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EX-32 - EXHIBIT 32 - MERGE HEALTHCARE INC | ex32.htm |
EX-23.1 - EXHIBIT 23.1 - MERGE HEALTHCARE INC | ex23_1.htm |
EX-31.2 - EXHIBIT 31.2 - MERGE HEALTHCARE INC | ex31_2.htm |
EX-31.1 - EXHIBIT 31.1 - MERGE HEALTHCARE INC | ex31_1.htm |
EX-23.2 - EXHIBIT 23.2 - MERGE HEALTHCARE INC | ex23_2.htm |
Washington, D.C. 20549
Amendment No. 2
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2011
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 001-33006
(Exact name of Registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization)
(I. R. S. Employer Identification No.)
200 East Randolph Street, 24th Floor
Chicago, Illinois 60601-6436
(Address of principal executive offices, including zip code)
(Registrant's telephone number, including area code) (312) 565-6868
Securities registered under Section 12(b) of the Exchange Act:
Title of Each Class
Name of Each Exchange on Which Registered
Common Stock, $0.01 par value per share
The NASDAQ Global Select Market
Securities registered under Section 12(g) of the Exchange Act: NONE
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesx No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.o
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer", and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer o
Accelerated filer x
Non-accelerated filer o
Smaller reporting company o
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No x
The aggregate market value for the Registrant's voting and non-voting common equity held by non-affiliates of the Registrant as of June 30, 2011, based upon the closing sale price of the Common Stock on June 30, 2011, as reported on The NASDAQ Global Select Market, was approximately $268,411,140. Shares of Common Stock held by each officer and director and by each person who owns ten percent or more of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.
The number of shares outstanding of the Registrant's common stock, par value $0.01 per share, as of February 21, 2012: 91,011,877
Certain of the information required by Part III is incorporated by reference from the Registrant's Proxy Statement for its 2012 Annual Meeting of Shareholders.
The Company is filing this Amendment No.2 ("Amendment No.2") to its Annual Report on Form 10-K for the fiscal year ended December 31, 2011 (the "Initial Report") solely to correct a typographical error in the certification contained in Exhibit 31.2 to the Initial Report. The corrected certification is filed as Exhibit 31.2 to this Amendment No. 2, together with the other certifications required by the Sarbanes-Oxley Act of 2002. This Amendment No. 2 does not change the Company's previously reported consolidated financial statements or make any other changes to the Initial Report and should be read in conjunction with the Initial Report. The Company has not updated the disclosures contained in the Initial Report to reflect any events that have occurred after the filing date of the Initial Report.
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Item 15.
This Annual Report on Form 10-K and other written or oral statements made by us or on our behalf may include forward-looking statements that reflect our current views with respect to future events and future financial performance. Certain statements in this Annual Report on Form 10-K are "forward-looking statements." You can identify these forward-looking statements by our use of the words "believes," "anticipates," "forecasts," "projects," "could," "plans," "expects," "may," "will," "would," "intends," "estimates" and similar expressions, whether in the negative or affirmative. We wish to caution you that any forward-looking statements made by us or on our behalf are subject to uncertainties and other factors that could cause such statements to be wrong. We cannot guarantee that we actually will achieve these plans, intentions or expectations. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements that we make and we cannot guarantee future results, levels of activity, and/or performance. We do not assume any obligation to update or revise any forward-looking statements that we make, whether as a result of new information, future events or otherwise.
Factors that may impact forward-looking statements include, among others, the risks and other matters set forth in the section entitled "Item 1A Risk Factors" in this Annual Report on Form 10-K. Although we have attempted to list comprehensively these important factors, we also wish to caution investors that other factors may prove to be important in the future in affecting our business and operating results. New factors emerge from time to time, and it is not possible for us to predict all of these factors, nor can we assess the impact each factor or combination of factors may have on our business.
Item 1.
Merge Healthcare Incorporated and its subsidiaries or affiliates (collectively Merge, we, us, or our) develop software solutions that facilitate the sharing of images to create a more effective and efficient electronic healthcare experience for patients and physicians. Our solutions are designed to help solve some of the most difficult challenges in health information exchange today, such as the incorporation of medical images and diagnostic information into broader healthcare IT applications, the interoperability of proprietary software solutions, and the ability to improve the efficiency and cost effectiveness of our customers' businesses.
We are a Delaware corporation that was founded in 1987. Our principal executive offices are located at 200 East Randolph Street, 24th Floor, Chicago, Illinois, 60601-6436, and our telephone number there is (312) 565-6868. Our website address, which we use to communicate important business information, can be accessed at: www.merge.com. We make our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports available free of charge on or through this website as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission (SEC). Materials we file with or furnish to the SEC may also be read and copied at the SEC's Public reference Room at 100 F Street, NE, Washington, D.C. 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. Also, the SEC Internet site (www.sec.gov) contains reports, proxy and information statements, and other information that we file electronically with the SEC.
We provide enterprise imaging solutions for radiology, cardiology, orthopaedics and eye care; a suite of products for clinical trials; software for financial and pre-surgical management, and applications that fuel some of the largest modality vendors in the world. Our products have been used by healthcare providers, vendors and researchers worldwide to improve patient care for more than 20 years. Our solutions optimize processes for healthcare organizations ranging in size from single-doctor practices to health systems, for the sponsors of clinical trials, for the medical device industry, for the healthcare commerce system and for consumers of healthcare.
Merge primarily generates revenue from the sale of perpetual software licenses, upgrading and/or renewing those licenses, hardware, professional services and maintenance. Except for maintenance, these contract elements comprise the majority of non-recurring revenue. Our backlog of non-recurring revenue was approximately $45.1 million as of December 31, 2011. Maintenance, which we typically renew annually with our customer base, is the primary component of recurring revenues. Recurring revenue also includes software licenses sold through contracts that are annually renewed and recognized ratably over the annual period (recorded as software revenue), revenues derived from SaaS offerings (recorded as professional services revenue) and Electronic Data Interchange (EDI) revenues which are recognized based on monthly transactional volumes. The following table presents our consolidated revenues by category, as a percentage of total revenues:
Year Ended December 31,
Net sales:
Software and other
34.8 | % | 30.2 | % | 49.4 | % | ||||||
Professional services
18.0 | % | 16.5 | % | 17.7 | % | ||||||
Maintenance and EDI
47.2 | % | 53.3 | % | 32.9 | % | ||||||
Total net sales
100.0 | % | 100.0 | % | 100.0 | % | ||||||
Recurring revenue
60.0 | % | 67.5 | % | 60.0 | % |
Healthcare IT Industry
We believe there are several factors that will be favorable for the global healthcare IT industry over the next few years. In the U.S., the recognition that healthcare IT is essential to help control healthcare costs and improve quality contributed to the inclusion of healthcare IT incentives in the American Recovery and Reinvestment Act (ARRA). The ARRA and accompanying Health Information Technology for Economic and Clinical Health (HITECH) provisions included more than $35 billion in incentives which reward providers who use certified electronic health records (EHRs) in a meaningful way. According to the Centers for Medicare and Medicaid Services (CMS), more than 175,000 professionals and hospitals had registered for meaningful use incentive programs through December 2011 and $2.5 billion was paid out in 2011 to eligible professionals and hospitals. These incentives are contributing to increased demand for healthcare IT solutions and services in the United States. In addition, we believe long-term revenue growth opportunities outside the United States remain significant because other countries are also focused on controlling healthcare spending while improving the efficiency and quality of care that is delivered. Many countries recognize healthcare IT as an important piece of the solution to these issues.
As providers adopt EHRs, we believe the need for solutions such as our iConnect platform, which offers connectivity, access to the image and interoperability between providers and other healthcare constituents, will be significant. Imaging is an essential component of healthcare delivery across the continuum of care. Increasing physician awareness and utilization of imaging to aid in patient diagnosis (including its use as a preventive screening method), as well as an increased availability of diagnostic imaging equipment in medical centers and hospitals, has fueled the growth of the diagnostic imaging industry. In addition, U.S. demographic trends and the opportunity for greater international adoption of medical imaging should provide the basis for long-term, sustainable growth in imaging volumes. We believe Merge is well positioned to benefit from these expected increases in demand due to our large footprint in United States hospitals and physician practices and our expansion into additional imaging specialties. Based on information from Frost & Sullivan and our own research, we believe the global market for imaging software and services, healthcare IT interoperability solutions, and EHR solutions for radiology, cardiology, ophthalmology and orthopaedics is $7.5 billion annually.
We believe that we are positioned to provide value added solutions and services to our customers amidst potential changes in industry standards and regulations. We believe the fundamental value proposition of healthcare IT remains strong and that the industry will likely benefit as healthcare providers and governments continue to recognize that these solutions and services contribute to safer, more efficient healthcare delivery.
Merge Growth Strategy
Our strategy is to be a leading provider of integrated, global healthcare IT solutions and services that improve the exchange of healthcare information. We believe the growth drivers for Merge are the importance of imaging, the opportunity with respect to meaningful use of EHRs, and the need for interoperability. Imaging continues to be a critical component of healthcare delivery across the continuum of care. We believe that an electronic medical record can only be considered meaningful if imaging data is included.
One of our core strengths is our proven ability to innovate, which has driven consistent expansion of our solutions and services and our entry into new markets. We currently own approximately 80 issued patents in various jurisdictions and we continue to expand our IP portfolio. Our portfolio of technologies is used across a wide variety of clinical specialties in addition to being an increasingly important component of clinical trials. For example, our iConnect platform offers hospitals, imaging centers and Health Information Exchanges the ability to create information exchanges within their environment and with other entities. As providers adopt electronic health records, we believe that the need for solutions offering connectivity and interoperability between providers and other healthcare constituents will be a new multi-billion dollar opportunity and one for which Merge is well-positioned to compete.
We will also look to expand through strategic acquisitions that will allow us to further expand our addressable market and customer base. We believe that our acquisitions in 2011 and 2010 have expanded our product offering and provided greater penetration into existing market segments. As a result of these acquisitions, we have extended our addressable market to include other specialties, such as solutions for ophthalmology, orthopaedics and laboratory markets, increased the depth of our solution portfolio for existing customers and added new prospects to include additional automation capabilities via healthcare stations.
We have an opportunity to grow revenues by cross-selling products to existing customers as only a small percent currently have more than one of our enterprise solutions. This is evidenced by the fact that no customer accounted for more than 5% of our net sales in any of the last three years. With the benefit of a broad customer base and several product lines undergoing ongoing innovation, we intend to continue to leverage technologies into new segments where customers see value. For example, as providers adopt EHRs and seek to qualify for meaningful use incentives, our EHR certified solutions and our iConnect solution will help providers facilitate meaningful use and accountable care initiatives.
We believe we are positioned well to gain market share in the United States during a period of expected strong demand driven by the HITECH provisions of ARRA and the nation's focus on improving the efficiency and quality of healthcare. We also have a strong brand, as evidenced by our popular eFilm Workstation that has over 100,000 downloads.
Our Product Portfolio
We provide a broad range of products and services to our customers, including:
Image Interoperability Platform
iConnect. This interoperability and connectivity platform enables hospitals, imaging centers, Integrated Delivery Networks and Health Information Exchanges to create information exchanges within their environments and with other entities. This platform provides access to imaging and diagnostic data across disparate sites, geographies, specialties and providers. This solution enables providers to expedite care, reduce duplicate exams, consolidate infrastructure and limit the expenses associated with moving, managing and storing diagnostic content and results.
Clinical and Financial Information Systems
Digital Imaging Solutions: Picture Archiving and Communication Systems (PACS), specialty workstations and related applications manage the image workflow of a medical enterprise. PACS can be used by any medical imaging provider at a hospital or outpatient imaging site. We offer PACS solutions for general image review and management, specialty solutions for cardiology, orthopaedics, ophthalmology, mammography and oncology, and add-on modules like referring physician portals and critical test results reporting. We also offer our eFilm Workstation for general radiology reading and CADstream workstations for specialty reading of magnetic resonance imaging (MRI) breast, liver and prostate studies.
Clinical information systems. These systems provide a complete electronic record of a medical procedure across a variety of specialties – including Merge OrthoEMR for orthopaedics, Merge Anesthesia Information Management System for surgery, and Merge RIS for radiology.
Revenue Cycle Management. We offer software and services for the revenue cycle management of physician practices. These solutions can be used across a many physician specialties, but our solutions are most commonly used by radiology practices, imaging centers and billing services.
Software Development Toolkits, Technologies and Platforms.
Merge toolkits, technologies and platforms provide software developers with the necessary resources to assist in the timely development of new products and enhance existing products. They can be used by any original equipment manufacturer (OEM), medical device manufacturer, RIS/PACS or general healthcare IT vendors. We offer development toolkits in the basic standards of medical imaging and information interoperability, as well as advanced toolkits and unfinished applications for specialized medical image review and distribution.
Hosted Software Solutions for Clinical Trial Data Management.
We provide hosted software solutions for the collection, aggregation, analysis, reporting and overall management of clinical trials information. These solutions can be sold to sponsors of clinical trials, including pharmaceutical companies, contract research organizations (CRO) or imaging core labs. Our solutions include electronic data capture (EDC), interactive voice/web response (IVR/IWR) and electronic patient reported outcomes (ePRO) software and devices.
The healthcare IT and imaging markets in which we participate are highly competitive, rapidly evolving and subject to rapid technological change. However, we believe that there is no single company that competes against our entire product portfolio.
Our principal competitors in the healthcare solutions and services market include: General Electric Company (Healthcare), McKesson Corporation, Fuji, Philips, Carestream, and Agfa, each of which offers software solutions that compete with a portion of our product portfolio. Almost all of these competitors are substantially larger or have more experience and market share than Merge in their respective markets. We also partner with certain of these companies to resell our products.
Other competitors focus on specific portions of the market that we address or compete against specific products we sell. For example, there are 30 other companies in the North American PACS market, according to Frost & Sullivan. These companies include original equipment manufacturers, former film companies and healthcare IT companies. Our CAD solutions compete with iCAD, InVivo (Philips) and Hologic. Our eClinical solutions and services are in a highly competitive market led by Oracle and Medidata. Our OEM technologies most often compete with internal development departments, but also compete with software development companies for our DICOM and HL7 toolkits.
In addition, major software information systems companies, large information technology consulting service providers and system integrators, start-up companies, managed care companies and others specializing in the healthcare industry offer competitive software solutions or services. The pace of change in the healthcare IT market is rapid and there are frequent new software solutions or service introductions, enhancements and evolving industry standards and requirements. We believe that the principal competitive factors in this market include the breadth and quality of solution and service offerings, the stability of the solution provider, the quality, features and performance of the products, the ongoing support for the systems and the potential for enhancements and future compatible software solutions.
At December 31, 2011, we had approximately 925 employees worldwide. Competition for personnel in the industry in which we compete is intense. We believe that our future success depends in part on our continued ability to hire, assimilate, train and retain qualified personnel.
Software Development
We commit significant resources to developing new health information system solutions. At December 31, 2011, approximately 225 of our employees were engaged in research and development activities. Total expenditures for the development and enhancement of our software solutions were approximately $27.5 million, $20.1 million and $10.7 million during 2011, 2010 and 2009, respectively.
Our products, ranging from standards-based development toolkits to fully integrated clinical applications, have been used by healthcare providers worldwide for over 20 years. Our software solutions follow industry standards such as DICOM, which ensures that images from any DICOM-compliant imaging modality can be displayed, moved and stored within a standard set of guidelines. In addition, Merge follows the guidelines of the Integrating the Healthcare Enterprise (IHE) standards body, an organization dedicated to developing standard profiles for health information exchange. Our long-time involvement with the standards committees and continuous development of products like our DICOM and HL7 toolkits have enabled Merge to stay closely tied to industry innovation. As discussed above, continued investment in research and development remains a core element of our strategy. This will include ongoing enhancement of our core solutions and development of new solutions and services such as honeycomb, our new cloud-based platform.
Sales, Marketing and Distribution
Sales to large health systems typically take more than nine months, while the sales cycle is often shorter when selling to smaller hospitals and imaging centers. In order to ramp up our sales and market presence, we began aggressively hiring sales and marketing personnel in the fourth quarter of 2010 and throughout 2011. At December 31, 2011, approximately 175 of our employees were engaged in sales and marketing activities. Our executive sales and marketing management is located at our innovation center in Chicago, Illinois, while our sales team is deployed across the United States and globally.
We employ quota based sales teams who specialize in particular solutions and services. In addition, we have sales teams dedicated to establishing and maintaining Value Added Reseller (VAR) and distributor relationships globally. We have concentrated inside and telesales staff in one location in order to bring economies of scale in management and process. Our sales teams are complemented by a staff of lead generation and marketing employees. These teams use online tools and resources that streamline and track the sales process.
Our marketing efforts are mainly electronic, utilizing our website and our extensive email database of customers for our communication campaigns, as well as our website for online communities and certain social media. Beyond electronic media, we employ consistent media relations efforts for market communications. In addition, we participate in the major industry trade shows for our respective product lines. We also have an active user group for our U.S. customers and an industry advisory board.
Financial Information about Segments
For financial information regarding our single segment business as well as our geographic areas of operation, refer to Item 8, "Note 1 – Basis of Presentation and Significant Accounting Policies" and "Note 15 – Segment Information and Concentrations of Risk" of this Annual Report on Form 10-K.
Item 1A.
Discussion of our business and operating results included in this annual report on Form 10-K should be read together with the risk factors set forth below. They describe various risks and uncertainties to which we are or may become subject. These risks and uncertainties, together with other factors described elsewhere in this report, have the potential to affect our business, financial condition, results of operations, cash flows, strategies or prospects in a material and adverse manner. New risks may emerge at any time, and we cannot predict those risks or estimate the extent to which they may affect financial performance. We undertake no obligation to update or revise the statements.
Our Business could be Harmed by Adverse General Economic and Market Conditions which could Lead to Reduced Spending on Information Technology Products.
Our markets have been and will continue to be affected by global macroeconomic conditions. As our business expands globally, we are increasingly subject to the risks arising from adverse changes in domestic and global economic and political conditions. If global economic conditions deteriorate or economic uncertainty continues, our clients might experience deterioration of their businesses, cash flow shortages and difficulty obtaining financing which may delay or reduce their purchases. This could result in reductions in sales of our products, longer sales cycles, slower adoption of new technologies and increased price competition. In addition, weakness in the end-user market could negatively affect our OEM and VAR customers who could, in turn, delay paying their obligations, which would increase our credit risk exposure and cause a decrease in operating cash flows. Also, if OEM and VAR customers experience excessive financial difficulties and/or insolvency, and we are unable to successfully transition end-users to purchase products from other vendors or directly from us, sales could decline. Any of these events would likely harm our business, results of operations and financial condition.
Disruption in Credit Markets and World-Wide Economic Changes may Adversely Affect our Business, Financial Condition, and Results of Operations.
Disruptions in the financial and credit markets may adversely affect our business and financial results. The tightening of credit markets may reduce the funds available to our customers to buy our products and services. It may also result in customers extending the length of time in which they pay and in our having higher customer receivables with increased default rates. General concerns about the fundamental soundness of domestic and foreign economies may also cause customers to reduce their purchases, even if they have cash or if credit is available to them.
We have a Substantial Amount of Indebtedness, which could Impact our Ability to Obtain Future Financing or Pursue our Growth Strategy.
We have substantial indebtedness. As of December 31, 2011, we had approximately $252.2 million of indebtedness, including $252.0 million aggregate principal amount of 11.75% Senior Secured Notes due 2015 (Notes).
Our high level of indebtedness could have important consequences and significant adverse effects on our business, including the following:
We must use a substantial portion of our cash flow from operations to pay interest on our indebtedness, which will reduce the funds available to us for operations and other purposes;
Our ability to obtain additional financing for working capital, capital expenditures, acquisitions or general corporate purposes may be impaired;
Our high level of indebtedness could place us at a competitive disadvantage compared to our competitors that may have proportionately less indebtedness;
Our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate may be limited; and
Our high level of indebtedness may make us more vulnerable to economic downturns and adverse developments in our business.
The indenture governing our Notes contains, and the instruments governing any indebtedness we may incur in the future may contain, restrictive covenants that impose significant operating and financial restrictions, including restrictions on our ability to take actions that we believe may be in our best interest. The indenture, among other things, limits our ability to:
Incur additional indebtedness and issue preferred stock;
Pay dividends on or make distributions in respect of capital stock;
Make certain investments or certain other restricted payments;
Issue dividends and enter into other payment restrictions affecting certain subsidiaries;
Enter into transactions with stockholders or affiliates;
Create or incur liens;
Enter into certain sale-leaseback transactions;
Guarantee indebtedness;
Merge or consolidate without meeting certain conditions; and
Issue or sell stock of certain subsidiaries.
Our failure to comply with these covenants could result in an event of default which, if not cured or waived, could result in the acceleration of all or a portion of our outstanding indebtedness, which would have a material adverse effect on our business, financial condition and results of operations.
Payments on our Indebtedness will Require a Significant Amount of Cash. Our Ability to Meet our Cash Requirements and Service our Indebtedness is Impacted by Many Factors that are Outside of our Control.
We expect to obtain the funds to pay our expenses and to pay the amounts due under the Notes primarily from our operations. Our ability to meet our expenses and make these payments thus depends on our future performance, which will be affected by financial, business, economic and other factors, many of which we cannot control. Our business may not generate sufficient cash flow from operations in the future and our currently anticipated growth in revenue and cash flow may not be realized, either or both of which could result in our being unable to repay indebtedness, including the Notes, or to fund other liquidity needs. If we do not have sufficient cash resources in the future, we may be required to refinance all or part of our then existing indebtedness, sell assets or borrow more money. We cannot be assured that we will be able to accomplish any of these alternatives on terms acceptable to us or at all. In addition, the terms of existing or future debt agreements may restrict us from adopting any of these alternatives. Our failure to generate sufficient cash flow or to achieve any of these alternatives could materially adversely affect the value of the Notes and our ability to pay the amounts due under the Notes. See the section captioned "Liquidity and Capital Resources" in the Management's Discussion and Analysis of Financial Condition and Results of Operations incorporated herein by reference.
We may be Able to Incur Substantial Additional Indebtedness that could Further Exacerbate the Risks Associated with our Indebtedness.
We may incur substantial additional indebtedness in the future. Although the indenture governing the Notes contains restrictions on our incurrence of additional indebtedness, these restrictions are subject to a number of qualifications and exceptions, and we could incur substantial additional indebtedness in the future, including additional secured indebtedness. If we incur additional indebtedness, the risks described above under "— We have a substantial amount of indebtedness, which could impact our ability to obtain future financing or pursue our growth strategy" and "— Payments on our indebtedness will require a significant amount of cash. Our ability to meet our cash requirements and service our indebtedness is impacted by many factors that are outside of our control" would intensify.
Our Future Capital Needs are Uncertain and our Ability to Access Additional Financing may be Negatively Impacted by the Volatility and Disruption of the Capital and Credit Markets and Adverse Changes in the Global Economy.
Our capital requirements in the future will depend on many factors, including:
Acceptance of and demand for our products;
The extent to which we invest in new technology and product development;
The costs of developing new products, services or technologies;
Our interest and principal payment obligations;
The number and method of financing of acquisitions and other strategic transactions; and
The costs associated with the growth of our business.
We must continue to enhance and expand our product and service offerings to maintain our competitive position, satisfy our working capital obligations and increase our market share. We have in the past required substantial capital infusions. Our ability to incur additional indebtedness in the future may be limited or available only on disadvantageous terms. We currently do not have a credit facility and such a facility may be difficult to obtain in the future given the amount of indebtedness that we have incurred and future market conditions. Unless we can achieve cash flow levels sufficient to support our operations, we may require additional borrowings or the sale of debt or equity securities, sale of non-strategic assets, or some combination thereof, to provide funding for our operations. Our ability to borrow in the future is dependent upon our ability to manage business operations and generate sufficient cash flows to service such indebtedness. If we are unable to generate sufficient working capital or obtain alternative financing, we may not be able to borrow or otherwise obtain additional funds to finance our operations when needed, our financial condition and operating results would be materially adversely affected.
If global economic conditions deteriorate, we could experience a decrease in cash flows from operations and may need additional financing to fund operations. Due to the existing uncertainty in the capital markets (including debt, private equity, venture capital and traditional bank lending), access to additional debt or equity may not be available on acceptable terms or at all. If we cannot raise funds on acceptable terms when necessary, we may not be able to develop or enhance products and services, execute our business plan, take advantage of future opportunities or respond to competitive pressures or unanticipated customer requirements.
Healthcare Industry Consolidation could Impose Pressure on our Software Prices, Reduce our Potential Client Base and Reduce Demand for our Software.
Many hospitals and imaging centers have consolidated to create larger healthcare enterprises with greater market power. If this consolidation trend continues, it could reduce the size of our potential customer base and give the resulting enterprises greater bargaining power, which may lead to erosion of the prices for our software. In addition, when hospitals and imaging centers combine, they often consolidate infrastructure, and consolidation of our customers could erode our revenue base.
We may Experience Significant Fluctuations in Revenue Growth Rates and Operating Results.
We may not be able to accurately forecast our growth rate. We base expense levels and investment plans on sales estimates and review all estimates on a quarterly basis. Many of our expenses and investments are fixed and we may not be able to adjust spending quickly enough if sales are lower than expected.
Our revenue growth may not be sustainable and our percentage growth rates may decrease or fluctuate significantly. Our revenue and operating profit growth depends on the continued growth of demand for our products and services offered through us or our OEM and VAR customers, and our business is affected by general economic and business conditions worldwide. A softening of demand, whether caused by changes in customer preferences or a weakening of the U.S. or global economies, may result in decreased revenue or growth.
Our net sales and operating results will also fluctuate for many other reasons, including due to risks described elsewhere in this section and the following:
Demand for our software solutions and services;
Our sales cycle;
Economic cycles;
The level of reimbursements to our end-user customers from government sponsored healthcare programs (principally, Medicare and Medicaid);
Accounting policy changes mandated by regulating entities;
Delays due to customers' internal budgets and procedures for approving capital expenditures, by competing needs for other capital expenditures and the deployment of new technologies and personnel resources;
Our ability to retain and increase sales to existing customers, attract new customers and satisfy our customers' demands;
Our ability to fulfill orders;
The introduction of competitive products and services;
Price decreases;
Changes to regulatory approval processes and/or requirements;
Timing, effectiveness and costs of expansion and changes in our systems and infrastructure;
The outcomes of legal proceedings and claims involving us; and
Variations in the mix of products and services offered by us.
Delays in the expected sales or installation of our software may have a significant impact on our anticipated quarterly revenues and, consequently, our earnings since a significant percentage of expenses are relatively fixed. Additionally, we sometimes depend, in part, upon large contracts with a small number of customers to meet sales goals in any particular quarter. Delays in the expected sales or installation of solutions under these large contracts may have a significant impact on our quarterly net sales and consequently our earnings, particularly because a significant percentage of our expenses are fixed.
The Length of our Sales and Implementation Cycles may Adversely Affect our Operating Results.
We have experienced long sales and implementation cycles. How and when to implement, replace, expand or substantially modify medical imaging management software, or to modify or add business processes, are major decisions for our end-user target market. The sales cycle for our software ranges from six to 18 months or more from initial contact to contract execution. Our end-user implementation cycle has generally ranged from three to nine months from contract execution to completion of implementation. During the sales and implementation cycles, we will expend substantial time, effort and resources preparing contract proposals, negotiating the contract and implementing the software, and may not realize any revenues to offset these expenditures. Additionally, any decision by our customers to delay or cancel purchases or the implementation of our software may adversely affect net sales.
We Operate in Competitive Markets, which may Adversely Affect our Market Share and Financial Results.
Some of our competitors are focused on sub-markets within targeted industries, while others have significant financial and information-gathering resources with recognized brands, technological expertise and market experience. We believe that competitors are continuously enhancing their products and services, developing new products and services and investing in technology to better serve the needs of their existing customers and to attract new customers.
We face competition in specific industries and with respect to specific offerings. We may also face competition from organizations and businesses that have not traditionally competed with us, but that could adapt their products and services to meet the demands of our customers. Increased competition may require us to reduce the prices of our offerings or make additional capital investments that would adversely affect margins. If we are unable or unwilling to do so, we may lose market share in target markets and our financial results may be adversely affected.
We face Aggressive Competition in Many Areas, and our Business will be Harmed if we Fail to Compete Effectively.
The markets for Healthcare IT solutions are highly competitive and subject to rapid technological change. We may be unable to maintain our competitive position against current and potential competitors. Many of our current and potential competitors have greater financial, technical, product development, marketing and other resources, and we may not be able to compete effectively with them. In addition, new competitors may emerge and our system and software solution offerings may be threatened by new technologies or market trends that reduce the value of our solutions.
We often compete with our OEM customers' own internal software engineering groups. The size and competency of these groups may create additional competition.
The development and acquisition of additional products, services and technologies, and the improvement of our existing products and services, require significant investments in research and development. For example, our current portfolio is in various stages of development and may require significant further research, development, pre-clinical or clinical testing, regulatory approval and commercialization. If we fail to successfully sell new products and update existing products, our operating results may decline as existing products reach the end of their commercial life cycles.
If We Are Unable to Successfully Identify or Effectively Integrate Acquisitions, our Financial Results may be Adversely Affected.
We have in the past and may in the future acquire and make investments in companies, products or technologies that we believe complement or expand our existing business and assist in quickly bringing new products to market. There can be no assurance that we will be able to identify suitable candidates for successful acquisitions at acceptable valuations. In addition, our ability to achieve the expected returns and synergies from past and future acquisitions depends in part upon our ability to integrate the offerings, technology, administrative functions, and personnel of these businesses into our business in an efficient and effective manner. We cannot predict whether we will be successful in integrating acquired businesses or that our acquired businesses will perform at anticipated levels. In addition, our past and future acquisitions may subject us to unanticipated risks or liabilities, or disrupt operations and divert management's attention from day-to-day operations. In addition, we may use our capital stock to acquire acquisition targets, which could be dilutive to the existing stockholders and cause a decline in the price of our common stock.
In making or attempting to make acquisitions or investments, we face a number of risks, including risks related to:
Identifying suitable candidates, performing appropriate due diligence, identifying potential liabilities and negotiating acceptable terms;
The potential distraction of our management, diversion of our resources and disruption to our business;
Retaining and motivating key employees of the acquired companies;
Managing operations that are distant from our current headquarters and operational locations;
Entering into industries or geographic markets in which we have little or no prior experience;
Competing for acquisition opportunities with competitors that are larger or have greater financial and other resources than us;
Accurately forecasting the financial impact of a transaction;
Assuming liabilities of acquired companies, including existing or potential litigation related to the operation of the business prior to the acquisition;
Reducing our working capital and hindering our ability to expand or maintain our business, if acquisitions are made using cash;
Maintaining good relations with the customers and suppliers of the acquired company; and
Effectively integrating acquired companies and achieving expected synergies.
In addition, any acquired business, products or technologies may not generate sufficient revenue and net income to offset the associated costs of such acquisitions, and such acquisitions could result in other adverse effects.
Moreover, from time to time, we may enter into negotiations for the acquisition of businesses, products or technologies but be unable or unwilling to consummate the acquisitions under consideration. This can be expensive and could cause significant diversion of managerial attention and resources.
We have Incurred and may Continue to Incur Costs Associated with Acquisition Activities.
In the years ended December 31, 2011, 2010 and 2009, we incurred $1.6 million, $9.7 million and $1.2 million of acquisition related costs, respectively. All such direct acquisition costs are expensed as incurred by us. In addition, we often are required to incur charges to operations in the quarters following an acquisition to reflect costs associated with integrating acquired companies. We may incur additional material charges in subsequent quarters associated with acquisitions. We anticipate that our acquisition activities will require cash outflows directly related to completing acquisitions as well as costs related to integration efforts. If the benefits of an acquisition do not exceed the costs of integrating the businesses, our financial results may be adversely affected.
A Portion of our Business Relies Upon a Network of Independent Contractors and Distributors Whose Actions could have an Adverse Effect on our Business.
We obtain some critical information from independent contractors. In addition, we rely on a network of VARs and distributors to sell our offerings in locations where we do not maintain a sales office or direct sales team. These independent contractors, VARs and distributors are not our employees. As a result, we have limited ability to monitor and direct their activities. The loss of a significant number of these independent contractors, VARs or distributors could disrupt our sales, marketing and distribution efforts. Furthermore, if any actions or business practices of these individuals or entities violate our policies or procedures or otherwise are deemed inappropriate or illegal, we could be subject to litigation, regulatory sanctions or reputation damage, any of which could adversely affect our business and require us to terminate relationships with them.
Our Investments in Technology may not be Sufficient and may not Result in an Increase in our Revenues or Decrease in our Operating Costs.
As the technological landscape continues to evolve, it may become increasingly difficult for us to make timely, cost-effective changes to our offerings in a manner that adequately differentiates them from those of our competitors. We cannot provide any assurance that our investments have been or will be sufficient to maintain or improve our competitive position or that the development of new or improved technologies and products by our competitors will not have a material adverse effect on our business.
Our Performance and Future Success Depends on our Ability to Attract, Integrate and Retain Qualified Technical, Managerial and Sales Personnel.
We are dependent, in part, upon the services of our senior executives and other key business and technical personnel. We do not currently maintain key-man life insurance on our senior executives. The loss of the services of any of our senior executives or other key employees could have a material adverse effect on our business. Our commercial success will depend upon, among other things, the successful recruiting, training and retention of highly skilled technical, managerial and sales personnel with experience in similar business activities. Competition for the type of highly skilled individuals that we seek is intense. We may not be able to retain existing key employees or be able to find, attract and retain skilled personnel on acceptable terms.
We may not be Able to Adequately Protect our Intellectual Property Rights or may be Accused of Infringing Intellectual Property Rights of Third Parties.
We regard our patents, trademarks, service marks, copyrights, trade secrets, proprietary technology and similar intellectual property as important to our success. We rely on trademark, copyright and patent law, trade secret protection and confidentiality and/or license agreements with employees, customers and others to protect our proprietary rights. Our U.S. patents may not provide us with a competitive advantage or may be challenged by third parties. Further, effective intellectual property protection may not be available in every country in which our products and services are available. We also may not be able to acquire or maintain appropriate intellectual property rights in all countries where we do business.
We may not be able to discover or determine the extent of any unauthorized use of our intellectual property and proprietary rights. Third parties that license our proprietary rights also may take actions that diminish the value of these rights. Any claims of alleged infringement of the intellectual property rights of third parties, whether or not meritorious, may result in the expenditure of significant financial and managerial resources. If we are found liable for infringement, we may be required to pay damages or cease making or selling certain products. We may need to obtain licenses from third parties who allege that we have infringed on their rights, but such licenses may not be available on terms acceptable to us or at all. In addition, we may not be able to obtain or utilize on favorable terms, or at all, licenses or other rights with respect to intellectual property we do not own in providing services under commercial agreements. These risks have been amplified by the increase in third parties whose sole or primary business is to assert such claims.
We also rely on proprietary know how and confidential information and employ various methods, such as entering into confidentiality and non-compete agreements with our current employees and with certain third parties to whom we have divulged proprietary information to protect the processes, concepts, ideas and documentation associated with our solutions. Such methods may not afford sufficient protection, and we may not be able to protect trade secrets adequately or ensure that other companies would not acquire information that we consider proprietary, particularly in foreign countries where the laws may not protect our proprietary rights as fully as in the U.S. Our inability to protect our proprietary technology could result in competitive harm that could adversely affect our business.
We have Foreign Exchange Rate Risk.
Our international operating results are exposed to foreign exchange rate fluctuations. While the functional currency of most of our international operations is the U.S. Dollar, certain account balances are maintained in the local currency. Upon remeasurement of such accounts or through normal operations, results may differ materially from expectations, and we may record significant gains or losses on the remeasurement of such balances. As we expand international operations, our exposure to exchange rate fluctuations may increase.
We may not be Successful in our Efforts to Expand into International Markets.
Our international activities are material to our revenues and profits, and we plan to further expand internationally. In 2011, our international revenues were $20.5 million, or about 9% of total revenues. We have limited experience operating in international markets and may not benefit from any first-to-market advantages or otherwise succeed. It is costly to establish, develop and maintain international operations and websites and promote our brand internationally. Our international operations may not be profitable on a sustained basis.
In addition to risks described elsewhere in this section, our international sales and operations are subject to a number of risks, including:
Local economic and political conditions;
Foreign government regulation of healthcare and government reimbursement of health services;
Local restrictions on sales or distribution of certain products or services and uncertainty regarding liability for products and services;
Local import, export or other business licensing requirements;
Local limitations on the repatriation and investment of funds and foreign currency exchange restrictions;
Shorter payable and longer receivable cycles and the resultant negative impact on cash flow;
Local laws and regulations regarding data protection, privacy, network security and restrictions on pricing;
Difficulty in staffing, developing and managing foreign operations as a result of distance, language and cultural differences;
Different employee/employer relationships and the existence of workers' councils and labor unions;
Laws and policies of the U.S. and other jurisdictions affecting trade, foreign investment, loans and taxes; and
Geopolitical events, including war and terrorism.
If our New and Existing Products, Including Product Upgrades, and Services do not Achieve and Maintain Sufficient Market Acceptance, our Business, Financial Condition, Cash Flows, Revenues, and Operating Results could Suffer.
The success of our business depends and will continue to depend in large part on the market acceptance of:
Our existing products and services;
Our new products and services, and
Enhancements to existing products, support and services.
There can be no assurance that customers will accept any of these products, product upgrades, support or services. In addition, even if customers accept these products and services initially, we cannot be assured that they will continue to purchase our products and services at levels that are consistent with, or higher than, past quarters. Customers may significantly reduce their relationships with us or choose not to expand their relationship with us. In addition, any pricing strategy that we implement for any of our products, product upgrades, or services may not be economically viable or acceptable to our target markets. Failure to achieve or to sustain significant penetration in our target markets with respect to any of these products, product upgrades, or services could have a material adverse effect on our business.
Achieving and sustaining market acceptance for these products, product upgrades and services is likely to require substantial marketing and service efforts and the expenditure of significant funds to create awareness and demand by participants in the healthcare industry. In addition, deployment of new or newly integrated products or product upgrades may require the use of additional resources for training our existing sales force and customer service personnel and for hiring and training additional sales and customer service personnel. There can be no assurance that the revenue opportunities for new products, product upgrades and services will justify the amounts that we spend for their development, marketing and rollout.
If we are unable to sell new and next-generation software products to healthcare providers that are in the market for healthcare information and/or image management systems, such inability will likely have a material adverse effect on our business, financial condition, cash flows, revenues and operating results, If anticipated software sales and services do not materialize, or if we lose customers or experience significant declines in orders from customers, our revenues would decrease over time due to the combined effects of attrition of existing customers and a shortfall in new client additions.
If we Fail to Manage Future Growth Effectively, we may be Unable to Execute our Business Plan, Maintain High Levels of Service or Address Competitive Challenges Adequately.
We plan to expand our business. We anticipate that this expansion will require substantial management effort and significant additional investment in infrastructure, service offerings and service center expansion. In addition, we will be required to continue to improve our operational, financial and management controls and our reporting procedures. Our future growth will place a significant strain on managerial, administrative, operational, financial and other resources. If we are unable to manage growth successfully, our business will be harmed.
Litigation or Regulatory Actions could Adversely Affect our Financial Condition.
As a result of lawsuits and regulatory matters, including the matters discussed in Item 3, Legal Proceedings in this Annual Report on Form 10-K, we have incurred and may continue to incur substantial expenses. In addition, we are, from time to time, parties to legal proceedings, lawsuits and other claims incident to our business activities. Such matters may include, among other things, assertions of contract breach or intellectual property infringement, claims for indemnity arising in the course of our business and claims by persons whose employment has been terminated. Such matters are subject to many uncertainties and outcomes are not predictable. The defense of these actions may be both time consuming and expensive. We are unable to estimate the ultimate aggregate amount of monetary liability, amounts which may be covered by insurance or recoverable from third parties, or the financial impact with respect to these matters as of the date of this Annual Report on Form 10-K. If any of these legal proceedings were to result in an unfavorable outcome, it could have a material adverse effect on our business, financial position and results of operations.
We may be Subject to Product Liability Claims if People or Property are Harmed by the Products and Services that we Sell.
Some of the products we sell or manufacture may expose us to product liability claims relating to personal injury, death or environmental or property damage and may require product recalls or other actions. Certain third parties, primarily our customers, also sell products or services using our products. This may increase our exposure to product liability claims. Although we maintain liability insurance, we cannot be certain that coverage will be adequate for liabilities actually incurred or that insurance will continue to be available on economically reasonable terms or at all. In addition, some of our agreements with vendors and sellers do not indemnify us from product liability. Even unsuccessful claims could result in substantial costs and diversion of management resources. A claim brought against us that is uninsured or under-insured could harm our business, financial condition and results of operations.
We Provide Customers with Certain Warranties that could Result in Higher Costs than Anticipated.
Software products such as ours that are used in a wide range of clinical and health information systems settings may contain a number of errors or "bugs," especially early in their product life cycle. Our products include clinical information systems used in patient care settings where a low tolerance for errors or bugs exists. Testing of products is difficult due to the wide range of environments in which systems are installed. The discovery of defects or errors in our software products or in our implementation of integrated solutions may cause delays in product delivery, poor client references, payment disputes, contract cancellations, harm to our reputation, product liability claims or additional expenses and payments to rectify problems. Furthermore, our customers might use our software together with products from other companies or those that they have developed internally. As a result, when problems occur, it might be difficult to identify the source of the problem. Even when our software does note cause these problems, the existence of these errors might cause us to incur significant costs, divert the attention of our technical personnel from our research and development efforts, impact our reputation and cause significant customer relations problems. Any of those factors may result in delayed acceptance of, or the return of, our software products.
We Depend on Licenses from Third Parties for Rights to Some Technology we use, and if we are Unable to Continue these Relationships and Maintain our Rights to this Technology, our Business could Suffer.
Some of the technology used in our software depends upon licenses from third party vendors. These licenses typically expire within one to five years, can be renewed only by mutual consent and may be terminated if we breach the license and fail to cure the breach within a specified period of time. We may not be able to continue using the technology made available to us under these licenses on commercially reasonable terms or at all. As a result, we may have to discontinue, delay or reduce software shipments until we obtain equivalent technology, if available, which could hurt our business. Most of our third party licenses are nonexclusive. Our competitors may obtain the same right to use any of the technology covered by these licenses and use the technology to compete directly with us. In addition, if our vendors choose to discontinue support of the licensed technology in the future or are unsuccessful in their continued research and development efforts, particularly with regard to the Microsoft Windows/Intel platform on which most of our products operate, we may not be able to modify or adapt our own software. This could have an adverse effect on our business.
We are Subject to Government Regulation, Changes to which could Negatively Impact our Business.
We are subject to regulation in the U.S. by the Food and Drug Administration (FDA), including periodic FDA inspections, in Canada under Health Canada's Medical Devices Regulations, and in other countries by corresponding regulatory authorities. We may be required to undertake additional actions in the U.S. to comply with the Federal Food, Drug and Cosmetic Act (FDCA Act), regulations promulgated under the FDCA Act, and any other applicable regulatory requirements. For example, the FDA has increased its focus on regulating computer software intended for use in a healthcare setting. If our software solutions are deemed to be actively regulated medical devices by the FDA, we could be subject to more extensive requirements governing pre- and post-marketing activities. Complying with these regulations could be time consuming and expensive, and may include:
Requiring us to receive FDA clearance of a pre-market notification submission demonstrating substantial equivalence to a device already legally marketed, or to obtain FDA approval of a pre-market approval application establishing the safety and effectiveness of the software;
Requiring us to comply with rigorous regulations governing the pre-clinical and clinical testing, manufacture, distribution, labeling and promotion of medical devices; and
Requiring us to comply with the FDCA Act regarding general controls, including establishment registration, device listing, compliance with good manufacturing practices, reporting of specified malfunctions and adverse device events.
Similar obligations may exist in other countries in which we do business, including Canada. Any failure by us to comply with other applicable regulatory requirements, both domestic and foreign, could subject us to a number of enforcement actions, including warning letters, fines, product seizures, recalls, injunctions, total or partial suspensions of production, operating restrictions or limitations on marketing, refusals of the government to grant new clearances or approvals, withdrawals of marketing clearances or approvals and civil and criminal penalties.
Changes in Federal and State Regulations Relating to Patient Data could Depress the Demand for our Software and Impose Significant Software Redesign Costs.
Federal regulations under the Health Insurance Portability and Accountability Act (HIPAA) impose national health data standards on healthcare providers that conduct electronic health transactions, healthcare clearinghouses that convert health data between HIPAA compliant and non-compliant formats and health plans. Collectively, these groups are known as covered entities. HIPAA regulations prescribe transaction formats and code sets for electronic health transactions, protect individual privacy by limiting the uses and disclosures of individually identifiable health information and require covered entities to implement administrative, physical and technological safeguards to ensure the confidentiality, integrity, availability and security of individually identifiable health information in electronic form. Although we are not a covered entity, most of our customers are, and they require that our software and services adhere to HIPAA regulations. Any failure or perceived failure of our software or services to meet HIPAA regulations, or breach of our network security, could adversely affect demand for our software and services and potentially require us to expend significant capital, research and development and other resources to modify our software or services to address the privacy and security requirements of our clients.
States and foreign jurisdictions have adopted, or may adopt, privacy standards that are similar to or more stringent than the federal HIPAA privacy regulations. This may lead to different restrictions for handling individually identifiable health information. As a result, our customers may demand IT solutions and services that are adaptable to reflect different and changing regulatory requirements, which could increase our development costs. In the future, federal, state or foreign governmental authorities may impose new data security regulations or additional restrictions on the collection, use, transmission and other disclosures of health information. We cannot predict the potential impact that these future rules may have on our business; however, the demand for our software and services may decrease if we are not able to develop and offer software and services that can address the regulatory challenges and compliance obligations facing our clients.
Healthcare Reform Legislation may have a Negative Impact on our Business. Among other things, Reductions in Medicare and Medicaid Reimbursement Rates for Imaging Procedures and Professional Services could Negatively Affect Revenues of our Hospital and Imaging Clinic Customers, which could Reduce our Customers' Ability to Purchase our Software and Services.
The U.S. Congress has enacted far-reaching health system reform legislation that could have a negative impact on our business. While the impact of the legislation is difficult to predict, the legislation will increase pressure to control spending in government programs (e.g., Medicare and Medicaid) and by third party payors. The ability of customers to obtain appropriate reimbursement for their services from these programs and payors is critical to the success of our company. For example, changes in the equipment utilization rate, once fully implemented, have the potential to decrease technical reimbursements for radiology procedures, and could have a particularly negative impact on hospitals and imaging clinics in rural regions of the country where utilization rates are naturally lower. A second significant potential reimbursement change relates to the Sustainable Growth Rate (SGR) component of the Medicare Physician Fee Schedule. The SGR is part of the update factor process used to set the annual rate of growth in allowed reimbursable medical expenditures, and is determined by a formula specified by Congress. Because the annual calculation of the SGR would have led to reimbursement reductions that Congress found unacceptable, Congress has interceded to delay the implementation of this statutory SGR update factor. While these changes have provided temporary reimbursement relief to healthcare providers and us, because of the significant budgetary impacts, Congress has retained the SGR formula, thereby allowing annual unimplemented payment reductions to accumulate in the Medicare statute. The Congress and the Obama administration are currently considering legislation to attempt to fix or delay this problem, but the prospects for enactment remain uncertain. The changes being considered have the potential to negatively impact the professional component of reimbursement.
Changes related to the equipment utilization assumption and the SGR calculation could result in a reduction in software and service procurement of our customers, and have a material adverse effect on our revenues and operating results.
There are a Limited Number of Stockholders who have Significant Control over our Common Stock, Allowing them to have Significant Influence over the Outcome of all Matters Submitted to Stockholders for Approval, which may Conflict with our Interests and the Interests of other Stockholders.
Our directors, officers and principal stockholders (stockholders owning 10% or more of our common stock) beneficially owned approximately 35.6 million, or 37.4%, of the outstanding shares of common stock and stock options that could have been converted to common stock at December 31, 2011, and such stockholders will have significant influence over the outcome of all matters submitted to our stockholders for approval, including the election of directors and other corporate actions. As of December 31, 2011, Merrick and its affiliates owned approximately 35.2% of our common stock. The influence of our large stockholders could impact our business strategy and also have the effect of discouraging others from attempting us to take over, thereby increasing the likelihood that the market price of our common stock will not reflect a premium for control.
Our Large Stockholders may have Interests that Differ from other Stockholders.
Merrick and its affiliates, including Merrick Ventures, beneficially own, as of December 31, 2011, 35.2% of our outstanding common stock. Michael W. Ferro, Jr., our Chairman of the Board, and trusts for the benefit of Mr. Ferro's family members beneficially own a majority of the equity interest in Merrick. Mr. Ferro also serves as the chairman and chief executive officer of Merrick and the chairman and chief executive officer of Merrick Ventures. Accordingly, Mr. Ferro indirectly owns or controls all of the shares of our common stock owned by Merrick and Merrick Ventures. Due to its stock ownership, Merrick has significant influence over our business, including the election of our directors.
Effective as of January 1, 2009, we entered into a consulting agreement with Merrick. Services provided by Merrick under the consulting agreement include financial analysis and strategic planning. Effective January 1, 2010, we entered into an amendment to extend the term of the consulting agreement through December 31, 2011, and modified the payment terms from a flat fee arrangement per quarter to a per transaction or success based arrangement. On February 24, 2012, we entered into a second amendment, effective January 3, 2012, to extend the term of the consulting agreement with Merrick through December 31, 2013, and modified the fee structure to include a quarterly retainer in the amount of $150,000. This is in addition to the per transaction or success based arrangement that exists. Further, the second amendment includes a modification of the success payment in the event of a sale, by including a payment of 2% of the total consideration received if the total consideration is greater than $1 billion (the agreement still allows for a 1% success fee if under $1 billion). The cost of this consulting agreement in 2011, 2010 and 2009 was $1.2 million, $2.1 million and $0.5 million, respectively.
In April 2010, Merrick purchased 10,000 shares of our Series A Non-Voting Preferred Stock, par value $0.01 per share (Series A Preferred Stock) and 1,800,000 shares of our common stock for an aggregate purchase price of $10.0 million. These shares were purchased by Merrick at the same price per share as paid by the other investors in the transaction. Merrick also purchased, at the same price per Note as the other investors, $5.0 million of the $200.0 million of Notes that we issued in April 2010 to complete our acquisition of AMICAS,
On July 30, 2010, we acquired substantially all of the Olivia Greets assets from Merrick Healthcare Solutions, LLC (Merrick Healthcare), an affiliate of Merrick Ventures, for 500,000 shares of our common stock.Merrick Healthcare transferred these shares of common stock to Merrick Ventures after the expiration of the one-year trading restriction. As a result of the Olivia Greets acquisition, the value-added reseller agreements that we entered into with Merrick Healthcare in March 2009 and March 2010 were terminated.
On June 20, 2011, Merrick purchased $5.0 million of the $52.0 million of additional Notes that we issued on June 20, 2011. Merrick purchased the Notes at the same purchase price per Note as the other investors in the transaction. We used the proceeds from this private placement of additional Notes to redeem and retire all outstanding shares of our Series A Preferred Stock for approximately $1,176 per share, including $11.8 million to redeem and retire the 10,000 shares of our Series A Preferred Stock held by Merrick.
In December 2011, we entered into a master services agreement with higi llc ("higi"), pursuant to which we agreed to provide higi with certain professional services, including software engineering design, application and web portal development for a fixed payment of $0.7 million. We recognized $0.5 million in revenue and were paid $0.5 million in 2011 under this Agreement, with the remaining fees to be earned in 2012. In addition, the master services agreement granted higi certain branding rights related to our health station business and requires higi to pay a fixed annual fee of $100 per station to us for each station that is branded with higi's trademarks and that includes higi's software, images and/or other intellectual property. No such stations are currently in service, although a pilot program for higi-branded stations may be launched during 2012. The agreement has an initial term of one year, with continuing renewal rights, and is subject to termination on 120 days notice. Merrick Ventures owns over 75% of higi's outstanding equity interests and Mr. Ferro is higi's Chairperson and Founder.
On February 24, 2012, we entered into an Assignment Agreement with Merrick Ventures under which Merge will sublease from Merrick approximately 4,700 square feet located at 200 E. Randolph Street, 22nd floor, Chicago, IL at an annual rental rate of $78,000, terminating on December 13, 2013. The rent will be paid to Merrick monthly and is exactly the same rate as Merrick currently pays under its lease. Under the Assignment, Merge will also pay approximately $70,000 (which represents the book value) for all fixtures, leasehold improvements and furniture located in the space.
As a result of these relationships, the interests of Merrick and its affiliates may differ from those of our other stockholders. Merrick Ventures and its affiliates are in the business of making investments in companies and maximizing the return on those investments. They currently have, and may from time to time in the future acquire, interests in businesses that directly or indirectly compete with certain aspects of our business or that supply us with goods and services. Merrick and its affiliates may also pursue acquisition opportunities that may be complementary to our business and, as a result, those acquisition opportunities may not be available to us. Merrick's significant ownership of our voting stock will enable it to influence or effectively control us.
The Market Price of our Common Stock may Decline as a Result of Acquisitions.
The market price of our common stock may decline after acquisitions are completed. Some of the issues that we could face are:
The integration of an acquired business is unsuccessful or takes longer or is more disruptive than anticipated;
We do not achieve the expected synergies or other benefits of the acquisition as rapidly or to the extent anticipated, if at all;
The effect of the acquisition on our financial results does not meet the expectations of Merge, financial analysts or investors; or
After the acquisition, the business does not perform as anticipated.
In connection with the acquisitions of etrials and Confirma in the third quarter of 2009, we issued 9.4 million additional shares of our common stock. We did not use our common stock as consideration for the AMICAS acquisition in April of 2010, but we did issue 7.5 million shares of our common stock to the purchasers of our new class of Preferred Stock that funded a portion of the purchase price for the AMICAS acquisition. In 2011, we issued 6.8 million additional shares of our common stock in connection with one acquisition completed in 2010 and three other acquisitions completed in 2011. The increase in the number of outstanding shares of our common stock may lead to sales of such shares or the perception that such sales may occur, either of which may adversely affect the market price of our common stock.
Shares of our Common Stock Eligible for Public Sale may have a Negative Impact on the Market Price of our Common Stock, and Dilute our Stockholders' Percentage Ownership and Voting Power.
Sales of a substantial number of shares of our common stock in the public market, or the perception that these sales may occur, could cause the market price of our common stock to decline. In addition, the sale of these shares could impair our ability to raise capital, should we wish to do so, through the sale of additional common or preferred stock. As of December 31, 2011, we had approximately 90.9 million shares of common stock outstanding. In addition, as of December 31, 2011, we had outstanding options to purchase approximately 9.2 million shares of our common stock, of which approximately 4.2 million options were then exercisable. Future sales of shares of our common stock by existing holders of our common stock or by holders of outstanding options, upon the exercise thereof, could have a negative impact on the market price of our common stock. As additional shares of common stock become available for sale in the public market, due to the exercise of options or the issuance of shares as a result of acquisitions, the market supply of shares of common stock will increase, which could also decrease the market price.
We are unable to estimate the number of shares that may be sold because this will depend on the market price for our common stock, the personal circumstances of the sellers and other factors. Any sale of substantial amounts of our common stock or other securities in the open market may adversely affect the market price of such securities and may adversely affect our ability to obtain future financing in the capital markets as well as create a potential market overhang.
Because we do not Intend to Pay Cash Dividends, Stockholders will Benefit from an Investment in our Stock Only if it Appreciates in Value.
We currently intend to retain future earnings, if any, to fund future growth, and do not expect to pay any cash dividends in the foreseeable future. As a result, the success of an investment in our common stock will depend upon any future appreciation in its value. There is no guarantee that our common stock will appreciate in value or even maintain the price at which stockholders have purchased and will purchase shares.
The Trading Price of our Common Stock has been Volatile and may Fluctuate Substantially in the Future.
The price of our common stock has been, and may continue to be, volatile. The trading price of our common stock may continue to fluctuate widely as a result of a number of factors, some of which are not in our control, including:
Our ability to meet or exceed the expectations of analysts or investors;
Changes in our forecasts or earnings estimates by analysts;
Quarter-to-quarter variations in our operating results;
Announcements regarding clinical activities or new products by us or our competitors;
General conditions in the healthcare IT industry;
Governmental regulatory action and healthcare reform measures, including changes in reimbursement rates for imaging procedures;
Rumors about our performance or software solutions;
Announcements regarding acquisitions;
Uncertainty regarding our ability to service existing debt;
Price and volume fluctuations in the overall stock market, which have particularly affected the market prices of many software, healthcare and technology companies; and
General economic conditions.
In addition, the market for our common stock may experience price and volume fluctuations unrelated or disproportionate to our operating performance. These fluctuations could have a significant impact on our business due to diminished incentives for management and diminished currency for acquisitions.
Certain Provisions of our Certificate of Incorporation, Bylaws and Delaware law could make a Takeover Difficult and May Prevent or Frustrate Attempts by our Stockholders to Replace or Remove our Management Team.
Various provisions contained in our certificate of incorporation and bylaws could delay or discourage some transactions involving an actual or potential change in control and may limit the ability of our stockholders to remove current management or approve transactions that our stockholders may deem to be in their best interests. For instance, we have an authorized class of 1,000,000 shares of preferred stock all of which shares are undesignated except for 50,000 shares of Series A Preferred Stock (none of which were issued and outstanding as of December 31, 2011). Shares of our authorized but unissued preferred stock may be issued by our board of directors without stockholder approval, on such terms and with such rights, preferences and designation as the board of directors may determine. Issuance of such preferred stock, depending upon the rights, preferences and designations thereof, may have the effect of delaying, deterring or preventing a change in control of us.
In addition, provisions of our certificate of incorporation and bylaws:
Require that any action required or permitted to be taken by our stockholders be effected at a duly called annual or special meeting of stockholders and may not be effected by any consent in writing;
Provide an advance written notice procedure with respect to stockholder proposals and the nomination of candidates for election as directors, other than nominations made by or at the direction of our board of directors or a committee of our board of directors;
State that special meetings of our stockholders may be called only by the chairman of our board of directors, our chief executive officer or by a majority of our board of directors then in office; and
Allow our directors to fill vacancies on our board of directors, including vacancies resulting from removal or enlargement of the board of directors.
We are also subject to provisions of Delaware corporate law which, subject to certain exceptions, will prohibit us from engaging in any "business combination" with a person who, together with affiliates and associates, owns 15% or more of our common stock for a period of three years following the date that the person came to own 15% or more of our common stock, unless the business combination is approved in a prescribed manner.
These provisions of our certificate of incorporation, bylaws and of Delaware law, may have the effect of delaying, deterring or preventing a change in control, may discourage bids for our common stock at a premium over market price and may adversely affect the market price, and the voting and other rights of the holders, of our common stock. In addition, these provisions make it more difficult to replace or remove our current management team in the event our stockholders believe this would be in our best interest and the best interests our stockholders.
Item 1B.
Item 2.
Our five largest facilities are set forth in the following table:
Square Footage
Annual Lease
(millions of $)
Chicago, Illinois
28,000 | $ | 0.5 | |||||
Daytona Beach, Florida
36,000 | 0.3 | ||||||
Hartland, Wisconsin
81,000 | 0.7 | ||||||
Mississauga, Ontario
24,000 | 0.6 | ||||||
Morrisville, North Carolina
17,000 | 0.3 |
We actively monitor our real estate needs in light of our current utilization and projected growth. We believe that we can acquire any necessary additional facility capacity on reasonably acceptable terms within a relatively short timeframe. We devote capital resources to facility improvements and expansions as we deem necessary to promote growth and most effectively serve our customers.
Item 3.
On June 1, 2009, Merge Healthcare was sued in the Milwaukee County Circuit Court, State of Wisconsin, by William C. Mortimore and David M. Noshay with respect to the separation of Mortimore's and Noshay's employment and our subsequent refusal to indemnify them with respect to litigation related to their services as officers of Merge. The plaintiffs allege that we breached their employment agreements, unreasonably refused their requests for indemnification and breached other covenants of good faith and fair dealing. The plaintiffs seek indemnification and unspecified monetary damages. Discovery in this case is on-going. On April 6, 2011, the Milwaukee County Circuit Court rendered a decision in which it concluded that Merge and Mortimore had entered into an oral employment contract on or about June 15, 2006, but the Court did not make any decision as to damages, which damages would be addressed in a later phase of the litigation. On May 9, 2011, Merge appealed the Circuit Court's decision. The appeal is ongoing and the Circuit Court litigation has been stayed pending appeal. We have retained litigation counsel, intend to continue to defend this action vigorously and have filed a counterclaim for fraud, among other claims, against both Mortimore and Noshay. We will also continue to pursue the appeal.
In January 2010, a purported stockholder class action complaint was filed in the Superior Court of Suffolk County, Massachusetts in connection with AMICAS Inc.'s (AMICAS) proposed acquisition by Thoma Bravo, LLC. A second similar action was filed in the same Court in February 2010 and consolidated with the first action. In March 2010, because AMICAS had terminated the Thoma Bravo Merger and agreed to be acquired by us, the Court dismissed the plaintiffs' claims as moot. Subsequently, counsel for the plaintiffs filed an application for approximately $5 million of attorneys' fees for its work on this case, which fee petition AMICAS opposed. We retained litigation counsel to defend against the fee petition. On December 4, 2010, the Court awarded plaintiffs approximately $3.2 million in attorneys' fees and costs. AMICAS has appealed from this judgment. We previously tendered the defense in this matter to our appropriate insurers, which provided coverage against the claims asserted against AMICAS. After receipt of the Court's attorneys' fee award decision, the insurer denied policy coverage for approximately $2.5 million of the fee award. We do not believe that the insurer's denial has merit and have retained counsel to contest it. We are vigorously asserting all of our rights under our applicable insurance policies, which we believe cover the claims and expenses incurred by AMICAS or us in connection with the fee award. On June 6, 2011, the insurer filed an action against AMICAS and Merge in U.S. District Court for the Northern District of Illinois seeking a declaration that it is not responsible for the $2.5 million portion of the judgment rendered on December 4, 2010 by the Superior Court of Suffolk County, Massachusetts. Merge filed a counterclaim seeking a declaration that the insurer must pay the full amount of the Superior Court's fee award, plus additional damages. An adverse outcome could negatively impact our financial condition and cash flow.
On February 1, 2010, Merge filed a complaint against its former CEO, Richard Linden, and its former CFO, Scott Veech, in the U.S. District for the Eastern District of Wisconsin, seeking a declaration that we do not have to indemnify either Mr. Linden or Mr. Veech for liabilities they incurred in connection with SEC investigation and enforcement actions and various securities fraud and shareholder derivative litigation. Merge also seeks to recover from both defendants all costs incurred by Merge associated with defending Mr. Linden and Mr. Veech in those prior actions. On October 15, 2010, the Court concluded that it did not have subject matter jurisdiction over Merge's claims and dismissed the claims in their entirety. The Court rendered no opinion on the merits of Merge's claims. Merge is evaluating its further options with respect to the Scott Veech matter in Wisconsin state court. On February 8, 2011, Merge filed a complaint in the U.S. District Court for the Eastern District of Wisconsin captioned Merge Healthcare Incorporated v. Richard Linden, Case no. 11-CV-001541. On May 4, 2011, Merge and Mr. Linden entered into a confidential settlement agreement resolving all claims against Mr. Linden and through which Linden agreed to issue a statement of regret and apology to Merge's Board of Directors and reimburse Merge for a portion of the Company's legal fees to defend Mr. Linden in prior legal actions. Merge believes that it has numerous meritorious claims against Mr. Veech and will continue to pursue these claims, which have not been affected by the settlement with Mr. Linden.
In August, 2010, Merge Healthcare was sued in the Northern District of Texas by the Court-appointed receiver for Stanford International Bank, Ltd. The receiver alleges that Merge was a recipient of a fraudulent conveyance as a result of a Ponzi scheme orchestrated by Robert Stanford and Stanford International Bank, Ltd. (SIBL). Merge is not alleged to have participated in the Ponzi scheme. The receiver's claims arise from the failed acquisition of Emageon, Inc. (Emageon) by Health Systems Solutions, Inc. (HSS), an affiliate of SIBL, in February 2009, which resulted in the payment of a $9 million break-up fee by HSS, which payment is alleged to have been financed by SIBL. Merge subsequently acquired Emageon as part of our AMICAS acquisition. The complaint seeks to recover the $9 million payment to Emageon, plus interest, costs, and attorneys' fees. We have retained litigation counsel and intend to vigorously defend this action. We have filed a motion to dismiss the complaint. That motion has been fully briefed, and we are awaiting a decision from the Court. An adverse outcome could negatively impact our operating results, cash flow and financial condition.
In addition to the matters discussed above, we are, from time to time, parties to legal proceedings, lawsuits and other claims incident to our business activities. Such matters may include, among other things, assertions of contract breach or intellectual property infringement, claims for indemnity arising in the course of our business and claims by persons whose employment has been terminated. Such matters are subject to many uncertainties and outcomes are not predictable. Consequently, we are unable to estimate the ultimate aggregate amount of monetary liability, amounts which may be covered by insurance or recoverable from third parties, or the financial impact with respect to these matters as of the date of this report.
Item 4.
Not applicable.
Item 5.
Our common stock trades on The NASDAQ Global Select Market (NASDAQ). The following table sets forth for the periods indicated, the high and low sale prices of our common stock as reported by the NASDAQ:
Common Stock Market Prices
4th Quarter
3rd Quarter
2nd Quarter
1st Quarter
$ | 7.16 | $ | 7.23 | $ | 6.19 | $ | 5.36 | ||||||||
$ | 4.32 | $ | 4.86 | $ | 4.55 | $ | 3.39 | ||||||||
4th Quarter
3rd Quarter
2nd Quarter
1st Quarter
$ | 4.25 | $ | 3.38 | $ | 3.16 | $ | 3.44 | ||||||||
$ | 2.84 | $ | 2.46 | $ | 1.92 | $ | 1.95 |
According to the records of American Stock Transfer & Trust Company, our registrar and transfer agent, we had 438 shareholders of record of common stock as of February 21, 2012.
Stock Price Performance Graph
The graph below compares the cumulative total return on our common stock with the Russell 2000 Index and the NASDAQ Computer Index (U.S. companies) for the period from December 31, 2006 to December 31, 2011. The comparison assumes that $100 was invested on December 31, 2006 in our common stock and in each of the comparison indices, and assumes reinvestment of dividends, where applicable. We have selected the Russell 2000 index for comparison purposes as we do not believe we can reasonably identify an appropriate peer group index. The comparisons shown in the graph below are based upon historical data. The stock price performance shown in the graph below is not indicative of, nor intended to forecast, the potential future performance of our common stock.
Merge Healthcare Incorporated (Nasdaq: MRGE)
Nasdaq Computer Index (^IXCO)
Russell 2000 Index (^RUT)
$100 | $100 | $100 |
$18 | $122 | $97 |
$20 | $65 | $63 |
$51 | $111 | $79 |
$57 | $130 | $99 |
$74 | $131 | $94 |
Dividend Policy
We are prohibited from making certain dividend payments based on the terms of our Notes. We currently do not intend to declare or pay any cash dividends on our common stock in the foreseeable future.
Recent Issuances of Unregistered Securities
In the fourth quarter of 2011, we donated 485,232 shares of our common stock with a value of approximately $1.9 million to a charitable organization. The value of the shares issued was based on the closing price of our common stock as of the transaction date, discounted based upon a one-year trading restriction.
Item 6.
The following selected historical financial data is qualified in its entirety by reference to, and should be read in conjunction with, our consolidated financial statements and the related notes thereto appearing elsewhere herein and Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in this Annual Report on Form 10-K.
Years Ended December 31,
(in thousands, except for share and per share data)
Statement of Operations Data:
Net sales
$ | 232,428 | $ | 140,332 | $ | 66,841 | $ | 56,735 | $ | 59,572 | ||||||||||
Operating income (loss)(3)
29,155 | (8,524 | ) | 8,963 | (21,697 | ) | (171,238 | ) | ||||||||||||
Income (loss) before income taxes
(1,866 | ) | (25,162 | ) | 150 | (23,743 | ) | (171,808 | ) | |||||||||||
Income tax expense (benefit)
3,665 | (13,646 | ) | (135 | ) | (60 | ) | (240 | ) | |||||||||||
Net income (loss)
(5,531 | ) | (11,516 | ) | 285 | (23,683 | ) | (171,568 | ) | |||||||||||
Net income (loss) attributable to Merge
(5,521 | ) | (11,516 | ) | 285 | (23,683 | ) | (171,568 | ) | |||||||||||
Net income (loss) available to common shareholders
(8,674 | ) | (30,592 | ) | 285 | (23,683 | ) | (171,568 | ) | |||||||||||
Earnings (loss) per share:
$ | (0.10 | ) | $ | (0.38 | ) | $ | 0.00 | $ | (0.51 | ) | $ | (5.06 | ) | ||||||
(0.10 | ) | (0.38 | ) | 0.00 | (0.51 | ) | (5.06 | ) | |||||||||||
Weighted average shares outstanding:
86,647,097 | 80,231,427 | 60,910,268 | 46,717,546 | 33,913,379 | |||||||||||||||
86,647,097 | 80,231,427 | 62,737,821 | 46,717,546 | 33,913,379 | |||||||||||||||
December 31,
2011 | 2010 | 2009 | 2008 | 2007 | ||||||||||||||||
(in thousands)
Balance Sheet Data:
Working capital
$ | 46,020 | $ | 28,357 | $ | 18,231 | $ | 8,254 | $ | 878 | ||||||||||
Total assets
450,387 | 396,645 | 100,249 | 54,737 | 61,635 | |||||||||||||||
Long-term debt obligations
249,438 | 195,077 | - | 14,230 | - | |||||||||||||||
Shareholders' equity
92,471 | 104,806 | 68,137 | 8,841 | 24,405 |
Includes the results of AMICAS from April 28, 2010, the date of the business combination.
Includes the results of etrials and Confirma from July 20, 2009 and September 1, 2009, the respective dates of the business combinations.
For the year ended December 31, 2007, we incurred a charge of $122.4 million related to the impairment of goodwill.
Item 7.
The discussion below contains "forward-looking statements. We have used words such as "believes," "intends," "anticipates," "expects" and similar expressions to identify forward-looking statements. These statements are based on information currently available to us and are subject to a number of risks and uncertainties that may cause our actual results of operations, financial condition, cash flows, performance, business prospects and opportunities and the timing of certain events to differ materially from those expressed in, or implied by, these statements. These risks, uncertainties and other factors include, without limitation, those matters discussed in Item 1A of Part I of this Annual Report on Form 10-K. Except as expressly required by the federal securities laws, we undertake no obligation to update such factors or to publicly announce the results of any of the forward-looking statements contained herein to reflect future events, developments, or changed circumstances, or for any other reason. The following discussion should be read in conjunction with our consolidated financial statements and notes thereto appearing elsewhere in this Annual Report on Form 10-K and Item 1A, "Risk Factors".
Management's Discussion and Analysis is presented in the following order:
Revenues and Expenses
Results of Operations
Liquidity and Capital Resources
Material Off Balance Sheet Arrangements
Critical Accounting Policies
We develop software solutions that facilitate the sharing of images to create a more effective and efficient electronic healthcare experience for patients and physicians. Our solutions are designed to help solve some of the most difficult challenges in health information exchange today, such as the incorporation of medical images and diagnostic information into broader healthcare IT applications, the interoperability of proprietary software solutions, the profitability of outpatient imaging practices in the face of declining reimbursement and the ability to improve the efficiency and cost effectiveness of our customers' businesses. Our ability to innovate has driven consistent expansion of solutions and services and entry into new markets. We also look to expand through strategic acquisitions that will allow us to further expand our addressable market and customer base. During the last three years, we have expanded our product offerings through the following strategic acquisitions (the first three of which we also refer to as Significant Acquisitions):
AMICAS, Inc. (AMICAS), an image and information management solutions provider, which we acquired on April 28, 2010;
Confirma, Inc. (Confirma), a provider of computer systems for processing and presenting data from magnetic resonance imaging (MRI) studies, which we acquired on September 1, 2009;
etrials Worldwide, Inc. (etrials), a provider of clinical trials software and services, which we acquired on July 20, 2009; and
Ophthalmic Imaging Systems (OIS), one of the top providers of digital imaging and informatics solutions for ophthalmology and other medical specialties, which we acquired on August 4, 2011.
We primarily generate revenue from the sale of perpetual software licenses, upgrading and/or renewing those licenses, hardware, professional services and maintenance. Except for maintenance, these contract elements comprise the majority of non-recurring revenue. Our backlog of non-recurring revenue was $45.1 million as of December 31, 2011. Maintenance, which we typically renew annually with our customer base, is the primary component of recurring revenues. Recurring revenue also includes software licenses sold through contracts that are annually renewed and recognized ratably over the annual period (recorded as software revenue), revenues derived from SaaS offerings (recorded as professional services revenue) and Electronic Data Interchange (EDI) revenues which are recognized based on monthly transactional volumes. In 2011, recurring revenue was approximately 60% of total net sales.
Our solutions optimize processes for healthcare providers ranging in size from single-doctor practices to health systems, to the sponsors of clinical trials and medical device manufacturers. These solutions are licensed by more than 1,500 hospitals; 6,000 clinics and labs, 250 medical device manufacturers and by top pharmaceutical companies world-wide. We believe that we have an opportunity to grow revenues by expanding our solution footprint with existing customers, as only a small percent currently have more than one of our enterprise solutions. With the benefit of a broad customer base and several product lines undergoing ongoing innovation, we also believe that we are well-positioned to continue to leverage technologies into new segments where customers see value. For example, as the push for meaningful use incentives drives adoption of electronic health records, we envision this will create significant demand for our iConnect platform to image-enable those newly deployed systems.
Revenues and Expenses
The following is a brief discussion of our revenues and expenses:
Net Sales
Net sales consist of:
Software and other sales, net of estimated returns and allowances, including software and purchased component revenue recognized in sales to OEM customers, healthcare facilities and other providers;
Professional services, including hosted clinical trial SaaS offerings, installation, custom engineering services, training, consulting and project management; and
Maintenance and EDI, including software maintenance and support and EDI revenues.
Cost of Sales
Cost of sales consists of:
Software and other cost of sales, including purchased components and third-party royalties included in software and hardware sales to our customers;
Professional services cost of sales, including headcount and related costs and direct third-party costs incurred in our performance of SaaS offerings, installation, custom engineering services, training, consulting and project management;
Maintenance and EDI cost of sales, including headcount and related costs and direct third-party costs incurred to fulfill our maintenance and support obligations and to deliver EDI services; and
Depreciation and amortization, including any impairment, for amounts assessed on capital equipment used to fulfill contract obligations as well as our purchased and developed software and backlog assets. Depreciation and amortization are recorded over the respective assets' useful life. Each quarter we test our purchased and developed software for impairment by comparing its net realizable value (estimated using undiscounted future cash flows) to the carrying value of the software. If the carrying value of the software exceeds its net realizable value, we record an impairment charge in the period in which the impairment is incurred equal to the amount of the difference between the carrying value and estimated undiscounted future cash flows.
Sales and Marketing Expense
Sales and marketing expense includes the costs of our sales and marketing departments, commissions and costs associated with trade shows.
Research and Development Expense
Research and development expense consists of expenses incurred for the development of our proprietary software and technologies. The amortization of capitalized software development costs and any related impairments are included in cost of sales.
General and Administrative Expense
General and administrative expense includes costs for information systems, accounting, administrative support, management personnel, bad debt expense, legal fees and general corporate matters.
Acquisition-Related Expenses
Acquisition-related expenses are costs incurred to effect business combinations, including banking, legal, accounting, valuation and other professional or consulting fees.
Restructuring and Other Expenses
Restructuring and other expenses consist of severance to involuntarily terminated employees and relocation expenses resulting from our restructuring initiatives, loss on disposal of subsidiaries and impairment of non-cancelable building leases associated with restructuring activities.
Depreciation, Amortization and Impairment
Depreciation and amortization, including any impairment, is assessed on capital equipment, leasehold improvements and our customer relationships, trade names and non-compete agreement intangible assets. Depreciation and amortization are recorded over the respective assets' useful life. We also record impairment of these long-lived assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable based primarily upon whether expected future undiscounted cash flows are sufficient to support recovery of the assets.
Other Income (Expense)
Other income (expense) is comprised of interest income earned on cash and cash equivalent balances, interest expense, amortization of costs and discounts incurred from borrowings and issuance costs on borrowings which did not qualify for capitalization. It also includes foreign exchange gains or losses on foreign currency payables and receivables at our Nuenen, Netherlands branch and at our subsidiaries located in Europe, Israel, Canada and China. In addition, we also record any other-than-temporary impairment charges recognized on our equity investments in non-public companies in other income (expense).
Results of Operations
The following have significantly impacted the results of operations for the periods discussed herein:
In 2010 and 2011, we expanded our product offerings through the acquisitions of AMICAS and OIS, which we acquired on April 28, 2010 and August 4, 2011, respectively. As a result of the timing of the completion of these acquisitions, the comparability of the results of operations for the year ended December 31, 2011 differ significantly from the year ended December 31, 2010.
During 2009, we completed the acquisitions of Confirma and etrials, which we acquired on September 1, 2009 and July 20, 2009, respectively. The results of operations of Confirma and etrials are included in our consolidated statements of operations since the respective dates of acquisition. Together with AMICAS, we refer to these as the Significant Acquisitions. As result of the timing of the Significant Acquisitions, the results of operations for the year ended December 31, 2010 differ significantly from the year ended December 31, 2009.
We completed restructuring initiatives in August 2011 concurrent with the acquisition of OIS, in April 2010 concurrent with the acquisition of AMICAS and in July 2009 concurrent with the acquisition of etrials. These initiatives assisted in providing operational rigor to a combined, larger organization and enabled us to decrease costs as a percentage of revenue (most notably general and administrative costs).
We issued $200.0 million of Notes in April 2010 as part of the financing for the acquisition of AMICAS. The Notes were issued at 97.266% of the principal amount, are due in 2015 and bear interest at 11.75% of principal (payable on May 1st and November 1st of each year). In connection with the Notes, we incurred issuance costs of $9.0 million. The years ended December 31, 2011 and 2010 include 12 months and eight months, respectively, of interest expense and amortization of the original issuance discount and costs of the Notes, whereas the year ended December 31, 2009 includes no such expenses.
We issued additional Notes in June 2011 to redeem and retire our Series A Preferred Stock (which had been issued as part of the financing for the acquisition of AMICAS). We issued these additional $52.0 million of Notes at 103.0% of the principal amount with terms identical to the Notes issued in April 2010. We used these proceeds to retire all 41,750 outstanding shares of our Series A Preferred Stock at the face value of $41.8 million and paid cumulative dividends of $7.3 million (which were accruing at a 15% annual compounded rate). The year ended December 31, 2011 includes seven months of interest expense and amortization of the premium and certain issuance costs, whereas the years ended December 31, 2010 and 2009 include no such expenses. Also, in the year ended December 31, 2011 we incurred $3.2 million in costs related to the issuance of the additional Notes, including $1.7 million which was expensed in "other expense, net" of our statement of operations and $1.5 million which was capitalized and is being amortized into interest expense over the remaining term of the Notes.
In November 2009, we sold 9.1 million shares of common stock in a registered direct offering for aggregate net proceeds of $25.2 million which we used to repay a then-existing $15.0 million note payable (at 13% interest). This note payable was originally issued at a discount and had issuance costs, both of which were being amortized over the life of the note payable. We recorded a $3.3 million loss on early extinguishment of the $15.0 million note payable, including a prepayment penalty of $2.7 million and write-off of $0.4 million of remaining debt issuance costs and note discount.
Year Ended December 31, 2011 Compared to the Year Ended December 31, 2010
The following table sets forth selected, summarized, consolidated financial data for the periods indicated, as well as comparative data showing increases and decreases between the periods. All amounts, except percentages, are in thousands.
Years Ended December 31,
(1 | ) | 2010 |
(1 | ) | $ | % | |||||||||||||||||
Net sales:
Software and other
$ | 80,948 | 34.8 | % | $ | 42,420 | 30.2 | % | $ | 38,528 | 90.8 | % | ||||||||||||||
Professional services
41,905 | 18.0 | % | 23,175 | 16.5 | % | 18,730 | 80.8 | % | |||||||||||||||||
Maintenance and EDI
109,575 | 47.2 | % | 74,737 | 53.3 | % | 34,838 | 46.6 | % | |||||||||||||||||
Total net sales
232,428 | 100.0 | % | 140,332 | 100.0 | % | 92,096 | 65.6 | % | |||||||||||||||||
Cost of sales:
Software and other
29,090 | 35.9 | % | 13,762 | 32.4 | % | 15,328 | 111.4 | % | |||||||||||||||||
Professional services
21,134 | 50.4 | % | 15,411 | 66.5 | % | 5,723 | 37.1 | % | |||||||||||||||||
Maintenance and EDI
29,090 | 26.5 | % | 24,418 | 32.7 | % | 4,672 | 19.1 | % | |||||||||||||||||
Depreciation, amortization and impairment
9,340 | 4.0 | % | 10,972 | 7.8 | % | (1,632 | ) | -14.9 | % | ||||||||||||||||
Total cost of sales
88,654 | 38.1 | % | 64,563 | 46.0 | % | 24,091 | 37.3 | % | |||||||||||||||||
Total gross margin
143,774 | 61.9 | % | 75,769 | 54.0 | % | 68,005 | 89.8 | % | |||||||||||||||||
Gross margin by net sales category (2)
Software and other
51,858 | 64.1 | % | 28,658 | 67.6 | % | 23,200 | 81.0 | % | |||||||||||||||||
Professional services
20,771 | 49.6 | % | 7,764 | 33.5 | % | 13,007 | 167.5 | % | |||||||||||||||||
Maintenance and EDI
80,485 | 73.5 | % | 50,319 | 67.3 | % | 30,166 | 59.9 | % | |||||||||||||||||
Operating expenses:
Sales and marketing
38,800 | 16.7 | % | 20,697 | 14.7 | % | 18,103 | 87.5 | % | |||||||||||||||||
Product research and development
27,542 | 11.8 | % | 20,064 | 14.3 | % | 7,478 | 37.3 | % | |||||||||||||||||
General and administrative
32,579 | 14.0 | % | 22,012 | 15.7 | % | 10,567 | 48.0 | % | |||||||||||||||||
Acquisition-related expenses
1,614 | 0.7 | % | 9,674 | 6.9 | % | (8,060 | ) | -83.3 | % | ||||||||||||||||
Restructuring and other expenses
1,216 | 0.5 | % | 5,006 | 3.6 | % | (3,790 | ) | -75.7 | % | ||||||||||||||||
Depreciation, amortization and impairment
12,868 | 5.5 | % | 6,840 | 4.9 | % | 6,028 | 88.1 | % | |||||||||||||||||
Total operating costs and expenses
114,619 | 49.3 | % | 84,293 | 60.1 | % | 30,326 | 36.0 | % | |||||||||||||||||
Operating income (loss)
29,155 | 12.5 | % | (8,524 | ) | -6.1 | % | 37,679 | -442.0 | % | ||||||||||||||||
Other expense, net
(31,021 | ) | -13.3 | % | (16,638 | ) | -11.9 | % | (14,383 | ) | 86.4 | % | ||||||||||||||
Loss before income taxes
(1,866 | ) | -0.8 | % | (25,162 | ) | -17.9 | % | 23,296 | -92.6 | % | |||||||||||||||
Income tax expense (benefit)
3,665 | 1.6 | % | (13,646 | ) | -9.7 | % | 17,311 | -126.9 | % | ||||||||||||||||
Net loss
$ | (5,531 | ) | -2.4 | % | $ | (11,516 | ) | -8.2 | % | $ | 5,985 | -52.0 | % |
Percentages are of total net sales, except for cost of sales and gross margin, which are based upon related net sales.
Depreciation, amortization and impairment expenses are excluded from these gross margin calculations.
Net Sales
Software and Other Sales. Total software and other sales in 2011 were $80.9 million, an increase of $38.5 million, or 90.8%, from $42.4 million in 2010, primarily due to sales arising from the Significant Acquisitions, sales from new product offerings such as iConnect and meaningful use (MU) and the success of our cross-selling initiatives.
Professional Services Sales. Total professional services sales in 2011 were $41.9 million, an increase of $18.7 million, or 80.8%, from $23.2 million in 2010, primarily due to the same reasons as indicated in "software and other sales".
Maintenance and EDI Sales. Total maintenance and EDI sales in 2011 were $109.5 million, an increase of $34.8 million, or 46.6%, from $74.7 million in 2010, primarily due to the same reasons as indicated in "software and other sales" as well as maintaining a high rate of annual maintenance renewals.
Gross Margin
Gross Margin – Software and Other Sales. Gross margin on software and other sales was $51.9 million in 2011, an increase of $23.2 million, or 81.0%, from $28.7 million in 2010. Gross margin as a percentage of software and other sales decreased to 64.1% in 2011 from 67.6% in 2010, due to an increase in hardware sales, which are at lower margins than those involving software only. Hardware sales were 32% of software and other sales in 2011 compared to 23% in 2010. We expect gross margins on software and other sales to fluctuate depending on the software and hardware mix.
Gross Margin – Professional Services Sales. Gross margin on professional service sales was $20.8 million in 2011, an increase of $13.0 million, or 167.5%, from $7.8 million in 2010. Gross margin as a percentage of professional service sales increased to 49.6% in 2011 from 33.5% in 2010, primarily due to an increase in the billable utilization of our professional services resources as well as the success of our 2010 restructuring initiative. As the majority of professional services costs are fixed, we expect gross margins going forward to fluctuate depending on billable utilization of these resources.
Gross Margin – Maintenance and EDI Sales. Gross margin on maintenance and EDI sales was $80.5 million in 2011, an increase of $30.2 million, or 59.9%, from $50.3 million in 2010. Gross margin as a percentage of maintenance and EDI sales increased to 73.5% in 2011 from 67.3% in 2010, primarily due to a reduction in third party maintenance costs. We expect that our future maintenance and EDI margins will be similar to 2011.
Depreciation, Amortization and Impairment. Depreciation, amortization and impairment expense decreased $1.6 million, or 14.9%, to $9.4 million in 2011 from $11.0 million in 2010, primarily due to a $2.3 million impairment charge in 2010 related to a write off of our purchased software assets involving overlapping products, offset by an increase in amortization from purchased software assets acquired in 2010 (which had a full year of amortization in 2011) as well as those acquired in 2011.
Sales and Marketing
Sales and marketing expense increased $18.1 million, or 87.5%, to $38.8 million in 2011 from $20.7 million in 2010, primarily due to the acquisition of AMICAS. As a percentage of net sales, sales and marketing increased by 2.0% to 16.7% due to increased branding efforts, customer facing events and personnel investments in these functions.
Product Research and Development
Product research and development expense increased $7.4 million, or 37.3%, to $27.5 million in 2011 from $20.1 million in 2010 primarily due to the acquisition of AMICAS. As a percentage of net sales, product research and development decreased by 2.5% to 11.8% as we were able to leverage our innovation efforts while continuing to innovate and produce new solutions.
General and Administrative
General and administrative expense increased $10.6 million, or 48.0%, to $32.6 million in 2011 from $22.0 million in 2010, primarily due to the acquisition of AMICAS. As a percentage of net sales, general and administrative expenses decreased by 1.7% to 14.0% as a result of our 2010 cost saving initiatives, offset by ongoing legal expenses incurred in the normal course of business.
Acquisition-Related Expenses
Acquisition-related expenses are costs incurred to effect business combinations, including banking, legal, accounting, valuation and other professional or consulting fees. In 2011, we incurred $1.6 million of such expenses, primarily related to our acquisition of OIS. In 2010, we incurred $9.7 million of such expenses primarily related to our acquisition of AMICAS.
Restructuring and Other Expenses
Restructuring and other expenses consist primarily of severance to involuntarily terminated employees and relocation of certain employees resulting from our restructuring initiatives and abandonment of non-cancelable building leases associated with restructuring activities. In 2011, we incurred $1.2 million of such expenses primarily related to the initiative completed concurrent with the acquisition of OIS. In 2010, we incurred $5.0 million of such expenses, primarily related to the reorganization of our business concurrent with the acquisition of AMICAS.
Depreciation, Amortization and Impairment
Depreciation and amortization expense increased $6.0 million, or 88.1%, to $12.8 million in 2011 from $6.8 million in 2010, primarily due to the acquisition of AMICAS as well as a $2.8 million charge for the impairment of trade names associated with certain products upon completion of a product rebranding initiative in the second quarter of 2011.
Other Expense, Net
Net other expense increased $14.4 million to $31.0 million in 2011 compared to $16.6 million of net expense in 2010. The expense in 2011 includes $29.1 million of interest expense and amortization of issuance costs and note discount associated with our Notes and $1.7 million in expense related to the additional $52 million in Notes issued in June 2011. In 2010, we incurred $17.3 million of interest expense and amortization of issuance costs and note discount associated with the Notes.
Income Tax Expense (Benefit)
In 2011, we recorded income tax expense of $3.7 million compared to a $13.6 million income tax benefit recorded in 2010. The tax expense in 2011 resulted from profitable Canadian operations, state income taxes, and the deferred effect of tax deductible goodwill amortization. Only the state income taxes resulted in cash tax payments. The tax benefit in 2010 resulted from the release of $14.1 million of valuation allowance that was previously established for the Canadian operations. Our expected effective income tax rate is volatile and may move up or down with changes in, among other items, operating income and the results of changes in tax law and regulations of the U.S. and the foreign jurisdictions in which we operate.
Year Ended December 31, 2010 Compared to the Year Ended December 31, 2009
The following table sets forth selected, summarized, consolidated financial data for the periods indicated, as well as comparative data showing increases and decreases between the periods. All amounts, except percentages, are in thousands.
Years Ended December 31,
(1 | ) | 2009 |
(1 | ) | $ | % | |||||||||||||||||||
Net sales:
Software and other
$ | 42,420 | 30.2 | % | $ | 33,037 | 49.4 | % | $ | 9,383 | 28.4 | % | ||||||||||||||||
Professional services
23,175 | 16.5 | % | 11,830 | 17.7 | % | 11,345 | 95.9 | % | |||||||||||||||||||
Maintenance and EDI
74,737 | 53.3 | % | 21,974 | 32.9 | % | 52,763 | 240.1 | % | |||||||||||||||||||
Total net sales
140,332 | 100.0 | % | 66,841 | 100.0 | % | 73,491 | 109.9 | % | |||||||||||||||||||
Cost of sales:
Software and other
13,762 | 32.4 | % | 3,730 | 11.3 | % | 10,032 | 269.0 | % | |||||||||||||||||||
Professional services
15,411 | 66.5 | % | 6,731 | 56.9 | % | 8,680 | 129.0 | % | |||||||||||||||||||
Maintenance and EDI
24,418 | 32.7 | % | 5,593 | 25.5 | % | 18,825 | 336.6 | % | |||||||||||||||||||
Depreciation, amortization and impairment
10,972 | 7.8 | % | 3,323 | 5.0 | % | 7,649 | 230.2 | % | |||||||||||||||||||
Total cost of sales
64,563 | 46.0 | % | 19,377 | 29.0 | % | 45,186 | 233.2 | % | |||||||||||||||||||
Total gross margin
75,769 | 54.0 | % | 47,464 | 71.0 | % | 28,305 | 59.6 | % | |||||||||||||||||||
Gross margin by net sales category (3)
Software and other
28,658 | 67.6 | % | 29,307 | 88.7 | % | (649 | ) | -2.2 | % | ||||||||||||||||||
Professional services
7,764 | 33.5 | % | 5,099 | 43.1 | % | 2,665 | 52.3 | % | |||||||||||||||||||
Maintenance and EDI
50,319 | 67.3 | % | 16,381 | 74.5 | % | 33,938 | 207.2 | % | |||||||||||||||||||
Operating expenses:
Sales and marketing
20,697 | 14.7 | % | 9,203 | 13.8 | % | 11,494 | 124.9 | % | |||||||||||||||||||
Product research and development
20,064 | 14.3 | % | 10,689 | 16.0 | % | 9,375 | 87.7 | % | |||||||||||||||||||
General and administrative
22,012 | 15.7 | % | 13,005 | 19.5 | % | 9,007 | 69.3 | % | |||||||||||||||||||
Acquisition-related expenses
9,674 | 6.9 | % | 1,225 | 1.8 | % | 8,449 |
(2 | ) | ||||||||||||||||||
Restructuring and other expenses
5,006 | 3.6 | % | 1,613 | 2.4 | % | 3,393 | 210.4 | % | |||||||||||||||||||
Depreciation and amortization
6,840 | 4.9 | % | 2,766 | 4.1 | % | 4,074 | 147.3 | % | |||||||||||||||||||
Total operating costs and expenses
84,293 | 60.1 | % | 38,501 | 57.6 | % | 45,792 | 118.9 | % | |||||||||||||||||||
Operating income (loss)
(8,524 | ) | -6.1 | % | 8,963 | 13.4 | % | (17,487 | ) | -195.1 | % | |||||||||||||||||
Other expense, net
(16,638 | ) | -11.9 | % | (8,813 | ) | -13.2 | % | (7,825 | ) | 88.8 | % | ||||||||||||||||
Income (loss) before income taxes
(25,162 | ) | -17.9 | % | 150 | 0.2 | % | (25,312 | ) |
(2 | ) | ||||||||||||||||
Income tax benefit
(13,646 | ) | -9.7 | % | (135 | ) | -0.2 | % | (13,511 | ) |
(2 | ) | |||||||||||||||
Net income (loss)
$ | (11,516 | ) | -8.2 | % | $ | 285 | 0.4 | % | $ | (11,801 | ) |
(2 | ) |
Percentages are of total net sales, except for cost of sales and gross margin, which are based upon related net sales.
NM denotes percentage is not meaningful.
Depreciation, amortization and impairment expenses are excluded from these gross margin calculations.
Net Sales
Software and Other Sales. Total software and other sales in 2010 were $42.4 million, an increase of $9.4 million, or 28.4%, from $33.0 million in 2009, primarily due to sales arising from the Significant Acquisitions.
Professional Services Sales. Total professional services sales in 2010 were $23.2 million, an increase of $11.3 million, or 95.9%, from $11.8 million in 2009, primarily due to sales arising from the Significant Acquisitions.
Maintenance and EDI Sales. Total maintenance and EDI sales in 2010 were $74.7 million, an increase of $52.7 million, or 240.1%, from $22.0 million in 2009, primarily due to sales arising from the Significant Acquisitions.
Gross Margin
Gross Margin – Software and Other Sales. Gross margin on software and other sales was $28.7 million in 2010, a decrease of $0.6 million, or 2.2%, from $29.3 million in 2009. Gross margin as a percentage of software and other sales decreased to 67.6% in 2010 from 88.7% in 2009, due to an increase in hardware sales, which are at lower margins than software only sales, as a result of the acquisition of AMICAS. Hardware sales were 23% of software and other sales in 2010 compared to 7% in 2009.
Gross Margin – Professional Services Sales. Gross margin on professional service sales was $7.8 million in 2010, an increase of $2.7 million, or 52.3%, from $5.1 million in 2009. Gross margin as a percentage of professional service sales decreased to 33.5% in 2010 from 43.1% in 2009, primarily due to the impact of our Significant Acquisitions.
Gross Margin – Maintenance and EDI Sales. Gross margin on maintenance and EDI sales was $50.3 million in 2010, an increase of $34.0 million, or 207.2%, from $16.4 million in 2009. Gross margin as a percentage of maintenance and EDI sales decreased to 67.3% in 2010 from 74.5% in 2009, primarily due to the impact of the AMICAS acquisition as such services include more third party maintenance costs. Further, prior to the acquisition of AMICAS, we did not have significant EDI sales. EDI margins are typically lower than that of maintenance.
Depreciation, Amortization and Impairment. Depreciation, amortization and impairment expense increased $7.6 million, or 230.2%, to $11.0 million in 2010 from $3.3 million in 2009, primarily due to the Significant Acquisitions. The 2010 expense also includes an impairment of purchased technology of $2.3 million as a result of decisions made related to overlapping products.
Sales and Marketing
Sales and marketing expense increased $11.5 million, or 124.9%, to $20.7 million in 2010 from $9.2 million in 2009, primarily as a result of the Significant Acquisitions. As a percentage of net sales, sales and marketing increased by 0.9% to 14.7% as a result of increases in headcount and other resources in the fourth quarter of 2010.
Product Research and Development
Product research and development expense increased $9.4 million, or 87.7%, to $20.1 million in 2010 from $10.7 million in 2009 primarily due to the Significant Acquisitions. As a percentage of net sales, product research and development decreased by 1.7% to 14.3% as a result of our cost saving initiatives to bring operational rigor to a larger organization.
General and Administrative
General and administrative expense increased $9.0 million, or 69.3%, to $22.0 million in 2010 from $13.0 million in 2009, primarily due to the Significant Acquisitions. As a percentage of net sales, general and administrative expenses decreased by 3.8% to 15.7% as a result of our cost saving initiatives to bring operational rigor to a larger organization as well as a one-time $1.3 million benefit on a negotiated settlement with former officers.
Acquisition-Related Expenses
Acquisition-related expenses are costs incurred to effect business combinations, including banking, legal, accounting, valuation and other professional or consulting fees. In 2010, we incurred $9.7 million of such expenses, primarily related to our significant acquisition of AMICAS as well as the completion of five other acquisitions. In 2009, we incurred $1.2 million of such expenses primarily related to our acquisitions of etrials and Confirma.
Restructuring and Other Expenses
Restructuring and other expenses consist primarily of severance to involuntarily terminated employees and relocation of certain employees resulting from our restructuring initiatives and abandonment of non-cancelable building leases associated with restructuring activities. In 2010, we incurred $5.0 million of such expenses primarily related to the reorganization of our business concurrent with our acquisition of AMICAS. In 2009, we incurred $1.6 million of such expenses, primarily related to the restructuring initiative announced concurrent with the acquisition of etrials and the abandonment of a portion of our leased space subsequent to the acquisition of Confirma.
Depreciation and Amortization
Depreciation and amortization expense increased $4.1 million, or 147.3%, to $6.8 million in 2010 from $2.7 million in 2009, due to depreciation and amortization on fixed assets and intangible assets acquired from Significant Acquisitions.
Other Expense, Net
Net other expense increased $7.8 million to $16.6 million in 2010 compared to $8.8 million of net expense in 2009. The expense in 2010 includes $17.3 million of interest expense and amortization of issuance costs and note discount associated with our $200.0 million of Notes issued to fund the AMICAS acquisition. The expense in 2009 includes an impairment charge of $3.6 million on an equity investment and $2.7 million of interest expense and amortization of issuance costs and note discount associated with a $15.0 million note payable and a $3.3 million loss on early extinguishment of the $15.0 million note payable (including a prepayment penalty of $2.7 million and write-off of $0.4 million of remaining debt issuance costs and note discount).
Income Tax Benefit
In 2010, we recorded income tax benefit of $13.6 million compared to an income tax benefit recorded in 2009. The tax benefit in 2010 resulted from the release of $14.1 million of valuation allowance that was previously established for the Canadian operations. Our expected effective income tax rate is volatile and may move up or down with changes in, among other items, operating income and the results of changes in tax law and regulations of the U.S. and the foreign jurisdictions in which we operate.
Liquidity and Capital Resources
Our cash and cash equivalents were $39.2 million at December 31, 2011, a decrease of approximately $1.8 million, or 4.3%, from our balance of $41.0 million at December 31, 2010. In addition, our working capital was $46.0 million at December 31, 2011, an increase of $17.6 million, or 62.3%, from our working capital of $28.4 million at December 31, 2010.
The net decrease in cash and cash equivalents (including restricted cash) of $1.8 million in 2011, and the increase in 2010 and 2009 of $21.4 million and $1.8 million, respectively, is attributed to the following factors:
Year Ended December 31,
(in millions)
Cash received from (paid for):
Issuance of debt and equity
$ | 53.6 | $ | 236.3 | $ | 25.2 | ||||||
Principal payments on notes
(4.6 | ) | - | (19.6 | ) | |||||||
Interest paid, net
(25.7 | ) | (11.9 | ) | (1.9 | ) | ||||||
Early retirement penalty on debt
- | - | (2.7 | ) | ||||||||
Debt and equity issuance costs
(3.2 | ) | (9.9 | ) | - | |||||||
Redemption of preferred stock
(41.8 | ) | - | - | ||||||||
Payment of preferred stock dividends
(7.3 | ) | - | - | ||||||||
Acquisitions, net of cash acquired
(2.9 | ) | (216.2 | ) | (2.8 | ) | ||||||
Restructuring initiatives
(1.9 | ) | (3.5 | ) | (1.9 | ) | ||||||
Acquisition related expenses
(1.8 | ) | (9.6 | ) | (1.2 | ) | ||||||
Property and equipment purchases
(1.9 | ) | (1.5 | ) | (1.1 | ) | ||||||
Sale of property
- | 6.1 | - | |||||||||
Settlements with former officers
(0.9 | ) | - | - | ||||||||
Other non-operating cash flows
0.4 | 0.6 | 0.9 | |||||||||
Business operations
36.2 | 31.0 | 6.9 | |||||||||
Increase (decrease) in cash, including restricted cash
$ | (1.8 | ) | $ | 21.4 | $ | 1.8 |
Operating Cash Flows
As set forth in the statement of cash flows included in our audited financial statements, cash provided by operating activities was $1.7 million in 2011, compared to cash provided by operating activities of $6.0 million in 2010. The net loss in 2011 of $5.5 million includes non-cash expenses of $41.2 million as well as $29.1 million in interest expense on our $252.0 million of Notes, of which $25.7 million was paid in 2011. We also paid $1.8 million in acquisition related expenses in 2011 compared to $9.6 million in 2010. Average quarterly DSO in 2011 was 96 days compared to a quarterly average of 99 days in 2010.
In addition to the payments related to restructuring initiatives as noted in the table above, we have remaining payments as of December 31, 2011 of $1.4 million.
Investing Cash Flows
Cash used in investing activities was $1.9 million in 2011, compared to cash used in investing activities of $212.1 million in 2010. In 2011, we paid $1.3 million for insignificant acquisitions, net of cash received, and purchased $2.0 million in fixed assets, offset by a $0.9 million decrease in restricted cash. In 2010, we paid $208.8 million, net of cash acquired, for our acquisition of AMICAS. We also paid $7.4 million, net of cash acquired, for other acquisitions, offset by $6.1 million in proceeds received from the sale of a facility.
Financing Cash Flows
In June 2011, we issued $52.0 million in additional Notes at 103.0% of the principal amount with terms identical to the existing Notes. Prior to issuance, we received consents from the majority of holders of existing Notes to amend the Indenture to allow us to incur the additional indebtedness. As consideration for the consents, we paid $1.5 million in consent fees from the proceeds of the Notes. The proceeds of these additional Notes were used to redeem and retire our Series A Preferred Stock at the face value of $41.8 million and to pay associated dividends of $7.3 million. In the year ended December 31, 2011, we also received $1.1 million in proceeds from the exercise of stock options and shares purchased under the employee stock purchase plan. In August 2011, we repaid $4.6 million of outstanding debt obligations assumed from our acquisition of OIS.
In April 2010, we issued 41,750 shares of preferred stock and 7,515,000 shares of common stock for $41.8 million of proceeds received. The preferred stock dividends accumulated at a rate of 15% (which compounded annually). In April 2010, we also issued $200.0 million of senior secured Notes, net of a $5.5 million discount. In order to complete the stock and debt issuances, we paid $9.9 million in issuance costs in 2010. We used the proceeds from the issuance of the Notes, preferred and common stock to fund our acquisition of AMICAS.
Contractual Obligations
Total outstanding commitments as of December 31, 2011 (in thousands), were as follows:
Payment due by period
Contractual Obligations
Less than
1 Year |
1 – 3 Years
3 – 5 Years
More than
5 Years |
Operating leases
$ | 20,457 | $ | 4,667 | $ | 4,263 | $ | 3,214 | $ | 8,313 | ||||||||||
Capital leases (including interest)
438 | 157 | 281 | - | - | |||||||||||||||
Acquisition obligation
9,706 | 4,651 | 4,782 | 273 | - | |||||||||||||||
Notes payable (including interest)
355,728 | 29,642 | 59,250 | 266,836 | - | |||||||||||||||
$ | 386,329 | $ | 39,117 | $ | 68,576 | $ | 270,323 | $ | 8,313 |
The above obligations include lease payments involving facilities that we have either ceased to use or previously abandoned.
Except for restricted cash of $0.7 million (primarily letters-of-credit related to our leased facilities) and a $0.5 million guarantee to a lender on behalf of a customer of ours at December 31, 2011, we do not have any other significant long-term obligations, contractual obligations, lines of credit, standby letters of credit, guarantees, standby repurchase obligations or other commercial commitments.
As of December 31, 2011, approximately $6.4 million of our cash balance was held by our foreign subsidiaries. We may need to accrue and pay taxes if we choose to repatriate these funds.
We believe our current cash and cash equivalent balances will be sufficient to meet our operating, financing and capital requirements through at least the next 12 months, including interest payments due under the Notes. However, any projections of future cash inflows and outflows are subject to uncertainty. In the event that it is necessary to raise additional capital to meet our short term or long term liquidity needs, such capital may be raised through additional debt, equity offerings or sale of certain assets. If we raise additional funds through the issuance of equity, equity-related or debt securities, such securities may have rights, preferences or privileges senior to those of our common stock. Furthermore, the number of shares of any new equity or equity-related securities that may be issued may result in significant dilution to existing shareholders. In addition, the issuance of debt securities could increase the liquidity risk or perceived liquidity risk that we face. We cannot, however, be certain that additional financing, or funds from asset sales, will be available on acceptable terms. If adequate funds are not available or are not available on acceptable terms, we will likely not be able to take advantage of opportunities, develop or enhance services or products or respond to competitive pressures. Any projections of future cash inflows and outflows are subject to uncertainty. In particular, our uses of cash in 2012 and beyond will depend on a variety of factors such as the costs to implement our business strategy, the amount of cash that we are required to devote to defend and address any regulatory proceedings, and potential merger and acquisition activities.
Material Off Balance Sheet Arrangements
We have no material off balance sheet arrangements.
Critical Accounting Policies
Our consolidated financial statements are impacted by the accounting policies used and the estimates, judgments, and assumptions made by management during their preparation. We base our estimates and judgments on our experience, our current knowledge (including terms of existing contracts), our beliefs of what could occur in the future, our observation of trends in the industry, information provided by our customers and information available from other sources. Actual results may differ from these estimates under different assumptions or conditions.
We have identified the following accounting policies and estimates as those that we believe are most critical to our financial condition and results of operations and that require management's most subjective and complex judgments in estimating the effect of inherent uncertainties: revenue recognition, allowance for sales returns and doubtful accounts, intangible assets and goodwill, share-based compensation expense, income taxes, guarantees and loss contingencies.
Revenue Recognition
Revenues are derived primarily from the licensing of software, sales of hardware and related ancillary products, SaaS offerings, installation and engineering services, training, consulting, and software maintenance and EDI. Inherent to software revenue recognition are significant management estimates and judgments in the interpretation and practical application of the complex rules to individual contracts. These interpretations generally would not influence the amount of revenue recognized, but could influence the timing of such revenues. In addition, revenue results are difficult to predict, and any shortfall in revenue or delay in recognizing revenue could cause our operating results to vary significantly from period to period. Significant areas of judgment include:
The determination of deliverables specified in a multiple-element arrangement and treatment as separate units of accounting;
Whether separate arrangements with the same customer executed within a short time frame of each other are a single arrangement;
The assessment of the probability of collection and the current credit worthiness of each customer since we generally do not request collateral from customers;
The determination of whether the fees are fixed and determinable;
Whether or not installation, engineering or consulting services are significant to the software licensed; and
The amount of total estimated labor hours, based on management's best estimate, to complete a project we account for under the input method of percentage of completion accounting. We review our contract estimates periodically to assess revisions in contract values and estimated labor hours, and reflect changes in estimates in the period that such estimates are revised under the cumulative catch-up method.
Typically, our contracts contain multiple elements, and while the majority of our contracts contain standard terms and conditions, there are instances where our contracts contain non-standard terms and conditions. As a result, contract interpretation is sometimes required to determine the appropriate accounting. We analyze our multiple element arrangements to determine the estimated selling price of each element, the amount of revenue to be recognized upon shipment, if any, and the period and conditions under which deferred revenue should be recognized. As a result, if facts and circumstances change that affect our current judgments, our revenue could be materially different in the future.
Allowance for Doubtful Accounts and Sales Returns
Based upon past experience and judgment, we establish allowances for doubtful accounts related to our accounts receivable and customer credits with respect to our sales returns. We determine collection risk and record allowances for bad debts based on the aging of accounts and past transaction history with customers. In addition, our policy is to allow sales returns when we have preauthorized the return. We have determined an allowance for estimated returns and credits based on our historical experience of returns and customer credits. We monitor our collections, write-offs, returns and credit experience to assess whether adjustments to our allowance estimates are necessary. Changes in trends in any of the factors that we believe impact the realizability of our receivables or modifications to our credit standards, collection, return and credit, authorization practices or other related policies may impact our estimates.
Intangible Assets and Goodwill
Intangible assets include purchased technology, capitalized software, customer relationships, backlog, trade names, and non-compete agreements. Finite-lived intangible assets are amortized to reflect the pattern in which the economic benefits are consumed, which is primarily the straight-line method.
Purchased technology and capitalized software are tested for impairment quarterly by comparing the net realizable value (estimated using undiscounted future cash flows) to the carrying value of the software. If the carrying value of the software exceeds its net realizable value, we record an impairment charge in the period in which the impairment is incurred equal to the amount of the difference between the carrying value and estimated undiscounted future cash flows.
Customer relationships, backlog, trade names and non-compete agreements are evaluated for potential impairment whenever events or circumstances indicate that the carrying amount may not be recoverable, based primarily upon whether expected future undiscounted cash flows are sufficient to support the asset's recovery. If the actual useful life of the asset is shorter than the useful life estimated by us, the asset may be deemed to be impaired, and, accordingly, a write-down of the value of the asset determined by a discounted cash flow analysis, or a shorter amortization period, may be required. We have reviewed these long-lived assets with estimable useful lives and determined that their carrying values as of December 31, 2011 are recoverable in future periods.
We review goodwill for impairment annually or more frequently if impairment indicators arise. Our policy provides that goodwill will be reviewed for impairment as of October 1st of each year. In calculating potential impairment losses, we evaluate the fair value of goodwill using either quoted market prices or, if not available, by estimating the expected present value of their future cash flows. Identification of, and assignment of assets and liabilities to, a reporting unit require our judgment and estimates. In addition, future cash flows are based upon our assumptions about future sales activity and market acceptance of our products. If these assumptions change, we may be required to write down the gross value of our remaining goodwill to a revised amount. We performed our goodwill testing and determined that there is no impairment as of December 31, 2011, since the fair value of our reporting unit substantially exceeded the carrying value.
Share-based Compensation Expense
We calculate share-based compensation expense for option awards based on the estimated grant-date fair value using the Black-Scholes option pricing model, and recognize the expense on a straight-line basis over the vesting period, net of estimated forfeitures. The fair value of stock-based awards is based on certain assumptions, including:
Expected volatility, which we base on the historical volatility of our stock and other factors; and
Estimated option life, which represents the period of time the options granted are expected to be outstanding and is based, in part, on historical data.
We also estimate employee terminations (option forfeiture rate), which is based, in part, on historical data, employee class and the type of award. We evaluate the assumptions used to value stock options and restricted stock awards on a quarterly basis. The estimation of share-based awards that will ultimately vest requires judgment, and to the extent actual results or updated estimates differ from our current estimates, such amounts will be recorded as a cumulative adjustment in the period estimates are revised. Although we believe our assumptions used to calculate share-based compensation expense are reasonable, these assumptions can involve complex judgments about future events, which are open to interpretation and inherent uncertainty. In addition, significant changes to our assumptions could significantly impact the amount of expense recorded in a given period.
Income Taxes
As part of the process of preparing our consolidated financial statements, we are required to estimate income taxes in each of the jurisdictions in which we operate. Our provision for income taxes is determined using the asset and liability approach to account for income taxes. A current liability is recorded for the estimated taxes payable for the current year. Deferred tax assets and liabilities are recorded for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using the enacted tax rates in effect for the year in which the timing differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of changes in tax rates or tax laws are recognized in the provision for income taxes in the period that includes the enactment date.
Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount more-likely-than-not to be realized. Changes in valuation allowances will flow through the statement of operations unless related to deferred tax assets that expire unutilized or are modified through translation, in which case both the deferred tax asset and related valuation allowance are similarly adjusted. Where a valuation allowance was established through purchase accounting for acquired deferred tax assets, any future change will be credited or charged to income tax expense.
The determination of our provision for income taxes requires significant judgment, the use of estimates, and the interpretation and application of complex tax laws. We are subject to income taxes in the U.S. and numerous foreign jurisdictions. Significant judgment is required in determining our worldwide provision for income taxes and recording the related tax assets and liabilities. In the ordinary course of our business, there are transactions and calculations for which the ultimate tax determination is uncertain. In spite of our belief that we have appropriate support for all the positions taken on our tax returns, we acknowledge that certain positions may be successfully challenged by the taxing authorities. We determine the tax benefits more likely than not to be recognized with respect to uncertain tax positions. Unrecognized tax benefits are evaluated quarterly and adjusted based upon new information, resolution with taxing authorities and expiration of the statute of limitations. The provision for income taxes includes the impact of changes in the liability for our uncertain tax positions. Although we believe our recorded tax assets and liabilities are reasonable, tax laws and regulations are subject to interpretation and inherent uncertainty; therefore, our assessments can involve both a series of complex judgments about future events and rely on estimates and assumptions. Although we believe these estimates and assumptions are reasonable, the final determination could be materially different than that which is reflected in our provision for income taxes and recorded tax assets and liabilities.
We recognize the importance of identifying the fair value of guarantee and indemnification arrangements issued or modified by us, as applicable. In addition, we must continue to monitor the conditions that are subject to the guarantees and indemnifications in order to identify if a loss has occurred. If we determine it is probable that a loss has occurred, then any such estimable loss would be recognized under those guarantees and indemnifications.
Under our standard software license agreements, we agree to indemnify, defend and hold harmless our licensees from and against certain losses, damages and costs arising from claims alleging the licensees' use of our software infringes the intellectual property rights of a third party. Historically, we have not been required to pay material amounts in connection with claims asserted under these provisions, and, accordingly, we have not recorded a liability relating to such provisions. We also represent and warrant to licensees that our software products will operate substantially in accordance with published specifications, and that the services we perform will be undertaken by qualified personnel in a professional manner conforming to generally accepted industry standards and practices. Historically, only minimal costs have been incurred relating to the satisfaction of product warranty claims.
Other guarantees include promises to indemnify, defend and hold harmless each of our executive officers, non-employee directors and certain key employees from and against losses, damages and costs incurred by each such individual in administrative, legal or investigative proceedings arising from alleged wrongdoing by the individual while acting in good faith within the scope of his or her job duties on our behalf.
Loss Contingencies
We have accrued for costs as of December 31, 2011 and may, in the future, accrue for costs associated with certain contingencies when such costs are probable and reasonably estimable. Liabilities established to provide for contingencies are adjusted as further information develops, circumstances change, or contingencies are resolved.
Recent Accounting Pronouncements
We describe below recent pronouncements that have had or may have a significant effect on our financial statements or have an effect on our disclosures. We do not discuss recent pronouncements that are not anticipated to have an impact on or are unrelated to our financial condition, results of operations, or related disclosures.
In May 2011, the FASB issued ASU No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements. This ASU represents the converged guidance of the FASB and the International Accounting Standards Board (the Boards) on fair value measurement. The collective efforts of the Boards and their staffs, reflected in ASU 2011-04, have resulted in common requirements for measuring fair value and for disclosing information about fair value measurements, including a consistent meaning of the term "fair value." The Boards have concluded the common requirements will result in greater comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with U.S. GAAP and International Financial Reporting Standards. The amendments to this ASU are to be applied prospectively. ASU No. 2011-04 is effective during interim and annual periods beginning after December 15, 2011. The adoption of this amendment will affect our disclosures only and will not have a material impact on our statement of operations or financial position.
In June 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income. ASU No. 2011-05 amends the FASB Accounting Standards Codification (Codification) to allow an entity the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. ASU No. 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders' equity. The amendments to the Codification in the ASU do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. ASU No. 2011-05 will be applied retrospectively and is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. Early adoption is permitted. We have not early adopted this ASU. Our adoption of this amendment will not impact the presentation of comprehensive income in our consolidated condensed financial statements.
In September 2011, the FASB issued ASU No. 2011-08, Intangibles – Goodwill and Other (Topic 350): Testing Goodwill for Impairment. This ASU permits a qualitative assessment of whether it is more likely than not that a reporting unit's fair value is less than its carrying value before applying the two-step goodwill impairment test. If an entity can support the conclusion that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, it would not need to perform the two-step impairment test for that reporting unit. This ASU is effective for annual and interim goodwill impairment tests performed in fiscal years beginning after December 15, 2011. The adoption of this amendment will not have a material impact on our results of operations or financial position.
Item 7A.
Interest Rate Risk
Our cash and cash equivalents are exposed to financial market risk due to fluctuations in interest rates, which may affect our interest income. As of December 31, 2011, our cash and cash equivalents included money market funds and short-term deposits, including certain cash that is restricted, totaling approximately $39.3 million, and earned interest at a weighted average rate of 0.1% in 2011. The value of the principal amounts is equal to the fair value for these instruments. Due to the short-term nature of our investment portfolio, our interest income is subject to changes in short-term interest rates. At current investment levels, our pre-tax results of operations would vary by approximately $0.4 million for every 100 basis point change in our weighted average short-term interest rate. We do not use our portfolio for trading or other speculative purposes.
Foreign Currency Exchange Risk
We have sales and expenses in Canada, China, Israel and Europe that are denominated in currencies other than the U.S. Dollar and, as a result, have exposure to foreign currency exchange risk. We do not enter into derivative financial instruments for trading or speculative purposes. In the event our exposure to foreign currency risk increases to levels that we do not deem acceptable, we may choose to hedge those exposures.
Item 8.
Report of Independent Registered Public Accounting Firm
Board of Directors and Shareholders
Merge Healthcare Incorporated
Chicago, Illinois
We have audited the accompanying consolidated balance sheets of Merge Healthcare Incorporated and subsidiaries (the Company) as of December 31, 2011 and 2010 and the related consolidated statements of operations, shareholders' equity, cash flows and comprehensive income (loss) for each of the three years in the period ended December 31, 2011. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide 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 Merge Healthcare Incorporated at December 31, 2011 and 2010, and the results of its operations, cash flows, and comprehensive income (loss) for each of the three years in the period ended December 31, 2011, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Merge Healthcare Incorporated's internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated February 27, 2012, expressed an unqualified opinion thereon.
/s/ BDO USA, LLP | |
Chicago, Illinois | |||
February 27, 2012 |
(in thousands, except for share data)
December 31, | ||||||||
2011 | 2010 | |||||||
Current assets:
Cash and cash equivalents, including restricted cash of $707 and $1,647 at December 31, 2011 and 2010, respectively
$ | 39,272 | $ | 41,029 | ||||
Accounts receivable, net of allowance for doubtful accounts and sales returns of $4,080 and $1,322 at December 31, 2011 and 2010, respectively
71,014 | 53,254 | ||||||
4,718 | 3,486 | ||||||
Prepaid expenses
5,678 | 4,191 | ||||||
Deferred income taxes
3,393 | 2,545 | ||||||
Other current assets
20,199 | 11,258 | ||||||
Total current assets
144,274 | 115,763 | ||||||
Property and equipment:
Computer equipment
10,183 | 9,859 | ||||||
Office equipment
2,262 | 2,007 | ||||||
Leasehold improvements
1,220 | 1,055 | ||||||
13,665 | 12,921 | |||||||
Less accumulated depreciation
9,274 | 7,149 | ||||||
Net property and equipment
4,391 | 5,772 | ||||||
Purchased and developed software, net of accumulated amortization of $9,283 and $9,811 at December 31, 2011 and 2010, respectively
23,924 | 26,619 | ||||||
Other intangible assets, net of accumulated amortization of $14,907 and $8,419 at December 31, 2011 and 2010, respectively
45,152 | 48,957 | ||||||
209,829 | 169,533 | ||||||
Deferred income taxes
9,209 | 17,006 | ||||||
Other assets
13,608 | 12,995 | ||||||
Total assets
$ | 450,387 | $ | 396,645 | ||||
Current liabilities:
Accounts payable
$ | 22,114 | $ | 18,370 | ||||
Interest payable
4,935 | 3,917 | ||||||
Accrued wages
6,972 | 4,304 | ||||||
Restructuring accrual
1,407 | 1,707 | ||||||
Other current liabilities
11,580 | 6,875 | ||||||
Deferred revenue
51,246 | 52,233 | ||||||
Total current liabilities
98,254 | 87,406 | ||||||
Notes payable
249,438 | 195,077 | ||||||
Deferred income taxes
1,891 | - | ||||||
Deferred revenue
1,679 | 1,709 | ||||||
Income taxes payable
727 | 5,683 | ||||||
5,927 | 1,964 | ||||||
Total liabilities
357,916 | 291,839 | ||||||
Shareholders' equity:
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