##### 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 ended June 30, 2008
 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.
  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
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
    
    Smaller reporting company o(Do not check if a smaller reporting company)
 o þ




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##### 



Index
 Page No.PART I FINANCIAL INFORMATION
    
    
    3Item 1. Financial Statements
    
    
    3Consolidated Balance Sheets at June 30, 2008 (unaudited) and December 31, 2007
    
    
    3Consolidated Statements of Operations (unaudited) for the Three and Six
Months Ended June 30, 2008 and 2007
    
    
    4Consolidated Statements of Cash Flows (unaudited) for the Six Months Ended
June 30, 2008 and 2007
    
    
    5Notes to Condensed Consolidated Financial Statements (unaudited)
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results
of Operations
    
    
    11Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    16Item 4. Controls and Procedures
    
    
    17PART II OTHER INFORMATION
    
    
    17Item 1A. Risk Factors
    
    
    17Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    17Item 4. Submission of Matters to a Vote of Security Holders
    
    
    18Item 5. Other Information
    
    
    18Item 6. Exhibits
    
    
    19SIGNATURES
    
    
    20EX-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)
 (Unaudited)June 30, 2008
    
    
    December 31, 2007ASSETSCurrent assets:Cash and cash equivalents
    
    $
    19,900
    
    
    $
    17,034Trade accounts receivable, net of allowance
for doubtful accounts of $530 at June 30,
2008 and $910 at December 31, 2007
    
    
    11,093
    
    
    
    26,796Inventories
    
    
    6,720
    
    
    
    6,249Prepaid expenses and other current assets
    
    
    4,212
    
    
    
    3,398Total current assets
    
    
    41,925
    
    
    
    53,477Property and equipment, net
    
    
    14,260
    
    
    
    15,143Other noncurrent assets
    
    
    3,370
    
    
    
    3,070Intangible assets, net
    
    
    4,514
    
    
    
    27,604TOTAL ASSETS
    
    $
    64,069
    
    
    $
    99,294LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    6,084
    
    
    $
    9,581Accrued payroll and related costs
    
    
    1,141
    
    
    
    2,877Deferred revenue
    
    
    16,477
    
    
    
    16,382Other accrued expenses
    
    
    1,858
    
    
    
    3,297Current portion of capital lease obligations
    
    
    27
    
    
    
    36Total current liabilities
    
    
    25,587
    
    
    
    32,173Long-term deferred revenue
    
    
    4,076
    
    
    
    4,306Other long-term liabilities
    
    
    405
    
    
    
    466Capital lease obligations
    
    
    32
    
    
    
    53TOTAL LIABILITIES
    
    
    30,100
    
    
    
    36,998STOCKHOLDERS EQUITY:Common stock, $0.001 par value, 165,050
shares authorized; 21,647 shares and 21,626
shares issued, and 21,472 shares and 21,450
shares outstanding at June 30, 2008 and
December 31, 2007, respectively
    
    
    22
    
    
    
    22Additional paid-in capital
    
    
    128,484
    
    
    
    126,332Accumulated other comprehensive income
    
    
    655
    
    
    
    741Accumulated deficit
    
    
    (94,917
    )
    
    
    (64,524
    )34,244
    
    
    
    62,571Treasury stock, 175 shares, at cost
    
    
    (275
    )
    
    
    (275
    )Total stockholders equity
    
    
    33,969
    
    
    
    62,296TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    64,069
    
    
    $
    99,294
 The accompanying notes are an integral part of these financial statements.
 3




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EMAGEON INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
 (in thousands, except per share amounts)
 Three Months Ended June 30,
    
    
    Six Months Ended June 30,2008
    
    
    2007(1)
    
    
    2008
    
    
    2007(1)REVENUE:System sales
    
    $
    5,999
    
    
    $
    11,235
    
    
    $
    11,819
    
    
    $
    24,903Support services
    
    
    12,115
    
    
    
    14,341
    
    
    
    25,562
    
    
    
    28,023Total revenue
    
    
    18,114
    
    
    
    25,576
    
    
    
    37,381
    
    
    
    52,926COST OF REVENUE:System sales
    
    
    3,830
    
    
    
    6,310
    
    
    
    8,102
    
    
    
    15,032Support services
    
    
    6,463
    
    
    
    7,204
    
    
    
    13,139
    
    
    
    14,885Total cost of revenue
    
    
    10,293
    
    
    
    13,514
    
    
    
    21,241
    
    
    
    29,917GROSS PROFIT
    
    
    7,821
    
    
    
    12,062
    
    
    
    16,140
    
    
    
    23,009OPERATING EXPENSES:Research and development
    
    
    4,727
    
    
    
    4,358
    
    
    
    9,053
    
    
    
    8,976Sales and marketing
    
    
    3,691
    
    
    
    4,500
    
    
    
    7,476
    
    
    
    8,892General and administrative
    
    
    3,372
    
    
    
    2,796
    
    
    
    7,147
    
    
    
    6,419Amortization of intangible assets
    
    
    345
    
    
    
    345
    
    
    
    690
    
    
    
    690Employee severance and related expenses
    
    
    32
    
    
    
    578
    
    
    
    851
    
    
    
    578Goodwill impairment charge
    
    
    21,577
    
    
    
    
    
    
    
    21,577
    
    
    
    Total operating expenses
    
    
    33,744
    
    
    
    12,577
    
    
    
    46,794
    
    
    
    25,555OPERATING LOSS
    
    
    (25,923
    )
    
    
    (515
    )
    
    
    (30,654
    )
    
    
    (2,546
    )Interest income
    
    
    129
    
    
    
    250
    
    
    
    286
    
    
    
    479Interest expense
    
    
    (9
    )
    
    
    (23
    )
    
    
    (25
    )
    
    
    (56
    )NET LOSS
    
    $
    (25,803
    )
    
    $
    (288
    )
    
    $
    (30,393
    )
    
    $
    (2,123
    )NET LOSS PER SHARE  BASIC AND DILUTED
    
    $
    (1.20
    )
    
    $
    (0.01
    )
    
    $
    (1.42
    )
    
    $
    (0.10
    )WEIGHTED AVERAGE SHARES OUTSTANDING,
BASIC AND DILUTED
    
    
    21,465
    
    
    
    21,315
    
    
    
    21,459
    
    
    
    21,294
 
 (1)
    
    Certain reclassifications have been made to prior year amounts to conform with the current
year presentation. The accompanying notes are an integral part of these financial statements.
 4




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EMAGEON INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
 (in thousands)
 Six Months Ended June 30,2008
    
    
    2007OPERATING ACTIVITIESNet loss
    
    $
    (30,393
    )
    
    $
    (2,123
    )Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:Goodwill impairment charge
    
    
    21,577
    
    
    
    Depreciation
    
    
    2,054
    
    
    
    3,281Amortization of intangible assets
    
    
    1,461
    
    
    
    1,482Stock-based compensation expense
    
    
    2,153
    
    
    
    1,340Provision for doubtful accounts
    
    
    (380
    )
    
    
    Other operating activities
    
    
    9
    
    
    
    213Changes in operating assets and liabilities, net
    
    
    8,625
    
    
    
    (4,491
    )Net cash provided by (used in) operations
    
    
    5,106
    
    
    
    (298
    )INVESTING ACTIVITIESPurchases of property and equipment
    
    
    (1,675
    )
    
    
    (1,631
    )Capitalized software development costs
    
    
    (39
    )
    
    
    (120
    )Other investing activities
    
    
    (500
    )
    
    
    (125
    )Net cash used in investing activities
    
    
    (2,214
    )
    
    
    (1,876
    )FINANCING ACTIVITIESProceeds of issuance of common stock
    
    
    
    
    
    
    472Payment of debt and capital lease obligations
    
    
    (30
    )
    
    
    (866
    )Decrease in restricted cash
    
    
    
    
    
    
    446Net cash (used in) provided by financing activities
    
    
    (30
    )
    
    
    52Effect of exchange rate changes on cash
    
    
    4
    
    
    
    11Net Increase (Decrease) in Cash and Cash Equivalents
    
    
    2,866
    
    
    
    (2,111
    )Cash and Cash Equivalents at beginning of period
    
    
    17,034
    
    
    
    23,008Cash and Cash Equivalents at end of period
    
    $
    19,900
    
    
    $
    20,897
 The accompanying notes are an integral part of these financial statements.
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EMAGEON INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
 NOTE 1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
    Fair Value Measurements
    NOTE 2. GOODWILL IMPAIRMENT CHARGE
  6




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NOTE 3. EMPLOYEE SEVERANCE AND RELATED EXPENSES
    NOTE 4. EXIT LIABILITY
  Three Months Ended
    
    
    
    
    Six Months EndedJune 30, 2008
    
    
    
    
    June 30, 2008Beginning liability balance
    
    $
    568
    
    
    Beginning liability balance
    
    $
    600Lease payments, net
    
    
    (32
    )
    
    Lease payments, net
    
    
    (64
    )Ending liability balance
    
    $
    536
    
    
    Ending liability balance
    
    $
    536
  NOTE 5. INTANGIBLE ASSETS
  7




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June 30, 2008
    
    
    December 31, 2007Gross
    
    
    
    
    
    
    
    
    
    
    GrossCarrying
    
    
    Total
    
    
    Net Carrying
    
    
    Carrying
    
    
    Total
    
    
    Net CarryingAmount
    
    
    Amortization
    
    
    Amount
    
    
    Amount
    
    
    Amortization
    
    
    AmountAcquired technology
    
    $
    5,240
    
    
    $
    5,121
    
    
    $
    119
    
    
    $
    5,240
    
    
    $
    4,595
    
    
    $
    645Customer relationships
    
    
    8,010
    
    
    
    3,683
    
    
    
    4,327
    
    
    
    8,010
    
    
    
    2,993
    
    
    
    5,017Software development
costs
    
    
    1,559
    
    
    
    1,491
    
    
    
    68
    
    
    
    1,521
    
    
    
    1,246
    
    
    
    275Goodwill
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    21,667
    
    
    
    
    
    
    
    21,667Total
    
    $
    14,809
    
    
    $
    10,295
    
    
    $
    4,514
    
    
    $
    36,438
    
    
    $
    8,834
    
    
    $
    27,604
   Remainder of 2008
    
    $
    8372009
    
    
    1,4222010
    
    
    1,3352011
    
    
    920Total
    
    $
    4,514
 NOTE 6. INVENTORIES
  June 30, 2008
    
    
    December 31, 2007Third-party components
    
    $
    3,512
    
    
    $
    3,086Work-in-process
    
    
    325
    
    
    
    447Completed systems
    
    
    2,883
    
    
    
    2,716Total
    
    $
    6,720
    
    
    $
    6,249
  NOTE 7. SUPPLEMENTARY CASH FLOW INFORMATION
  Six Months Ended June 30,2008
    
    
    2007(Increase) decrease in:Trade accounts receivable
    
    $
    16,083
    
    
    $
    5,790Inventories
    
    
    (471
    )
    
    
    2,127Prepaid expenses and other current assets
    
    
    (814
    )
    
    
    (1,328
    )Other noncurrent assets
    
    
    (300
    )
    
    
    111Increase (decrease) in:Accounts payable
    
    
    (3,002
    )
    
    
    (2,379
    )Accrued payroll and related costs
    
    
    (1,736
    )
    
    
    (1,968
    )Other accrued expenses
    
    
    (1,000
    )
    
    
    (589
    )Deferred revenue
    
    
    (135
    )
    
    
    (6,255
    )Net changes in operating assets and liabilities
    
    $
    8,625
    
    
    $
    (4,491
    )
 8




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NOTE 8. COMPUTATION OF NET LOSS PER SHARE
  NOTE 9. STOCK BASED COMPENSATION
   Three Months Ended June 30,
    
    Six Months Ended June 30,2008
    
    2007
    
    2008
    
    2007Dividend yield
    
    
    
    
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Expected volatility
    
    
    
    
    
    
    50.0
    %
    
    
    50.0
    %
    
    
    50.0
    %Risk-free interest rate
    
    
    
    
    
    
    4.80
    %
    
    
    2.53
    %
    
    
    4.65
    %Expected life of options (in years)
    
    
    
    
    
    
    5.0
    
    
    
    5.0
    
    
    
    5.0
   Three Months Ended June 30,
    
    Six Months Ended June 30,2008
    
    2007
    
    2008
    
    2007Stock options:Grants, in shares
    
    
    
    
    
    
    53
    
    
    
    804
    
    
    
    350Weighted average grant date fair value, per share
    
    
    
    
    
    $
    3.89
    
    
    $
    1.16
    
    
    $
    5.78Exercises, in shares
    
    
    
    
    
    
    34
    
    
    
    
    
    
    
    74Proceeds of exercises
    
    
    
    
    
    $
    191
    
    
    
    
    
    
    $
    472Restricted stock units:Grants, in shares
    
    
    
    
    
    
    
    
    
    
    48
    
    
    
    61Weighted average grant date fair value, per share
    
    
    
    
    
    
    
    
    
    $
    2.52
    
    
    $
    12.46Shares vested in the period
    
    
    11
    
    
    
    8
    
    
    
    22
    
    
    
    15
 9




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NOTE 10. COMPREHENSIVE LOSS
  NOTE 11. INCOME TAXES
     NOTE 12. WARRANTY OBLIGATION
    Three Months Ended
    
    
    Six Months EndedJune 30, 2008
    
    
    June 30, 2008Beginning liability balance
    
    $
    410
    
    
    $
    440Additions charged to expense
    
    
    
    
    
    
    31Deductions for claim resolution
    
    
    (37
    )
    
    
    (98
    )Ending liability balance
    
    $
    373
    
    
    $
    373
 10




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ITEM 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 FORWARD-LOOKING STATEMENTS
    COMPANY OVERVIEW
  RESULTS SUMMARY
  11




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
    
    The primary market for sales of the Companys PACS radiology systemslarge hospitals
and large hospital networksentered a mature phase in 2007, resulting in a shift of demand
from new systems to replacement of legacy systems, which lengthened the sales cycle and
resulted in a significant decline in radiology systems sales in 2007. Those market
conditions have continued through the first half of 2008, and the Company now expects those
conditions in the large system radiology market to continue through at least the first half
of 2009, which will adversely impact 2008 and 2009 revenues and financial condition.
    
    During the first half of 2008, tightening credit market conditions had a negative effect
on the spending decisions of customers of the Company. The purchase of the Companys
products involves a significant financial commitment by its customers. Credit pressures may
continue to have an adverse effect on the Companys revenues and financial condition.
 
    
    The Companys recently completed proxy contest required significant expenditures and
diversion of management resources. In addition, the uncertainty surrounding the outcome of
the contest, as well as the ongoing investigation of strategic alternatives, has caused an erosion of confidence among the Companys base of existing and
potential customers. The additional expenditures and the uncertainty in the Companys
customer base have resulted in delays or cancellations of customer orders, and have
negatively affected the Companys revenues.
    Revenue and Gross Margin
   12




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Three Months Ended June 30,
    
    
    Six Months Ended June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Revenue:System sales
    
    $
    5,999
    
    
    $
    11,235
    
    
    $
    11,819
    
    
    $
    24,903Support services
    
    
    12,115
    
    
    
    14,341
    
    
    
    25,562
    
    
    
    28,023Total
    
    $
    18,114
    
    
    $
    25,576
    
    
    $
    37,381
    
    
    $
    52,926Cost of Revenue:System sales
    
    $
    3,830
    
    
    $
    6,310
    
    
    $
    8,102
    
    
    $
    15,032Support services
    
    
    6,463
    
    
    
    7,204
    
    
    
    13,139
    
    
    
    14,885Total
    
    $
    10,293
    
    
    $
    13,514
    
    
    $
    21,241
    
    
    $
    29,917Gross Profit:System sales
    
    $
    2,169
    
    
    $
    4,925
    
    
    $
    3,717
    
    
    $
    9,871Support services
    
    
    5,652
    
    
    
    7,137
    
    
    
    12,423
    
    
    
    13,138Total
    
    $
    7,821
    
    
    $
    12,062
    
    
    $
    16,140
    
    
    $
    23,009Gross Margin:System sales
    
    
    36.2
    %
    
    
    43.8
    %
    
    
    31.4
    %
    
    
    39.6
    %Support services
    
    
    46.7
    %
    
    
    49.8
    %
    
    
    48.6
    %
    
    
    46.9
    %Total
    
    
    43.2
    %
    
    
    47.2
    %
    
    
    43.2
    %
    
    
    43.5
    %
 Summary
   System Sales Revenue
 Summary
 13




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System Sales Gross Margin
   Support Services Revenue
  Support Services Gross Margin
  Research & Development, Sales & Marketing, and General & Administrative Expenses
    14




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Research and Development Expenses
  Sales and Marketing Expenses
   General and Administrative Expenses
   LIQUIDITY AND CAPITAL RESOURCES
 Summary
  Cash From Operating Activities
  15




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Cash Used In Investing Activities
  Cash From Financing Activities
  Contractual Cash Obligations
  Available Credit
   
 ITEM 3.
    
    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
   16




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ITEM 4.
    
    CONTROLS AND PROCEDURES
  
 PART II. OTHER INFORMATION
 
 ITEM 1A. RISK FACTORS
   The Companys consideration of strategic alternatives may adversely affect its customer and
other relationships as well as its operations and financial condition.
  
 ITEM 2.
    
    UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  17




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ITEM 4.
    
    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  1)
    
    Three directors were elected to the Board of Directors to serve for a
three year term or until their successors have been duly elected and
qualified. All nominees were serving as directors of the Company at
the time of their nomination for the current term.
 Votes For
    
    
    Votes WithheldArthur P. Beattie
    
    
    12,851,206
    
    
    
    2,729,939Fred C. Goad, Jr.
    
    
    12,782,176
    
    
    
    2,798,969Charles A. Jett, Jr.
    
    
    12,839,266
    
    
    
    2,741,879
   Terms Expiring In 2009
  Terms Expiring In 2010
  Terms Expiring In 2011
 2)
    
    The ratification of the appointment of Ernst & Young LLP as the
Companys independent registered public accountants for the year
ending December 31, 2008 was approved as follows:
 
 
 
 
 ITEM 5.
    
    OTHER INFORMATION
  18




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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 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 18U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
 
 *
    
    Filed herewith 19




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SIGNATURES
  EMAGEON INC.
 By:
    /s/ Charles A. Jett, Jr.Charles A. Jett, Jr.Chief Executive Officer and President
(Principal Executive Officer)By:
    /s/ John W. WilhoiteJohn W. WilhoiteChief Financial Officer and Treasurer
(Principal Financial and Accounting Officer) 20