PART 1 - FINANCIAL INFORMATION

 

Item 1.

Condensed Consolidated Financial Statements

 

MERGE HEALTHCARE INCORPORATED AND SUBSIDIARIES

		March 31,				December 31,
		2009				2008
ASSETS		(Unaudited)
Current assets:
Cash and cash equivalents, including restricted cash of $363 and $621 at March 31, 2009
and December 31, 2008, respectively		$	19,690			$	17,848
Accounts receivable, net of allowance for doubtful accounts and sales returns of $1,602
and $1,378 at March 31, 2009 and December 31, 2008, respectively			13,387				12,779
Inventory			114				550
Prepaid expenses			1,456				1,509
Deferred income taxes			217				217
Other current assets			278				721
Total current assets			35,142				33,624
Property and equipment:
Computer equipment			6,366				6,317
Office equipment			1,988				1,989
Leasehold improvements			1,291				1,272
			9,645				9,578
Less accumulated depreciation			7,915				7,604
Net property and equipment			1,730				1,974
Purchased and developed software, net of accumulated amortization of $13,234 and
$12,584 at March 31, 2009 and December 31, 2008, respectively			5,003				5,653
Customer relationships, net of accumulated amortization of $1,496 and $1,259 at
March 31, 2009 and December 31, 2008, respectively			2,054				2,291
Deferred income taxes			4,585				4,585
Investments			5,527				5,690
Other assets			775				920
Total assets		$	54,816			$	54,737
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable		$	2,760			$	3,387
Accrued wages			1,759				1,590
Restructuring accrual			673				1,173
Other accrued liabilities			2,760				3,070
Deferred revenue			14,324				16,150
Total current liabilities			22,276				25,370
Note payable			14,358				14,230
Deferred income taxes			39				39
Deferred revenue			466				644
Income taxes payable			5,435				5,418
Other			177				195
Total liabilities			42,751				45,896
Shareholders' equity:
Common stock, $0.01 par value: 100,000,000 shares authorized: 55,603,076 shares and 55,506,702
shares issued and outstanding at March 31, 2009 and December 31, 2008, respectively			556				555
Common stock subscribed, 20,210 shares and 30,271 shares at March 31, 2009 and
December 31, 2008, respectively			26				37
Additional paid-in capital			465,638				465,083
Accumulated deficit			(455,799	)			(458,641	)
Accumulated other comprehensive income			1,644				1,807
Total shareholders' equity			12,065				8,841
Total liabilities and shareholders' equity		$	54,816			$	54,737

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

·		During 2008, we completed two significant restructuring initiatives, the first in February 2008 and the second in June 2008.  Both of these initiatives included workforce reductions in all parts of the organization as well as elimination of facilities.
·		In the second quarter of 2008, we disposed of our French subsidiary.
·		In the second quarter of 2008, we completed a private placement pursuant to which we raised net proceeds of $16.6 million.
·		In the third quarter of 2008, we exited our operations in India.
·		Our Canadian operations primarily invoice customers in U.S. dollars, whereas the majority of operating expenses, which include approximately one-half of our current workforce, are denominated in the Canadian dollar.  During late 2008, the U.S. dollar to Canadian dollar exchange rate significantly strengthened.  As a result, we have experienced an approximate 20% reduction in average cost for our Canadian dollar denominated expenses in the three months ended March 31, 2009 when compared to similar costs in the three months ended March 31, 2008.

 

The following table sets forth selected, summarized, unaudited, 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.

 

	Three Months Ended March 31,														Change
	2009			%		(1)		2008			%		(1)		$			%
Net sales:
Software and other	$	8,684		56.7	%			$	6,055		44.1	%			$	2,629		43.4	%
Services and maintenance		6,625		43.3	%				7,688		55.9	%				(1,063	)	-13.8	%
Total net sales		15,309		100.0	%				13,743		100.0	%				1,566		11.4	%
Cost of sales:
Software and other		1,230		14.2	%				1,199		19.8	%				31		2.6	%
Services and maintenance		2,150		32.5	%				3,775		49.1	%				(1,625	)	-43.0	%
Amortization		650		NM		(2)			716		NM		(2)			(66	)	-9.2	%
Total cost of sales		4,030		26.3	%				5,690		41.4	%				(1,660	)	-29.2	%
Gross margin
Software and other		6,804		78.4	%	(3)			4,140		68.4	%	(3)			2,664		64.3	%
Services and maintenance		4,475		67.5	%				3,913		50.9	%				562		14.4	%
Total gross margin		11,279		73.7	%				8,053		58.6	%				3,226		40.1	%
Operating expenses:
Sales and marketing		1,672		10.9	%				3,362		24.5	%				(1,690	)	-50.3	%
Product research and development		2,271		14.8	%				4,735		34.5	%				(2,464	)	-52.0	%
General and administrative		3,252		21.2	%				6,158		44.8	%				(2,906	)	-47.2	%
Restructuring and other expenses		-		0.0	%				1,362		9.9	%				(1,362	)	-100.0	%
Depreciation and amortization		548		3.6	%				842		6.1	%				(294	)	-34.9	%
Total operating costs and expenses		7,743		50.6	%				16,459		119.8	%				(8,716	)	-53.0	%
Operating income (loss)		3,536		23.1	%				(8,406	)	-61.2	%				11,942		NM		(2)
Other income (expense), net		(672	)	-4.4	%				574		4.2	%				(1,246	)	-217.1	%
Income (loss) before income taxes		2,864		18.7	%				(7,832	)	-57.0	%				10,696		NM		(2)
Income tax expense		22		0.1	%				-		0.0	%				22		NM		(2)
Net income (loss)	$	2,842		18.6	%			$	(7,832	)	-57.0	%			$	10,674		NM		(2)

 

(1)	Percentages are of total net sales, except for cost of sales and gross margin, which are based upon related net sales.
(2)	NM denotes percentage is not meaningful.
(3)	Gross margin for software and other sales includes amortization expense recorded in cost of sales.

 

 

We have no material off balance sheet arrangements.

 

Critical Accounting Policies

 

Our discussion and analysis of our financial condition and results of operations are based upon our unaudited condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States.  The preparation of these condensed consolidated financial statements requires our management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities.  On an ongoing basis, our management evaluates these estimates.  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 materially from these estimates.

 

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

	Registrant:
	MERGE HEALTHCARE INCORPORATED
May 8, 2009	By:	/s/ Justin C. Dearborn
		Justin C. Dearborn
		Chief Executive Officer
		(principal executive officer)
May 8, 2009	By:	/s/ Steven M. Oreskovich
		Steven M. Oreskovich
		Chief Financial Officer
		(principal financial officer and principal accounting officer)

 

 

3.1	Certificate of Incorporation as filed on October 14, 2008(A)
3.2	Certificate of Merger as filed on December 3, 2008 and effective on December 5, 2008(A)
3.3	Bylaws of Registrant(A)
4.1	Term Note, dated June 4, 2008, between Registrant and Merrick RIC, LLC(B)
10.1	Registration rights Agreement, dated June 4, 2008, by and between Registrant and Merrick RIS, LLC(B)
10.2	Securities Purchase Agreement, dated May 21, 2008, by and among Registrant, the subsidiaries listed on the Schedule of Subsidiaries attached thereto, and Merrick RIS, LLC(C)
10.3	Employment Letter Agreement between the Registrant and Justin C. Dearborn entered into as of June 4, 2008(D)
10.4	Employment Letter Agreement between the Registrant and Steven M. Oreskovich entered into as of June 4, 2008(D)
10.5	Employment Letter Agreement between the Registrant and Nancy J. Koenig entered into as of June 4, 2008(D)
10.6	Employment Letter Agreement between the Registrant and Antonia Wells entered into as of June 4, 2008(D)
10.7	Amendment dated July 1, 2008 to that certain Securities Purchase Agreement, dated May 21, 2008, by and among the Registrant, certain of its subsidiaries and Merrick RIS, LLC(E)
10.8	Consulting Agreement, effective as of January 1, 2009, by and between Registrant and Merrick RIS, LLC(A)
10.9	1996 Stock Option Plan for Employees of Registrant dated May 13, 1996(F), as amended and restated in its entirety as of September 1, 2003(G)
10.10	1998 Stock Option Plan for Directors(H)
10.11	2000 Employee Stock Purchase Plan of Registrant effective July 1, 2000(I)
10.12	2003 Stock Option Plan of Registrant dated June 24, 2003, and effective July 17, 2003(G)
10.13	2005 Equity Incentive Plan adopted March 4, 2005, and effective May 24, 2005(J)
31.1	Certificate of Chief Executive Officer (principal executive officer) Pursuant to Rule 13a–14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes–Oxley Act of 2002
31.2	Certificate of Chief Financial Officer (principal accounting officer) Pursuant to Rule 13a–14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes–Oxley Act of 2002
32	Certificate of Chief Executive Officer (principal executive officer) and Chief Financial Officer (principal accounting officer) Pursuant to Section 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the    Sarbanes–Oxley Act of 2002

 

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(A)	Incorporated by reference from the Registrant’s Annual Report on Form 10–K dated March 11, 2009.
(B)	Incorporated by reference from the Registrant’s Current Report on Form 8–K dated June 6, 2008.
(C)	Incorporated by reference from the Registrant’s Current Report on Form 8–K dated May 22, 2008.
(D)	Incorporated by reference from the Registrant’s Current Report on Form 8–K dated July 15, 2008.
(E)	Incorporated by reference from the Registrant’s Current Report on Form 8–K dated July 7, 2008.
(F)	Incorporated by reference from Registration Statement on Form SB-2 No. 333-39111) effective January 29, 1998.
(G)	Incorporated by reference from the Registrant’s Quarterly Report on Form 10–Q for the three and nine months ended September 30, 2003.
(H)	Incorporated by reference from the Registrant’s Annual Report on Form 10–KSB for the fiscal year ended December 31, 1997.
(I)	Incorporated by reference from the Registrant’s Proxy Statement for Annual Meeting of Shareholders dated May 8, 2000.
(J)	Incorporated by reference from the Registrant’s Registration Statement on Form S–8 (No. 333–125386) effective June 1, 2005.

 

 

Pursuant to Rule 13a–14(a) under the Securities Exchange Act of 1934, as Adopted

 

I, Justin C. Dearborn certify that:

 

1.		I have reviewed this quarterly report on Form 10-Q of Merge Healthcare Incorporated;
2.		Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.		Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.		The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
		(a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
		(b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
		(c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation;
		(d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.		The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s Board of Directors (or such other persons performing the equivalent functions):
		(a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
		(b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 8, 2009
/s/ Justin C. Dearborn
Justin C. Dearborn
Chief Executive Officer
(principal executive officer)

 

Pursuant to Rule 13a–14(a) under the Securities Exchange Act of 1934, as Adopted

 

I, Steven M. Oreskovich certify that:

 

1.		I have reviewed this quarterly report on Form 10-Q of Merge Healthcare Incorporated;
2.		Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.		Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.		The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
		(a)	Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
		(b)	Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
		(c)	Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation;
		(d)	Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.		The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s Board of Directors (or such other persons performing the equivalent functions):
		(a)	All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
		(b)	Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

.

Date: May 8, 2009
//s/ Steven M. Oreskovich
Steven M. Oreskovich
Chief Financial Officer
(principal financial officer and principal accounting officer)

FINANCIAL OFFICER

 

 

In connection with the Quarterly Report on Form 10-Q of MERGE HEALTHCARE INCORPORATED (the “Company”) for the period ended March 31, 2009, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), Justin C. Dearborn, as principal executive officer of the Company, and Steven M. Oreskovich, as principal financial officer of the Company, each hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of their knowledge:

 

(1)		The Report fully complies with the requirements of Section 13(a) or 15(d) of  the Securities Exchange Act of 1934; and
(2)		The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

Date:  May 8, 2008				By:		/s/ Justin C. Dearborn
						Justin C. Dearborn
						Chief Executive Officer
						(principal executive officer)
Date:  May 8, 2008				By:		/s/ Steven M. Oreskovich
						Steven M. Oreskovich
						Chief Financial Officer
						(principal financial officer
						and principal accounting officer)

 

This certification accompanies the Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.