##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period endedJune 30, 2006, or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the transition period from to
 Commission File Number 0-51149
 EMAGEON INC.
 (Exact name of registrant as specified in its charter)
 Delaware
    
    63-1240138(State or other jurisdiction of incorporation
or organization)
    
    (I.R.S. Employer Identification No.)1200 Corporate Drive, Suite 200
Birmingham, Alabama
    
    35242(Address of principal executive offices)
    
    (Zip Code)
 205-980-9222
 
  þ o
 o þ o
 o þ




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##### Table of Contents



EMAGEON INC.
FORM 10-Q
June 30, 2006
 Table of Contents
 Page No.PART I. Financial Information
    
    
    3Item 1.
Consolidated Financial Statements
    
    
    3Consolidated Balance Sheets at June 30, 2006
and December 31, 2005
    
    
    3Consolidated Statements of Operations for the
Three Months Ended June 30, 2006 and 2005
and the Six Months Ended June 30, 2006 and 2005
    
    
4Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 2006 and 2005
    
    
5Notes to Consolidated Financial Statements
    
    
6Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
13Item 3. Quantitative and Qualitative Disclosures About
Market Risk
    
    
23Item 4. Controls and Procedures
    
    
24PART II. OTHER INFORMATION
    
    
24Item 1A. Risk Factors
    
    
24Item 2. Unregistered Sales of Equity Securities and
Use of Proceeds
    
    
25Item 4.
Submission of Matters to a Vote of Security Holders
    
    
25Item 6. Exhibits
    
    
25SIGNATURES
    
    
26EX-31.1 SECTION 302 CERTIFICATION OF CEOEX-31.2 SECTION 302 CERTIFICATION OF CFOEX-32 SECTION 906 CERTIFICATION OF CEO/CFO
 2




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##### Table of Contents



PART I: FINANCIAL INFORMATION
 
 ITEM 1: CONSOLIDATED FINANCIAL STATEMENTS
 EMAGEON INC.
 
 CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
 June 30,
    
    
    December 31,2006
    
    
    2005(Unaudited)ASSETS:Current assets:Cash and cash equivalents
    
    $
    14,701
    
    
    $
    15,520Marketable securities
    
    
    
    
    
    
    4,951Trade accounts receivable, net
    
    
    29,075
    
    
    
    29,261Prepaid expenses and other current assets
    
    
    3,747
    
    
    
    3,052Inventories
    
    
    11,778
    
    
    
    8,031Total current assets
    
    
    59,301
    
    
    
    60,815Property and equipment, net
    
    
    21,342
    
    
    
    21,433Other noncurrent assets
    
    
    1,595
    
    
    
    1,419Intangible assets, net
    
    
    32,471
    
    
    
    34,277Total assets
    
    $
    114,709
    
    
    $
    117,944LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    9,702
    
    
    $
    13,196Accrued payroll and related costs
    
    
    3,223
    
    
    
    4,104Deferred revenue
    
    
    28,332
    
    
    
    25,312Other accrued expenses
    
    
    7,455
    
    
    
    4,723Current portion of long-term debt
and capital lease obligations
    
    
    2,274
    
    
    
    2,763Total current liabilities
    
    
    50,986
    
    
    
    50,098Long-term deferred revenue
    
    
    4,028
    
    
    
    3,221Long-term debt and capital lease obligations
    
    
    81
    
    
    
    986Total liabilities
    
    
    55,095
    
    
    
    54,305Stockholders equity:Common stock, $0.001 par value, 23,965
shares authorized; 21,100 shares and 20,629
shares issued, and 20,924 shares and 20,453
shares outstanding at June 30, 2006 and December 31, 2005, respectively
    
    
    21
    
    
    
    21Additional paid in capital
    
    
    118,707
    
    
    
    115,215Other comprehensive income
    
    
    418
    
    
    
    85Accumulated deficit
    
    
    (59,257
    )
    
    
    (51,407
    )Treasury stock, 176 shares, at cost
    
    
    (275
    )
    
    
    (275
    )Total stockholders equity
    
    
    59,614
    
    
    
    63,639Total liabilities and stockholders equity
    
    $
    114,709
    
    
    $
    117,944
 The accompanying notes are an integral part of these financial statements.
 3




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##### Table of Contents



EMAGEON INC.
 
 STATEMENTS OF OPERATIONS
 (in thousands, except per share amounts)
 Unaudited
    
    
    UnauditedThree Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Revenue:System sales
    
    $
    17,601
    
    
    $
    13,402
    
    
    $
    34,870
    
    
    $
    21,121Support services
    
    
    12,415
    
    
    
    5,513
    
    
    
    22,147
    
    
    
    9,379Total revenue
    
    
    30,016
    
    
    
    18,915
    
    
    
    57,017
    
    
    
    30,500Cost of revenue:System sales
    
    
    9,977
    
    
    
    5,753
    
    
    
    23,261
    
    
    
    10,576Support services
    
    
    6,534
    
    
    
    3,667
    
    
    
    12,752
    
    
    
    6,999Total cost of revenue
    
    
    16,511
    
    
    
    9,420
    
    
    
    36,013
    
    
    
    17,575Gross profit
    
    
    13,505
    
    
    
    9,495
    
    
    
    21,004
    
    
    
    12,925Operating expenses:Research and development
    
    
    4,032
    
    
    
    2,797
    
    
    
    8,162
    
    
    
    5,331Sales and marketing
    
    
    4,589
    
    
    
    2,596
    
    
    
    8,591
    
    
    
    5,400General and administrative
    
    
    3,855
    
    
    
    2,537
    
    
    
    8,173
    
    
    
    4,828Amortization of intangible assets
related to Camtronics acquisition
    
    
    885
    
    
    
    
    
    
    
    1,770
    
    
    
    Integration costs
related to Camtronics acquisition
    
    
    1,077
    
    
    
    
    
    
    
    2,281
    
    
    
    Total operating expenses
    
    
    14,438
    
    
    
    7,930
    
    
    
    28,977
    
    
    
    15,559Operating income (loss)
    
    
    (933
    )
    
    
    1,565
    
    
    
    (7,973
    )
    
    
    (2,634
    )Interest income
    
    
    160
    
    
    
    477
    
    
    
    316
    
    
    
    710Interest expense
    
    
    (84
    )
    
    
    (142
    )
    
    
    (193
    )
    
    
    (994
    )Net income (loss)
    
    $
    (857
    )
    
    $
    1,900
    
    
    $
    (7,850
    )
    
    $
    (2,918
    )Net income (loss) per share,
basic and diluted
    
    $
    (0.04
    )
    
    $
    0.09
    
    
    $
    (0.38
    )
    
    $
    (0.19
    )Basic weighted average shares
outstanding
    
    
    20,866
    
    
    
    20,028
    
    
    
    20,725
    
    
    
    15,708Diluted weighted average shares
outstanding
    
    
    20,866
    
    
    
    21,493
    
    
    
    20,725
    
    
    
    15,708
 The accompanying notes are an integral part of these financial statements.
 4




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##### Table of Contents



EMAGEON INC.
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (in thousands)
 UnauditedSix Months Ended June 30,2006
    
    
    2005Operating activitiesNet loss
    
    $
    (7,850
    )
    
    $
    (2,918
    )Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:Depreciation
    
    
    3,584
    
    
    
    2,557Amortization of intangible assets
    
    
    2,510
    
    
    
    448Write-off of subordinated debt discount
    
    
    
    
    
    
    646Stock-based compensation expense
    
    
    1,366
    
    
    
    572Other operating activities
    
    
    5
    
    
    
    120Changes in operating assets and liabilities, net
    
    
    (2,301
    )
    
    
    (4,662
    )Net cash used in operations
    
    
    (2,686
    )
    
    
    (3,237
    )Investing activitiesPurchases of property and equipment
    
    
    (3,507
    )
    
    
    (4,485
    )Purchases of marketable securities
    
    
    
    
    
    
    (59,229
    )Maturities of marketable securities
    
    
    5,000
    
    
    
    15,000Capitalized software development costs
    
    
    (426
    )
    
    
    (175
    )Other investing activities
    
    
    65
    
    
    
    Net cash provided by (used in) investing activities
    
    
    1,132
    
    
    
    (48,889
    )Financing activitiesProceeds of issuance of common stock, net of issue costs
    
    
    2,127
    
    
    
    69,328Proceeds of issuance of preferred stock, net of issue costs
    
    
    
    
    
    
    58Payment of debt and capital lease obligations
    
    
    (1,394
    )
    
    
    (5,234
    )Other financing activities
    
    
    
    
    
    
    374Net cash provided by financing activities
    
    
    733
    
    
    
    64,526Effect of exchange rate changes on cash
    
    
    2
    
    
    
    Net (decrease) increase in cash
    
    
    (819
    )
    
    
    12,400Cash at beginning of period
    
    
    15,520
    
    
    
    5,994Cash at end of period
    
    $
    14,701
    
    
    $
    18,394
 The accompanying notes are an integral part of these financial statements.
 5




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EMAGEON INC.
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 1  BASIS OF PRESENTATION AND SIGNIFICANT
ACCOUNTING POLICIES
     Period
    
    AmountThree months
ended March 31, 2005
    
    $
    249Three months
ended June 30, 2005
    
    
    345Six months
ended June 30, 2005
    
    $
    594Three months
ended March 31, 2006
    
    $
    423Three months
ended June 30, 2006
    
    
    668Six months
ended June 30, 2006
    
    $
    1,091
     6




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##### Table of Contents



NOTE 2  INITIAL PUBLIC OFFERING
  NOTE 3  ACQUISITIONS AND INTANGIBLE ASSETS
    7




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##### Table of Contents



June 30, 2006
    
    
    December 31, 2005Gross
    
    
    
    
    
    
    Net
    
    
    Gross
    
    
    
    
    
    
    NetCarrying
    
    
    Accumulated
    
    
    Carrying
    
    
    Carrying
    
    
    Accumulated
    
    
    CarryingAmount
    
    
    Amort.
    
    
    Amount
    
    
    Amount
    
    
    Amort.
    
    
    AmountAcquired
technology
    
    $
    5,240
    
    
    $
    2,808
    
    
    $
    2,432
    
    
    $
    5,240
    
    
    $
    2,212
    
    
    $
    3,028Customer
relationships
    
    
    10,028
    
    
    
    2,074
    
    
    
    7,954
    
    
    
    10,028
    
    
    
    518
    
    
    
    9,510Trade names
    
    
    501
    
    
    
    286
    
    
    
    215
    
    
    
    501
    
    
    
    72
    
    
    
    429Software
development
costs
    
    
    1,174
    
    
    
    661
    
    
    
    513
    
    
    
    798
    
    
    
    567
    
    
    
    231Goodwill
    
    
    21,357
    
    
    
    
    
    
    
    21,357
    
    
    
    21,079
    
    
    
    
    
    
    
    21,079Total
    
    $
    38,300
    
    
    $
    5,829
    
    
    $
    32,471
    
    
    $
    37,646
    
    
    $
    3,369
    
    
    $
    34,277
   Six months
ended December 31, 2006
    
    $
    2,5222007
    
    
    2,9302008
    
    
    2,0272009
    
    
    1,3812010 and thereafter
    
    
    2,254Total
    
    $
    11,114
 NOTE 4  MARKETABLE SECURITIES
  8




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NOTE 5  INVENTORIES
  June 30,
    
    
    December 31,2006
    
    
    2005Third-party components
    
    $
    1,629
    
    
    $
    1,708Work-in-process
    
    254
    
    
    
    345Completed systems
    
    9,895
    
    
    
    5,978Total
    
    $
    11,778
    
    
    $
    8,031
  NOTE 6  SUPPLEMENTARY CASH FLOW INFORMATION
  Six Months Ended June 30,2006
    
    
    2005(Increase) decrease in:Trade accounts receivable, net
    
    $
    186
    
    
    $
    897Inventories, net
    
    
    (3,747
    )
    
    
    (503
    )Prepaid expenses and other current assets
    
    
    (829
    )
    
    
    (683
    )Other noncurrent asssets
    
    
    (129
    )
    
    
    (54
    )Increase (decrease) in:Accounts payable
    
    
    (3,492
    )
    
    
    4Accrued payroll and related costs
    
    
    (882
    )
    
    
    (375
    )Other accrued expenses
    
    
    2,732
    
    
    
    (1,745
    )Deferred revenue
    
    
    3,860
    
    
    
    (2,203
    )Net changes in operating assets
and liabilities
    
    $
    (2,301
    )
    
    $
    (4,662
    )
 9




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##### Table of Contents



NOTE 7  COMPUTATION OF NET LOSS PER SHARE
  10




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##### Table of Contents



NOTE 8  STOCK-BASED COMPENSATION
  Share-Based Payment Accounting for Stock Issued to Employees
     
 11




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##### Table of Contents



Three Months Ended

Six Months EndedJune 30, 2005

June 30, 2005Net income (loss):As reported
 
$
    1,900
    

    $
    (2,918
    )Add:
Stock-based employee compensation reported in net income (loss):
 
    
    290

    
    
    572Deduct: Stock-based employee compensation under the fair
value method for all awards
 
    
    (461
)
    
    
    (939
    )Pro forma
net income (loss)
 
    $
    1,729
    

    $
    (3,285
    )Basic and
diluted net income (loss) per share:As reported
 
    $
    0.09
    

    $
    (0.19
    )Add: Stock-based employee compensation reported in net loss
 
    
    0.01

    
    
    0.04Deduct: Stock-based employee compensation under the fair
value method for all awards
    
 
    (0.02
)
    
    
    (0.06
    )Pro forma
net income (loss) per share
    
    $
    0.08

    
    $
    (0.21
    )
 Stock
Options
  Three Months Ended June 30,
    
    
    Six Months Ended June 30,2005
    
    
    2006
    
    
    2005
    
    
    2006Dividend yield
    
    not applicable
    
    
    
    0.0
    %
    
    
    0.0
    %
    
    $
    0.0
    %Expected volatility
    
    not applicable
    
    
    
    70.9
    %
    
    
    70.9
    %
    
    
    70.9
    %Risk-free interest rate
    
    not applicable
    
    
    
    4.85
    %
    
    
    3.71
    %
    
    
    4.85
    %Expected life of options (in years)
    
    not applicable
    
    
    
    5.0
    
    
    
    5.0
    
    
    
    5.0Weighted-average grant-date fair value
    
    not applicable
    
    
    $
    10.33
    
    
    $
    9.40
    
    
    $
    10.33
    Three Months Ended March 31, 2006
    
    
    Three Months Ended June 30, 2006Weighted-Average
    
    
    
    
    
    
    
    
    Weighted-AverageNumber of
    
    
    Weighted-Average
    
    
    Remaining
    
    
    Number of
    
    
    Weighted-Average
    
    
    RemainingShares
    
    
    Exercise Price
    
    
    Contractual Life
    
    
    Shares
    
    
    Exercise Price
    
    
    Contractual LifeOptions at beginning of period
    
    
    2,129
    
    
    $
    5.91
    
    
    
    
    
    
    
    1,742
    
    
    $
    6.17Granted
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    438
    
    
    
    16.56Exercised
    
    
    (333
    )
    
    
    4.40
    
    
    
    
    
    
    
    (126
    )
    
    
    4.85Forfeited
    
    
    (54
    )
    
    
    6.63
    
    
    
    
    
    
    
    - 0 -
    
    
    
    - 0 -Outstanding at end of period
    
    
    1,742
    
    
    $
    6.17
    
    
    7.05 years
    
    
    
    2,054
    
    
    $
    8.47
    
    
    7.43 yearsExercisable at end of period
    
    
    1,071
    
    
    $
    4.50
    
    
    6.03 years
    
    
    
    1,110
    
    
    $
    4.66
    
    
    5.90 yearsNonvested stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    944
    
    
    $
    12.95
    
    
    9.2 years
 12




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Restricted
Stock
   NOTE 9  COMPREHENSIVE LOSS
  
 ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
 FORWARD-LOOKING STATEMENTS
  13




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##### Table of Contents



COMPANY OVERVIEW
  14




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##### Table of Contents



RESULTS SUMMARY
    1)
    
    second quarter expenses of $1.1 million, or $0.05 per share, related to the
integration of Camtronics with the Company ($2.3 million, or $0.11 per share, for the six
months ended June 30, 2006),2)
    
    second quarter non-cash expenses of $1.0 million, or $0.05 per share, in amortization
of intangible assets acquired in the Camtronics acquisition, ($2.0 million, or $0.10 per
share, for the six months ended June 30, 2006), and3)
    
    second quarter non-cash expenses of $0.8 million, or $0.04 per share, for stock
options-based compensation after the Companys adoption of Statement of Financial
Accounting Standards No. 123R as of January 1, 2006 ($1.4 million, or $0.07 per share, for
the six months ended June 30, 2006).
  15




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Revenue and Gross Margin
     (In Thousands)Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Revenue:Systems sales
    
    $
    17,601
    
    
    $
    13,402
    
    
    $
    34,870
    
    
    $
    21,121Support services
    
    
    12,415
    
    
    
    5,513
    
    
    
    22,147
    
    
    
    9,379Total
    
    
    30,016
    
    
    
    18,915
    
    
    
    57,017
    
    
    
    30,500Cost of revenue:Systems sales
    
    
    9,977
    
    
    
    5,753
    
    
    
    23,261
    
    
    
    10,576Support services
    
    
    6,534
    
    
    
    3,667
    
    
    
    12,752
    
    
    
    6,999Total
    
    
    16,511
    
    
    
    9,420
    
    
    
    36,013
    
    
    
    17,575Gross profit:Systems sales
    
    
    7,624
    
    
    
    7,649
    
    
    
    11,609
    
    
    
    10,545Support services
    
    
    5,881
    
    
    
    1,846
    
    
    
    9,395
    
    
    
    2,380Total
    
    $
    13,505
    
    
    $
    9,495
    
    
    $
    21,004
    
    
    $
    12,925Gross margin:Systems sales
    
    
    43.3
    %
    
    
    57.1
    %
    
    
    33.3
    %
    
    
    49.9
    %Support services
    
    
    47.4
    %
    
    
    33.5
    %
    
    
    42.4
    %
    
    
    25.4
    %Total
    
    
    45.0
    %
    
    
    50.2
    %
    
    
    36.8
    %
    
    
    42.4
    %
 16




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##### Table of Contents



Summary.
  Systems
Sales Revenue.
  17




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##### Table of Contents



Systems
Sales Gross Margin.
   Support
Services Revenue.
  18




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##### Table of Contents



Support Services Gross Margin.
  Research & Development, Sales & Marketing, and General & Administrative Expenses
  19




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##### Table of Contents



Research
and Development Expenses
  Sales
and Marketing Expenses
  20




---



##### Table of Contents



General
and Administrative Expenses
  LIQUIDITY AND CAPITAL RESOURCES
 Summary
 21




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##### Table of Contents



Cash Used In Operating Activities
   Cash From Investing Activities
   22




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##### Table of Contents



Cash From Financing Activities.
  Contractual Cash Obligations
 Available Credit
  
 ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  23




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##### Table of Contents



ITEM 4: CONTROLS AND PROCEDURES
  
 PART II. OTHER INFORMATION
 
 ITEM
1A. RISK FACTORS
 24




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##### Table of Contents



ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF  SECURITY HOLDERS
   Votes For
        
Votes WithheldRoddy J.H. Clark
    

18,771,441
    
    130,428John W. Thompson
    

18,771,291
    
    130,578
  Terms
expiring in 2007
 Terms expiring in 2008
  
 ITEM 6. EXHIBITS
  Exhibit No.
    
    DESCRIPTION31.1 *
    
    Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or
Rule 15d-14(a) under the Securities Exchange Act of 193431.2 *
    
    Certification of the Chief Financial Officer pursuant to Rule 13a-14(a)
or Rule 15d-14(a) under the Securities Exchange Act of 193432 *
    
    Certification of the Chief Executive Officer and Chief Financial
Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
 
 *
    
    Filed herewith 25




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##### Table of Contents



SIGNATURES
  Emageon Inc.
 Date: August 9, 2006
    
    
    By:
 
    /s/ Charles A. Jett, Jr.Charles A. Jett, Jr.Chairman, Chief Executive Officer, and President(Principal Executive Officer)Date: August 9, 2006
    
    
    By:
 
    /s/ W. Randall PittmanW. Randall PittmanChief Financial Officer and Treasurer(Principal Financial and Accounting Officer)
 26