EMAGEON INC.
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Form 10-Q/A
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For
the quarterly period ended September 30, 2005
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File 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 of incorporation)
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(I.R.S. Employer Identification No.) |
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1200 Corporate Drive, Suite 200
Birmingham, Alabama
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35242 |
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(Address of principal executive offices)
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(zip code) |
Registrants
telephone number, including area code: (205) 980-9222
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. YES þ NO o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange
Act Rule 12b-2). YES o NO þ
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act
Rule 12b-2). YES o NO þ
The number of shares outstanding of the registrants Common Stock, par value $.001 per share,
as of November 9, 2005 was 20,269,683.
Explanatory
Note:
This
Amendment No. 1 to our quarterly report on Form 10-Q for the period
ended September 30, 2005 is being filed to make a technical
correction to the language of Footnote 5 to part I, Item 1,
Consolidated Financial statements, and to delete certain
extraneous text appearing above the Index to Exhibits in part II,
Item 6 of the original filing. The remaining items contained within
this Amendment No. 1 consist of all other items originally contained
in our Quarterly Report on Form 10-Q for the quarter ended September
30, 2005 in the form filed with the Securities and Exchange
Commission on November 14, 2005. These remaining items are not
amended hereby, but are included for the convenience of the reader.
Except as expressly stated herein, this report continues to speak as
of the date of the original filing, and we have not updated the
disclosures in this report to speak as of any later date.
PART I: FINANCIAL INFORMATION
ITEM 1: CONSOLIDATED FINANCIAL STATEMENTS
EMAGEON INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except for share data)
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September 30, |
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December 31, |
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2005 |
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2004 |
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(Unaudited) |
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ASSETS |
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Current assets: |
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|
|
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Cash and cash equivalents |
|
$ |
30,529 |
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$ |
5,994 |
|
Marketable securities |
|
|
29,381 |
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|
|
|
|
Trade accounts receivable, net of allowance for doubtful accounts of $100
and $75 at September 30, 2005 and December 31, 2004, respectively |
|
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18,073 |
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|
14,255 |
|
Prepaid expenses and other current assets |
|
|
3,533 |
|
|
|
1,799 |
|
Deferred offering costs |
|
|
|
|
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|
1,326 |
|
Unbilled revenue |
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|
198 |
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|
302 |
|
Third-party components to be sold to customers |
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|
1,391 |
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|
1,422 |
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|
|
|
|
|
|
Total current assets |
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|
83,105 |
|
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|
25,098 |
|
Property and equipment, net |
|
|
10,960 |
|
|
|
8,832 |
|
Restricted cash |
|
|
534 |
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|
903 |
|
Other noncurrent assets |
|
|
116 |
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|
|
62 |
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Intangible assets: |
|
|
|
|
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|
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Goodwill |
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|
3,755 |
|
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|
3,755 |
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Acquired software, net |
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2,222 |
|
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|
2,847 |
|
Capitalized software development costs, net |
|
|
230 |
|
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|
21 |
|
Trademark |
|
|
250 |
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|
250 |
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|
|
|
|
|
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Total intangible assets |
|
|
6,457 |
|
|
|
6,873 |
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|
|
|
|
|
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|
Total assets |
|
$ |
101,172 |
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|
$ |
41,768 |
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|
|
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LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS EQUITY (DEFICIT) |
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Current liabilities: |
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|
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Accounts payable |
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$ |
6,124 |
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$ |
4,658 |
|
Accrued payroll and related costs |
|
|
1,247 |
|
|
|
1,557 |
|
Deferred revenue |
|
|
17,755 |
|
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|
21,357 |
|
Other accrued expenses |
|
|
2,141 |
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|
3,838 |
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Current portion of long-term debt |
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1,973 |
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|
2,472 |
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Current portion of capital lease obligations |
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664 |
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|
620 |
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|
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Total current liabilities |
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29,904 |
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|
34,502 |
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Long-term deferred revenue |
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|
3,389 |
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2,796 |
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Deferred tax liability |
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|
95 |
|
|
|
95 |
|
Long-term debt |
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|
1,272 |
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|
5,528 |
|
Capital lease obligations, less current portion |
|
|
366 |
|
|
|
869 |
|
|
|
|
|
|
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Total liabilities |
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35,026 |
|
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|
43,790 |
|
Redeemable preferred stock: |
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|
Series B redeemable preferred stock, $0.001 par value; 17,200,000 shares
authorized, no shares and 16,885,966 shares issued and outstanding at
September 30, 2005 and December 31, 2004, respectively |
|
|
|
|
|
|
9,597 |
|
Series B-1 redeemable preferred stock, $0.001 par value; 5,700,000 shares
authorized, no shares and 5,652,631 shares issued and outstanding at
September 30, 2005 and December 31, 2004, respectively |
|
|
|
|
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3,210 |
|
Series C redeemable preferred stock, $0.001 par value; 27,500,000 shares
authorized, no shares and 27,433,370 shares issued and outstanding at
September 30, 2005 and December 31, 2004, respectively |
|
|
|
|
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|
11,620 |
|
Series E redeemable preferred stock, $0.001 par value; 14,050,000 shares
authorized, no shares and 14,035,087 shares issued and outstanding at
September 30, 2005 and December 31, 2004, respectively |
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|
|
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5,921 |
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|
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|
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Total redeemable preferred stock |
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|
|
|
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30,348 |
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Stockholders equity (deficit): |
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Series A preferred stock, $0.001 par value; 5,965,000 shares authorized, no
shares and 5,965,000 shares issued and outstanding at September 30, 2005 and
December 31, 2004, respectively |
|
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|
|
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1,438 |
|
Series D preferred stock, $0.001 par value; 18,000,000 shares authorized, no
shares and 13,727,358 shares issued and no shares and 12,354,620 outstanding
at September 30, 2005 and December 31, 2004, respectively |
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|
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5,868 |
|
Common stock, $0.001 par value; 66,000,000 and 165,050,000 shares
authorized, 20,382,567 and 3,056,181 issued and 20,206,810 and 2,709,370
shares outstanding at September 30, 2005 and December 31, 2004, respectively |
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20 |
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|
3 |
|
Additional paid in capital |
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|
113,899 |
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|
6,998 |
|
Treasury stock, 175,757 shares, at cost |
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(275 |
) |
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|
(275 |
) |
Accumulated deficit |
|
|
(47,498 |
) |
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|
(46,402 |
) |
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|
|
|
|
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|
Total stockholders equity (deficit) |
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|
66,146 |
|
|
|
(32,370 |
) |
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Total liabilities, redeemable preferred stock and stockholders equity (deficit) |
|
$ |
101,172 |
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|
$ |
41,768 |
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The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
3
EMAGEON INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except for share data and per share amounts)
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For the Three Months Ended |
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For the Nine Months Ended |
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September 30, |
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September 30, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
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|
2004 |
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|
(Unaudited) |
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|
(Unaudited) |
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|
(Unaudited) |
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Revenue: |
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System sales |
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$ |
13,490 |
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$ |
7,458 |
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$ |
34,611 |
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|
$ |
21,128 |
|
Support services |
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|
6,116 |
|
|
|
2,864 |
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|
|
14,901 |
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|
8,428 |
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|
|
|
|
|
|
|
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|
|
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Total revenue |
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|
19,606 |
|
|
|
10,322 |
|
|
|
49,512 |
|
|
|
29,556 |
|
Cost of revenue: |
|
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|
|
|
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|
|
|
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|
|
|
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System sales |
|
|
7,206 |
|
|
|
5,554 |
|
|
|
17,782 |
|
|
|
13,160 |
|
Support services |
|
|
3,389 |
|
|
|
2,949 |
|
|
|
9,794 |
|
|
|
7,642 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of revenue |
|
|
10,595 |
|
|
|
8,503 |
|
|
|
27,576 |
|
|
|
20,802 |
|
|
|
|
|
|
|
|
|
|
|
|
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|
Gross profit |
|
|
9,011 |
|
|
|
1,819 |
|
|
|
21,936 |
|
|
|
8,754 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
|
2,364 |
|
|
|
1,581 |
|
|
|
7,282 |
|
|
|
4,154 |
|
Sales and marketing |
|
|
2,344 |
|
|
|
2,359 |
|
|
|
7,554 |
|
|
|
6,504 |
|
General and administrative |
|
|
2,838 |
|
|
|
2,079 |
|
|
|
8,269 |
|
|
|
5,652 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
7,546 |
|
|
|
6,019 |
|
|
|
23,105 |
|
|
|
16,310 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
1,465 |
|
|
|
(4,200 |
) |
|
|
(1,169 |
) |
|
|
(7,556 |
) |
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
497 |
|
|
|
14 |
|
|
|
1,207 |
|
|
|
17 |
|
Interest expense |
|
|
(131 |
) |
|
|
(347 |
) |
|
|
(1,125 |
) |
|
|
(730 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income (expense) |
|
|
366 |
|
|
|
(333 |
) |
|
|
82 |
|
|
|
(713 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
1,831 |
|
|
$ |
(4,533 |
) |
|
$ |
(1,087 |
) |
|
$ |
(8,269 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share basic |
|
$ |
0.09 |
|
|
$ |
(1.69 |
) |
|
$ |
(0.06 |
) |
|
$ |
(3.26 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share diluted |
|
$ |
0.09 |
|
|
$ |
(1.69 |
) |
|
$ |
(0.06 |
) |
|
$ |
(3.26 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common stock outstanding basic |
|
|
20,110,390 |
|
|
|
2,693,640 |
|
|
|
17,191,333 |
|
|
|
2,549,124 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common stock outstanding diluted |
|
|
21,381,695 |
|
|
|
2,693,640 |
|
|
|
17,191,333 |
|
|
|
2,549,124 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
4
EMAGEON INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY (DEFICIT)
(Unaudited)
(in thousands, except for share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Stock |
|
|
Common Stock |
|
|
Additional |
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
Carrying |
|
|
|
|
|
|
Par |
|
|
Paid in |
|
|
Treasury |
|
|
Accumulated |
|
|
Stockholders |
|
|
|
Shares |
|
|
Value |
|
|
Shares |
|
|
Value |
|
|
Capital |
|
|
Stock |
|
|
Deficit |
|
|
Equity (Deficit) |
|
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 |
|
|
|
|
|
|
|
|
|
|
171,261 |
|
|
|
|
|
|
|
273 |
|
|
|
|
|
|
|
|
|
|
|
273 |
|
Exercise of stock warrants |
|
|
105,703 |
|
|
|
58 |
|
|
|
24,632 |
|
|
|
|
|
|
|
74 |
|
|
|
|
|
|
|
|
|
|
|
132 |
|
Exercise of mandatorily
redeemable stock warrants
in connection with initial
public offering |
|
|
|
|
|
|
|
|
|
|
537,082 |
|
|
|
1 |
|
|
|
735 |
|
|
|
|
|
|
|
|
|
|
|
736 |
|
Proceeds from initial
public offering, net of
issuance costs |
|
|
|
|
|
|
|
|
|
|
5,750,000 |
|
|
|
6 |
|
|
|
67,195 |
|
|
|
|
|
|
|
|
|
|
|
67,201 |
|
Automatic conversion of
non-redeemable preferred
stock into common stock in
connection with initial
public offering |
|
|
(19,798,061 |
) |
|
|
(7,364 |
) |
|
|
2,402,898 |
|
|
|
2 |
|
|
|
7,362 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Automatic conversion of
redeemable preferred stock
into common stock in
connection with initial
public offering |
|
|
|
|
|
|
|
|
|
|
8,440,513 |
|
|
|
8 |
|
|
|
30,348 |
|
|
|
|
|
|
|
|
|
|
|
30,356 |
|
Stock based compensation -
stock options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
914 |
|
|
|
|
|
|
|
|
|
|
|
914 |
|
Accretion of redeemable
preferred stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9 |
) |
|
|
(9 |
) |
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,087 |
) |
|
|
(1,087 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2005 |
|
|
|
|
|
$ |
|
|
|
|
20,382,567 |
|
|
$ |
20 |
|
|
$ |
113,899 |
|
|
$ |
(275 |
) |
|
$ |
(47,498 |
) |
|
$ |
66,146 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
5
EMAGEON INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended |
|
|
|
September 30, |
|
|
|
2005 |
|
|
2004 |
|
|
|
(Unaudited) |
|
|
|
|
|
Operating activities |
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(1,087 |
) |
|
$ |
(8,269 |
) |
Adjustments to reconcile net loss to net cash (used in) provided by
operating activities: |
|
|
|
|
|
|
|
|
Depreciation |
|
|
1,943 |
|
|
|
1,019 |
|
Depreciation of property and equipment at contracted customer sites |
|
|
2,127 |
|
|
|
2,491 |
|
Amortization of acquired software |
|
|
625 |
|
|
|
625 |
|
Amortization of capitalized software development costs |
|
|
84 |
|
|
|
262 |
|
Bad debt expense |
|
|
25 |
|
|
|
63 |
|
Interest income on restricted cash |
|
|
(5 |
) |
|
|
(5 |
) |
Sales discount from issuance of warrants |
|
|
92 |
|
|
|
50 |
|
Consulting expense for options issued to non-employees |
|
|
40 |
|
|
|
|
|
Amortization and write off of subordinated debt discount |
|
|
646 |
|
|
|
82 |
|
Stock based compensation expense |
|
|
873 |
|
|
|
332 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
Trade accounts receivable |
|
|
(3,842 |
) |
|
|
(7,482 |
) |
Prepaid expenses and other current assets |
|
|
(1,827 |
) |
|
|
(1,366 |
) |
Unbilled revenue |
|
|
104 |
|
|
|
(470 |
) |
Other noncurrent assets |
|
|
(54 |
) |
|
|
(59 |
) |
Third-party components to be sold to customers |
|
|
31 |
|
|
|
(2,271 |
) |
Accounts payable |
|
|
1,466 |
|
|
|
2,438 |
|
Accrued payroll and related costs |
|
|
(310 |
) |
|
|
(272 |
) |
Other accrued expenses |
|
|
(1,697 |
) |
|
|
2,226 |
|
Deferred revenue |
|
|
(3,009 |
) |
|
|
12,303 |
|
|
|
|
|
|
|
|
Net cash (used in) provided by operating activities |
|
|
(3,775 |
) |
|
|
1,697 |
|
Investing activities |
|
|
|
|
|
|
|
|
Purchases of property and equipment for internal
purposes |
|
|
(4,812 |
) |
|
|
(1,001 |
) |
Purchases of third-party components to be located at contracted
customer sites |
|
|
(1,392 |
) |
|
|
(1,671 |
) |
Sales of third-party components leased to customers |
|
|
|
|
|
|
1,501 |
|
Purchases of marketable securities |
|
|
(59,381 |
) |
|
|
|
|
Proceeds from maturities of marketable securities |
|
|
30,000 |
|
|
|
|
|
Capitalized software development costs |
|
|
(293 |
) |
|
|
(26 |
) |
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(35,878 |
) |
|
|
(1,197 |
) |
Financing activities |
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock, net of
issuance costs |
|
|
69,614 |
|
|
|
34 |
|
Proceeds from issuance of preferred stock, net of issuance costs |
|
|
59 |
|
|
|
|
|
Payments on capital lease obligations |
|
|
(459 |
) |
|
|
(426 |
) |
Payments of loans |
|
|
(5,400 |
) |
|
|
(1,310 |
) |
Proceeds from loans, net of issuance costs |
|
|
|
|
|
|
3,980 |
|
Additions to restricted cash to secure letter of credit |
|
|
|
|
|
|
(96 |
) |
Cash released from restriction |
|
|
374 |
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
64,188 |
|
|
|
2,182 |
|
|
|
|
|
|
|
|
Net increase in cash |
|
|
24,535 |
|
|
|
2,682 |
|
Cash at beginning of period |
|
|
5,994 |
|
|
|
2,340 |
|
|
|
|
|
|
|
|
Cash at end of period |
|
$ |
30,529 |
|
|
$ |
5,022 |
|
|
|
|
|
|
|
|
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
6
EMAGEON INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited condensed consolidated financial statements of Emageon Inc.
(Emageon or the Company) have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01
of Regulation S-X. Accordingly, they do not include all of the information and notes required by
accounting principles generally accepted in the United States of America. In the opinion of
management, all adjustments, consisting only of normal recurring adjustments, for a fair
presentation have been included. Operating results for the three months and nine months ended
September 30, 2005 are not necessarily indicative of the results that may be expected for the year
ending December 31, 2005. These financial statements should be read in conjunction with the
financial statements and notes thereto included in the Companys Annual Report on Form 10-K for the
year ended December 31, 2004. Certain amounts in the prior period financial statements have been
reclassified to conform to the current financial statement presentation.
Securities
Available-for-Sale
The Company is required to classify debt securities as held-to-maturity, available-for-sale or
trading. The appropriateness of each classification is reassessed at each reporting date. As of
September 30, 2005, the Company classified all debt securities
as available-for-sale. At September
30, 2005, securities available-for-sale totaling $29.8 million (including accrued interest
receivable) consisted of U.S. Government Agency securities and marketable corporate debt securities
carried at fair market value in accordance with the Financial Accounting Standards Board Statement No.
115, Accounting for Certain Investments in Debt and Equity Securities.
Income Taxes
The Company accounts for income taxes using the asset and liability method. Deferred income
tax assets and liabilities are determined based on differences between financial reporting and tax
bases of assets and liabilities and are measured using the enacted tax rates and laws. Valuation
allowances are established when necessary to reduce deferred tax assets to the amounts that are
more likely than not to be realized. The effective tax rate for the three months ended September
30, 2005 is zero percent due to a reduction in the valuation allowance, which equaled the tax
effect of our taxable income during the quarter.
Because the majority of the deferred tax assets relate to net operating loss (NOL)
carryforwards that can only be realized if the Company is profitable in future periods, it is
uncertain whether the Company will realize any tax benefit related to the net operating loss
carryforward. Accordingly, the Company has provided a valuation allowance against the net deferred
tax assets due to uncertainties as to their ultimate realization. The valuation allowance will
remain at the full amount of the deferred tax asset until it is more likely than not that the
related tax benefits will be realized through deduction against taxable income during the
carryforward period. In the event of certain ownership changes, the Tax Reform Act of 1986 imposes
restrictions on the amount of net operating loss and research credit carryforwards that the Company
may use in any year. Due to recent stock issuances, it is possible that such limitations could
currently apply. The Company has not performed a detailed analysis on its ability to use these net
operating loss and research credit carryforwards. However, it is not anticipated that any such
analysis would have a material impact on the balance sheet as a result of offsetting changes in the
deferred tax valuation allowance.
Customer Indemnification Provisions
We offer our customers certain indemnities and warranties related to our products. The
following is a summary of our agreements that include these provisions:
7
(1) Our sales agreements with customers generally contain infringement indemnity provisions.
Under these agreements, we agree to indemnify, defend and hold harmless the customer in connection
with patent, copyright or trade secret infringement claims made by third parties with respect to
the customers authorized use of our products and services. The indemnity provisions generally
provide for our control of any required defense and settlement and cover costs and damages finally
awarded against the customer. Our infringement indemnity provisions typically give us the option
to make modifications of the product so it is no longer infringing or, if it cannot be corrected,
to require the customer to return the product in exchange for a specified payment for loss of use.
Our sales agreements with customers sometimes also contain indemnity provisions for death, personal
injury or property damage caused by our personnel or contractors in the course of performing
services to customers. Under these agreements, we agree to indemnify, defend and hold harmless the
customer in connection with death, personal injury and property damage claims made by third parties
with respect to actions of our personnel or contractors. The indemnity provisions generally
provide for our control of any required defense and settlement and cover costs and damages finally
awarded against the customer. The indemnity obligations contained in sales agreements generally
have no specified expiration date but typically limit the amount of award covered to some portion
of the fees paid by the customer over some portion of the contract term. To date, we have not
incurred any costs to settle claims or pay awards under these indemnification obligations, nor have
we been notified of any such claims. Accordingly, we have no liabilities recorded for these
provisions as of September 30, 2005.
(2) We warrant that our software products will perform in all material respects in accordance
with our standard published specifications in effect at the time of delivery of the licensed
products to the customer as long as the contract remains in effect. Additionally, we warrant that
our services will be performed by qualified personnel in a manner consistent with normally accepted
industry standards. If necessary, we would provide for the estimated cost of product and service
warranties based on specific warranty claims and claim history. However, we have not incurred
significant recurring expense under our product or service warranties. Accordingly, we have no
liabilities recorded for these provisions as of September 30, 2005.
(3) Our standard contracts with customers typically provide for a 99% guarantee of system
availability and a 98% guarantee of component availability with penalty provisions if our solution
fails to meet the guarantee thresholds. Our 99% system availability guarantee covers our solution
as a whole, while the component guarantee covers each individual component, as in certain
circumstances a component may fail without affecting system availability. The penalty provisions
in our contracts typically allow for a reduction in the software maintenance fee related to failure
to meet guaranteed uptime percentages. We calculate these penalties as a percentage of the
software maintenance fee and would reduce the amount of the software maintenance fee charged in a
specific period for these penalties. To date, we have not incurred any penalties associated with
these guarantees. Accordingly, we have no liabilities recorded for these provisions as of
September 30, 2005.
(2) COMPUTATION OF NET INCOME (LOSS) PER SHARE
Net income (loss) per share basic is computed using the weighted average common shares
outstanding during the period. Net income (loss) per share diluted is computed using the
weighted average common shares outstanding and common share equivalents outstanding during the
period. Common share equivalents consist of common convertible preferred stock, stock warrants and
options to purchase common stock. Certain common share equivalents were excluded from periods with
a net loss because they were anti-dilutive.
8
The computations for basic and diluted net income (loss) per share for each period are as
follows (in thousands, except for share and per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended |
|
|
For the Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
1,831 |
|
|
$ |
(4,533 |
) |
|
$ |
(1,087 |
) |
|
$ |
(8,269 |
) |
Accretion of redemption value related to
redeemable preferred stock |
|
|
|
|
|
|
(17 |
) |
|
|
(8 |
) |
|
|
(50 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) allocable to common stockholders |
|
$ |
1,831 |
|
|
$ |
(4,550 |
) |
|
$ |
(1,095 |
) |
|
$ |
(8,319 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock outstanding at beginning of period |
|
|
20,027,924 |
|
|
|
2,687,880 |
|
|
|
2,709,370 |
|
|
|
2,429,742 |
|
Weighted average effect of the release of
escrowed common stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
116,137 |
|
Weighted average effect of the conversion of
preferred stock to common stock |
|
|
|
|
|
|
|
|
|
|
9,056,036 |
|
|
|
|
|
Weighted average effect of the issuance of
common stock in initial public offering |
|
|
|
|
|
|
|
|
|
|
4,791,209 |
|
|
|
|
|
Weighted average effect of the issuance of
common stock and preferred stock pursuant to
stock option and warrant exercises |
|
|
82,466 |
|
|
|
5,760 |
|
|
|
491,862 |
|
|
|
3,245 |
|
Weighted average effect of the release of
escrowed common stock upon completion of
initial public offering |
|
|
|
|
|
|
|
|
|
|
142,856 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares of common stock basic |
|
|
20,110,390 |
|
|
|
2,693,640 |
|
|
|
17,191,333 |
|
|
|
2,549,124 |
|
Effect of dilutive stock options and warrants |
|
|
1,271,305 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares of common stock diluted |
|
|
21,381,695 |
|
|
|
2,693,640 |
|
|
|
17,191,333 |
|
|
|
2,549,124 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share basic |
|
$ |
0.09 |
|
|
$ |
(1.69 |
) |
|
$ |
(0.06 |
) |
|
$ |
(3.26 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share diluted |
|
$ |
0.09 |
|
|
$ |
(1.69 |
) |
|
$ |
(0.06 |
) |
|
$ |
(3.26 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock convertible into 10,827,403 shares of common stock for the three months and
nine months ended September 30, 2004 and 10,843,411 shares of common stock for the nine months
ended September 30, 2005, was not included in the computation of diluted earnings per share because
the effect on earnings per share would have been anti-dilutive. Options and warrants to purchase
3,612,387, 2,224,340 and 3,612,387 shares of common stock for the three months ended September 30,
2004 and for the nine months ended September 30, 2005 and 2004, respectively, and warrants to
purchase 216,138, none and 216,138 shares of Series D preferred stock for the three months ended
September 30, 2004 and the nine months ended September 30, 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.
(3) STOCK-BASED COMPENSATION
The Company recognizes compensation expense for its stock-based employee and director
compensation plans using the intrinsic value method prescribed in Accounting Principles Board
Opinion (APB) No. 25, Accounting for Stock Issued to Employees (APB 25), and complies with the
disclosure provisions of Statement of Financial Accounting Standard (SFAS) No. 123, Accounting
for Stock-Based Compensation, as amended. Under APB 25, compensation expense of fixed stock options
is based on the difference, if any, on the date of the grant between the fair value of the stock
and the exercise price of the option. Compensation expense is recognized on a straight-line basis
over the vesting period, which is generally three years. The Company recognizes expense for
stock-based compensation issued to non-employees and non-directors at fair value in accordance with
the provisions of SFAS No. 123 and Emerging Issues Task Force (EITF) Issue No. 96-18, Accounting
for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction
with Selling, Goods or Services.
Had compensation expense for the stock-based compensation plans been determined using the
fair-value method at the grant date for all employee and director awards using the Black-Scholes
pricing model, the net income (loss)
9
and related net income (loss) per share would have been as follows for the periods indicated
(in thousands, except for share and per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended |
|
|
For the Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual net income (loss) |
|
$ |
1,831 |
|
|
$ |
(4,533 |
) |
|
$ |
(1,087 |
) |
|
$ |
(8,269 |
) |
Deduct: Accretion of redemption value related to
redeemable preferred stock |
|
|
|
|
|
|
(17 |
) |
|
|
(8 |
) |
|
|
(50 |
) |
Add: Total stock-based employee compensation
expense determined under APB 25 |
|
|
301 |
|
|
|
161 |
|
|
|
873 |
|
|
|
332 |
|
Deduct: Total stock-based employee compensation
expense determined under fair value method for
all awards |
|
|
(599 |
) |
|
|
(188 |
) |
|
|
(1,684 |
) |
|
|
(394 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income (loss) allocable to common
stockholders |
|
$ |
1,533 |
|
|
$ |
(4,577 |
) |
|
$ |
(1,906 |
) |
|
$ |
(8,381 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares of common stock basic |
|
|
20,110,390 |
|
|
|
2,693,640 |
|
|
|
17,191,333 |
|
|
|
2,549,124 |
|
Effect of dilutive stock options and warrants |
|
|
971,171 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares of common stock diluted |
|
|
21,081,561 |
|
|
|
2,693,640 |
|
|
|
17,191,333 |
|
|
|
2,549,124 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income (loss) per share basic |
|
$ |
0.08 |
|
|
$ |
(1.70 |
) |
|
$ |
(0.11 |
) |
|
$ |
(3.29 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income (loss) per share diluted |
|
$ |
0.07 |
|
|
$ |
(1.70 |
) |
|
$ |
(0.11 |
) |
|
$ |
(3.29 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
The pro forma effects on the net income (loss) for the periods presented above are not
necessarily representative of the pro forma effects that may occur in future periods.
(4) INITIAL PUBLIC OFFERING
On February 14, 2005, the Company completed the initial public offering of its common stock.
The Company sold 5,000,000 shares of its common stock at a price of $13.00 per share. On February
18, 2005, the over-allotment option to purchase 750,000 additional shares of common stock was
exercised at $13.00 per share. Total proceeds from the initial public offering (net of
underwriting discount and offering expenses) were approximately $67.2 million. In conjunction with
the initial public offering, the Company issued 10,843,411 shares of common stock upon the
automatic conversion of outstanding shares of preferred stock into shares of common stock. The
Company also issued 537,082 shares of common stock upon the required exercise of warrants to
purchase common stock upon the closing of the offering. The Company also released the remaining
escrow holdback related to the Ultravisual Medical Systems Corporation (Ultravisual) merger upon
the closing of the offering. Upon completion of the offering, 552,661 of common stock warrants
with an exercise price of $0.00825 per share were canceled. As of the close of the initial public
offering, the Company had no remaining warrants to purchase preferred stock outstanding.
With a portion of the proceeds from the offering, the Company repaid $4.0 million of its
subordinated debt on February 18, 2005. Concurrent with this repayment, the Company recorded a
non-cash interest charge of $621,012 for the write-off of the debt discount related to the
subordinated debt.
(5) MARKETABLE SECURITIES
At September 30, 2005, the Company had marketable debt securities that were classified as
available-for-sale and carried at estimated fair market value.
Available-for-sale securities consisted of the
following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2005 |
|
|
2004 |
|
U.S. government agency securities |
|
$ |
24,507 |
|
|
$ |
|
|
Corporate commercial paper |
|
|
4,874 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
available-for-sale securities |
|
$ |
29,381 |
|
|
$ |
|
|
|
|
|
|
|
|
|
These marketable debt securities have expiration dates ranging from October 3, 2005 to March
27, 2006.
10
At
September 30, 2005, all available-for-sale securities were classified as current.
(6) NEW ACCOUNTING PRONOUNCEMENTS
In December 2004, the FASB issued Statement No. 123 (revised 2004), Share-Based Payment (SFAS
123R). SFAS 123R establishes standards for the accounting for transactions in which an entity
exchanges its equity instruments for goods or services. It focuses primarily on accounting for
transactions in which an entity obtains employee services in share-based payment transactions.
SFAS 123R requires publicly-traded companies to measure the cost of employee services received in
exchange for an award of equity instruments based on the grant-date fair value of the award and the
estimated number of awards that are expected to vest. That cost is to be recognized over the
period during which an employee is required to provide service in exchange for the award, which is
usually the vesting period. SFAS 123R supersedes APB 25, which the Company had previously elected
to follow. SFAS 123R will be effective for the Company at the beginning of the fiscal first
quarter of 2006. SFAS 123R applies to all awards granted after the required effective date and to
awards modified, repurchased, or canceled after that date. Compensation cost is recognized on or
after the required effective date for the portion of outstanding awards for which the requisite
services have not yet been rendered, based on the grant-date fair value of those awards calculated
under SFAS 123 that the Company has followed for disclosure purposes. For periods before the
required effective date, the Company may elect to adjust financial statements of prior periods on a
basis consistent with the pro forma disclosures required for those periods by SFAS 123. The
Company has elected not to restate prior periods. Based on stock options granted through September
30, 2005, the Company estimates that it will record additional costs relating to compensation
expense as a result of the adoption of SFAS 123R starting in the first quarter of 2006.
In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections, which is
a replacement of APB Opinion No. 20, Accounting Changes, and SFAS No. 3, Reporting Changes in
Interim Financial Statements. SFAS No. 154 applies to all voluntary changes in accounting
principle and changes in the accounting for and reporting of a change in accounting principle.
SFAS No. 154 requires that a change in method of depreciation or amortization for long-lived
non-financial assets be accounted for as a change in accounting estimate that is effected by a
change in accounting principle. SFAS No. 154 is effective for accounting changes and corrections
of errors made in fiscal years beginning after December 15, 2005. The Company does not expect that
the adoption of SFAS No. 154 will have a material impact on its financial position, results of
operations or cash flows.
(7) SUBSEQUENT EVENT
On November 1, 2005, the Company acquired all the stock of Camtronics Medical Systems, Ltd.,
formerly a wholly-owned subsidiary of Analogic Corporation, based in Hartland, Wisconsin. Under the
terms of the acquisition agreement, the Company paid $40 million in cash to Analogic for the stock
of Camtronics. The Company sold $15 million of short-term
marketable securities and utilized these proceeds, combined with
existing cash, to fund the purchase price. As part of this transaction the Company acquired all of Camtronics assets,
including its corporate headquarters building in Hartland, and assumed all of Camtronics
liabilities. For its fiscal year ended July 31, 2005, Camtronics had unaudited revenue of $38.1
million.
11
ITEM 2: MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with our consolidated
financial statements and related notes included in Item 1 of Part I of this quarterly report and
the audited consolidated financial statements and notes and Managements Discussion and Analysis of
Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the
year ended December 31, 2004.
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 solution consists of advanced visualization and image management
software, third-party components and comprehensive support services. 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 two dimensional (2D) perspective and a three dimensional
(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 solution is designed to help customers improve staff
productivity, enhance revenue opportunities, automate complex medical imaging workflow, lower total
cost of ownership and provide better service to physicians and patients.
Results Overview
Total revenue for the quarter was $19.6 million, which represents an 89.9% increase over the
corresponding quarter in 2004. The increase was comprised of an 80.9% increase in system sales
revenue and a 113.5% increase in support services revenue. Our overall gross margin percentage
increased from 17.6% for the quarter ended September 30, 2004 to 46.0% for the quarter ended
September 30, 2005. We achieved gross margin percentages of 46.6% and 44.6% for system sales and
support services revenue, respectively, during the quarter ended September 30, 2005, compared to
25.5% and (3.0)%, respectively, for the corresponding quarter in 2004. Net income was $1.8
million in the third quarter of 2005 compared to a net loss of $4.5 million in the third quarter of
2004. This improvement was driven by revenue growth, margin expansion and expense control.
Operating margin was 7.5% in the third quarter of 2005 compared to a negative operating margin of
40.7% in the year-ago quarter. Going forward, we believe that we can continue to achieve positive
operating margins by expanding margins on services, leveraging investments in research and
development and controlling spending.
We also executed to our operational plan in the third quarter of 2005. We installed and
received acceptance of thirteen solutions during the third quarter of 2005, bringing the cumulative
number of sites implemented to 122.
Recent Events
On November 1, 2005, we acquired all the stock of Camtronics Medical Systems, Ltd., based in
Hartland, Wisconsin. Under the terms of the acquisition agreement, we paid $40 million in cash for
the stock of Camtronics. We acquired all of Camtronics assets, including its corporate
headquarters building in Hartland, and all of Camtronics liabilities. We currently anticipate
that following this transaction our combined 2006 revenue should reflect growth of 45% to 50% above
our 2005 revenue. We also believe that this acquisition should be accretive to our earnings after a
period of dilution during the integration of the two companies. We expect to substantially
complete the integration of this business by the end of the third quarter of 2006.
Camtronics, founded in 1986, is a leading provider of cardiology image and information
management systems. Camtronics, which had unaudited revenue of $38.1 million for the fiscal year
ended July 31, 2005, currently serves a customer base that includes approximately 350 hospitals. In
2004, Frost and Sullivan, a leading market research firm, named Camtronics as one of the top five
cardiology-solution vendors in the United States, and when Camtronics customers are added to our
current customer relationships with over 250 hospitals, our combined organization now has a
customer base that includes approximately 600 medical facilities.
12
We record business combinations in accordance with SFAS No. 141, Business Combinations, and
SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires the purchase method of
accounting for all business combinations, and that certain acquired intangible assets in a business
combination be recognized as assets separate from goodwill. We will apply SFAS No. 141 in the
allocation of the purchase price of the Camtronics acquisition. Accordingly, we will identity and
allocate the estimated fair value to the intangibles acquired as required by SFAS No. 141.
Our Market
We are seeing the following industry trends in the health information technology market which
magnify clinical demand for our products:
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|
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Increased procedure volumes |
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|
|
Increased procedure size |
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|
|
Modality blending, a layering of studies from two separate modalities for
diagnostic and treatment purposes |
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|
The expanding adoption and use of standards |
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Increasing emphasis by healthcare providers and government agencies on electronic
health record integration |
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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, healthcare
information users want access to the stored data at any time, and in any location. In addition,
modalities that provide non-invasive alternatives continue to expand into other clinical domains.
Examples include:
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MR and CT Angiography |
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Multi-Detector CT for heart and chest imaging |
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CT/PET Fusion |
One area that has received significant attention is advanced visualization, which uses 3D and
analysis tools as key elements in an enterprise visual medical system. Earlier generation Picture
Archiving and Communications Systems (PACS) have focused primarily on single departments and have
utilized generic 2D tools. The enterprise visualization system of the future must support full 2D
capabilities, but also include 3D tools, integrate easily into other information systems and adhere
to standards. To understand these new images, referring physicians will need new tools, ones that
adapt to their specialty. We expect that clinicians and specialists will soon consider enterprise
visualization routine, since these images can be easier to understand and utilize.
Our solution can be extended to multiple stakeholders throughout the healthcare enterprise.
Our solution goes beyond moving images from point A to point B to effectively distributing
multi-specialty tools and clinical content using a web-enabled platform. Not only does our
solution manage very complex datasets, it performs advanced visualization such as 3D reconstruction
and analysis within the viewing application,and distributes essential clinical tools through the
network.
Significant Events in the Nine Months Ended September 30, 2005
During the nine months ended September 30, 2005, we continued to focus on our core set of
strategic and operational objectives that are designed to improve our position in the medical
imaging market and achieve our financial goals. We believe the following events were significant
with respect to our goals:
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|
During February 2005, we completed our initial public offering, selling a total of
5,750,000 shares of our common stock at a price of $13.00 per share, which resulted in
net proceeds of approximately $67.2 million. |
13
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|
During February 2005, we entered into a ten-year, digital healthcare information
management agreement with Sisters of St. Francis Health Services, Inc., an integrated
network of 12 hospitals, clinics and associated facilities located in Indiana and
Illinois. |
|
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|
|
During March 2005, our quality management system received ISO 13485:2003
certification from the certification body, Lloyds Register Quality Assurance, for both
the Madison, Wisconsin and Birmingham, Alabama offices. The certificate issued is for
the design and management of software manufacturing and for services used by healthcare
provider organization for the clinical analysis, management, storage, distribution and
visualization of digital medical images and corresponding data. |
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|
During May 2005, we announced enhancements to our advanced visualization software
allowing radiologists and treating physicians to better use volume rendering and 3D
navigation in one native, integrated, open-standards package. This improvement means
physicians can utilize both 2D and 3D tools without having to resort to third-party
software and proprietary hardware to analyze medical images offering time-savings and
increased productivity. |
|
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|
|
During September 2005, we received certification under the Canadian Medical Device
Conformity Assessment System recognizing our ISO 13485:2003 status in Canada. We also
received our medical device license from Health Canada to allow us to market our
products in Canada. We believe that there may be a strong opportunity for business
with multi-facility providers throughout the Canadian provinces. |
Change in Financial Position
As noted above, we completed our initial public offering during February 2005. The following
significant changes in our financial position occurred as a result of the completion of the initial
public offering:
|
|
|
We issued 10,843,411 shares of common stock upon the automatic conversion of
outstanding shares of preferred stock into shares of common stock. |
|
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|
We issued 5,750,000 shares of common stock. |
|
|
|
|
We issued 537,082 shares of common stock upon exercise of mandatorily redeemable warrants. |
|
|
|
|
We received total cash proceeds (net of underwriting discount and offering expenses)
of $67.2 million. |
|
|
|
|
With a portion of the proceeds, we repaid $4.0 million of our subordinated debt. We
also recorded a non-cash interest charge of $0.6 million for the write-off of the debt
discount related to the subordinated debt. |
|
|
|
|
We invested the remaining proceeds in cash equivalents and short-term marketable
securities. |
As of September 30, 2005, we have 20,382,567 shares of common stock issued, 20,206,810 shares
of common stock outstanding and warrants to purchase 48,986 shares of common stock outstanding at
exercise prices ranging from $3.63 to $5.52 per share. As of the close of the initial public
offering, we had no remaining warrants to purchase preferred stock outstanding.
Results of Operations
Revenue
Revenue consists of system sales and support services revenue. System sales revenue is
comprised of revenue from sales of our software and third party components. Support services
revenue is comprised of revenue from up-front professional services such as implementation,
adoption and training, as well as ongoing maintenance services. The following table sets forth
revenue component data.
14
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
September 30, |
|
September 30, |
|
|
(In thousands except percentages) |
|
(In thousands except percentages) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
Change |
|
|
2005 |
|
2004 |
|
Change |
|
(%) |
|
2005 |
|
2004 |
|
Change |
|
(%) |
|
|
|
|
|
System sales |
|
$ |
13,490 |
|
|
$ |
7,458 |
|
|
$ |
6,032 |
|
|
|
80.9 |
% |
|
$ |
34,611 |
|
|
$ |
21,128 |
|
|
$ |
13,483 |
|
|
|
63.8 |
% |
Percentage of total
revenue |
|
|
68.8 |
% |
|
|
72.3 |
% |
|
|
|
|
|
|
|
|
|
|
69.9 |
% |
|
|
71.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Support services |
|
$ |
6,116 |
|
|
$ |
2,864 |
|
|
$ |
3,252 |
|
|
|
113.5 |
% |
|
$ |
14,901 |
|
|
$ |
8,428 |
|
|
$ |
6,473 |
|
|
|
76.8 |
% |
Percentage of total
revenue |
|
|
31.2 |
% |
|
|
27.7 |
% |
|
|
|
|
|
|
|
|
|
|
30.1 |
% |
|
|
28.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
19,606 |
|
|
$ |
10,322 |
|
|
$ |
9,284 |
|
|
|
89.9 |
% |
|
$ |
49,512 |
|
|
$ |
29,556 |
|
|
$ |
19,956 |
|
|
|
67.5 |
% |
|
|
|
|
|
During the three months ended September 30, 2005, the increase in system sales revenue was
attributable to an increase in the number of new and existing customer installations offset by a
decrease in the average size of these installations. Compared to the third quarter of 2004, during the
third quarter of 2005, we had 10 more system acceptances. The average revenue recognized per
acceptance (excluding outliers, such as unusually small or large dollar amounts) decreased slightly
in the quarter ended September 30, 2005 as compared to the quarter ended September 30, 2004. All
revenue associated with acceptances during both quarters was related to perpetual software
licenses. The average revenue recognized per acceptance decreased as a result of an increase in
add-on sales to our existing customer base, which tend to be smaller than initial sales to new
customers.
During the nine months ended September 30, 2005, the increase in system sales revenue was
attributable to an increase in the number of new and existing customer installations offset by a
decrease in the average size of these installations as well as the recognition of $3.4 million of
previously deferred revenue. Compared to the nine months ended September 30, 2004, we had 14 more
system acceptances during the nine months ended September 30, 2005. The average revenue recognized
per acceptance (excluding outliers, such as unusually small or large dollar amounts) decreased
slightly in the nine months ended September 30, 2005 as compared to the period a year ago. As our
pricing has not changed significantly from the prior year, the decrease is primarily related to an
increase in add-on sales to our existing customer base, which tend to be smaller than initial sales
to new customers. Also, during the nine months ended September 30, 2005, we recognized system
sales revenue of $3.4 million related to a contract for which we deferred revenue in 2004 as a
result of the existence of certain undelivered upgrades. We delivered the additional software
features during the second quarter of 2005 and, as a result of all revenue recognition criteria
being met, we recognized the system sales revenue associated with the contract.
During the three months ended September 30, 2005, the increase in support services revenue was
attributable to an increase in customer installations. Approximately $1.2 million of the increase
in support services revenue for the three months ended September 30, 2005, was attributable to an
increased number of customers that have implemented our solution and are paying us ongoing support
and maintenance fees. The remaining $2.1 million increase was related to the increase in the
recognition of non-recurring revenue related to services such as implementation and training for
new customers as well as add-on services for existing customers.
During the nine months ended September 30, 2005, the increase in support services revenue was
attributable to an increase in customer installations. Approximately $3.3 million of the increase
in support services revenue for the nine months ended September 30, 2005, was attributable to an
increased number of customers that have implemented our solution and are paying us ongoing support
and maintenance fees. Also included in this $3.3 million increase is the recognition of $0.4
million of revenue related to the contract mentioned above for which we deferred revenue in 2004 as
a result of the existence of undelivered upgrades. We delivered the additional software features
during the second quarter of 2005 and, as a result of all revenue recognition criteria being met,
we recognized the support services revenue catch-up adjustment. The remaining $3.2 million
increase was related to the increase in the recognition of non-recurring revenue related to
services such as implementation and training for new customers as well as add-on services for
existing customers.
15
In general, the increased number of customer installations was a result of increased customer
awareness and acceptance of our products and services with multi-facility healthcare providers. Of
the software acceptances received during the nine months ended September 30, 2004 and 2005, 83% and
96%, respectively, related to agreements with multi-facility healthcare providers. We expect
revenue to continue to increase as we recognize revenue from our existing long-term customer
agreements while also recognizing revenue related to new customer agreements.
We also believe that support services as a percentage of total revenue will continue to
increase as compared to prior periods as our customer base expands.
Cost of Revenue
Cost of revenue consists of costs associated with system sales and support services revenue.
System sales cost of revenue is comprised of the cost of third-party components and the cost of
software licenses. Support services cost of revenue is comprised of labor costs and related
overhead relating to the implementation, installation, training, application support and
maintenance of our solution as well as costs related to maintenance of third-party components. The
following table sets forth cost of revenue component data.
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|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
September 30, |
|
September 30, |
|
|
(In thousands except percentages) |
|
(In thousands except percentages) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
Change |
|
|
2005 |
|
2004 |
|
Change |
|
(%) |
|
2005 |
|
2004 |
|
Change |
|
(%) |
|
|
|
|
|
Cost of system
sales revenue |
|
$ |
7,206 |
|
|
$ |
5,554 |
|
|
$ |
1,652 |
|
|
|
29.7 |
% |
|
$ |
17,782 |
|
|
$ |
13,160 |
|
|
$ |
4,622 |
|
|
|
35.1 |
% |
Percentage of
system sales
revenue |
|
|
53.4 |
% |
|
|
74.5 |
% |
|
|
|
|
|
|
|
|
|
|
51.4 |
% |
|
|
62.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of support
services revenue |
|
$ |
3,389 |
|
|
$ |
2,949 |
|
|
$ |
440 |
|
|
|
14.9 |
% |
|
$ |
9,794 |
|
|
$ |
7,642 |
|
|
$ |
2,152 |
|
|
|
28.2 |
% |
Percentage of
support services
revenue |
|
|
55.4 |
% |
|
|
103.0 |
% |
|
|
|
|
|
|
|
|
|
|
65.7 |
% |
|
|
90.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of
revenue |
|
$ |
10,595 |
|
|
$ |
8,503 |
|
|
$ |
2,092 |
|
|
|
24.6 |
% |
|
$ |
27,576 |
|
|
$ |
20,802 |
|
|
$ |
6,774 |
|
|
|
32.6 |
% |
|
|
|
|
|
Percentage of total
revenue |
|
|
54.0 |
% |
|
|
82.4 |
% |
|
|
|
|
|
|
|
|
|
|
55.7 |
% |
|
|
70.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in total cost of revenue was attributable to increased purchases of third-party
components and, to a lesser extent, increased labor costs, as a result of the increased number and
size of new customer installations. The decrease in cost of revenue as a percentage of total
revenue was a result of the increase in the number of software acceptances received during the
current period for which we recognized revenue as compared to the corresponding period in 2004.
Our costs associated with software licenses as a percentage of total revenue are significantly
lower than costs associated with other components of our revenue.
For the three and nine months ended September 30, 2005, cost of system sales increased by
29.7% and 35.1%, respectively, as compared to the corresponding periods in 2004. These increases
were caused by the increased number of health care institutions that acquired and installed our
solution. We anticipate that our cost of revenue will continue to increase in absolute dollars as
a result of additional purchases of third-party components related to customer installations, which
purchases are in turn driven by our increase in customers. Cost of system sales as a percentage of
system sales revenue decreased in both periods in 2005 presented above as compared to the
corresponding periods in 2004. A portion of this decrease, for the nine month period, is
attributable to the recognition of $3.4 million of previously deferred revenue during the second
quarter of 2005. As a result of the timing of the revenue recognition, there were minimal costs
associated with this revenue when it was recognized. We believe that the quarterly percentages will remain relatively stable in future quarters as
we believe the mix in our system sales revenue during the third quarter of 2005 is fairly
indicative of what we expect to see in the future.
16
For the three and nine months ended September 30, 2005, cost of support services increased by
14.9% and 28.2%, respectively, as compared to the corresponding periods in 2004. These increases
were caused by an increase in staffing levels in our support services teams as well as increased
costs to maintain third-party components due to an increase in volume. Cost of support services as
a percentage of support services revenue decreased in both periods in 2005 presented above as
compared to the corresponding periods in 2004. The decrease in cost of support services as a
percentage of total support services revenue was a result of efficiencies realized as our customer
base grew and the cost of support services was spread over the broader base of customers. Our
management team has focused on ensuring the professional services and support departments achieve
the benefits associated with efficiencies of scale as a result of our increased customer base.
These initiatives include departmental reorganizations, investments in software technologies, use
of external consultants to gauge best practices and use of lower-cost resources.
Gross Margin Percentage
Our gross margin percentage increased from 17.6% of total revenue for the quarter ended
September 30, 2004 to 46.0% of total revenue for the quarter ended September 30, 2005. For the
nine months ended September 30, 2005, our gross margin percentage increased to 44.3% as compared to
29.6% for the corresponding period in 2004. These improvements were primarily a result of the
increased revenue attributable to software license acceptances that represent higher margins than
other components of our revenue.
Research and Development (R&D)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
|
September 30, |
|
September 30, |
|
|
(In thousands except percentages) |
|
(In thousands except percentages) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change |
|
|
|
|
|
|
|
|
|
|
|
|
|
Change |
|
|
2005 |
|
2004 |
|
Change |
|
(%) |
|
2005 |
|
2004 |
|
Change |
|
(%) |
|
|
|
R&D Expense |
|
$ |
2,364 |
|
|
$ |
1,581 |
|
|
$ |
783 |
|
|
|
49.5 |
% |
|
$ |
7,282 |
|
|
$ |
4,154 |
|
|
$ |
3,128 |
|
|
|
75.3 |
% |
% of Revenue |
|
|
12.1 |
% |
|
|
15.3 |
% |
|
|
|
|
|
|
|
|
|
|
14.7 |
% |
|
|
14.1 |
% |
|
|
|
|
|
|
|
|
The increases in research and development expenses for the three and nine months ended
September 30, 2005 as compared to corresponding periods in 2004 are mainly attributable to an
increase in the number of personnel, which accounted for approximately $0.7 million and $2.4
million of the increases, respectively. Research and development headcount increased to 71
employees at September 30, 2005 from 49 employees at January 1, 2004 and 60 employees at September
30, 2004. The personnel growth has been enhanced by a re-organization of the R&D department. The
increased headcount and revised organizational structure has provided increased productivity and
efficiency during the development phase of a software release and has also helped improve service
to customers. Accompanying the increased headcount has been increased employee support spending
such as training. Additional training expenditures have been focused on developing a new
engineering training program coupled with participation in outside management programs.
Increased spending for outside consultants accounted for approximately $0.1 million and $0.7
million of the increases for the three and nine months ended September 30, 2005, respectively. A
portion of the spending has been focused on enhancing our use of low-cost consultants that are
engaged in quality development and service activities in support of an expanding R&D employee base.
The remaining spending has been targeted on consultants and developers that assist our personnel in
product quality assurance and validation, system framework implementations, as well as internal
network administration.
Investments have been made to develop testing programs and aid development of software
releases. Significant expenditures have been made to purchase engineering laboratory equipment and
expand our laboratory and testing environments. The additional expenditures are reflected in a
growing asset base and increased depreciation expense included in the General and Administrative
line item.
17
Sales and Marketing (S&M)
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Three Months Ended |
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Nine Months Ended |
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September 30, |
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September 30, |
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(In thousands except percentages) |
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(In thousands except percentages) |
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Change |
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Change |
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2005 |
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2004 |
|
Change |
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(%) |
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2005 |
|
2004 |
|
Change |
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(%) |
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|
S&M Expense |
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$ |
2,344 |
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|
$ |
2,359 |
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|
($15 |
) |
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|
(0.6 |
%) |
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$ |
7,554 |
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$ |
6,504 |
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$ |
1,050 |
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16.1 |
% |
% of Revenue |
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12.0 |
% |
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22.9 |
% |
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15.3 |
% |
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22.0 |
% |
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|
For the three months ended September 30, 2005, sales and marketing expenses remained
relatively consistent compared to the three months ended September 30, 2004. For the nine months
ended September 30, 2005, sales and marketing expenses increased by $1.1 million, representing an
increase of 16.1% over the corresponding period in 2004. The stability in sales and marketing
expenses during the three months ended September 30, 2005 as compared to the corresponding period
in 2004 includes a $0.4 million increase in personnel expenses (excluding commissions), a $0.3
million decrease in commission expense and a decrease in direct marketing expenses of $0.1 million.
The 16.1% increase from the nine months ended September 30, 2005 as compared to the corresponding
period in 2004 was attributable to an increase of $1.5 million in personnel expenses, a decrease of
$0.3 million in commission expense and a decrease in direct marketing expenses of $0.1 million.
Sales and marketing headcount increased to 45 employees at September 30, 2005, from 29
employees at January 1, 2004 and 38 employees at September 30, 2004. The majority of the increases
have been related to our efforts to develop a client sales group and to increase the size of the
marketing support group. The client sales group primarily focuses on support and development of
current relationships with large hospitals. The additional increases in marketing support have been
focused on expanding the product demonstration team. The product demonstration team has also been
augmented with new tools and technology that have created enhanced avenues for potential customers
to evaluate our visualization technology. Accompanying the increased headcount are increased
expenditures related to training, communications and technology that have increased the
effectiveness and productivity of our sales and marketing personnel.
The decrease in commission expense during the three and nine months ended September 30, 2005
as compared to the corresponding periods in 2004 is primarily related to the timing and type of
contracts closed and accepted during the respective periods. The commission expense for the quarter
ended September 30, 2004 reflected greater than usual commission expense related to the execution
of master contracts for large network customers. The three and nine months ended September 30,
2005 reflect reduced average payments and expense of commissions related to the execution of
contract addenda in association with existing customer master contracts. Commission payments
related to the execution of master contract addenda are lower than the payments for new customer
contracts, as commissions related to the original master contracts have already been paid or are
being paid and expensed on a monthly basis over the period of the master contract initial
commitment. Commissions for new contract addenda that are included in the master contract are
typically paid based on contract revenue above and beyond the levels in the master contract for
that particular site; therefore, although the new contract addenda related to these master
contracts represent major new installations, the incremental commission expense associated with
these addenda is less than the corresponding level for a similarly sized, new contract.
The decrease in direct marketing expenses reflects a focused attempt to grow our market
presence with a more efficient use of expenditures. We have directed funds towards industry trade
shows that provide opportunities for us to display our product to a wider, more knowledgeable
customer base through the utilization of state-of-the-art booths and exhibits. We have also
internally developed and published a periodic industry magazine that promotes industry specific
topics while providing brand name awareness.
All of the efforts discussed above have augmented our reputation in the marketplace and should
help deliver continued growth in the future. We expect to increase our sales and marketing expenses
at a steady, controlled pace as we hire additional sales and marketing personnel and focus on
increasing market awareness of our products and service offerings. The leveraging of these sales
and marketing expenses is reflected in the percentage of sales and marketing expense to total
revenue. Sales and marketing expenses decreased as a percentage of total revenue, from
18
22.9% for the quarter ended September 30, 2004 to 12.0% for the quarter ended September 30,
2005. These percentages for the nine months ended September 30, 2005 and 2004, were 15.3% and
22.0%, respectively.
General and Administrative (G&A)
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Three Months Ended |
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Nine Months Ended |
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|
September 30, |
|
September 30, |
|
|
(In thousands except percentages) |
|
(In thousands except percentages) |
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|
Change |
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|
Change |
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|
2005 |
|
2004 |
|
Change |
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(%) |
|
2005 |
|
2004 |
|
Change |
|
(%) |
|
|
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|
|
G&A Expense |
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$ |
2,838 |
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$ |
2,079 |
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|
$ |
759 |
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36.5 |
% |
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$ |
8,269 |
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$ |
5,652 |
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$ |
2,617 |
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46.3 |
% |
% of Revenue |
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|
14.5 |
% |
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20.1 |
% |
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16.7 |
% |
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19.1 |
% |
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|
As expected, our general and administrative expenses have grown in absolute terms from 2004 to
2005 for comparable periods. These additional expenditures are in support of our increasing
employee base and are a natural result of the growth of our company as a whole. The majority of the
increases can be broken down into the following categories:
|
|
|
Administrative expense has increased $0.2 million and $0.7 million for the three and
nine months ended September 30, 2005, respectively, as compared to corresponding periods in
2004. The increases occurred in insurance, accounting and legal fees, and other
professional fees mainly as a result of our becoming a public company in 2005 and
associated expenses incurred for compliance and regulatory affairs. |
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|
|
|
Depreciation expense has increased $0.4 million and $0.9 million for the three and nine
months ended September 30, 2005, respectively, as compared to corresponding periods in
2004, mainly as a result of increased purchases of employee computer equipment, server
equipment for the internal engineering laboratory and testing equipment. |
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|
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|
Stock-based compensation has increased $0.1 million and $0.6 million for the three and
nine months ended September 30, 2005, respectively, as compared to corresponding periods in
2004. The majority of stock options with an intrinsic value were issued during 2004 and the
beginning of 2005; thus we recorded minimal expense during the first nine months of 2004.
Periodic stock-based compensation has remained consistent during 2005 as fewer options have
been granted. |
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|
Personnel expense has increased $0.1 million and $0.4 million for the three and nine
months ended September 30, 2005, respectively, as compared to corresponding periods in
2004. New employees have been added in the accounting, human resources and general
administrative functions in support of our increased employee base and increased amount of
administrative transactions and activity. In addition, associated costs such as travel,
communications and rent have increased in conjunction with the growth in our employee base. |
Although our general and administrative expenses have increased as a result of being a public
company, our general and administrative expenses as a percentage of revenue have decreased as a
result of revenue growth. We expect our general and administrative expenses to continue to increase
in absolute dollars as a result of being a public company and also as a result of our continued
growth. Specifically, we expect to incur increased costs associated with accounting, consulting,
legal and other professional services, increased insurance costs and increased personnel in our
finance, legal and human resources functions. By way of example, although we have not previously
been involved in any type of significant litigation, we recognize that most companies from time to
time may be the subject of customer or other complaints, and that such complaints could result in
litigation. In such a case, it is likely that our external legal expenses would increase.
Operating Income (Loss)
For the three months ended September 30, 2005, operating income increased by $5.7 million as
compared to the three months ended September 30, 2004. Operating income as a percentage of total
revenue improved from a
negative 40.8% for the quarter ended September 30, 2004 to a positive 7.4% for the quarter
ended September 30, 2005. For the nine months ended September 30, 2005, operating loss decreased
by $6.4 million as compared to the nine months ended September 30, 2004. Operating loss as a
percentage of total revenue decreased from 25.6% for
19
the nine months ended September 30, 2004 to
2.4% for the nine months ended September 30, 2005. These improvements are a result of the total
revenue increase, increases in gross margin and the increased leverage in operating costs discussed
above.
Interest Income and Expense
For the three and nine months ended September 30, 2005, interest income increased by $0.5
million and $1.2 million, respectively, over the corresponding periods in 2004. These increases
are a result of investing the proceeds from our initial public offering.
For the three months ended September 30, 2005, interest expense decreased $0.2 million as
compared to the corresponding period in 2004. For the nine months ended September 30, 2005,
interest expense increased by $0.4 million as compared to the corresponding period in 2004
primarily as a result of our repayment of $4.0 million of our subordinated debt with a portion of
the proceeds from our initial public offering. In conjunction with this extinguishment, we
recorded a non-cash interest charge of $0.6 million for the write-off of the subordinated debt
discount.
Liquidity and Capital Resources
As of September 30, 2005 and December 31, 2004, our net cash position was as follows (in
thousands except ratios):
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|
September 30, |
|
December 31, |
|
|
2005 |
|
2004 |
Working capital |
|
$ |
53,201 |
|
|
$ |
(9,404 |
) |
Current ratio* |
|
|
2.8:1.0 |
|
|
|
0.7:1.0 |
|
Cash, cash equivalents and short-term investments |
|
|
59,910 |
|
|
|
5,994 |
|
Short-term borrowings and long-term debt |
|
|
4,275 |
|
|
|
9,489 |
|
Net cash position** |
|
$ |
55,635 |
|
|
$ |
(3,495 |
) |
|
|
|
* |
|
Current ratio is the ratio of current assets to current liabilities. |
|
** |
|
Net cash position is the sum of cash, cash equivalents and short-term investments in public and
private debt securities less short-term borrowings and long-term debt. |
The significant increase in our working capital, current ratio, and cash, cash equivalents,
and short-term investments is due to $67.2 million of proceeds from the initial public offering of
our common stock that was completed in February 2005. The large decrease in short-term borrowings
and long-term debt from December 31, 2004 to September 30, 2005 is a result of our repayment of
$4.0 million of our subordinated debt with a portion of the proceeds from the initial public
offering and scheduled debt retirement on other debt.
Operating Activities
During the nine months ended September 30, 2005, cash used in operations was $3.8 million,
which primarily related to our net loss of $1.1 million and changes in working capital accounts.
We experienced significant increases in trade accounts receivable and prepaid expenses during the
period as well as a significant decrease in deferred revenue. Our accounts receivable balance
increased as a result of the timing of customer acceptances as well as the timing of new customer
contracts. Prepaid expenses increased as a result of the existence of numerous annual hardware
maintenance contract renewals for customer third-party components during the period for which
expenses are recognized on a monthly basis over the contract periods. The decrease in deferred
revenue for the period is primarily related to the recognition of $3.8 million of revenue
previously deferred as a result of the existence of future deliverables in a customer contract. We
also experienced a decline in cash due to the payment of
higher than usual other accrued expenses existing at December 31, 2004 during the first nine
months of 2005. Our days sales outstanding in accounts receivable on an annualized basis as of
September 30, 2005 and December 31, 2004, were 85 days and 114 days, respectively. Our weighted
average collection period for accounts receivable as of September 30, 2005 was 48 days compared to
55 days at December 31, 2004. We calculate weighted average
20
collection period based on average
days outstanding per customer based on historical experience and then weight these days outstanding
based on proportional dollar value of the accounts receivable balance at the end of the period.
The changes in other working capital accounts were primarily driven by increased operations and the
timing of cash payments.
During the nine months ended September 30, 2004, cash provided by operations was $1.7 million,
which consisted of an increase of $5.1 million from changes in working capital accounts and a
decrease of $3.4 million as a result of our net loss offset by non-cash items. Changes in the
working capital accounts primarily related to an increase in accounts receivable, an increase in
prepaid expenses, an increase in third-party components to be sold to customers, increases in
accounts payable and other accrued expenses and an increase in deferred revenue due to an increased
customer base and timing of customer payments. The changes in working capital accounts were
primarily driven by increased operations and the timing of cash payments.
Cash provided by and used in operating activities has historically been affected by changes in
working capital accounts, primarily deferred revenue, accounts receivable and accrued expenses.
Fluctuations within accounts receivable and deferred revenue are primarily related to the timing of
billings and the associated revenue recognition.
Investing Activities
We used cash of $35.9 million and $1.2 million for investing activities during the first nine
months of 2005 and 2004, respectively.
We used $6.2 million and $2.7 million for property and equipment purchases during the first
nine months of 2005 and 2004, respectively. Approximately $4.8 million of the purchases for the
first nine months of 2005 related to investments in equipment for internal use, including test
equipment for our research and development and quality assurance departments as well as computer
equipment and furniture for new and existing personnel. Approximately $1.0 million of the
purchases for the first nine months of 2004 related to computer equipment for new and existing
personnel. We anticipate that we will continue to purchase property and equipment as necessary in
the normal course of business. Approximately $1.4 million and $1.7 million of the purchases for
the nine months ended September 30, 2005 and 2004, respectively, related to investments in
equipment located at contracted customer sites. We anticipate that we will incur additional
capital expenditures at customer sites as we further standardize and update our hardware platform.
During the nine months ended September 30, 2004, we sold equipment that we owned that had a net
book value of $1.5 million to a customer.
We used $59.4 million for the purchase of marketable securities and received proceeds of $30
million upon the maturity of some of these securities during the first nine months of 2005. The
marketable securities consist of U.S. government agency obligations and corporate commercial paper,
all with maturities of less than one year.
Financing Activities
Cash provided by financing activities totaled $64.2 million and $2.2 million for the nine
months ended September 30, 2005 and 2004, respectively. The cash provided by financing activities
for the first nine months of 2005 resulted primarily from the completion of our initial public
offering. This inflow of cash was offset by our $4.0 million repayment of our subordinated debt
and other payments on borrowings. During the nine months ended September 30, 2005, we also had
$0.4 million of restricted cash released from restriction. The cash provided by financing
activities for the first nine months of 2004 resulted from proceeds from the issuance of
subordinated debt of $4.0 million, which was later repaid upon completion of our initial public
offering, offset by payments on existing borrowings and an addition to restricted cash used to
secure a letter of credit for an operating lease.
The following table summarizes, as of September 30, 2005, the general timing of future
payments (including payments of interest) under our outstanding loan agreements, lease agreements
and other long-term contractual obligations:
21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period |
Contractual Cash Obligations |
|
Total |
|
Less than 1 Year |
|
1-3 Years |
|
3-5 Years |
|
More Than 5 Years |
|
|
(Dollars in thousands) |
Long-term debt |
|
$ |
3,488 |
|
|
$ |
2,181 |
|
|
$ |
1,307 |
|
|
$ |
|
|
|
$ |
|
|
Capital lease obligations |
|
|
1,153 |
|
|
|
769 |
|
|
|
384 |
|
|
|
|
|
|
|
|
|
Operating leases |
|
|
6,322 |
|
|
|
1,091 |
|
|
|
2,169 |
|
|
|
1,890 |
|
|
|
1,172 |
|
|
|
|
Total contractual cash obligations |
|
$ |
10,963 |
|
|
$ |
4,041 |
|
|
$ |
3,860 |
|
|
$ |
1,890 |
|
|
$ |
1,172 |
|
|
|
|
In August 2005, we executed a new operating lease for rental space for our Madison, Wisconsin
office. The lease term ends January 31, 2013. Monthly lease payments of $23,468 begin in February
2006 and increase 3% annually on each August 1st until the end of the lease term.
In April 2004, we entered into a loan and security agreement with a bank under which we can
borrow up to $4.0 million subject to certain restrictions. Interest accrues at the prime rate plus
1.5% to 2.0%, depending on our net income. This line of credit was amended as of July 31, 2004 and
expires April 30, 2006 at which time all advances will be due and payable. As of September 30,
2005 we had no outstanding balance under this line of credit.
We believe our existing cash, together with future cash flows from operations and the
availability under our loan and security agreement will be sufficient to execute our business plan
in 2005. However, any projections of future cash inflows and outflows are subject to uncertainty.
Our future capital 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 the 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. On
November 1, 2005, we paid $40 million in cash to Analogic for the acquisition of Camtronics.
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. Additional funds may not be available on
terms favorable to us or at all.
Recently Issued Accounting Pronouncements
In December 2004, the FASB issued Statement No. 123 (revised 2004), Share-Based Payment
(SFAS 123R). SFAS 123R establishes standards for the accounting for transactions in which an
entity exchanges its equity instruments for goods or services. It focuses primarily on accounting
for transactions in which an entity obtains employee services in share-based payment transactions.
SFAS 123R requires a public entity to measure the cost of employee services received in exchange
for an award of equity instruments based on the grant-date fair value of the award and the
estimated number of awards that are expected to vest. That cost will be recognized over the period
during which an employee is required to provide service in exchange for the award, which is usually
the vesting period. SFAS 123R supersedes APB 25, which the Company has elected to follow. SFAS
123R will be effective for the Company at the beginning of the fiscal first quarter of 2006. SFAS
123R applies to all awards granted after the required effective date and to awards modified,
repurchased, or canceled after that date. Compensation cost is recognized on or after the required
effective date for the portion of outstanding awards for which the requisite services have not yet
been rendered, based on the grant-date fair value of those awards calculated under SFAS 123 that
the Company has followed for disclosure purposes. For periods before the required effective date,
the Company may elect to adjust financial statements of prior periods on a basis consistent with
the pro forma disclosures required for those periods by SFAS 123. The Company has elected not to
restate prior periods. Based on stock options granted through September 30, 2005, the Company
estimates that it will record additional costs relating to compensation expense as a result of the
adoption of SFAS 123R starting in the first quarter of 2006.
In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections, which is
a replacement of APB Opinion No. 20, Accounting Changes, and SFAS No. 3, Reporting Changes in
Interim
22
Financial Statements. SFAS No. 154 applies to all voluntary changes in accounting principle
and changes in the accounting for and reporting of a change in accounting principle. SFAS No. 154
requires that a change in method of depreciation or amortization for long-lived non-financial
assets be accounted for as a change in accounting estimate that is effected by a change in
accounting principle. SFAS No. 154 is effective for accounting changes and corrections of errors
made in fiscal years beginning after December 15, 2005. The Company does not expect that the
adoption of SFAS No. 154 will have a material impact on its financial position, results of
operations or cash flows.
Forward Looking Statements; Important Factors Affecting Future Results
Some of the statements made in this section captioned Managements Discussion and
Analysis of Financial Condition and Results of Operations 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 Quarterly 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. These risks, uncertainties and other factors include, among
others, the risk that we may not compete successfully against larger competitors, risks associated
with our history of operating losses, the risk that we may not manage our growth effectively, risks
related to acquisitions (including integration difficulties, dilution or other adverse financial
consequences), risks associated with our reliance on continuing relationships with large customers,
the risk of significant product errors or product failures, our reliance on reseller arrangements
for important components of our solution, the risk that we may not respond effectively to changes
in our industry, our customers reliance on third party reimbursements, and the potential impact on
our business of FDA regulations and other applicable health care regulations. In addition, there
are or will be important factors that could cause our actual results to differ materially from
those indicated in these forward-looking statements.
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 Quarterly Report and in
our 2004 Annual Report on Form 10-K. 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 Quarterly Report, whether as a result of new information,
future developments or otherwise.
If one or more of the risks or uncertainties referred to in this Quarterly Report or in our
2004 Annual Report on Form 10-K materialize, or if our underlying assumptions prove to be
incorrect, actual results may vary materially from what we projected. Any forward-looking
statements you read in this prospectus reflect our current views with respect to future events and
are subject to these and other risks, uncertainties and assumptions relating to our operations,
financial condition, growth strategy and liquidity. You should specifically consider the factors
identified in this Quarterly Report that could cause actual results to differ.
For a more complete discussion of the important factors that may impact future performance and
prospects, please refer to the discussion of Risk Factors as set forth in our 2004 Annual Report on
Form 10-K in the portion of Item 7 labeled Managements Discussion and Analysis of Financial
Condition and Results of Operations Risk Factors.
23
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our debt instruments do not expose us to material market risks relating to changes in interest
rates. Some of the proceeds of our initial public offering have been invested in short-term,
interest-bearing, investment grade securities pending their application. The value of these
securities will be subject to interest rate risk and could fall in value if interest rates rise.
The effect of a hypothetical one hundred basis point decrease across all interest rates related to
our investments would result in an annual decrease of approximately $0.3 million in operating
results assuming no further changes in the amount of our investments outstanding at September 30,
2005.
The primary objective of our investment activities is to preserve principal while maximizing
the income we receive from our investments without significantly increasing our risk. We invest
excess cash principally in U.S. marketable debt securities from a diversified portfolio of
institutions with strong credit ratings and in U.S. government and agency bills and notes, and by
policy, limit the amount of credit exposure at any one institution. These investments are
generally not collateralized and mature within one year. Some of the securities we invest in may
have market risk. This means that a change in prevailing interest rates may cause the fair value
of the principal amount of the investment to fluctuate. To minimize this risk, we schedule our
investments to have maturities that coincide with our expected cash flow needs, thus avoiding the
need to redeem an investment prior to its maturity date. Accordingly, we believe we have no
material exposure to interest rate risk arising from our investments. Therefore, no quantitative
tabular disclosure is provided.
ITEM 4: CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our chief executive officer and chief financial
officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) under the Exchange Act) as of September 30, 2005. Based on this
evaluation, our chief executive officer and chief financial officer concluded that, as of September
30, 2005, our disclosure controls and procedures were (1) designed to ensure that material
information relating to us is made known to our chief executive officer and chief financial officer
by others within our company, particularly during the period in which this report was being
prepared and (2) effective, in that they provide reasonable assurance that information required to
be disclosed by us in the reports that we file or submit under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the Securities and Exchange
Commissions rules and forms.
Changes in Internal Control over Financial Reporting
No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and
15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended September 30, 2005 that
has materially affected, or is reasonably likely to materially affect, our internal control over
financial reporting.
24
PART II: OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
None
ITEM 2: UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Unregistered Sales of Equity Securities
None
Use of Proceeds from Initial Public Offering
Our initial public offering of common stock was effected through a Registration Statement on
Form S-1 (File No. 333-120621) that was declared effective by the Securities and Exchange
Commission on February 8, 2005, pursuant to which we sold all 5,750,000 shares of our common stock
registered. We received net proceeds of approximately $67.2 million from the offering. We used
$4.0 million of the net proceeds to repay borrowings outstanding under our subordinated notes on
February 18, 2005. We invested the remaining net proceeds, after payment of the subordinated notes
referred to in the preceding paragraph, in short-term, investment-grade, interest bearing
instruments.
During the nine months ended September 30, 2005, we spent approximately $6.2 million of such
net proceeds on capital purchases, substantially all of which was spent on purchases of equipment.
On November 1, 2005, the Company spent an additional $40 million of the net offering proceeds to
acquire all of the outstanding stock of Camtronics Medical Systems, Ltd.
ITEM 6: EXHIBITS
(a) Exhibit Index.
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Exhibit No. |
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Description |
10.1
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Form of Restricted Stock Award
Agreement under the 2005 Non-Employee Director Stock Incentive Plan |
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10.2 |
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Form of Restricted Stock Award
Agreement under the 2005 Equity Incentive Plan |
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31.1
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Certification of Chief Executive Officer pursuant to
Rule13a-14(a) or Rule 15d-14(a) under the Securities Exchange
Act of 1934 |
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31.2
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Certification of Chief Financial Officer pursuant to
Rule13a-14(a) or Rule 15d-14(a) under the Securities Exchange
Act of 1934 |
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32.1
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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 |
25
SIGNATURES
Pursuant to the requirements 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
November 14, 2005.
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Emageon Inc. |
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By:
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/s/ Charles A. Jett. Jr. |
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Charles A. Jett, Jr. |
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Chief Executive Officer |
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(principal executive officer) |
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By:
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/s/ W. Randall Pittman |
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W. Randall Pittman |
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Chief Financial Officer and Treasurer |
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(principal accounting and financial officer) |
26