MERGE HEALTHCARE INC - FORM 8-K - EX-99.1 - EXHIBIT 99.1 - February 20, 2014

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8-K - MERGE HEALTHCARE INCORPORATED 8-K 2-20-2014 - MERGE HEALTHCARE INCform8k.htm
Exhibit 99.1
 

 
News Release

Media Contact:
Jennifer Jawor
Vice President, Corporate Marketing
312.565.6825
jennifer.jawor@merge.com

MERGE REPORTS FOURTH QUARTER FINANCIAL RESULTS
 
Merge builds momentum with significantly improved operating results, cash flow generation and launch of new advanced interoperability service in quarter

Chicago, IL (February 20, 2014) – Merge Healthcare Incorporated (NASDAQ: MRGE), a leading provider of innovative enterprise imaging, interoperability and clinical systems that seek to advance healthcare, today announced its financial and business results for the fourth quarter of 2013 and provided 2014 guidance.

“We continued in 2013 to improve our solution portfolio to meet government mandates, our cash collections, our capital structure, and the alignment of our core business operations, while we also increased our recurring revenue base,” said Justin Dearborn, CEO of Merge Healthcare. “Merge remains a leader in enterprise imaging and advanced interoperability, and we believe we are the only vendor that has a complete enterprise imaging and interoperability solution. We announced general availability of our new iConnect® Network for MU2, expanded our customer base with the addition of one of the largest imaging centers in the United States and announced a new strategic partnership with athenahealth. We’ve made enterprise imaging a reality with the addition of two new hospital clients that will deploy our latest radiology, cardiology and interoperability solutions. Our cardiology business captured top honors in the recent 2013 Best in KLAS Awards: Software & Services report. As a result, despite the lingering reimbursement uncertainty that healthcare providers face, I remain optimistic that our core enterprise solutions will continue to deliver tangible value for our customers as we deploy the iConnect Network and our clinical trials platform and grow our recurring revenue base.”

Financial Summary:
 
· Cash generated from business operations grew to $14.2 million (51%) in the fourth quarter of 2013 from $9.4 million in the fourth quarter of 2012, which compares to net cash provided by (used in) operating activities on the statement of cash flows of $14.0 million in the fourth quarter of 2013 and ($6.0) million in the fourth quarter of 2012;
 
· Although sales decreased to $53.6 million ($53.9 million on a pro forma basis) in the fourth quarter of 2013, from $64.7 million ($65.1 million on a pro forma basis) in the fourth quarter of 2012, adjusted EBITDA increased in the fourth quarter of 2013 to $9.0 million, representing 17% of pro forma revenue, compared to $0.7 million and 1% in the fourth quarter of 2012;
 
· Subscription backlog grew 39% since the fourth quarter of 2012 (as revised), with growth in both Merge Healthcare and DNA segments;
· Net loss in the fourth quarter of 2013 was $0.3 million, or $0.00 per share, compared to $17.3 million, or a loss of $0.19 per share, in the fourth quarter of 2012; and
 
· We repaid $9.7 million of debt principal and achieved a leverage ratio of 5.3:1, within the 5.5:1 leverage covenant of our credit facility.

Business Highlights:
 
· Continued to drive a new white-space market opportunity for advanced interoperability with iConnect Network, executing agreements including the Center for Diagnostic Imaging (CDI), and its affiliated providers, which is one of the nation’s largest providers of diagnostic imaging, interventional radiology and mobile imaging services;
 
· Added athenahealth, a leading provider of cloud-based services for electronic health records (EHR), practice management and care coordination, as a new partner for iConnect Network. athenahealth will integrate iConnect Network with athenahealth’s national cloud-based platform so that athenahealth clients can receive and view exam results, diagnostic quality images and other critical patient information within the athenaClinicals® EHR workflow;
 
· Continued to make progress with large enterprise imaging deals, securing two significant hospital contracts valued at more than $3 million total in sales combined;
 
· Announced that Merge Cardio™ has been named Best in KLAS in the Cardiology Software Category and Merge Hemo™ has been named the “Category Leader” for Cardiology Hemodynamics for the third consecutive year in the “2013 Best in KLAS: Software & Services” report. Also, Merge was ranked in the top 10 for “Overall Software Vendor”;
 
· Supported the conduct of 267 active clinical trials, with more than 225,000 study subjects, using the Merge eClinical OS™ platform;
 
· Successfully certified iConnect® Access, Merge PACS™, Merge Eye Care PACS™, Merge OrthoPACS™, Merge Cardio, Merge RIS™ and Merge LIS™ for MU; and
 
· Started ICD-10 readiness in all applicable Merge solutions and launched ICD-10 versions of our billing solutions.
 
Quarter Results:
Results compared to the same quarter in the prior year on a GAAP basis are as follows (in millions, except per share data):
 
 
    
Q4 2013
      
Q4 2012
  
Net sales
  
$
53.6
    
$
64.7
  
Operating income (loss)
    
3.7
      
(8.4
)
Net loss
    
(0.3
)
    
(17.3
)
Net loss per diluted share
  
$
0.00
    
$ 
(0.19
)
 
                
Cash balance at period end
  
$
19.7
    
$
35.9
  
Cash from business operations*
    
14.2
      
9.4
  

*See table at the back of this earnings release for a reconciliation.
Page 2
Pro forma results and other, non-GAAP measures compared to the same quarter in the prior year are as follows (in millions, except percentages and per share data):

 
    
Q4 2013
      
Q4 2012
  
Pro forma results
                
Net sales
  
$
53.9
    
$
65.1
  
Adjusted net income (loss)
    
3.4
      
(11.6
)
Adjusted EBITDA
    
9.0
      
0.7
  
 
                
Adjusted net income (loss) per diluted share
  
$
0.04
    
$ 
(0.13
)
Adjusted EBITDA per diluted share
  
$
0.09
    
$
0.01
  
 
                
Non-GAAP and other measures
                
Subscription, maintenance & EDI revenue as % of net sales
    
64
%
    
58
%
Subscription and non-recurring backlog at period end
  
$
79.5
    
$
71.1
  
Days sales outstanding
    
106
      
102
  

A reconciliation of GAAP net income (loss) to adjusted net income and adjusted EBITDA is included after the financial information below.

Pro Forma Operating Group Results:
 
Results (in millions) for our operating groups are as follows:

 
  
Three Months Ended December 31, 2013
  
 
  
Healthcare
    
DNA
    
Corporate/
Other
    
Total
  
Net sales:
  
   
   
   
 
Software and other
  
$
14.3
    
$
3.7
    
   
$
18.0
  
Service
    
6.8
      
3.0
    
     
9.8
  
Maintenance
    
25.7
      
0.4
    
     
26.1
  
Total net sales
    
46.8
      
7.1
    
     
53.9
  
Gross Margin
    
27.3
      
3.7
    
     
31.0
  
Gross Margin %
    
58.3
%
    
52.1
%
  
     
57.5
%
Expenses
    
20.5
      
3.7
    
     
24.2
  
Segment income (loss)
  
$
6.8
    
$
-
    
   
$
6.8
  
Operating Margin %
    
15
%
    
0
%
  
     
13
%
Net corporate/other expenses (1)
                  
$
7.2
      
7.2
  
Loss before income taxes
                            
(0.4
)
Adj. EBITDA reconciling adjustments
    
3.6
      
0.8
      
5.0
      
9.4
  
Adjusted EBITDA
  
$
10.4
    
$
0.8
    
$
(2.2
)
  
$
9.0
  
Adjusted EBITDA %
    
22.2
%
    
11.3
%
            
16.7
%

(1) Net corporate/other expenses include public company costs, corporate administration costs, acquisition-related expenses and net interest expense.
Page 3
 
  
Net Sales in the Three Months Ended
December 31, 2013
    
   
Backlog as of
December 31, 2013
    
 
 
  
Healthcare
    
DNA
    
   
Healthcare
    
DNA
    
 
Revenue Source
  
$
    
%
    
$
    
%
    
Total
    
$
    
%
    
$
    
%
    
Total
  
Maintenance & EDI (1)
  
$
25.7
      
54.9
%
  
$
0.4
      
5.6
%
    
48.4
%
  
           
           
 
Subscription
    
2.2
      
4.7
%
    
6.3
      
88.8
%
    
15.8
%
  
$
11.8
      
32.8
%
  
$
43.5
      
100.0
%
    
69.6
%
Non-recurring
    
18.9
      
40.4
%
    
0.4
      
5.6
%
    
35.8
%
    
24.2
      
67.2
%
    
-
      
0.0
%
    
30.4
%
Total
  
$
46.8
      
100.0
%
  
$
7.1
      
100.0
%
    
100.0
%
  
$
36.0
      
100.0
%
  
$
43.5
      
100.0
%
    
100.0
%
 
    
86.8
%
            
13.2
%
                    
45.3
%
            
54.7
%
                

(1) Due to the variability in timing and length of maintenance renewals, we do not believe backlog for this revenue component is a meaningful disclosure.

2014 Outlook:
 
During 2013, we exited certain low to no-margin businesses that generated approximately $14 million of revenue.  Excluding those net sales, our 2013 GAAP revenue would have been approximately $218 million, which we believe is a reasonable starting point for our 2014 outlook.  Looking ahead to 2014, we continue to believe that overall market conditions may delay certain large-scale perpetual-license purchases of our software, and subscription software offerings will remain a relatively small percentage of our total revenue base.  As a result, our outlook for 2014 sales is essentially flat with 2013 sales for our continuing businesses, while our adjusted EBITDA is expected to improve due to the positive impact of our 2013 cost containment initiatives.
 
The following table outlines expectations surrounding the various items comprising the difference between GAAP net income and adjusted EBITDA:
Page 4
2014 Projection
(in millions, except for per share data)
(unaudited)

 
  
High
    
Low
  
Net sales
  
$
225
    
$
212
  
Adjusted EBTIDA %
    
20
%
    
19
%
 
                
Adjusted EBITDA
    
45
      
40
  
Income tax expense
    
(3
)
    
(2
)
Net interest expense
    
(15
)
    
(15
)
Depreciation & amortization - COGS
    
(1
)
    
(1
)
Depreciation & amortization - operating expense
    
(6
)
    
(6
)
Adjusted net income
    
20
      
16
  
Share-based compensation expense
    
(5
)
    
(5
)
Amortization of significant acquisition intangibles - COGS
    
(4
)
    
(4
)
Amortization of significant acquisition intangibles - operating expense
    
(5
)
    
(5
)
Net acquisition-related sales & COGS adjustments
    
(1
)
    
(1
)
Net income
  
$
5
    
$
1
  
 
                
Net income per share - diluted
  
$
0.05
    
$
0.01
  
Adjusted net income per share - diluted
  
$
0.21
    
$
0.16
  
 
                
Estimated fully diluted shares
    
95
      
100
  
 
                
Cash flow considerations:
                
Adjusted EBITDA
  
$
45
    
$
40
  
Income taxes
    
(1
)
    
(1
)
Net interest expense
    
(13
)
    
(14
)
Capital expenditures
    
(5
)
    
(5
)
Capitalized software costs
    
(3
)
    
(2
)
Estimated cash flow (assuming no working capital change)
  
$
23
    
$
18
  

We expect to continue to use excess cash to make voluntary debt payments in 2014.  Based on our 2014 outlook, we anticipate maintaining compliance with the loan leverage covenant in our credit facility.  We have already repaid $3.0 million of debt principal in January 2014.

Explanation of Non-GAAP Financial Measures
We report our financial results in accordance with generally accepted accounting principles or GAAP. This press release includes certain non-GAAP financial measures to supplement its GAAP information. Non-GAAP measures are not an alternative to GAAP and may be different from non-GAAP measures used by other companies. A quantitative reconciliation of GAAP net income available to common shareholders to adjusted net income and adjusted EBITDA is included after the financial information included in this press release.
Page 5
Management believes that the presentation of non-GAAP results, when shown in conjunction with corresponding GAAP measures, provides useful information to it and investors regarding financial and business trends related to results of operations, because certain charges, costs and expenses reflect events that are not essential to recurring business operations. In addition, management believes these non-GAAP measures provide investors useful information regarding the underlying performance of the post-acquisition business operations when compared to the pre-acquisition results of Merge and any significant acquired company.  Purchase accounting adjustments made in accordance with GAAP can make it difficult to make meaningful comparisons of the underlying operations of the business without considering the non-GAAP adjustments that are provided and discussed herein. Further, management believes that these non-GAAP measures improve its and investors’ ability to compare Merge’s financial performance with other companies in the technology industry. Management also uses financial statements that exclude these charges, costs and expenses for its internal budgets.  While GAAP results are more complete, these supplemental metrics are offered since, with reconciliations to GAAP, they may provide greater insight into our financial results. Management does not intend the presentation of these non-GAAP financial measures to be considered in isolation or as a substitute for results prepared in accordance with GAAP.
 
Additional information regarding the non-GAAP financial measures presented is as follows:
 
- Pro forma revenue consists of GAAP revenue as reported, adjusted to add back the acquisition related sales adjustments (for all significant acquisitions) recorded for GAAP purposes.
 
- Subscription revenue and the related backlog are comprised of software, hardware and professional services (including installation, training, etc.) contracted with and payable by the customer over a number of years.  Generally, these contracts will include a minimum volume / dollar commitment.  As such, the revenue from these transactions is recognized ratably over an extended period of time.  These types of arrangements will include monthly payments (including leases), long-term clinical trials, renewable annual software agreements (with very high renew rate), to specify a few contract methods.
 
- Non-recurring revenue and related backlog represents revenue that we anticipate recognizing in future periods from signed customer contracts as of the end of the period presented.  Non-recurring revenue is comprised of perpetual software license sales and includes licenses, hardware and professional services (including installation, training and consultative engineering services).
 
- Adjusted net income consists of GAAP net income available to common stockholders, adjusted to exclude (a) acquisition-related costs, (b) debt extinguishment costs, (c) restructuring and other costs, (d) share-based compensation expense, (e) acquisition-related amortization (f) acquisition-related sales adjustments, and (g) acquisition-related cost of sales adjustments.
 
- Adjusted EBITDA adjusts GAAP net income available to common stockholders for the items considered in adjusted net income as well as (a) remaining depreciation and amortization, (b) net interest expense and (c) income tax expense (benefit).
 
- Cash from business operations reconciles the cash generated from such operations to the change in GAAP cash balance for the period by reflecting payments of liabilities associated with debt issuance and retirement activities, acquisitions, payments of acquisition related fees, interest payments and other payments and receipts of cash not generated by the business operations.  Cash generated from business operations and used to pay restructuring initiatives, acquisition related costs and interest approximates net cash provided by operating activities in the condensed consolidated statement of cash flows.
 
Management has excluded certain items from non-GAAP adjusted net income because it believes (i) the amount of certain expenses in any specific period may not directly correlate to the underlying performance of business operations and (ii) the adjustment facilitates comparisons of pre-acquisition results to post-acquisition results.  In addition, the following adjustments are described in more detail below:
Page 6
- Debt extinguishment expense is comprised of both non-cash expenses, such as the remaining unamortized balance of costs associated with the issuance of the old debt and unamortized balance of the discount when the old debt was issued, as well as contractually owed cash charges to the holders of the old debt to allow us to retire it early.  Management excludes this expense from non-GAAP net income because it believes such expense does not directly correlate to the underlying performance of operations, rather is an expense that is specific to a transaction that we would expect to occur infrequently.
 
- Acquisition-related amortization expense is a non-cash expense arising from the acquisition of intangible assets in connection with significant acquisitions. Management excludes acquisition-related amortization expense from non-GAAP net income because it believes such expenses can vary significantly between periods as a result of new acquisitions and full amortization of previously acquired intangible assets.
 
- Share-based compensation expense is a non-cash expense arising from the grant of stock awards to employees and is excluded from non-GAAP net income because management believes such expenses can vary significantly between periods as a result of the timing of grants of new stock-based awards, including grants to new employees resulting from acquisitions.
 
- Acquisition-related sales and costs of sales adjustments reflect the fair value adjustment to deferred revenues acquired in connection with significant acquisitions. The fair value of deferred revenue represents an amount equivalent to the estimated cost plus an appropriate profit margin to perform services-related software and product support, which assumes a legal obligation to do so, based on the deferred revenue balances as of the date the acquisition of a significant company was completed. Management adds back this deferred revenue adjustment, net of related costs, for non-GAAP revenue and non-GAAP net income because it believes the inclusion of this amount directly correlates to the underlying performance of operations and facilitates comparisons of pre-acquisition to post-acquisition results.
 
Notice of Conference Call
 
Merge will host a conference call at 8:30 AM ET on Thursday, February 20, 2014. The call will address fourth quarter results and will provide a business update on the company’s market outlook and strategies for 2014.

Participants may preregister for this teleconference at http://emsp.intellor.com?p=414469&do=register&t=8. Upon registration, a confirmation page will display dial-in numbers and a unique PIN, and the participant will also receive an email confirmation with this information.

A replay via the Internet or phone will be available after the call at http://www.merge.com/Company/Investors/Conference-Call-Info.aspx.

Source: 2013 Best in KLAS Awards: Software & Services report
Page 7
About Merge
Merge is a leading provider of innovative enterprise imaging, interoperability and clinical systems that seek to advance healthcare. Merge’s enterprise and cloud-based technologies for image intensive specialties provide access to any image, anywhere, any time. Merge also provides clinical trials software with end-to-end study support in a single platform and other intelligent health data and analytics solutions. With solutions that have been used by providers for more than 25 years, Merge is helping to reduce costs, improve efficiencies and enhance the quality of healthcare worldwide. For more information, visit merge.com and follow us @MergeHealthcare.

Cautionary Notice Regarding Forward-Looking Statements
The matters discussed in this press release may include forward-looking statements, which could involve a number of risks and uncertainties. When used in this press release, the words “will,” “believes,” “intends,” “anticipates,” “expects” and similar expressions are intended to identify forward-looking statements. Actual results could differ materially from those expressed in, or implied by, such forward-looking statements. The potential risks and uncertainties include those risks and uncertainties included under the captions “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2012 and our most recent Quarterly Report on Form 10-Q for the quarter ended September 30, 2013 which are on file with the SEC and are available on our investor relations website at merge.com and on the SEC website at www.sec.gov. Additional information will also be set forth in our Annual Report on Form 10-K for the year ended December 31, 2013. Except as expressly required by the federal securities laws, Merge undertakes no obligation to update such factors or to publicly announce the results of any of the forward-looking statements.

Page 8
MERGE HEALTHCARE INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)

 
  
December 31,
    
December 31,
  
 
  
2013
    
2012
  
Current assets:
  
   
 
Cash (including restricted cash)
  
$
19,729
    
$
35,875
  
Accounts receivable, net
    
61,895
      
72,065
  
Inventory
    
5,851
      
5,979
  
Prepaid expenses
    
4,803
      
4,972
  
Deferred income taxes
    
1,915
      
3,135
  
Other current assets
    
12,631
      
21,621
  
Total current assets
    
106,824
      
143,647
  
 
                
Property and equipment, net
    
4,739
      
4,964
  
Purchased and developed software, net
    
14,882
      
19,007
  
Other intangible assets, net
    
26,200
      
35,628
  
Goodwill
    
214,374
      
214,312
  
Deferred income taxes
    
6,979
      
7,041
  
Other assets
    
8,413
      
12,254
  
Total assets
  
$
382,411
    
$
436,853
  
 
                
Current liabilities:
                
Accounts payable
  
$
22,072
    
$
24,438
  
Current maturities of long-term debt
    
2,490
      
-
  
Interest payable
    
-
      
4,944
  
Accrued wages
    
5,559
      
5,881
  
Restructuring accrual
    
1,301
      
222
  
Other current liabilities
    
8,205
      
12,606
  
Deferred revenue
    
55,183
      
52,355
  
Total current liabilities
    
94,810
      
100,446
  
 
                
Long-term debt, less current maturities, net of unamortized discount
    
233,942
      
250,046
  
Deferred income taxes
    
4,065
      
3,046
  
Deferred revenue
    
378
      
894
  
Income taxes payable
    
1,399
      
1,040
  
Other liabilities
    
2,557
      
3,920
  
Total liabilities
    
337,151
      
359,392
  
Total Merge shareholders' equity
    
44,813
      
77,011
  
Noncontrolling interest
    
447
      
450
  
Total shareholders' equity
    
45,260
      
77,461
  
Total liabilities and shareholders' equity
  
$
382,411
    
$
436,853
  

Page 9
MERGE HEALTHCARE INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except for share and per share data)
(unaudited)

 
  
Three Months Ended
    
Year Ended
  
 
  
December 31,
    
December 31,
  
 
  
2013
    
2012
    
2013
    
2012
  
Net sales
  
   
   
   
 
Software and other
  
$
17,768
    
$
25,215
    
$
78,575
    
$
94,466
  
Professional services
    
9,708
      
10,405
      
43,830
      
40,978
  
Maintenance and EDI
    
26,119
      
29,026
      
109,262
      
113,460
  
Total net sales
    
53,595
      
64,646
      
231,667
      
248,904
  
Cost of sales
                                
Software and other
    
8,706
      
14,278
      
41,813
      
43,281
  
Professional services
    
5,939
      
6,171
      
25,114
      
24,693
  
Maintenance and EDI
    
6,661
      
7,250
      
28,989
      
31,090
  
Depreciation and amortization
    
1,555
      
3,158
      
6,980
      
8,987
  
Total cost of sales
    
22,861
      
30,857
      
102,896
      
108,051
  
Gross margin
    
30,734
      
33,789
      
128,771
      
140,853
  
Operating costs and expenses:
                                
Sales and marketing
    
7,603
      
11,435
      
36,585
      
43,908
  
Product research and development
    
7,400
      
8,168
      
32,388
      
32,419
  
General and administrative
    
9,122
      
18,544
      
34,689
      
42,366
  
Acquisition-related expenses
    
306
      
958
      
906
      
3,402
  
Restructuring and other expenses
    
-
      
-
      
3,856
      
830
  
Depreciation and amortization
    
2,641
      
3,125
      
10,540
      
11,308
  
Total operating costs and expenses
    
27,072
      
42,230
      
118,964
      
134,233
  
Operating income (loss)
    
3,662
      
(8,441
)
    
9,807
      
6,620
  
Loss on debt extinguishment
    
-
      
-
      
(23,822
)
    
-
  
Other expense, net
    
(4,287
)
    
(8,130
)
    
(22,079
)
    
(31,349
)
Loss before income taxes
    
(625
)
    
(16,571
)
    
(36,094
)
    
(24,729
)
Income tax expense (benefit)
    
(360
)
    
681
      
2,889
      
4,091
  
Net loss
    
(265
)
    
(17,252
)
    
(38,983
)
    
(28,820
)
Less:  noncontrolling interest's share
    
26
      
12
      
(2
)
    
(18
)
Net loss available to common shareholders
  
$
(291
)
  
$
(17,264
)
  
$
(38,981
)
  
$
(28,802
)
 
                                
Net loss per share - basic
  
$
(0.00
)
  
$
(0.19
)
  
$
(0.42
)
  
$
(0.31
)
Weighted average number of common shares outstanding - basic
    
94,394,867
      
93,057,636
      
93,727,394
      
92,134,191
  
 
                                
Net loss per share - diluted
  
$
(0.00
)
  
$
(0.19
)
  
$
(0.42
)
  
$
(0.31
)
Weighted average number of common shares outstanding - diluted
    
94,394,867
      
93,057,636
      
93,727,394
      
92,134,191
  

Page 10
MERGE HEALTHCARE INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)

 
  
  
Year Ended
  
 
  
  
December 31,
  
 
 
  
2013
    
2012
  
Cash flows from operating activities:
 
  
   
 
Net loss
 
  
$
(38,983
)
  
$
(28,820
)
Adjustments to reconcile net loss to net cash provided by (used in)  operating activities:
 
                
Depreciation and amortization
 
    
17,520
      
20,295
  
Share-based compensation
 
    
4,839
      
5,786
  
Change in contingent consideration for acquisitions
 
    
-
      
1,380
  
Amortization of debt issuance costs & discount
 
    
1,649
      
2,724
  
Loss on extinguishment of debt
 
    
23,822
      
-
  
Provision for doubtful accounts receivable and allowances, net of recoveries
 
    
(2,136
)
    
9,993
  
Deferred income taxes
 
    
2,301
      
3,581
  
Realized and unrealized loss (gain) on equity security
 
    
645
      
(486
)
Loss on acquisition settlement
 
    
1,345
      
-
  
Stock issued for lawsuit settlement
 
    
885
      
-
  
Net change in assets and liabilities (net of effects of acquisitions)
 
    
9,394
      
(15,333
)
Net cash provided by (used in) operating activities
 
    
21,281
      
(880
)
Cash flows from investing activities:
 
                
Cash paid for acquisitions, net of cash acquired
 
    
-
      
(876
)
Purchases of property, equipment and leasehold improvements
 
    
(1,574
)
    
(2,174
)
Purchased technology and capitalized software development
 
    
(535
)
    
-
  
Proceeds from sale of equity investment
 
    
1,785
      
-
  
Change in restricted cash
 
    
422
      
(106
)
Net cash provided by (used in) investing activities
 
    
98
      
(3,156
)
Cash flows from financing activities:
 
                
Proceeds from exercise of stock options and employee stock purchase plan
 
    
1,489
      
1,039
  
Proceeds from debt issuance
 
    
252,450
      
-
  
Retirement of debt
 
    
(252,000
)
    
-
  
Penalty for early extinguishment of debt
 
    
(16,863
)
    
-
  
Note issuance costs paid
 
    
(4,588
)
    
-
  
Principal payments on notes
 
    
(16,286
)
    
(37
)
Principal payments on capital leases
 
    
(1,200
)
    
(396
)
Net cash provided by (used in) financing activities
 
    
(36,998
)
    
606
  
Effect of exchange rate changes on cash
 
    
(106
)
    
(73
)
Net increase (decrease) in cash and cash equivalents
 
    
(15,725
)
    
(3,503
)
Cash and cash equivalents, beginning of period (net of restricted cash)
(1)
    
35,062
      
38,565
  
Cash and cash equivalents, end of period (net of restricted cash)
(2)
  
$
19,337
    
$
35,062
  

(1) Restricted cash of $813 and $707 as of December 31, 2012 and 2011, respectively.
(2) Restricted cash of $392 and $813 as of December 31, 2013 and 2012, respectively.
Page 11
MERGE HEALTHCARE INCORPORATED AND SUBSIDIARIES
RECONCILIATION OF NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS TO ADJUSTED EBITDA
(in thousands, except for share and per share data)
(unaudited)

 
  
Three Months Ended
    
Year Ended
  
 
  
December 31,
    
December 31,
  
 
  
2013
    
2012
    
2013
    
2012
  
Net loss available to common shareholders of Merge
  
$
(291
)
  
$
(17,264
)
  
$
(38,981
)
  
$
(28,802
)
Acquisition-related costs
    
306
      
958
      
906
      
3,402
  
Debt extinguishment costs
    
-
      
-
      
23,822
      
-
  
Restructuring and other
    
-
      
-
      
3,856
      
830
  
Share-based compensation expense
    
647
      
1,541
      
4,645
      
5,786
  
Amortization of significant acquisition intangibles
    
2,506
      
2,726
      
10,026
      
10,905
  
Acquisition-related sales adjustments
    
277
      
435
      
1,432
      
2,055
  
Acquisition-related cost of sales adjustments
    
(61
)
    
(35
)
    
(215
)
    
(361
)
Adjusted net income (loss)
  
$
3,384
    
$
(11,639
)
  
$
5,491
    
$
(6,185
)
Depreciation and amortization
    
1,690
      
3,557
      
7,494
      
9,390
  
Net interest expense
    
4,291
      
8,137
      
21,248
      
32,160
  
Income tax expense (benefit)
    
(360
)
    
681
      
2,889
      
4,091
  
Adjusted EBITDA
  
$
9,005
    
$
736
    
$
37,122
    
$
39,456
  
 
                                
Adjusted net income (loss) per share - diluted
  
$
0.04
    
$
(0.13
)
  
$
0.06
    
$
(0.07
)
Adjusted EBITDA per share - diluted
  
$
0.09
    
$
0.01
    
$
0.39
    
$
0.42
  
 
                                
Fully diluted shares (if net income)
    
95,643,567
      
94,984,813
      
95,463,373
      
94,545,728
  

 
  
Pro Forma Three Months
Ended December 31,
    
Pro Forma Year Ended
December 31,
  
 
  
2013
    
2012
    
2013
    
2012
  
Net loss available to common shareholders of Merge
  
$
(75
)
  
$
(16,864
)
  
$
(37,764
)
  
$
(27,108
)
Acquisition-related costs
    
306
      
958
      
906
      
3,402
  
Debt extinguishment costs
    
-
      
-
      
23,822
      
-
  
Restructuring and other
    
-
      
-
      
3,856
      
830
  
Share-based compensation expense
    
647
      
1,541
      
4,645
      
5,786
  
Amortization of significant acquisition intangibles
    
2,506
      
2,726
      
10,026
      
10,905
  
Adjusted net income (loss)
  
$
3,384
    
$
(11,639
)
  
$
5,491
    
$
(6,185
)
Depreciation and amortization
    
1,690
      
3,557
      
7,494
      
9,390
  
Net interest expense
    
4,291
      
8,137
      
21,248
      
32,160
  
Income tax expense (benefit)
    
(360
)
    
681
      
2,889
      
4,091
  
Adjusted EBITDA
  
$
9,005
    
$
736
    
$
37,122
    
$
39,456
  
 
                                
Adjusted net income (loss) per share - diluted
  
$
0.04
    
$
(0.13
)
  
$
0.06
    
$
(0.07
)
Adjusted EBITDA per share - diluted
  
$
0.09
    
$
0.01
    
$
0.39
    
$
0.42
  
 
                                
Fully diluted shares (if net income)
    
95,643,567
      
94,984,813
      
95,463,373
      
94,545,728
  

Page 12
MERGE HEALTHCARE INCORPORATED AND SUBSIDIARIES
CASH FROM BUSINESS OPERATIONS
(unaudited)

 
  
Three Months Ended
December 31,
    
Year Ended
December 31,
  
 
  
2013
    
2012
    
2013
    
2012
  
 
  
(amounts in millions)
  
Cash received from (paid for):
  
   
   
   
 
Issuance of debt, net of OID of $2.5
  
$
-
    
$
-
    
$
252.5
    
$
-
  
Debt principal reduction
    
(9.7
)
    
-
      
(16.3
)
    
-
  
Debt issuance costs
    
-
      
-
      
(4.6
)
    
-
  
Retirement of debt, including prepayment penalty of $16.8
    
-
      
-
      
(268.9
)
    
-
  
Interest paid, net
    
(3.8
)
    
(14.9
)
    
(24.8
)
    
(29.7
)
Acquisitions
    
-
      
-
      
-
      
(0.9
)
Restructuring initiatives
    
(0.8
)
    
(0.3
)
    
(2.8
)
    
(1.5
)
Acquisition related costs
    
(0.3
)
    
(0.2
)
    
(1.1
)
    
(1.0
)
Sale of investment
    
-
      
-
      
1.8
      
-
  
Proceeds from stock option exercises
    
0.3
      
-
      
1.2
      
-
  
Property and equipment purchases
    
-
      
(0.2
)
    
(1.7
)
    
(2.2
)
Purchased technology and capitalized software development
    
(0.5
)
    
-
      
(0.5
)
    
-
  
Business operations
    
14.2
      
9.4
      
49.0
      
32.0
  
Decrease in cash
  
$
(0.6
)
  
$
(6.2
)
  
$
(16.2
)
  
$
(3.3
)
 
 
Page 13

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MERGE HEALTHCARE INC Reports