Merge Healthcare Inc. (MRGE) News

Cost synergies from AMICAS acquisition ahead of schedule; company

is on track to generate $200 million of annual run-rate revenues by the

end of 2010

Aug. 9, 2010 (Business Wire) -- Merge Healthcare Incorporated (NASDAQ: MRGE), a health IT solutions provider, today announced financial results for the second quarter of 2010. Revenue grew to $29.0 million ($41.5 million on a pro forma basis) in the quarter, compared to $15.4 million ($38.8 million on a pro forma basis) in the second quarter of 2009.

“We entered the second quarter with a mission to take the steps necessary to create the leading independent provider of healthcare IT and imaging solutions with the acquisition of AMICAS,” said Justin Dearborn, Merge CEO. “This meant capturing the synergies from the AMICAS transaction while developing a clear go-forward strategy for the future of our business.”

Mr. Dearborn continued, “In addition to successfully raising $242 million to finance the AMICAS transaction in Q2, we eliminated in excess of $15 million of annualized expenses. As a result, we are ahead of schedule in capturing our targeted synergies from the acquisition. In addition, the market has reacted very favorably to three new elements of our solution portfolio – our imaging interoperability platform, our healthcare automation platform, and our imaging clinical trials platform. Overall, I am very pleased with the progress to date and believe our company is now better positioned both as a platform for growth and to accelerate cross selling and overall sales efforts. Although there was a period of uncertainty with our customers in the second quarter prior to the closing of the AMICAS transaction, we are now on track to deliver $200 million of annual run-rate revenue by the end of 2010.”

“I am extremely excited to see the rapid transformation of Merge that was completed successfully in the second quarter,” said Michael Ferro, Jr., Merge Healthcare Chairman. “We now have the unique platforms and technologies in place to tackle the challenges confronting healthcare providers, patients, physicians, and payers. We’re looking forward to sharing the significant value our products deliver with the market.”

Quarter Results:

Results compared to the same quarter in the prior year are as follows (in millions, except per share data and percentages):

* Operating and net income in the second quarter of 2010 include acquisition-related and restructuring costs of $5.9 million, compared to $0.3 million in the second quarter of 2009. Net income (loss) available to common shareholders includes a one-time deemed dividend of $14.9 million in the second quarter of 2010.

The GAAP results for the second quarter of 2010 include AMICAS, Inc. (AMICAS) subsequent to the acquisition on April 28, 2010. In addition, second quarter results include certain ongoing costs from employees who are transitioning as part of the company-wide reorganization that occurred concurrent with the acquisition of AMICAS. These costs, as well as any related restructuring activities, are anticipated to be fully incurred by the end of the third quarter of 2010.

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):

** Historic Merge only amount.

A table reconciling GAAP net income to adjusted net income and adjusted EBITDA is included after the financial information included in this press release.

Year-to-Date Results:

Results for the current year-to-date compared to the prior year, are as follows (in millions, except per share data):

Explanation of Non-GAAP Financial Measures

Merge Healthcare reports its financial results in accordance with generally accepted accounting principles, or GAAP. To supplement this information, this press release includes certain non-GAAP financial measures. These measures are not in accordance with, or 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.

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 it and investors useful information regarding the underlying performance of the post-merger business operations when compared to the pre-merger results of the combined Merge and AMICAS businesses (including considerations of certain significant acquisitions made by each 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.

The following offer additional information regarding the non-GAAP financial measures presented:

• Pro forma revenue consists of GAAP revenue as reported, adjusted to reflect the acquisition of AMICAS as if it had occurred at the beginning of the respective periods presented and to add back the acquisition related sales adjustment (for all significant acquisitions) booked for GAAP purposes.
• Recurring revenue is generated from agreements that generally contain a stated annual amount and which we have a high success rate of renewing each year. More specifically, this includes revenue generated from our DICOM toolkit and eFilm Workstation® product lines, long-term contracts associated with our SaaS related offerings, and EDI and maintenance contracts across the entire business.
• Non-recurring revenue backlog represents revenue that we anticipate recognizing in future periods from signed, firm customer orders as of the end of the period presented. Non-recurring revenue is comprised of all other sources of revenue not included as recurring revenue, primarily from perpetual software licenses, hardware and professional services (including installation, training and consultative engineering services). Merge started to track non-recurring revenue backlog during the first quarter of 2010 and was able to calculate this metric as of December 31, 2009. Comparative information prior to the end of the fourth quarter of 2009 is unavailable.
• Adjusted net income consists of GAAP net income available to common stockholders, adjusted to reflect the acquisition of AMICAS as if it had occurred at the beginning of the respective period presented and, to the extent such items occurred in the periods presented, excludes (a) one-time preferred stock deemed dividend at issuance date, (b) impairment of investments, (c) sale of non-core patents, (d) acquisition-related costs, (e) acquisition-related severance not qualifying for restructuring, (f) restructuring and other costs, (g) stock-based compensation expense, (h) acquisition-related amortization, and (i) acquisition-related cost of sales adjustments and adds back (j) the acquisition-related 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, (c) non-cash preferred stock dividends and (d) income tax expense (benefit).

Management has excluded certain items from non-GAAP adjusted net income because it believes (i) the amount of such expenses in any specific period may not directly correlate to the underlying performance of business operations and (ii) the adjustment facilitates comparisons of pre-merger results to post-merger results. In addition, the following adjustments are described in more detail below:

• 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.
• Stock-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-merger to post-merger results.

The second quarter 2010 earnings call will be held at 8:30 AM EDT on Tuesday, August 10, 2010. Investors can listen to the conference call live via telephone or over the Internet at Merge Healthcare Web Cast. To access the call via phone, investors can dial 800.221.2015 (US and Canada) or 706.634.2159 (International). The Conference ID Number to reference is 89657195. A replay via the Internet or telephone will be available shortly after the call at http://www.merge.com/investor/conferencecall.asp.

Merge Healthcare develops software solutions that automate healthcare data and diagnostic workflow to create a more comprehensive electronic record of the patient experience. Merge products, ranging from standards-based development toolkits to fully integrated clinical applications, have been used by healthcare providers worldwide for over 20 years. Additional information can be found at www.merge.com.

Cautionary Notice Regarding Forward-Looking Statements

This news release contains "forward-looking statements," including statements which are related to future, not past, events. Forward-looking statements usually describe expected future business and financial outlook or performance, and often contain words such as “will,” “believes,” “intends,” “anticipates,” “expects,” "plans," "seeks," “see” and similar expressions. Forward-looking statements, by their nature, address matters that are, to varying degrees, uncertain and subject to various known and unknown risks. For Merge, particular uncertainties and risks that could cause actual results to differ materially from post-merger forward-looking statements include, among other issues: the successful integration of AMICAS and Merge; achieving certain post-acquisition synergies; the market acceptance of implemented product solutions; market acceptance and performance of Merge’s products and services; the impact of competitive products and pricing; possible delays in the implementation of its managed services offering; the risks and effects of its recent changes in its executive and Board leadership, including the costs and expenses related to severance payments made to departing officers; the risks and effects of its recent securities issues, including the issuance of certain senior secured notes; the past restatement of its financial statements and other actions that may be taken or required as a result of such restatement; its ability to generate sufficient cash from operations to meet future operating, financing and capital requirements, including repayment obligations with respect to its outstanding indebtedness; risks associated with its prior delays in filings with the SEC or its ability to continue to meet the listing requirements of The NASDAQ Global Market; the costs, risks and effects of various pending legal proceedings; and other risk factors detailed in its filings with the Securities and Exchange Commission. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date the statement was made. Merge does not undertake any obligation to update forward-looking statements or any of risks, uncertainties and other factors.