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| EMAG > SEC Filings for EMAG > Form 10-K on 26-Mar-2009 | All Recent SEC Filings |
26-Mar-2009
Annual Report
regarding a transaction with Emageon, but did not receive any executable offers
in the process. As a result, in April 2008 the strategic alternatives committee
concluded its evaluation of strategic alternatives.
In May 2008, Oliver Press Partners LLC, or Oliver Press, a significant
stockholder of the Company, filed a preliminary proxy statement with the SEC
indicating it would seek stockholder support for election at our 2008 annual
stockholders' meeting of a slate of three directors in opposition to the slate
recommended by us. Over the ensuing weeks we engaged in a proxy contest with
Oliver Press. In June 2008, we reached agreement with Oliver Press to terminate
the proxy contest and to reconstitute our board of directors. In connection with
the settlement, the strategic alternatives committee was reconstituted and
recommenced its evaluation of strategic alternatives. From July 2008 through
September 2008, the strategic alternatives committee, through its financial
advisors, contacted numerous parties regarding a potential business combination
involving Emageon, and we engaged in various levels of negotiation with several
interested parties. These efforts culminated in the execution of a merger
agreement with Health Systems Solutions, Inc., or HSS, in October 2008.
Our stockholders adopted the merger agreement with Health Systems Solutions
at a special meeting held on December 17, 2008, and, having satisfied the other
conditions to closing in the merger agreement, the merger was scheduled to close
in late December 2008. However, prior to the closing, we were notified by Health
Systems Solutions that its lender and majority shareholder, Stanford
International Bank Limited, or SIBL, would not provide funding to consummate the
merger at that time. After further negotiation, the merger agreement was amended
to, among other things, extend the closing date to February 11, 2009 and
increase the amount of the deposit escrow account established in connection with
the merger from $5.0 million to $9.0 million. On February 11, 2009, SIBL again
did not fulfill its obligations to provide the financing necessary to fund the
merger, and the merger with HSS was not consummated. On February 12, 2009, we
terminated the amended merger agreement with Health Systems Solutions and HSS
Acquisition Corp. pursuant to Sections 7.4(a) and 7.4(c) thereof as a result of
the failure by Health Systems Solutions to receive all necessary financing on or
before the designated closing date of February 11, 2009. In connection
therewith, on February 13, 2009, we received the $9 million that had been placed
in escrow by Health Systems Solutions in connection with the transactions
contemplated by the merger agreement.
Over the next several days, our board, through its financial advisor, held
discussions with several parties regarding a possible acquisition of Emageon,
and on February 23, 2009 we entered into a merger agreement with AMICAS, Inc.
and its wholly owned subsidiary AMICAS Acquisition Corp. Under the terms of the
merger agreement, AMICAS commenced a tender offer on March 5, 2009 to purchase
all of our issued and outstanding shares of common stock at a purchase price of
$1.82 per share in cash. Unless extended in accordance with the terms and
conditions of the merger agreement, the tender offer is scheduled to expire on
April 1, 2009. The tender offer is conditioned upon, among other things, at
least a majority of our shares outstanding being tendered. Assuming that the
tender offer is successful, the merger agreement provides that the tender offer
will be followed by a merger pursuant to which AMICAS Acquisition Corp would be
merged with and into Emageon, and Emageon would become a wholly owned subsidiary
of AMICAS. We expect the merger to be completed in second quarter of 2009. On
March 5, 2009, we filed a Solicitation/Recommendation Statement on Schedule
14D-9 with the SEC regarding the tender offer. This Schedule 14D-9 includes
additional details regarding our stragetic alternatives process, the tender
offer, and the proposed merger with AMICAS.
The $9.0 million in escrowed funds received by the Company upon termination
of the merger agreement with Health Systems Solutions were provided to Health
Systems Solutions by SIBL. Because of charges against and ongoing investigations
of SIBL by the Securities and Exchange Commission and other federal agencies, it
is possible that all or a portion of those funds could become the subject of a
claim or other proceeding.
Results Overview
Total revenue for 2008 was $69.3 million, a 33.7% decrease from total 2007
revenue. This decline in total revenue in 2008 followed a 15.3% decline in total
revenue from 2006 to 2007. The 2008 decline was comprised of a 61.0% decrease in
system sales revenue and a 7.6% decrease in support services revenue. The
decline in system
sales revenue was the result of a substantial decline in sales orders, primarily
for our large hospital and hospital network radiology products, and a
combination of the following additional factors and conditions:
• Slow overall market demand for medical imaging software, hardware, and
support services;
• Maturity in our primary picture archiving and communications radiology (PACS) market, which has made that market primarily a replacement systems market;
• A high level of penetration of our primary radiology market and consequent delay in the timing of our customers' system replacement cycle;
• Disruption in our base of existing and potential customers as a result of our prolonged investigation of strategic alternatives and our 2008 proxy contest with Oliver Press;
• The ongoing deterioration in general economic conditions;
• The ongoing negative lending environment, which has negatively affected the capital spending plans of our existing and potential customers, many of whom are nonprofit organizations; and
• Our difficulties in development, marketing, and sale of next generation imaging software to replace our current software offerings.
Our total gross margin percentage declined by 0.9 percentage points in 2008
compared to 2007, consisting of an 18.2 percentage point decline in system sales
gross margin, offset by a 5.8 percentage point increase in support services
gross margin. Our total research and development, sales and marketing, and
general and administrative expenses for 2008 were $44.5 million, down $5.8
million from the 2007 level. Our net loss was $42.3 million in 2008, which
included a goodwill impairment charge of $21.6 million, strategic alternative
investigation expenses of $3.2 million, employee severance expenses of
$1.3 million, and a litigation settlement charge of $1.0 million. The net loss
of $42.3 million in 2008 compares to a net loss of $7.1 million in 2007, which
included $2.0 million in costs of employee severance and related expenses.
Our bookings of new orders for system sales and support services for 2008
were $46.9 million, down by $45.8 million from the 2007 level. At December 31,
2008 we had $126.7 million in contracted orders backlog, of which $104.0 million
were support services orders, compared to $149.1 million at December 31, 2007,
of which $131.4 million were support services orders. We expect to recognize
revenue from our December 31, 2008 backlog of $56.3 million in 2009,
$32.9 million in 2010, and the remainder by 2014. Our sales orders backlog
increases as we enter into new contracts, and decreases as we earn and recognize
revenue from those orders.
Sources of Revenue
A typical sale of our solution is comprised of system sales and support
services. Revenue from system sales is derived from the licensing of our
software as well as from sales and integration of third-party components that
are required to implement our solution. Support services revenue is derived from
fees related to the implementation, training, and on-going maintenance and
support of our solution.
Our software is comprised of four main components: RadSuite Advanced
Visualization, our suite of software tools for the advanced visualization and
analysis of digital medical images; Clinical Content Management, our image
archival and distribution management software; Clinical Workflow, our
standards-based software used to manage integration and data migration between
our solution and other health information systems throughout the enterprise; and
HeartSuite, our suite of software tools focused on the cardiology department.
Although Clinical Content Management and HeartSuite software products are
available collectively as stand-alone applications, we offer our software
primarily as an integrated enterprise-level image management solution. License
pricing for RadSuite Advanced Visualization is primarily determined by either
the number of licenses based on the number of
concurrent users or on the average annual study volume. License pricing for
Clinical Content Management and Clinical Workflow is determined based on
projected volume and size of image studies to be stored or migrated by the
particular customer. License pricing for HeartSuite software products is
determined based on the number of workstations purchased. We offer customers our
software primarily as perpetual licenses with maintenance and support relating
to the software. The sale and integration of third-party components typically
include servers, data storage, backup and recovery systems, workstations and
monitors, database software and computed radiography devices as well as
orthopedic templates and dictation systems.
We also derive revenue from the provision of support services, including
implementation, project planning, management, design and training services. Our
customers typically contract for these support services pursuant to their
initial agreements with us. The initial term of support services under these
agreements ranges from one to ten years, with a typical duration of five years.
Upon expiration of the initial term, these agreements typically renew
automatically from year-to-year thereafter until terminated.
Ascension Health, the largest not-for-profit hospital system in the United
States, is our largest customer. Revenue associated with facilities controlled
by Ascension Health accounted for approximately 16% of our total revenue in
2008, and accounted for 14% of our total contracted backlog at December 31,
2008. We anticipate that Ascension Health will continue to be a significant
customer as we continue to support our existing installations as well as sign
add-on orders and new order addenda with additional Ascension Health facilities.
Cost of Revenue
The cost of system sales consists of the cost of third-party components and
the cost of software licenses. The cost of our third-party components consists
primarily of direct and indirect expenses related to the purchase,
manufacturing, shipment, installation and configuration of our solutions. The
cost of our software licenses consists primarily of the amortization of acquired
software and the amortization of capitalized software costs for internally
developed software.
The cost of our support services consists primarily of labor costs and
overhead relating to the implementation, installation, training, application
support and maintenance of our solution as well as costs related to maintenance
of third-party components. The cost of support services revenue varies based
upon the productivity of our support services organization as well as costs
associated with the use of outside contractors to support internal resources.
Gross Profit
Gross profit from system sales varies based on several factors, including:
• sales prices negotiated in the contracting process;
• costs associated with purchasing and assembly or integration of third-party components;
• fluctuations in prices received from third-party component manufacturers and distributors relative to the mark-up percentages provided for in customer contracts;
• the relative mix of the hardware and software components comprising system sales in a given period; and
• the volume of systems sales in a given period relative to the semi-fixed costs of procurement and assembly.
Gross profit from support services varies based on several factors,
including:
• services fees negotiated during the contracting process;
• productivity of our professional service team;
• costs of service agreements related to third-party components included in our solution;
• costs associated with the use of outside contractors; and
• the level of support services revenue relative to the semi-fixed costs of support.
Operating Expenses
Research and Development. Research and development expenses consist primarily
of employee-related expenses, allocated overhead, and the costs of outside
contractors. We have historically focused our research and development efforts
on improving the functionality, performance, and integration of our software
products. We expect that research and development expenses will fluctuate with
the level of third-party research and development activities undertaken.
Sales and Marketing. Sales and marketing expenses consist primarily of
employee-related expenses, including travel, marketing programs, allocated
overhead, and sales commissions. Sales and marketing expenses may increase as we
expand our selling and marketing activities associated with existing and new
product and service offerings to existing and new customers, and build brand
awareness.
General and Administrative. General and administrative expenses consist
primarily of employee-related expenses, professional fees, other corporate
expenses, and allocated overhead. We expect that general and administrative
expenses will remain relatively stable due to economies of scale available in
most administrative areas.
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States. The preparation
of these consolidated financial statements requires us to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenue,
costs and expenses, and related disclosures. On an ongoing basis, we evaluate
our estimates and assumptions. Our actual results may differ from these
estimates.
We believe that, of our significant accounting policies, which are described
in Note 2 of the notes to our consolidated financial statements, the following
accounting policies involve the greatest degree of judgment and complexity.
Accordingly, these are the policies we believe are the most critical to aid in
fully understanding and evaluating our consolidated financial position and
results of operations.
Revenue Recognition and Deferred Revenue. While the basis for software
license revenue recognition is substantially governed by the provisions of AICPA
Statement of Position 97-2, ("SOP 97-2"), Software Revenue Recognition, as
amended, in the application of this standard we exercise judgment and use
estimates to determine the amount of system sales and support services revenue
to be recognized in each accounting period.
We sell software under three types of licenses:
• Perpetual licenses: software licensed on a perpetual basis to a customer
based on a fixed number of users and/or estimates of annual study volumes
with no right to return the licensed software;
• Enterprise licenses: software licensed on a perpetual basis to a customer (typically a multi-facility health care provider), as opposed to licensing based on a fixed number of users or on estimates of annual study volumes, with no right to return the licensed software; and
• Term licenses: which we use to a lesser extent and consist of software licensed on a term basis according to a fixed number of users and/or estimates of annual study volumes.
Generally, our software license arrangements do not include significant
modification or customization of the underlying software and, as a result, we
recognize license revenue when: (1) persuasive evidence of an arrangement
exists: (2) delivery has occurred; (3) customer payment is deemed fixed or
determinable; and (4) collection is probable. We assess each of the four
criteria as follows:
• Persuasive evidence of an arrangement exists: It is our customary practice
to have a written contract, which is signed by both the customer and us,
or a purchase order from those customers that have previously negotiated a
standard end-user license arrangement, prior to recognizing revenue on an
arrangement.
• Delivery has occurred: It is our customary practice to obtain acceptance of our software, which is evidenced by written customer acknowledgement. In the event that we grant a customer the right to specified upgrades, we defer recognition of the entire arrangement fee until we deliver the specified upgrades as we have not established vendor specific objective evidence (VSOE) of fair value for specified upgrades. Specified upgrades include, but are not limited to, future software deliverables that are stated in the customer contract.
• The customer's payment is deemed fixed or determinable: We assess whether fees are fixed or determinable and free of contingencies or significant uncertainties at the time of sale and recognize revenue when all other revenue recognition requirements are met. If the fee is determined not to be fixed or determinable, we recognize revenue as the amounts become due and payable.
• Collection is probable: Likelihood of collection is assessed on a customer by customer basis. If it is determined from the outset of an arrangement or at the time of add-on sales to existing customers that collection is not probable based upon our credit review process, revenue is recognized on a cash collected basis if all other criteria are met.
We account for software license and nonrecurring support services revenue
included in multiple element arrangements using the residual method. Under the
residual method, the fair value of the undelivered elements (i.e., software
maintenance and ongoing support services) based on VSOE of fair value is
deferred and the remaining portion of the arrangement fee is allocated to the
delivered elements (i.e., software license and nonrecurring support services).
If evidence of the fair value of one or more of the undelivered services does
not exist, revenue is deferred and recognized when delivery of those services
occurs or fair value can be established. We determine VSOE of fair value for
ongoing support services revenue based upon renewal rates for the maintenance
and ongoing support, which coincide with our pricing model. Significant
incremental discounts offered in multiple element arrangements that would be
characterized as separate elements are infrequent and are applied to the initial
arrangement.
For term license arrangements, we recognize revenue for the multiple element
arrangement over the term of the arrangement beginning in the month after we
receive customer acceptance, provided that the other revenue recognition
criteria have been met.
Software maintenance services generally include rights to upgrades (when and
if available), telephone support, updates and bug fixes. Software maintenance
revenue is recognized ratably over the term of the maintenance contract on a
straight line basis when all the revenue recognition requirements are met. We
include the first year of software maintenance in the software license fee. We
defer this software maintenance fee based on its fair value and recognize it
ratably over the first year of the arrangement.
Ongoing support services generally include telephone support related to
third-party components. Ongoing support service revenue is recognized ratably
over the term of the ongoing support services contract on a straight line basis
when all the revenue recognition requirements are met. As it relates to
services, we may also provide services that vary depending on the scope and
complexity requested by the customer. Examples of such services include
additional database consulting, system configuration, existing systems
interface, and network consulting. These services generally are not deemed to be
essential to the functionality of the software. If we have VSOE of fair value
for the services, the timing of the software license revenue is not impacted,
and service revenue is recognized as the services are performed. We commonly
perform services for which we do not have VSOE of fair value and, accordingly,
the software license revenue is deferred until the services are completed.
Revenue related to product sales is recognized upon shipment provided that
title and risk of loss have passed to the customer, there is persuasive evidence
of an arrangement, the sales price is fixed or determinable, collection of the
related receivable is reasonably assured, and customer acceptance criteria, if
any, have been successfully demonstrated. We classify shipping and handling cost
in cost of system sales.
Third-party component revenue, including hardware sales and hardware
maintenance, is recognized in accordance with contractual terms. When we are
responsible for installing third-party components, revenue is recognized when
the third-party components are delivered, installed and accepted by the
customer. When we are not responsible for installing the third-party components,
revenue is recognized when the third-party components are delivered to the
customer. When third-party components and related maintenance are not separately
priced in our contracts, we recognize revenue related to the arrangement when
all revenue recognition criteria have been met.
The following is a summary of our product warranty and guarantee agreements
and our related accounting policies:
• Our sales agreements with customers generally contain infringement
indemnity provisions. Under these agreements, we agree to indemnify,
defend and hold harmless the customer in connection with patent, copyright
or trade secret infringement claims made by third parties with respect to
the customer's authorized use of our products and services. Our sales
agreements with customers sometimes also contain indemnity provisions for
death, personal injury or property damage caused by our personnel or
contractors in the course of performing services to customers. Under these
agreements, we agree to indemnify, defend and hold harmless the customer
in connection with death, personal injury and property damage claims made
by third parties with respect to actions of our personnel or contractors.
The indemnity obligations contained in sales agreements generally have no
specified expiration date but typically limit the amount of award covered
to a portion of the fees paid by the customer over a portion of the
contract term. We have not incurred costs to settle claims or pay awards
under these indemnification provisions. Accordingly, we have no
liabilities recorded for these provisions as of December 31, 2008.
• We warrant that our software products will perform in all material respects in accordance with our standard published specifications in effect at the time of delivery of the licensed products to the customer as long as the contract remains in effect. Additionally, we warrant that our services will be performed by qualified personnel in a manner consistent with normally accepted industry standards. We provide for the estimated cost of product and service warranties based on specific warranty claims and claim history. As of December 31, 2008 we have a liability of $0.3 million in our balance sheet for these obligations.
Billings may not coincide with the recognition of revenue. Unbilled revenue, which is included in accounts receivable in the consolidated balance sheet, occurs when revenue recognition precedes billing to the customer, and arises primarily from sales with predetermined billing schedules. Billings in excess of sales (deferred revenue) occur when billing to the customer precedes revenue recognition, and arise primarily from sales with partial prepayments upon contract execution and from maintenance revenue billed in advance of performance of the maintenance activity. We recognize deferred revenue, as applicable, upon delivery and acceptance of products, as ongoing services are rendered or as other requirements requiring deferral under SOP 97-2 are satisfied. Costs related to deferred revenue are included as an asset in our consolidated balance sheet and charged to expense when the related deferred revenue is recognized.
The timing of customer acceptances could significantly affect our results of operations during a given period. As noted above, we require written acknowledgement from the customer to evidence that delivery of the products or services has occurred. Delays in the implementation process could negatively affect operations in a given period by increasing volatility in revenue recognition. . . .
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