##### 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, 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 200Birmingham, 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




---



##### 



Index
 Page No.PART I FINANCIAL INFORMATION
    
    
    3Item 1. Financial Statements
    
    
    3Consolidated Balance Sheets at September 30, 2008 (unaudited) and December 31, 2007
    
    
    3Consolidated Statements of Operations (unaudited) for the Three and Nine Months Ended September 30, 2008 and 2007
    
    
    4Consolidated Statements of Cash Flows (unaudited) for the Nine Months Ended September 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
    
    
    12Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    17Item 4. Controls and Procedures
    
    
    18PART II OTHER INFORMATION
    
    
    18Item 1.
Legal Proceedings
    
    
    18Item 1A. Risk Factors
    
    
    18Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    19Item 6. Exhibits
    
    
    19SIGNATURES
    
    
    20EX-31.1EX-31.2EX-32
  2




---



##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
 EMAGEON INC.
 
 CONSOLIDATED BALANCE SHEETS
 (in thousands)
 (Unaudited)September 30, 2008
    
    
    December 31, 2007ASSETSCurrent assets:Cash and cash equivalents
    
    $
    19,483
    
    
    $
    17,034Trade accounts receivable, net of allowance
for doubtful accounts of $400 at September
30, 2008 and $910 at December 31, 2007
    
    
    8,920
    
    
    
    26,796Inventories
    
    
    5,781
    
    
    
    6,249Prepaid expenses and other current assets
    
    
    3,368
    
    
    
    3,398Total current assets
    
    
    37,552
    
    
    
    53,477Property and equipment, net
    
    
    13,410
    
    
    
    15,143Other noncurrent assets
    
    
    3,156
    
    
    
    3,070Intangible assets, net
    
    
    4,095
    
    
    
    27,604TOTAL ASSETS
    
    $
    58,213
    
    
    $
    99,294LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    4,893
    
    
    $
    9,581Accrued payroll and related costs
    
    
    1,320
    
    
    
    2,877Deferred revenue
    
    
    16,338
    
    
    
    16,382Other accrued expenses
    
    
    3,246
    
    
    
    3,297Current portion of capital lease obligations
    
    
    39
    
    
    
    36Total current liabilities
    
    
    25,836
    
    
    
    32,173Long-term deferred revenue
    
    
    3,470
    
    
    
    4,306Other long-term liabilities
    
    
    372
    
    
    
    466Capital lease obligations
    
    
    20
    
    
    
    53TOTAL LIABILITIES
    
    
    29,698
    
    
    
    36,998STOCKHOLDERS EQUITY:Common stock, $0.001 par value, 165,050
shares authorized; 21,624 shares and 21,593
shares issued, and 21,449 shares and 21,418
shares outstanding at September 30, 2008
and December 31, 2007, respectively
    
    
    22
    
    
    
    22Additional paid-in capital
    
    
    129,081
    
    
    
    126,332Accumulated other comprehensive income
    
    
    667

    
    
    
    741Accumulated deficit
    
    
    (100,980
    )
    
    
    (64,524
    )28,790
    
    
    
    62,571Treasury stock, 175 shares, at cost
    
    
    (275
    )
    
    
    (275
    )Total stockholders equity
    
    
    28,515
    
    
    
    62,296TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    58,213
    
    
    $
    99,294
 The accompanying notes are an integral part of these financial statements.
 3




---



##### Table of Contents



EMAGEON INC.
 
 CONSOLIDATED STATEMENTS OF OPERATIONS
 (unaudited)
 (in thousands, except per share amounts)
 Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2008
    
    
    2007(1)
    
    
    2008
    
    
    2007(1)REVENUE:System sales
    
    $
    4,232
    
    
    $
    10,706
    
    
    $
    16,051
    
    
    $
    35,609Support services
    
    
    11,717
    
    
    
    12,022
    
    
    
    37,279
    
    
    
    40,045Total revenue
    
    
    15,949
    
    
    
    22,728
    
    
    
    53,330
    
    
    
    75,654COST OF REVENUE:System sales
    
    
    3,245
    
    
    
    6,327
    
    
    
    11,347
    
    
    
    21,359Support services
    
    
    5,845
    
    
    
    7,681
    
    
    
    18,984
    
    
    
    22,565Total cost of revenue
    
    
    9,090
    
    
    
    14,008
    
    
    
    30,331
    
    
    
    43,924GROSS PROFIT
    
    
    6,859
    
    
    
    8,720
    
    
    
    22,999
    
    
    
    31,730OPERATING EXPENSES:Research and development
    
    
    4,883
    
    
    
    5,197
    
    
    
    13,936
    
    
    
    14,174Sales and marketing
    
    
    3,143
    
    
    
    4,121
    
    
    
    10,619
    
    
    
    13,013General and administrative
    
    
    3,666
    
    
    
    3,251
    
    
    
    10,813
    
    
    
    9,670Amortization of intangible assets
    
    
    346
    
    
    
    346
    
    
    
    1,036
    
    
    
    1,036Employee severance and related expenses
    
    
    
    
    
    
    298
    
    
    
    851
    
    
    
    876Litigation settlement
    
    
    1,000
    
    
    
    
    
    
    
    1,000
    
    
    
    Goodwill impairment charge
    
    
    
    
    
    
    
    
    
    
    21,577
    
    
    
    Total operating expenses
    
    
    13,038
    
    
    
    13,213
    
    
    
    59,832
    
    
    
    38,769OPERATING LOSS
    
    
    (6,179
    )
    
    
    (4,493
    )
    
    
    (36,833
    )
    
    
    (7,039
    )Interest income
    
    
    123
    
    
    
    232
    
    
    
    409
    
    
    
    711Interest expense
    
    
    (7
    )
    
    
    (19
    )
    
    
    (32
    )
    
    
    (75
    )NET LOSS
    
    $
    (6,063
    )
    
    $
    (4,280
    )
    
    $
    (36,456
    )
    
    $
    (6,403
    )NET LOSS PER SHARE  BASIC AND DILUTED
    
    $
    (0.28
    )
    
    $
    (0.20
    )
    
    $
    (1.70
    )
    
    $
    (0.30
    )WEIGHTED AVERAGE SHARES OUTSTANDING,
BASIC AND DILUTED
    
    
    21,476
    
    
    
    21,382
    
    
    
    21,462
    
    
    
    21,342
 
 (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




---



##### Table of Contents



EMAGEON INC.
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (unaudited)
 (in thousands)
 Nine Months Ended September 30,2008
    
    
    2007OPERATING ACTIVITIESNet loss
    
    $
    (36,456
    )
    
    $
    (6,403
    )Adjustments to reconcile net loss to net cash provided by (used in) operating activities:Goodwill impairment charge
    
    
    21,577
    
    
    
    Depreciation
    
    
    3,042
    
    
    
    4,747Amortization of intangible assets
    
    
    1,939
    
    
    
    2,290Stock-based compensation expense
    
    
    2,749
    
    
    
    2,091Provision for doubtful accounts
    
    
    (510
    )
    
    
    Other operating activities
    
    
    11
    
    
    
    328Changes in operating assets and liabilities, net
    
    
    12,523
    
    
    
    (4,853
    )Net cash provided by (used in) operations
    
    
    4,875
    
    
    
    (1,800
    )INVESTING ACTIVITIESPurchases of property and equipment
    
    
    (1,815
    )
    
    
    (2,225
    )Capitalized software development costs
    
    
    (97
    )
    
    
    (112
    )Other investing activities
    
    
    (500
    )
    
    
    (125
    )Net cash used in investing activities
    
    
    (2,412
    )
    
    
    (2,462
    )FINANCING ACTIVITIESProceeds of issuance of common stock
    
    
    
    
    
    
    534Payment of debt and capital lease obligations
    
    
    (30
    )
    
    
    (911
    )Decrease in restricted cash
    
    
    
    
    
    
    (555
    )Net cash used in financing activities
    
    
    (30
    )
    
    
    (932
    )Effect of exchange rate changes on cash
    
    
    16
    
    
    
    16Net Increase (Decrease) in Cash and Cash Equivalents
    
    
    2,449
    
    
    
    (5,178
    )Cash and Cash Equivalents at beginning of period
    
    
    17,034
    
    
    
    23,008Cash and Cash Equivalents at end of period
    
    $
    19,483
    
    
    $
    17,830
 The accompanying notes are an integral part of these financial statements.
 5




---



##### Table of Contents



EMAGEON INC.
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (unaudited)
 NOTE 1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
    Fair Value Measurements
    NOTE 2. MERGER AGREEMENT WITH HEALTH SYSTEMS SOLUTIONS
   6




---



##### Table of Contents



NOTE 3. LITIGATION SETTLEMENT
   NOTE 4. GOODWILL IMPAIRMENT CHARGE
   NOTE 5. EMPLOYEE SEVERANCE AND RELATED EXPENSES
  7




---



##### Table of Contents



NOTE 6. EXIT LIABILITY
  Three Months EndedSeptember 30, 2008Beginning liability balance
    
    $
    536Lease payments, net
    
    
    (35
    )Ending liability balance
    
    $
    501
 Nine Months EndedSeptember 30, 2008Beginning liability balance
    
    $
    600Lease payments, net
    
    
    (99
    )Ending liability balance
    
    $
    501
  NOTE 7. INTANGIBLE ASSETS
  September 30, 2008
    
    
    December 31, 2007Gross
    
    
    
    
    
    
    
    
    
    
    GrossCarrying
    
    
    Total
    
    
    Net Carrying
    
    
    Carrying
    
    
    Total
    
    
    Net CarryingAmount
    
    
    Amortization
    
    
    Amount
    
    
    Amount
    
    
    Amortization
    
    
    AmountAcquired technology
    
    $
    5,240
    
    
    $
    5,210
    
    
    $
    30
    
    
    $
    5,240
    
    
    $
    4,595
    
    
    $
    645Customer relationships
    
    
    8,010
    
    
    
    4,029
    
    
    
    3,981
    
    
    
    8,010
    
    
    
    2,993
    
    
    
    5,017Software development costs
    
    
    104
    
    
    
    20
    
    
    
    84
    
    
    
    1,521
    
    
    
    1,246
    
    
    
    275Goodwill
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    21,667
    
    
    
    
    
    
    
    21,667Total
    
    $
    13,354
    
    
    $
    9,259
    
    
    $
    4,095
    
    
    $
    36,438
    
    
    $
    8,834
    
    
    $
    27,604
   Remainder of 2008
    
    $
    3922009
    
    
    1,4382010
    
    
    1,3452011
    
    
    920Total
    
    $
    4,095
 8




---



##### Table of Contents



NOTE 8. INVENTORIES
  September 30, 2008
    
    
    December 31, 2007Third-party components
    
    $
    2,869
    
    
    $
    3,086Work-in-process
    
    
    236
    
    
    
    447Completed systems
    
    
    2,676
    
    
    
    2,716Total
    
    $
    5,781
    
    
    $
    6,249
  NOTE 9. SUPPLEMENTARY CASH FLOW INFORMATION
  Nine Months Ended September 30,2008
    
    
    2007(Increase) decrease in:Trade accounts receivable
    
    $
    18,386
    
    
    $
    5,381Inventories
    
    
    468
    
    
    
    1,369Prepaid expenses and other current assets
    
    
    30
    
    
    
    (852
    )Other noncurrent assets
    
    
    (86
    )
    
    
    189Increase (decrease) in:Accounts payable
    
    
    (4,193
    )
    
    
    (732
    )Accrued payroll and related costs
    
    
    (1,557
    )
    
    
    (2,050
    )Other accrued expenses
    
    
    355
    
    
    
    (898
    )Deferred revenue
    
    
    (880
    )
    
    
    (7,260
    )Net changes in operating assets and liabilities
    
    $
    12,523
    
    
    $
    (4,853
    )
  NOTE 10. COMPUTATION OF NET LOSS PER SHARE
  NOTE 11. STOCK BASED COMPENSATION
   9




---



##### Table of Contents



Three Months Ended September 30,
    
    Nine Months Ended September 30,2008
    
    2007
    
    2008
    
    2007Dividend yield
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %Expected volatility
    
    
    50.0
    %
    
    
    50.0
    %
    
    
    50.0
    %
    
    
    50.0
    %Risk-free interest rate
    
    
    4.33
    %
    
    
    4.59
    %
    
    
    2.53
    %
    
    
    4.62
    %Expected life of options (in years)
    
    
    5.0
    
    
    
    5.0
    
    
    
    5.0
    
    
    
    5.0
   Three Months Ended September 30,
    
    Nine Months Ended September 30,2008
    
    2007
    
    2008
    
    2007Stock options:Grants, in shares
    
    
    68
    
    
    
    325
    
    
    
    862
    
    
    
    675Weighted average grant date fair value, per share
    
    $
    0.87
    
    
    $
    4.48
    
    
    $
    1.15
    
    
    $
    5.16Exercises, in shares
    
    
    
    
    
    
    19
    
    
    
    
    
    
    
    93Proceeds of exercises
    
    
    
    
    
    $
    68
    
    
    
    
    
    
    $
    534Restricted stock units:Grants, in shares
    
    
    
    
    
    
    4
    
    
    
    57
    
    
    
    65Weighted average grant date fair value, per share
    
    
    
    
    
    $
    9.19
    
    
    $
    2.52
    
    
    $
    12.27Shares vested in the period
    
    
    8
    
    
    
    8
    
    
    
    30
    
    
    
    23
  NOTE 12. COMPREHENSIVE LOSS
  NOTE 13. INCOME TAXES
     10




---



##### Table of Contents



NOTE 14. WARRANTY OBLIGATION
    Three Months Ended
    
    
    Nine Months EndedSeptember 30, 2008
    
    
    September 30, 2008Beginning liability balance
    
    $
    373
    
    
    $
    440Additions charged to expense
    
    
    63
    
    
    
    94Deductions for claim resolution
    
    
    (82
    )
    
    
    (180
    )Ending liability balance
    
    $
    354
    
    
    $
    354
 NOTE 15. BANK LINE OF CREDIT AGREEMENT
   11




---



##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 FORWARD-LOOKING STATEMENTS
    COMPANY OVERVIEW
   RESULTS SUMMARY
  12




---



##### Table of Contents




    
    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 three quarters of 2008, and the Company now
expects those conditions in the large system radiology market to continue through at least
the first three quarters of 2009 and perhaps into 2010, which will adversely impact 2008
and 2009 revenues and financial condition.
    
    During the first three quarters of 2008, and particularly during the third quarter of
2008, the current economic downturn and tightening credit market conditions had a negative
effect on the spending decisions of customers of the Company, and the Company now expects
those and other recessionary conditions to extend throughout much of 2009. The purchase of
the Companys products involves a significant financial commitment by its customers, many
of whom are not-for-profit organizations. Credit pressures and general economic conditions
may continue to have an adverse effect on the Companys revenues and financial condition.
    
    The Companys 2008 proxy contest required significant expenditures and diversion of
management resources. In addition, uncertainty surrounding the outcome of the contest, and
uncertainty during the pendency of the recently completed investigation of strategic
alternatives, caused an erosion of confidence among the Companys base of existing and
potential customers. This uncertainty in the Companys customer base resulted in delays or
cancellations of customer orders, and negatively affected the Companys revenues. The
Company expects these uncertainties to extend, and to incur additional merger-related
expenses, through closing of its pending merger with Health Systems (see Note 2).
    Revenue and Gross Margin
   13




---



##### Table of Contents



Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Revenue:System sales
    
    $
    4,232
    
    
    $
    10,706
    
    
    $
    16,051
    
    
    $
    35,609Support services
    
    
    11,717
    
    
    
    12,022
    
    
    
    37,279
    
    
    
    40,045Total
    
    $
    15,949
    
    
    $
    22,728
    
    
    $
    53,330
    
    
    $
    75,654Cost of Revenue:System sales
    
    $
    3,245
    
    
    $
    6,327
    
    
    $
    11,347
    
    
    $
    21,359Support services
    
    
    5,845
    
    
    
    7,681
    
    
    
    18,984
    
    
    
    22,565Total
    
    $
    9,090
    
    
    $
    14,008
    
    
    $
    30,331
    
    
    $
    43,924Gross Profit:System sales
    
    $
    987
    
    
    $
    4,379
    
    
    $
    4,704
    
    
    $
    14,250Support services
    
    
    5,872
    
    
    
    4,341
    
    
    
    18,295
    
    
    
    17,480Total
    
    $
    6,859
    
    
    $
    8,720
    
    
    $
    22,999
    
    
    $
    31,730Gross Margin:System sales
    
    
    23.3
    %
    
    
    40.9
    %
    
    
    29.3
    %
    
    
    40.0
    %Support services
    
    
    50.1
    %
    
    
    36.1
    %
    
    
    49.1
    %
    
    
    43.7
    %Total
    
    
    43.0
    %
    
    
    38.4
    %
    
    
    43.1
    %
    
    
    41.9
    %
 Summary
   System Sales Revenue
 Summary
 System Sales Gross Margin
  14




---



##### Table of Contents



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




---



##### Table of Contents



Research and Development Expenses
  Sales and Marketing Expenses
   General and Administrative Expenses
   LIQUIDITY AND CAPITAL RESOURCES
 Summary
  Cash From Operating Activities
  16




---



##### Table of Contents



Cash Used In Investing Activities
  Cash From Financing Activities
  Contractual Cash Obligations
  Available Credit
    
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
   17




---



##### Table of Contents



ITEM 4. CONTROLS AND PROCEDURES
  
 PART II. OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
   
 ITEM 1A. RISK FACTORS
   Risks and uncertainties relating to the pending merger with Health Systems Solutions may have a
material adverse effect on the Companys business, results of operations, and financial
condition.
  18




---



##### Table of Contents



ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  
 ITEM 6. EXHIBITS
 Exhibit No.
    
    Description2.1
    
    Agreement and Plan of Merger, dated as of October 13, 2008, by
and among the Company, Health Systems Solutions, Inc., and HSS
Acquisition Corp. (incorporated by reference to Exhibit 2.1 of
the Companys Form 8-K filed October 14, 2008)31.1*
    
    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




---



##### Table of Contents



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