We use a three-tier value hierarchy to prioritize the inputs used in measuring fair value of our financial assets and liabilities. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore, requiring an entity to develop its own assumptions.
We also consider additional information in estimating fair value when the volume and level of activity for the asset or liability have significantly decreased, or circumstances indicate a transaction is not suitable for fair value measurement. See Note 4 for further discussion of the fair value of our financial instruments.
Cash and cash equivalents consist of balances with banks (including restricted cash), money market accounts and liquid short-term investments with original maturities of ninety days or less and are carried on the balance sheet at cost plus accrued interest. As of December 31, 2013, cash and cash equivalents were $19,729, including restricted cash of $392. Restricted cash consisted of letters-of-credit relating to our leased facilities.
Inventory, consisting principally of finished goods (primarily purchased third-party hardware) is stated at the lower of cost or market determined on a first-in, first-out (FIFO) basis. We also maintain inventory reserves for excess and obsolete inventory determined based on the age of our inventory.
During the third quarter of 2013, we sold the equity investment that was included in other current assets as of December 31, 2012. See Note 4, Fair Value Measurements for additional discussion of this sale.
The following table shows the changes in our reserves for revenue recognized in excess of billings:
During the fourth quarter of 2012, we recorded a charge of $1,308 related primarily to uncollectible billings from customer contracts obtained through acquisitions in the past few years. The $1,308 related to a change in estimate to our reserve for revenues in excess of billings. The effect of the change in estimate related to our reserve for revenues in excess of billings, which was recorded to general and administrative in our statement of operations, was to increase our net loss by $1,308 ($0.01 per share, net of income tax), for the year ended December 31, 2012.
Property and equipment are stated at cost. Depreciation on property and equipment is calculated on the straight-line method over the estimated useful lives of the assets. Property and equipment 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. Useful lives of our major classes of property and equipment are three years for computer equipment and three to five years for office equipment. Leasehold improvements are amortized using the straight-line method over the shorter of the estimated life of the asset or the term of the lease. We recorded depreciation expense of $3,394, $3,752 and $3,955 in 2013, 2012 and 2011, respectively.
Intangible assets include purchased and capitalized technology, customer relationships, backlog, trade names, and non-compete agreements. Finite-lived intangible assets are amortized to reflect the pattern of economic benefits consumed, which is primarily the straight-line method.
Purchased software 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 assets with estimable useful lives and determined that their carrying values as of December 31, 2013 are recoverable in future periods.
All research and development costs incurred prior to the point at which management believes a project has reached technological feasibility or incurred in the preliminary stages of development are expensed as incurred.
We review goodwill for impairment annually on October 1st, or more frequently if impairment indicators arise. During 2012, our reporting units changed from Merge Healthcare and Merge eClinical to Merge Healthcare and Merge Data and Analytics (DNA) due to the level of discrete financial information as well as the aggregation of Merge’s components, which exhibit similar long term performance and have similar economic characteristics. In calculating potential impairment losses, we evaluate the fair value of our reporting units using either quoted market prices or, if not available, by estimating the expected present value of their future cash flows. We use a two-step impairment test. The first step of the goodwill impairment test, used to identify potential impairment, compares the fair value of a reporting unit with its carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired, thus the second step of the impairment test is unnecessary. If the carrying amount of a reporting unit exceeds its fair value, the second step of the goodwill impairment test is performed to measure the amount of impairment loss, if any. The second step of the goodwill impairment test, used to measure the amount of impairment loss, compares the implied fair value of reporting unit goodwill with the carrying amount of that goodwill. If the carrying amount of reporting unit’s goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. 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. We performed our annual goodwill testing and determined that there is no impairment, since the fair value of our reporting units substantially exceeded the carrying value.
The acquisition obligation relates to the current portion of the balance due for an insignificant acquisition completed in 2011. The non-current portion of $273 and $2,041 is recorded in other non-current liabilities in our consolidated balance sheets as of December 31, 2013 and 2012, respectively. Total amounts to be paid under this obligation of $1,967 and $273 in 2014 and 2015, respectively, were recorded at their discounted amounts based on the payment due dates.
Guarantees
We recognize 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 recorded 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.
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.
Accumulated Other Comprehensive Income
Foreign currency translation adjustments and unrealized gains or losses on our available-for-sale securities, net of applicable taxes, are included in accumulated other comprehensive income, and are further detailed in Note 4 for the years ended December 31, 2013 and 2012.
Revenue Recognition
Revenues are derived primarily from the licensing of software, sales of hardware and related ancillary products, hosted clinical trial software-as-a-service (SaaS) offerings, installation and engineering services, training, consulting, and software maintenance and support. 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. 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, including whether the deliverables specified in a multiple-element arrangement should be treated as separate units of accounting for revenue recognition purposes, and if so, the relative selling price that should be allocated to each of the elements and when to recognize revenue for each element.
We recognize revenue on software arrangements involving multiple elements, including separate arrangements with the same customer executed within a short time frame of each other, based on the vendor-specific objective evidence (VSOE) of fair values of those elements. For the majority of our business, we determine the fair value of the maintenance and support portion of the arrangement based on the substantive renewal price of the maintenance offered to customers, which generally is stated in the contract. The fair value of installation, engineering services, training, and consulting is based upon the price charged when these services are sold separately. For sales transactions where the software is incidental or the only contract deliverable is engineering or other services, as well as hardware transactions where no software is involved, we recognize revenue based on VSOE of fair value, other third-party evidence of fair value or our best estimated selling price of those elements.
Revenue from multiple-element arrangements including software is recognized using the residual method. Under the residual method, revenue is recognized in a multiple element arrangement when fair value exists for all of the undelivered elements in the arrangement, even if fair value does not exist for one or more of the delivered elements in the arrangement, assuming all other conditions for revenue recognition have been satisfied. If evidence of fair value cannot be established for the maintenance and support element of a sale, and it represents the only undelivered element, all contract elements are deferred and recognized ratably over the related maintenance and support period.
Revenue from multiple-element arrangements not including software is typically recognized using the relative method. Under the relative method, revenue is recognized in a multiple element arrangement based on selling prices for all of the elements in the arrangement, assuming all other conditions for revenue recognition have been satisfied.
Provided that evidence of an arrangement exists, fees are fixed or determinable, collection of the related receivable is probable, fair value for the undelivered elements exist and there are no other contract considerations resulting in the deferral of revenue, we typically recognize revenue in the following manner:
·
|
Software licenses and hardware are recognized upon delivery, while installation, engineering services, training, and consulting services are recognized as performed and maintenance and support is recognized ratably over the period in which the services are performed. This is the primary method used for sales of software products which are typically fully functional upon delivery and do not require significant modification or alteration. Any subsequent software royalties associated with such contracts are generally recognized as reported by the customer. Revenue is also recognized in this manner for the majority of sales of additional modules to existing customers.
|
·
|
Merge sells software with or without various standard hardware components (i.e. servers, monitors, storage disk arrays, etc.). The hardware items are sold primarily as a convenience for its customers who may choose not to purchase it because either they already have the applicable hardware or they purchased the hardware directly from a third party vendor. We have a sufficient number of stand-alone sales of hardware to allow it to obtain vendor-specific objective evidence of fair value for the hardware. These arrangements include software that is more-than-incidental to the hardware. Therefore, the software is not essential to the functionality of the hardware (and vice versa). Software licenses sold through annual contracts that include software maintenance and support are deferred and recognized ratably over the one-year period.
|
·
|
Revenues derived from SaaS offerings are generally recognized ratably as we provide software application-hosting and are recognized using the proportional performance method for services provided to customers under fixed-price contracts. Such contracts are entered into by certain customers with clinical trial products comprising the vast majority. These contracts consist of master agreements containing general terms and conditions and separately negotiated addendums (called task orders) which include services, software subscription and usage fees, and hosting fees. Customers generally have the ability to terminate contracts upon 30 days’ notice. However, these contracts typically require payment of fees earned from all services provided through the termination date.
|
·
|
If services are considered essential to the functionality of the software, revenue is recognized based on service hours expended through project completion and maintenance and support is recognized ratably over the applicable period.
|
·
|
EDI revenues are typically recognized monthly based on transactional volumes or a fixed fee.
|
If services are considered essential, we recognize revenue using either the proportional performance guidelines or percentage of completion accounting, as appropriate. Revenue is determined by the input method based upon the amount of labor hours expended compared to the total labor hours expended plus the estimated amount of labor hours to complete the project. Total estimated labor hours are based on management’s best estimate of the total amount of time it will take to complete a project. These estimates require the use of judgment. A significant change in one or more of these estimates could affect the profitability of one or more of our contracts. We review our contract estimates periodically to assess the possible need for 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. When estimates indicate a loss, such loss is recognized in the current period in its entirety. Because of the inherent uncertainties in estimating total labor hours, it is possible that the estimates will change and could result in a material change of revenue recognized in the applicable period. We record a loss for a contract at the point it is determined that the total estimated contract costs will exceed management’s estimates of contract revenues. As of December 31, 2013, we have not experienced any material losses on uncompleted contracts.
We assess collectability based on a number of factors, including past transaction history with the customer and the credit worthiness of the customer. We must exercise our judgment when we assess the probability of collection and the current credit worthiness of each customer. We have provided for an allowance for estimated returns and credits based on our historical experience of returns and customer credits.
Deferred revenue is comprised of deferrals for license fees, support and maintenance and other services. Long-term deferred revenue as of December 31, 2013 represents license fees, support and maintenance and other services to be earned or provided beginning January 1, 2015. Revenue recognized that has not yet been billed to a customer results in an asset as of the end of the period. As of December 31, 2013 and 2012, there was $12,069 and $18,812, net of reserves, recorded within other current assets related to revenue recognized that has not yet been billed.
We record reimbursable out-of-pocket expenses in both services and maintenance net sales and as a direct cost of services and maintenance. The reimbursement by customers of shipping and handling costs are recorded in software and other net sales and the associated cost as a cost of sale. Sales tax, if any, is passed on to our customers.
Share-Based Compensation
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.
Share-based compensation expense for restricted stock awards is calculated based on the fair market value of the restricted stock awards at the date of grant, and recognized on a straight-line basis over the vesting period.
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. We consider different factors when estimating expected forfeitures, including types of awards, employee class, and historical experience
.
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, statement of operations, or related disclosures.
In February 2013, the
Financial Accounting Standards Board (
FASB) issued Accounting Standards Update (ASU) No. 2013-02,
Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income
, which is included in ASC Topic 220 (Comprehensive Income). The objective of ASU 2013-02 is to improve the reporting of reclassifications out of accumulated other comprehensive income. The amendments are effective prospectively for reporting periods beginning after December 15, 2012. We have implemented this amendment and included the required disclosure in the Notes to the Consolidated Financial Statements.
In July 2013, the FASB issued ASU No. 2013-11,
Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exist
, which is included in ASC Topic 740 (Income Taxes). ASU 2013-11 requires an entity to net its liability for unrecognized tax positions against a net operating loss carryforward, a similar tax loss or a tax credit carryforward when settlement in this manner is available under the tax law. The provisions of this new guidance are effective for reporting periods beginning after December 15, 2013. The guidance is not expected to have a material impact on our statement of operations, financial position, or cash flows.
In October 2012, the FASB issued ASU No. 2012-04
,
Technical Corrections and Improvements.
The amendments in this update cover a wide range of Topics in the Accounting Standards Codification. These amendments include technical corrections and improvements to the Accounting Standards Codification and conforming amendments related to fair value measurements. The amendments in this update will be effective for fiscal periods beginning after December 15, 2012. The adoption of ASU No. 2012-014 did not have a material impact on our statement of operations, financial position or cash flows.
In August 2012, the FASB issued ASU No. 2012-03
,
Technical Amendments and Corrections to SEC Sections: Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin (SAB) No. 114, Technical Amendments Pursuant to SEC Release No. 33-9250, and Corrections Related to FASB Accounting Standards Update No. 2010-22 (SEC Update).
This update amends various SEC paragraphs pursuant to the issuance of SAB No. 114. The adoption of ASU No. 2012-03 did not have a material impact on our statement of operations, financial position, or cash flows.
In July 2012, the FASB issued ASU No. 2012-02
,
Intangibles — Goodwill and Other — Testing Indefinite-Lived Intangible Assets for Impairment
,
to establish an optional two-step analysis for impairment testing of indefinite-lived intangibles other than goodwill. The two-step analysis establishes an optional qualitative assessment to precede the quantitative assessment, if necessary. In the qualitative assessment, the entity must evaluate the totality of qualitative factors, including any recent fair value measurements, that impact whether an indefinite-lived intangible asset other than goodwill has a carrying amount that more likely than not exceeds its fair value. The entity must proceed to conducting a quantitative analysis, according to which the entity would record an impairment charge for the amount of the asset’s fair value exceeding the carrying amount, if (1) the entity determines that such an impairment is more likely than not to exist, or (2) the entity foregoes the qualitative assessment entirely. The standards update will be effective for financial statements of periods beginning after September 15, 2012, with early adoption permitted. The adoption of ASU No. 2012-02 did not have a material impact on our statement of operations, financial position, or cash flows.
(2)
Accounts Receivable
Substantially all receivables are derived from sales and related services, support and maintenance of our products to healthcare IT providers, device manufacturers and pharmaceutical companies located throughout the U.S. and in certain foreign countries as indicated in Note 14.
Our accounts receivable balance is reported net of an allowance for doubtful accounts and for sales returns. We provide for an allowance for estimated uncollectible accounts and sales returns based upon historical experience and management’s judgment. As of December 31, 2013 and 2012, the allowances for estimated uncollectible accounts and sales returns were $11,938 and $14,074, respectively.
The following table shows the changes in our allowance for doubtful accounts and sales returns.
|
|
Balance at Beginning of Period
|
|
|
Net Additions Charged to Revenue and Expenses
|
|
|
Deductions
|
|
|
Balance at End of Period
|
|
For year ended December 31,:
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
$
|
14,074
|
|
|
$
|
693
|
|
|
$
|
(2,829
|
)
|
|
$
|
11,938
|
|
2012
|
|
|
4,080
|
|
|
|
10,523
|
|
|
|
(529
|
)
|
|
|
14,074
|
|
2011
|
|
|
1,322
|
|
|
|
2,766
|
|
|
|
(8
|
)
|
|
|
4,080
|
|
During the year ended December 31, 2013, we wrote off $2,492 of accounts receivable and had $337 of sales returns..
During the year ended December 31, 2012, we recorded a charge to bad debt expense for $12,051 within general and administrative in our statement of operations primarily due to uncollectible billings from customer contracts obtained through acquisitions in prior years. The expense included a charge recorded in the fourth quarter of $7,855 related to a change in estimate to our allowance for bad debts and sales returns. The effect of the change in estimate, which was recorded to general and administrative in our statement of operations, was to increase our net loss by $7,855 ($0.09 per share, net of income tax), for the year ended December 31, 2012.
(3) Goodwill and Other Intangible Assets
Goodwill
Goodwill is our primary intangible asset not subject to amortization. The changes in carrying amount in the years ended December 31, 2013 and 2012 was as follows:
|
|
Total
|
|
|
Merge
Healthcare
|
|
|
Merge
DNA
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2011
|
|
$
|
209,829
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Increase due to acquisitions
|
|
|
4,431
|
|
|
|
-
|
|
|
|
-
|
|
Allocation to operating segments
|
|
|
-
|
|
|
|
194,115
|
|
|
|
20,145
|
|
Increase due to foreign currency
|
|
|
52
|
|
|
|
-
|
|
|
|
52
|
|
Balance at December 31, 2012
|
|
|
214,312
|
|
|
|
194,115
|
|
|
|
20,197
|
|
Increase due to foreign currency
|
|
|
62
|
|
|
|
-
|
|
|
|
62
|
|
Balance at December 31, 2013
|
|
$
|
214,374
|
|
|
$
|
194,115
|
|
|
$
|
20,259
|
|
Other Intangible Assets
Our intangible assets subject to amortization are summarized as of December 31, 2013 and 2012 as follows:
|
|
|
|
|
December 31, 2013
|
|
|
December 31, 2012
|
|
|
|
Weighted Average Remaining Amortization Period (Years)
|
|
|
Gross Carrying Amount
|
|
|
Accumulated Amortization
|
|
|
Gross Carrying Amount
|
|
|
Accumulated Amortization
|
|
Purchased software
|
|
|
3.8
|
|
|
$
|
31,542
|
|
|
$
|
16,885
|
|
|
$
|
31,066
|
|
|
$
|
12,350
|
|
Capitalized software
|
|
|
2.5
|
|
|
|
1,910
|
|
|
|
1,685
|
|
|
|
1,825
|
|
|
|
1,534
|
|
Customer relationships
|
|
|
5.3
|
|
|
|
46,333
|
|
|
|
22,740
|
|
|
|
46,302
|
|
|
|
15,012
|
|
Backlog
|
|
|
1.0
|
|
|
|
9,680
|
|
|
|
9,448
|
|
|
|
9,680
|
|
|
|
8,338
|
|
Trade names
|
|
|
6.9
|
|
|
|
1,463
|
|
|
|
605
|
|
|
|
1,463
|
|
|
|
446
|
|
Non-competes
|
|
|
3.3
|
|
|
|
3,190
|
|
|
|
1,673
|
|
|
|
3,190
|
|
|
|
1,211
|
|
Total
|
|
|
|
|
|
$
|
94,118
|
|
|
$
|
53,036
|
|
|
$
|
93,526
|
|
|
$
|
38,891
|
|
As a result of an insignificant acquisition in the twelve months ended December 31, 2012, we increased the gross carrying amounts of purchased software, customer relationships, and trade names by $780, $1,220, and $80, respectively. Upon completion of a product rationalization and a product being rebranded in the fourth quarter of 2012, we recorded a $796 impairment charge to purchased software and a $474 impairment charge to trade names. We also wrote off the fully amortized gross carrying amounts and the accumulated amortization related to the purchased software and trade name of $1,110 and $620, respectively, in 2012.
Estimated aggregate amortization expense for our intangible assets, which become fully amortized in 2022, for the remaining periods is as follows:
For the year ending December 31:
|
2014
|
|
|
12,378
|
|
2015
|
|
|
9,864
|
|
2016
|
|
|
7,819
|
|
2017
|
|
|
5,637
|
|
2018
|
|
|
3,402
|
|
Thereafter
|
|
|
1,982
|
|
Total
|
|
$
|
41,082
|
|
Amortization expense, including impairments for our intangible assets, is set forth in the following table:
|
|
Year Ended December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
Amortization included in cost of sales:
|
|
|
|
|
|
|
|
|
|
Purchased software
|
|
$
|
4,525
|
|
|
$
|
5,501
|
|
|
$
|
4,915
|
|
Capitalized software
|
|
|
152
|
|
|
|
205
|
|
|
|
189
|
|
Backlog
|
|
|
1,110
|
|
|
|
2,211
|
|
|
|
3,745
|
|
Total
|
|
|
5,787
|
|
|
|
7,917
|
|
|
|
8,849
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization included in operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
|
7,719
|
|
|
|
7,434
|
|
|
|
5,667
|
|
Trade names
|
|
|
159
|
|
|
|
732
|
|
|
|
3,241
|
|
Non-competes
|
|
|
461
|
|
|
|
461
|
|
|
|
496
|
|
Total
|
|
|
8,339
|
|
|
|
8,627
|
|
|
|
9,404
|
|
Total amortization
|
|
$
|
14,126
|
|
|
$
|
16,544
|
|
|
$
|
18,253
|
|
(4)
Fair Value of Investments
Our financial instruments include cash and cash equivalents, accounts receivable, marketable and non‑marketable securities, accounts payable, debt payable, and certain accrued liabilities. The carrying amounts of our cash and cash equivalents (which are comprised primarily of deposit and overnight sweep accounts), accounts receivable, accounts payable, and certain accrued liabilities approximate fair value due to the short maturity of these instruments. The carrying amounts of our marketable equity securities were based on the quoted price of the security in an active market. The estimated fair values of the non-marketable equity securities have been determined from information obtained from independent valuations and management estimates. The carrying value of our long-term debt recognized in the consolidated balance sheets as of December 31, 2013 and 2012, was approximately $236,432 and $250,046, respectively, while the fair value of long-term debt as of December 31, 2013 and 2012, was approximately
$226,789
and $271,858, respectively, based on Level 2 inputs consisting of quoted market prices for the same issues.
See Note 6 for further discussion of our debt.
Current Investment
During 2013, we sold an equity security investment for $1,785 that was classified as a Level 1 trading security within Other current assets in our consolidated balance sheets. We recorded a realized loss of $231 within the other, net line in our statement of operations for the year ended December 31, 2013. This equity security investment was transferred from Level 2 to Level 1during 2013 upon the lapse of a trading restriction.
We acquired this equity security investment i
n the second quarter of 2012 from a customer as settlement for purchase commitments and outstanding receivables associated with a contract. This equity investment was classified as a Level 2 trading security within other current assets in our consolidated balance sheets. We estimated the fair value of this investment on a recurring basis bases using the quoted market price of the security less a discount due to a trading restriction. The valuation technique for this Level 2 investment utilized qualitative and quantitative methodologies including other publicly traded companies and option pricing models. We initially estimated the fair value of this investment to be $1,530. At December 31, 2012, we re-estimated the fair value of this investment and recorded a gain of $486 within the other, net line in our statements of operations for the twelve months ended December 31, 2012. The carrying value of this investment was $2,016 at December 31, 2012.
Non-Current Investments
At December 31, 2013, we held certain securities in private companies, which are classified within other assets in our consolidated balance sheets. The investments in equity securities of private companies are classified as Level 3 investments and are reported at cost or on an equity basis. Any loss due to impairment in value is recorded as a realized loss when such loss occurs. We performed the evaluation of our Level 3 investments as of December 31, 2013, and recorded a realized loss of $100 for the year ended December 31, 2013, based on our proportionate share of the losses from the Level 3 investment that we account for under the equity method of accounting.
During the third quarter of 2013, we wrote off an investment in a publicly traded company as the company filed bankruptcy and trading of the stock was halted. The investment in the publicly traded equity security, over which we do not exert significant influence, was classified as available-for-sale and reported at fair value on a recurring basis using Level 1 inputs. Unrealized gains and losses were reported within the accumulated other comprehensive income component of shareholders’ equity. We recorded an unrealized loss of $56 net of tax within other comprehensive income for the year ended December 31, 2013 and reclassified $454 from accumulated other comprehensive income to our statement of operations with a $414 realized loss included in the Other, net line in our statements of operations for the year ended December 31, 2013 and the balance of $40 included in tax expense.
The following table sets forth the change in the fair value of our investments for the periods indicated:
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2010
|
|
$
|
55
|
|
|
$
|
-
|
|
|
$
|
313
|
|
|
$
|
368
|
|
Unrealized gain (loss)
|
|
|
51
|
|
|
|
-
|
|
|
|
-
|
|
|
|
51
|
|
Balance at December 31, 2011
|
|
|
106
|
|
|
|
-
|
|
|
|
313
|
|
|
|
419
|
|
Unrealized gain (loss)
|
|
|
(50
|
)
|
|
|
486
|
|
|
|
-
|
|
|
|
436
|
|
Acquired investments
|
|
|
-
|
|
|
|
1,530
|
|
|
|
240
|
|
|
|
1,770
|
|
Balance at December 31, 2012
|
|
|
56
|
|
|
|
2,016
|
|
|
|
553
|
|
|
|
2,625
|
|
Unrealized gain (loss)
|
|
|
19
|
|
|
|
(441
|
)
|
|
|
-
|
|
|
|
(422
|
)
|
Realized gain (loss)
|
|
|
135
|
|
|
|
-
|
|
|
|
(100
|
)
|
|
|
35
|
|
Level inputs transfer
|
|
|
1,575
|
|
|
|
(1,575
|
)
|
|
|
-
|
|
|
|
-
|
|
Sale of investment
|
|
|
(1,785
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,785
|
)
|
Balance at December 31, 2013
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
453
|
|
|
$
|
453
|
|
Unrealized gains or losses on our available-for-sale (publicly traded) security, as well as foreign currency translation adjustments, are components of accumulated other comprehensive income as set forth in the following table:
|
|
|
|
|
|
Cumulative Translation Adjustment
|
|
|
Unrealized Gain (Loss)
on Available-For-Sale Security, Net of Tax
|
|
|
Accumulated Other Comprehensive Income
|
|
Balance at December 31, 2010
|
|
$
|
1,936
|
|
|
$
|
(392
|
)
|
|
$
|
1,544
|
|
Net current period other comprehensive income
|
|
|
25
|
|
|
|
44
|
|
|
|
69
|
|
Balance at December 31, 2011
|
|
|
1,961
|
|
|
|
(348
|
)
|
|
|
1,613
|
|
Net current period other comprehensive income (loss)
|
|
|
4
|
|
|
|
(50
|
)
|
|
|
(46
|
)
|
Balance at December 31, 2012
|
|
|
1,965
|
|
|
|
(398
|
)
|
|
|
1,567
|
|
Other comprehensive loss before reclassification
|
|
|
(103
|
)
|
|
|
(56
|
)
|
|
|
(159
|
)
|
Amounts reclassified from accumulated other comprehensive income
|
|
|
-
|
|
|
|
454
|
|
|
|
454
|
|
Net current period other comprehensive income (loss)
|
|
|
(103
|
)
|
|
|
398
|
|
|
|
295
|
|
Balance at December 31, 2013
|
|
$
|
1,862
|
|
|
$
|
-
|
|
|
$
|
1,862
|
|
(5)
Restructuring
We incurred $3,856, $830 and $1,216 of restructuring costs in the years ended December 31, 2013, 2012 and 2011, respectively, in restructuring and other expenses in our statements of operations.
In 2013, we completed certain restructuring initiatives. These initiatives included the end of life of specific, non-core products, consolidations of operations surrounding three facilities and the reorganization of our leadership team and sales organization.
Included in contract exit costs are those charges associated with exiting or cancelling both vendor and customer contracts. In 2012, we completed a restructuring initiative to reduce our workforce. This action was taken based upon our assessment of ongoing personnel needs. In 2011, we committed to a restructuring initiative to reduce our workforce by approximately 30 individuals.
The following table shows a summary of the restructuring activity through December 31, 2013:
|
|
Employee Termination Costs
|
|
|
Contract Exit Costs
|
|
|
Relocation
|
|
|
Total
|
|
Balance at December 31, 2010
|
|
$
|
449
|
|
|
$
|
1,698
|
|
|
$
|
42
|
|
|
$
|
2,189
|
|
Charges to expense
|
|
|
1,137
|
|
|
|
104
|
|
|
|
(25
|
)
|
|
|
1,216
|
|
Payments
|
|
|
(612
|
)
|
|
|
(1,365
|
)
|
|
|
(17
|
)
|
|
|
(1,994
|
)
|
Foreign exchange
|
|
|
(4
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(4
|
)
|
Balance at December 31, 2011
|
|
$
|
970
|
|
|
$
|
437
|
|
|
$
|
-
|
|
|
$
|
1,407
|
|
Charges to expense
|
|
|
830
|
|
|
|
-
|
|
|
|
-
|
|
|
|
830
|
|
Payments
|
|
|
(1,094
|
)
|
|
|
(434
|
)
|
|
|
-
|
|
|
|
(1,528
|
)
|
Non-cash adjustments
|
|
|
(487
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(487
|
)
|
Balance at December 31, 2012
|
|
$
|
219
|
|
|
$
|
3
|
|
|
$
|
-
|
|
|
$
|
222
|
|
Charges to expense
|
|
|
1,943
|
|
|
|
1,913
|
|
|
|
-
|
|
|
|
3,856
|
|
Payments
|
|
|
(1,890
|
)
|
|
|
(887
|
)
|
|
|
-
|
|
|
|
(2,777
|
)
|
Balance at December 31, 2013
|
|
$
|
272
|
|
|
$
|
1,029
|
|
|
$
|
-
|
|
|
$
|
1,301
|
|
As of December 31, 2013, the remaining balance of $1,301 is included in the restructuring accrual in current liabilities. We expect that the majority of the balance will be paid out by the end of 2014.
(6)
Debt and Operating Leases
Term Loan and Revolving Credit Facility
On April 23, 2013, we issued a new senior secured credit facility consisting of a six-year term loan (the Term Loan) of $255,000 issued at 99% of the Term Loan amount and a five-year revolving credit facility (the Revolving Credit Facility) of up to $20,000. As of
December 31
, 2013, nothing was outstanding under the Revolving Credit Facility. We are currently required to make quarterly principal payments totaling $2,490 annually over the life of the Term Loan. The future maturities of principal under the Term Loan for each of the years ending December 31, 2014, 2015, 2016, 2017 and 2018 are $2,490 with $226,275 due in 2019. Interest is currently due
the last business day of each March, June, September and December and is dependent upon the type of loan outstanding under the Credit Agreement.
The Term Loan replaces $252,000 of Senior Secured Notes that bore interest at 11.75% (Notes).
The Term Loan and Revolving Credit Facility were established pursuant to a Credit Agreement (the Credit Agreement) which contains certain financial covenants, , in particular a debt-to-adjusted-EBITDA ratio with a maximum allowance of 5.5 : 1 as of December 31, 2013. As of December 31, 2013, our debt-to-adjusted EBITDA ratio was 5.3 : 1. The Credit Agreement also contains various other negative covenants, including restrictions on incurring indebtedness, creating liens, mergers, dispositions of property, dividends and stock repurchases, acquisitions and other investments, capital expenditures and entering into new lines of business. The Credit Agreement also contains various affirmative covenants, including covenants relating to the delivery of financial statements and other financial information, maintenance of property, maintenance of insurance, maintenance of books and records and compliance with environmental laws. As of
December 31
, 2013, we were in compliance with all applicable covenants.
The Credit Agreement provides that borrowings will bear interest at a variable rate which can be, at our option, either (i) a LIBOR borrowing rate for a specified interest period plus an applicable margin or, (ii) an alternative base rate plus an applicable margin, subject to a LIBOR rate floor of 1.25% or a base rate floor of 2.25%, as applicable. The applicable spread for borrowings under the Credit Agreement is 4.75% per annum for LIBOR loans and 3.75% per annum for base rate loans. Based on an election we made pursuant to the terms of the Credit Agreement with respect to the interest period, through December 31, 2013, borrowings under the Credit Agreement bore interest at a rate of 6.00% per annum.
As of December 31, 2013, current borrowings under our credit agreement had an effective interest rate of 6.50% and weighted average interest rate of 6.00%, determined as the LIBOR rate (subject to a 1.25% floor) plus 4.75%.
If an event of default occurs under the Credit Agreement, the applicable interest rate will increase by 2.00% per annum during the continuance of such event of default. As required by the terms of the Credit Agreement, we entered into a two-year, interest rate cap at 3.00% (versus the 1.25% floor) for 50% of the total amount of Term Loan principal outstanding on October 21, 2013 at a cost of $65.
During 2013, we capitalized $4,588 of debt issuance costs in other assets in our consolidated balance sheet. These issuance costs and the original issue discount of $2,550 are being amortized over the life of the loan using the effective interest method. The unamortized debt issuance costs and debt discount at December 31, 2013 are $4,127 and $2,294, respectively. For the year ended December 31, 2013, we made required principal payments of $1,275 against the Term Loan as well as additional voluntary payments of $15,000.
$252,000 Senior Secured Notes
These Notes were replaced by our Term Loan and Revolving Credit Facility in April 2013.
In April 2010, we issued $200,000 of Notes in order to finance the acquisition of AMICAS. The Notes were issued at 97.266% of the principal amount, bore interest at 11.75% of principal (payable on May 1st and November 1st of each year) and would have matured on May 1, 2015. The Notes were offered in a private placement pursuant to Rule 144A and Regulation S under the Securities Act of 1933, as amended. Subsequent to the issuance of the Notes, we completed an exchange offer to satisfy our obligations under the registration rights agreement entered into in connection with the issuance of the Notes, pursuant to which we exchanged the Notes for new Notes that were registered under the Securities Act of 1933 but otherwise identical in all material respects. In connection with the Notes, we incurred issuance costs of $9,015 (which were recorded in other assets on the consolidated balance sheet). These issuance costs were recorded as a long-term asset and were amortized over the life of the Notes using the effective interest method.
In June 2011, we issued an additional $52,000 in Notes at 103.0% of the principal amount with terms identical to the existing Notes. The proceeds of these additional Notes were used to redeem and retire our Series A Preferred Stock and to pay associated dividends (as further discussed in Note 7). These additional Notes were offered in a private placement pursuant to Rule 144A and Regulation S under the Securities Act of 1933, as amended. Prior to issuance, we received consents from the majority of holders of the existing Notes to amend the Indenture to allow us to incur the additional indebtedness. As consideration for the consents, we paid $1,528 in consent fees from the proceeds of the Notes. These fees are recorded as an issuance cost in long-term assets and were amortized, along with the premium, over the remaining life of the Notes using the effective interest method. Subsequent to the issuance of the additional Notes, we completed an exchange offer to satisfy our obligations under the registration rights agreement entered into in connection with the issuance of the additional Notes, pursuant to which we exchanged the Notes for new Notes that were registered under the Securities Act of 1933 but otherwise were identical in all material respects. We also incurred $1,686 in costs related to the issuance of the additional Notes that did not qualify for capitalization. These costs are recorded in other expense, net in our consolidated statement of operations for 2011.
Other Debt
In 2011 we also repaid $4,591 in debt obligations which we assumed from an insignificant acquisition.
Interest and Other Expenses Related to Debt
For the years ended
December 31
, 2013, 2012 and 2011, we recorded $21,551
,
$32,334 and $29,135, respectively, of interest expense related to the Term Loan and Notes, including $1,162, $2,049 and $1,659, respectively, of amortization of debt issuance costs and $487, $675 and $733, respectively, of amortization of net debt discount. For the year ended
December 31
, 2013, we
also recorded a charge of $23,822 for early debt extinguishment in our consolidated statement of operations. This charge consisted of $5,235 for unamortized debt issuance costs, $1,724 for unamortized net debt discount and $16,863 for early retirement costs associated with the extinguishment of the Notes.
In 2013, 2012 and 2011, we made interest payments of $24,759, $29,610 and $25,723, respectively, related to the Term Loan and Notes. As of December 31, 2013 and 2012, the long term debt balances on our consolidated balance sheet included $2,293 and $1,954, respectively, of unamortized net discount related to the Term Loan and Notes.
Operating Leases
We had a $15.0 million lease line facility with interest at 7.4%. This facility expired on March 31, 2013. As of December 31, 2012, $0.9 million was outstanding and was included in other current liabilities.
We have non-cancelable operating leases at various locations. Our five largest operating leases are all facility leases as set forth in the following table:
Location
|
|
Square Footage
|
|
|
Annual Lease Payments
|
|
End of Term
|
Chicago, Illinois
|
|
|
22,633
|
|
|
$
|
367
|
|
December 2015
|
Daytona Beach, Florida
|
|
|
36,000
|
|
|
|
177
|
|
December 2015
|
Hartland, Wisconsin
|
|
|
81,000
|
|
|
|
716
|
|
November 2025
|
Mississauga, Ontario
|
|
|
24,000
|
|
|
|
665
|
|
February 2020
|
Morrisville, North Carolina
|
|
|
14,746
|
|
|
|
241
|
|
September 2016
|
Total rent expense in 2013, 2012 and 2011 was $3,184, $3,351, and $3,443, respectively. Future minimum lease payments under all non-cancelable operating leases as of December 31, 2013, are:
2014
|
|
$
|
2,313
|
|
2015
|
|
|
2,318
|
|
2016
|
|
|
1,593
|
|
2017
|
|
|
1,382
|
|
2018
|
|
|
1,382
|
|
Thereafter
|
|
|
5,734
|
|
Total minimum lease payments
|
|
$
|
14,722
|
|
Income received under non-cancelable sub-leases in 2013 was $76 and in 2012 was $227. The above obligations include lease payments related to facilities that we have either ceased to use or abandoned as of December 31, 2013.
(7)
Shareholders’ Equity
In 2013, we issued 40,225 shares of our common stock valued at $124 as consideration for insignificant acquisitions. The value of the shares issued was based on the closing price of our common stock on the date of issuance. Additionally, we cancelled 122,292 shares of common stock which were originally valued at $6.95 per share and were issued as part of a holdback position in an insignificant acquisition. The cancellation of the shares was in settlement of a $2,194 indemnified asset. This resulted in a charge of $1,345 within general and administrative expense. We also issued 400,000 shares of our common stock valued at $885 as consideration in the settlement of a lawsuit that existed at the time of an insignificant acquisition. The value of the shares issued was based on the closing price of our common stock on the date of issuance, discounted for a trading restriction, and was recorded within general and administrative expense.
In 2012, we issued 1,356,917 shares of our common stock valued at $5,202 as consideration for insignificant acquisitions. The value of the shares issued was based on the closing price of our common stock on the earlier of the date shares were issued or subscribed, discounted based upon a holdback provision and trading restrictions over one year. The agreement also contained a provision for a settlement at a future date calculated by the change in the volume weighted average price of our stock. This was accounted for as a liability based on the use of the Monte Carlo Simulation Method. Through settlement, we incurred a $1,383 charge to Acquisition-related expenses for the change in fair value of this Level 2 instrument. These shares were issued pursuant to an exception from registration provided by Section 4(2) of the Securities Act of 1933, as amended. We also issued 505,038 shares of restricted stock which immediately vested to current employees as settlement of contingent consideration arising for an insignificant acquisition. The restricted shares were valued at $1,827 based on the closing price of our common stock on the date of issuance. We also issued 53,574 shares of our common stock, valued at $373, as partial consideration for an insignificant acquisition which was completed in the fourth quarter of 2011. These shares had been recorded as common stock subscribed as of December 31, 2011.
In 2011, w
e issued 6,044,898 shares of our common stock (including 175,866 shares subscribed at December 31, 2011) valued at $34,802, as partial consideration for three insignificant acquisitions completed in 2011. The value of the shares issued for acquisitions was based on the closing price of our common stock on the respective acquisition dates, with certain shares discounted based upon holdback provisions and trading restrictions over one year, as applicable. We also issued 974,701 shares of our common stock, valued at $3,147, as partial consideration for an insignificant acquisition which was completed in the fourth quarter of 2010. These shares had been recorded as common stock subscribed as of December 31, 2010.
In 2011, one of our insignificant acquisitions included a 63% ownership interest in a subsidiary. We recorded a non-controlling interest of $478 based upon 37% of the fair value of net assets of the less-than-wholly-owned subsidiary as of the acquisition date.
On December 31, 2011, we issued 485,232 shares of our common stock with a value of $1,851 as a charitable contribution. 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. The expense is included in the general and administrative category within our consolidated statements of operations.
In June 2011, we redeemed and retired all outstanding shares of our Series A Preferred Stock at the face value of $41,750 and paid cumulative dividends of $7,328. Prior to the redemption, holders of our Series A Preferred Stock waived the two-year liquidation preference.
In the years ended December 31, 2013, 2012, and 2011, we recorded cumulative dividends of zero, zero, and $3,153, respectively, related to our Series A Preferred Stock. These dividends are reflected as an increase to net loss available to common shareholders in our consolidated statement of operations.
(8)
Share-Based Compensation
The following table summarizes share-based compensation expense related to share-based awards recognized in 2013, 2012 and 2011:
|
|
Years Ended December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Share-based compensation expense included in the statement of operations:
|
|
|
|
|
|
|
|
|
|
Software and other
|
|
$
|
20
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Professional services
|
|
|
91
|
|
|
|
90
|
|
|
|
45
|
|
Maintenance
|
|
|
44
|
|
|
|
40
|
|
|
|
186
|
|
Sales and marketing
|
|
|
1,243
|
|
|
|
1,805
|
|
|
|
1,460
|
|
Product research and development
|
|
|
498
|
|
|
|
451
|
|
|
|
36
|
|
General and administrative
|
|
|
2,749
|
|
|
|
3,400
|
|
|
|
2,181
|
|
Restructuring and other expenses
|
|
|
194
|
|
|
|
-
|
|
|
|
-
|
|
Share-based compensation expense, net of tax
|
|
$
|
4,839
|
|
|
$
|
5,786
|
|
|
$
|
3,908
|
|
The expense in restructuring and other expenses of $194 relates to the acceleration of certain stock options held by a former executive officer.
Share-Based Compensation Plans
We maintain three share-based employee compensation plans, including our employee stock purchase plan (ESPP), and one director option plan under which we grant restricted stock awards and options to acquire shares of our common stock to certain employees, non-employees, non-employee directors and to existing stock option holders in connection with the consolidation of option plans following an acquisition.
Our 2005 Equity Incentive Plan (EIP) provides for awards of common stock, non-statutory stock options, incentive stock options, stock unit and performance unit grants and stock appreciation rights to eligible participants. On June 18, 2013, an amendment was approved by our shareholders to increase the number of shares of common stock authorized for issuance under the 2005 EIP by 2,000,000 to 18,500,000 shares. This increase was preceded by another approval on June 2, 2011 to increase the number of shares of common stock authorized for issuance by 3,000,000 to 16,500,000 shares of our common stock. Under the terms of the 2005 EIP, incentive stock option grants are limited to 5.0 million shares. Also, under the EIP, new stock option grants have an exercise price equal to the fair market value of our common stock at the date of grant with limited exceptions. The majority of the options issued under the 2005 EIP vest over a three or four-year period. As of December 31, 2013, non-statutory stock options to purchase 8,898,290 shares of our common stock were outstanding under this plan.
Upon approval of the 2005 EIP, we stated that we did not plan to issue any more options under our other stock option plans. Our 1998 Director Stock Option Plan, for our non-employee directors, provided for the granting of options to purchase a maximum of 300,000 shares of our common stock. In addition, our Board of Directors adopted an equity compensation plan in connection with our acquisition of a company in 2003. As of December 31, 2013, non-statutory stock options to purchase 20,000 shares of our common stock were outstanding under these plans.
Stock Options
We use the Black-Scholes option pricing model to estimate the fair value of stock option awards on the date of grant utilizing the assumptions noted in the following table. We expense the cost of stock option awards on a straight-line basis over the vesting period. Expected volatilities are based on the historical volatility of our stock and other factors. We use historical data to estimate option exercises and employee terminations within the valuation model. The expected term of options represents the period of time that options granted are expected to be outstanding. The risk-free rate for periods during the contractual life of the option is based on the U.S. Treasury rates in effect at the grant date.
|
|
Years Ended December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Dividend yield
|
|
|
0
|
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected volatility
|
|
|
65
|
%
|
|
|
65
|
%
|
|
|
100
|
%
|
Risk–free interest rate
|
|
|
0.3% - 1.0
|
%
|
|
|
0.3% - 0.8
|
%
|
|
|
0.6% - 1.8
|
%
|
Expected term (in years)
|
|
|
3.0
|
|
|
|
3.0
|
|
|
|
4.0
|
|
Weighted–average grant date fair value
|
|
$
|
1.99
|
|
|
$
|
3.51
|
|
|
$
|
3.37
|
|
The assumptions above are based on multiple factors, including the historical exercise patterns of employees in relatively homogeneous groups with respect to exercise and post-vesting employment termination behaviors, expected future exercise patterns for these same homogeneous groups, and the volatility of our stock price. ASC Topic No. 718
,
Compensation-Stock Compensation,
requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
At December 31, 2013, there was $10,137 of unrecognized compensation cost related to stock option share-based payments. We expect this compensation cost to be recognized over a weighted-average period of 2.5 years.
Stock option activity for the year ended December 31, 2013 was as follows:
|
|
|
|
|
|
|
|
Weighted-Average
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
|
|
|
|
Number
|
|
|
Weighted-
|
|
|
Contractual
|
|
|
Aggregate
|
|
|
|
of
|
|
|
Average
|
|
|
Term
|
|
|
Intrinsic
|
|
|
|
Options
|
|
|
Exercise Price
|
|
|
(In Years)
|
|
|
Value
|
|
Options outstanding, December 31, 2011
|
|
|
9,191,034
|
|
|
$
|
3.14
|
|
|
|
5.2
|
|
|
$
|
17,860
|
|
Options granted
|
|
|
4,455,000
|
|
|
|
5.19
|
|
|
|
|
|
|
|
|
|
Options exercised
|
|
|
(190,269
|
)
|
|
|
3.62
|
|
|
|
|
|
|
$
|
506
|
|
Options forfeited and expired
|
|
|
(1,283,313
|
)
|
|
|
5.60
|
|
|
|
|
|
|
|
|
|
Options outstanding, December 31, 2012
|
|
|
12,172,452
|
|
|
$
|
3.63
|
|
|
|
4.1
|
|
|
$
|
3,767
|
|
Options granted
|
|
|
1,120,000
|
|
|
|
3.19
|
|
|
|
|
|
|
|
|
|
Options exercised
|
|
|
(902,500
|
)
|
|
|
1.37
|
|
|
|
|
|
|
$
|
1,238
|
|
Options forfeited and expired
|
|
|
(3,471,662
|
)
|
|
|
4.37
|
|
|
|
|
|
|
|
|
|
Options outstanding, December 31, 2013
|
|
|
8,918,290
|
|
|
$
|
3.51
|
|
|
|
2.5
|
|
|
$
|
2,391
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable, December 31, 2013
|
|
|
6,185,165
|
|
|
$
|
3.06
|
|
|
|
1.8
|
|
|
$
|
2,391
|
|
Options exercisable, December 31, 2012
|
|
|
5,545,382
|
|
|
$
|
2.50
|
|
|
|
3.4
|
|
|
$
|
3,765
|
|
Options exercisable, December 31, 2011
|
|
|
4,215,920
|
|
|
$
|
2.78
|
|
|
|
4.6
|
|
|
$
|
10,381
|
|
We received cash proceeds of $1,236 from the exercise of stock options in 2013 and $688 in 2012.
The following table summarizes information about stock options outstanding at December 31, 2013:
Options Outstanding
|
|
|
Options Exercisable
|
|
|
|
|
|
|
|
Weighted–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
average
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
remaining
|
|
|
Weighted–
|
|
|
|
|
|
Weighted–
|
|
|
|
|
Number of
|
|
|
contractual life
|
|
|
average
|
|
|
Number of
|
|
|
average
|
|
Range of exercise prices
|
|
|
shares
|
|
|
in years
|
|
|
exercise price
|
|
|
shares
|
|
|
exercise price
|
|
$
|
0.00 - $2.48
|
|
|
|
1,945,000
|
|
|
|
2.1
|
|
|
$
|
1.09
|
|
|
|
1,938,750
|
|
|
$
|
1.09
|
|
$
|
2.48 - $4.97
|
|
|
|
4,647,324
|
|
|
|
2.1
|
|
|
|
3.09
|
|
|
|
3,241,699
|
|
|
|
3.13
|
|
$
|
4.97 - $7.46
|
|
|
|
2,274,272
|
|
|
|
3.6
|
|
|
|
6.13
|
|
|
|
953,022
|
|
|
|
6.05
|
|
$
|
7.46 - $9.95
|
|
|
|
-
|
|
|
|
0.0
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
$
|
9.95 - $12.44
|
|
|
|
1,694
|
|
|
|
3.3
|
|
|
|
10.81
|
|
|
|
1,694
|
|
|
|
10.81
|
|
$
|
12.44 - $14.92
|
|
|
|
-
|
|
|
|
0.0
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
$
|
14.92 - $17.41
|
|
|
|
20,000
|
|
|
|
0.4
|
|
|
|
16.19
|
|
|
|
20,000
|
|
|
|
16.19
|
|
$
|
17.41 - $19.90
|
|
|
|
30,000
|
|
|
|
1.4
|
|
|
|
17.50
|
|
|
|
30,000
|
|
|
|
17.50
|
|
|
|
|
|
|
8,918,290
|
|
|
|
2.5
|
|
|
$
|
3.51
|
|
|
|
6,185,165
|
|
|
$
|
3.06
|
|
Restricted Stock Awards
In 2013, we granted restricted stock awards to employees under the 2005 EIP. A restricted stock award is an award of shares of our Common Stock that is subject to time-based vesting during a specified period, which is generally three years. Restricted stock awards are independent of option grants and are generally subject to forfeiture if employment terminates prior to the vesting of the awards. Participants have full voting and dividend rights with respect to shares of restricted stock.
We expense the cost of the restricted stock awards, which is determined to be the fair market value of the restricted stock awards at the date of grant, on a straight-line basis over the vesting period. For these purposes, the fair market value of the restricted stock award is determined based on the closing price of our Common Stock on the grant date.
The following table presents a summary of the activity for our restricted stock awards:
|
|
|
|
|
|
|
|
Weighted-Average
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
|
Number
|
|
|
Weighted-Average
|
|
|
Vesting
|
|
|
|
of
|
|
|
Grant-date
|
|
|
Term
|
|
|
|
Shares
|
|
|
Fair Value
|
|
|
(In Years)
|
|
Restricted stock outstanding, December 31, 2012
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
Restricted stock granted
|
|
|
2,100,000
|
|
|
|
2.47
|
|
|
|
-
|
|
Restricted stock vested
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Restricted stock forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Restricted stock outstanding, December 31, 2013
|
|
|
2,100,000
|
|
|
$
|
2.47
|
|
|
|
2.9
|
|
During 2013, we granted 2,100,000 shares of restricted stock at a weighted-average grant date fair value of $2.47 per share that vest over a 3 year term. During 2012, we granted 505,038 shares of restricted stock at a weighted-average grant date fair value of $3.62 per share of which all were vested upon issuance in 2012.
Other information pertaining to option and vested restricted stock activity was as follows:
|
|
Years Ended December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Total fair value of restricted stock awards vested
|
|
$
|
-
|
|
|
$
|
1,591
|
|
|
$
|
-
|
|
Employee Stock Purchase Plan
We maintain an ESPP that allows eligible employees to purchase shares of our common stock through payroll deductions of up to 10% of eligible compensation on an after-tax basis. The eligible employees receive a 5% discount from the market price at the end of each calendar quarter. There is no stock-based compensation expense associated with our ESPP.
Employees contributed $253, $353, and $294, during the years ended December 31, 2013, 2012, and 2011, respectively, to purchase shares of our common stock under the employee stock purchase plan.
(9)
Commitments and Contingencies
Litigation
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. 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. On September 18, 2012, the Appellate Court issued its decision reversing the trial court and determined that Mortimore must arbitrate his disputes with Merge. On June 18, 2013, Merge and Mortimore participated in a hearing before the arbitrator. On July 17, 2013, the arbitrator rendered a reasoned award in which he concluded that Merge and Mortimore did not enter into an oral contract. As a result, Mortimore's claims and Merge's counterclaims were heard at arbitration from March 3, 2014 through March 7, 2014. A decision from the arbitrator is pending. Following the arbitrator’s ruling in July 2013, Mr. Noshay filed a motion to lift the stay as to his claims. The Court granted Mr. Noshay’s motion and set a discovery schedule with a trial expected to be set in the third or fourth quarter of 2014. We believe it is reasonably possible that we may incur a loss with respect to these matters; however, at this stage of the proceedings, it is not possible for management to reasonably estimate the amount of any potential loss.
In January and February 2010, purported stockholder class action complaints were filed in the Superior Court of Suffolk County, Massachusetts in connection with AMICAS Inc.’s (AMICAS) proposed acquisition by a third party. In March 2010, because AMICAS had terminated the merger agreement with that third party and agreed to be acquired by Merge, the Court dismissed the plaintiffs’ claims as moot. Subsequently, plaintiffs’ counsel filed an application for approximately $5,000 of attorneys’ fees. AMICAS opposed the fee petition, tendered the defense to its insurers that provided coverage against such claims and retained litigation counsel to defend the matter. On December 4, 2010, the Massachusetts court awarded plaintiffs approximately $3,200 in attorneys’ fees and costs. AMICAS appealed this judgment to the Massachusetts Court of Appeals. After receipt of the Massachusetts court’s attorneys’ fee award decision, AMICAS’s insurer denied policy coverage for approximately $2,500 of the fee award and filed a declaratory judgment action to that effect against AMICAS and Merge in Federal court for the Northern District of Illinois. We contested the insurer’s denial of coverage, asserted our rights under the applicable insurance policies and filed a counterclaim against the insurer seeking full payment of the Massachusetts court’s fee award, plus additional damages. On April 30, 2012, the Illinois Federal court ruled in favor of our motion for summary judgment, which decision was appealed by the insurer to the United States Seventh Circuit Court of Appeals. In late February 2013, the insurer settled the Massachusetts court case by agreeing to pay $2,990 to plaintiffs’ counsel and further agreeing not to pursue AMICAS or Merge for any portion of the amount paid. As a result of the Massachusetts settlement, we recognized a gain of $2,500 within general and administrative expense in our statement of operations with respect to these matters in the year ended December 31, 2013 based on the February 27, 2013 Massachusetts appellate court dismissal date. On July 16, 2013, the Seventh Circuit Court of Appeals affirmed the Federal District court’s decision in all respects and entered Final Judgment.
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 $9,000 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 $9,000 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. We believe it is reasonably possible that we may incur a loss with respect to this matter. The potential loss may lie in a range from zero to the full amount claimed, plus interest.
In September 2012, Merge Healthcare was sued in the Middle District of North Carolina by Heart Imaging Technologies, LLC (HIT). HIT alleged that certain features of products within our Image Interoperability Platform infringed three of HIT’s patents related to internet-based image viewing. On December 7, 2013, Merge Healthcare and HIT executed a non-exclusive patent license and settlement agreement (Settlement Agreement). The Settlement Agreement settled all claims between the parties and provides Merge Healthcare with access to HIT’s complete portfolio of healthcare information patents. Merge Healthcare agreed to pay HIT $1.4 million ratably over 11 years beginning in 2013 and recorded an asset equal to this amount which was less than the fair value of the patent license agreement. A corresponding liability of $1,400 was also recorded in accordance with ASC 450 requirements. Pursuant to ASU 350-30
Intangibles - Goodwill and Other,
the asset will be amortized over the life of the license and will be tested annually for impairment. Merge Healthcare also agreed to collaborate on future products and to make certain contingent payments to HIT if Merge Healthcare incorporates other zero footprint technologies into Merge Healthcare’s products and is not licensing HIT’s zero footprint technology if it is still being offered. The suit was dismissed with prejudice pursuant to a joint stipulation filed December 17, 2013.
On January 16, 2014, a purported shareholder class action complaint was filed in the United States District Court for the Northern District of Illinois by Fernando Rossy, who claims to be a Merge Healthcare stockholder, against Merge Healthcare and certain current and former directors and officers claiming violations of federal securities laws and asserting that a class of our stockholders suffered damages due to the alleged dissemination or approval of false and misleading statements by Merge Healthcare from August 1, 2012 through January 7, 2014 related to falsified subscription backlog figures and a reluctance amongst large health systems to make enterprise purchases, as well as a lack of effective controls. On February 14, 2014, William B. Federman, who claims to be a Merge Healthcare stockholder, filed a derivative complaint in the Circuit Court of Cook County, Illinois against certain of our current and former directors and officers, asserting breaches of fiduciary duty arising out of materially the same conduct alleged in the securities fraud class action complaint. Subsequently, other similar class action and derivative complaints have been filed. The plaintiffs in these cases have not claimed a specific amount of damages. We expect these complaints to be consolidated into one or two actions. Merge Healthcare and the other named defendants are actively considering all possible responses to these complaints. While we intend to defend the claims vigorously and carry directors and officers insurance, it is reasonably possible that we may incur a loss in this matter. At this stage of the proceedings, however, it is not possible for management to reasonably estimate either the likelihood of such a loss or its magnitude.
In addition to the matters discussed above, we are involved in various legal matters that are in the process of litigation or settled in the ordinary course of business. Although the final results of all such matters and claims cannot be predicted with certainty, we believe that the ultimate resolution of all such matters and claims will not have a material adverse effect on Merge’s financial condition. Professional legal fees are expensed when incurred. We accrue for contingent losses when such losses are probable and reasonably estimable. In the event that estimates or assumptions prove to differ from actual results, adjustments are made in subsequent periods to reflect more current information. Should we fail to prevail in any legal matter or should several legal matters be resolved against us in the same reporting period, such matters could have a material adverse effect on our operating results and cash flows for that particular period.
(10)
Transactions with Related Party
Merrick Ventures, LLC (Merrick Ventures) and Merrick Venture Management Holdings, LLC (Merrick Holdings), beneficially own, as of December 31, 2013, approximately
27.5
% of our outstanding common stock. Michael W. Ferro, Jr., the former Chairman of the Board of Merge Healthcare, and trusts for the benefit of Mr. Ferro’s family members beneficially own a majority of the equity interests in Merrick Ventures and Merrick Holdings.
On August 26, 2013, Mr. Ferro resigned as Chairman of the Board and as a director of Merge Healthcare.
Mr. Ferro serves as the chairman and chief executive officer of each of Merrick Holdings and of Merrick Ventures. Accordingly, Mr. Ferro indirectly controls all of the shares of Common Stock owned by Merrick Holdings and Merrick Ventures.
Beginning in 2009 we were a party to a consulting agreement with Merrick RIS, LLC, an affiliate of Merrick Holdings and Merrick Ventures, under which Merrick provided services including financial analysis and strategic planning. In 2012 we entered into a second amendment to extend the term of the consulting agreement with Merrick RIS, LLC through December 31, 2013, and modified the fee structure to include a quarterly retainer in the amount of $150 in addition to a per transaction fee of $250 for acquisitions by Merge Healthcare.
We paid $627, $1,069 and $1,348 to Merrick for such services and recognized $600, $850 and $919 in acquisition related expenses and $27, $126 and $257 in general and administrative expenses in 2013, 2012 and 2011, respectively. As of
December 31
, 2013 and 2012, we had $0 and $38, respectively, recorded in accounts payable covering obligations under this agreement. The consulting agreement expired on December 31, 2013.
In April 2010 and June 2011, Merrick RIS, LLC purchased an aggregate of $10,000 in principal amount of our Notes at the same purchase price as the other investors in the transactions. In April 2013, we commenced a cash tender offer for any and all of the Notes, and Merrick RIS, LLC, or an affiliate thereof, tendered $10,000 of its Notes. We purchased the Notes from Merrick RIS, LLC, or an affiliate thereof, for a total price of $10,670, which is based on the same consideration calculation as provided to other investors that tendered Notes.
Merrick Ventures owns 33% of the outstanding equity interest of an entity called higi llc (higi). Mr. Ferro is higi’s Founder. In December 2011, we entered into a master services agreement with higi, pursuant to which we agreed to provide higi with certain professional services, including software engineering design, application and web portal development. Revenue of $14, $155 and $506 was recognized under this agreement in 2013, 2012 and 2011, respectively. In addition, the agreement granted higi certain branding rights related to our health station business and requires higi to pay to us a fixed annual fee of one hundred dollars per station for each station that is branded with higi’s trademark and that includes higi’s user interface. The agreement terminated in accordance with its terms on December 31, 2013. On March 28, 2012, we entered into an agreement to sell higi health stations and related equipment for $2,750. Revenue of $2,750 was recognized related to this agreement in 2012.
On September 8, 2010, we entered into an assignment agreement with Merrick Ventures under which Merrick Ventures assigned to us its sublease with Aon Corporation for approximately 11,934 square feet located on the 20th floor of 200 East Randolph Street, in Chicago Illinois, at an annual base rental rate of approximately $19.5 per month from August 1, 2011 to July 31, 2012, $20.0 per month from August 1, 2012 to July 31, 2013 and $20.5 per month from August 1, 2013 to December 9, 2013, when the sublease expired. The rent was paid to the sub–landlord monthly and was the same rate as Merrick Ventures paid under the sublease.
On February 24, 2012, we entered into an agreement with Merrick Ventures under which Merge agreed to sublease from Merrick approximately 4,700 square feet located at 200 E. Randolph Street, 22nd floor, Chicago, IL at an annual rental of $80. This agreement expired on December 13, 2013. The rent was paid to Merrick monthly and was the same rate as Merrick paid under its lease. Under the Assignment, Merge paid approximately $74 (which represents the book value) for all fixtures, leasehold improvements and furniture located in the space. We vacated the space we subleased from Merrick Ventures in September 2013.
Components of loss before income taxes in 2013, 2012, and 2011 are as follows:
|
|
Years Ended December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
United States
|
|
$
|
(39,888
|
)
|
|
$
|
(32,231
|
)
|
|
$
|
(7,976
|
)
|
Foreign
|
|
|
3,794
|
|
|
|
7,502
|
|
|
|
6,110
|
|
|
|
$
|
(36,094
|
)
|
|
$
|
(24,729
|
)
|
|
$
|
(1,866
|
)
|
The provision for income taxes consists of the following in 2013, 2012 and 2011:
|
|
Years Ended December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Current:
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(4,191
|
)
|
State
|
|
|
588
|
|
|
|
482
|
|
|
|
(287
|
)
|
Foreign
|
|
|
-
|
|
|
|
28
|
|
|
|
35
|
|
Total current
|
|
|
588
|
|
|
|
510
|
|
|
|
(4,443
|
)
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
1,054
|
|
|
|
925
|
|
|
|
5,636
|
|
State
|
|
|
(89
|
)
|
|
|
279
|
|
|
|
425
|
|
Foreign
|
|
|
1,336
|
|
|
|
2,377
|
|
|
|
2,047
|
|
Total deferred
|
|
|
2,301
|
|
|
|
3,581
|
|
|
|
8,108
|
|
Total provision
|
|
$
|
2,889
|
|
|
$
|
4,091
|
|
|
$
|
3,665
|
|
Actual income taxes varied from the expected income taxes (computed by applying the statutory income tax rate of 35% for the years ended December 31, 2013, 2012, and 2011 to income before income taxes) as a result of the following:
|
|
Years Ended December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
Expected tax benefit
|
|
$
|
(12,633
|
)
|
|
$
|
(8,655
|
)
|
|
$
|
(653
|
)
|
Total increase (decrease) in income taxes resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in valuation allowance allocated to income tax expense
|
|
|
16,223
|
|
|
|
13,987
|
|
|
|
10,641
|
|
Acquisition costs
|
|
|
(293
|
)
|
|
|
309
|
|
|
|
(684
|
)
|
State and local income taxes, net of federal income tax benefit
|
|
|
(8
|
)
|
|
|
(672
|
)
|
|
|
(212
|
)
|
Foreign income tax rate differential
|
|
|
(426
|
)
|
|
|
(723
|
)
|
|
|
(463
|
)
|
Change in unrecognized tax benefits
|
|
|
359
|
|
|
|
167
|
|
|
|
(4,669
|
)
|
Other
|
|
|
(333
|
)
|
|
|
(322
|
)
|
|
|
(295
|
)
|
Actual income tax expense (benefit)
|
|
$
|
2,889
|
|
|
$
|
4,091
|
|
|
$
|
3,665
|
|
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2013 and 2012 are presented as follows:
|
|
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
Deferred tax assets:
|
|
|
|
|
|
|
Accrued compensation
|
|
$
|
1,354
|
|
|
$
|
162
|
|
Bad Debt
|
|
|
2,977
|
|
|
|
3,844
|
|
Depreciation
|
|
|
1,780
|
|
|
|
2,703
|
|
Research and experimentation credit carryforwards
|
|
|
6,951
|
|
|
|
6,951
|
|
Other credit carryforwards
|
|
|
1,566
|
|
|
|
1,566
|
|
Domestic loss carryforwards
|
|
|
125,143
|
|
|
|
115,421
|
|
Foreign loss carryforwards
|
|
|
7,240
|
|
|
|
8,007
|
|
Nonqualified stock options
|
|
|
6,667
|
|
|
|
5,374
|
|
Other
|
|
|
4,249
|
|
|
|
5,576
|
|
Total gross deferred tax assets
|
|
|
157,927
|
|
|
|
149,604
|
|
Less: asset valuation allowance
|
|
|
(136,364
|
)
|
|
|
(121,117
|
)
|
Net deferred tax asset
|
|
|
21,563
|
|
|
|
28,487
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Software development costs and intangible assets
|
|
|
(5,656
|
)
|
|
|
(7,572
|
)
|
Intangibles—customer contracts & tradenames
|
|
|
(5,977
|
)
|
|
|
(8,680
|
)
|
Other
|
|
|
(5,101
|
)
|
|
|
(5,105
|
)
|
Total gross deferred liabilities
|
|
|
(16,734
|
)
|
|
|
(21,357
|
)
|
Net deferred tax asset
|
|
$
|
4,829
|
|
|
$
|
7,130
|
|
Included on balance sheet:
|
|
|
|
|
|
|
|
|
Current assets: deferred income taxes
|
|
$
|
1,915
|
|
|
$
|
3,135
|
|
Non–current asset: deferred income taxes
|
|
|
6,979
|
|
|
|
7,041
|
|
Non–current liabilities: deferred income taxes
|
|
|
(4,065
|
)
|
|
|
(3,046
|
)
|
Net deferred income taxes
|
|
$
|
4,829
|
|
|
$
|
7,130
|
|
At December 31, 2013, we had U.S. federal net operating loss, research credit, alternative minimum tax credit, and foreign tax credit carryforwards of $324,683, $4,911, $977, and $297 respectively, state net operating loss and research credit carryforwards of $173,169 and $408, respectively, foreign federal and provincial net operating loss carryforwards of $24,358 and $16,291, respectively, foreign and provincial capital loss carryforwards of $5,631 and $5,631, respectively, and foreign federal and provincial research credit carryforwards of $2,008 and $291, respectively. The U.S. federal net operating loss, research credit and foreign tax credit carryforwards expire in varying amounts beginning in 2015 and continuing through 2033, 2030 and 2018, respectively. The state net operating loss carryforwards expire in varying amounts beginning in 2014 and continuing through 2033, and the credit carryforwards expire in varying amounts beginning 2020 and continuing through 2023. The foreign tax credits expire in varying amounts beginning in 2018, and continuing through 2024. The foreign federal and provincial net operating loss carryforwards expire in varying amounts beginning in 2014, and continuing through 2030. Foreign and provincial capital losses may be carried forward indefinitely.
Management has an obligation to review, at least annually, the components of our deferred tax assets. This review is to ascertain that, based upon the information available at the time of the preparation of financial statements, it is more likely than not, that we expect to utilize these future deductions and credits. In the event that management determines that it is more likely than not these future deductions, or credits, will not be utilized, a valuation allowance is recorded, reducing the deferred tax asset to the amount expected to be realized. Management’s analysis for 2013 resulted in a valuation allowance of $136,364 at December 31, 2013. Based on both quantitative and qualitative factors, the company records a valuation allowance for all jurisdictions except Canada, which is profitable. We considered the effect of U.S. Internal Revenue Code (Code) Section 382 on our ability to utilize existing U.S. net operating loss and tax credit carryforwards. Section 382 imposes limits on the amount of tax attributes that can be utilized where there has been an ownership change as defined under the Code. Almost all of our U.S. and state net operating loss, capital loss and credit carryforwards are subject to future limitation. The future limitation is in addition to any past limitations applicable to the net operating loss and credit carryforwards of previously acquired businesses. While application of Section 382 is complex, we currently estimate deferred tax assets of $30,570 related to U.S. net operating loss and research tax credit carryforwards may be unrealizable due to Section 382 limitations. We have recorded a full valuation reserve for these deferred tax assets.
The net increase in the valuation allowance in 2013, 2012, and 2011 was $15,247, $15,375, and $4,358, respectively. The 2013 increase was primarily attributable to valuation allowances established in connection with current year net operating losses.
There exist potential tax benefits for us associated with stock-based compensation. At December 31, 2013 and 2012, we had $1,892 and $1,638, respectively, of excess tax benefits related to vesting of restricted stock awards, nonqualified stock option exercises and disqualifying dispositions of employee incentive stock options. The income tax benefit related to excess tax benefits of stock-based compensation will be credited to paid-in-capital, when recognized, by reducing taxes payable.
The total amount of unrecognized tax benefits as of December 31, 2013, 2012, and 2011 was $2,232, $2,109, and $1,862, respectively. We recognize interest and penalties in the provision for income taxes. Total accrued interest and penalties as of December 31, 2013 were $299 and $199, respectively. Total accrued interest and penalties as of December 31, 2012 were $162 and $102, respectively. Total interest included in tax expense in 2013, 2012, and 2011 were $138, $19, and $(111), respectively. Total penalties included in tax expense in 2013, 2012, and 2011 were $98, $48, and $(3), respectively.
The following is a tabular reconciliation of the total amounts of unrecognized tax benefits in 2013, 2012 and 2011:
|
|
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
Balance at January 1
|
|
$
|
2,109
|
|
|
$
|
1,862
|
|
|
$
|
6,703
|
|
Gross increases - tax positions in current year
|
|
|
-
|
|
|
|
55
|
|
|
|
-
|
|
Gross increases - tax positions in prior year
|
|
|
123
|
|
|
|
192
|
|
|
|
-
|
|
Gross decreases - tax positions in prior year
|
|
|
-
|
|
|
|
-
|
|
|
|
(12
|
)
|
Decreases due to statute expirations
|
|
|
-
|
|
|
|
-
|
|
|
|
(4,829
|
)
|
Balance at December 31
|
|
$
|
2,232
|
|
|
$
|
2,109
|
|
|
$
|
1,862
|
|
The total amount of unrecognized tax benefits at December 31, 2013 and December 31, 2012 that, if recognized, would affect the effective tax rate is $2,029 and $1,948, respectively. We do not expect a significant change in unrecognized tax benefits within the next twelve months.
We file income tax returns in the U.S., various states and foreign jurisdictions. We are not currently under examination in the U.S. federal taxing jurisdictions for which years ending after 2009 remain subject to examination. Years prior to 2010 remain subject to examination to the extent net operating loss and tax credit carryforwards have been utilized after 2009, or remain subject to carryforward. Our Canadian tax returns have been examined through 2009.
We indefinitely reinvest any undistributed profits of our non-U.S. subsidiaries. Through year-end our non-U.S. subsidiaries have cumulative deficits.
Basic and diluted net earnings or loss per share is computed by dividing earnings or loss available to common shareholders by the weighted average number of shares of common stock outstanding. For 2011, earnings or loss available to common shareholders is computed as net income or loss less the 15% cumulative annual compounding dividend earned by preferred shareholders. See Note 7 for further information. The computation of earnings or loss available to common shareholders is presented in our consolidated statements of operations. Diluted earnings per share includes the dilution that could occur based on outstanding restricted stock awards and the potential exercise of stock options, except for stock options with an exercise price of more than the average market price of our common stock, as such exercise would be anti-dilutive.
In 2013, 2012, and 2011, options to purchase 5,023,602, 4,579,300 and 941,556 shares of our Common Stock, respectively, had exercise prices greater than the average market price of our common stock, and, therefore, are not included in the calculations of diluted net income (loss) per share. The restricted stock issued in 2013 was not included in the calculation of basic or diluted net income (loss) per share as the shares were not vested as of December 31, 2013.
As a result of the losses in 2013, 2012 and 2011, incremental shares from the assumed conversion of employee stock options totaling 3,894,688, 7,593,152, and 8,249,478 shares, respectively, have been excluded from the calculation of diluted loss per share as their inclusion would have been anti-dilutive.
Potentially dilutive Common Stock equivalent securities, including securities that may be considered in the calculation of diluted earnings per share outstanding as of December 31, 2013, 2012 and 2011 were 11,018,290, 12,172,452, and 9,191,034, respectively.
(13)
|
Employee Benefit Plan
|
We maintain defined contribution retirement plans (a 401(k) profit sharing plan for the U.S. employees and Registered Retirement Saving Plan (RRSP) for the Canadian employees), covering employees who meet the minimum service requirements and have elected to participate. We made matching contributions (under the 401(k) profit sharing plan for the U.S. employees and Deferred Profit Sharing Plan (DPSP) for the Canadian employees) equal to a maximum of 3.0% of base salary in 2013, 2012 and 2011. Our matching contributions totaled $1,256, $1,225, and $1,905, in 2013, 2012, and 2011, respectively.
(14)
|
Segment Information and Concentrations of Risk
|
We operate under two reportable segments, Merge Healthcare and Merge DNA. Our Merge Healthcare operating group, which represents about 83% of our total revenue in 2013, markets, sells and implements interoperability, imaging and clinical solutions to healthcare providers. Our Merge DNA (Data and Analytics) operating group represents the remaining revenue and focuses on data capture software for clinical trials and other solutions.
We evaluate the performance of these operating groups based on their respective revenues and operating income, which exclude public company costs, certain corporate costs (amortization expense that is not specific to a segment), net interest expense and income taxes.
The following tables present operating group financial information for the periods indicated.
|
|
Year ended December 31, 2013
|
|
|
|
Healthcare
|
|
|
DNA
|
|
|
Total
|
|
Net sales:
|
|
|
|
|
|
|
|
|
|
Software and other
|
|
$
|
57,371
|
|
|
$
|
21,204
|
|
|
$
|
78,575
|
|
Professional Services
|
|
|
28,290
|
|
|
|
15,540
|
|
|
|
43,830
|
|
Maintenance and EDI
|
|
|
107,220
|
|
|
|
2,042
|
|
|
|
109,262
|
|
Total net sales
|
|
|
192,881
|
|
|
|
38,786
|
|
|
|
231,667
|
|
Expenses
|
|
|
171,838
|
|
|
|
35,094
|
|
|
|
206,932
|
|
Segment income
|
|
$
|
21,043
|
|
|
$
|
3,692
|
|
|
|
24,735
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net corporate/other expenses (1)
|
|
|
|
|
|
|
|
|
|
|
60,829
|
|
Loss before income taxes
|
|
|
|
|
|
|
|
|
|
$
|
(36,094
|
)
|
|
|
Year ended December 31, 2012
|
|
|
|
Healthcare
|
|
|
DNA
|
|
|
Total
|
|
Net sales:
|
|
|
|
|
|
|
|
|
|
Software and other
|
|
$
|
78,941
|
|
|
$
|
15,525
|
|
|
$
|
94,466
|
|
Professional Services
|
|
|
27,552
|
|
|
|
13,426
|
|
|
|
40,978
|
|
Maintenance and EDI
|
|
|
110,894
|
|
|
|
2,566
|
|
|
|
113,460
|
|
Total net sales
|
|
|
217,387
|
|
|
|
31,517
|
|
|
|
248,904
|
|
Expenses
|
|
|
192,408
|
|
|
|
33,315
|
|
|
|
225,723
|
|
Segment income (loss)
|
|
$
|
24,979
|
|
|
$
|
(1,798
|
)
|
|
|
23,181
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net corporate/other expenses (1)
|
|
|
|
|
|
|
|
|
|
|
47,910
|
|
Loss before income taxes
|
|
|
|
|
|
|
|
|
|
$
|
(24,729
|
)
|
|
|
Year ended December 31, 2011
|
|
|
|
Healthcare
|
|
|
DNA
|
|
|
Total
|
|
Net sales:
|
|
|
|
|
|
|
|
|
|
Software and other
|
|
$
|
76,947
|
|
|
$
|
4,001
|
|
|
$
|
80,948
|
|
Professional Services
|
|
|
23,437
|
|
|
|
18,468
|
|
|
|
41,905
|
|
Maintenance and EDI
|
|
|
109,562
|
|
|
|
13
|
|
|
|
109,575
|
|
Total net sales
|
|
|
209,946
|
|
|
|
22,482
|
|
|
|
232,428
|
|
Expenses
|
|
|
166,898
|
|
|
|
20,406
|
|
|
|
187,304
|
|
Segment income
|
|
$
|
43,048
|
|
|
$
|
2,076
|
|
|
|
45,124
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net corporate/other expenses (1)
|
|
|
|
|
|
|
|
|
|
|
46,990
|
|
Loss before income taxes
|
|
|
|
|
|
|
|
|
|
$
|
(1,866
|
)
|
|
(1)
|
Net corporate/other expenses include public company costs, corporate administration expenses, amortization expense
|
|
|
Healthcare
|
|
|
DNA
|
|
|
Corporate/
Other
|
|
|
Consolidated
|
|
Depreciation and amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2013
|
|
$
|
13,522
|
|
|
$
|
3,949
|
|
|
$
|
49
|
|
|
$
|
17,520
|
|
Restructuring and Other One Time Charges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2013
|
|
$
|
2,886
|
|
|
$
|
405
|
|
|
$
|
565
|
|
|
$
|
3,856
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets as of December 31, 2013
|
|
$
|
333,789
|
|
|
$
|
42,894
|
|
|
$
|
5,728
|
|
|
$
|
382,411
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Healthcare
|
|
|
DNA
|
|
|
Corporate/
Other
|
|
|
Consolidated
|
|
Depreciation and amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2012
|
|
$
|
16,049
|
|
|
$
|
4,187
|
|
|
$
|
59
|
|
|
$
|
20,295
|
|
Restructuring and Other One Time Charges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2012
|
|
$
|
333
|
|
|
$
|
497
|
|
|
$
|
-
|
|
|
$
|
830
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets as of December 31, 2012
|
|
$
|
412,841
|
|
|
$
|
33,207
|
|
|
$
|
(9,195
|
)
|
|
$
|
436,853
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Healthcare
|
|
|
DNA
|
|
|
Corporate/
Other
|
|
|
Consolidated
|
|
Depreciation and amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2011
|
|
$
|
19,311
|
|
|
$
|
2,165
|
|
|
$
|
732
|
|
|
$
|
22,208
|
|
Restructuring and Other One Time Charges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2011
|
|
$
|
1,216
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,216
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets as of December 31, 2011
|
|
$
|
354,442
|
|
|
$
|
47,722
|
|
|
$
|
48,223
|
|
|
$
|
450,387
|
|
Foreign sales account for approximately 7%, 6%, and 9% of our net sales in 2013, 2012, and 2011, respectively, and sales in foreign currency represented approximately 2%, 3%, and 2%, respectively, of our net sales in 2013, 2012 and 2011.
The following tables present certain geographic information, based on location of customer:
|
|
Net Sales for the Years Ended December 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
United States of America
|
|
$
|
216,560
|
|
|
$
|
232,848
|
|
|
$
|
211,907
|
|
Europe
|
|
|
7,566
|
|
|
|
8,687
|
|
|
|
8,767
|
|
Japan
|
|
|
2,061
|
|
|
|
2,190
|
|
|
|
5,312
|
|
Korea
|
|
|
1,105
|
|
|
|
1,018
|
|
|
|
1,449
|
|
Canada
|
|
|
1,718
|
|
|
|
1,707
|
|
|
|
1,598
|
|
Other
|
|
|
2,657
|
|
|
|
2,454
|
|
|
|
3,395
|
|
Total Net Sales
|
|
$
|
231,667
|
|
|
$
|
248,904
|
|
|
$
|
232,428
|
|
|
|
Long Lived Assets
|
|
|
|
2013
|
|
|
2012
|
|
|
2011
|
|
United States of America
|
|
$
|
4,184
|
|
|
$
|
4,316
|
|
|
$
|
3,866
|
|
Canada
|
|
|
487
|
|
|
|
569
|
|
|
|
520
|
|
Europe
|
|
|
68
|
|
|
|
79
|
|
|
|
3
|
|
Other
|
|
|
-
|
|
|
|
-
|
|
|
|
2
|
|
Total
|
|
$
|
4,739
|
|
|
$
|
4,964
|
|
|
$
|
4,391
|
|
(15)
|
Quarterly Results (unaudited)
|
|
|
2013 Quarterly Results
|
|
|
|
March 31
|
|
|
June 30
|
|
|
September 30
|
|
|
December 31
|
|
Net sales
|
|
$
|
63,634
|
|
|
$
|
57,193
|
|
|
$
|
57,245
|
|
|
$
|
53,595
|
|
Gross margin
|
|
|
35,443
|
|
|
|
31,981
|
|
|
|
30,616
|
|
|
|
30,731
|
|
Loss before income taxes
|
|
|
(3,478
|
)
|
|
|
(27,408
|
)
|
|
|
(4,579
|
)
|
|
|
(629
|
)
|
Net loss
|
|
|
(6,493
|
)
|
|
|
(28,120
|
)
|
|
|
(4,101
|
)
|
|
|
(269
|
)
|
Net loss attributable to Merge
|
|
|
(6,475
|
)
|
|
|
(28,107
|
)
|
|
|
(4,105
|
)
|
|
|
(293
|
)
|
Basic and diluted loss per share
|
|
$
|
(0.07
|
)
|
|
$
|
(0.30
|
)
|
|
$
|
(0.04
|
)
|
|
$
|
(0.00
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012 Quarterly Results
|
|
|
|
March 31
|
|
|
June 30
|
|
|
September 30
|
|
|
December 31
|
|
Net sales
|
|
$
|
60,978
|
|
|
$
|
62,886
|
|
|
$
|
60,394
|
|
|
$
|
64,646
|
|
Gross margin
|
|
|
35,995
|
|
|
|
35,590
|
|
|
|
35,540
|
|
|
|
33,728
|
|
Loss before income taxes
|
|
|
(2,258
|
)
|
|
|
(3,758
|
)
|
|
|
(2,142
|
)
|
|
|
(16,571
|
)
|
Net loss
|
|
|
(1,863
|
)
|
|
|
(5,879
|
)
|
|
|
(3,826
|
)
|
|
|
(17,252
|
)
|
Net loss attributable to Merge
|
|
|
(1,842
|
)
|
|
|
(5,882
|
)
|
|
|
(3,814
|
)
|
|
|
(17,264
|
)
|
Basic and diluted loss per share
|
|
$
|
(0.02
|
)
|
|
$
|
(0.06
|
)
|
|
$
|
(0.04
|
)
|
|
$
|
(0.19
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011 Quarterly Results
|
|
|
|
March 31
|
|
|
June 30
|
|
|
September 30
|
|
|
December 31
|
|
Net sales
|
|
$
|
52,672
|
|
|
$
|
55,592
|
|
|
$
|
60,077
|
|
|
$
|
64,087
|
|
Gross margin
|
|
|
30,569
|
|
|
|
36,861
|
|
|
|
36,128
|
|
|
|
40,216
|
|
Income (loss) before income taxes
|
|
|
(744
|
)
|
|
|
341
|
|
|
|
(1,255
|
)
|
|
|
(208
|
)
|
Net loss
|
|
|
(1,589
|
)
|
|
|
(1,685
|
)
|
|
|
(1,013
|
)
|
|
|
(1,244
|
)
|
Net loss attributable to Merge
|
|
|
(1,589
|
)
|
|
|
(1,685
|
)
|
|
|
(995
|
)
|
|
|
(1,252
|
)
|
Net loss available to common shareholders
|
|
|
(3,155
|
)
|
|
|
(3,272
|
)
|
|
|
(995
|
)
|
|
|
(1,252
|
)
|
Basic and diluted loss per share
|
|
$
|
(0.04
|
)
|
|
$
|
(0.04
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.01
|
)
|
During the second quarter of 2013,
we
recorded a charge of $23,822 for the early extinguishment of the Notes in our consolidated statement of operations. This charge consisted of $5,235 for unamortized debt issuance costs, $1,724 for unamortized net debt discount and $16,863 for early retirement costs.
During the fourth quarter of 2012, we recorded charges of $3,872 related to third party licenses and technology considered unusable, $1,269 for the write-off of acquired intangibles and $9,163 related primarily to our reserve for revenues in excess of billings and uncollectible billings from customer contracts obtained through acquisitions in the past few years. The aggregate of these adjustments was to increase our net loss by $14,304 ($0.15 per share, net of income tax) for the quarter ended December 31, 2012.
|
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
|
Not applicable.
(a)
Disclosure Controls and Procedures
Our control system is designed to provide reasonable assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.
Our management has evaluated, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2013. Based on their evaluation as of December 31, 2013, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures (as defined in Rules 13a−15(e) and 15d−15(e) under the Exchange Act) were effective.
(b)
|
Management’s Report on Internal Control Over Financial Reporting
|
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our financial statements for external reporting purposes in accordance with GAAP.
Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2013, using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control - Integrated Framework (1992). Based on its assessment, management concluded that our internal control over financial reporting was effective as of December 31, 2013. The effectiveness of our internal control over financial reporting as of December 31, 2013 has been audited by BDO USA, LLP, an independent registered public accounting firm, as stated in its report which is included below.
(c)
|
Report of Independent Registered Public Accounting Firm
|
Board of Directors and Shareholders
Merge Healthcare Incorporated
Chicago, Illinois
We have audited Merge Healthcare Incorporated’s internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control – Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission
in Internal Control
(the COSO criteria). Merge Healthcare Incorporated’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying “Item 9A Management’s Report on Internal Control Over Financial Reporting”. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit 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 effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed 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. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Merge Healthcare Incorporated maintained, in all material respects, effective internal control over financial reporting as of December 31, 2013, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Merge Healthcare Incorporated as of December 31, 2013 and 2012, and the related consolidated statements of operations, comprehensive loss, shareholders’ equity, and cash flows and for each of the three years in the period ended December 31, 2013 and our report dated March 14, 2014 expressed an unqualified opinion thereon.
/s/ BDO USA, LLP
|
|
Milwaukee, Wisconsin
|
|
March 14, 2014
|
|
(d)
|
Changes in Internal Control Over Financial Reporting
|
In 2013, we enhanced the design of the control environment in the Merge DNA segment surrounding contract completeness within the revenue cycle in order to strengthen our processes for logging customer contracts and calculating commissions for our sales personnel.
There were no other changes with respect to our internal control over financial reporting that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting during the quarter ended December 31, 2013.
Item 9B.
OTHER INFORMATION
None.
PART III
As permitted by SEC rules, we have omitted certain information required by Part III from this Report on Form 10-K, because we intend to file (pursuant to Section 240.14a-101) our definitive proxy statement for our 2014 annual shareholder meeting (Proxy Statement) not later than April 30, 2014, and are, therefore, incorporating by reference in this Annual Report on Form 10-K such information from the Proxy Statement.
|
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
|
The information required by this Item 10 will be included under the captions “Election of Directors — Director Biographies and Qualifications” and “Corporate Governance — Executive Officers” in our Proxy Statement for our 2014 annual meeting of shareholders. Information concerning the compliance of our officers, directors and 10% shareholders with Section 16(a) of the Securities Exchange Act of 1934 is incorporated by reference to the information to be contained in the Proxy Statement under the caption “Section 16(a) Beneficial Ownership Reporting Compliance.” The information regarding Audit Committee members and “Audit Committee Financial Experts” is incorporated by reference to the information to be contained in the Proxy Statement under the caption “Corporate Governance — Committee Membership.” The information regarding any changes to the procedures by which security holders may recommend nominees to the registrant's board of directors is incorporated by reference to the information to be contained in the Proxy Statement under the caption “Election of Directors — Director Nominations.” The information regarding our Code of Business Ethics is incorporated by reference to the information to be contained in the Proxy Statement under the heading “Corporate Governance — Merge Healthcare’s Code of Ethics.”
Merge Healthcare's Code of Ethics
All of our employees, including the Chief Executive Officer, Chief Financial Officer, our Controller, and persons performing similar functions, and all Directors, are required to abide by Merge Healthcare’s Code of Ethics to ensure that our business is conducted in a consistently legal and ethical manner. This Code of Ethics along with our Whistleblower Policy form the foundation of a comprehensive process that includes compliance with all corporate policies and procedures, an open relationship among colleagues that contributes to good business conduct, and the high integrity level of our employees and Directors. Our policies and procedures cover all areas of professional conduct, including employment policies, conflicts of interest, intellectual property and the protection of confidential information, as well as strict adherence to all laws and regulations applicable to the conduct of our business. Employees are required to report any conduct that they believe in good faith to be an actual or apparent violation of Merge Healthcare’s Code of Ethics. The Sarbanes–Oxley Act of 2002 requires audit committees to have procedures to receive, retain and address complaints received regarding accounting, internal accounting controls or auditing matters and to allow for the confidential and anonymous submission by employees of concerns regarding questionable accounting or auditing matters. We have such procedures in place as set forth in the Merge Healthcare Incorporated Whistleblower Policy and the Code of Ethics. The Code of Ethics is included on the website, www.merge.com/Company/Investors/Corporate-Governance.
The information required by this item is incorporated herein by reference to the information set forth under the captions “Compensation of Executive Officers and Directors”, “Corporate Governance — Committee Membership — Compensation Committee Interlocks and Insider Participation” and “Compensation Discussion and Analysis — Compensation Committee Report” in the Proxy Statement.
|
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
|
The information required by this item is incorporated herein by reference to the information set forth under the captions “Security Ownership of Certain Beneficial Owners and Management” and “Equity Compensation Plan Summary” in the Proxy Statement. For additional information regarding our share-based compensation plans, please see Note 8 of the notes to consolidated financial statements included in this Annual Report on Form 10-K.
|
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
|
The information required by this item is incorporated herein by reference to the information set forth under the captions “Corporate Governance — Transactions with Related Persons” and “Corporate Governance — Director Independence” in the Proxy Statement.
|
PRINCIPAL ACCOUNTING FEES AND SERVICES
|
The information required by this item is incorporated herein by reference to the information set forth under the caption “Audit and Non-Audit Fees” in the Proxy Statement.
PART IV
|
EXHIBITS AND FINANCIAL STATEMENTS SCHEDULES
|
(a)
The following documents are filed as part of this annual report:
Financial Statements filed as part of this report pursuant to Part II, Item 8 of this Annual Report on Form 10-K:
|
·
|
Consolidated Balance Sheets of Merge Healthcare Incorporated and Subsidiaries at December 31, 2013 and 2012;
|
|
·
|
Consolidated Statements of Operations of Merge Healthcare Incorporated and Subsidiaries for each of the three years ended December 31, 2013, 2012 and 2011;
|
|
·
|
Consolidated Statements of Comprehensive Loss of Merge Healthcare Incorporated and Subsidiaries for each of the three years ended December 31, 2013, 2012 and 2011;
|
|
·
|
Consolidated Statements of Shareholders’ Equity of Merge Healthcare Incorporated and Subsidiaries for each of the three years ended December 31, 2013, 2012 and 2011;
|
|
·
|
Consolidated Statements of Cash Flows of Merge Healthcare Incorporated and Subsidiaries for each of the three years ended December 31, 2013, 2012 and 2011;
|
|
·
|
Notes to Consolidated Financial Statements of Merge Healthcare Incorporated and Subsidiaries;
|
(b)
See Exhibit Index that follows.
Exhibit
|
|
Description
|
|
Incorporated Herein by Reference to
|
|
Filed Herewith
|
|
|
|
|
|
|
|
3.1
|
|
Certificate of Incorporation of the Registrant as filed on October 14, 2008
|
|
Exhibit 3.1 of the Annual Report on Form 10-K of Merge Healthcare Incorporated for the fiscal year ended December 31, 2008
|
|
|
|
|
|
|
|
|
|
3.2
|
|
Certificate of Merger as filed on December 3, 2008 and effective on December 5, 2008
|
|
Exhibit 3.2 of the Annual Report on Form 10-K of Merge Healthcare Incorporated for the fiscal year ended December 31, 2008
|
|
|
|
|
|
|
|
|
|
3.3
|
|
Amendment to the Certificate of Incorporation of the Registrant as filed on September 27, 2010
|
|
Exhibit 3.1 of the Current Report on Form 8-K of Merge Healthcare Incorporated dated September 30, 2010
|
|
|
|
|
|
|
|
|
|
3.4
|
|
Bylaws of Registrant
|
|
Exhibit 3.3 of the Annual Report on Form 10-K of Merge Healthcare Incorporated for the fiscal year ended December 31, 2008
|
|
|
|
|
|
|
|
|
|
10.1
|
|
Registration Rights Agreement, dated June 4, 2008, by and between the Registrant and Merrick RIS, LLC
|
|
Exhibit 10.1 of the Current Report on Form 8-K of Merge Healthcare Incorporated dated June 6, 2008
|
|
|
|
|
|
|
|
|
|
10.2
|
|
Securities Purchase Agreement, dated May 21, 2008, by and among the Registrant, the subsidiaries listed on the Schedule of Subsidiaries attached thereto, and Merrick RIS, LLC
|
|
Exhibit 10.1 of the Current Report on Form 8-K of Merge Healthcare Incorporated dated May 22, 2008
|
|
|
|
|
|
|
|
|
|
10.3
|
|
Employment Letter Agreement between the Registrant and Justin C. Dearborn entered into as of June 4, 2008
|
|
Exhibit 10.19 of the Current Report on Form 8-K of Merge Healthcare Incorporated dated July 15, 2008
|
|
|
|
|
|
|
|
|
|
10.4
|
|
Employment Letter Agreement between the Registrant and Steven M. Oreskovich entered into as of June 4, 2008
|
|
Exhibit 10.20 of the Current Report on Form 8-K of Merge Healthcare Incorporated dated July 15, 2008
|
|
|
10.5
|
|
Employment Letter Agreement between the Registrant and Nancy J. Koenig entered into as of June 4, 2008
|
|
Exhibit 10.21 of the Current Report on Form
8-K of Merge Healthcare Incorporated dated July 15, 2008
|
|
|
|
|
|
|
|
|
|
10.6
|
|
First Amendment, dated July 1, 2008, to that certain Securities Purchase Agreement, dated as of May 21, 2008, by and among the Registrant, certain of its subsidiaries and Merrick RIS, LLC
|
|
Exhibit 10.1 of the Current Report on Form 8-K of Merge Healthcare Incorporated dated July 7, 2008
|
|
|
|
|
|
|
|
|
|
10.7
|
|
1998 Stock Option Plan for Directors
|
|
Exhibit 10.8 of the Annual Report on Form 10-KSB of Merge Healthcare Incorporated for the fiscal year ended December 31, 1997
|
|
|
|
|
|
|
|
|
|
10.8
|
|
2000 Employee Stock Purchase Plan of the Registrant effective July 1, 2000
|
|
Annex A of the Proxy Statement for Annual Meeting of Shareholders of Merge Healthcare Incorporated dated May 8, 2000
|
|
|
|
|
|
|
|
|
|
10.9
|
|
2005 Equity Incentive Plan (as amended through the fourth amendment thereto)
|
|
Annex A of the Proxy Statement for Annual Meeting of Shareholders of Merge Healthcare Incorporated dated April 30, 2013
|
|
|
|
|
|
|
|
|
|
10.1
|
|
Master Services Agreement, effective as of December 30, 2011, by and between Merge Healthcare Canada Corp., a wholly owned subsidiary of the Registrant, and higi llc
|
|
Exhibit 10.15 of the Annual Report on Form 10-K of Merge Healthcare Incorporated for the fiscal year ended December 31, 2011
|
|
|
|
|
|
|
|
|
|
10.11
|
|
Agreement for the Purchase and Sale of Merge Kiosks, dated March 29, 2012, by and between Merge Healthcare Solutions Inc., a wholly owned subsidiary of the Registrant, and higi llc†
|
|
Exhibit 10.1 of the Quarterly Report on Form 10-Q of Merge Healthcare Incorporated for the three and nine months ended March 31, 2012
|
|
|
|
|
|
|
|
|
|
10.12
|
|
Credit Agreement, dated as of April 23, 2013, among Merge Healthcare Incorporated, as Borrower, the Subsidiary Guarantors party thereto, the Lenders party thereto from time to time, Jefferies Finance LLC, as Lead Arranger, Book Runner, Administrative Agent and Collateral Agent, and Bank of America, N.A., as Swingline Lender, Issuing Bank and Documentation Agent
|
|
Exhibit 10.1 of the Current Report on Form 8-K of Merge Healthcare Incorporated dated April 29, 2013
|
|
|
10.13
|
|
Security Agreement, dated as of April 23, 2013, among Merge Healthcare Incorporated, the subsidiaries of Merge Healthcare Incorporated party thereto and Jefferies Finance LLC, as Collateral Agent
|
|
Exhibit 10.2 of the Current Report on Form 8-K of Merge Healthcare Incorporated dated April 29, 2013
|
|
|
|
|
|
|
|
|
|
10.14
|
|
Letter Agreement, dated May 17, 2013, between Merge Healthcare Incorporated and Ann Mayberry-French*
|
|
Exhibit 10.1 of the Current Report on Form 8-K of Merge Healthcare Incorporated dated May 20, 2013
|
|
|
|
|
|
|
|
|
|
10.15
|
|
General Release, dated May 17, 2013, between Merge Healthcare Incorporated and Ann Mayberry-French*
|
|
Exhibit 10.1 of the Current Report on Form 8-K of Merge Healthcare Incorporated dated May 20, 2013
|
|
|
|
|
|
|
|
|
|
10.16
|
|
Letter Agreement, dated August 8, 2013, between Merge Healthcare Incorporated and Jeffery A. Surges*
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Exhibit 10.1 of the Current Report on Form 8-K of Merge Healthcare Incorporated dated August 9, 2013
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10.17
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General Release, dated August 8, 2013, between Merge Healthcare Incorporated and Jeffery A. Surges*
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Exhibit 10.2 of the Current Report on Form 8-K of Merge Healthcare Incorporated dated August 9, 2013
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14.1
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Code of Ethics
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Exhibit 14.1 of the Annual Report on Form 10-K of Merge Healthcare Incorporated for the fiscal year ended December 31, 2008
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14.2
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Whistleblower Policy
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Exhibit 14.2 of the Annual Report on Form 10-K of Merge Healthcare Incorporated for the fiscal year ended December 31, 2008
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List of Subsidiaries of the Registrant
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X
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Consent of Independent Registered Public Accounting Firm – BDO USA, LLP
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X
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Power of Attorney
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X
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Certificate of Chief Executive Officer (principal executive officer) Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934
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X
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Certificate of Chief Financial Officer (principal financial officer) Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934
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X
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32
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Certificate of Chief Executive Officer (principal executive officer) and Chief Financial Officer (principal financial 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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X
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101
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The following materials from the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2013 formatted in Extensible Business Language (XBRL): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Shareholders’ Equity, (iv) the Consolidated Statements of Cash Flows, and (v) the Consolidated Statements of Comprehensive Loss
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X
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*
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Management contract or compensatory plan or arrangement required to be filed as an exhibit to this Annual Report on Form 10-K.
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†
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Portions of the exhibit are omitted and have been filed separately with the SEC pursuant to the Company's application seeking confidential treatment under Rule 24b-2 of the Securities Exchange Act of 1934.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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MERGE HEALTHCARE INCORPORATED
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Date: March 14, 2014
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By:
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/s/
Justin C. Dearborn
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Justin C. Dearborn
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Chief Executive Officer
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Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on behalf of the Registrant by the following persons in the capacities and on the dates indicated.
Date: March 14, 2014
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Dennis Brown*
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Dennis Brown
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Chairman of the Board
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Date: March 14, 2014
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William J. Devers Jr.*
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William J. Devers Jr.
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Director
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Date: March 14, 2014
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Matthew M. Maloney*
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Matthew M. Maloney
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Director
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Date: March 14, 2014
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Nancy J. Koenig*
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Nancy J. Koenig
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Chief Operating Officer and Director
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Date: March 14, 2014
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Richard A. Reck*
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Richard A. Reck
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Director
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Date: March 14, 2014
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Neele E. Stearns, Jr.*
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Neele E. Stearns, Jr.
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Director
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Date: March 14, 2014
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By:
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/s/
Justin C. Dearborn
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Justin C. Dearborn
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Chief Executive Officer and Director
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(principal executive officer)
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Date: March 14, 2014
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/s/ Steven M. Oreskovich
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Chief Financial Officer
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(principal financial officer and principal accounting officer)
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Date: March 14, 2014
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*Justin C. Dearborn, by signing his name hereto, does hereby sign this Form 10−K on behalf of each of the above named and designated directors of the Company pursuant to a Power of Attorney executed by such persons and filed with the Securities and Exchange Commission.
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/s/
Justin C. Dearborn
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Justin C. Dearborn, Attorney-in-Fact
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