##### 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 September 30, 2006
 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 200Birmingham, Alabama
    
    35242(Address of principal executive offices)
    
    (Zip Code)
 (205) 980-9222
 
  þ o
  o þ o
 o þ




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##### 



Form 10-Q
September 30, 2006
Table of Contents
 Page No.PART I FINANCIAL INFORMATIONItem 1. Unaudited Financial Statements
    
    
    3Consolidated Balance Sheets at September 30, 2006
and December 31, 2005
    
    
    3Consolidated Statements of Operations for the Three and Nine
Months Ended September 30, 2006 and 2005
    
    
    4Consolidated Statements of Cash Flows for the Nine
Months Ended September 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
    
    
    20Item 4. Controls and Procedures
    
    
    20PART II OTHER INFORMATIONItem 1A. Risk Factors
    
    
    21Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    21Item 6. Exhibits
    
    
    21SIGNATURES
    
    
    22EX-31.1 SECTION 302 CERTIFICATION OF CEOEX-31.2 SECTION 302 CERTIFICATION OF CFOEX-32 SECTION 906 CERTIFICATIONS OF CEO AND CFO




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 ITEM
1. CONDENSED FINANCIAL STATEMENTS
 EMAGEON INC.
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (in thousands, except per share amounts)
 September 30,
    
    
    December 31,2006
    
    
    2005(Unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    13,762
    
    
    $
    15,520Marketable securities
    
    
    
    
    
    
    4,951Trade accounts receivable, net
    
    
    29,959
    
    
    
    29,261Inventories
    
    
    9,875
    
    
    
    8,031Prepaid expenses and other current assets
    
    
    3,774
    
    
    
    3,052Total current assets
    
    
    57,370
    
    
    
    60,815Property and equipment, net
    
    
    19,507
    
    
    
    21,433Other noncurrent assets
    
    
    1,647
    
    
    
    1,419Intangible assets, net
    
    
    31,427
    
    
    
    34,277Total assets
    
    $
    109,951
    
    
    $
    117,944LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    9,285
    
    
    $
    13,196Accrued payroll and related costs
    
    
    3,447
    
    
    
    4,104Deferred revenue
    
    
    26,649
    
    
    
    26,057Other accrued expenses
    
    
    3,634
    
    
    
    3,978Current portion of long-term debt and capital lease obligations
    
    
    1,639
    
    
    
    2,763Total current liabilities
    
    
    44,654
    
    
    
    50,098Long-term deferred revenue
    
    
    3,967
    
    
    
    3,221Other long-term liabilities
    
    
    201
    
    
    
    Long-term debt and capital lease obligations
    
    
    27
    
    
    
    986Total liabilities
    
    
    48,849
    
    
    
    54,305Stockholders equity:Common
stock, $0.001 par value, 66,000 shares authorized; 21,254
shares and 20,629 shares issued, and 21,079 shares and 20,453
shares outstanding at September 30, 2006 and December 31, 2005,
respectively
    
    
    21
    
    
    
    21Additional paid-in capital
    
    
    120,469
    
    
    
    115,215Accumulated other comprehensive income
    
    
    417
    
    
    
    85Accumulated deficit
    
    
    (59,530
    )
    
    
    (51,407
    )Treasury stock, 176 shares, at cost
    
    
    (275
    )
    
    
    (275
    )Total stockholders equity
    
    
    61,102
    
    
    
    63,639Total liabilities and stockholders equity
    
    $
    109,951
    
    
    $
    117,944
 The accompanying notes are an integral part of these financial statements.
 3




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EMAGEON INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (in thousands, except per share amounts)
 Unaudited
    
    
    UnauditedThree Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Revenue:System sales
    
    $
    19,754
    
    
    $
    13,490
    
    
    $
    54,624
    
    
    $
    34,611Support services
    
    
    13,257
    
    
    
    6,526
    
    
    
    35,404
    
    
    
    15,905Total revenue
    
    
    33,011
    
    
    
    20,016
    
    
    
    90,028
    
    
    
    50,516Cost of revenue:System sales
    
    
    10,712
    
    
    
    7,206
    
    
    
    33,973
    
    
    
    17,782Support services
    
    
    6,187
    
    
    
    3,799
    
    
    
    18,939
    
    
    
    10,798Total cost of revenue
    
    
    16,899
    
    
    
    11,005
    
    
    
    52,912
    
    
    
    28,580Gross profit
    
    
    16,112
    
    
    
    9,011
    
    
    
    37,116
    
    
    
    21,936Operating expenses:Research and development
    
    
    4,601
    
    
    
    2,624
    
    
    
    12,763
    
    
    
    7,955Sales and marketing
    
    
    4,435
    
    
    
    2,455
    
    
    
    13,026
    
    
    
    7,855General and administrative
    
    
    4,495
    
    
    
    2,467
    
    
    
    12,668
    
    
    
    7,295Amortization of intangible assets related to
Camtronics acquisition
    
    
    885
    
    
    
    
    
    
    
    2,655
    
    
    
    Integration costs related to Camtronics acquisition
    
    
    2,062
    
    
    
    
    
    
    
    4,343
    
    
    
    Total operating expenses
    
    
    16,478
    
    
    
    7,546
    
    
    
    45,455
    
    
    
    23,105Operating (loss) income
    
    
    (366
    )
    
    
    1,465
    
    
    
    (8,339
    )
    
    
    (1,169
    )Interest income
    
    
    157
    
    
    
    497
    
    
    
    473
    
    
    
    1,207Interest expense
    
    
    (64
    )
    
    
    (131
    )
    
    
    (257
    )
    
    
    (1,125
    )Net (loss) income
    
    $
    (273
    )
    
    $
    1,831
    
    
    $
    (8,123
    )
    
    $
    (1,087
    )Net (loss) income per share, basic and diluted
    
    $
    (0.01
    )
    
    $
    0.09
    
    
    $
    (0.39
    )
    
    $
    (0.06
    )Basic weighted average shares outstanding
    
    
    21,013
    
    
    
    20,110
    
    
    
    20,822
    
    
    
    17,191Diluted weighted average shares outstanding
    
    
    21,013
    
    
    
    21,382
    
    
    
    20,822
    
    
    
    17,191
 The accompanying notes are an integral part of these financial statements.
 4




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EMAGEON INC.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (in thousands)
 UnauditedNine Months Ended September 30,2006
    
    
    2005OPERATING ACTIVITIESNet loss
    
    $
    (8,123
    )
    
    $
    (1,087
    )Adjustments
to reconcile net loss to net cash (used in) provided by operating activities:Depreciation
    
    
    5,320
    
    
    
    4,070Amortization of intangible assets
    
    
    3,677
    
    
    
    709Write-off of subordinated debt discount
    
    
    
    
    
    
    646Stock-based compensation expense
    
    
    2,348
    
    
    
    918Loss on disposal of fixed assets
    
    
    460
    
    
    
    Other operating activities
    
    
    (49
    )
    
    
    107Changes in operating assets and liabilities, net
    
    
    (6,389
    )
    
    
    (9,138
    )Net cash used in operations
    
    
    (2,756
    )
    
    
    (3,775
    )INVESTING ACTIVITIESPurchases of property and equipment
    
    
    (4,330
    )
    
    
    (6,204
    )Purchases of marketable securities
    
    
    
    
    
    
    (59,381
    )Maturities of marketable securities
    
    
    5,000
    
    
    
    30,000Capitalized software development costs
    
    
    (551
    )
    
    
    (293
    )Other investing activities
    
    
    55
    
    
    
    Net cash provided by (used in) investing activities
    
    
    174
    
    
    
    (35,878
    )FINANCING ACTIVITIESProceeds of issuance of common stock, net of issue costs
    
    
    2,906
    
    
    
    69,614Proceeds of issuance of preferred stock, net of issue costs
    
    
    
    
    
    
    59Payment of debt and capital lease obligations
    
    
    (2,083
    )
    
    
    (5,859
    )Other financing activities
    
    
    
    
    
    
    374Net cash provided by financing activities
    
    
    823
    
    
    
    64,188Effect of exchange rate changes on cash
    
    
    1
    
    
    
    Net (decrease) increase in cash
    
    
    (1,758
    )
    
    
    24,535Cash at beginning of period
    
    
    15,520
    
    
    
    5,994Cash at end of period
    
    $
    13,762
    
    
    $
    30,529
 The accompanying notes are an integral part of these financial statements.
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EMAGEON INC.
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
        6




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NOTE 2. INITIAL PUBLIC OFFERING
  NOTE 3. ACQUISITIONS AND INTANGIBLE ASSETS
    September 30, 2006
    
    
    December 31, 2005Gross
    
    
    
    
    
    
    Net
    
    
    Gross
    
    
    
    
    
    NetCarrying
    
    
    Total
    
    
    Carrying
    
    
    Carrying
    
    
    Total
    
    
    CarryingAmount
    
    
    Amortization
    
    
    Amount
    
    
    Amount
    
    
    Amortization
    
    
    AmountAcquired technology
    
    $
    5,240
    
    
    $
    3,106
    
    
    $
    2,134
    
    
    $
    5,240
    
    
    $
    2,212
    
    
    $
    3,028Customer relationships
    
    
    10,028
    
    
    
    2,851
    
    
    
    7,177
    
    
    
    10,028
    
    
    
    518
    
    
    
    9,510Trade names
    
    
    501
    
    
    
    394
    
    
    
    107
    
    
    
    501
    
    
    
    72
    
    
    
    429Software development
costs
    
    
    1,349
    
    
    
    695
    
    
    
    654
    
    
    
    798
    
    
    
    567
    
    
    
    231Goodwill
    
    
    21,355
    
    
    
    
    
    
    
    21,355
    
    
    
    21,079
    
    
    
    
    
    
    
    21,079Total
    
    $
    38,473
    
    
    $
    7,046
    
    
    $
    31,427
    
    
    $
    37,646
    
    
    $
    3,369
    
    
    $
    34,277
   7




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Three months
ending December 31, 2006
    
    $
    1,3072007
    
    
    3,1032008
    
    
    2,0272009
    
    
    1,3812010 and thereafter
    
    
    2,254Total
    
    $
    10,072
  NOTE 4. MARKETABLE SECURITIES
  NOTE 5. INVENTORIES
  September 30, 
2006
    
    
    December 31, 
2005Third-party components
    
    $
    3,352
    
    
    $
    1,708Work-in-process
    
    
    230
    
    
    
    345Completed systems
    
    
    6,293
    
    
    
    5,978Total
    
    $
    9,875
    
    
    $
    8,031
 NOTE 6. SUPPLEMENTARY CASH FLOW INFORMATION
  Nine Months Ended September 30,2006
    
    
    2005(Increase) decrease in:Trade accounts receivable, net
    
    $
    (698
    )
    
    $
    (3,738
    )Inventories, net
    
    
    (1,844
    )
    
    
    31Prepaid expenses and other current assets
    
    
    (722
    )
    
    
    (1,827
    )Other noncurrent assets
    
    
    (228
    )
    
    
    (54
    )Increase (decrease) in:Accounts payable
    
    
    (3,911
    )
    
    
    1,466Accrued payroll and related costs
    
    
    (657
    )
    
    
    (310
    )Other accrued expenses
    
    
    333
    
    
    
    (1,697
    )Deferred revenue
    
    
    1,338
    
    
    
    (3,009
    )Net changes in operating assets and liabilities
    
    $
    (6,389
    )
    
    $
    (9,138
    )
 8




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NOTE 7. COMPUTATION OF EARNINGS PER SHARE
  NOTE 8. STOCK BASED COMPENSATION
     9




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10




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Three Months Ended
    
    
    Nine Months EndedSeptember 30, 2005
    
    
    September 30, 2005Net income (loss):As reported
    
    $
    1,831
    
    
    $
    (1,087
    )Add: Stock-based employee compensation
reported in net income (loss)
    
    
    301
    
    
    
    918Deduct: Stock-based employee
compensation under the fair value method
for all awards
    
    
    (488
    )
    
    
    (1,427
    )Pro forma net income (loss)
    
    $
    1,644
    
    
    $
    (1,596
    )Basic and diluted net income (loss) per share:As reported
    
    $
    0.09
    
    
    $
    (0.06
    )Add: Stock-based employee compensation
reported in net income (loss)
    
    
    0.01
    
    
    
    0.05Deduct: Stock-based employee
compensation under the fair value method
for all awards
    
    
    (0 .02
    )
    
    
    (0.08
    )Pro forma net income (loss) per share
    
    $
    0.08
    
    
    $
    (0.09
    )
 Stock Options
  Three Months Ended
    
    Three Months Ended
    
    Nine Months Ended
    
    Nine Months EndedSeptember 30, 2005
    
    September 30, 2006
    
    September 30, 2005
    
    September 30, 2006Dividend yield
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %Expected volatility
    
    
    70.9
    %
    
    
    70.9
    %
    
    
    70.9
    %
    
    
    70.9
    %Risk-free interest rate
    
    
    4.06
    %
    
    
    5.02
    %
    
    
    3.81
    %
    
    
    4.87
    %Expected life of options, in years
    
    
    5.0
    
    
    
    5.0
    
    
    
    5.0
    
    
    
    5.0Weighted average grant date fair value
    
    $
    8.10
    
    
    $
    9.38
    
    
    $
    9.08
    
    
    $
    9.61
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Weighted-AverageWeighted-Average
    
    
    RemainingThree Months Ended September 30, 2006
    
    Number of Shares
    
    
    Exercise Price
    
    
    Contractual LifeOptions at beginning of period
    
    
    2,115
    
    
    $
    8.63Granted
    
    
    31
    
    
    
    15.10Exercised
    
    
    (154
    )
    
    
    5.07Forfeited
    
    
    (97
    )
    
    
    10.54Outstanding at end of period
    
    
    1,895
    
    
    $
    8.93
    
    
    7.31 yearsExercisable at end of period
    
    
    967
    
    
    $
    4.75
    
    
    5.60 yearsNonvested stock options
    
    
    928
    
    
    $
    13.29
    
    
    9.08 years
 Weighted-AverageWeighted-Average
        
    RemainingNine Months Ended September 30, 2006
    
    Number of Shares
        
    Exercise Price
        
    Contractual LifeOptions at beginning of period
    
    
    2,129
    
    
    $
    5.91Granted
    
    
    530
    
    
    
    16.18Exercised
    
    
    (613
    )
    
    
    4.66Forfeited
    
    
    (151
    )
    
    
    9.14Outstanding at end of period
    
    
    1,895
    
    
    
    8.93
    
    
    7.31 yearsExercisable at end of period
    
    
    967
    
    
    
    4.75
    
    
    5.60 years
  12




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Restricted Stock
   NOTE 9. COMPREHENSIVE LOSS
  
 NOTE
10. RECENT ACCOUNTING PRONOUNCEMENTS
 Accounting For Uncertainty in Income
Taxes Fair
Value Measurements
 ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 FORWARD-LOOKING STATEMENTS
   13




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COMPANY OVERVIEW
  RESULTS SUMMARY
    1)
    
    Third quarter expenses of $2.1 million, or $0.10 per share, related to the integration
of Camtronics with the Company ($4.3 million, or $0.21 per share, for the nine months ended
September 30, 2006),2)
    
    Third quarter non-cash expenses of $1.0 million, or $0.05 per share, in amortization of
intangible assets acquired in the Camtronics acquisition,
($2.9 million, or $0.14 per
share, for the nine months ended September 30, 2006), and3)
    
    Third quarter non-cash expenses of $1.0 million, or $0.05 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 ($2.3 million, or $0.11 per share, for
the nine months ended September 30, 2006).
  14




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Revenue and Gross Margin
     (In Thousands)Three Months Ended
    
    
    Nine Months EndedSept. 30,
    
    
    Sept. 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Revenue:System sales
    
    $
    19,754
    
    
    $
    13,490
    
    
    $
    54,624
    
    
    $
    34,611Support services
    
    
    13,257
    
    
    
    6,526
    
    
    
    35,404
    
    
    
    15,905Total
    
    
    33,011
    
    
    
    20,016
    
    
    
    90,028
    
    
    
    50,516Cost of Revenue:System sales
    
    
    10,712
    
    
    
    7,206
    
    
    
    33,973
    
    
    
    17,782Support services
    
    
    6,187
    
    
    
    3,799
    
    
    
    18,939
    
    
    
    10,798Total
    
    
    16,899
    
    
    
    11,005
    
    
    
    52,912
    
    
    
    28,580Gross Profit:System sales
    
    
    9,042
    
    
    
    6,284
    
    
    
    20,651
    
    
    
    16,829Support services
    
    
    7,070
    
    
    
    2,727
    
    
    
    16,465
    
    
    
    5,107Total
    
    $
    16,112
    
    
    $
    9,011
    
    
    $
    37,116
    
    
    $
    21,936Gross Margin:System sales
    
    
    45.7
    %
    
    
    46.6
    %
    
    
    37.8
    %
    
    
    48.6
    %Support services
    
    
    53.3
    %
    
    
    41.8
    %
    
    
    46.5
    %
    
    
    32.1
    %Total
    
    
    48.8
    %
    
    
    45.0
    %
    
    
    41.2
    %
    
    
    43.4
    %
 Summary
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System
Sales Revenue.
  System
Sales Gross Margin
   Support Services Revenue.
 16




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Support Services Gross Margin.
  Research & Development, Sales & Marketing, and General & Administrative Expenses
    17




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Research and Development Expenses.
  Sales
and Marketing Expenses. .
  General and Administrative Expenses. .
  LIQUIDITY AND CAPITAL RESOURCES
 Summary
 18




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Cash Used In Operating Activities
   Cash From Investing Activities
   Cash From Financing Activities
  Contractual Cash Obligations
 19




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Available Credit
  
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
 ITEM 4. CONTROLS AND PROCEDURES
  20




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PART II. OTHER INFORMATION
 
 ITEM 1A. RISK FACTORS
  
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  
 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*
    
    Certifications 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 21




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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 and Accounting Officer)
 22