Platform Compatibility. The system uses a common personal computer graphics standard,
allowing off-site physicians to use inexpensive personal computers and permitting the
enterprise to make use of lower priced workstations with off the shelf graphics hardware. |
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Web-enabled. Physicians or other authorized users have secure access to images and
advanced visualization tools at any network access point. |
Clinical Workflow is our standards-based software used to manage integration and data
migration between our solution and other health information systems throughout the enterprise. We
utilize a DICOM imaging device worklist, which automates technologist workflow, prioritizing and
managing processes based on other systems such as admissions. In addition, Clinical Workflow
includes tools that enable the integration of our solution with electronic health records and other
information systems such as voice recognition. The benefits of the system include the rapid and
systematic integration of the patients digital medical images with the rest of the enterprises
clinical and administrative information systems without the need for custom programming,
integration services, or third-party translation devices.
Our HeartSuite enterprise solutions for cardiology were added to our product offerings as a
result of our acquisition of Camtronics. Our cardiology solutions include HeartSuite VERICIS,
HeartSuite Hemodynamics and HeartSuite Cardiovascular Information System, or CVIS.
HeartSuite VERICIS creates a complete digital record of images and reports for patients in the
cardiac catheterization lab, in echocardiography (including specialized applications for pediatric
echocardiography), in vascular ultrasound and in nuclear cardiology. Like all our solutions,
VERICIS is built to conform to DICOM and HL7 standards. Benefits include:
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elimination of film and paper-based processes; |
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reduction of redundant tasks, including cine film handling, data entry, archiving and transcription; |
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streamlined access to patient studies and reports; and |
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scalable and expandable to meet needs of any size cardiology department. |
HeartSuite Hemodynamics is a comprehensive monitoring and data management system that
integrates cardiac catheterization lab procedural information into the patients cardiac record.
HeartSuite Hemodynamics provides functionality for data collection, real-time waveform analysis,
inventory control, patient charging and procedure
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reporting in a single system. Benefits include
the ability to mine data and create custom reports that aid in driving improvements in quality and
efficiency.
HeartSuite CVIS is a web-based system designed to provide the cardiology department with all
its information needs in one application. It summarizes the patient cardiovascular state and
aggregates all clinical information in one location, tracks patient clinical trends and supports
care planning. The system aids in workflow in the department of cardiology by scheduling labs and
office encounters, tracking patients while they are in the hospital,
and capturing and aggregating
cardiovascular billing codes. The information in the system is stored in a central database that
provides cross-modality statistics for operational, administrative and other business needs.
Service and Support
We believe that our implementation, user adoption and support services differentiate us
strategically from our competitors. Large-scale infrastructure information technology
installations can present special challenges to an enterprise, regardless of its size or
sophistication. We believe that information technology projects often fail due to inadequate
implementation and support services and believe that our service model better meets the
installation and investment objectives of our customers.
Our Customer Success Program includes the following components:
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Adoption Success Management (ASM). ASM is our services program that facilitates rapid
and complete adoption by all relevant constituents during the implementation phase, which
typically lasts several months. We have designed ASM to maximize the user implementation
experience, promote behavioral change at all levels and increase the probability of
complete implementation success. |
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Total Solution Management (TSM). TSM is an ongoing set of support services to ensure
that our systems are highly available and optimally configured for the users. Through
continuous remote monitoring of our solution, we analyze system and user behaviors and,
when appropriate, intervene and make the necessary adjustments to prevent anticipated
problems from occurring. We provide standard 24-hour service and support for our software
and any third-party components we provide to the customer. |
We provide revenue mix analysis services, using data combined from hospital information
systems and the enterprises imaging environment data, to understand and prioritize key equipment
and physician revenue producers for a hospital. This analysis can provide critical data to
hospital administrators for capital and technology investment planning initiatives. We also
provide additional professional information technology services to our customers that have specific
needs related to system integrations and interfaces and data migration.
Third-Party Components
Our solutions typically include the installation and implementation of platform components
that we procure from third parties. We believe that providing third-party components helps us
deliver a comprehensive solution that meets the needs of our customers. Some of the third-party
components we provide include:
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Servers. Our software and the database run on a cluster of standard redundant servers. |
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Data Storage. We support industry standard storage configurations, including
fault-tolerant 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 the digital
medical images. We also offer an optional configuration with mirrored archives in two
locations, enabling uninterrupted operation in the event of the loss of one archive. |
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Workstations and Monitors. Customers typically implement our advanced visualization
software using standard personal computer workstations and high-resolution monitors for
visualization within the facility. |
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Database. Our software applications operate on Oracle
database technology and
other standard relational database applications. |
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Computed Radiography. We offer computed radiography devices manufactured by Eastman
Kodak Company. Computed radiography devices convert analog X-ray images into digital
images. |
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Advanced 3D Analysis Tools. We offer Vital Images Vitrea software as an option for
advanced clinical applications for visualization and integrated analysis tools that
complement our enterprise native visualization and workflow capabilities. Through the
desktop integration of our respective products, physicians can access Vitreas advanced
visualization and analysis tools and review the image data seamlessly without interrupting
workflow. |
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Electronic Health Record, Enterprise Practice Management, and Electronic Health
Exchange. We offer Allscripts TouchWorks EHR and PM solutions to our healthcare system and
hospital customers, thereby offering another system to enhance patient care and lower
healthcare costs for physicians and healthcare professionals. The robust integration
between these respective solutions can enable physicians who use TouchWorks in ambulatory
offices to visualize and analyze images from the practice or hospital. Desktop sharing
rapidly presents our visualization and analysis tools which are tailored to the
specialists needs. |
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We also offer a software toolset for orthopedic surgeons which is licensed from
Orthocrat, Ltd. and a voice recognition dictation system from Lanier Worldwide, Inc. |
Our Technology
We believe the following technologies and strategies help us compete more effectively:
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Native DICOM Compatibility. We have written our software to conform to the DICOM
standard for medical image storage and workflow management as promulgated by the American
College of Radiology and the National Electronics Manufacturers Association. DICOM is an
industry standard in medical imaging that defines the data elements, communication
protocols, storage formats and workflow methods associated with medical imaging data and
processes. Our software stores and manages medical images using native DICOM
communications, preserves the DICOM information associated with the image and follows DICOM
workflow methods. Using native DICOM communication means our solution does not require
translation devices for converting the DICOM information into a proprietary storage or
other format. We believe our commitment to DICOM as the underlying protocol for our
software is a competitive advantage, delivering faster streaming, more efficient storage of
the image and the ability to integrate our software to new imaging devices. |
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Proprietary DICOM-Toolkit. While DICOM is an industry standard protocol for medical
image data management and storage, the software toolsets used to process, manage and use
DICOM information are generally unique to particular software vendors. Unlike many of our
competitors who license DICOM-toolkits from third parties, we have developed and own a
DICOM-toolkit that we believe permits us to more rapidly integrate DICOM-based information
into our software. We believe that the ownership and continued development of our
DICOM-toolkit is a core technology strategy. |
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Commitment to the IHE Technical Framework. The Radiological Society of North America
and the Healthcare Information Management Systems Society created the Integrated Healthcare
Enterprise (IHE) technical framework. IHE is a protocol for the integration of DICOM image
information and HL7 text-based patient information. We believe our commitment to IHE helps
to ensure that our software integrates seamlessly with HL7-based billing and patient record
information systems implemented at our customer sites. |
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Compatibility with the OPEN GL Graphics Standard. Our advanced visualization software
performs sophisticated 3D rendering and other graphics intensive functions that provide
physicians the ability to view 3D medical images for diagnosis and treatment planning.
Historically, workstations and graphics |
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hardware that could provide advanced
visualization functionality were cost prohibitive. Our advanced visualization software
uses the OPEN GL graphics standard, which permits our customers, or off-site physicians
affiliated with our customers, to purchase inexpensive personal computers and graphics
hardware to perform sophisticated image analysis. |
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Component-Based Software Engineering. Our software architecture is based on a
component-based services model. Our software development framework supports common and
domain specific components that can be plugged in while the system is operating. By
building flexible, dynamic, reusable components, we gain flexibility to add functionality
to and increase the reliability of our system because we can remedy problems at the
component rather than the entire application level. |
Customers
Our customers range in size from single imaging centers to large multi-facility healthcare
networks. As of December 31, 2006, we had installed our EVMS solution in 190 hospitals or other
health care facilities, 158 of which are members of multi-facility networks with which we have
customer relationships. At December 31, 2006, we had implemented our RadSuite advanced
visualization solution in 73% of our current installed EVMS customer base. This is an increase
over the 66% of our installed base that used our RadSuite advanced visualization software at
December 31, 2005. There are also 270 hospitals utilizing our HeartSuite solutions in their
cardiology departments. Our customers include members of the following multi-facility networks
with ten or more facilities: Allina Hospitals and Clinics, Ascension Health, Aurora Health Care,
BJC Healthcare, Catholic Healthcare West, Christus Health, Kaiser Foundation Hospitals, Sisters of
Mercy Health Systems and Sisters of St. Francis Health Services.
Contracted implementations for Ascension Health constituted 27% of our contracted backlog as
of December 31, 2006, compared to 33% as of December 31, 2005.
Sales and Marketing
We use a direct sales model, with sales representatives who have substantial experience in
health care-related direct sales. Our sales representatives undergo rigorous training in our
products as well as the needs of each constituent group within our potential customers. During our
sales cycle for a typical customer we might, at various times, present to the Chief Information
Officer, the Director of Radiology or Cardiology, the Chief Financial Officer, the Chief Medical
Officer, the Chief Operating Officer, 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, 2006, we had 108 employees who are primarily dedicated to research and
development activities. In addition to our employees, we also utilize contractors from Apollo
Health Street on a routine basis to perform specified research and development activities. 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 mission on the
continued evolution of intelligent, fault tolerant, highly scalable image management and
visualization systems for mission-critical medical image management applications. We adhere to a
philosophy of open standards-based solutions, and have designed our visualization platform in a way
that enables us to efficiently add new functionality. We are focusing our research and development
efforts on:
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improving physician and technologist workflow; |
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expansion of content management to cover medical documents beyond DICOM data; |
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expansion of content management to service communities; |
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improving reporting and data analysis capabilities; |
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developing and refining visualization capabilities including new 3D and analysis applications; and |
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extending imaging tools to referring physicians in multiple
specialties. |
We follow a formal product development process and employ dedicated product development
personnel. Under our formal product development process, internal and external (customer) requests
for added features or functionality are forwarded to our product management strategy and
architecture team. This team evaluates and prioritizes these potential product enhancements taking
into account expected costs, anticipated value to the customer, regulatory requirements, timing and
resource availability. After 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 $6.2 million, $11.7 million and $17.4 million for research and development in
2004, 2005 and 2006, respectively.
Competition
The markets for the digital medical image management and visualization systems that we offer
are highly competitive. Many customers purchase products and services from us and from our
competitors as well. We compete with companies that fall into four primary categories:
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companies that manufacture and sell digital imaging devices such as GE Healthcare,
Siemens Medical Solutions and Philips Medical Systems, who may integrate some of the
functionality provided by our products into their equipment or bundle it with the equipment
sale; |
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companies that have traditionally sold imaging films such as Eastman Kodak Company and
Fujifilm Medical Systems USA, Inc.; |
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companies that have traditionally sold health care information technology applications
such as McKesson Corp. and Cerner Corp.; and |
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a number of smaller companies that sell department-level or cardiology-specific PACS or
specialty visualization tools. |
Many of our current and potential competitors have significantly greater name recognition and
more established distribution networks and relationships with health care providers. To compete
effectively, we often must persuade the prospective customer to separate its purchasing decisions
with respect to imaging equipment from its purchasing decisions with respect to 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 will depend on a number of factors both within and outside
our control, including:
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product innovation; |
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regulatory decisions; |
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product quality and performance; |
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customer service and support; |
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the experience of our sales, marketing and service professionals; |
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rapid development of new products and features; |
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price; |
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continued active involvement in the development of DICOM and other standards-based
medical communication protocols; and |
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product and policy decisions announced by competitors. |
Intellectual Property
We rely generally on a combination of trade secret and copyright law, employee and third-party
nondisclosure agreements and other protective measures to protect intellectual property rights
pertaining to all of our software technology. In addition, we have filed patent applications to
protect certain aspects of our software technology. To date, four patents have been issued.
As filed in the U.S., Europe, and Japan, our patent applications generally relate to
DICOM-type image transmission and, in particular, to methods and apparatus for streaming DICOM-type
images via a network. In addition, we have also filed a patent application in the U.S. that
generally relates to a method and system for storing, communicating and displaying image data. In
particular, this application relates to methods and systems for storing image data on a server,
communicating at least a portion of the image data from the server to a client via a network, and
displaying images at the client using the communicated data.
We have one device and method patent related to improved quantitative coronary artery
analysis. This patent is on file in the U.S. and Canada. This patent, while enforceable, has
limited use in our current product offerings and product development efforts.
We have an exclusive, worldwide, royalty-bearing license from the University of Alabama
Birmingham (UAB) Research Foundation for certain technology used in our Clinical Content Management
software.
We do not own all of the software and hardware used in our solution, but we have all of the
licenses from third parties we believe are necessary to offer our current solution. As we develop
new products and new versions of products, it may be necessary to renegotiate with such third
parties to make sure our licenses are complete and valid. In such a case, our existing third-party
licensors may not be willing to make the needed licenses available on terms acceptable to us, but
we believe in most cases there are alternative vendors from whom we could obtain hardware, other
components or any necessary licenses for software.
Emageon®, Camtronics®, Heartsuite, VERICIS®, Ultravisual, Enterprise Visual Medical System,
EVMS, Mammosuite, I-Readmammo, Enterprise Body Transparency, Studynotes, and our logo are our
trademarks or service marks. All other trademarks, trade names and service marks appearing in this
Annual Report are the property of their respective owners.
Employees
As of December 31, 2006, we had 438 employees, 108 of whom were primarily engaged in research
and development, 71 of whom were primarily engaged in sales and marketing, 207 of whom were
primarily engaged in providing technical installation and support services, and 52 of whom were
primarily engaged in administration and finance. With respect to location, 130 of these employees
are located at our corporate headquarters in Birmingham, Alabama; 187 of these employees are
located at our offices in Hartland, Wisconsin; 33 of these employees are
located at our office in Ottawa, Ontario, Canada; and the remainder of our employees are
located at customer
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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.
The FDA cleared EVMS visualization and infrastructure tools; the radiology PACS; Heartsuite
cardiovascular tools; VERICIS hardware and software; the cardiology PACS; and Heartsuite
Hemodynamics (formerly known as Physiolog), the hemodynamic measurement recording software, through
the 510(k) notification process. We have applied, and will continue to apply for 510(k) clearance
for additional clinical uses of our devices. Clearance under the 510(k) process typically takes 90
days to over a year from the date of a complete filing, depending on the number of questions the
FDA has concerning the submission. Some applications may never receive clearance because the FDA
raises safety issues or requests additional data that may not be economical to produce. Therefore,
there is the risk that FDA clearance for any of our future devices, or for further clinical uses of
our existing devices, may be delayed or not cleared. There is also the risk that FDA clearance,
once received, may contain more restrictive conditions of use than we would like. Moreover, the
FDA is always free to subsequently withdraw any clearance previously granted.
For cases where the 510(k) approval process is not available, the FDAs other approval
process, the pre-market approval process, or PMA, is a more costly, lengthy and uncertain process
than the 510(k) process. The PMA application requires human clinical trial data to enable the FDA
to evaluate whether the PMA contains sufficient, valid scientific evidence that the device is safe
and effective for its intended use. The PMA process generally requires one to several years from
the date the applicant submits the device for FDA review, if, in fact, the FDA ever approves the
device. Even then, the FDA may condition its approval on stringent limitations regarding the
indicated uses for which the device may be marketed. To date, our software and related
comprehensive solutions have not required approval under the PMA process. However, 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.
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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 currently hold licenses to market, sell, and distribute many of our products in the
Canadian health care industry. To date, we have sold no devices in the Canadian marketplace, but
our intent is to market in the future all devices for which we hold licenses.
We have procedures in place to ensure that we are compliant with the Canadian Medical Device
Regulation as documented in the Food and Drugs Act: Medical Devices Regulations for Canada:
SOR/98-282 which includes quality system certificates for ISO 13485:2003, CMDCAS for the classes of
our devices.
HIPAA Privacy and Security Regulations. The HIPAA Privacy Rule prohibits a covered entity
from using or disclosing an individuals protected health information unless the use or disclosure
is authorized by the individual or is specifically required or permitted under the Privacy Rule.
The Privacy Rule has imposed a complex system of requirements on covered entities for complying
with this basic standard. Under the Security Rule, covered entities must establish administrative,
physical, and technical safeguards to protect the confidentiality, integrity, and availability of
electronic protected health information maintained or transmitted by them or by others on their
behalf.
The HIPAA Privacy and Security Rules apply directly only to covered entities such as health
plans, health care clearinghouses, and health care providers who engage in HIPAA-defined standard
electronic transactions. We are not a covered entity, but our customers are. In order to provide
to a customer certain services that may involve the use or disclosure of protected health
information, the HIPAA Privacy and Security Rules require our customers to enter into business
associate agreements with us, which must provide adequate written assurances with respect to,
among other things, how we will use and disclose the protected health information. In addition to
requiring us to provide these adequate written assurances, the business associate agreements with
our customers also impose significant privacy and information security requirements on us, and
there can be no assurance that we will not in the future be subject to liability in connection with
those business associate agreements.
Government Reimbursement. Our customer base consists of health care providers, all of whom
are subject to regulation by a number of governmental agencies, including those which administer
Medicare and Medicaid programs. Accordingly, our customers are sensitive to legislative and
regulatory changes in, and limitations on, the government health care programs and changes in
reimbursement. During recent years, there have been numerous federal legislative and
administrative actions that have affected the Medicare and Medicaid programs, including past
adjustments that have reduced payments to hospitals and other health care providers. For example,
in an effort to curb its increasing costs associated with diagnostic imaging, the federal
government has recently implemented a percentage reduction applicable to a certain component (i.e.,
the technical component) of reimbursement for combined diagnostic imaging services under specified
circumstances. It is likely that the federal government will consider and could implement future
reductions in Medicare reimbursement or other changes that adversely affect our health care
customer base. Any such changes could adversely affect our own financial condition by reducing the
capital expenditure budgets of our customers.
Fraud and Abuse. A number of federal laws, loosely referred to as fraud-and-abuse laws, are
used to prosecute health care providers, physicians and others that fraudulently or wrongfully
obtain reimbursement that increases costs to any federal health care program. Given the breadth of
these laws and regulations, there can be no assurance that they will not be found applicable to our
business or the financial arrangements through which we market, sell, and distribute our products.
These include federal anti-kickback and self-referral laws and regulations.
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Anti-Kickback Law. The anti-kickback provisions of the Social Security Act prohibit the
exchange of anything of value with the intent to encourage utilization of items or services
payable under a federal health care program. Courts have construed the anti-kickback law
to mean that a financial arrangement will violate such law if even one of the purposes of
one of the parties is to encourage patient referrals or other Medicare/Medicaid business,
regardless of whether legitimate purposes also exist for the arrangement. Penalties for
federal anti-kickback violations are severe. Conviction can result in up to five years
imprisonment, a $25,000 fine per offense, and exclusion from participation under federal
health care programs. Violators may also be assessed civil monetary penalties ranging from
$10,000 to $50,000 per offense, as well as damage assessments equal to three times the
total amount of the kickback. We believe that all of our arrangements with physicians and
health care facilities have been fully lawful. But given the broad sweep of the federal
anti-kickback law, we cannot assure you that all such arrangements will be found compliant
with such law if examined by government regulators, to the extent that such regulators
determine that any of our arrangements are subject to such law. |
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Stark Law. The Ethics in Patient Referrals Act, known as the Stark Law, also prohibits
certain types of referral arrangements between physicians and health care entities.
Physicians are prohibited under the original Stark Law, its subsequent Stark II amendment,
and the Stark implementing regulations from referring patients for designated health
services reimbursed under the Medicare and Medicaid programs to entities with which they
have a financial relationship or an ownership interest, unless such referrals fall within a
Stark exception. Violations of the statute can result in civil monetary penalties of up to
$15,000 per improper referral and exclusion from the Medicare and Medicaid programs. We do
not believe that our arrangements with physician consultants or other health care providers
violate the Stark Law, but we cannot provide assurances to such effect, nor can there be
assurance that we will not in the future be subject to Stark Law penalties. |
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State Law. Various states have enacted equivalents of the foregoing federal statutory
and regulatory provisions. These state law equivalents would apply to items or services
reimbursed by any third-party payor, including commercial payors. Many of these laws vary
significantly from state to state, rendering compliance a costly and uncertain endeavor. |
Available Information
Our internet website address is www.emageon.com. We make available free of charge through our
website our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form
8-K, and amendments to those reports, as soon as reasonably practicable after we file them with, or
furnish them to, the Securities and Exchange Commission.
Our business involves various risks and uncertainties, some of which are discussed in this
section. The information discussed below should be considered carefully with the other information
contained in this Annual Report on Form 10-K and the other documents and materials we file with the
SEC, as well as news releases and other information we may publicly disseminate from time to time.
The risks and uncertainties described below are not the only ones we face. Additional risks and
uncertainties not presently known to us, or that we currently believe to be immaterial, may also
adversely affect our business. Any of the following risks or uncertainties that develop into
actual events could have a materially adverse effect on our business, financial condition or
results of operations, or on the market price of our common stock.
Our industry includes many large companies that have significantly greater resources and other
competitive advantages, and we may not be able to compete successfully against these competitors.
We compete with large, well-capitalized, multinational corporations such as GE Healthcare,
Siemens Medical Solutions, McKesson Corp., and Philips Medical Systems. These competitors have
significantly greater brand recognition and more established distribution networks and
relationships with health care providers. As our market grows, it may attract other competitors
with substantial resources, such as large information technology, or IT,
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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 and increased penetration of PACS in the hospitals in the U.S. may also delay or
extend the sales cycle for affected customers. As a result, our enterprise solution has a
typical sales cycle, from the initial contact to the placing of an order, of nine to twelve
months, and sometimes 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 substantially from quarter to quarter solely due to the timing
of satisfying our revenue recognition criteria. |
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Implementation Delays: Once we enter into a customer contract, our recognition of
revenue from that contract depends, to a significant extent, on the timing of our
implementation of the project. Customer implementation schedules may be delayed for
reasons beyond our control, such as customer scheduling changes, delays in acceptance
testing by customers, unusual integration issues or delays in obtaining equipment from
third-party vendors. Delays in the implementation of a particular project may require us
to delay the recognition of anticipated revenue from one quarter to another and may
contribute to substantial fluctuations in our quarterly operating results. |
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
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fall below expectations of investors and stock market analysts which could cause our stock
price to decline or exhibit volatility.
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 incur operating losses in the future. As a result
of our operating losses, we had an accumulated deficit of $57.4 million at December 31, 2006. You
should not consider our historical growth in revenue or our profitability in the fourth quarter of
2006 as necessarily indicative of our future performance. In addition, we expect our sales,
marketing, research and development and other operating expenses to increase in the future as we
expand our business. If our revenue does not grow to offset these expected increased expenses or
if our operating expenses exceed our expectations, we may not be profitable and may incur
substantial additional operating losses. Our ability to achieve and maintain annual profitability
will depend on, among other things, our ability to market successfully our solution, create new
product offerings, respond to competitive developments and attract and retain qualified sales,
technical and management employees. Even though we may achieve profitability, we may not be able
to maintain profitable operations on an annual basis.
Our failure to manage growth effectively may strain our management, personnel and other resources,
which could impair our ability to meet customer requirements.
We have grown very rapidly and must continue to add customers and employees to be successful.
Our business could suffer if we fail to manage effectively our growth. For the two year period
ended December 31, 2006, our annual revenue grew by 166% and the number of our employees increased
from 199 to 438, including employees added through our November 2005 acquisition of Camtronics.
While it is unlikely that we can continue to grow at this rate, continued growth may significantly
strain our management, personnel and other resources. Simultaneously undertaking numerous projects
with large multi-site health care providers could also strain our existing resources and cause our
implementation and customer service to suffer. This could cause us to fail to satisfy material
performance requirements under our contracts which could, under certain circumstances, permit
customers to terminate their contracts with us and would adversely affect our reputation.
Failure to successfully execute our acquisition strategy may have an adverse impact on our growth
strategy.
Our overall growth strategy has involved, and is expected to continue to involve, the
acquisition of businesses, technologies, services and products. For example, in November 2005, we
acquired Camtronics, which added a new suite of cardiology tools to our advanced visualization
software offering, increased our customer base by over 300 medical facilities, and increased our
employee headcount by 212 employees. Our growth strategy is dependent, in part, upon our ability
to identify, finance and acquire complementary businesses. If we are unable to successfully
identify and consummate suitable acquisitions, we may not be able to execute our growth strategy,
and may not be able to expand our business or increase our revenue at the rates we currently
contemplate.
Implementing our acquisition strategy could result in integration risks, operating difficulties,
dilution or other adverse financial consequences.
Implementation of our acquisition strategy may impose significant strains on our management,
operating systems and financial resources. The pursuit of acquisitions may divert the attention of
management and cause us to incur various expenses identifying, investigating and pursuing suitable
acquisitions, whether or not they are consummated. If we acquire additional businesses, we may not
be able to integrate the acquired operations successfully with our business or we may not achieve
the anticipated benefits from the acquired business. If we are unable to integrate any new
business successfully, we could be required either to dispose of the acquired operation or to
undertake changes to the acquired operations in an effort to integrate them with our business. In
either event, our business operations and financial condition could suffer a material adverse
effect. Future acquisitions could
18
result in potentially dilutive issuances of our equity securities, the incurrence of debt,
contingent liabilities or amortization expenses, or write-offs of goodwill, any of which could harm
our financial condition. Acquisition financing, if needed, may not be available on favorable
terms. Further, there can be no assurance that future acquisitions will not have an adverse effect
upon our operating results, particularly during periods in which the operations of acquired
businesses are being integrated into our operations.
We are dependent on our senior executive management, and the loss of any member of senior executive
management may prevent us from managing and growing our businesses effectively.
Our success depends largely on the continued service of our senior executive management,
including Charles A. Jett, Jr., our Chairman, President and Chief Executive Officer; Grady Floyd,
our Chief Operating Officer; and W. Randall Pittman, our Chief Financial Officer. We have entered
into executive employment agreements with these key members of senior executive management, and
with Vicki Moore, our Chief Administrative Officer; Dan McCutcheon, our Executive Vice President of
Product Management; and Joe Verciglio, our Executive Vice President of Service. The terms of these
employment agreements are two years for Mr. Jett, 18 months for Mr. Floyd, and one year for
Mr.Pittman, Mr.McCutcheon, Mr.Verciglio, and Ms. Moore, and renew automatically on a day-by-day
basis thereafter unless we or the officer give notice to stop the automatic renewal. The loss of
any of our senior executive officers could have an adverse impact on our ability to manage and grow
our business effectively. We cannot assure you that in such an event we would be able to replace
any member of senior executive management in a timely manner, or at all, on acceptable terms.
Our products are complex and are operated in a wide variety of network configurations, which could
result in errors or product failures.
Because our software is complex, undetected errors, failures or bugs may occur when we first
introduce our products or when we release new versions. As we develop product enhancements and
extensions, the complexity of our software may increase. Our products often are installed and used
in large-scale computing environments with different operating systems, system management software
and equipment and networking configurations, any of which may cause errors or failures in our
products or may expose undetected errors, failures or bugs in our products. In the past, we have
encountered failures in certain of our product offerings after their installation, and we have been
required to expend significant resources to repair the problem and sustain the customer
relationship. Despite testing by us and by others, errors, failures or bugs may not be found in
new products or releases until after general release. The occurrence or existence of such errors,
failures or bugs in our products could result in negative publicity, contract cancellations, loss
of or delay in market acceptance or claims by customers or others. In addition, if an actual or
perceived breach of network security occurs in one of our customers medical image storage systems,
regardless of whether the breach is attributable to our solution, the market perception of our
products and services could be harmed.
We may not be able to raise additional capital on acceptable terms to fund our operations, develop
product enhancements or fund acquisitions, which could adversely affect our growth prospects.
We expect our cash resources to be sufficient to meet our working capital and capital
expenditure needs for the next twelve months. We may need to raise additional funds, however,
through public or private financings, strategic relationships or other arrangements in order to:
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develop new technologies; |
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enhance existing product lines, such as expanding our advanced visualization tools
product line to apply to additional clinical specialties; |
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fund additional sales and marketing programs; |
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invest in or acquire complementary businesses, product lines or technologies; or |
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hire additional personnel, particularly to expand sales, marketing, research and development. |
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If it becomes necessary to raise additional funds, our ability to operate our business could be
adversely affected if we are unable to identify additional sources of capital to fund these
activities on acceptable terms.
We may not be successful in expanding our sales and marketing efforts into new market segments,
which may have an adverse impact on our growth strategy.
Historically we have focused our sales and marketing efforts on large, multi-site health care
providers, but our management has determined that expansion of our sales and marketing efforts into
new market segments is an important part of our overall growth strategy. Currently we are
developing a strategy to expand our sales and marketing efforts into the smaller hospital segment,
and may in the future expand these efforts into additional market segments.
This type of expansion is subject to many of the risks inherent in establishing a new business
enterprise, and acceptance of our products and services in new market segments will depend on our
ability to, among other things, successfully:
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refine and adapt our products and services for new or different applications; |
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offer our products and services at price points that are competitive in the market segment; |
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create and develop demand for and market acceptance of our products and services in the
market segment; |
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market, promote and distribute our products and services, and establish public awareness
of our brand in the market segment; |
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compete with other companies already in the market segment; and |
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establish and maintain sufficient internal marketing, sales and customer service
infrastructures to support these efforts. |
Although customers in the small hospital market segment are closely related to the large,
multi-site health care providers, there can be no assurance that we will be able to successfully
enter this market segment. Successful entry into this market segment may require considerable
resources and expenditures, which could have an adverse effect on our results of operations or
financial position. In addition, if we are unable to successfully enter this market segment, it
could affect the execution of our overall growth strategy, and we may not be able to expand our
business or increase our revenues at the rates we currently contemplate.
The loss of Ascension Health or future major customers could materially and adversely affect our
results of operations and financial condition because portions of our future revenues are tied to
continuing relationships with significant customers.
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 $42.7
million, or 27% of our contracted backlog at December 31, 2006. In addition, our future revenue
and growth significantly depend on our ability to sell add-on functionality and new products to
existing multi-facility customers such as Ascension Health. As a result, the loss of Ascension
Health or any other future major customers or their failure to renew maintenance and support
agreements with us could have a material adverse effect on our revenue and operating results.
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We depend on highly specialized personnel, and the loss or failure to identify, hire, motivate and
retain additional highly specialized personnel could adversely affect our ability to grow our
business.
Our future success and the execution of our growth strategy depend on our continuing
ability to identify, hire, develop, motivate and retain highly specialized personnel for technical
and sales positions within our organization. For example, when hiring an advanced visualization
software engineer, we generally seek individuals with advanced post-graduate degrees in specialized
fields. We also must identify experienced candidates for sales positions who can effectively
communicate the cost, clinical and information technology benefits of our products to multiple
constituents at our target customers. Our competitors, employers in other industries, academic
institutions and governmental entities and organizations also often seek persons with similar
qualifications. As a result, we may not be able to identify and hire the personnel we need in a
timely manner.
In addition, to hire, motivate and retain these personnel, we believe we must provide them
with a competitive compensation package, which may include stock-based incentives, such as
restricted stock or stock options. Increases in shares available for issuance under our stock
incentive plans generally will require stockholder approval, and our stockholders may not approve
future increases. Recent changes in the accounting for stock options may cause us to issue fewer
stock options and rely more on restricted stock grants instead, which may be less attractive to
potential employees. If this occurs, we may find it more difficult to hire, motivate and retain
highly specialized personnel, which could have a material adverse effect on our ability to grow our
business.
Changes in our third-party reselling arrangements may affect our revenues and our ability to
deliver a complete solution, which may adversely impact our revenue and cause customer
dissatisfaction.
We resell third-party computer hardware components from numerous companies, including IBM
Corporation, Network Appliances, Inc., EMC Corporation and Eastman Kodak Company, as part of our
solution. As the cost of third-party hardware components continues to decline, our revenue from
third-party component sales and installation and, consequently, our overall revenue per individual
sale may also decline. If we cease selling third-party hardware components as part of our solution
or if the vendors of these products, some of whom are also competitors, curtail or delay our
ability to resell them as part of our solution, we may be limited in our ability to provide our
customers with a complete solution, and our revenue, profit and reputation may decline. Our
implementation capabilities and performance also may be adversely affected if our customers are
required to obtain the necessary third-party components on their own.
We may not be able to respond to changes in our industry, competitive technologies, changes in
customer requirements or evolving industry standards, which would result in reduced revenue and
profit margins.
Because our industry is subject to rapid technological change, we must constantly monitor
changes in industry standards, customer requirements and other matters. If we fail to anticipate
and respond adequately to these changes in a timely manner, our business and operating results
could suffer a material adverse effect. Although we currently support emerging industry standards,
we cannot assure you that we will be able to conform to future evolving standards in a timely
fashion, or that such conformity, if achieved, will benefit our competitive position in the market.
In anticipation of new product introductions by us or our competitors, customers could refrain
from purchasing our existing products. New products could render certain of our existing products
obsolete, or we may fail to develop product enhancements or new products that are accepted by our
customers. Furthermore, as the market for our solution matures, we may be subject to pricing
pressures, and our revenues and profits may decline. Any of these events could delay or prevent
our customers from acquiring our solution or require us to reduce the price of our solution, either
of which could lead to a decrease in revenue and profit margins.
Our customers depend on third-party reimbursement. A reduction or other change in third-party
reimbursements to our customers could negatively affect our business by reducing the demand for our
products or adversely impacting our pricing.
We sell our products to hospitals, clinics, imaging centers and other health care providers
which typically bill various third-party payors, such as government health programs, private health
insurance plans, managed care organizations and other similar programs. Third-party payors
increasingly challenge the prices charged for medical services and, in some instances, have put
pressure on service providers to lower their prices or reduce their services. We cannot predict
what changes third-party payors will make to their reimbursement methods. Third-party payors can
indirectly affect the pricing or relative attractiveness of our products by regulating the maximum
amount of reimbursement that they will provide for generating, storing and interpreting medical
images. A decline in
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reimbursements may decrease the amount which physicians, clinics and hospitals are able to
recover for such services and may reduce the number and complexity of medical images. A reduction
in the use or reimbursement of digital medical images may lead to our customers decreasing their
capital investment budgets, which could significantly reduce the demand for our products.
If we fail to obtain or maintain necessary FDA clearances for our products, if such clearances are
delayed, or if our products are subject to FDA recall, we will be unable to distribute and market
some of our products.
Our advanced visualization software products are subject to FDA regulation of medical devices.
Medical devices are a highly regulated class of products. The FDA regulates the development,
testing, manufacturing, labeling, promotion and record-keeping procedures for medical devices,
including imaging software and systems. The process of obtaining FDA marketing clearance for new
products and new applications for existing products can be time consuming and expensive. The FDA
has granted us marketing clearance, pursuant to the 510(k) pre-market notification process, for our
currently marketed uses of our advanced visualization tools. Before we can market other clinical
uses of our advanced visualization tools, generally we must seek 510(k) clearance for the
additional clinical uses. We cannot assure you either that the FDA will grant clearance for future
uses of our advanced visualization tools, that such clearance will be broad enough to allow all the
requested new uses, that such clearance will not be delayed, or that once clearance is obtained, it
will not be necessary for us or the FDA to recall one or more of our products. Also, the FDA may
not grant clearance with respect to our future products or enhancements, or future FDA reviews may
involve delays that could adversely affect our ability to market such future products or
enhancements. Moreover, our future products or enhancements may be subject to the FDAs more
lengthy and expensive pre-market approval process if we are unable to demonstrate that such
products and enhancements meet the FDAs requirements regarding similarity to pre-existing approved
devices.
Furthermore, it is possible that even if we receive required regulatory clearances and
approvals from the FDA to market a given product, these clearances and approvals may include
limitations on the indicated uses of the product. Also, the FDA can withdraw product clearances
and approvals due to failure to comply with regulatory standards, quality system manufacturing
regulations, unapproved manufacturing changes, or if unforeseen problems arise after initial
approval. The FDA could also limit or prevent our distribution of products. We might conduct a
voluntary recall or the FDA could recall such products if it deems them defective, a health risk,
or in violation of FDA regulations. These regulations depend heavily on administrative
interpretation, and any such future interpretations could adversely affect us. The FDA may also
inspect us and our facilities from time to time, or the facilities of our suppliers, to determine
whether we are in compliance with quality system regulations and current good manufacturing
practices. If the FDA determines that we are not in compliance with such regulations, it could
require us to correct these deficiencies or could suspend the 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, and our business, operations, and financial condition could be adversely
impacted.
We do not deliver health care services directly to patients, control health care referrals, or
submit claims to or otherwise bill Medicare, Medicaid, or any other third-party payors. However,
we have engaged certain physicians to serve as consultants on our behalf, entered into service
agreements and license agreements with health care entities, and had certain of our products
evaluated at health care facilities. Because of the breadth of many health care laws and
regulations, and their potential impact on our customers, we cannot assure you that such laws and
regulations will not apply to our business, either directly or indirectly. We could be subject to
health care fraud and patient privacy regulation by both the federal government and the states in
which we conduct our business. The regulations that may affect our ability to operate include the
following:
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The Federal Anti-Kickback Statute prohibits the exchange of anything of value with the
intent to encourage utilization of services payable under a federal health care program.
Courts have construed this statute as being implicated even when only one of the purposes
of one of the parties is to encourage patient referrals or other federal health care
business, even if legitimate purposes also exist for the arrangement. |
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The Federal Ethics in Patient Referrals Act, known as the Stark Law, prohibits (absent
an applicable Stark exception) referrals for designated health services reimbursable under
Medicare or Medicaid by a physician to an entity with which the physician, or an immediate
family member, has a financial relationship. |
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The Federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, has
increased the scope of federal fraud-and-abuse laws by applying them to prohibit fraudulent
conduct in connection with any health care benefit program, not only federal health care
programs. Although we are not a covered entity that is directly subject to liability under
the HIPAA privacy and security standards, we could be impacted by such regulations through
contractual relations with those of our customer base who are covered entities. |
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State law equivalents of each of the above federal laws, such as anti-kickback,
self-referral, and false claims laws, may apply to items or services reimbursed by any
third-party payor (including commercial insurers). State laws governing the privacy of
health information in certain circumstances, many of which differ from each other in
significant ways and often are not preempted by HIPAA (thus complicating compliance
efforts) and some of which may apply to us directly, may also affect our operations. |
If our operations are found to violate any of these laws or other governmental regulations, we
may be subject to penalties, including civil and criminal penalties, damages, fines, and the
curtailment or restructuring of our operations. Any such occurrences could adversely affect our
ability to operate our business and our financial results. Determining such risk is complicated by
the fact that many of these laws and regulations have not been fully interpreted by governing
regulatory authorities or the courts, and many of the provisions of such laws and regulations are
open to a wide range of interpretations. Any action against us for violating such laws or
regulations, even if we successfully defend such an action, could cause us to incur significant
legal expenses and divert our managements attention from the operation of our business. Moreover,
compliance with applicable federal and state privacy, security, and electronic transaction laws may
require us to modify our operations with respect to the handling of patient information.
Implementing these modifications may prove costly and time consuming. At this time, we are not
able to determine the full consequences to us, including the total cost of compliance, of these
various federal and state laws.
If the market for digital medical imaging products and services does not develop as we expect, our
business strategy may be ineffective, and we may not be able to grow our business.
We operate in a developing industry where customer acceptance and market demand is still
evolving. The digital medical imaging solutions market is still developing due to:
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the availability of high performance computers and storage systems at reduced prices; |
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the continuing development of industry standards for the generation, transmission and
storage of medical imaging data; |
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changing dynamics in the health care industry, including consolidation and third-party
reimbursement, which are driving increased automation across multiple sites; and |
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changing medical practices, including demand for more and better medical imaging. |
There can be no assurance that this market will continue to develop in the manner we
anticipate, that the market will provide growth opportunities for us or that our business
strategies will be successful. If the market for digital medical imaging products and services
fails to develop as we expect, our business, results of operations and financial condition are
likely to be materially and adversely affected.
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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. However, to date, only one of our patent
applications has resulted in the issuance of a patent, and we cannot assure you that these patent
applications will result in patents being issued in the U.S., Europe or Japan, or that such patents
will be issued in a form that will be advantageous to us. Even if we obtain such patents, they may
be challenged, invalidated or circumvented by third parties. We may not be able to prevent the
unauthorized disclosure or use of our technical knowledge or other trade secrets by employees.
Furthermore, the laws of foreign countries may not protect our intellectual property rights to the
same extent as the laws of the U.S. Litigation may be necessary to enforce our intellectual
property rights which could result in substantial costs to us and substantial diversion of
management attention. If we do not adequately protect our intellectual property, our competitors
could use it to enhance their products. Additionally, because we use or include open source
software, which is not proprietary, in the components of some of our products, our competitors may
freely use such open source software, and in certain circumstances may freely use such components.
This could harm our competitive position, decrease our market share or otherwise harm our business.
The prosecution and enforcement of copyrights and patents relating to components licensed or
sold to us by third parties is not within our control, and without these components, we may be
unable to provide our solution or maintain our technological advantage. If the third-party
suppliers of components used by us fail to protect their patents or copyrights or if these
components are found to infringe on the rights of another party, the functionality of our products
could suffer, and our ability to bring new and existing products to market could be delayed or even
prohibited.
Our operating results could suffer if we become subject to a protracted infringement claim or
litigation or a significant damage award.
Substantial intellectual property litigation and threats of litigation exist in our industry.
We expect that digital image visualization software, image management software and open source
software products may become increasingly subject to third-party infringement or other claims as
the number of competitors grows and the functionality of products increases. Any claims, with or
without merit, could have the following negative consequences:
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costly litigation and damage awards; |
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diversion of management attention and resources; |
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product sales and distribution delays or suspensions, either temporary or permanent; and |
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the need to enter into royalty or licensing agreements, which may not be available on
terms acceptable to us, if at all. |
A successful infringement or other claim against us could result in a substantial damage award
and materially harm our financial condition. Our failure or inability to license the infringed or
similar technology could prevent us from selling our products and adversely affect our business and
financial results.
Our directors may not be held personally liable for certain actions, which could discourage
stockholder suits against them.
As permitted by Delaware law, our amended and restated certificate of incorporation provides
that our directors shall not be personally liable to us or our stockholders for monetary damages
for breach of fiduciary duty as a director, with limited exceptions. These provisions may
discourage stockholders from bringing suit against a director for breach of fiduciary duty and may
reduce the likelihood of derivative litigation brought by stockholders on our behalf against a
director. In addition, we provide for mandatory indemnification of directors and officers to the
fullest extent permitted by Delaware law and have entered into indemnification agreements with our
directors and officers.
Delaware law and certain anti-takeover provisions of our corporate documents could delay or prevent
a third party from acquiring us or a change in control even if it would benefit our stockholders.
Our amended and restated certificate of incorporation and bylaws contain a number of
provisions that may delay, deter or inhibit a future acquisition or change in control that is not
first approved by our board of directors. This could occur even if our stockholders receive an
attractive offer for their shares or if a substantial number or even a majority of our stockholders
believe the takeover may be in their best interest. These provisions are intended to encourage any
person interested in acquiring us to negotiate with and obtain approval from our board of directors
prior to pursuing a transaction. Provisions that could delay, deter or inhibit a future
acquisition or change in control include the following:
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our board of directors may issue 200,000 shares of blank check preferred stock without
stockholder approval and that may be substantially dilutive or contain preferences or
rights objectionable to an acquiror; |
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our board of directors is comprised of classes of directors with staggered, three-year
terms so that only a portion of our directors is subject to election at each annual
meeting; |
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our board of directors can amend our bylaws without stockholder approval; |
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stockholders cannot call special meetings of stockholders; |
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stockholders cannot act by written consent; |
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stockholders must give advance notice to nominate directors for election or to submit
proposals at stockholder meetings; |
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we may be obligated to make payments under executive employment agreements in the event
of a change in control; and |
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some Delaware statutes restrict or prohibit certain transactions with affiliated or
interested parties and permit the adoption of poison pills without stockholder approval. |
These provisions could also discourage bids for our common stock at a premium and cause the
market price of our common stock to decline. In addition, these provisions may also entrench our
management by preventing or frustrating any attempt by our stockholders to replace or remove our
current management.
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ITEM 1B. |
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UNRESOLVED STAFF COMMENTS |
Not Applicable.
Our principal offices occupy approximately 43,500 square feet of leased office space in
Birmingham, Alabama, under a lease that expires in March 2010, and 79,500 square feet of owned
office and manufacturing space, including approximately 13 acres of land, in Hartland, Wisconsin.
We also maintain a research and development and customer support facility consisting of
approximately 14,500 square feet of leased office space located in Ottawa, Ontario, under a lease
that expires in December 2009; a research and development facility consisting of approximately
2,000 square feet of leased office space in Winter Park, Florida, under a lease that expires in
October 2008; and a research and development facility consisting of approximately 2,400 square feet
of leased office space located in Hartland, Wisconsin, under a lease expiring in April 2007. We
believe our current facilities are adequate for our current needs.
During the third quarter of 2006 we, as part of the integration of Camtronics, vacated a
leased facility and combined the operations formerly at that facility with another existing
facility. We have estimated and recorded a liability representing the present value of future net negative cash flow of $1,074,000 expected to
arise from the continuing lease obligation, and have written off $266,000 representing the net book
value of property, plant and equipment items attendant to the former facility. We are attempting to
sub-lease the facility and to otherwise minimize expense related to the vacated facility.
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ITEM 3. |
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LEGAL PROCEEDINGS |
There are no pending material legal proceedings other than ordinary routine litigation
incidental to normal business to which we are a party or to which any of our properties are
subject.
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ITEM 4. |
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SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS |
Not applicable.
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PART II
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ITEM 5. |
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MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
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 1, 2007, the 21,313,333 outstanding shares of common
stock were held by 76 holders of
record. The closing price per share of our common stock on the Nasdaq Global Market on March 1,
2007 was $11.50.
The following table presents the range of share prices for each quarter in the two year period
ended December 31, 2006:
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2005 Quarter Ended |
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Low |
March 31, 2005 |
|
$ |
18.50 |
|
|
$ |
14.35 |
|
June 30, 2005 |
|
|
17.29 |
|
|
|
13.99 |
|
September 30, 2005 |
|
|
15.00 |
|
|
|
11.30 |
|
December 31, 2005 |
|
$ |
16.47 |
|
|
$ |
12.35 |
|
|
|
|
|
|
|
|
|
|
2006 Quarter Ended |
|
High |
|
Low |
March 31, 2006 |
|
$ |
18.82 |
|
|
$ |
15.30 |
|
June 30, 2006 |
|
|
17.90 |
|
|
|
12.90 |
|
September 30, 2006 |
|
|
15.96 |
|
|
|
13.39 |
|
December 31, 2006 |
|
$ |
16.53 |
|
|
$ |
13.79 |
|
Dividends
We have not declared or paid any cash dividends on our common stock and do not anticipate
paying cash dividends on our common stock for the foreseeable future. Instead, we currently intend
to retain all future earnings, if any, for use in the operations of our business and to fund future
growth. Any future decision to declare and pay dividends will be at the discretion of our board of
directors, after taking into account our financial results, capital requirements and other factors
it may deem relevant. Covenants in our debt agreements currently prohibit us from paying dividends
or making other distributions.
Use of Proceeds from Initial Public Offering
Our initial public offering of common stock was effected through a Registration Statement on
Form S-l (File No. 333-120621) that was declared effective by the Securities and Exchange
Commission on February 8, 2005, pursuant to which we sold all 5,750,000 shares of our common stock
registered. We received net proceeds of approximately $67.2 million from the offering. We used
$4.0 million of the net proceeds to repay borrowings outstanding under our subordinated notes on
February 18, 2005. We invested the remaining net proceeds, after payment of such subordinated
notes, in short-term, investment-grade, interest bearing instruments pending their further use.
27
Since the initial public offering of our stock and through December 31, 2006,we have spent
approximately $10.7 million of such net proceeds on capital purchases, substantially all of which
was spent on purchases of equipment, and an additional $40.4 million of the net offering proceeds
to acquire all of the outstanding stock of Camtronics Medical Systems, Ltd. on November 1, 2005.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
We did not repurchase any shares of our common stock during the twelve month period ended
December 31, 2006.
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, 2006. 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
28
|
|
|
ITEM 6. |
|
SELECTED CONSOLIDATED FINANCIAL DATA |
The following consolidated statements of operations data for the years ended December 31,
2004, 2005 and 2006 and consolidated balance sheet data as of December 31, 2005 and 2006 are
derived from our audited consolidated financial statements and related notes, which are included
elsewhere in this document. The consolidated statements of operations data for the years ended
December 31, 2002 and 2003 and the balance sheet data as of December 31, 2002, 2003 and 2004 are
derived from our audited consolidated financial statements that do not appear in this filing. The
consolidated selected financial data set forth below should be read in conjunction with our
consolidated financial statements and related notes and Managements Discussion and Analysis of
Financial Condition and Results of Operations included elsewhere in this filing. Historical
results are not necessarily indicative of the results to be expected for any future period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2002 |
|
|
2003 |
|
|
2004 |
|
|
2005 |
|
|
2006 |
|
|
|
(In thousands, except per share data) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Statements of Operations Data (1) (2): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
System sales |
|
$ |
8,437 |
|
|
$ |
17,234 |
|
|
$ |
33,441 |
|
|
$ |
50,041 |
|
|
$ |
75,340 |
|
Support services |
|
|
4,198 |
|
|
|
6,341 |
|
|
|
13,059 |
|
|
|
25,023 |
|
|
|
48,165 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
|
12,635 |
|
|
|
23,575 |
|
|
|
46,500 |
|
|
|
75,064 |
|
|
|
123,505 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
System sales |
|
|
6,316 |
|
|
|
10,227 |
|
|
|
21,452 |
|
|
|
28,316 |
|
|
|
43,333 |
|
Support services |
|
|
4,056 |
|
|
|
7,777 |
|
|
|
11,426 |
|
|
|
15,921 |
|
|
|
24,331 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenue |
|
|
10,372 |
|
|
|
18,004 |
|
|
|
32,878 |
|
|
|
44,237 |
|
|
|
67,664 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
2,263 |
|
|
|
5,571 |
|
|
|
13,622 |
|
|
|
30,827 |
|
|
|
55,841 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
|
2,570 |
|
|
|
4,875 |
|
|
|
6,197 |
|
|
|
11,652 |
|
|
|
17,368 |
|
Sales and marketing |
|
|
4,642 |
|
|
|
6,403 |
|
|
|
9,377 |
|
|
|
12,238 |
|
|
|
18,459 |
|
General and administrative |
|
|
2,776 |
|
|
|
4,802 |
|
|
|
7,498 |
|
|
|
10,945 |
|
|
|
17,028 |
|
Amortization and write-off of intangible assets
related to Camtronics acquisition |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
993 |
|
|
|
3,540 |
|
Integration costs related to Camtronics acquisition |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
244 |
|
|
|
5,369 |
|
Loss on disposal of property and equipment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
437 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
9,988 |
|
|
|
16,080 |
|
|
|
23,072 |
|
|
|
36,072 |
|
|
|
62,201 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss |
|
|
(7,725 |
) |
|
|
(10,509 |
) |
|
|
(9,450 |
) |
|
|
(5,245 |
) |
|
|
(6,360 |
) |
Interest income (expense), net |
|
|
(601 |
) |
|
|
(850 |
) |
|
|
(1,022 |
) |
|
|
248 |
|
|
|
328 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(8,326 |
) |
|
$ |
(11,359 |
) |
|
$ |
(10,472 |
) |
|
$ |
(4,997 |
) |
|
$ |
(6,032 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share, basic and diluted |
|
$ |
(6.38 |
) |
|
$ |
(5.79 |
) |
|
$ |
(4.07 |
) |
|
$ |
(0.28 |
) |
|
$ |
(0.29 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares, basic and diluted |
|
|
1,314 |
|
|
|
1,973 |
|
|
|
2,590 |
|
|
|
17,975 |
|
|
|
20,919 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected Cash Flow Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash provided by (used in) operations |
|
$ |
(7,847 |
) |
|
$ |
(2,377 |
) |
|
$ |
4,959 |
|
|
$ |
(1,881 |
) |
|
$ |
7,263 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
|
|
2002 |
|
2003 |
|
2004 |
|
2005 |
|
2006 |
|
|
(In thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Balance Sheet Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
2,242 |
|
|
$ |
2,340 |
|
|
$ |
5,995 |
|
|
$ |
15,520 |
|
|
$ |
23,008 |
|
Marketable securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,951 |
|
|
|
|
|
Intangible assets, net |
|
|
|
|
|
|
8,000 |
|
|
|
6,873 |
|
|
|
34,277 |
|
|
|
30,090 |
|
Total assets |
|
|
24,990 |
|
|
|
29,050 |
|
|
|
41,768 |
|
|
|
117,944 |
|
|
|
113,908 |
|
Total debt and capital lease obligations |
|
|
10,260 |
|
|
|
8,467 |
|
|
|
9,489 |
|
|
|
3,749 |
|
|
|
961 |
|
Redeemable preferred stock |
|
|
24,326 |
|
|
|
30,282 |
|
|
|
30,348 |
|
|
|
|
|
|
|
|
|
Total stockholders equity (deficit) |
|
|
(20,508 |
) |
|
|
(23,535 |
) |
|
|
(32,370 |
) |
|
|
63,639 |
|
|
|
65,107 |
|
|
|
|
(1) |
|
On November 1, 2005, we acquired Camtronics Medical Systems, Ltd., and on May 30, 2003, we
merged with Ultravisual Medical Systems Corporation. Both the acquisition and the merger were
accounted for as purchases under Statement of Financial Accounting Standards No. 141, Business
Combinations. Accordingly, the results of operations of Camtronics Medical Systems, Ltd. and
Ultravisual Medical Systems Corporation have been included in the accompanying consolidated
financial statements since the respective dates of acquisition. For more information, see
Note 4 of the notes to our consolidated financial statements. |
|
(2) |
|
Certain reclassifications have been made to prior years financial data to conform to the
current year presentation. |
30
|
|
|
ITEM 7. |
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Company Overview
We provide an enterprise-level information technology solution for the clinical analysis and
management of digital medical images within multi-hospital networks, community hospitals and
diagnostic imaging centers. Our solutions consist of advanced visualization and image management
software for multiple medical specialties such as cardiology, radiology and orthopedics,
comprehensive support services and third-party components. Our web-enabled advanced visualization
software, which is hosted by the customer, provides physicians across the enterprise in multiple
medical specialties and at any network access point with dynamic tools to manipulate and analyze
images in both a 2D perspective and a 3D perspective. With these tools, physicians have the
ability to better understand internal anatomic structure and pathology, which can improve clinical
diagnoses, disease screening and therapy planning. Our open standards-based solutions are designed
to help customers improve staff productivity, enhance revenue opportunities, automate complex
medical imaging workflow, lower total cost of ownership and provide better service to physicians
and patients.
Our fiscal year ends on December 31. References below to annual periods or years refer to the
fiscal years ended December 31.
Results Overview
Total revenue for 2006 was $123.5 million, representing a 64.5% increase over 2005. The
increase was comprised of a 50.6% increase in system sales revenue and a 92.5% increase in support
services revenue. Our overall gross margin percentage increased from 41.1% for 2005 to 45.2% for
2006. We achieved gross margin percentages of 42.5% and 49.5% for system sales and support
services revenue, respectively, during 2006, compared to 43.4% and 36.4%, respectively, for 2005.
Our net loss was $6.0 million in 2006 compared to a net loss of $5.0 million in 2005, including
$5.4 million and $0.2 million, respectively, in acquisition related integration costs in those
years.
As of December 31, 2006, we had $158.4 million in contracted backlog, consisting of fees for
contracted future installations and for the support of existing installations, compared with a
contracted backlog of $158.0 million at December 31, 2005. We expect to recognize revenue from our
current backlog of approximately $68.0 million in 2007 and $32.0 million in 2008. Substantially
all of the remaining $58.0 million, which primarily consists of recurring revenue from support
services, is expected to be recognized by 2011. Our backlog will generally decrease as we
recognize revenue under existing contracts, and it will increase as we enter into new contracts.
However, our order and revenue patterns increasingly consist of relatively shorter periods between
initial order and completion of installation, particularly for add-on orders from existing
customers and, as a result, annually reported contracted backlog figures may not accurately portray
historical or prospective sales activity levels.
Initial Public Offering And Camtronics Integration
On February 14, 2005, we completed our initial public offering of common stock. We sold 5.0
million shares of our common stock at a price of $13.00 per share. On February 18, 2005, our
underwriters exercised the over-allotment option to purchase 750,000 additional shares at a price
of $13.00 per share. Total proceeds from the initial public offering, net of underwriting discount
and offering expenses, were $67.2 million. At December 31, 2006, we had 21,433,574 shares of common
stock issued, 21,257,817 shares of common stock outstanding, and 36,424 warrants to purchase
shares of our common stock outstanding at an exercise price of $5.52 per share.
On November 1, 2005, we acquired all the stock of Camtronics Medical Systems, Ltd., based in
Hartland, Wisconsin, for $40.4 million in cash. As of December 31, 2006, we have completed the
integration of Camtronics into the Company.
31
Our Market
We believe the health information technology market is exhibiting the following trends:
|
|
|
Increasing procedure volumes |
|
|
|
|
Increasing procedure size |
|
|
|
|
Modality blending, a layering of studies from two separate modalities for diagnostic
and treatment purposes |
|
|
|
|
Expanding adoption and use of standards |
|
|
|
|
Increasing emphasis by payors, healthcare providers, and government agencies on
electronic health record integration |
|
|
|
|
Body transparency, a new paradigm for navigating through large volumes of information |
The amount of imaging data being generated by health care providers is growing extremely
rapidly. This data must be stored and made available for easy retrieval. Increasingly, health
care information users want access to the stored data at any time, and in any location. In
addition, modalities that provide non-invasive alternatives continue to expand into other clinical
domains. Examples include:
|
|
|
MR and CT angiography |
|
|
|
|
Multi-Detector CT for heart and chest imaging |
|
|
|
|
CT/PET Fusion |
|
|
|
|
Cardiac catheterization |
One area that has received significant attention is advanced visualization, which uses 3D and
other advanced analytic tools as key elements in an enterprise visual medical system. Earlier
generation PACS have focused primarily on single departments and have utilized generic 2D tools. A
complete enterprise visualization system must not only support full 2D capabilities, but also
include 3D tools, integrate easily into other information systems, and adhere to standards. To
understand these images, referring physicians need tools that adapt to their specialty.
Our solutions can be extended to multiple stakeholders throughout the health care enterprise.
Our solutions go beyond moving images from point A to point B to effectively distributing
multi-specialty tools and clinical content using a web-enabled platform. Our solutions not only
manage very complex datasets, but also perform advanced visualization such as 3D reconstruction and
analysis within the viewing application, and distribute essential clinical tools through the
network.
Significant Events in 2006
During the year ended December 31, 2006, we continued to focus on our core set of strategic
goals. We believe the following 2006 events were significant with respect to our goals:
|
|
|
We successfully completed the integration of Camtronics into our business, including
integration of the management structure and sales force, commencement of cross-selling
efforts, consolidation of the engineering staff, and consolidation of the administrative
function including financial systems. |
32
|
|
|
In November, we entered into strategic relationships with Vital Images, Inc. and
AllScripts Healthcare Solutions allowing us to offer the complementary products of those
companies with our products across our installed base of customers. |
|
|
|
|
We expanded our customer relationships to now encompass 588 medical facilities, 460 of
which have installed our products. |
|
|
|
|
We achieved record bookings and revenue, improved our gross margins, reduced our
operating expenses as a percentage of revenue, and generated positive operating cash flow
while avoiding the incurrence of debt. |
Sources of Revenue
A typical sale of our solution is comprised of system sales and support services. Revenue
from system sales is derived from the licensing of our Advanced Visualization, Clinical Content
Management, and Clinical Workflow for RadSuite and HeartSuite (collectively referred to as our
Enterprise Visual Medical System, or EVMS), as well as from sales and integration of third-party
components that are required to implement our solution. Support services revenue is derived from
fees related to the implementation, training and on-going customer support of our solution.
Our software is comprised of four main components: RadSuite Advanced Visualization, our suite
of software tools for the advanced visualization and analysis of digital medical images; Clinical
Content Management, our image archival and distribution management software; Clinical Workflow, our
standards-based software used to manage integration and data migration between our solution and
other health information systems throughout the enterprise; and HeartSuite, our suite of software
tools focused on the cardiology department. Although Clinical Content Management and HeartSuite
software products are available collectively as stand-alone applications, we offer our software
primarily as an integrated enterprise-level image management solution. License pricing for
RadSuite Advanced Visualization is primarily determined by either the number of licenses based on
the number of concurrent users or on the average annual study volume. License pricing for Clinical
Content Management and Clinical Workflow is determined based on projected volume and size of image
studies to be stored or migrated by the particular customer. License pricing for HeartSuite
software products is determined based on the number of workstations purchased. We offer customers
our software as perpetual or term licenses, in either case with maintenance and support relating to
the software. Term licenses for our software are typically from two to ten years with annual
renewals after the initial term. The sale and integration of third-party components typically
include servers, data storage, backup and recovery systems, workstations and monitors, database
software and computed radiography devices as well as orthopedic templates and dictation systems.
We also derive revenue from the provision of support services, including implementation,
project planning, management, design and training services. Our customers typically contract for
these support services pursuant to their initial agreements with us. The initial term of these
support services under these agreements range from one to ten years, with a typical duration of
five years. Upon expiration of the initial term, these agreements typically renew automatically
from year-to-year thereafter until terminated.
Ascension Health, the largest not-for-profit hospital system in the United States, is our
largest customer. Revenue associated with facilities controlled by Ascension Health accounted for
approximately 27% of both our total revenue during 2006 and our total contracted backlog at
December 31, 2006. 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
33
primarily of the amortization of acquired software and the amortization of capitalized
software costs for internally developed software.
The cost of our support services consists primarily of labor costs and overhead relating to
the implementation, installation, training, application support and maintenance of our solution as
well as costs related to maintenance of third-party components. The cost of support services
revenue varies based upon the productivity of our support services organization as well as costs
associated with the use of outside contractors to support internal resources.
Gross Profit
Our overall gross profit has improved due to an increase in the software content of our system
sales and in recurring support services revenue derived from our growing installed base of
customers. Gross profit from system sales varies based on several factors, including:
|
|
|
actual sales prices negotiated in the contracting process; |
|
|
|
|
costs associated with purchasing and manufacturing third-party components; |
|
|
|
|
fluctuations in prices received from third-party component manufacturers and
distributors relative to the mark-up percentages provided for in customer contracts; and |
|
|
|
|
the relative mix of the hardware and software components comprising system sales in a given period. |
Gross profit from support services varies based on several factors, including:
|
|
|
actual services fees negotiated during the contracting process; |
|
|
|
|
productivity of our professional service team; |
|
|
|
|
costs of service agreements related to third-party components included in our solution; and |
|
|
|
|
costs associated with the use of outside contractors. |
Operating Expenses
Research and Development. Research and development expenses consist primarily of
employee-related expenses, allocated overhead, and the costs of outside contractors. We have
historically focused our research and development efforts on improving the functionality,
performance, and integration of our software products. We expect that research and development
expenses will increase as we strive to introduce additional products and services.
Sales and Marketing. Sales and marketing expenses consist primarily of employee-related
expenses, including travel, marketing programs, allocated overhead and sales commissions. We
expect that sales and marketing expenses will increase as we expand our selling and marketing
activities associated with existing and new product and service offerings to existing and new
customers, 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 increase as we add personnel and incur
additional professional fees and administrative costs related to the growth of our business and
operations, including additional compliance costs in connection with public company corporate
governance and financial reporting requirements.
34
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with accounting principles
generally accepted in the United States. The preparation of these consolidated financial
statements requires us to make estimates and assumptions that affect the reported amounts of
assets, liabilities, revenue, costs and expenses and related disclosures. On an ongoing basis, we
evaluate our estimates and assumptions. Our actual results may differ from these estimates.
We believe that, of our significant accounting policies, which are described in Note 2 of the
notes to our consolidated financial statements, the following accounting policies involve the
greatest degree of judgment and complexity. Accordingly, these are the policies we believe are the
most critical to aid in fully understanding and evaluating our consolidated financial condition and
results of operations.
Revenue Recognition and Deferred Revenue. While the basis for software license revenue
recognition is substantially governed by the provisions of AICPA Statement of Position 97-2, (SOP
97-2), Software Revenue Recognition, as amended, in the application of this standard, we exercise
judgment and use estimates to 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. |
|
|
|
|
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. |
|
|
|
|
Term licenses: software licensed on a term basis according to a fixed number of users
and/or estimates of annual study volumes. |
Generally, our software license arrangements do not include significant modification or
customization of the underlying software and, as a result, we recognize license revenue when: (1)
persuasive evidence of an arrangement exists; (2) delivery has occurred; (3) customer payment is
deemed fixed or determinable; and (4) collection is probable. We assess each of the four criteria
as follows:
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|
|
Persuasive evidence of an arrangement exists: It is our customary practice to have a
written contract, which is signed by both the customer and us, or a purchase order from
those customers that have previously negotiated a standard end-user license arrangement,
prior to recognizing revenue on an arrangement. |
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|
|
Delivery has occurred: It is our customary practice to obtain acceptance for our
software, which is evidenced by written customer acknowledgement. In the event that we
grant a customer the right to specified upgrades, we defer recognition of the entire
arrangement fee until we deliver the specified upgrades as we have not established
vendor-specific objective evidence (VSOE) of fair value for specified upgrades. Specified
upgrades include, but are not limited to, future software deliverables that are stated in
the customer contract. |
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|
The customers payment is deemed fixed or determinable: We assess whether fees are
fixed or determinable and free of contingencies or significant uncertainties at the time of
sale and recognize revenue when all other revenue recognition requirements are met. 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 |
35
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 non-recurring support services revenue included in
multiple element arrangements using the residual method. Under the residual method, the fair value
of the undelivered elements (i.e., software maintenance and ongoing support services) based on VSOE
of fair value is deferred and the remaining portion of the arrangement fee is allocated to the
delivered elements (i.e., software license and non-recurring support services). If evidence of the
fair value of one or more of the undelivered services does not exist, revenue is deferred and
recognized when delivery of those services occurs or fair value can be established. We determine
VSOE of fair value for ongoing support services revenue based upon the renewal rates for the
maintenance and ongoing support, which coincide with our pricing model. Significant incremental
discounts offered in multiple element arrangements that would be characterized as separate elements
are infrequent and are applied to the initial arrangement.
For term license arrangements, we recognize revenue for the multiple element arrangement over
the term of the arrangement beginning in the month after we receive customer acceptance, provided
that the other revenue recognition criteria have been met.
Software maintenance services generally include rights to upgrades (when and if available),
telephone support, updates and bug fixes. Software maintenance revenue is recognized ratably over
the term of the maintenance contract on a straight-line basis when all the revenue recognition
requirements are met. We include the first year of software maintenance in the software license
fee. We defer this software maintenance fee based on its fair value and recognize it ratably over
the first year of the arrangement.
Ongoing support services generally include telephone support related to third-party
components. Ongoing support service revenue is recognized ratably over the term of the ongoing
support services contract on a straight-line basis when all the revenue recognition requirements
are met. As it relates to services, we may also provide services that vary depending on the scope
and complexity requested by the customer. Examples of such services include additional database
consulting, system configuration, existing systems interface, and network consulting. These
services generally are not deemed to be essential to the functionality of the software. If we have
VSOE of fair value for the services, the timing of the software license revenue is not impacted,
and service revenue is recognized as the services are performed. We commonly perform services for
which we do not have VSOE of fair value and, accordingly, the software license revenue is deferred
until the services are completed.
Revenue related to product sales is recognized upon shipment provided that title and risk of
loss have passed to the customer, there is persuasive evidence of an arrangement, the sales price
is fixed and determinable, collection of the related receivable is reasonably assured and customer
acceptance criteria, if any, have been successfully demonstrated. We classify shipping and
handling cost in cost of system sales.
Third-party component revenue, including hardware sales and hardware maintenance, is
recognized in accordance with contractual terms. When we are responsible for installing
third-party components, revenue is recognized when the third-party components are delivered,
installed and accepted by the customer. When we are not responsible for installing the third-party
components, revenue is recognized when the third-party components are delivered to the customer.
When third-party components and related maintenance are not separately priced in our contracts, we
recognize revenue related to the arrangement when all revenue recognition criteria have been met.
The following is a summary of our product warranty and guarantee and our related accounting
policies for these agreements:
(1) Our sales agreements with customers generally contain infringement indemnity
provisions. Under these agreements, we agree to indemnify, defend and hold harmless the
customer in connection with patent, copyright or trade secret infringement claims made by third
parties with respect to the customers authorized use of our products and services. 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
36
actions of our personnel or contractors. The indemnity obligations contained in sales
agreements generally have no specified expiration date but typically limit the amount of award
covered to a portion of the fees paid by the customer over a portion of the contract term. We
have not previously incurred costs to settle claims or pay awards under these indemnification
provisions. Accordingly, we have no liabilities recorded for these provisions as of December
31, 2006.
(2) We warrant that our software products will perform in all material respects in
accordance with our standard published specifications in effect at the time of delivery of the
licensed products to the customer as long as the contract remains in effect. Additionally, we
warrant that our services will be performed by qualified personnel in a manner consistent with
normally accepted industry standards. We provide for the estimated cost of product and service
warranties based on specific warranty claims and claim history. As of December 31, 2006 we have
$0.8 million of liabilities recorded for these agreements.
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.
The timing of customer acceptances could significantly affect our results of operations during
a given period. As noted above, we require written acknowledgement from the customer to evidence
that delivery of the products or services has occurred. Delays in the implementation process could
negatively affect operations in a given period by increasing volatility in revenue recognition.
Research and Development Costs. Research and development costs are charged to expense as
incurred. However, costs incurred for the development of software that will be sold, leased or
otherwise marketed are capitalized as incurred after technological feasibility has been established
and capitalization ceases when the software is generally available for release. Judgment is
involved in determining when technological feasibility is reached. We believe that technological
feasibility is reached when we have completed a working model that is ready to be beta-tested at a
customer site. These capitalized costs are subject to an ongoing assessment of recoverability
based on anticipated future revenue and changes in technologies. Costs deemed not recoverable are
charged to expense. Costs that are capitalized primarily consist of direct labor.
Amortization of capitalized software development costs begins when the product is available
for general release. Amortization is provided on a product-by-product basis using the
straight-line method over periods not exceeding three years.
Intangible and Other Long-Lived Assets. U.S. generally accepted accounting principles require
the purchase method of accounting for all business combinations after June 30, 2001, and that
certain acquired intangible assets in a business combination be recognized as assets separate from
goodwill. Accordingly, we identify and allocate values to intangible assets based on discounted
cash flow analyses and market research, as well as our judgment. Intangibles determined to have an
indefinite life are not amortized but are tested for impairment at least annually. We evaluate
intangible assets for impairment on an annual basis and also if and when impairment indicators are
identified. In assessing the recoverability of intangibles, we must make assumptions regarding
estimated future cash flows and other factors to determine the fair value of the respective assets.
These estimates include forecasted revenue, which is inherently difficult to predict. If these
estimates or their related assumptions change in the future, we may be required to record
impairment charges for these assets. Property, equipment and intangible assets are amortized over
their useful lives. Useful lives of the intangible assets are based on managements estimates of
the periods over which such assets will generate revenue.
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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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
Year Ended December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
Change |
|
|
Change (%) |
|
|
2005 |
|
|
2004 |
|
|
Change |
|
|
Change(%) |
|
|
|
(In thousands except percentages) |
|
|
(In thousands except percentages) |
|
System sales |
|
$ |
75,340 |
|
|
$ |
50,041 |
|
|
$ |
25,299 |
|
|
|
50.6 |
% |
|
$ |
50,041 |
|
|
$ |
33,441 |
|
|
$ |
16,600 |
|
|
|
49.6 |
% |
Support services |
|
$ |
48,165 |
|
|
$ |
25,023 |
|
|
$ |
23,142 |
|
|
|
92.5 |
% |
|
$ |
25,023 |
|
|
$ |
13,059 |
|
|
$ |
11,964 |
|
|
|
91.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
123,505 |
|
|
$ |
75,064 |
|
|
$ |
48,441 |
|
|
|
64.5 |
% |
|
$ |
75,064 |
|
|
$ |
46,500 |
|
|
$ |
28,564 |
|
|
|
61.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue for 2006 was $123.5 million, a 64.5% increase over 2005 revenue of $75.1 million
and a 166% increase over revenue for the year ended December 31, 2004. These increases reflect both
the organic growth of our products and the results of our acquisition of Camtronics and its
cardiology line of products on November 1, 2005. Excluding cardiology products
acquired with the Camtronics acquisition, our revenue grew by 25% in 2006.
System sales revenue for 2006 was $75.3 million, a 50.6% increase over 2005 systems sales
revenue of $50.0 million. As described above, the acquisition of Camtronics on November 1, 2005 was
a contributing factor in our 2006 system sales revenue growth, but our system sales excluding cardiology products grew as well, by approximately 19% in 2006. This growth was the result
of greater numbers of systems installations for both existing and new customers, and of greater
acceptance of our products in the marketplace, particularly with multi-facility health care
providers. Growth in our radiology line of products was driven in equal parts by increased sales of
software and third-party components, with our sales of software licenses particularly strong with
existing customers.
The increase in system sales revenue from 2004 to 2005 was attributable to an increase in the
number of new and existing customer installations offset by a decrease in the size of these
installations, as well as the recognition of $4.5 million of revenue deferred in 2004 and
recognized in 2005. During 2005, we had more acceptances of our software and third party
components than in 2004. The average revenue recognized per acceptance decreased slightly in 2005
as compared to 2004, the result primarily of an increase in add-on sales to our existing customer
base, which tend to be smaller than initial sales to new customers. Also during 2005, we
recognized system sales revenue of $4.5 million related to two contracts for which we deferred
revenue in 2004 as a result of the existence of certain undelivered upgrades. We delivered the
additional software features during 2005 and recognized the system sales revenue associated with
these contracts.
Support services revenue grew by 92.5% to $48.2 million in 2006 from its 2005 level of $25.0
million. As described above, our acquisition of Camtronics on
November 1, 2005 was a contributing factor in our support services revenue growth, but our legacy service offerings grew
as well, by 38% in 2006 to over $32.0 million. Both the professional services and system
maintenance components of support services revenue grew substantially in 2006. Support services
revenue is ancillary to system sales revenue and therefore tends to grow as system sales revenue
grows, as new or add-on system installations are completed and as more customers subscribe to our
maintenance services.
The increase in support services revenue from 2004 to 2005 was attributable to an increase in
customer installations. Approximately $5.7 million of the increase in support services revenue for
2005 was attributable to an increased number of customers that implemented our solution and pay us
ongoing support and maintenance fees. Also included in this $5.7 million increase is the
recognition of $1.6 million of revenue related to the contracts mentioned above for which we
deferred revenue in 2004 as a result of the existence of undelivered upgrades. We delivered the
additional software features during 2005 and recognized the support services revenue attributable
to
38
the previously provided services for which we had deferred support services revenue. The
remaining $6.3 million increase was related to an increase in non-recurring revenue related to
services such as implementation and training for new customers as well as add-on services for
existing customers.
Gross Margin
The following table sets forth gross margin earned on revenues for the three years in the
period ended December 31, 2006:
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|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
(Dollars in thousands) |
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
System sales |
|
$ |
75,340 |
|
|
$ |
50,041 |
|
|
$ |
33,441 |
|
Support services |
|
|
48,165 |
|
|
|
25,023 |
|
|
|
13,059 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
123,505 |
|
|
|
75,064 |
|
|
|
46,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
System sales |
|
|
43,333 |
|
|
|
28,316 |
|
|
|
21,452 |
|
Support services |
|
|
24,331 |
|
|
|
15,921 |
|
|
|
11,426 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
67,664 |
|
|
|
44,237 |
|
|
|
32,878 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit: |
|
|
|
|
|
|
|
|
|
|
|
|
System sales |
|
|
32,007 |
|
|
|
21,725 |
|
|
|
11,989 |
|
Support services |
|
|
23,834 |
|
|
|
9,102 |
|
|
|
1,633 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
55,841 |
|
|
$ |
30,827 |
|
|
$ |
13,622 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin: |
|
|
|
|
|
|
|
|
|
|
|
|
System sales |
|
|
42.5 |
% |
|
|
43.4 |
% |
|
|
35.9 |
% |
Support services |
|
|
49.5 |
% |
|
|
36.4 |
% |
|
|
12.5 |
% |
Total |
|
|
45.2 |
% |
|
|
41.1 |
% |
|
|
29.3 |
% |
System sales gross margin was 42.5% in 2006 compared to 43.4% in 2005, a decline of 0.9 margin
points. This decline in system sales margin is related primarily to our acquisition of Camtronics
on November 1, 2005 and the inclusion of a full twelve months of cardiology product line revenue
and costs in our revenue and gross margin in 2006. Cardiology products in general earn slightly
lower gross margins than radiology products, and the mix of cardiology to radiology revenue in a
given period can affect the level of total gross margin reported. This lower cardiology margin for
the year met our initial expectations, though these margins were lower in the first half of 2006
due to one-time acquisition accounting adjustments to revenue deferred by Camtronics prior to the
acquisition. Additionally, our gross margin on the third-party components of radiology system sales
was approximately two margin points lower in 2006 than in 2005 due primarily to pricing
considerations. Gross margin earned on the software component of radiology system revenue was flat
with 2005 as a percentage of software revenue, and the relative mix of the hardware and software
components of radiology revenue was approximately the same in 2006 as in 2005.
In general, the cost of third-party hardware components tends to lower our system sales gross
margin. We expect system sales gross margins on an annual basis in the mid forty percent range
going forward, assuming a normal mix of hardware to software and radiology to cardiology system
sales revenue. However, we also expect a continuation of price competition in our industry, which
could act to lower our system margins, and we expect fluctuation in the system sales margins we
earn quarter to quarter depending on the mix of system sales revenue recognized in given reporting
periods.
39
System sales gross margin was 43.4% in 2005 compared to 35.9% in 2004, an increase of 7.5
margin points. This increase is related to an increase in the software content of system
sales in 2005 compared to 2004. In addition, gross margin earned on the software component of
system sales was higher in 2005 compared to 2004. System sales gross margin in 2005 was further
increased relative to 2004 by recognition of $4.5 million in revenue in 2005 that had been deferred
in 2004. Due to the timing of recognition of this revenue, minimal associated costs were recognized
in 2005. The overall increase in system sales gross margin in 2005 was limited somewhat by
inclusion in the statement of operations of the revenue and costs of Camtronics for the two month
period following its acquisition
Support services gross margin was 49.5% in 2006, an increase of 13.1 margin points over the
2005 margin of 36.4%. Support services revenue consists primarily of professional services, which
accounts for the majority of support services revenue, and of maintenance revenue from our
customers who subscribe to our ongoing maintenance services. Professional services revenue is
ancillary to systems sales revenue, and thus will grow as the number of new system installations or
system additions grows, and maintenance revenue will grow as the number of our customers who
subscribe to our maintenance services increases. Both forms of revenue can provide significant
leverage with respect to margins earned since the costs of both forms of revenue consist largely of
labor and associated costs that are primarily fixed in nature. In 2006, we benefited substantially
from this leverage, as the investments made in prior years in support services headcount and
technology were spread over an increasing base of revenue-providing customers in both the
professional services and maintenance areas, and as that labor force increased its efficiencies in
service activities. Correspondingly, support services revenue in 2005 earned a much lower gross
margin as our increased investments in employees and technology had just been made and we had a
smaller installed base of customers. In addition, we benefited from inclusion of a full twelve
months of cardiology support services revenue in 2006, as cardiology support services typically
earn a slightly higher gross margin than radiology support services.
The
timing of completion of individual system sales installations can significantly impact the
level of support services revenue and gross margin from period to period. With our current mix of
business, we expect support services gross margin on an annual basis slightly in excess of our
system sales gross margin, assuming continuing efficiencies from our support staff and assuming the
cardiology business continues to deliver support services gross margin at the present level, but we
also expect some level of timing-based variability in the level of support services gross margin
reported from period to period.
Support services gross margin was 36.4% in 2005 compared to 12.5% in 2004. The increase in
support services revenue between these periods of 91.6% was the primary contributing factor in the
gross margin increase as, due to the nature of support services costs, increases in support
services revenue do not bring corresponding increases in costs. As discussed above, the costs of
support services are primarily labor oriented and fixed in nature. These costs were spread over an
expanding base of customer installations in both 2005 and 2006, yielding a pattern of increasing
support services gross margin over the three year period ended in 2006. In addition, we believe
that the efficiencies of our support staff increased as we invested in training and technology and
that those investments should further enhance our support services gross margin.
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, 2006 were $52.9 million compared to $34.8 million in the
corresponding prior year period, an increase of $18.1 million, or 51.7%. The addition of the
operating expenses of Camtronics, which was acquired November 1, 2005, accounts for the majority of
the total increase, with the remainder consisting of:
|
|
|
increased general and administrative expenses resulting from additional compliance
costs related to public company financial reporting requirements, specifically the
costs of compliance with the Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley); |
|
|
|
|
stock-based compensation expense recognized in accordance with Statement of
Financial Accounting Standards No. 123R, Share-Based Payment (SFAS No. 123R); and |
40
|
|
|
increased costs of personnel and overhead expenses consistent with our growth and
expanded development, selling and marketing efforts and related supporting
administrative costs. |
The growth of 51.7% in these expenses in 2006 compares to total revenue growth over the same
period of 64.5% and growth in gross profit of 81.0%. As a percentage of revenue, these expenses in
total declined to 42.8% in 2006 compared to 46.4% in 2005 as a result of 64.5% revenue growth and
our efforts to limit the rate of increase in our operating expenses.
We expect that our research and development, sales and marketing, and general and
administrative expenses will continue to grow as revenue grows and as we address new products and
markets, but we do not expect this growth to exceed the rate of revenue growth over the long-term.
Research and Development (R&D) Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
Year Ended December 31, |
|
|
2006 |
|
2005 |
|
Change |
|
Change (%) |
|
2005 |
|
2004 |
|
Change |
|
Change(%) |
|
|
(In thousands except percentages) |
|
(In thousands except percentages) |
R&D Expense |
|
$ |
17,368 |
|
|
$ |
11,652 |
|
|
$ |
5,716 |
|
|
|
49.1 |
% |
|
$ |
11,652 |
|
|
$ |
6,197 |
|
|
$ |
5,455 |
|
|
|
88.0 |
% |
% of Revenue |
|
|
14.1 |
% |
|
|
15.5 |
% |
|
|
|
|
|
|
|
|
|
|
15.5 |
% |
|
|
13.3 |
% |
|
|
|
|
|
|
|
|
The increase in research and development expense in 2006 compared to 2005 of $5.7
million, or 49.1%, is almost entirely the net result of the acquisition of Camtronics on November
1, 2005 and the inclusion of the former Camtronics R&D expenses in our financial statements for a
full twelve month period in 2006. Increased R&D expense resulting from the Camtronics acquisition
aside, the level of increase in R&D expense in 2006 was minimized by a decline in direct R&D
headcount and related expenses and in the number of operations personnel performing R&D activities
as the result of the consolidation of engineering staffs between the companies and the efficiencies
that resulted from that consolidation. Offsetting the effects of the decline in headcount were
increased R&D overhead expenses, primarily depreciation, related to the upgrade of R&D laboratory
facilities during 2005 and the physical consolidation of R&D facilities into a single location in
2006, and increased stock-based compensation expense recognized in 2006 as the result of initial
adoption of SFAS No. 123R.
A portion of R&D spending is focused on use of lower cost consultants engaged in quality
development and on consultants and developers that assist our personnel in product quality
assurance and validation, and system framework implementations. We anticipate that use of outside
consultants for these activities will continue in the future.
The increase in R&D expense in 2005 compared to 2004 of $5.5 million, or 88.0%, is the result
of the acquisition of Camtronics on November 1, 2005, which added approximately $0.8 million to
2005 expense, and of increased R&D headcount and related expenses unrelated and prior to the
acquisition of Camtronics of approximately $3.1 million incurred in acceleration of product
development efforts. In addition, spending on outside consultants increased by $0.8 million in 2005
compared to 2004 in support of these same efforts.
Sales and Marketing Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
Year Ended December 31, |
|
|
2006 |
|
2005 |
|
Change |
|
Change (%) |
|
2005 |
|
2004 |
|
Change |
|
Change(%) |
|
|
(In thousands except percentages) |
|
(In thousands except percentages) |
S&M Expense |
|
$ |
18,459 |
|
|
$ |
12,238 |
|
|
$ |
6,221 |
|
|
|
50.8 |
% |
|
$ |
12,238 |
|
|
$ |
9,377 |
|
|
$ |
2,861 |
|
|
|
30.5 |
% |
% of Revenue |
|
|
14.9 |
% |
|
|
16.3 |
% |
|
|
|
|
|
|
|
|
|
|
16.3 |
% |
|
|
20.2 |
% |
|
|
|
|
|
|
|
|
41
The increase in sales and marketing expense in 2006 compared to 2005 of $6.2
million, or 50.8%, is largely the result of the acquisition of Camtronics on November 1, 2005 and
the reflection in the 2006 financial statements of a full twelve months of the former Camtronics
sales and marketing expenses, and related cross-training of the sales staffs and cross-selling
activities between the radiology and cardiology product lines. Increased sales and marketing
expenses in 2006 are, however, also the result of our planned and executed efforts to extend our
product base to existing and prospective customers and to increase awareness of our products in the
marketplace. Accordingly, expenses were approximately $0.6 million higher in 2006 than in 2005 in
the combined areas of advertising, targeted marketing and market research, customer relations, and
trade show attendance and related expenses. In addition, stock-based compensation expense under
SFAS123R added approximately $0.5 million to 2006 sales and marketing expense. Offsetting these
increases were declines in personnel and related expenses reflecting a slight decline in sales and
marketing headcount in 2006, and in commissions expense, which declined despite increased revenue
as the result of a higher percentage of sales to existing customers, which result in lower
commission percentage than sales to new customers, and the effects of timing of the earning of
commissions and of differences in the types of sales closed and installed in 2006 compared to 2005.
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.
The increase in sales and marketing expense of $2.9 million, or 30.5%, in 2005 compared to
2004 relates primarily to headcount in the sales and marketing area, which more than doubled in
2005 including personnel acquired with the Camtronics acquisition, and to headcount related
expenses such as travel and training. Specific sales and marketing employee groups augmented in
2005 include our client sales group, which is engaged in support and development of large hospital
and hospital network customers, and our marketing support group, which is engaged in product
demonstration and product marketing. Viewed separately, the acquisition of Camtronics added
approximately $1.2 million to 2005 sales and marketing expense. The level of commissions expense
was relatively stable in 2005 compared to the 2004 level.
We believe that all of the efforts discussed above have heightened our reputation in the
marketplace and should help deliver continued revenue growth in the future. We expect that our
sales and marketing expenses will continue to increase as we address new customers and new markets.
General and Administrative Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
Year Ended December 31, |
|
|
2006 |
|
2005 |
|
Change |
|
Change (%) |
|
2005 |
|
2004 |
|
Change |
|
Change(%) |
|
|
(In thousands except percentages) |
|
(In thousands except percentages) |
G&A Expense |
|
$ |
17,028 |
|
|
$ |
10,945 |
|
|
$ |
6,083 |
|
|
|
55.6 |
% |
|
$ |
10,945 |
|
|
$ |
7,498 |
|
|
$ |
3,447 |
|
|
|
46.0 |
% |
% of Revenue |
|
|
13.8 |
% |
|
|
14.6 |
% |
|
|
|
|
|
|
|
|
|
|
14.6 |
% |
|
|
16.1 |
% |
|
|
|
|
|
|
|
|
As we expected, our general and administrative expense has grown significantly in
absolute terms over the three year period ended December 31, 2006. This growth is in support of our
growth in revenue over the three year period and is also the result of our becoming a publicly-held
company in February, 2005, our acquisition of Camtronics in November, 2005, and additional
compliance costs related to public company financial reporting requirements, specifically
compliance with aspects of the Sarbanes-Oxley Act of 2002.
The increase in general and administrative expense of $6.1 million, or 55.6%, in 2006 compared
to 2005 is the result of the acquisition of Camtronics on November 1, 2005 and resulting inclusion
of a full twelve months of Camtronics general and administrative expense in our 2006 financial
statements, of our compliance with Sarbanes-Oxley, of stock-based compensation expense, and of our
growth in revenue over the period. Our general and administrative staff was augmented in 2006,
adding personnel and personnel-related expense of approximately $0.5 million in support of our
increased base of employees and public company obligations. In addition and for the same reasons,
our insurance, property taxes and similar expenses grew significantly in 2006. The most significant
increases in expense in 2006 compared to 2005 were our professional and consulting fees and related
expenses incurred in connection with Sarbanes-Oxley compliance (approximately $1.2 million), and
our recognition of stock-
42
based compensation expense in accordance with SFAS No. 123R of approximately $1.1 million in
excess of the 2005 level.
The increase in general and administrative expense in 2005 compared to 2004 of $3.4 million,
or 46.0%, consisted of the addition of the November and December 2005 expenses of Camtronics of
$0.4 million, increased insurance, legal, professional, and consulting fees and expenses of $1.9
million, largely as the result of becoming a publicly-held company in February 2005, increased
stock-based compensation compared to 2004 of $0.7 million, and an increase in administrative
headcount and related expenses in support of our growth and public company status.
We expect our general and administrative expense to continue to increase in absolute dollar
terms in support of our continued growth, but at a rate of growth less than that of our other
operating expenses and revenue.
Amortization of Intangible Assets Related to Camtronics Acquisition
Amortization expense related to the acquisition of Camtronics consists of straight-line
amortization of the intangible assets acquired with Camtronics over periods of one to six years.
The estimated useful lives of these intangible assets are determined based on projected future
economic benefits and expected life cycles of the intangible assets.
Integration Costs Related to Camtronics Acquisition
We incurred integration costs of $5.4 million in 2006 as a result of the November 2005
acquisition of Camtronics ($0.2 million in November and December 2005). Integration costs are
comprised primarily of employee costs including travel and relocation expenses, severance and
related expenses of terminated employees, and the costs of facility closure. We believe that
Camtronics has been fully integrated into our business as of December 31, 2006.
Operating Income (Loss)
For the year ended December 31, 2006, operating loss increased by $1.1 million as compared to
the year ended December 31, 2005, as the benefits of significantly improved revenue and gross
margin in 2006 were offset by the incurrence of $5.4 million in costs related to the integration of
Camtronics into our business. Excluding the impact of those integration costs, operating loss
improved to $1.0 million in 2006 from $5.0 million in 2005 and $9.5 million in 2004.
Other Income and Expense
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.
For the year ended December 31, 2005, interest expense increased by $0.2 million as compared
to 2004 primarily as a result of a non-cash interest charge of $0.6 million for the write-off of
subordinated debt discount, offset by a reduction in interest expense from repayment of $4.0
million of subordinated debt with a portion of the proceeds from our initial public offering.
43
Quarterly Results of Operations
The following tables set forth selected unaudited quarterly consolidated statement of
operations data for the eight most recent quarters. The information for each of these quarters has
been prepared on the same basis as the audited consolidated financial statements included in this
filing and, in the opinion of management, includes all adjustments necessary for the fair
presentation of the results of operations for such periods. This data should be read in
conjunction with the audited consolidated financial statements and the related notes included in
this filing. These quarterly operating results are not necessarily indicative of our operating
results for any future period.
Certain reclassifications have been made to prior year financial information to provide
comparability with the current year presentation.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended |
|
|
|
March 31, |
|
|
June 30, |
|
|
September 30, |
|
|
December 31, |
|
|
March 31, |
|
|
June 30, |
|
|
September 30, |
|
|
December 31, |
|
|
|
2005 |
|
|
2005 |
|
|
2005 |
|
|
2005 |
|
|
2006 |
|
|
2006 |
|
|
2006 |
|
|
2006 |
|
|
|
(Dollars in thousands, except per share data) |
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
System sales |
|
$ |
7,719 |
|
|
$ |
13,402 |
|
|
$ |
13,490 |
|
|
$ |
15,430 |
|
|
$ |
17,269 |
|
|
$ |
17,601 |
|
|
$ |
19,370 |
|
|
$ |
21,100 |
|
Support services |
|
|
3,865 |
|
|
|
5,513 |
|
|
|
6,526 |
|
|
|
9,118 |
|
|
|
9,732 |
|
|
|
12,415 |
|
|
|
13,641 |
|
|
|
12,377 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
|
11,584 |
|
|
|
18,915 |
|
|
|
20,016 |
|
|
|
24,548 |
|
|
|
27,001 |
|
|
|
30,016 |
|
|
|
33,011 |
|
|
|
33,477 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
System sales |
|
|
4,823 |
|
|
|
5,753 |
|
|
|
7,206 |
|
|
|
10,534 |
|
|
|
13,284 |
|
|
|
9,977 |
|
|
|
10,712 |
|
|
|
9,360 |
|
Support services |
|
|
3,331 |
|
|
|
3,667 |
|
|
|
3,799 |
|
|
|
5,123 |
|
|
|
6,218 |
|
|
|
6,534 |
|
|
|
6,187 |
|
|
|
5,392 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenue |
|
|
8,154 |
|
|
|
9,420 |
|
|
|
11,005 |
|
|
|
15,657 |
|
|
|
19,502 |
|
|
|
16,511 |
|
|
|
16,899 |
|
|
|
14,752 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
3,430 |
|
|
|
9,495 |
|
|
|
9,011 |
|
|
|
8,891 |
|
|
|
7,499 |
|
|
|
13,505 |
|
|
|
16,112 |
|
|
|
18,725 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and
development |
|
|
2,534 |
|
|
|
2,797 |
|
|
|
2,624 |
|
|
|
3,697 |
|
|
|
4,130 |
|
|
|
4,032 |
|
|
|
4,601 |
|
|
|
4,605 |
|
Sales and marketing |
|
|
2,803 |
|
|
|
2,596 |
|
|
|
2,455 |
|
|
|
4,384 |
|
|
|
4,002 |
|
|
|
4,589 |
|
|
|
4,435 |
|
|
|
5,433 |
|
General and
administrative |
|
|
2,292 |
|
|
|
2,537 |
|
|
|
2,467 |
|
|
|
3,649 |
|
|
|
4,338 |
|
|
|
3,851 |
|
|
|
4,495 |
|
|
|
4,344 |
|
Amortization and
write-off of
intangible assets
related to Camtronics
acquisition |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
993 |
|
|
|
885 |
|
|
|
885 |
|
|
|
885 |
|
|
|
885 |
|
Integration costs
related to Camtronics
acquisition |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
244 |
|
|
|
1,204 |
|
|
|
1,077 |
|
|
|
2,062 |
|
|
|
1,026 |
|
Loss on disposal of
property and equipment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(20 |
) |
|
|
4 |
|
|
|
|
|
|
|
453 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
7,629 |
|
|
|
7,930 |
|
|
|
7,546 |
|
|
|
12,967 |
|
|
|
14,539 |
|
|
|
14,438 |
|
|
|
16,478 |
|
|
|
16,746 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
(4,199 |
) |
|
|
1,565 |
|
|
|
1,465 |
|
|
|
(4,076 |
) |
|
|
(7,040 |
) |
|
|
(933 |
) |
|
|
(366 |
) |
|
|
1,979 |
|
Other (expense) income, net |
|
|
(619 |
) |
|
|
335 |
|
|
|
366 |
|
|
|
166 |
|
|
|
47 |
|
|
|
76 |
|
|
|
93 |
|
|
|
112 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(4,818 |
) |
|
$ |
1,900 |
|
|
$ |
1,831 |
|
|
$ |
(3,910 |
) |
|
$ |
(6,993 |
) |
|
$ |
(857 |
) |
|
$ |
(273 |
) |
|
$ |
2,091 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per
share-basic and
diluted |
|
$ |
(0.42 |
) |
|
$ |
0.09 |
|
|
$ |
0.09 |
|
|
$ |
(0.19 |
) |
|
$ |
(0.34 |
) |
|
$ |
(0.04 |
) |
|
$ |
(0.01 |
) |
|
$ |
0.10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our operating results have fluctuated from quarter to quarter and are likely to continue
to fluctuate for a variety of reasons, as explained below. In addition, in the quarter ended December 31, 2006, we made several adjustments to correct amounts recorded in prior quarters. The
amounts were not material to any quarter.
Revenue. In the past, we have at times experienced lower bookings volume in the third quarter
of each year relative to other quarters. We believe that this is the result of the historical
capital expenditure patterns of our customer base. This, in turn, may cause our revenue in the
first quarter of the following year to be lower in comparison to the immediately preceding quarter
due to the length of our installations and our revenue recognition policies.
Gross Margin. Our gross margin fluctuates from quarter to quarter as a result of changes in
the relative contributions to our total revenue from system sales and support services, the mix of
the hardware and software
44
components of systems sales revenue, the mix of cardiology revenue to radiology revenue, and
changes in the productivity of support services personnel.
Operating Expenses. Our sales and marketing expenses may fluctuate due to the timing of sales
and of individual marketing programs. Also, the most significant trade show that we attend occurs
within the fourth quarter of each year, increasing our sales and marketing expenses in that
quarter.
Some important additional factors that could cause our revenue and operating results to
fluctuate from quarter to quarter include expenses incurred as a direct result of our acquisitions
of other businesses, such as our acquisition of Camtronics in the fourth quarter of 2005, 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, 2006 and 2005, our net cash position was as follows (in thousands, except
ratios):
|
|
|
|
|
|
|
|
|
|
|
December 31 |
|
|
2006 |
|
2005 |
Working capital * |
|
$ |
21,392 |
|
|
$ |
10,717 |
|
Current ratio ** |
|
|
1.5:1.0 |
|
|
|
1.2:1.0 |
|
Cash, cash equivalents and marketable securities |
|
$ |
23,008 |
|
|
$ |
20,471 |
|
Short-term borrowings and long-term debt |
|
$ |
961 |
|
|
$ |
3,749 |
|
|
|
|
* |
|
Working capital is total current assets less total current liabilities. |
|
** |
|
Current ratio is the ratio of current assets to current liabilities. |
The improvement in our liquidity during 2006 was due to increased cash provided by
operating activities through the year, but particularly in the fourth quarter of the year. The
decrease in short-term borrowings and long-term debt from December 31, 2005 to December 31, 2006 is
a result of scheduled debt retirement.
Operating Activities
During the year ended December 31, 2006, 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. 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, 2005, cash used in operations was $1.9 million, which
primarily related to our net loss of $5.0 million and changes in working capital accounts. We
experienced significant increases in trade accounts receivable and inventory to be sold to
customers during the year. Our accounts receivable balance increased as a result of the timing of
customer acceptances as well as the timing of new customer contracts. Our inventory increased as a
result of the timing of acceptances of third party components at customer sites. The
45
changes in other working capital accounts were primarily driven by increased volume of operations
and the timing of cash payments.
During the year ended December 31, 2004, cash provided by operations was $5.0 million, which
consisted of an increase of $8.5 million from changes in working capital accounts and a decrease of
$3.5 million as a result of our net loss offset by non-cash items. Changes in the working capital
accounts primarily related to an increase in accounts receivable, an increase in prepaid expenses,
an increase in inventory, increases in accounts payable and other accrued expenses and an increase
in deferred revenue due to an increased customer base and timing of customer payments. The changes
in working capital accounts were primarily driven by increased volume of operations and the timing
of cash payments.
Investing Activities
We used cash of $0.9 million, $53.3 million and $2.9 million for investing activities during
2006, 2005 and 2004, respectively.
We used $5.2 million, $7.7 million and $2.9 million for property and equipment purchases
during 2006, 2005 and 2004, respectively. The purchases for 2006 and 2005 related to investments in
equipment for internal use, including test equipment for our research and development and quality
assurance departments as well as computer equipment and furniture for new and existing personnel,
and to improvements to the building we own in Hartland, Wisconsin. Approximately $2.7 million of
the purchases for 2004 related to computer equipment for new and existing personnel. We anticipate
that we will continue to purchase property and equipment for internal use, consistent with our
growth, development efforts, and staffing levels. We also invested in equipment located at
contracted customer sites in 2005 and 2004 in the amounts of
$1.9 million and $0.2 million, respectively.
In November 2005, we used $40.4 million to acquire all the stock of Camtronics.
We used $44.2 million for the purchase of marketable securities and received proceeds of $39.3
million upon the maturity or sale of some of these securities during 2005. The marketable
securities consisted of U.S. government agency obligations and corporate commercial paper, all with
maturities of less than one year.
Financing Activities
Cash provided by financing activities totaled $1.1 million, $64.5 million, and $1.6 million
for 2006, 2005 and 2004, respectively. Net cash provided by financing activities in 2006 consisted
of $3.9 million in proceeds from issuance of common stock on the exercise of employee stock
options, offset by the payment of scheduled debt and lease obligations of $2.8 million. Cash
provided by financing activities for 2005 resulted primarily from the completion of our initial
public offering. This inflow of cash was offset by repayment of our $4.0 million subordinated debt
and other payments on borrowings. Cash provided by financing activities for 2004 resulted from
proceeds from the issuance of subordinated debt of $4.0 million, which was repaid in 2005 upon
completion of our initial public offering, offset by payments on existing borrowings and an
addition to restricted cash used to secure a letter of credit for an operating lease.
The following table summarizes, as of December 31, 2006, the general timing of future payments
(including payments of interest) under our outstanding loan agreements and 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) |
|
Long-term debt, including interest |
|
$ |
762 |
|
|
$ |
762 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Capital lease obligations |
|
|
244 |
|
|
|
230 |
|
|
|
14 |
|
|
|
|
|
|
|
|
|
Operating leases |
|
|
6,408 |
|
|
|
1,505 |
|
|
|
3,127 |
|
|
|
1,206 |
|
|
|
570 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual cash obligations |
|
$ |
7,414 |
|
|
$ |
2,497 |
|
|
$ |
3,141 |
|
|
$ |
1,206 |
|
|
$ |
570 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
46
Our April 2004 loan and security agreement with a bank, as amended in April,
2006, provides for borrowing of up to $10.0 million, subject to certain restrictions. Interest
accrues at the banks prime rate of interest. This agreement is for a term of two years, at the
end of which all amounts borrowed become due and payable. Security for any amounts borrowed under
the agreement consists of all assets of the Company other than our intellectual property and real
estate. As of December 31, 2005 and 2006, we had no outstanding balances under this line of
credit.
We believe our existing cash, together with future cash flows from operations and available
borrowings under our loan and security agreement, if necessary, will be sufficient to execute our
business plan in 2007. However, any projections of future cash inflows and outflows are subject to
uncertainty. Our future cash requirements will depend on many factors, including our rate of
revenue growth, the expansion of our marketing and sales activities, the timing and extent of
spending to support product development efforts and expansion into new territories, the timing of
introductions of new products and services, enhancements to existing products and services, the
amount and form of consideration we may issue in acquisition or similar transactions, and the
continuing market acceptance of our solution. To the extent that our existing cash, together with
future cash flows from operations and availability under our loan and security agreement are
insufficient to fund our future activities, we may need to raise additional funds through equity or
debt financing. Although we are currently not a party to any binding agreement or letter of intent
with respect to any other potential investments in, or acquisitions of, complementary businesses,
services or technologies, we may enter into these types of arrangements in the future, which could
also require us to seek additional equity or debt financing. It is possible that additional funds
may not be available on terms favorable to us or at all.
Off-Balance Sheet Arrangements
Except for operating leases entered into for ordinary business purposes, we do not currently
have any off-balance sheet arrangements with unconsolidated entities or financial partnerships, or
with entities often referred to as structured finance or special 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 June, 2006 the Financial Accounting Standards Board (the FASB) its Interpretation No. 48,
Accounting For Uncertainty in Income Taxes. This pronouncement, which is effective and will be
adopted by us January 1, 2007, prescribes a recognition threshold and measurement attribute for
financial statement recognition and measurement of a tax position taken or expected to be taken in
a tax return. We are currently evaluating this pronouncement and its application to the Company,
but do not believe this pronouncement will have a material effect on our results of operations and
financial position.
In September, 2006, the FASB issued Statement of Financial Accounting Standards No. 157, Fair
Value Measurements. This pronouncement, which is effective for our fiscal year ending December 31,
2008, defines fair value, establishes a framework for measuring fair value under generally accepted
accounting principles, and expands financial statement disclosure of fair value measurements. We
are currently evaluating this pronouncement to determine any effects on our reported financial
position and results of operations, but we do not currently believe this pronouncement will have a
material effect on our results of operations and financial position.
|
|
|
ITEM 7A. |
|
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Our debt instruments do not expose us to material market risks relating to changes in interest
rates. Some of the proceeds of our initial public offering were invested in short-term,
interest-bearing, investment grade securities pending their application. The value of these
securities will be subject to interest rate risk and could fall in value if interest rates rise.
The effect of a hypothetical one hundred basis point decrease across all interest rates related to
our investments would result in an annual decrease of approximately $0.1 million in operating
results assuming no further changes in the amount of our investments outstanding at December 31,
2006.
47
The primary objective of our investment activities is to preserve principal while maximizing
the income we receive from our investments without significantly increasing our risk. We invest
excess cash principally in U.S. marketable debt securities from a diversified portfolio of
institutions with strong credit ratings and in U.S. government and agency bills and notes, or in
money market mutual funds that invest in such instruments, and by policy limit the amount of credit
exposure at any one institution. 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. To minimize this risk, we schedule our investments to have maturities
that coincide with our expected cash flow needs, thus reducing the need to sell or redeem an
investment prior to its maturity date. Accordingly, we believe we have no material exposure to
interest rate risk arising from our investments.
|
|
|
ITEM 8. |
|
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
The information required by this item appears beginning on page F-1 of this report.
|
|
|
ITEM 9. |
|
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
Not applicable.
|
|
|
ITEM 9A. |
|
CONTROLS AND PROCEDURES |
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our principal executive officer and principal
financial officer, evaluated the effectiveness of our disclosure controls and procedures (as
defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the
Exchange Act)) as of December 31, 2006. Based on this evaluation, our principal executive
officer and principal financial officer concluded that, as of December 31, 2006, our disclosure
controls and procedures were (1) designed to ensure that material information relating to us is
made known to our chief executive officer and chief financial officer by others within our company,
particularly during the period in which this report was being prepared and (2) effective, in that
they provide reasonable assurance that information required to be disclosed by us in the reports
that we file or submit under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in the Securities and Exchange Commissions rules and forms.
Managements Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over
financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities and Exchange
Act. Our internal control over financial reporting is designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with U.S. generally accepted accounting principles, or GAAP. Our
internal control over financial reporting includes those policies and procedures that:
|
|
|
pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of our assets; |
|
|
|
|
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with GAAP, and that our
receipts and expenditures are being made only in accordance with authorizations of
our management and directors; and |
|
|
|
|
provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition or use of our assets that could have a material effect on
our financial statements. |
Because of inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become
48
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, 2006. In making this assessment, our management used the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated
Framework.
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
managements assessment of internal control over financial reporting. That report appears on pages
F-3 of this Form 10-K.
Changes in Internal Control Over Financial Reporting
No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and
15d-15(f) under the Exchange Act) occurred during the fourth quarter of 2006 that has materially
affected, or is reasonably likely to materially affect, our internal control over financial
reporting.
|
|
|
ITEM 9B. |
|
OTHER INFORMATION |
Not Applicable.
49
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 2007 Annual Meeting of Shareholders and is incorporated herein by reference.
Our board of directors has adopted a code of conduct and code of ethics applicable to our
chief executive officer, chief financial officer and senior financial officers, directors, officers
and employees in accordance with applicable rules and regulations of the SEC and the Nasdaq
National Market. Our code of conduct and code of ethics is available on our website at
www.emageon.com.
|
|
|
ITEM 11. |
|
EXECUTIVE COMPENSATION |
The information called for by this Item will be contained in our definitive Proxy Statement
for our 2007 Annual Meeting of Shareholders and is incorporated herein by reference.
|
|
|
ITEM 12. |
|
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT |
The information called for by this Item will be contained in our definitive Proxy Statement
for our 2007 Annual Meeting of Shareholders and is incorporated herein by reference.
|
|
|
ITEM 13. |
|
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
The information called for by this Item will be contained in our definitive Proxy Statement
for our 2007 Annual Meeting of Shareholders and is incorporated herein by reference.
|
|
|
ITEM 14. |
|
PRINCIPAL ACCOUNTING FEES AND SERVICES |
The information called for by this Item will be contained in our definitive Proxy Statement
for our 2007 Annual Meeting of Shareholders and is incorporated herein by reference.
50
PART IV
|
|
|
ITEM 15. |
|
EXHIBITS, FINANCIAL STATEMENT SCHEDULES |
(a) |
|
The following documents are filed as part of this Report: |
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|
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|
|
|
|
Page Number |
Description |
|
in Report |
|
|
|
|
|
Report of
Independent Registered Public Accounting Firm on Financial Statements |
|
|
F-2 |
|
|
|
|
|
|
Report of Independent Registered Public Accounting Firm on Managements Assessment of
Internal Control Over Financial Reporting |
|
|
F-3 |
|
|
|
|
|
|
Consolidated Balance Sheets as of December 31, 2006 and 2005 |
|
|
F-4 |
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|
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|
|
|
Consolidated Statements of Operations for the years ended December 31, 2006, 2005 and 2004 |
|
|
F-5 |
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|
Consolidated Statements of Cash Flows for the years ended December 31, 2006, 2005 and 2004 |
|
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F-6 |
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|
|
Consolidated
Statements of Stockholders Equity (Deficit) for the years ended December 31, 2006,
2005 and 2004 |
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F-7 |
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|
|
Notes to Consolidated Financial Statements |
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F-8 |
|
2. |
|
Financial Statement Schedules |
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|
|
|
Page Number |
Description |
|
in Report |
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|
|
|
|
Schedule II Valuation and
Qualifying Accounts and Reserves for
the three years ended December 31,
2006 |
|
Follows page F-24 |
All other schedules are omitted because they are not applicable or the required information is
shown in the financial statements or notes thereto.
The following exhibits are required to be filed with this Report by Item 601 of Regulation
S-K:
|
|
|
Exhibit No. |
|
Description |
|
|
|
2.1
|
|
Agreement and Plan of Merger, dated as of April 30, 2003, by
and among Emageon, Inc., Emageon UV Development
Corporation, Ultravisual Medical Systems Corporation and
Jeff Rusinow as Stockholders Representative (incorporated
by reference to Exhibit 2.1 to the Companys Registration
Statement on Form S-1, Registration No. 333-120621, filed on
November 19, 2004) |
|
|
|
3.1
|
|
Emageon Inc. Amended and Restated Certificate of
Incorporation (incorporated by reference to Exhibit 3.2 to
the Companys Registration Statement on Form S-1/A,
Registration No. 333-120621, filed on February 4, 2005) |
|
|
|
3.2
|
|
Emageon Inc. Amended and Restated Bylaws (incorporated by
reference to Exhibit 3.4 to the Companys Registration
Statement on Form S-1/A, Registration No. 333-120621, filed
on January 25, 2005) |
51
|
|
|
Exhibit No. |
|
Description |
|
|
|
4.1
|
|
Form of Emageon Inc. common stock certificate (incorporated
by reference to Exhibit 3.4 to the Companys Registration
Statement on Form S-1/A, Registration No. 333-120621, filed
on February 4, 2005) |
|
|
|
10.1#
|
|
Imageon Solutions, Inc. 2000 Equity Incentive Plan
(incorporated by reference to Exhibit 10.1 to the Companys
Registration Statement on Form S-1, Registration No.
333-120621, filed on November 19, 2004) |
|
|
|
10.2#
|
|
Emageon, Inc. 2000 Equity Compensation Plan (incorporated by
reference to Exhibit 10.2 to the Companys Registration
Statement on Form S-1, Registration No. 333-120621, filed on
November 19, 2004) |
|
|
|
10.3#
|
|
Emageon Inc. 2005 Equity Incentive Plan (incorporated by
reference to Exhibit 10.3 to the Companys Registration
Statement on Form S-1/A, Registration No. 333-120621, filed
on February 4, 2005) |
|
|
|
10.4#
|
|
Emageon Inc. 2005 Non-Employee Director Stock Incentive Plan
(incorporated by reference to Exhibit 10.4 to the Companys
Registration Statement on Form S-1/A, Registration No.
333-120621, filed on February 4, 2005) |
|
|
|
10.5#
|
|
Employment Agreement of Charles A. Jett, Jr. (incorporated
by reference to Exhibit 10.5 to the Companys Registration
Statement on Form S-1, Registration No. 333-120621, filed on
November 19, 2004) |
|
|
|
10.6#
|
|
Employment Agreement of Milton G. Silva-Craig (incorporated
by reference to Exhibit 10.6 to the Companys Registration
Statement on Form S-1, Registration No. 333-120621, filed on
November 19, 2004) |
|
|
|
10.7#
|
|
Employment Agreement of W. Randall Pittman (incorporated by
reference to Exhibit 10.7 to the Companys Registration
Statement on Form S-1, Registration No. 333-120621, filed on
November 19, 2004) |
|
|
|
10.8#
|
|
Employment Agreement of Mark A. Gehring (incorporated by
reference to Exhibit 10.8 to the Companys Registration
Statement on Form S-1, Registration No. 333-120621, filed on
November 19, 2004) |
|
|
|
10.9#
|
|
Employment Agreement of Noel D. Gartman (incorporated by
reference to Exhibit 10.9 to the Companys Registration
Statement on Form S-1, Registration No. 333-120621, filed on
November 19, 2004) |
|
|
|
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) |
52
|
|
|
Exhibit No. |
|
Description |
|
|
|
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) |
|
|
|
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 |
53
EMAGEON INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
CONTENTS
|
|
|
|
|
F-2 |
|
|
|
|
|
F-3 |
|
|
|
|
|
F-4 |
|
|
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|
F-5 |
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|
F-6 |
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F-7 |
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|
F-8 |
F-1
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON FINANCIAL
STATEMENTS
The Board of Directors and Stockholders
Emageon Inc.
We have audited the accompanying consolidated balance sheets of Emageon Inc. (the Company) as
of December 31, 2005 and 2006, and the related consolidated statements of operations, stockholders
equity (deficit), and cash flows for each of the three years in the period ended December 31, 2006. Our
audits also include the financial statement schedule listed in the Index at Item 15(a). These
financial statements and schedule are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial statements and schedule based on our
audits.
We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the 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 financial statements referred to above present fairly, in all material
respects, the financial position of Emageon Inc. at December 31, 2005 and 2006, and the results of
its operations and its cash flows for each of the three years in the period ended December 31,
2006, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the
related financial statement schedule, when considered in relation to the basic financial statements
taken as a whole, presents fairly in all material respects the information set forth therein.
As
discussed in Note 2 of the Financial Statements, in 2006 the
Company adopted Statement of Financial Accounting Standards No. 123
(Revised), Share Based Payment.
We
also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the effectiveness of Emageons internal control over financial
reporting as of December 31, 2006, 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 15, 2007 expressed an unqualified opinion thereon.
Atlanta, Georgia
March 15, 2007
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM ON MANAGEMENTS ASSESSMENT
OF INTERNAL CONTROL OVER FINANCIAL REPORTING
The Board of Directors and Stockholders
Emageon Inc.
We have audited managements assessment, included in the accompanying Managements Report on
Internal Control Over Financial Reporting, that Emageon Inc. maintained effective internal control
over financial reporting as of December 31, 2006, based on criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (the COSO criteria). Emageons management is responsible for maintaining effective
internal control over financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express an opinion on managements
assessment and an opinion on the effectiveness of 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, evaluating managements assessment, testing and evaluating the
design and operating effectiveness of internal control, 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, managements assessment that Emageon Inc. maintained effective internal
control over financial reporting as of December 31, 2006, is fairly stated, in all material
respects, based on the COSO criteria. Also, in our opinion, Emageon Inc. maintained, in all
material respects, effective internal control over financial reporting as of December 31, 2006,
based on the COSO criteria.
We also have 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,
2005 and 2006, and the related consolidated statements of operations,
stockholders equity (deficit), and
cash flows for each of the three years in the period ended December 31, 2006 of Emageon Inc. and
our report dated March 15, 2007 expressed an unqualified opinion thereon.
|
|
|
|
|
|
/s/ Ernst &Young LLP
|
|
|
Atlanta, Georgia March 15, 2007
|
|
|
F-3
EMAGEON INC.
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
|
(In thousands, except |
|
|
|
share data) |
|
|
|
|
|
|
|
|
|
|
ASSETS |
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
23,008 |
|
|
$ |
15,520 |
|
Marketable securities |
|
|
|
|
|
|
4,951 |
|
Trade accounts receivable, net of allowance for doubtful
accounts of $277 and $126 at December 31, 2006 and 2005,
respectively |
|
|
27,602 |
|
|
|
29,261 |
|
Inventories |
|
|
8,579 |
|
|
|
8,031 |
|
Prepaid expenses and other current assets |
|
|
4,459 |
|
|
|
3,052 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
63,648 |
|
|
|
60,815 |
|
Property and equipment, net |
|
|
18,362 |
|
|
|
21,433 |
|
Other noncurrent assets |
|
|
1,808 |
|
|
|
1,419 |
|
Intangible assets: |
|
|
|
|
|
|
|
|
Goodwill |
|
|
21,210 |
|
|
|
21,079 |
|
Customer relationships, net |
|
|
6,399 |
|
|
|
9,510 |
|
Acquired technology, net |
|
|
1,836 |
|
|
|
3,028 |
|
Capitalized software development costs, net |
|
|
645 |
|
|
|
231 |
|
Trademark and trade names, net |
|
|
|
|
|
|
429 |
|
|
|
|
|
|
|
|
Total intangible assets |
|
|
30,090 |
|
|
|
34,277 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
113,908 |
|
|
$ |
117,944 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
9,738 |
|
|
$ |
13,858 |
|
Accrued payroll and related costs |
|
|
3,770 |
|
|
|
4,104 |
|
Deferred revenue |
|
|
24,849 |
|
|
|
26,057 |
|
Other accrued expenses |
|
|
2,946 |
|
|
|
3,316 |
|
Current portion of long-term debt and capital lease obligations |
|
|
953 |
|
|
|
2,763 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
42,256 |
|
|
|
50,098 |
|
Long-term deferred revenue |
|
|
5,851 |
|
|
|
3,221 |
|
Other long-term liabilities |
|
|
686 |
|
|
|
|
|
Long-term debt and capital lease obligations |
|
|
8 |
|
|
|
986 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
48,801 |
|
|
|
54,305 |
|
Stockholders equity: |
|
|
|
|
|
|
|
|
Common stock, $0.001 par value: 165,050,000 shares authorized;
21,433,574 shares and 20,628,913 shares issued; and 21,257,817
shares and 20,453,156 shares outstanding at December 31, 2006 and
2005, respectively |
|
|
21 |
|
|
|
21 |
|
Additional paid in capital |
|
|
122,538 |
|
|
|
115,215 |
|
Accumulated other comprehensive income |
|
|
262 |
|
|
|
85 |
|
Accumulated deficit |
|
|
(57,439 |
) |
|
|
(51,407 |
) |
|
|
|
|
|
|
|
|
|
|
65,382 |
|
|
|
63,914 |
|
Treasury stock: 175,757 shares |
|
|
(275 |
) |
|
|
(275 |
) |
|
|
|
|
|
|
|
Total stockholders equity |
|
|
65,107 |
|
|
|
63,639 |
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
113,908 |
|
|
$ |
117,944 |
|
|
|
|
|
|
|
|
F-4
EMAGEON INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
(In thousands, except per share amounts) |
|
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
System sales |
|
$ |
75,340 |
|
|
$ |
50,041 |
|
|
$ |
33,441 |
|
Support services |
|
|
48,165 |
|
|
|
25,023 |
|
|
|
13,059 |
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
|
123,505 |
|
|
|
75,064 |
|
|
|
46,500 |
|
Cost of revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
System sales |
|
|
43,333 |
|
|
|
28,316 |
|
|
|
21,452 |
|
Support services |
|
|
24,331 |
|
|
|
15,921 |
|
|
|
11,426 |
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenue |
|
|
67,664 |
|
|
|
44,237 |
|
|
|
32,878 |
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
55,841 |
|
|
|
30,827 |
|
|
|
13,622 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
|
17,368 |
|
|
|
11,652 |
|
|
|
6,197 |
|
Sales and marketing |
|
|
18,459 |
|
|
|
12,238 |
|
|
|
9,377 |
|
General and administrative |
|
|
17,028 |
|
|
|
10,945 |
|
|
|
7,498 |
|
Amortization and write-off of intangible assets related
to Camtronics acquisition |
|
|
3,540 |
|
|
|
993 |
|
|
|
|
|
Integration costs related to Camtronics acquisition |
|
|
5,369 |
|
|
|
244 |
|
|
|
|
|
Loss on disposal of property and equipment |
|
|
437 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
62,201 |
|
|
|
36,072 |
|
|
|
23,072 |
|
|
|
|
|
|
|
|
|
|
|
Operating loss |
|
|
(6,360 |
) |
|
|
(5,245 |
) |
|
|
(9,450 |
) |
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
655 |
|
|
|
1,497 |
|
|
|
31 |
|
Interest expense |
|
|
(327 |
) |
|
|
(1,249 |
) |
|
|
(1,053 |
) |
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(6,032 |
) |
|
$ |
(4,997 |
) |
|
$ |
(10,472 |
) |
|
|
|
|
|
|
|
|
|
|
Net loss per share basic and diluted |
|
$ |
(0.29 |
) |
|
$ |
(0.28 |
) |
|
$ |
(4.07 |
) |
|
|
|
|
|
|
|
|
|
|
Weighted average common stock outstanding basic and diluted |
|
|
20,919 |
|
|
|
17,975 |
|
|
|
2,590 |
|
|
|
|
|
|
|
|
|
|
|
F-5
EMAGEON INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
(In thousands) |
|
Operating activities |
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(6,032 |
) |
|
$ |
(4,997 |
) |
|
$ |
(10,472 |
) |
Adjustments to reconcile net loss to net cash (used in) provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation |
|
|
6,990 |
|
|
|
5,668 |
|
|
|
4,790 |
|
Amortization of intangible assets |
|
|
4,969 |
|
|
|
1,626 |
|
|
|
1,160 |
|
Write off of intangible assets related to Camtronics acquisition, net of tax liability |
|
|
|
|
|
|
403 |
|
|
|
|
|
Amortization and write off of subordinated debt discount |
|
|
|
|
|
|
646 |
|
|
|
157 |
|
Employee stock based compensation expense |
|
|
3,430 |
|
|
|
1,171 |
|
|
|
533 |
|
Loss on disposal of property and equipment |
|
|
702 |
|
|
|
|
|
|
|
|
|
Other operating activities |
|
|
129 |
|
|
|
215 |
|
|
|
373 |
|
Changes in operating assets and liabilities, net of acquired companies |
|
|
(2,925 |
) |
|
|
(6,613 |
) |
|
|
8,418 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities |
|
|
7,263 |
|
|
|
(1,881 |
) |
|
|
4,959 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment |
|
|
(5,229 |
) |
|
|
(7,680 |
) |
|
|
(2,905 |
) |
Purchases of marketable securities |
|
|
|
|
|
|
(44,198 |
) |
|
|
|
|
Proceeds from maturities of marketable securities |
|
|
5,000 |
|
|
|
39,335 |
|
|
|
|
|
Capitalized software development costs |
|
|
(652 |
) |
|
|
(354 |
) |
|
|
(32 |
) |
Purchase price of Camtronics, net of cash received |
|
|
|
|
|
|
(40,359 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(881 |
) |
|
|
(53,256 |
) |
|
|
(2,937 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock, net of issuance costs |
|
|
3,892 |
|
|
|
70,630 |
|
|
|
64 |
|
Payment of debt and capital lease obligations |
|
|
(2,788 |
) |
|
|
(6,515 |
) |
|
|
(2,316 |
) |
Proceeds from loans, net of issuance costs |
|
|
|
|
|
|
|
|
|
|
3,980 |
|
Other financing activities |
|
|
|
|
|
|
432 |
|
|
|
(96 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
1,104 |
|
|
|
64,547 |
|
|
|
1,632 |
|
Effect of exchange rate changes on cash |
|
|
2 |
|
|
|
116 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash |
|
|
7,488 |
|
|
|
9,526 |
|
|
|
3,654 |
|
Cash at beginning of year |
|
|
15,520 |
|
|
|
5,994 |
|
|
|
2,340 |
|
|
|
|
|
|
|
|
|
|
|
Cash at end of year |
|
$ |
23,008 |
|
|
$ |
15,520 |
|
|
$ |
5,994 |
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid |
|
$ |
357 |
|
|
$ |
1,266 |
|
|
$ |
863 |
|
|
|
|
|
|
|
|
|
|
|
F-6
EMAGEON INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY (DEFICIT)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
Accumulated Other |
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
Preferred Stock |
|
|
Common Stock |
|
|
Paid In |
|
|
Comprehensive |
|
|
Treasury |
|
|
Accumulated |
|
|
Stockholders' |
|
|
|
Shares |
|
|
Carrying Value |
|
|
Shares |
|
|
Par Value |
|
|
Capital |
|
|
Income
(Loss) |
|
|
Stock |
|
|
Deficit |
|
|
Equity
(Deficit) |
|
|
|
(In thousands, except for share data) |
|
Balance at December 31, 2003 |
|
|
19,692,358 |
|
|
$ |
7,306 |
|
|
|
3,033,209 |
|
|
$ |
3 |
|
|
$ |
5,294 |
|
|
|
|
|
|
$ |
(275 |
) |
|
$ |
(35,863 |
) |
|
$ |
(23,535 |
) |
Exercise of stock options |
|
|
|
|
|
|
|
|
|
|
22,972 |
|
|
|
|
|
|
|
64 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
64 |
|
Issuance of warrants in
connection with
subordinated debt and
customer sales agreement |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,046 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,046 |
|
Stock based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
594 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
594 |
|
Accretion of redeemable
preferred stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(67 |
) |
|
|
(67 |
) |
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,472 |
) |
|
|
(10,472 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2004 |
|
|
19,692,358 |
|
|
|
7,306 |
|
|
|
3,056,181 |
|
|
|
3 |
|
|
|
6,998 |
|
|
|
|
|
|
|
(275 |
) |
|
|
(46,402 |
) |
|
|
(32,370 |
) |
Exercise of stock options |
|
|
|
|
|
|
|
|
|
|
417,607 |
|
|
|
1 |
|
|
|
1,292 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,293 |
|
Exercise of stock warrants |
|
|
105,703 |
|
|
|
58 |
|
|
|
24,632 |
|
|
|
|
|
|
|
74 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
132 |
|
Exercise of mandatorily
redeemable stock warrants
in connection with
initial public offering |
|
|
|
|
|
|
|
|
|
|
537,082 |
|
|
|
1 |
|
|
|
735 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
736 |
|
Proceeds from initial
public offering, net of
issuance costs |
|
|
|
|
|
|
|
|
|
|
5,750,000 |
|
|
|
6 |
|
|
|
67,195 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
67,201 |
|
Automatic conversion of
non-redeemable preferred
stock into common stock
in connection with
initial public offering |
|
|
(19,798,061 |
) |
|
|
(7,364 |
) |
|
|
2,402,898 |
|
|
|
2 |
|
|
|
7,362 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Automatic conversion of
redeemable preferred
stock into common stock
in connection with
initial public offering |
|
|
|
|
|
|
|
|
|
|
8,440,513 |
|
|
|
8 |
|
|
|
30,348 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30,356 |
|
Stock based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,211 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,211 |
|
Foreign currency
translation adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
93 |
|
|
|
|
|
|
|
|
|
|
|
93 |
|
Unrealized loss on
available-for-sale
marketable securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8 |
) |
|
|
|
|
|
|
|
|
|
|
(8 |
) |
Accretion of redeemable
preferred stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8 |
) |
|
|
(8 |
) |
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,997 |
) |
|
|
(4,997 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005 |
|
|
|
|
|
|
|
|
|
|
20,628,913 |
|
|
|
21 |
|
|
|
115,215 |
|
|
|
85 |
|
|
|
(275 |
) |
|
|
(51,407 |
) |
|
|
63,639 |
|
Exercise of stock options |
|
|
|
|
|
|
|
|
|
|
787,699 |
|
|
|
|
|
|
|
3,772 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,772 |
|
Exercise of warrants |
|
|
|
|
|
|
|
|
|
|
12,562 |
|
|
|
|
|
|
|
46 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
46 |
|
Other stock issuance |
|
|
|
|
|
|
|
|
|
|
4,400 |
|
|
|
|
|
|
|
75 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
75 |
|
Stock based compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,430 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,430 |
|
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 |
|
|
|
|
|
$ |
|
|
|
|
21,433,574 |
|
|
$ |
21 |
|
|
$ |
122,538 |
|
|
$ |
262 |
|
|
$ |
(275 |
) |
|
$ |
(57,439 |
) |
|
$ |
65,107 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-7
EMAGEON INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2006, 2005, and 2004
Note 1. Business Description and Background
Business Description
Emageon
Inc. (the Company) provides an enterprise-level information technology solution for
the clinical analysis and management of digital medical images within health care provider
organizations. Emageons solution consists of advanced visualization and image management software
for multiple medical specialties such as cardiology, radiology and orthopedics, comprehensive
support services and third-party components. Emageons web-enabled advanced visualization software
provides physicians across the enterprise in multiple medical specialties and at any network
access point with tools to manipulate and analyze images in two dimensions (2D) and three
dimensions (3D).
Background
Emageon Inc. was incorporated in Delaware on January 3, 2000. In May 2003, the Company
acquired Ultravisual Medical Systems Corporation (Ultravisual), and in November 2005, the Company
acquired Camtronics Medical Systems, Ltd. (Camtronics), both engaged in businesses similar and
complementary to that of the Company. In February 2005, the Company completed its initial public
offering of common stock. See Note 4 for details of the Companys acquisitions and Note 3 for
details of the Companys initial public stock offering.
Note 2. Summary of Significant Accounting Policies
Presentation
Unless otherwise noted, all amounts included in the financial statements and notes,
except share and per share data, are expressed in thousands.
Reclassification
Certain items relating to prior years have been reclassified to conform to the current
year presentation.
In
2006, the Company revised its presentation of expenses incurred on behalf of, and
billable to, its customers to reflect those expenses in support services cost of revenue,
and reflect the related customer billing in support services revenue. Previously, revenue
from such customer billings was netted against the related expense for presentation in the
statement of operations. The effect of this revision of revenue and expense was to increase
both support services revenue and cost of revenue by $1,273 and $698 for the years
ended December 31, 2005, and 2004, respectively. The revision had no effect on the
Companys reported income from operations or net loss for any of these periods.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the Company and its
wholly-owned subsidiaries. All significant intercompany transactions and balances have been
eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally
accepted in the United States requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amount of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
F-8
Fair value of financial instruments
The Companys financial instruments consist primarily of cash, cash equivalents, marketable
securities, accounts receivable, and accounts payable for which current carrying amounts
approximate fair market values.
Cash and Cash Equivalents
For purposes of financial statement presentation, investments with maturities at acquisition
of three months or less are considered to be cash equivalents.
Restricted Cash
In
conjunction with two of the secured promissory notes discussed in Note 12, the Company is
required to maintain a restricted bank cash account of approximately 20% of the note amounts. At
December 31, 2006, the restricted amount was $446, and is included in other noncurrent assets in
the consolidated balance sheet.
Securities Available-for-Sale
The Company classifies debt securities as held-to-maturity, available-for-sale, or trading.
The appropriateness of each classification is reassessed at each reporting date. As of December
31, 2005, the Company classified all of its debt securities, consisting of U.S. Government Agency
securities carried at fair market value, as available-for-sale. The Company held no debt
securities at December 31, 2006.
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 any inability of customers to make required payments.
When determining the allowance for doubtful accounts, management takes several factors into
consideration, including the age of the accounts, 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. The Company has one customer, Ascension Health, whose
hospitals accounted for 27% of the Companys 2006 revenue (36% of 2005 revenue). As of December 31,
2006, hospitals controlled by Ascension Health owed the Company approximately $4,623.
As of December 31, 2006 and 2005, unbilled revenue of $481 and $161, respectively, was
included in accounts receivable in the consolidated balance sheets.
Inventories
Inventories are stated at the lower of cost or market (net realizable value) using the
specific identification and first-in, first-out methods and include materials, labor and
manufacturing overhead. The Company periodically reviews its quantities of inventories on hand and
compares these amounts to expected usage of each particular product or product line. The Company
records as a charge to cost of revenue the amount required to reduce the carrying value of
inventories to estimated net realizable value.
Costs of purchased third-party hardware and software associated with the Companys customer
contracts are included as inventories in the Companys consolidated balance sheet and charged to
cost of system sales when the Company receives customer acceptance and all other relevant revenue
recognition criteria are met.
F-9
Property and Equipment
Property and equipment used for internal purposes are recorded at cost. Expenditures for
property and equipment are capitalized, and minor replacements, maintenance and repairs are charged
to expense as incurred. Depreciation is computed using the straight-line method over the estimated
useful lives of the assets. Leasehold improvements are amortized over the shorter of their
estimated useful lives or the term of the respective leases. The asset cost and related
accumulated depreciation or amortization are adjusted upon asset retirement or disposal with the
resulting gain or loss, if any, credited or charged to results of operations.
Property and equipment at contracted customer sites is recorded at cost and consists of
third-party hardware and software associated with customer contracts. Depreciation is computed
using the straight-line method over the lives of the specific customer contracts, which are
typically five years.
Assets held under capital leases are recorded at the lower of the net present value of minimum
lease payments or the fair value of the leased asset at the inception of the lease. Amortization
expense is computed using the straight-line method over the shorter of the estimated useful lives
of the assets or the period of the related lease. Amortization of assets under capital leases is
included in depreciation expense.
Business Combinations, Goodwill, and Intangible Assets
The Company records business combinations in accordance with Statement of Financial Accounting
Standards No. 141, Business Combinations (SFAS 141), and Statement of Financial Accounting
Standards No. 142, Goodwill and Other Intangible Assets (SFAS 142). SFAS 141 requires the
purchase method of accounting for all business combinations, and that certain acquired intangible
assets in a business combination be recognized as assets separate from goodwill. The Company has
applied SFAS 141 in the allocation of the purchase price of Camtronics and Ultravisual.
Accordingly, the Company has identified and allocated estimated fair value to the intangibles
acquired.
The
Company continually evaluates whether events or changes in circumstances have occurred that indicate
the carrying value of long-lived assets and finite life intangible assets may not be recoverable.
Recoverability of these assets is evaluated by a comparison of the carrying amount of the asset to
future net undiscounted cash flows expected to be generated by the asset. If the carrying amount
of an asset exceeds its estimated undiscounted future cash flows, an impairment charge is
recognized for the excess of the carrying amount over the fair value of the asset. The fair value
of the asset or asset group is measured by quoted market prices, if available, or by utilizing
present value techniques.
Goodwill is tested for impairment at least annually or more frequently if events or changes in
circumstances indicate possible impairment. The Companys goodwill impairment test entails
calculating the aggregate fair value of the Companys assets, including goodwill and other
intangible assets. Should the aggregate fair value of the
Companys outstanding equity securities plus
its interest bearing liabilities be less than the aggregate carrying
value of the Companys net assets, including
goodwill and intangible assets, the Company would compare the estimated fair value of goodwill to
the corresponding book value of goodwill and record an impairment loss to the extent the book value
exceeds that estimated fair value. The Company has determined that its goodwill is not impaired as
of October 1, 2006.
In assessing fair value of intangibles, management must make assumptions regarding estimated
future cash flows and other factors. Critical estimates in valuing intangible assets include, but
are not limited to, future expected cash flows from acquired developed technologies and discount
rates. Managements estimates of fair value are based upon assumptions believed to be reasonable
but which are inherently uncertain and unpredictable and, as a result, actual fair values may
differ from estimates.
Treasury Stock
Treasury stock is accounted for using the cost method.
F-10
Revenue Recognition
Revenue is derived primarily from system sales, which include software licenses and
third-party component sales, and from support services, which include fees related to system
implementation, user adoption and ongoing customer support services.
Software licenses are sold under both perpetual and term license arrangements ranging in
length from two to seven years. The Company typically requires deposits upon the receipt of a
signed purchase order or agreement. Deposits are classified as deferred revenue in the Companys
consolidated balance sheet.
The Company accounts for software and support services revenue under the provisions of AICPA
Statement of Position 97-2, Software Revenue Recognition, as amended (SOP 97-2). Under this
guidance, revenue is recognized when persuasive evidence of an arrangement exists, delivery has
occurred or the services have been rendered and accepted by the customer, the price to the customer
is fixed or determinable, and collectibility is reasonably assured. The Company considers a signed
contract or purchase order to be persuasive evidence of an arrangement. The Company obtains
customer acceptance of software and third-party component sales, in the form of written customer
acknowledgements. In the event that the Company grants a customer the right to specified upgrades,
the Company defers recognition of the entire arrangement fee until the specified upgrades are
delivered, as the Company has not established vendor-specific objective evidence (VSOE) of fair
value for specified upgrades. Specified upgrades include, but are not limited to, future software
deliverables.
Fees for sales including multiple-element arrangements are allocated to each element of the
arrangement based on the relative fair values of the elements. The Company determines the fair
value of each element in multi-element arrangements based on VSOE of the fair value for each
element. If evidence of fair value of all undelivered elements exists but evidence does not exist
for one or more delivered elements, revenue is recognized using the residual method. Under the
residual method, the fair value of the undelivered elements is deferred and the remaining portion
of the arrangement fee is recognized as revenue. VSOE for the undelivered elements is based on the
renewal rates or other objective criteria for maintenance and support services, which coincide with
current pricing. The Company may also provide services that vary depending on the scope and
complexity requested by the customer. Examples of such services include additional database
consulting, system configuration, existing systems interface, and network consulting. These
services generally are not deemed to be essential to the functionality of the software. If the
Company has VSOE of fair value for the services, the timing of software license revenue recognition
is not impacted, and service revenue is recognized as the services are performed. If the Company
performs services for which VSOE of fair value is not available, software license revenue is
deferred until the services are completed.
For term based license arrangements, the Company recognizes revenue for the elements over the
term of the arrangement commencing upon customer acceptance, provided that all other revenue
recognition criteria have been met.
For perpetual license arrangements, revenue is recognized using the residual method for
software license revenue and implementation services commencing upon customer acceptance. The
Company generally includes the first year of maintenance in the software license fee. This
maintenance fee is deferred based on its fair value and recognized ratably over the first year of
the arrangement.
Revenue related to product sales is recognized upon shipment provided that title and risk of
loss have passed to the customer, there is persuasive evidence of an arrangement, the sales price
is fixed or determinable, collection of the related receivable is reasonably assured and customer
acceptance criteria, if any, have been successfully demonstrated. The Company classifies shipping
and handling cost in cost of system sales.
Third-party component revenue is recognized in accordance with contractual terms. When the
Company is responsible for installing third-party components, revenue is recognized when the
third-party components are delivered, installed and accepted by the customer. When the Company is
not responsible for installing third-party components, revenue is recognized when the third-party
components are delivered to the customer. Hardware
F-11
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.
Customer Indemnity and Warranty Costs
The Company provides for the estimated cost of product warranties at the time revenue is
recognized if the customer does not purchase a service contract. Its warranty obligations depend
upon product failure rates and service delivery costs incurred to correct any product failures.
Should actual product failure rates or service delivery costs differ from the Companys estimates
(which are based on specific warranty claims, historical data and engineering estimates, where
applicable), the estimated warranty liability is revised.
The Company offers its customers certain indemnities and warranties related to its products as
follows:
Customer Indemnity: The Company generally agrees to indemnify, defend and hold harmless its
customers in connection with any patent, copyright or trade secret infringement claims made by
third parties with respect to the customers authorized use of products and services, and also
provides indemnity for death, personal injury or property damage caused by the Companys personnel
or contractors in the course of performing services for customers. To date, the Company has not
incurred any costs to settle claims or pay awards under these indemnification provisions, nor has
it been notified of any such claims. Accordingly, there are no liabilities recorded for these
provisions as of December 31, 2006.
Product Warranty: The Company warrants that its software products will perform in all
material respects in accordance with standard published specifications in effect at the time of
delivery of the licensed products to the customer as long as the contract remains in effect.
Additionally, the Company warrants that its services will be performed by qualified personnel in a
manner consistent with normally accepted industry standards. The Company has a $700 liability
recorded for these provisions as of December 31, 2006 ($937 at December 31, 2005).
F-12
Income Taxes
The Company accounts for income taxes using the liability method. Deferred income tax assets
and liabilities are determined based on differences between financial reporting and tax basis of
assets and liabilities and are measured using enacted tax rates and laws. Valuation allowances are
established when necessary to reduce deferred tax assets to the amounts that are more likely than
not to be realized.
The Companys effective tax rate for the years ended December 31, 2006, 2005, and 2004 is zero
due to an increase in the valuation allowance in an amount equal to the tax effect of our 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. In addition,
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 in the event of certain ownership
changes. It is possible that such limitations could apply to the Company. The Company has not
performed a detailed analysis of its ability to use these net operating loss and research credit
carryforwards. However, it is not anticipated that any such analysis would have a material impact
on the Companys financial position or results of operations.
See Recent Accounting Pronouncements following for discussion of a related new accounting
standard effective for the Companys 2007 fiscal year.
Comprehensive Income
The Companys comprehensive income includes net loss as well as all non-owner changes in
equity. With respect to the Company, such non-owner equity items include foreign currency
translation adjustments and unrealized losses on available-for-sale marketable securities. Total
comprehensive losses for the years ended December 31, 2006,
2005, and 2004 were $(5,855), $(4,912) and
$(10,472), respectively.
Computation of Net Loss Per Share
Basic net loss per share is computed using the weighted average common shares outstanding
during the period. Diluted net loss per share is computed using the weighted average number of
common and equivalent common shares outstanding during the period. Common share equivalents in
years prior to 2006 consisted of convertible preferred stock, stock warrants, and options to
purchase common stock granted to employees and directors of the Company (stock options). In
2006, common share equivalents consisted of stock options, restricted stock awards, and warrants to
purchase common stock. These common share equivalents are excluded from the computation for periods
in which the Company incurs a net loss because they are anti-dilutive.
The computations for basic and diluted net loss per share for each period are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
Net loss |
|
$ |
(6,032 |
) |
|
$ |
(4,997 |
) |
|
$ |
(10,472 |
) |
Accretion of redemption value related to redeemable
preferred stock |
|
|
|
|
|
|
(8 |
) |
|
|
(66 |
) |
|
|
|
|
|
|
|
|
|
|
Net loss allocable to common stockholders |
|
$ |
(6,032 |
) |
|
$ |
(5,005 |
) |
|
$ |
(10,538 |
) |
|
|
|
|
|
|
|
|
|
|
Common stock outstanding at beginning of period |
|
|
20,453,156 |
|
|
|
2,709,370 |
|
|
|
2,429,742 |
|
Weighted average effect of: |
|
|
|
|
|
|
|
|
|
|
|
|
Release of escrowed common stock |
|
|
|
|
|
|
|
|
|
|
151,866 |
|
Conversion of preferred stock to common stock |
|
|
|
|
|
|
9,506,552 |
|
|
|
|
|
Issuance of common stock in initial public offering |
|
|
|
|
|
|
5,032,877 |
|
|
|
|
|
Issuance of common stock and preferred stock
pursuant to stock option and warrant exercises |
|
|
465,562 |
|
|
|
576,321 |
|
|
|
8,224 |
|
Release of escrowed common stock upon completion
of initial public offering |
|
|
|
|
|
|
149,963 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares of common stock
basic and diluted |
|
|
20,918,718 |
|
|
|
17,975,083 |
|
|
|
2,589,832 |
|
|
|
|
|
|
|
|
|
|
|
Net loss per share basic and diluted |
|
$ |
(0.29 |
) |
|
$ |
(0.28 |
) |
|
$ |
(4.07 |
) |
|
|
|
|
|
|
|
|
|
|
F-13
Preferred stock convertible into 10,827,403 shares of common stock for the year ended
December 31, 2004 were not included in the computation of diluted earnings per share because their
effect on earnings per share would have been anti-dilutive. Options and warrants to purchase
1,837,981, 2,171,361, and 3,683,036 shares of common stock for the years ended December 31, 2006,
2005 and 2004, respectively, and warrants to purchase 51,027 and 216,138 shares of Series D
preferred stock for the years ended December 31, 2005 and 2004, respectively, were not included in
the computation of diluted earnings per share because their effect on earnings per share would have
been anti-dilutive.
Stock-Based Compensation
Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards No.
123 (revised), Share-Based Payment (SFAS 123R), utilizing the modified prospective approach.
Prior to the adoption of SFAS 123R, the Company accounted for stock option grants in accordance
with APB Opinion No. 25, Accounting for Stock Issued to Employees utilizing the intrinsic value
method, and accordingly recognized no compensation expense for stock options that were granted with
exercise prices at or above the fair market value of the Companys common stock on the date of
grant.
The provisions of SFAS 123R are applied to awards granted after its effective date and to
awards outstanding at the effective date that are subsequently modified, repurchased, or cancelled.
Under the modified prospective approach, compensation cost to be recognized includes compensation
cost for all share-based awards granted prior to, but not yet vested as of the effective date,
based on the grant date fair value estimated in accordance with the original provisions of SFAS
123, and includes compensation cost for all share-based awards granted subsequent to the effective
date based on the grant date fair value estimated in accordance with the provisions of SFAS 123R.
As allowed by SFAS 123R, the Company elected to not restate periods prior to the effective date to
reflect the impact of adopting the new standard. The effects of adopting SFAS 123R on the Companys
statement of operations for the year ended December 31, 2006, the pro forma effects of applying
SFAS 123R to the Companys statement of operations for the years ended December 31, 2005 and 2004,
and other information related to the Companys stock-based compensation plans are included in Note
14.
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 direct labor
costs.
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 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.
F-14
Exchange gains and losses resulting from foreign currency transactions (transactions
denominated in a currency other than that of the entities
functional currency), excluding long-term
intercompany receivables and investments, are included in operations in the period in which they
occur.
Foreign currency translation and exchange gains and losses have not had, and are not expected
to have, a material effect on the results of operations of the Company.
Advertising Expense
The Company expenses advertising costs as they are incurred. Advertising expense for the
years ended December 31, 2006, 2005 and 2004 was $307, $48, and $191, respectively.
Recent Accounting Pronouncements
In June, 2006, the Financial Accounting Standards Board issued its Interpretation No. 48,
Accounting For Uncertainty in Income Taxes (Interpretation No. 48), and in September, 2006,
issued Statement of Financial Accounting Standards No. 157, Fair Value Measurements (SFAS
No.157). Interpretation No. 48, which is effective for the Companys fiscal year beginning January
1, 2007, prescribes a recognition threshold and measurement attribute for financial statement
recognition and measurement of a tax position taken or expected to be taken in a tax return. SFAS
No. 157, which is effective for the Companys fiscal year ending December 31, 2008, defines fair
value, establishes a framework for measuring fair value under U.S. generally accepted accounting
principles, and expands disclosure about fair value measurements. The Company currently is
evaluating Interpretation No. 48 but does not believe that it will have a material effect on its
results of operations or financial position, and is evaluating SFAS No. 157 to determine its
effects, if any, on the Companys results of operations and financial position.
Note 3. Initial Public Offering
On February 14, 2005, the Company completed the initial public offering of its common stock.
The Company sold 5,000,000 shares of its common stock at a price of $13.00 per share, and on
February 18, 2005, the over-allotment option to purchase 750,000 additional shares of common stock
was exercised at $13.00 per share. Total proceeds from the initial public offering net of
underwriting discount and offering expenses were approximately $67,200. In conjunction with the
initial public offering, the Company issued 10,843,411 shares of common stock upon the automatic
conversion of outstanding shares of preferred stock, issued 537,082 shares of common stock upon the
required exercise of common stock warrants, released the remaining escrow holdback related to its
merger with Ultravisual, and cancelled 552,661 of common stock warrants with an exercise price of
$0.00825 per share.
The Company repaid $4,000 of its subordinated debt on February 18, 2005 with a portion of the
offering proceeds. Concurrent with this repayment, the Company recorded a non-cash interest charge
of $621 for the write-off of debt discount related to the subordinated debt.
F-15
Note 4. Acquisitions and Intangible Assets
On November 1, 2005, the Company acquired all the outstanding capital stock of Camtronics, a
developer and manufacturer of cardiology image and information management systems, for a cash
purchase price, including acquisition expenses and net of cash acquired, of $40,359. The results of
operations of Camtronics have been included in the Companys statements of operations since the
acquisition date.
The purchase price of Camtronics was allocated to its assets and liabilities on a fair value
basis, including the identification and valuation of its intangible assets and the assignment of
value to goodwill. Goodwill represents, among other things, the synergistic value and potential
competitive benefits that may be realized as a result of the acquisition, any future products that
may arise from the acquired technology, and the skilled and specialized workforce acquired. In
total, intangible asset value of $11,603 and goodwill value of $17,325 related to the Camtronics
acquisition were identified and recorded. The Company believes that approximately $7,800 of the identified goodwill amount is deductible for income tax purposes. As of July 1, 2006, the Company determined the purchase
price of Camtronics to be final and the period for allocation of that purchase price to be
completed.
The following table summarizes the estimated fair value of the
assets acquired and liabilities assumed at the date of acquisition:
|
|
|
|
|
Accounts receivable |
|
$ |
7,101 |
|
Inventories |
|
|
3,207 |
|
Property, plant and equipment |
|
|
10,595 |
|
Other current assets |
|
|
693 |
|
Goodwill |
|
|
17,325 |
|
Intangible assets: |
|
|
|
|
Customer relationships |
|
|
10,028 |
|
Developed technology |
|
|
1,074 |
|
Trade names |
|
|
501 |
|
In-process technology |
|
|
248 |
|
|
|
|
|
Total assets acquired |
|
|
50,772 |
|
|
|
|
|
Accounts payable and other liabilities |
|
|
5,312 |
|
Accrued expenses |
|
|
844 |
|
Unearned revenue |
|
|
4,257 |
|
|
|
|
|
Total liabilities assumed |
|
|
10,413 |
|
|
|
|
|
Net assets acquired |
|
$ |
40,359 |
|
|
|
|
|
The valuation also resulted in the identification of $248 of acquired in-process
technology costs. This amount was determined by identifying the acquired specific in-process research and development
projects that would be continued, and for which (1) technological feasibility had not been established
at the acquisition date, (2) there was no alternative future use, and (3) the fair value was estimable with
reasonable reliability. Accordingly, this amount was immediately expensed in the consolidated statement of operations at
the acquisition date.
The following unaudited pro forma information shows results of operations
for 2004 and 2005 as if the acquisition had occurred at the beginning of 2004 and 2005, respectively. Pro forma results
include adjustments for amortization of identified intangible assets, acquired in-process technology, additional interest expense and reduced interest
income for cash needed to finance the acquisition. However, pro forma results do not include any anticipated cost savings or other
effects of integration. The unaudited pro forma condensed consolidated results of operations are for comparative purposes
only and are not necessarily indicative of results that would have occurred had the acquisition occurred as of the
beginning of the years presented, nor are they necessarily indicative of future results.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended |
|
|
|
|
|
|
|
December 31, |
|
|
|
|
|
|
|
2004 |
|
|
2005 |
|
|
|
|
|
|
|
(unaudited) |
|
Revenue |
|
|
|
|
|
$ |
99,876 |
|
|
$ |
111,032 |
|
Net loss |
|
|
|
|
|
$ |
(16,459 |
) |
|
|
(11,689 |
) |
Loss per share basic and diluted |
|
|
|
|
|
$ |
(6.38 |
) |
|
$ |
(0.65 |
) |
Summarized below are the Companys intangible assets, which include those arising from the
Camtronics acquisition, the acquisitions of other businesses, and the capitalized portion of costs
of internally developed software. These assets are amortized on a straight-line basis over lives
ranging from one to six years, with the exception of goodwill, which is not amortized but is tested
for impairment at least annually or as circumstances arise that may indicate impairment.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
Amortization |
|
|
December 31, 2006 |
|
|
December 31, 2005 |
|
|
|
Period |
|
|
Gross Carrying |
|
|
Accumulated |
|
|
Gross Carrying |
|
|
Accumulated |
|
|
|
(Years) |
|
|
Amount |
|
|
Amortization |
|
|
Amount |
|
|
Amortization |
|
Acquired technology |
|
|
4.6 |
|
|
$ |
5,240 |
|
|
$ |
(3,404 |
) |
|
$ |
5,240 |
|
|
$ |
(2,212 |
) |
Goodwill |
|
|
n/a |
|
|
|
21,210 |
|
|
|
|
|
|
|
21,079 |
|
|
|
|
|
Customer relationships |
|
|
4.9 |
|
|
|
10,028 |
|
|
|
(3,629 |
) |
|
|
10,028 |
|
|
|
(518 |
) |
Trade names |
|
|
1.2 |
|
|
|
501 |
|
|
|
(501 |
) |
|
|
501 |
|
|
|
(72 |
) |
Capitalized software
development costs |
|
|
1.4 |
|
|
|
1,451 |
|
|
|
(806 |
) |
|
|
798 |
|
|
|
(567 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
38,430 |
|
|
$ |
(8,340 |
) |
|
$ |
37,646 |
|
|
$ |
(3,369 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
expense was $4,969, $2,029, and $1,160 for the years ended December 31,
2006, 2005 and 2004, respectively. Expense for 2005 includes write-off of a trademark and
write-off of the in-process technology acquired in the Camtronics acquisition. Estimated
aggregate amortization expense for each of the next five years and beyond is as follows:
|
|
|
|
|
2007 |
|
$ |
3,089 |
|
2008 |
|
|
2,157 |
|
2009 |
|
|
1,381 |
|
2010 |
|
|
1,335 |
|
2011 and thereafter |
|
|
918 |
|
|
|
|
|
Total |
|
$ |
8,880 |
|
|
|
|
|
Note 5. Marketable Securities
At December 31, 2005, the Company had marketable debt securities that were classified as
available-for-sale and carried at estimated fair market value, consisting of U.S. government agency
securities in the amount of $4,951 and with a maturity date of March 27, 2006.
At December 31, 2005, these securities were classified as a current asset. During the years
ended December 31, 2006 and 2005, the Company recorded $42 and $1,399 of interest income,
respectively, and in 2005 recorded $29 of losses related to its marketable securities. The Company
held no marketable securities at December 31, 2006.
F-16
Note 6. 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 sheet and charged to system sales cost of revenue in the
statement of operations when customer acceptance has been received and all other revenue
recognition criteria have been met. Inventories consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
Third-party components |
|
$ |
2,716 |
|
|
$ |
1,708 |
|
Work-in-process |
|
|
336 |
|
|
|
345 |
|
Completed systems |
|
|
5,527 |
|
|
|
5,978 |
|
|
|
|
|
|
|
|
|
|
$ |
8,579 |
|
|
$ |
8,031 |
|
|
|
|
|
|
|
|
Note 7. Supplementary Cash Flow Information
Changes in operating assets and liabilities of the Company, net of the effects of acquisitions
of other businesses, in reconciling net loss to net cash provided by or used in operations are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
(Increase) decrease in: |
|
|
|
|
|
|
|
|
|
|
|
|
Trade accounts receivable, net |
|
$ |
1,659 |
|
|
$ |
(7,659 |
) |
|
$ |
(10,233 |
) |
Inventories, net |
|
|
(548 |
) |
|
|
(3,402 |
) |
|
|
(1,137 |
) |
Prepaid expenses and other current assets |
|
|
(1,407 |
) |
|
|
(885 |
) |
|
|
(2,120 |
) |
Other noncurrent assets |
|
|
(389 |
) |
|
|
(726 |
) |
|
|
(59 |
) |
|
Increase (decrease) in: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable |
|
|
(4,120 |
) |
|
|
5,775 |
|
|
|
3,243 |
|
Accrued payroll and related costs |
|
|
(334 |
) |
|
|
348 |
|
|
|
184 |
|
Other accrued expenses |
|
|
792 |
|
|
|
(187 |
) |
|
|
3,500 |
|
Deferred revenue |
|
|
1,422 |
|
|
|
123 |
|
|
|
15,040 |
|
|
|
|
|
|
|
|
|
|
|
|
Net changes in operating assets and liabilities |
|
$ |
(2,925 |
) |
|
$ |
(6,613 |
) |
|
$ |
8,418 |
|
|
|
|
|
|
|
|
|
|
|
Note 8. Property and Equipment
The Companys major classes of property and equipment are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated |
|
|
December 31, |
|
|
|
Useful Lives |
|
|
2006 |
|
|
2005 |
|
Land |
|
|
Indefinite |
|
|
$ |
791 |
|
|
$ |
791 |
|
Buildings and improvements |
|
|
39 years |
|
|
|
7,141 |
|
|
|
5,913 |
|
Machinery and equipment |
|
|
5 to 7 years |
|
|
|
990 |
|
|
|
861 |
|
Computers, software and other |
|
|
3 to 7 years |
|
|
|
10,918 |
|
|
|
12,733 |
|
Furniture and fixtures |
|
|
3 to 7 years |
|
|
|
1,973 |
|
|
|
1,967 |
|
Leasehold improvements |
|
|
4 to 5 years |
|
|
|
560 |
|
|
|
1,411 |
|
Third-party components leased to customers
under operating leases |
|
|
5 to 7 years |
|
|
|
11,553 |
|
|
|
13,234 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33,926 |
|
|
|
36,910 |
|
Less accumulated depreciation and amortization |
|
|
|
|
|
|
(15,564 |
) |
|
|
(15,477 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
18,362 |
|
|
$ |
21,433 |
|
|
|
|
|
|
|
|
|
|
|
|
F-17
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,
2006, the cost of this equipment and related accumulated amortization
were $571 and $324,
respectively ($571 and $247, respectively, at December 31, 2005). Amortization of assets held under
capital leases is included in depreciation expense in the statement of operations.
Note 9. Major Customers and Related Party Transactions
Revenue associated with hospitals controlled by Ascension Health accounted for approximately
27%, 36%, and 36% of total revenue during 2006, 2005 and 2004, respectively. As of December 31,
2006, Ascension Health held warrants to purchase up to 36,424 shares of the Companys common stock
at an exercise price of $5.52 per share. In October, 2006 the Company appointed Douglas D. French, a
former President and Chief Executive Officer of Ascension, to its board of directors.
Note 10. Defined Contribution Benefit Plan
The Company has established a 401(k) plan (the Plan) for all eligible employees pursuant to
Section 401(k) of the Internal Revenue Code. Prior to 2006, the Company made no contributions to
the Plan. Effective January 1, 2006, the Company began matching employee contributions to the Plan
at a rate of 50% of employee contributions up to a total of 3% of the employees annual salary. The
Companys aggregate contribution to the Plan for the year ended December 31, 2006 was $487.
Note 11. 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, 2006 and 2005 are as
follows:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
Net operating loss carryforward |
|
$ |
16,967 |
|
|
$ |
17,066 |
|
Intangible assets |
|
|
1,544 |
|
|
|
394 |
|
Deferred revenue |
|
|
4,293 |
|
|
|
3,021 |
|
Reserves and accrued liabilities |
|
|
428 |
|
|
|
436 |
|
Stock-based compensation |
|
|
1,269 |
|
|
|
|
|
Other |
|
|
158 |
|
|
|
100 |
|
|
|
|
|
|
|
|
|
|
|
24,659 |
|
|
|
21,017 |
|
|
|
|
|
|
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
Depreciation |
|
|
(1,220 |
) |
|
|
(223 |
) |
Developed technology |
|
|
(1,602 |
) |
|
|
(1,033 |
) |
|
|
|
|
|
|
|
|
|
|
(2,822 |
) |
|
|
(1,256 |
) |
|
|
|
|
|
|
|
Net deferred tax assets |
|
|
21,837 |
|
|
|
19,761 |
|
Valuation allowance |
|
|
(21,837 |
) |
|
|
(19,761 |
) |
|
|
|
|
|
|
|
Net deferred tax liability |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
Because the majority of the deferred tax assets relate to net operating loss (NOL)
carryforwards that can only be realized if the Company is profitable in future periods, and because
the Company has never been profitable in the past, it is uncertain whether the Company will realize
any tax benefit related to the net operating loss
F-18
carryforward. Accordingly, the Company has provided a valuation allowance against net
deferred tax assets in full. The valuation allowance will remain at the full amount of the
deferred tax asset until it is more likely than not that the related tax benefits will be realized
through deduction against taxable income during the carryforward period. Net operating loss and
research credit carryforwards expire at various times from 2019
through 2026. In the event of
certain ownership changes, the Tax Reform Act of 1986 imposes restrictions on the amount of net
operating loss and research credit carryforwards that the Company may use in any year. It is
possible that such limitations could currently apply. The Company has not performed a detailed
analysis of its ability to use these net operating loss and research credit carryforwards.
However, it is not anticipated that any such analysis would have a material impact on the financial
position of the Company as a result of offsetting changes in the deferred tax valuation allowance.
At December 31, 2006, the Company had federal and state net operating loss carryforwards of
approximately $57.5 million.
A reconciliation of the income tax benefit computed using the statutory rate of 34% to the tax
provision reported in the statements of operations is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
Tax benefit computed at the statutory federal rate |
|
$ |
(2,051 |
) |
|
$ |
(1,731 |
) |
|
$ |
(3,561 |
) |
State taxes, net of federal tax benefit |
|
|
(168 |
) |
|
|
(137 |
) |
|
|
(314 |
) |
Increase in tax from: |
|
|
|
|
|
|
|
|
|
|
|
|
Change in deferred tax valuation allowance |
|
|
2,076 |
|
|
|
1,591 |
|
|
|
3,899 |
|
Permanent differences |
|
|
143 |
|
|
|
184 |
|
|
|
33 |
|
Other |
|
|
|
|
|
|
93 |
|
|
|
(57 |
) |
|
|
|
|
|
|
|
|
|
|
Benefit for income taxes |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
Note 12. Debt And Capital Lease Obligations
Long-term debt and capital lease obligations consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
Secured promissory note payable in 60 monthly installments of
$45, including interest at 10.0%, due in December 2006, secured by hardware and
software at customer site |
|
$ |
|
|
|
$ |
508 |
|
Secured promissory note payable in 60 monthly installments of $38, including
interest at 9.88%, due in March 2007, secured by hardware and software at
customer site |
|
|
113 |
|
|
|
536 |
|
Secured promissory note payable in 58 monthly installments of $11, including
interest at 4.76%, final payment of $10 in September 2007, secured by hardware
and software at customer site |
|
|
109 |
|
|
|
237 |
|
Secured promissory note payable to bank in 54 monthly installments of $83,
including interest at 6.13%, due in June 2007, secured by hardware and software
at customer site |
|
|
480 |
|
|
|
1,397 |
|
Promissory note to governmental agency payable in 57 monthly installments of $5,
including interest at 4.0%, final payment of $4 in October 2007 |
|
|
47 |
|
|
|
103 |
|
Capital lease of third-party computer hardware and software at a customer site,
57 month term expiring March 2007, with renewal and purchase options; and
capital leases of certain office and computer equipment |
|
|
212 |
|
|
|
968 |
|
|
|
|
|
|
|
|
Total debt and capital lease obligations |
|
|
961 |
|
|
|
3,749 |
|
Current portion |
|
|
(953 |
) |
|
|
(2,763 |
) |
|
|
|
|
|
|
|
Long-term portion of debt and capital lease obligations |
|
$ |
8 |
|
|
$ |
986 |
|
|
|
|
|
|
|
|
F-19
The Company entered into a loan and security agreement with a bank in April, 2004, and
amended April, 2006, under which it may borrow up to $10.0 million subject to certain restrictions
and covenants, including maintenance of certain minimum levels of tangible net worth and current
ratio. Interest accrues at the banks prime rate. There were no amounts outstanding under this
agreement at December 31, 2006 and 2005. Any borrowings under the agreement are secured by all of
the assets of the Company, excluding its intellectual property and real estate. The agreement is
for a term of two years, at the end of which all amounts borrowed become due and payable.
Note 13. Common Stock Warrants
On June 25, 2004, in conjunction with the issuance of $4,000 of promissory notes to various
purchasers under a subordinated debt agreement, the Company issued a warrant to purchase 127,589
shares of common stock with an exercise price of $4.70 per share. The warrants vested upon
execution of the subordinated debt agreement. The fair value of the warrants issued was $7.80 per
share and was estimated using the Black-Scholes method with the following assumptions: fair value
of the common stock of $10.725 per share, dividend yield of zero percent, risk-free interest rate
of 3.2%, expected volatility of 70.87%, and expected life of four years. These warrants were
converted to common stock at the time of the Companys initial public offering in February 2005.
In conjunction with a customer agreement signed in May 2004, the Company issued a warrant to
purchase 36,424 shares of common stock at an exercise price of $5.52 per share. These warrants
vested upon execution of the agreement. The fair value of the warrants issued was $6.76 per share
and was estimated using the Black-Scholes method with the following assumptions: fair value of the
common stock of $10.725 per share, dividend yield of zero percent, risk-free interest rate of 3.2%,
expected volatility of 70.87% and expected life of 2.5 years. The warrants were recorded at a fair
value of $246 and classified in prepaid expenses and other current assets in the balance sheet.
This amount was recorded as a sales discount over the life of the agreement.
A summary of warrant activity and related information is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
Exercise |
|
|
|
|
|
|
Exercise |
|
|
|
|
|
|
Exercise |
|
|
|
Shares |
|
|
Price |
|
|
Shares |
|
|
Price |
|
|
Shares |
|
|
Price |
|
Common stock warrants at
beginning of period |
|
|
48,986 |
|
|
$ |
5.04 |
|
|
|
1,479,443 |
|
|
$ |
3.56 |
|
|
|
1,315,430 |
|
|
$ |
3.39 |
|
Forfeited or Canceled |
|
|
|
|
|
|
|
|
|
|
(552,661 |
) |
|
|
0.01 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(12,562 |
) |
|
$ |
3.63 |
|
|
|
(883,981 |
) |
|
|
5.67 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
|
|
|
$ |
|
|
|
|
6,185 |
|
|
$ |
3.63 |
|
|
|
164,013 |
|
|
|
4.88 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of period |
|
|
36,424 |
|
|
$ |
5.52 |
|
|
|
48,986 |
|
|
$ |
5.04 |
|
|
|
1,479,443 |
|
|
$ |
3.56 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at end of period |
|
|
36,424 |
|
|
$ |
5.52 |
|
|
|
48,986 |
|
|
$ |
5.04 |
|
|
|
910,116 |
|
|
$ |
5.66 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-20
As of December 31, 2006, common stock warrants outstanding had an exercise price of $5.52
and a remaining contractual life of 2.33 years. The aggregate intrinsic value of warrants outstanding with customers of the Company at December 31, 2006 was $358. The total intrinsic value of warrants exercised by customers in the year ended
December 31, 2005 was $5,213. No warrants were exercised by customers in 2004 or 2006.
Note 14. Stock-Based Compensation
The Company has established stock-based compensation plans (the Plans) as a means to
attract, motivate and retain key employees and directors. The Compensation Committee of the Board
of Directors administers and interprets the Plans and is authorized to grant awards to eligible
employees of Emageon and non-employee directors and consultants. The Plans provide for the award
of incentive stock options, non-qualified stock options, and restricted stock. Shares available for
future stock option grants to employees and directors under the Plans were 2,954,577 and 429,750,
respectively, at December 31, 2006.
Generally, options granted under the Plans vest over three to four years and are exercisable
for a period of ten years.
As discussed in Note 2, the Company adopted SFAS 123R effective January 1, 2006 using the
modified prospective approach. As a result, the Companys net loss and basic and diluted loss per
share for the year ended December 31, 2006 were $2,239 and $0.11 higher, respectively, than if the Company had continued to account for
stock-based compensation under APB Opinion No. 25.
The Company recognized total share-based compensation in costs of revenue and operating
expenses in its statement of operations of $3,430, $1,215, and $533 during the years ended December
31, 2006, 2005, and 2004, respectively.
The following table illustrates the effect on net loss and net loss per share had the Company
accounted for stock-based compensation in accordance with SFAS No. 123R for the years ended
December 31, 2005 and 2004:
|
|
|
|
|
|
|
|
|
|
|
Year Ended |
|
|
Year Ended |
|
|
|
December 31, 2005 |
|
|
December 31, 2004 |
|
|
|
|
|
|
|
|
|
|
Net loss: |
|
|
|
|
|
|
|
|
As reported |
|
$ |
(4,997 |
) |
|
$ |
(10,472 |
) |
Deduct:
Accretion of redemption value related to redeemable preferred stock |
|
|
(8 |
) |
|
|
(66 |
) |
Add: Stock-based employee
compensation reported in net loss |
|
|
1,171 |
|
|
|
533 |
|
Deduct: Stock-based employee
compensation under the fair value
method for all awards |
|
|
(2,045 |
) |
|
|
(801 |
) |
|
|
|
|
|
|
|
Pro-forma net loss |
|
$ |
(5,879 |
) |
|
$ |
(10,806 |
) |
|
|
|
|
|
|
|
Basic and diluted net loss
per share: |
|
|
|
|
|
|
|
|
As reported |
|
$ |
(0.28 |
) |
|
$ |
(4.04 |
) |
Deduct:
Accretion of redemption value related to redeemable preferred stock |
|
|
|
|
|
|
(0.03 |
) |
Add: Stock-based employee
compensation reported in net loss |
|
|
0.06 |
|
|
|
0.21 |
|
Deduct: Stock-based employee
compensation under the fair value
method for all awards |
|
|
(0.11 |
) |
|
|
(0.31 |
) |
|
|
|
|
|
|
|
Pro-forma net loss per share |
|
$ |
(0.33 |
) |
|
$ |
(4.17 |
) |
|
|
|
|
|
|
|
F-21
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, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
2006 |
|
2005 |
|
2004 |
Dividend yield |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
0.0 |
% |
Expected volatility |
|
|
70.9 |
% |
|
|
70.9 |
% |
|
|
70.9 |
% |
Risk-free interest rate |
|
|
4.87 |
% |
|
|
4.11 |
% |
|
|
3.09 |
% |
Expected life of options, in years |
|
|
5.0 |
|
|
|
5.0 |
|
|
|
5.0 |
|
Weighted average grant date fair value |
|
$ |
10.09 |
|
|
$ |
8.53 |
|
|
$ |
8.51 |
|
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.
At December 31, 2006, there was $5,984 of unrecognized compensation cost related to
stock option payments. The Company expects this compensation cost to be recognized over
a weighted average period of 2.75 years.
Cash proceeds from exercise of stock options were $3,772, $1,292, and $64 for the years ended
December 31, 2006, 2005, and 2004.
The weighted average grant date fair values of options granted to employees under all stock
option plans during the years ended December 31, 2006, 2005, and
2004 were $10.09, $8.53, and $8.51,
respectively. Prior to the Companys initial public offering of its stock in February 2005, options
were granted under these plans 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, 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
Exercise |
|
|
|
|
|
|
Exercise |
|
|
|
|
|
|
Exercise |
|
|
|
Shares |
|
|
Price |
|
|
Shares |
|
|
Price |
|
|
Shares |
|
|
Price |
|
Options at beginning of period |
|
|
2,128,560 |
|
|
$ |
5.91 |
|
|
|
2,166,901 |
|
|
$ |
4.46 |
|
|
|
1,779,527 |
|
|
$ |
4.14 |
|
Forfeited |
|
|
(156,139 |
) |
|
|
8.99 |
|
|
|
(33,517 |
) |
|
|
4.90 |
|
|
|
(51,842 |
) |
|
|
4.26 |
|
Exercised |
|
|
(787,699 |
) |
|
|
4.80 |
|
|
|
(448,141 |
) |
|
|
3.76 |
|
|
|
(22,972 |
) |
|
|
2.76 |
|
Granted |
|
|
535,339 |
|
|
|
16.15 |
|
|
|
443,317 |
|
|
|
10.74 |
|
|
|
462,188 |
|
|
|
5.85 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of period |
|
|
1,720,061 |
|
|
$ |
9.33 |
|
|
|
2,128,560 |
|
|
$ |
5.91 |
|
|
|
2,166,901 |
|
|
$ |
4.46 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at end of period |
|
|
894,393 |
|
|
$ |
5.29 |
|
|
|
1,262,281 |
|
|
$ |
4.35 |
|
|
|
1,328,091 |
|
|
$ |
3.94 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-22
Further information relating to stock option plans outstanding at December 31, 2006 is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding |
|
|
Options Exercisable |
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
Average |
|
|
Weighted |
|
|
|
|
|
|
Average |
|
|
Weighted |
|
|
|
|
|
|
|
Remaining |
|
|
Average |
|
|
|
|
|
|
Remaining |
|
|
Average |
|
|
|
|
|
|
|
Contractual |
|
|
Exercise |
|
|
|
|
|
|
Contractual |
|
|
Exercise |
|
Range of Exercise Prices |
|
Number |
|
|
Life |
|
|
Price |
|
|
Number |
|
|
Life |
|
|
Price |
|
$1.73 to $2.07 |
|
|
115,804 |
|
|
4.59 years |
|
$ |
1.84 |
|
|
|
115,804 |
|
|
4.59 years |
|
$ |
1.84 |
|
$4.70 to $7.17 |
|
|
873,203 |
|
|
5.86 years |
|
|
5.39 |
|
|
|
708,689 |
|
|
5.42 years |
|
|
5.10 |
|
$12.72 to $14.90 |
|
|
264,319 |
|
|
8.88 years |
|
|
13.06 |
|
|
|
69,900 |
|
|
8.75 years |
|
|
12.93 |
|
$15.05 to $17.79 |
|
|
466,735 |
|
|
9.32 years |
|
|
16.44 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,720,061 |
|
|
7.18 years |
|
$ |
9.33 |
|
|
|
894,393 |
|
|
5.57 years |
|
$ |
5.29 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The aggregate intrinsic value of options outstanding at December 31, 2006 was
$10,374, and the aggregate intrinsic value of options exercisable was $9,009. The total intrinsic
value of options exercised in the years ended December 31, 2006, 2005, and 2004 was $9,025, $4,225,
and $0.00 respectively.
The following table provides information regarding the Companys nonvested option activity in
2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Grant Date |
|
|
Number of options |
|
Fair Value |
|
Nonvested options at
January 1, 2006 |
|
|
866,279 |
|
|
$ |
7.25 |
|
Granted |
|
|
535,339 |
|
|
|
10.09 |
|
Vested |
|
|
(419,811 |
) |
|
|
6.13 |
|
Forfeited |
|
|
(156,139 |
) |
|
|
7.88 |
|
|
|
|
|
|
|
|
|
|
Nonvested options at
December 31, 2006 |
|
|
825,668 |
|
|
|
9.55 |
|
|
|
|
|
|
|
|
|
|
The aggregate fair value of options vested during the years ended December 31, 2006, 2005, and
2004 was $2,575, $1,352, and $0.00, respectively.
Restricted
Stock
The Companys plans allow for the issuance of restricted stock awards that may not be sold or
otherwise transferred until certain restrictions have lapsed. The unearned stock-based compensation
related to these awards is being amortized to compensation expense over the four year period in
which the restrictions lapse. Stock-based expense for these 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. During the year ended December 31, 2006, the Company granted 85,496
shares of restricted stock with an aggregate grant date fair value of $1,393, of which 81,496
shares were outstanding and unvested at December 31, 2006. Total related compensation expense
recognized in the year ended December 31, 2006 was $412. No shares of restricted stock were granted
in the years ended December 31, 2005 and 2004.
Note 15. 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, 2006, 2005 and
2004 of $2,572, $1,147, and $939, respectively. As of December 31, 2006, the amount of operating
lease payments in each of the next five years and beyond is as follows:
F-23
|
|
|
|
|
2007 |
|
$ |
1,505 |
|
2008 |
|
|
1,569 |
|
2009 |
|
|
1,558 |
|
2010 |
|
|
711 |
|
2011 |
|
|
495 |
|
2012 and beyond |
|
|
570 |
|
|
|
|
|
|
|
$ |
6,408 |
|
|
|
|
|
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
at that facility with those at another location. The Company has
estimated and recorded a liability for the estimated future
net negative cash flow of $1,074 expected to arise from the continuing lease obligation, and has
identified and written-off $266 representing the net book value of property and equipment attendant
to the former facility. Both of these charges are included in Integration costs related to
Camtronics acquisition in the 2006 statement of operations. The estimated future liability for
lease payments is included in other accrued expenses and other long-term liabilities in the
December 31, 2006 balance sheet. The Company is attempting to sub-lease the facility to another
occupant and to otherwise minimize expense related to the facility.
Lessor Arrangements. Revenue associated with rentals under operating leases was approximately
$2,489, $2,432, and $2,187 for the years ended December 31, 2006, 2005 and 2004, respectively, and
is included in systems sales. At December 31, 2006, the cost and accumulated depreciation of
computer equipment leased to others and included in property and equipment in the consolidated
balance sheet was $11,553 and $10,029, respectively ($13,234 and
$9,187, respectively, at December 31,
2005).
The following is a schedule by year of minimum future rental income under noncancelable
operating leases of computer hardware as of December 31, 2006:
|
|
|
|
|
2007 |
|
$ |
1,119 |
|
2008 |
|
|
303 |
|
2009 |
|
|
152 |
|
|
|
|
|
Total minimum future rentals |
|
$ |
1,574 |
|
|
|
|
|
Note 16. Selected Quarterly Financial Data (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarters Ended |
|
|
March 31 |
|
June 30 |
|
September 30 |
|
December 31 |
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
27,001 |
|
|
$ |
30,016 |
|
|
$ |
33,011 |
|
|
$ |
33,477 |
|
Gross profit |
|
|
7,499 |
|
|
|
13,505 |
|
|
|
16,112 |
|
|
|
18,725 |
|
Operating income (loss) |
|
|
(7,040 |
) |
|
|
(933 |
) |
|
|
(366 |
) |
|
|
1,979 |
|
Net income (loss) |
|
$ |
(6,993 |
) |
|
$ |
(857 |
) |
|
$ |
(273 |
) |
|
$ |
2,091 |
|
Net income (loss) per share basic and diluted |
|
$ |
(0.34 |
) |
|
$ |
(0.04 |
) |
|
$ |
(0.01 |
) |
|
$ |
0.10 |
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
11,584 |
|
|
$ |
18,915 |
|
|
$ |
20,016 |
|
|
$ |
24,549 |
|
Gross profit |
|
|
3,430 |
|
|
|
9,495 |
|
|
|
9,011 |
|
|
|
8,891 |
|
Operating income (loss) |
|
|
(4,199 |
) |
|
|
1,565 |
|
|
|
1,465 |
|
|
|
(4,076 |
) |
Net income (loss) |
|
$ |
(4,818 |
) |
|
$ |
1,900 |
|
|
$ |
1,831 |
|
|
$ |
(3,910 |
) |
Net income (loss) per share basic and diluted |
|
$ |
(0.42 |
) |
|
$ |
0.09 |
|
|
$ |
0.09 |
|
|
$ |
(0.19 |
) |
F-24
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 16, 2007.
|
|
|
|
|
|
Emageon Inc.
|
|
|
By: |
/s/ Charles A. Jett, Jr.
|
|
|
|
Charles A. Jett, Jr. |
|
|
|
Chairman, President and Principal 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 16, 2007.
|
|
|
Signature |
|
Title |
|
|
|
/s/ Charles A. Jett, Jr.
Charles A. Jett, Jr.
|
|
Chairman of the Board, President and
Principal Executive Officer |
|
|
|
/s/ W. Randall Pittman
W. Randall Pittman
|
|
Principal Financial Officer and Treasurer,
and Principal Accounting Officer |
|
|
|
/s/ Arthur P. Beattie
Arthur P. Beattie
|
|
Director |
|
|
|
/s/ Roddy J.H. Clark
Roddy J.H. Clark
|
|
Director |
|
|
|
/s/ Douglas D. French
Douglas D. French
|
|
Director |
|
|
|
/s/ Fred C. Goad, Jr.
Fred C. Goad, Jr.
|
|
Director |
|
|
|
/s/ Chris H. Horgen
Chris H. Horgen
|
|
Director |
|
|
|
/s/ Mylle H. Mangum
Mylle H. Mangum
|
|
Director |
|
|
|
/s/ John W. Thompson
John W. Thompson
|
|
Director |
|
|
|
/s/ Hugh H. Williamson, III
Hugh H. Williamson, III
|
|
Director |
EMAGEON INC.
SCHEDULE IIVALUATION AND QUALIFYING ACCOUNTS AND RESERVES
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance |
|
Additions Charged To |
|
|
|
|
|
|
|
|
Beginning |
|
Costs and |
|
Other |
|
|
|
|
|
Balance End |
Description |
|
Of Period |
|
Expenses |
|
Accounts |
|
Deductions |
|
Of Period |
Allowance for
doubtful accounts
deducted from
accounts receivable
in the
balance sheet ...2006 |
|
$ |
126 |
|
|
|
367 |
|
|
|
|
|
|
|
(216 |
) (1) |
|
$ |
277 |
|
...2005 |
|
|
75 |
|
|
|
57 |
|
|
|
|
|
|
|
(6 |
) (1) |
|
|
126 |
|
...2004 |
|
|
50 |
|
|
|
123 |
|
|
|
|
|
|
|
(98 |
) (1) |
|
|
75 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation
allowance deducted
from net deferred
tax asset in the
balance sheet...2006 |
|
$ |
19,761 |
|
|
|
2,076 |
|
|
|
|
|
|
|
|
|
|
$ |
21,837 |
|
...2005 |
|
|
17,571 |
|
|
|
1,582 |
|
|
|
608 |
(2) |
|
|
|
|
|
|
19,761 |
|
...2004 |
|
|
13,672 |
|
|
|
3,899 |
|
|
|
|
|
|
|
|
|
|
|
17,571 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued
liability for product warranty included in other accrued expenses in
the balance sheet ...2006 |
|
$ |
937 |
|
|
|
254 |
|
|
|
|
|
|
|
(491 |
) (4) |
|
$ |
700 |
|
...2005 |
|
|
|
|
|
|
178 |
|
|
|
844 |
(3) |
|
|
(85 |
) (4) |
|
|
937 |
|
...2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Uncollectible accounts written off, and payments received on previously written-off
accounts |
|
(2) |
|
Deferred tax assets arising from Camtronics acquisition
in November 2005 |
|
|
(3) |
|
Warranty liability of Camtronics at acquisition in November
2005. |
|
(4) |
|
Expenditures in settlement of warranty claims. |