##### 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, 2005
 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 No.: 0-51149
 Emageon
Inc.
 (Exact name of registrant as specified in its charter)
 Delaware
    
    63-1240138(State of incorporation)
    
    (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 þ




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TABLE OF CONTENTS
  
 PagePART I: FINANCIAL INFORMATIONItem 1: Financial Statements
    
    
    3Item 2: Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    12Item 3: Quantitative and Qualitative Disclosures About Market Risk
    
    
    24Item 4: Controls and Procedures
    
    
    24PART II: OTHER INFORMATIONItem 1: Legal Proceedings
    
    
    25Item 2: Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    25Item 6: Exhibits
    
    
    25SIGNATURES
    
    
    26EX-10.1 FORM OF RESTRICTED STOCK AWARD AGREEMENTEX-10.2 FORM OF RESTRICTED STOCK AWARD AGREEMENTEX-31.1 SECTION 302 CERTIFICATION OF THE CEOEX-31.2 SECTION 302 CERTIFICATION OF THE CFOEX-32.1 SECTION 906 CERTIFICATION OF THE CEO & CFO
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PART I: FINANCIAL INFORMATION
 
 ITEM 1: CONSOLIDATED FINANCIAL STATEMENTS
 EMAGEON INC.
 CONSOLIDATED BALANCE SHEETS
(in thousands, except for share data)
 September 30,
    
    
    December 31,2005
    
    
    2004(Unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    30,529
    
    
    $
    5,994Marketable securities
    
    
    29,381
    
    
    
    Trade accounts receivable, net of allowance for doubtful accounts of $100
and $75 at September 30, 2005 and December 31, 2004, respectively
    
    
    18,073
    
    
    
    14,255Prepaid expenses and other current assets
    
    
    3,533
    
    
    
    1,799Deferred offering costs
    
    
    
    
    
    
    1,326Unbilled revenue
    
    
    198
    
    
    
    302Third-party components to be sold to customers
    
    
    1,391
    
    
    
    1,422Total current assets
    
    
    83,105
    
    
    
    25,098Property and equipment, net
    
    
    10,960
    
    
    
    8,832Restricted cash
    
    
    534
    
    
    
    903Other noncurrent assets
    
    
    116
    
    
    
    62Intangible assets:Goodwill
    
    
    3,755
    
    
    
    3,755Acquired software, net
    
    
    2,222
    
    
    
    2,847Capitalized software development costs, net
    
    
    230
    
    
    
    21Trademark
    
    
    250
    
    
    
    250Total intangible assets
    
    
    6,457
    
    
    
    6,873Total assets
    
    $
    101,172
    
    
    $
    41,768LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS EQUITY (DEFICIT)Current liabilities:Accounts payable
    
    $
    6,124
    
    
    $
    4,658Accrued payroll and related costs
    
    
    1,247
    
    
    
    1,557Deferred revenue
    
    
    17,755
    
    
    
    21,357Other accrued expenses
    
    
    2,141
    
    
    
    3,838Current portion of long-term debt
    
    
    1,973
    
    
    
    2,472Current portion of capital lease obligations
    
    
    664
    
    
    
    620Total current liabilities
    
    
    29,904
    
    
    
    34,502Long-term deferred revenue
    
    
    3,389
    
    
    
    2,796Deferred tax liability
    
    
    95
    
    
    
    95Long-term debt
    
    
    1,272
    
    
    
    5,528Capital lease obligations, less current portion
    
    
    366
    
    
    
    869Total liabilities
    
    
    35,026
    
    
    
    43,790Redeemable preferred stock: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
    
    
    
    
    
    
    9,597Series 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
    
    
    
    
    
    
    3,210Series 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
    
    
    
    
    
    
    11,620Series 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
    
    
    
    
    
    
    5,921Total redeemable preferred stock
    
    
    
    
    
    
    30,348Stockholders equity (deficit):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
    
    
    
    
    
    
    1,438Series 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
    
    
    
    
    
    
    5,868Common 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
    
    
    20
    
    
    
    3Additional paid in capital
    
    
    113,899
    
    
    
    6,998Treasury stock, 175,757 shares, at cost
    
    
    (275
    )
    
    
    (275
    )Accumulated deficit
    
    
    (47,498
    )
    
    
    (46,402
    )Total stockholders equity (deficit)
    
    
    66,146
    
    
    
    (32,370
    )Total liabilities, redeemable preferred stock and stockholders equity (deficit)
    
    $
    101,172
    
    
    $
    41,768
 The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
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EMAGEON INC.
 CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except for share data and per share amounts)
 For the Three Months Ended
    
    
    For the Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004(Unaudited)
    
    
    (Unaudited)
    
    
    (Unaudited)Revenue:System sales
    
    $
    13,490
    
    
    $
    7,458
    
    
    $
    34,611
    
    
    $
    21,128Support services
    
    
    6,116
    
    
    
    2,864
    
    
    
    14,901
    
    
    
    8,428Total revenue
    
    
    19,606
    
    
    
    10,322
    
    
    
    49,512
    
    
    
    29,556Cost of revenue:System sales
    
    
    7,206
    
    
    
    5,554
    
    
    
    17,782
    
    
    
    13,160Support services
    
    
    3,389
    
    
    
    2,949
    
    
    
    9,794
    
    
    
    7,642Total cost of revenue
    
    
    10,595
    
    
    
    8,503
    
    
    
    27,576
    
    
    
    20,802Gross profit
    
    
    9,011
    
    
    
    1,819
    
    
    
    21,936
    
    
    
    8,754Operating expenses:Research and development
    
    
    2,364
    
    
    
    1,581
    
    
    
    7,282
    
    
    
    4,154Sales and marketing
    
    
    2,344
    
    
    
    2,359
    
    
    
    7,554
    
    
    
    6,504General and administrative
    
    
    2,838
    
    
    
    2,079
    
    
    
    8,269
    
    
    
    5,652Total operating expenses
    
    
    7,546
    
    
    
    6,019
    
    
    
    23,105
    
    
    
    16,310Operating income (loss)
    
    
    1,465
    
    
    
    (4,200
    )
    
    
    (1,169
    )
    
    
    (7,556
    )Other income (expense):Interest income
    
    
    497
    
    
    
    14
    
    
    
    1,207
    
    
    
    17Interest 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
    
    
    
    2,549,124Weighted 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.
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EMAGEON INC.
 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY (DEFICIT)
(Unaudited)
(in thousands, except for share data)
 Preferred Stock
    
    
    Common Stock
    
    
    Additional
    
    
    
    
    
    
    
    
    
    
    TotalCarrying
    
    
    
    
    
    
    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
    
    
    
    
    
    
    
    
    
    
    
    273Exercise of stock warrants
    
    
    105,703
    
    
    
    58
    
    
    
    24,632
    
    
    
    
    
    
    
    74
    
    
    
    
    
    
    
    
    
    
    
    132Exercise of mandatorily
redeemable stock warrants
in connection with initial
public offering
    
    
    
    
    
    
    
    
    
    
    537,082
    
    
    
    1
    
    
    
    735
    
    
    
    
    
    
    
    
    
    
    
    736Proceeds from initial
public offering, net of
issuance costs
    
    
    
    
    
    
    
    
    
    
    5,750,000
    
    
    
    6
    
    
    
    67,195
    
    
    
    
    
    
    
    
    
    
    
    67,201Automatic 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
    
    
    
    
    
    
    
    
    
    
    
    30,356Stock based compensation -
stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    914
    
    
    
    
    
    
    
    
    
    
    
    914Accretion 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.
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EMAGEON INC.
 CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
 For the Nine Months EndedSeptember 30,2005
    
    
    2004(Unaudited)Operating activitiesNet loss
    
    $
    (1,087
    )
    
    $
    (8,269
    )Adjustments to reconcile net loss to net cash (used in) provided by
operating activities:Depreciation
    
    
    1,943
    
    
    
    1,019Depreciation of property and equipment at contracted customer sites
    
    
    2,127
    
    
    
    2,491Amortization of acquired software
    
    
    625
    
    
    
    625Amortization of capitalized software development costs
    
    
    84
    
    
    
    262Bad debt expense
    
    
    25
    
    
    
    63Interest income on restricted cash
    
    
    (5
    )
    
    
    (5
    )Sales discount from issuance of warrants
    
    
    92
    
    
    
    50Consulting expense for options issued to non-employees
    
    
    40
    
    
    
    Amortization and write off of subordinated debt discount
    
    
    646
    
    
    
    82Stock based compensation expense
    
    
    873
    
    
    
    332Changes 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
    
    
    
    2,438Accrued payroll and related costs
    
    
    (310
    )
    
    
    (272
    )Other accrued expenses
    
    
    (1,697
    )
    
    
    2,226Deferred revenue
    
    
    (3,009
    )
    
    
    12,303Net cash (used in) provided by operating activities
    
    
    (3,775
    )
    
    
    1,697Investing activitiesPurchases 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
    
    
    
    
    
    
    1,501Purchases 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 activitiesProceeds from issuance of common stock, net of
issuance costs
    
    
    69,614
    
    
    
    34Proceeds 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
    
    
    
    
    
    
    3,980Additions to restricted cash to secure letter of credit
    
    
    
    
    
    
    (96
    )Cash released from restriction
    
    
    374
    
    
    
    Net cash provided by financing activities
    
    
    64,188
    
    
    
    2,182Net increase in cash
    
    
    24,535
    
    
    
    2,682Cash at beginning of period
    
    
    5,994
    
    
    
    2,340Cash at end of period
    
    $
    30,529
    
    
    $
    5,022
 The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
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EMAGEON INC.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
   Securities
Available-for-Sale
 Accounting for Certain Investments in Debt and Equity Securities
 Income Taxes
   Customer Indemnification Provisions
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For the Three Months Ended
    
    
    For the Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Numerator: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
    
    
    
    2,429,742Weighted average effect of the release of
escrowed common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    116,137Weighted 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
    
    
    
    3,245Weighted 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
    
    
    
    2,549,124Effect 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
    
    
    
    2,549,124Net 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
    )
   Accounting for Stock Issued to Employees Accounting
for Stock-Based Compensation, Accounting
for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction
with Selling, Goods or Services.
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For the Three Months Ended
    
    
    For the Nine Months EndedSeptember 30,
    
    
    September 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Numerator: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
    
    
    
    332Deduct: 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
    
    
    
    2,549,124Effect of dilutive stock options and warrants
    
    
    971,171
    
    
    
    
    
    
    
    
    
    
    
    Weighted average shares of common stock  diluted
    
    
    21,081,561
    
    
    
    2,693,640
    
    
    
    17,191,333
    
    
    
    2,549,124Pro 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
    )
       September 30,
    
    
    December 31,2005
    
    
    2004U.S. government agency securities
    
    $
    24,507
    
    
    $
    Corporate commercial paper
    
    
    4,874
    
    
    
    Total held-to-maturity securities
    
    $
    29,381
    
    
    $
    
  10




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##### Table of Contents



Share-Based Payment
 Accounting Changes and Error Corrections Accounting Changes Reporting Changes in
Interim Financial Statements
   11




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##### Table of Contents



ITEM 2: MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  Company Overview
  Results Overview
   Recent Events
   12




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##### Table of Contents



Business Combinations Goodwill and Other Intangible Assets
 Our Market
  
    
    Increased procedure volumes
    
    Increased procedure size
    
    Modality blending, a layering of studies from two separate modalities for
diagnostic and treatment purposes
    
    The expanding adoption and use of standards
    
    Increasing emphasis by healthcare providers and government agencies on electronic
health record integration
    
    Body transparency, a new paradigm for navigating through large volumes of
information
  
    
    MR and CT Angiography
    
    Multi-Detector CT for heart and chest imaging
    
    CT/PET Fusion
   Significant Events in the Nine Months Ended September 30, 2005
  
    
    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.
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##### Table of Contents




    
    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.
    
    During March 2005, our quality management system received ISO 13485:2003
certification from the certification body, Lloyds 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.
    
    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.
    
    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
  
    
    We issued 10,843,411 shares of common stock upon the automatic conversion of
outstanding shares of preferred stock into shares of common stock.
    
    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.
  Results of Operations
 Revenue
  14




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##### Table of Contents



Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,(In thousands except percentages)
    
    (In thousands except percentages)Change
    
    
    
    
    
    
    
    
    
    
    
    
    
    Change2005
    
    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
    %
     15




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##### Table of Contents



Cost of Revenue
  Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,(In thousands except percentages)
    
    (In thousands except percentages)Change
    
    
    
    
    
    
    
    
    
    
    
    
    
    Change2005
    
    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
    %
   16




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##### Table of Contents



Gross Margin Percentage
  Research and Development (R&D)
 Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,(In thousands except percentages)
    
    (In thousands except percentages)Change
    
    
    
    
    
    
    
    
    
    
    
    
    
    Change2005
    
    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
    %
    17




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##### Table of Contents



Sales and Marketing (S&M)
 Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,(In thousands except percentages)
    
    (In thousands except percentages)Change
    
    
    
    
    
    
    
    
    
    
    
    
    
    Change2005
    
    2004
    
    Change
    
    (%)
    
    2005
    
    2004
    
    Change
    
    (%)S&M Expense
    
    $
    2,344
    
    
    $
    2,359
    
    
    
    ($15
    )
    
    
    (0.6
    %)
    
    $
    7,554
    
    
    $
    6,504
    
    
    $
    1,050
    
    
    
    16.1
    %% of Revenue
    
    
    12.0
    %
    
    
    22.9
    %
    
    
    
    
    
    
    
    
    
    
    15.3
    %
    
    
    22.0
    %
      18




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##### Table of Contents



General and Administrative (G&A)
 Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,(In thousands except percentages)
    
    (In thousands except percentages)Change
    
    
    
    
    
    
    
    
    
    
    
    
    
    Change2005
    
    2004
    
    Change
    
    (%)
    
    2005
    
    2004
    
    Change
    
    (%)G&A Expense
    
    $
    2,838
    
    
    $
    2,079
    
    
    $
    759
    
    
    
    36.5
    %
    
    $
    8,269
    
    
    $
    5,652
    
    
    $
    2,617
    
    
    
    46.3
    %% of Revenue
    
    
    14.5
    %
    
    
    20.1
    %
    
    
    
    
    
    
    
    
    
    
    16.7
    %
    
    
    19.1
    %
  
    
    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.
    
    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.
    
    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.
    
    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.
  Operating Income (Loss)
  19




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Interest Income and Expense
   Liquidity and Capital Resources
  September 30,
    
    December 31,2005
    
    2004Working capital
    
    $
    53,201
    
    
    $
    (9,404
    )Current ratio*
    
    
    2.8:1.0
    
    
    
    0.7:1.0Cash, cash equivalents and short-term investments
    
    
    59,910
    
    
    
    5,994Short-term borrowings and long-term debt
    
    
    4,275
    
    
    
    9,489Net 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.  Operating Activities
  20




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Investing Activities
    Financing Activities
   21




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##### Table of Contents



Payments Due by PeriodContractual 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
    
    
    
    1,172Total contractual cash obligations
    
    $
    10,963
    
    
    $
    4,041
    
    
    $
    3,860
    
    
    $
    1,890
    
    
    $
    1,172
 st
   Recently Issued Accounting Pronouncements
  Accounting Changes and Error Corrections Accounting Changes Reporting Changes in
Interim
 22




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Financial Statements
 Forward Looking Statements; Important Factors Affecting Future Results
     23




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ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
   
 ITEM 4: CONTROLS AND PROCEDURES
 Evaluation of Disclosure Controls and Procedures
  Changes in Internal Control over Financial Reporting
  24




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##### Table of Contents



PART II: OTHER INFORMATION
 
 ITEM 1: LEGAL PROCEEDINGS
  
 ITEM 2: UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 Unregistered Sales of Equity Securities
  Use of Proceeds from Initial Public Offering
   
 ITEM 6: EXHIBITS
  [Consider adding Form of Restricted Stock Agreement, which should be filed as an Item 10 exhibit in
a 10-Q, 10-K or 8-K prior to individual grants in order to avoid filing an 8-K to report the
grants.]
 Exhibit No.
    
    Description10.1
    
    Form of Restricted Stock Award
Agreement under the 2005 Non-Employee Director Stock Incentive Plan10.2
    
    Form of Restricted Stock Award
Agreement under the 2005 Equity Incentive Plan31.1
    
    Certification of Chief Executive Officer pursuant to
Rule13a-14(a) or Rule 15d-14(a) under the Securities Exchange
Act of 193431.2
    
    Certification of Chief Financial Officer pursuant to
Rule13a-14(a) or Rule 15d-14(a) under the Securities Exchange
Act of 193432.1
    
    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




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##### Table of Contents



SIGNATURES
  Emageon Inc.By:
    
    /s/ Charles A. Jett. Jr.Charles A. Jett, Jr.Chief Executive Officer(principal executive officer)By:
    
    /s/ W. Randall PittmanW. Randall PittmanChief Financial Officer and Treasurer(principal accounting and financial officer)
 26