EXHIBIT 99.2
CAMTRONICS MEDICAL SYSTEMS, LTD. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
JULY 31, 2005
CONTENTS
Page
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INDEPENDENT AUDITORS' REPORT 3
FINANCIAL STATEMENTS
Consolidated Balance Sheets 4
Consolidated Statements of Operations and Changes in Retained Earnings
and Comprehensive Loss 5
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 7
INDEPENDENT AUDITORS' REPORT
December 30, 2005
Board of Directors
Camtronics Medical Systems, Ltd. and Subsidiaries
Hartland, Wisconsin
We have audited the accompanying consolidated balance sheets of Camtronics
Medical Systems, Ltd. and subsidiaries (the Company) as of July 31, 2005 and
2004, and the related consolidated statements of operations and changes in
retained earnings and comprehensive loss and cash flows for the three years
ended July 31, 2005. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Camtronics Medical
Systems, Ltd. and subsidiaries as of July 31, 2005 and 2004, and the results of
their operations and their cash flows for the three years ended July 31, 2005 in
conformity with accounting principles generally accepted in the United States of
America.
/s/ Warren, Averett, Kimbrough & Marino, LLC
Birmingham, Alabama
CAMTRONICS MEDICAL SYSTEMS, LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
JULY 31
------------------
2005 2004
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ASSETS
CURRENT ASSETS
Cash $ 743 $ 635
Trade accounts receivable, net of allowance for
doubtful accounts of $118 and $251 at July 31, 2005
and 2004, respectively 5,849 10,263
Inventories, net 4,293 4,587
Cost related to deferred revenue 11,526 12,692
Deferred income taxes 4,350 2,788
Prepaid expenses and other current assets 689 861
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TOTAL CURRENT ASSETS 27,450 31,826
Property, plant and equipment, net 7,015 8,055
Capitalized software development costs, net 4,048 3,100
Intangible assets, net 1,088 4,132
Due from Analogic Corporation 1,700 2,292
Other noncurrent assets -- 1,651
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6,836 11,175
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$41,301 $51,056
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 42 $ 785
Current portion of capital lease obligations 104 177
Accounts payable, trade 1,701 3,580
Other accrued expenses 3,272 3,245
Deferred revenue 22,372 22,332
Advance payments and other 2,015 1,751
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TOTAL CURRENT LIABILITIES 29,506 31,870
Capital lease obligations, less current portion 58 155
Long-term deferred revenue 295 824
Deferred income taxes 1,588 2,864
STOCKHOLDERS' EQUITY
Common stock, $.01 par value; 100,000 shares authorized; 1 1
61,599 shares issued and outstanding
Additional paid-in capital 2,958 2,958
Retained earnings 6,462 12,150
Accumulated other comprehensive income 433 234
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9,854 15,343
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$41,301 $51,056
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See notes to consolidated financial statements.
CAMTRONICS MEDICAL SYSTEMS, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND CHANGES
IN RETAINED EARNINGS AND COMPREHENSIVE LOSS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED JULY 31
---------------------------
2005 2004 2003
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REVENUE
System sales $21,529 $35,239 $29,312
Support services 16,563 16,113 10,731
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38,092 51,352 40,043
COST OF REVENUE
System sales 13,731 23,148 16,958
Support services 7,327 7,162 4,497
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21,058 30,310 21,455
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GROSS PROFIT 17,034 21,042 18,588
OPERATING EXPENSES
Research and development 7,506 8,668 7,586
Sales and marketing 8,651 10,334 10,601
Parent company management fees 510 527 500
General and administrative 3,683 3,881 2,520
Asset impairment charges 3,599 -- --
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23,949 23,410 21,207
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OPERATING LOSS (6,915) (2,368) (2,619)
OTHER INCOME (EXPENSE) (151) (246) 90
------- ------- -------
LOSS BEFORE INCOME TAXES (7,066) (2,614) (2,529)
BENEFIT (PROVISION) FOR INCOME TAXES 1,378 (113) 97
------- ------- -------
NET LOSS (5,688) (2,727) (2,432)
RETAINED EARNINGS - BEGINNING OF YEAR 12,150 14,877 17,309
------- ------- -------
RETAINED EARNINGS - END OF YEAR $ 6,462 $12,150 $14,877
======= ======= =======
NET LOSS PER SHARE $(92.34) $(44.28) $(39.47)
======= ======= =======
NET LOSS $(5,688) $(2,727) $(2,432)
OTHER COMPREHENSIVE INCOME:
FOREIGN CURRENCY TRANSLATIONS 199 126 108
------- ------- -------
COMPREHENSIVE LOSS $(5,489) $(2,601) $(2,324)
======= ======= =======
See notes to consolidated financial statements.
CAMTRONICS MEDICAL SYSTEMS, LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED JULY 31
---------------------------
2005 2004 2003
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CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(5,688) $(2,727) $(2,432)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Deferred income taxes (2,838) 4,639 (161)
Depreciation and amortization 3,075 2,989 3,053
Provision for (reduction in ) bad debts (133) 137 (1)
Loss on disposal of equipment 13 44 14
Asset impairment charges 3,599 -- --
Equity loss in unconsolidated affiliates 21 61 62
Change in accounts receivable 4,547 (658) (1,889)
Change in inventories 294 1,034 (1,230)
Change in cost related to deferred revenue 1,166 3,187 (4,212)
Change in other assets 417 633 1,700
Change in accounts payable (1,879) 1,513 (1,409)
Change in accrued liabilities 27 (264) 342
Change in deferred revenue (489) (804) 6,471
Change in advance payments and other 264 (3,742) 3,035
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NET CASH PROVIDED BY OPERATING ACTIVITIES 2,396 6,042 3,343
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, plant and equipment (725) (1,022) (1,479)
Capitalized software development costs (1,441) (1,235) (1,234)
Net change in due from Analogic Corporation -- (2,434) --
Purchase or asset acquisitions, net of cash acquired -- (1,720) (2,062)
------- ------- -------
NET CASH USED IN INVESTING ACTIVITIES (2,166) (6,411) (4,775)
CASH FLOWS FROM FINANCING ACTIVITIES
Payments of capital lease obligations (170) (176) (181)
Proceeds (payments) on notes payable, net (743) (259) 926
Net change in due to Analogic Corporation 592 -- 667
------- ------- -------
NET CASH PROVIDED (USED) IN FINANCING ACTIVITIES (321) (435) 1,412
EFFECT OF EXCHANGE RATE CHANGES ON CASH 199 126 108
------- ------- -------
NET INCREASE (DECREASE) IN CASH 108 (678) 88
CASH - BEGINNING OF YEAR 635 1,313 1,225
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CASH - END OF YEAR $ 743 $ 635 $ 1,313
======= ======= =======
See notes to consolidated financial statements.
CAMTRONICS MEDICAL SYSTEMS, LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS OPERATIONS
Camtronics Medical Systems, Ltd. (the Company) was incorporated in Wisconsin in
1986. Since July 31, 2001, the Company has been a wholly-owned subsidiary of
Analogic Corporation (the Parent). On November 1, 2005, Emageon Inc. (Emageon)
purchased 100 percent of the Company's outstanding shares. See Note 16 for
discussion of the subsequent event transaction.
The Company designs, develops, manufactures and services state-of-the art
cardiology image and information management systems, which it sells to hospitals
both directly and through third-party distribution agreements. The Company also
sells software licenses that were internally developed or acquired under
separate agreements and provides ongoing service and maintenance to customers
under separate agreements.
SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiaries: Camtronics Medical Systems Canada (formerly VMI
Medical Systems), an engineering and customer support company located in Ottawa,
Ontario Canada which was acquired in November 2002; Camtronics Medical Systems,
Inc., a Canadian holding company; and Camtronics Foreign Sales Corporation,
Inc., a nonoperating foreign sales corporation. All significant intercompany
accounts and transactions have been eliminated in consolidation.
ESTIMATES
Preparation of consolidated financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
CASH
The Company maintains cash at financial institutions which may exceed federally
insured amounts.
INVENTORIES
Inventories are stated at the lower of cost or market (net realizable value)
using the average cost method and include materials, labor and manufacturing
overhead. The Company periodically reviews its quantities of inventories on hand
and compares these amounts to expected usage of each particular product or
product line. The Company records as a charge to cost of revenue the amount
required to reduce the carrying value of the inventories to estimated net
realizable value.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are reported at cost and depreciated using the
straight-line method over their estimated useful lives. Assets under capital
leases and leasehold improvements are amortized over the shorter of their
estimated useful lives or the term of the respective leases. Upon retirement or
disposal, the cost of the asset disposed of and the related accumulated
depreciation are removed from the accounts, and any gain or loss is reflected in
the Company's statements of operations and changes in retained earnings.
Expenditures for maintenance and repairs are charged to expense when incurred
while the costs of significant improvements, which extend the life of the
underlying asset, are capitalized.
The annual provisions for depreciation and amortization have been computed in
accordance with the following ranges of estimated useful lives:
ITEM ESTIMATED USEFUL LIFE
---- ---------------------
Buildings 39 years
Leasehold improvements Shorter of useful life or lease term
Machinery and equipment 5 to 7 years
Furniture and fixtures 3 to 7 years
Computers, software and other 3 to 7 years
CAPITALIZED SOFTWARE DEVELOPMENT COSTS
Software development costs incurred subsequent to establishing technological
feasibility through general release of the software products are capitalized in
accordance with Statement of Financial Accounting Standards (SFAS) No. 86,
Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise
Marketed. Capitalized costs are amortized on a straight-line basis over the
estimated economic lives of the related products, generally three years.
Amortization expense was $493 in fiscal 2005, $508 in fiscal 2004 and $592 in
fiscal 2003 and is included in system sales cost of revenue. The unamortized
balance of capitalized software was $4,048 and $3,100 at July 31, 2005 and 2004,
respectively.
GOODWILL
The Company discontinued amortizing goodwill as of August 1, 2002, in accordance
with SFAS No. 142, Goodwill and Other Intangible Assets, and adopted a policy of
evaluating goodwill for potential impairment on an annual basis or at any time
that events or changes in circumstances suggest that the carrying amount may not
be recoverable from estimated future cash flows. As required by SFAS 142,
intangible assets that do not meet the criteria for separate recognition must be
classified as goodwill.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
REVENUE RECOGNITION AND ACCOUNTS RECEIVABLE
The majority of the Company's revenue is from the sale of software licenses or
products in which the software is considered significant. The Company recognizes
revenue in accordance with the American Institute of Certified Public
Accountants (AICPA)'s Statement of Position (SOP) 97-2, Software Revenue
Recognition (SOP 97-2). The application of SOP 97-2 requires judgment, including
whether a software arrangement includes multiple elements, and if so, whether
vendor-specific objective evidence (VSOE) of fair value exists for those
elements. License revenue is recognized upon delivery, provided that persuasive
evidence of an arrangement exists, no significant obligations with regards to
installation or implementation remain, fees are fixed or determinable,
collectibility is probable and customer acceptance, when applicable, is
obtained. The Company allocates revenue first to the fair value of the
undelivered elements and then allocates the residual revenue to the delivered
elements. Hardware and software maintenance is marketed under annual and
multiyear arrangements, and revenue is recognized ratably over the contracted
maintenance term.
As it relates to services, the Company 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,
project management, interfacing to existing systems and network consulting.
Services generally are not deemed to be essential to the functionality of the
software. If the Company has 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. The Company commonly performs services for which
the Company does not have VSOE of fair value; accordingly, the software license
revenue is deferred until the services are completed.
Deferred revenue is comprised of (1) license fee, maintenance and other service
revenues for which payment has been received and for which services have not yet
been performed and (2) revenue related to delivered components of a
multiple-element arrangement for which VSOE of fair value has not been
determined for components not yet delivered or accepted by the customer.
Deferred costs represent costs related to these revenues, for example, cost of
goods sold and services provided and sales commission expenses.
The Company recognizes revenue from its remaining sales in accordance with SEC
Staff Accounting Bulletin No. l04, Revenue Recognition in Financial Statements.
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.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
The Company's sales contracts generally provide for the customer to accept title
and risk of loss when the product leaves the Company's facilities. When shipping
terms do not allow for passage of title and risk of loss at the shipping point,
the Company defers recognizing revenue until title and risk of loss transfer to
the customer. The Company classifies shipping and handling cost in cost of
revenue.
The Company grants credit to end users and distributors and performs ongoing
credit evaluation of its customers' financial condition. The Company
continuously monitors collections and payments from its customers and maintains
a provision for estimated credit losses based upon historical experience and
specific customer collection issues that have been identified.
WARRANTY COSTS
The Company provides for the estimated cost of product warranties at the time
products are shipped. Although the Company engages in extensive product quality
programs and processes, its warranty obligations are affected by product failure
rates and service delivery costs incurred to correct product failures. Should
actual product failure rates or service delivery costs differ from the Company's
estimates (which are based on specific warranty claims, historical data, and
engineering estimates, where applicable), revision to the estimated warranty
liability would be required. Such revisions could adversely affect the Company's
operating results. Generally, the Company warrants that its product will perform
in all material respects in accordance with its standard published
specifications in effect at the time of delivery of the products to the customer
for a period of 12 months from the date of delivery.
RESEARCH AND PRODUCT DEVELOPMENT COSTS
Research and product development costs are expensed as incurred and include
primarily engineering salaries, overhead and materials used in connection with
research and development projects. Project costs are expensed as research and
development until technological feasibility is determined for the project.
INCOME TAXES
Deferred income tax assets and liabilities are determined based on the
difference between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse. The Company is included in the consolidated
federal income tax return of the Parent. The provision for federal income taxes
is computed as if the Company was filing a separate federal tax return,
excluding certain credits and deductions that were utilized at the consolidated
Parent level.
OTHER COMPREHENSIVE INCOME
SFAS No. 130, Reporting Comprehensive Income, established standards for
reporting and displaying other comprehensive income and its components. Other
comprehensive income consists of foreign currency translation adjustments.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
STOCK-BASED COMPENSATION
Employees of the Company participate in key employee stock option plans and key
employee stock bonus plans of the Parent. The cost of such benefits is
determined by the Parent and allocated to the Company based on its employees'
participation in the plans. As permitted under SFAS No. 123, "Accounting for
Stock Based Compensation", the Company applied the provisions of the Accounting
Principle Board (APB) 25, and related interpretations, with regard to
measurement of compensation cost for stock options granted under the Parent
equity compensation plans for all periods presented. As permitted under current
accounting standards, no compensation cost was recognized in the consolidated
statements of operations and changes in retained earnings for the Company's
participation in the Parent stock option plans as the option exercise prices
were equal to the fair market value of the common stock at date of grant.
NEW ACCOUNTING PRONOUNCEMENTS
In June 2005, the Financial Accounting Standards Board (FASB) issued SFAS No.
154, Accounting Changes and Error Corrections. This statement replaces APB
Opinion No. 20, Accounting Changes, and SFAS No. 3, Reporting Accounting Changes
in Interim Financial Statements. This statement applies to all voluntary changes
in accounting for and reporting of changes in accounting principles and is
effective for accounting changes and corrections of errors made in fiscal years
beginning after December 15, 2005. The adoption of SFAS No. 154 is not expected
to have a material impact on the Company's financial position or results of
operations.
In December 2004, the FASB issued SFAS No. 151, Inventory Costs. SFAS No. 151
clarifies the accounting for inventory when there are abnormal amounts of idle
facility expense, freight, handling costs, and wasted materials. Under existing
U.S. generally accepted accounting principles (GAAP), items such as idle
facility expense, excessive spoilage, double freight and rehandling costs may be
"so abnormal" as to require treatment as current period charges rather than
recorded as adjustments to the value of the inventory. SFAS No. 151 requires
that those items be recognized as current-period charges regardless of whether
they meet the criterion of "so abnormal." In addition, SFAS No. 151 requires
that allocation of fixed production overheads to the cost of conversion be based
on the normal capacity of the production facilities. The provision of SFAS No.
151 is effective for inventory costs incurred during fiscal years beginning
after June 15, 2005. Earlier application is permitted for inventory costs
incurred during fiscal years beginning after the date SFAS No. 151 was issued.
The adoption of SFAS No. 151 is not expected to have a material impact on the
Company's financial position or results of operations.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of cash, accounts receivable, accounts payable, and notes
payable approximates fair value.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
IMPAIRMENT OF LONG-LIVED ASSETS
The Company evaluates the recoverability of its long-lived assets in accordance
with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets. SFAS No. 144 requires recognition of impairment of long-lived assets in
the event the net book value of such assets exceeds the estimated future
undiscounted cash flows attributable to such assets. If impairment is indicated,
the asset is written down to its estimated fair value based on a discounted cash
flow analysis. The Company reviews long-lived assets for impairment annually or
whenever events or changes in business circumstances indicate that the carrying
amount of the assets may not be fully recoverable or that the useful lives of
the assets are no longer appropriate. Each impairment test is based on a
comparison of the estimated undiscounted cash flows of the asset as compared to
the recorded value of the asset.
TRANSLATION OF FOREIGN CURRENCIES
The assets and liabilities of the Company's foreign subsidiaries, whose cash
flows are primarily in their local currency, have been translated into U.S.
dollars using the current exchange rates at each balance sheet date. The
operating results of these foreign subsidiaries have been translated at average
exchange rates that prevailed during each reporting period. Adjustments
resulting from translation of foreign currency financial statements are
reflected as accumulated other comprehensive income in the consolidated balance
sheets.
Exchange gains and losses resulting from foreign currency transactions
(transactions denominated in a currency other than that of the entities' primary
cash flow), excluding long-term intercompany receivables and investments, are
included in operations in the period in which they occur. Foreign exchange
transaction gains and losses are included in the results of operations in other
income, net. The Company had foreign exchange loss of $50 in fiscal 2005, gain
of $43 in fiscal 2004 and gain of $158 in fiscal 2003.
2. PURCHASE OF ASSETS, INVESTMENT, AND INTANGIBLES
INVESTMENT IN CARDIOWORKS, INC.
On August 30, 2001, the Company invested $2,000 in CardioWorks, Inc.
(CardioWorks) in exchange for a 15 percent equity position and a seat on the
Board of Directors. The Company accounted for this investment under the equity
method due to the Company's ability to exercise significant influence over
operating and financial policies. CardioWorks used the Company's investment
proceeds to establish the technical framework to perform clinical data research
analysis on treatment protocols and outcomes in order to create revenue
generating opportunities from pharmaceutical and device manufacturers. The
investment included in other assets on the balance sheets was $0 and $1,651 as
of July 31, 2005 and 2004, respectively. See Note 6 for discussion of the
subsequent impairment of the investment in CardioWorks in fiscal 2005.
2. PURCHASE OF ASSETS, INVESTMENT, AND INTANGIBLES - CONTINUED
Simultaneous with this investment, the Company entered into a Joint Development,
Distribution and Support Agreement with CardioWorks for the development and
commercialization of certain cardiology specific electronic medical records
(EMR) technology that CardioWorks had developed. The Company invested
significant time and effort during fiscal years 2003 to 2005 to develop the
CardioWorks EMR product. Subsequent to July 31, 2005, the Company negotiated an
agreement with a third party for marketing and distribution of the CardioWorks
EMR product.
ACQUISITION OF VMI MEDICAL, INC. (VMI)
On November 6, 2002, the Company purchased all the outstanding shares of VMI
Medical, Inc. (VMI) of Ottawa, Canada for $2,000 and future consideration (as
defined in the VMI Payout Agreement) which was based on VMI achieving certain
performance criteria over specified periods. Subsequent evaluation by management
of the estimated payout under the agreement resulted in an additional payment
accrual of $818 and goodwill recorded during fiscal 2004.
The Company acquired the software technology product line of Echo IMS and Cardio
IMS on November 6, 2002, in conjunction with the acquisition of VMI, and the
majority of the purchase price (approximately $1.5 million) was assigned to
these intellectual properties. These software technology products are currently
utilized in the pediatric market.
During the initial budgeting process for fiscal year 2006 (initiated in April
2005), it became apparent to the Company that the market penetration of the Echo
IMS and Cardio IMS software technology products had been less than anticipated
due to the limited number of pediatric hospitals able to make the capital
investment needed to implement these products. See Note 6 for discussion of the
subsequent impairment of the intangible assets recorded in fiscal 2005.
QUINTON ASSET PURCHASE
On October 20, 2003, the Company acquired certain assets from Quinton, Inc.
(QTN), a Washington corporation, primarily related to intellectual property
rights and interests associated with QTN's Q-Cath hemodynamics and monitoring
system business. The Company's decision to acquire these assets and liabilities
was based on its desire to expand its current product offerings and gain access
to QTN's existing customer base. The Company's total investment amounted to
$1,750, with payments of $1,000 due at closing and $750 due one year from the
closing date.
In connection with the above transaction, the parties entered into a Cooperative
Marketing Agreement. The Cooperative Marketing Agreement, which has a term of
four years, provides for QTN to potentially earn up to an additional $1,500 in
commissions upon the successful conversion of each QTN Q-Cath system to the
Company's Physiolog and Vericis products. The Company allocated the purchase
price of $1,750 to the acquired assets, which included $274 to inventory and
$1,476 to the customer list, based on their relative fair value at the date of
purchase. The intangible asset related to the customer list is being amortized
over the estimated useful life of four years. The unamortized balance of the
customer list intangible was approximately $830 and $1,200 at July 31, 2005 and
2004, respectively.
3. INVENTORIES
Inventories consist of the following components at July 31:
2005 2004
------ ------
Raw materials $5,108 $4,832
Work in process 178 367
Finished goods 2,904 3,346
------ ------
8,190 8,545
Less reserve for obsolescence 3,897 3,958
------ ------
$4,293 $4,587
====== ======
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following components at July 31:
2005 2004
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Land $ 463 $ 463
Buildings and improvements 6,823 6,878
Machinery and equipment 5,268 5,388
Furniture and fixtures 2,241 2,401
Computers, software and other 7,473 7,925
------- -------
22,268 23,055
Less accumulated depreciation 15,253 15,000
------- -------
$ 7,015 $ 8,055
======= =======
The following is a summary of equipment held under capital lease obligations and
is included in property, plant and equipment in the accompanying financial
statements.
2005 2004
---- ----
Equipment $641 $696
Less accumulated depreciation 518 394
---- ----
$123 $302
==== ====
Depreciation expense was $1,752 in fiscal 2005, $1,631 in fiscal 2004, and
$2,028 in fiscal 2003 and includes depreciation of assets held under capital
lease.
5. GOODWILL AND INTANGIBLE ASSETS
Goodwill and intangible assets consist of the following components at July 31:
2005 2004
------ ------
GOODWILL $ 516 $1,334
AMORTIZABLE INTANGIBLE ASSETS:
Intellectual property -- 2,855
Customer list 1,476 1,476
------ ------
1,476 4,331
Less accumulated amortization 904 1,533
------ ------
$1,088 $4,132
====== ======
Amortization expense for intangible assets was approximately $830 in fiscal
2005, $850 in fiscal 2004, and $433 in fiscal 2003. Amortization lives of
intangible assets range from four to five years.
6. ASSET IMPAIRMENT CHARGES
During fiscal 2005, the Company recorded asset impairment charges as an
operating expense in the Company's consolidated statements of operations and
changes in retained earnings as follows:
Goodwill $ 434
Intangible asset 1,535
Investment in CardioWorks, Inc. 1,630
------
$3,599
======
There were no asset impairment charges recorded for the years ended July 31,
2004 and 2003.
GOODWILL
In fiscal 2005, the Company decided not to make the required significant
additional investment in research and development in order for VMI to realize
the potential market opportunities of the Echo IMS and Cardio IMS software
technology products due to the lower than anticipated participation by the
pediatric hospitals. Due to the changes in circumstance, the Company performed
an impairment test of the Company's goodwill in accordance with SFAS No. 142,
Goodwill and Other Intangible Assets, in the third quarter of fiscal 2005.
6. ASSET IMPAIRMENT CHARGES - CONTINUED
The estimated fair value of the VMI investment was less than the book value of
its assets, and the Company recorded an impairment charge of $434 in fiscal 2005
and a related balance sheet reclass to reduce goodwill and accrued liabilities
for the unpaid contingent consideration which was no longer owed.
Also, the Company determined that significant additional investment would be
required to complete the development efforts on these products. As a result, the
Company performed an assessment of the recoverability of these long-lived assets
related to the acquired software technology products of Echo IMS and Cardio IMS.
The Company evaluated the future undiscounted cash flows attributable to these
software technology products with the net book value exceeding the estimated
future undiscounted cash flows. The Company recorded an asset impairment charge
of $1,535 related to the acquired software technology products of Echo IMS and
Cardio IMS in fiscal 2005, leaving a balance of zero as of July 31, 2005.
IMPAIRMENT OF INVESTMENT IN CARDIOWORKS
Due to delays in the availability of the front end data collection software,
CardioWorks experienced delays in bringing their product to market and had
expended the majority of their working capital. Based upon the uncertainty of
CardioWorks funding their working capital needs as well as the inability of the
Company to recover its investment, the Company determined that its investment in
CardioWorks was impaired. Accordingly, the Company recorded an impairment charge
of $1,630 in fiscal 2005 to write off the investment in CardioWorks as of July
31, 2005.
7. ACCRUED LIABILITIES
Accrued liabilities consist of the following components at July 31:
2005 2004
------ ------
Accrued employee compensation and benefits $1,867 $1,808
Accrued warranty 737 985
Other 668 452
------ ------
$3,272 $3,245
====== ======
8. NOTES PAYABLE
Notes payable consist of the following at July 31:
2005 2004
---- ----
Note payable issued in October 2004 for the acquisition of certain
assets from Quinton, with imputed interest at 4% (repaid during
fiscal 2005) $-- $743
Other noninterest-bearing note payable 42 42
--- ----
42 785
Less current portion 42 785
--- ----
$-- $ --
=== ====
Total interest expense was $86 in fiscal 2005, $105 in fiscal 2004 and $95 in
fiscal 2003.
9. LEASES AND RENTAL COMMITMENTS
The Company leases office and warehouse space and equipment under noncancelable
operating leases. These leases contain renewal options. Total rental expense
amounted to $404 in fiscal 2005, $398 in fiscal 2004 and $335 in fiscal 2003.
The following is a schedule by year of future minimum lease payments at July 31,
2005:
CAPITAL OPERATING
LEASES LEASES
------- ---------
2006 $110 $ 276
2007 35 318
2008 27 324
2009 -- 298
2010 -- 114
---- ------
172 1,330
Less amounts representing interest 10 --
---- ------
Present value of minimum lease payments
(includes current portion of $104 in 2005) $162 $1,330
==== ======
10. OTHER INCOME AND EXPENSES
Other income consists primarily of loss attributable to the Company's investment
in CardioWorks which is accounted for under the equity method, foreign exchange
gains (losses), interest expense and income (loss) on the sale of property,
plant and equipment.
11. STOCK OPTION AND STOCK BONUS PLANS
At July 31, 2005, employees of the Company participated in key employee stock
option plans and key employee stock bonus plans of the Parent. Employee stock
options were paid out or terminated with the sale of the Company - see Note 16
for subsequent event.
Options granted under the key employee stock option plans generally become
exercisable in installments commencing no earlier than two years from the date
of grant and no later than six years from the date of grant. Unexercised options
expire up to seven years from date of grant. Options issued under the plans are
nonqualified options or incentive stock options and are issued at prices of not
less than 100 percent of the fair market value of the common stock of the Parent
at the date of grant. Tax benefits and exercise of these options are recorded by
the Parent, and the exercise of these options had no impact on the financial
statements of the Company.
As permitted under SFAS No. 123, Accounting for Stock Based Compensation
(revised June 2004), the Company currently accounts for share-based payments to
employees using the intrinsic value method in accordance with APB 25 and, as
such, generally recognizes no compensation cost for employee stock options as
the option price is equal to the fair market value of common stock at the date
of grant. As of July 31, 2005, there were approximately 46,000 stock options
granted to employees of the Company under these plans, of which approximately
9,000 options had been exercised, and approximately 11,000 were vested with
option prices ranging from $34 to $47 per share. Had compensation expense for
the Company's participation in the Parent's stock based compensation plan been
recorded and applied in accordance with SFAS No. 123, and recognized ratably
over the options' vesting period, the Company's pro forma net loss would have
been increased by approximately $74, $178 and $214 for the years ended July 31,
2005, 2004 and 2003, respectively.
Under the Parent's key employee stock bonus plans, common stock may be granted
to key employees under terms and conditions as determined by the Board of
Directors of the Parent. Generally, participants under the stock bonus plans may
not dispose or otherwise transfer stock granted for three years from date of
grant. Stock granted under these plans generally vest in four equal installments
beginning in the third year from the date of grant. Upon issuance of stock under
the plans, unearned compensation equivalent to the market value at the date of
grant is charged to the Parent's stockholders' equity and subsequently amortized
over the periods during which the restrictions lapse (up to six years).
Amortization of unearned compensation of $83 in fiscal 2005, $107 in fiscal 2004
and $107 in fiscal 2003 was recorded by the Company for costs associated with
its employees participating in the restricted stock option plan.
12. RETIREMENT PLANS
Employees of the Company are eligible to participate in The Analogic Corporation
Profit Sharing/40l(k) Plan (the Plan) which is a qualified retirement plan to
provide retirement income for employees through employee contributions and
employer contributions from the Company and its Parent. Employer contributions
are discretionary and may be in the form of a direct profit sharing contribution
or a discretionary matching contribution as determined and approved by the Board
of Directors of the Parent. The Parent's contribution each year shall in no
event exceed the maximum allowable under applicable provision of the Internal
Revenue Code. All contributions vest immediately.
This Plan, as allowed under Section 401(k) of the Internal Revenue Code, permits
tax deferred salary/wage deductions for eligible employees. Employees may
contribute from one percent to 80 percent of their eligible compensation to the
Plan, limited to a maximum annual amount as determined by the Internal Revenue
Service.
Beginning in fiscal year 2003, the Parent elected to contribute five percent of
its net income, as defined, to the Plan. The Parent charged the Company $142 in
fiscal 2005, $168 in fiscal 2004 and $315 in fiscal 2003 for contributions made
to the Plan for benefit to the accounts of employees of the Company.
13. INCOME TAXES
The components of the provision for income taxes are as follows:
2005 2004 2003
------- ------- -----
Current income taxes (benefits)
Federal $ 1,227 $(3,864) $ 627
State 237 (729) 139
Foreign (3) 66 --
------- ------- -----
$ 1,461 $(4,527) $ 766
======= ======= =====
Deferred income taxes (benefits)
Federal $(2,389) $ 3,904 $(358)
State (450) 736 (505)
Foreign -- -- --
------- ------- -----
$(2,839) $ 4,640 $(863)
======= ======= =====
13. INCOME TAXES - CONTINUED
Loss before income taxes from domestic and foreign operations is as follows:
2005 2004 2003
------- ------- -------
Domestic $(3,819) $ (26) $ (714)
Foreign (3,247) (2,588) (1,815)
------- ------- -------
$(7,066) $(2,614) $(2,529)
======= ======= =======
The components of the deferred tax assets and liabilities are as follows at
July 31, 2005:
DEFERRED DEFERRED
TAX TAX
ASSETS LIABILITIES
-------- -----------
Deferred revenue $1,007 $ --
Intangibles 237 --
Bad debt 45 --
Inventory 1,591 --
Warranty 288 --
Unrealized equity gain (loss) 742 --
Capitalized software, net -- 1,580
Other 440 8
------ ------
$4,350 $1,588
====== ======
The components of the deferred tax assets and liabilities are as follows at
July 31, 2004:
DEFERRED DEFERRED
TAX TAX
ASSETS LIABILITIES
-------- -----------
Deferred revenue $ -- $1,655
Intangibles 145 --
Bad debt 63 --
Inventory 1,589 --
Warranty 384 --
Unrealized equity gain (loss) 97 --
Capitalized software, net 1,209
Other 510 --
------ ------
$2,788 $2,864
====== ======
13. INCOME TAXES - CONTINUED
A reconciliation of income taxes at the United States statutory rate to the
effective tax rate follows:
2005 2004 2003
---- ---- ----
U.S. federal statutory tax rate 35% 35% 35%
State income taxes, net of federal benefit 2% -- 1%
Meals and entertainment (1%) (2%) (3%)
International operations (17%) (37%) (25%)
Other -- -- (4%)
--- --- ---
19% (4%) 4%
=== === ===
The Company does not provide for U.S. federal income taxes on undistributed
earnings of consolidated foreign subsidiaries as such earnings are intended to
be indefinitely reinvested in those operations. Determination of the potential
deferred income tax liability on these undistributed earnings is not practicable
because such liability, if any, is dependent on circumstances existing if and
when remittance occurs.
The Company had net operating loss and credit carry forwards in Canada of
approximately $7,413, $6,073 and $5,281 for the years ended July 31, 2005, 2004
and 2003, respectively, which expire from year 2006 to year 2012.
Income taxes for the Canadian subsidiaries are calculated separately from the
U.S. provision for federal income taxes and separate tax returns are filed under
Canadian tax laws. Management has determined that it is more likely than not
that the Company will not recognize the benefit of the Canadian (foreign) losses
and tax credits and as a result, valuation allowances have been established at
100 percent of the balances outstanding at July 31, 2005 and July 31, 2004. The
increase in the valuation allowance in fiscal 2005 is the result of additional
losses incurred by the Canadian subsidiaries.
The Company's federal tax return is filed on a consolidated basis with its
Parent and other subsidiary companies of the Parent. Taxable losses of the
Company are used as offsets against the taxable income of other members of the
Parent's federal tax return. The Company's federal tax provision is based upon
total utilization of any tax losses by the Parent and tax related balances are
recorded as due to (from) the Parent. Taxes have been computed as if the Company
operated on a stand-alone basis, excluding certain credits and deductions that
are only available to the Parent or one member of the consolidated group.
14. RELATED PARTY TRANSACTIONS
The Company is a subsidiary of Analogic Corporation and, as such, certain
transactions are processed and recorded by the Parent. The Company pays
management fees to the Parent for legal, accounting, risk management, employee
benefit administration and executive management services which are performed by
the Parent for the benefit of its subsidiaries. The Parent may incur other
charges, such as legal or accounting services, on behalf of the Company that are
not billed to the Company; such charges are not included in the accompanying
consolidated statements of operations and changes in retained earnings and are
considered expenses of the Parent.
The Company makes or obtains advances to or from the Parent as working capital
needs dictate and is charged interest for such advances. In addition, as
discussed in Note 13, the Company files a consolidated federal income tax return
with its Parent. Benefits and refunds resulting from losses incurred by the
Company were collected by the Parent and are included in the net balance due to
or from the Parent. Other assets at July 31, 2005, include a net amount due from
the Parent of $1,700 consisting of accrued tax benefits receivable of $3,649 net
of advances from the Parent of $1,949. Due from parent of $2,292 at July 31,
2004, consists of accrued tax benefits receivable of $5,098 net of advances from
the Parent of $2,806. Interest paid on amounts due to the Parent was $58 in
fiscal 2005, $28 in fiscal 2004, and $6 in fiscal 2003.
15. CONCENTRATION OF CREDIT RISKS
Sales revenue and accounts receivable potentially subject the Company to credit
risk. The Company had one major customer that accounted for approximately 14
percent of sales in fiscal 2005, 15 percent in fiscal 2004, and 28 percent in
fiscal 2003. At July 31, 2005, the Company had accounts receivable from two
major customers totaling 25 percent of the outstanding balance. Substantially
all of these receivables were collected subsequent to July 31, 2005.
16. SUBSEQUENT EVENTS
On November 1, 2005, Analogic Corporation announced that it had sold 100 percent
of the stock of the Company to Emageon for $40,000. Emageon, Inc. acquired all
the assets and assumed all liabilities of the Company except for cash,
intercompany balances due to Analogic Corporation, notes payable and any assets
or liabilities relating to taxes of any type arising from activities prior to
November 1, 2005. In addition, Emageon, Inc. obtained certain indemnifications
for certain events or transactions that were pending at the date of sale. The
ultimate impact of the purchase on the Company, if any, has not been determined
at this date.
For tax purposes, consistent with Internal Revenue Code Section 338(h)(10), the
Company will elect to treat this acquisition as an asset purchase. This
election allows the basis in the assets of Camtronics to be valued for tax
purposes at fair market value on the date of purchase. This election will
eliminate any deferred income or expense items related to assets acquired in
the acquisition, as the assets will have the same cost for book as well as tax
purposes. Also, no tax attributes will carryover from Camtronics, such as net
operating losses.