##### 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, 2007
 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
    
    (I.R.S. Employer Identification No.)incorporation or organization)1200 Corporate Drive, Suite 200Birmingham, Alabama
    
    35242(Address of principal executive offices)
    
    (Zip Code)
 (205) 980-9222
 
   þ o
  o þ o
  o þ




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##### 



Index
 Page No.PART I FINANCIAL INFORMATION
    
    
    Item 1. Unaudited Financial Statements
    
    
    
    
3Consolidated Balance Sheets at June 30, 2007
and December 31, 2006
    
    
    
    
3Consolidated Statements of Operations for the Three and Six
Months Ended June 30, 2007 and 2006
    
    
    
    
4Consolidated Statements of Cash Flows for the Six
Months Ended June 30, 2007 and 2006
    
    
    
    
5Notes to Consolidated Financial Statements
    
    
    
    
6Item 2. Managements Discussion and Analysis of Financial Condition
and Results of Operations
    
    
    
    
11Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    
    
18Item 4. Controls and Procedures
    
    
    
    
18PART II OTHER INFORMATIONItem 1A. Risk Factors
    
    
    
    
19Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    
    
19Item 4. Submission of Matters to a Vote of Security Holders
    
    
    
    
19Item 6. Exhibits
    
    
    
    
20SIGNATURESEX-31.1 SECTION 302 CERTIFICATION OF THE CEOEX-31.2 SECTION 302 CERTIFICATION OF THE CFOEX-32 SECTION 906 CERTIFICATIONS OF THE CEO AND CFO




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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 amounts)
 (Unaudited)June 30, 2007
    
    
    December 31, 2006ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    20,897
    
    
    $
    23,008Trade
accounts receivable, net of allowances of $270 at June 30, 2007
and $277 at December 31, 2006
    
    
    20,916
    
    
    
    26,706Inventories
    
    
    6,452
    
    
    
    8,579Prepaid expenses and other current assets
    
    
    5,787
    
    
    
    4,459Total current assets
    
    
    54,052
    
    
    
    62,752PROPERTY AND EQUIPMENT,net
    
    
    16,568
    
    
    
    18,362OTHER NONCURRENT ASSETS
    
    
    1,376
    
    
    
    1,808INTANGIBLE ASSETS,net
    
    
    28,972
    
    
    
    30,090TOTAL ASSETS
    
    $
    100,968
    
    
    $
    113,012LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIES:Accounts payable
    
    $
    7,359
    
    
    $
    9,738Accrued payroll and related costs
    
    
    1,802
    
    
    
    3,770Deferred revenue
    
    
    17,136
    
    
    
    23,953Other accrued expenses
    
    
    2,411
    
    
    
    2,946Current portion of long-term debt and capital lease obligations
    
    
    100
    
    
    
    953Total current liabilities
    
    
    28,808
    
    
    
    41,360LONG-TERM DEFERRED REVENUE
    
    
    6,413
    
    
    
    5,851OTHER LONG-TERM LIABILITIES
    
    
    632
    
    
    
    686LONG-TERM PORTION OF CAPITAL LEASE OBLIGATIONS
    
    
    64
    
    
    
    8TOTAL LIABILITIES
    
    
    35,917
    
    
    
    47,905STOCKHOLDERS EQUITY:Common stock, $0.001 par value, 165,050 shares authorized; 21,508
shares and 21,434 shares issued, and 21,332 shares and 21,258
shares outstanding at June 30, 2007 and December 31, 2006,
respectively
    
    
    22
    
    
    
    21Additional paid-in capital
    
    
    124,349
    
    
    
    122,538Accumulated other comprehensive income
    
    
    517
    
    
    
    262Deficit
    
    
    (59,562
    )
    
    
    (57,439
    )65,326
    
    
    
    65,382Treasury stock, 176 shares, at cost
    
    
    (275
    )
    
    
    (275
    )Total stockholders equity
    
    
    65,051
    
    
    
    65,107TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    100,968
    
    
    $
    113,012
 The accompanying notes are an integral part of these financial statements.
 3




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EMAGEON INC.
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 (in thousands, except per share amounts)
 UnauditedThree Months Ended June 30,
    
    
    Six Months Ended June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006REVENUE:System sales
    
    $
    11,235
    
    
    $
    17,601
    
    
    $
    24,903
    
    
    $
    34,870Support services
    
    
    14,341
    
    
    
    12,415
    
    
    
    28,023
    
    
    
    22,147Total revenue
    
    
    25,576
    
    
    
    30,016
    
    
    
    52,926
    
    
    
    57,017COST OF REVENUE:System sales
    
    
    6,310
    
    
    
    9,977
    
    
    
    15,032
    
    
    
    23,261Support services
    
    
    6,894
    
    
    
    6,495
    
    
    
    14,054
    
    
    
    12,752Total cost of revenue
    
    
    13,204
    
    
    
    16,472
    
    
    
    29,086
    
    
    
    36,013GROSS PROFIT
    
    
    12,372
    
    
    
    13,544
    
    
    
    23,840
    
    
    
    21,004OPERATING EXPENSES:Research and development
    
    
    4,668
    
    
    
    3,978
    
    
    
    9,807
    
    
    
    8,162Sales and marketing
    
    
    4,500
    
    
    
    4,524
    
    
    
    8,892
    
    
    
    8,591General and administrative
    
    
    2,796
    
    
    
    4,013
    
    
    
    6,419
    
    
    
    8,173Amortization of intangible assets related to
Camtronics acquisition
    
    
    345
    
    
    
    885
    
    
    
    690
    
    
    
    1,770Integration costs related to Camtronics acquisition
    
    
    
    
    
    
    1,077
    
    
    
    
    
    
    
    2,281Restructuring charge
    
    
    578
    
    
    
    
    
    
    
    578
    
    
    
    Total operating expenses
    
    
    12,887
    
    
    
    14,477
    
    
    
    26,386
    
    
    
    28,977OPERATING LOSS
    
    
    (515
    )
    
    
    (933
    )
    
    
    (2,546
    )
    
    
    (7,973
    )INTEREST INCOME
    
    
    250
    
    
    
    160
    
    
    
    479
    
    
    
    316INTEREST EXPENSE
    
    
    (23
    )
    
    
    (84
    )
    
    
    (56
    )
    
    
    (193
    )NET LOSS
    
    $
    (288
    )
    
    $
    (857
    )
    
    $
    (2,123
    )
    
    $
    (7,850
    )NET LOSS PER SHARE  BASIC AND DILUTED
    
    $
    (0.01
    )
    
    $
    (0.04
    )
    
    $
    (0.10
    )
    
    $
    (0.38
    )WEIGHTED
AVERAGE SHARES OUTSTANDING, BASIC AND DILUTED
    
    
    21,315
    
    
    
    20,866
    
    
    
    21,294
    
    
    
    20,725
 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 EndedJune 30,2007
    
    
    2006OPERATING ACTIVITIESNet loss
    
    $
    (2,123
    )
    
    $
    (7,850
    )Adjustments
to reconcile net loss to net cash used in operating activities:Depreciation
    
    
    3,281
    
    
    
    3,584Amortization of intangible assets
    
    
    1,482
    
    
    
    2,510Stock-based compensation expense
    
    
    1,340
    
    
    
    1,366Loss on
disposal of fixed assets
    
    
    213
    
    
    
    5Changes in operating assets and liabilities, net
    
    
    (4,491
    )
    
    
    (2,301
    )Net cash used in operations
    
    
    (298
    )
    
    
    (2,686
    )INVESTING ACTIVITIESPurchases of property and equipment
    
    
    (1,631
    )
    
    
    (3,507
    )Maturities of marketable securities
    
    
    
    
    
    
    5,000Capitalized software development costs
    
    
    (120
    )
    
    
    (426
    )Other investing activities
    
    
    (125
    )
    
    
    65Net cash (used in) provided by investing activities
    
    
    (1,876
    )
    
    
    1,132FINANCING ACTIVITIESProceeds of issuance of common stock, net of issue costs
    
    
    472
    
    
    
    2,127Payment of debt and capital lease obligations
    
    
    (866
    )
    
    
    (1,394
    )Decrease in restricted cash
    
    
    446
    
    
    
    Net cash provided by financing activities
    
    
    52
    
    
    
    733EFFECT OF EXCHANGE RATE CHANGES ON CASH
    
    
    11
    
    
    
    2NET DECREASE IN CASH
    
    
    (2,111
    )
    
    
    (819
    )CASH at beginning of period
    
    
    23,008
    
    
    
    15,520CASH at end of period
    
    $
    20,897
    
    
    $
    14,701
 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
        NOTE
2. RESTRUCTURING CHARGE AND EXIT LIABILITY
   Three Months Ended
    
    
    Six Months EndedJune 30, 2007
    
    
    June 30, 2007Beginning liability balance
    
    $
    968
    
    
    $
    1,057Lease payments
    
    
    (87
    )
    
    
    (174
    )Payment of related expenses
    
    
    (29
    )
    
    
    (31
    )Ending liability balance
    
    $
    852
    
    
    $
    852
  NOTE 3 . ACQUISITIONS AND INTANGIBLE ASSETS
  6




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June 30, 2007
    
    December 31, 2006Gross
    
    
    
    
    
    
    
    
    
    GrossCarrying
    
    Total
    
    Net Carrying
    
    Carrying
    
    Total
    
    Net CarryingAmount
    
    Amortization
    
    Amount
    
    Amount
    
    Amortization
    
    AmountAcquired technology
    
    $
    5,240
    
    
    $
    3,999
    
    
    $
    1,241
    
    
    $
    5,240
    
    
    $
    3,404
    
    
    $
    1,836Customer relationships
    
    
    8,010
    
    
    
    2,302
    
    
    
    5,708
    
    
    
    10,028
    
    
    
    3,629
    
    
    
    6,399Trade names
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    501
    
    
    
    501
    
    
    
    Software development
costs
    
    
    1,570
    
    
    
    1,001
    
    
    
    569
    
    
    
    1,451
    
    
    
    806
    
    
    
    645Goodwill
    
    
    21,454
    
    
    
    
    
    
    
    21,454
    
    
    
    21,210
    
    
    
    
    
    
    
    21,210Total
    
    $
    36,274
    
    
    $
    7,302
    
    
    $
    28,972
    
    
    $
    38,430
    
    
    $
    8,340
    
    
    $
    30,090
   Remainder of 2007
    
    $
    1,5142008
    
    
    2,3682009
    
    
    1,3812010
    
    
    1,3352011 and thereafter
    
    
    920Total
    
    $
    7,518
 NOTE 4. INVENTORIES
  7




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June 30, 2007
    
    December 31, 2006Third-party components
    
    $
    3,255
    
    
    $
    2,716Work-in-process
    
    
    474
    
    
    
    336Completed systems
    
    
    2,723
    
    
    
    5,527Total
    
    $
    6,452
    
    
    $
    8,579
  NOTE 5. SUPPLEMENTARY CASH FLOW INFORMATION
  Six Months Ended June 30,2007
    
    2006(Increase) decrease in:Trade accounts receivable, net
    
    $
    5,790
    
    
    $
    609Inventories, net
    
    
    2,127
    
    
    
    (3,747
    )Prepaid expenses and other current assets
    
    
    (1,328
    )
    
    
    (829
    )Other noncurrent assets
    
    
    111
    
    
    
    (129
    )Increase (decrease) in:Accounts payable
    
    
    (2,379
    )
    
    
    (3,492
    )Accrued payroll and related costs
    
    
    (1,968
    )
    
    
    (882
    )Other accrued expenses
    
    
    (589
    )
    
    
    2,732Deferred revenue
    
    
    (6,255
    )
    
    
    3,437Net changes in operating assets and liabilities
    
    $
    (4,491
    )
    
    $
    (2,301
    )
  NOTE 6. COMPUTATION OF NET LOSS PER SHARE
  NOTE 7. STOCK BASED COMPENSATION
  8




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Share Based Payment Accounting for Stock Issued to Employees
  Three Months Ended June 30,
    
    Six Months Ended June 30,2007
    
    2006
    
    2007
    
    2006Dividend yield
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Expected volatility
    
    
    50.0
    %
    
    
    70.9
    %
    
    
    50.0
    %
    
    
    70.9
    %Risk-free interest rate
    
    
    4.80
    %
    
    
    4.87
    %
    
    
    4.65
    %
    
    
    4.87
    %Expected life of options, in years
    
    
    5.0
    
    
    
    5.0
    
    
    
    5.0
    
    
    
    5.0
    Three Months Ended June 30,
    
    Six Months Ended June 30,2007
    
    2006
    
    2007
    
    2006Stock options:Grants, in shares
    
    
    53
    
    
    
    470
    
    
    
    350
    
    
    
    470Weighted average grant
date fair value, per share
    
    $
    3.89
    
    
    $
    10.14
    
    
    $
    5.78
    
    
    $
    10.14Exercises, in shares
    
    
    34
    
    
    
    126
    
    
    
    74
    
    
    
    459Proceeds of exercises
    
    $
    191
    
    
    $
    609
    
    
    $
    472
    
    
    $
    2,087Restricted stock units:Grants, in shares
    
    
    
    
    
    
    64
    
    
    
    61
    
    
    
    78Weighted average grant
date fair value, per share
    
    
    
    
    
    $
    16.56
    
    
    $
    12.46
    
    
    $
    16.38Shares vested in the period
    
    
    8
    
    
    
    6
    
    
    
    15
    
    
    
    8
 9




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10




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NOTE 8. COMPREHENSIVE LOSS
  NOTE 9. INCOME TAXES
 Accounting For Uncertainty In Income Taxes Accounting For Income Taxes
     NOTE 10. WARRANTY OBLIGATION
    Three Months Ended
    
    
    Six Months EndedJune 30, 2007
    
    
    June 30, 2007Beginning liability balance
    
    $
    623
    
    
    $
    700Additions charged to expense
    
    
    155
    
    
    
    341Deductions for claim resolution
    
    
    (243
    )
    
    
    (506
    )Ending liability balance
    
    $
    535
    
    
    $
    535
 
 ITEM 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 FORWARD-LOOKING STATEMENTS
  11




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COMPANY OVERVIEW
  RESULTS SUMMARY
   12




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1)
    
    Second quarter non-cash expenses of $0.3 million, or $0.02 per share, in amortization
of intangible assets acquired in the Camtronics acquisition, ($0.7 million, or $0.03 per
share, for the six months ended June 30),2)
    
    Second quarter non-cash expenses of $0.7 million, or $0.03 per share, for stock-based
compensation ($1.3 million, or $0.06 per share, for the six months ended June 30), and3)
    
    A restructuring charge of $0.6 million, or $0.03 per share, representing the
severance and related costs of the Companys workforce
reduction  in
May 2007 in its effort to align operating expenses with the current level of revenue.
  Revenue and Gross Margin
     (In Thousands)Three Months Ended June 30,
    
    
    Six Months Ended June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Revenue:System sales
    
    $
    11,235
    
    
    $
    17,601
    
    
    $
    24,903
    
    
    $
    34,870Support services
    
    
    14,341
    
    
    
    12,415
    
    
    
    28,023
    
    
    
    22,147Total
    
    $
    25,576
    
    
    $
    30,016
    
    
    $
    52,926
    
    
    $
    57,017Cost of Revenue:System sales
    
    $
    6,310
    
    
    $
    9,977
    
    
    $
    15,032
    
    
    $
    23,261Support services
    
    
    6,894
    
    
    
    6,495
    
    
    
    14,054
    
    
    
    12,752Total
    
    $
    13,204
    
    
    $
    16,472
    
    
    $
    29,086
    
    
    $
    36,013Gross Profit:System sales
    
    $
    4,925
    
    
    $
    7,624
    
    
    $
    9,871
    
    
    $
    11,609Support services
    
    
    7,447
    
    
    
    5,920
    
    
    
    13,969
    
    
    
    9,395Total
    
    $
    12,372
    
    
    $
    13,544
    
    
    $
    23,840
    
    
    $
    21,004
 13




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Three Months Ended June 30,
    
    
    Six Months Ended June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Gross Margin:System sales
    
    
    43.8
    %
    
    
    43.3
    %
    
    
    39.6
    %
    
    
    33.3
    %Support services
    
    
    51.9
    %
    
    
    47.7
    %
    
    
    49.8
    %
    
    
    42.4
    %Total
    
    
    48.4
    %
    
    
    45.1
    %
    
    
    45.0
    %
    
    
    36.8
    %
 Summary
   System Sales Revenue
   System Sales Gross Margin
    14




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Support Services Revenue
  Support Services Gross Margin
   Research & Development, Sales & Marketing, and General & Administrative Expenses
    15




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Research and Development Expenses
   Sales and Marketing Expenses
   General and Administrative Expenses
   LIQUIDITY AND CAPITAL RESOURCES
 Summary
  16




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Cash Used In Operating Activities
    Cash From Investing Activities
    Cash From Financing Activities
   Contractual Cash Obligations
  17




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Available Credit
   
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
 ITEM 4. CONTROLS AND PROCEDURES
  18




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PART II. OTHER INFORMATION
 
 ITEM 1A. RISK FACTORS
  
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  1)
    
    Two directors were elected to the Board of Directors to serve for a three
year term expiring at the annual meeting in 2010 or until their successors have been
duly elected and qualified. Both nominees were serving as directors of the Company at
the time of their nomination for the current term. The terms of office of six other
directors continued after the meeting.
 Votes For
    
    Votes WithheldMylle H. Mangum
    
    
    17,327,152
    
    
    
    1,432,627Hugh H. Williamson, III
    
    
    17,345,114
    
    
    
    1,414,665Directors whose terms of office continued after the meeting:Terms Expiring In 2008Arthur P. BeattieFred C. GoadCharles A. Jett, Jr.Terms Expiring In 2009Roddy J.H. ClarkDouglas D. FrenchJohn W. Thompson
 19




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##### Table of Contents



2)
    
    The ratification of the appointment of Ernst&Young LLP as the Companys
independent registered public accountants for the year ending December 31, 2007 was
approved as follows:Votes for18,603,833Votes against138,740Abstentions17,206
 
 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 18U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 *
    
    Filed herewith 20




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SIGNATURES
  EMAGEON INC.By:

/s/ Charles A. Jett, Jr.Charles A. Jett, Jr.Chairman, Chief Executive Officer, and President
(Principal Executive Officer)By:
    /s/ W. Randall PittmanW. Randall PittmanChief Financial Officer and Treasurer
(Principal Financial Officer) 21