10-Q 1 form10q.htm MERGE HEALTHCARE INCORPORATED 10-Q 9-30-2011 form10q.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
 
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2011
 
 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from                    to                   
 
Commission file number 001–33006

MERGE HEALTHCARE INCORPORATED
(Exact name of Registrant as specified in its charter)
 
Delaware
 
39–1600938
(State or other jurisdiction of incorporation or organization)
 
(I. R. S. Employer Identification No.)

 
200 East Randolph Street, 24th Floor
Chicago, Illinois  60601-6436
 (Address of principal executive offices, including zip code)
(Registrant’s telephone number, including area code) (312) 565-6868
 
 
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes xNo o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes xNo o
 
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b–2 of the Exchange Act.
 
Large accelerated filero
Accelerated filerx
Non-accelerated filer¨ Smaller reporting company o
 
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b–2 of the Act). Yes   o    No  x

The number of shares outstanding of the Registrant’s common stock, par value $0.01 per share, as of November 1, 2011:  90,504,495



 
 

 
 
 
       
Page
   
PART I – FINANCIAL INFORMATION
   
Item 1.
   
1
     
1
     
2
     
3
     
4
     
5
     
6
Item 2.
   
21
Item 3.
   
30
Item 4.
   
30
         
   
PART II – OTHER INFORMATION
   
Item 1.
   
31
Item 1A.
   
32
Item 2
   
32
Item 6.
   
33
   
    Exhibit 31.1 Section 302 Certification of Principal Executive Officer
 
36
   
    Exhibit 31.2 Section 302 Certification of Principal Financial Officer
 
37
   
    Exhibit 32 Section 906 Certification of Principal Executive and Financial Officers
 
38

 
 


PART I – FINANCIAL INFORMATION
 
 
MERGE HEALTHCARE INCORPORATED AND SUBSIDIARIES
(Unaudited)
 (In thousands, except for share data)

   
September 30,
   
December 31,
 
ASSETS
 
2011
   
2010
 
Current assets:
           
Cash and cash equivalents, including restricted cash of $707 and $1,647 at September 30, 2011  and December 31, 2010, respectively
  $ 44,685     $ 41,029  
Accounts receivable, net of allowance for doubtful accounts and sales returns of $2,570  and $1,322 at September 30, 2011 and December 31, 2010, respectively
    66,538       53,254  
Inventory
    3,727       3,486  
Prepaid expenses
    4,990       4,191  
Deferred income taxes
    1,151       2,545  
Other current assets
    17,195       9,336  
Total current assets
    138,286       113,841  
Property and equipment:
               
Computer equipment
    9,819       9,859  
Office equipment
    2,180       2,007  
Leasehold improvements
    1,220       1,055  
      13,219       12,921  
Less accumulated depreciation
    8,356       7,149  
Net property and equipment
    4,863       5,772  
Purchased and developed software, net of accumulated amortization of $8,134 and $9,811 at September 30, 2011 and December 31, 2010, respectively
    26,366       26,619  
Other intangible assets, net of accumulated amortization of $12,108 and $8,419 at September 30, 2011 and December 31, 2010, respectively
    42,760       48,957  
Goodwill
    199,756       169,533  
Deferred income taxes
    12,625       17,006  
Other assets
    12,356       14,660  
Total assets
  $ 437,012     $ 396,388  
LIABILITIES AND SHAREHOLDERS' EQUITY
               
Current liabilities:
               
Accounts payable
  $ 18,136     $ 18,370  
Interest payable
    12,338       3,917  
Accrued wages
    7,803       4,304  
Restructuring accrual
    1,629       1,707  
Other accrued liabilities
    8,223       6,875  
Deferred revenue
    44,813       49,876  
Total current liabilities
    92,942       85,049  
Notes payable, net of unamortized discount
    249,215       195,077  
Deferred income taxes
    2,147       -  
Deferred revenue
    4,373       3,809  
Income taxes payable
    720       5,683  
Other
    1,582       1,964  
Total liabilities
    350,979       291,582  
Shareholders' equity:
               
Series A Non-voting Preferred Stock, $0.01 par value: 50,000 shares authorized; zero and 41,750 shares issued and outstanding at September 30, 2011 and December 31, 2010, respectively.  Aggregate liquidation preference:  zero and $54,275 at September 30, 2011 and December 31, 2010, respectively.
    -       41,750  
Common stock, $0.01 par value: 150,000,000 shares authorized: 89,775,017 shares and 83,258,123 shares issued and outstanding at September 30, 2011 and December 31, 2010, respectively
    898       833  
Common stock subscribed, 12,858 shares and 991,053 shares at September 30, 2011 and December 31, 2010, respectively
    74       3,323  
Additional paid-in capital
    556,825       527,228  
Accumulated deficit
    (474,141 )     (469,872 )
Accumulated other comprehensive income
    1,917       1,544  
Total Merge Healthcare Incorporated shareholders' equity
    85,573       104,806  
Noncontrolling interest
    460       -  
Total shareholders' equity
    86,033       104,806  
Total liabilities and shareholders' equity
  $ 437,012     $ 396,388  
 
See accompanying notes to unaudited condensed consolidated financial statements.
 
 
1


MERGE HEALTHCARE INCORPORATED AND SUBSIDIARIES
(Unaudited)
(in thousands, except for share and per share data)

   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2011
   
2010
   
2011
   
2010
 
Net sales:
                       
Software and other
  $ 20,060     $ 12,931     $ 56,370     $ 28,888  
Professional services
    11,999       6,826       30,914       16,203  
Maintenance and EDI
    28,018       25,432       81,057       49,071  
Total net sales
    60,077       45,189       168,341       94,162  
Cost of sales:
                               
Software and other
    8,909       4,930       20,167       7,324  
Professional services
    5,403       4,381       15,482       11,406  
Maintenance and EDI
    7,409       8,622       22,060       15,928  
Depreciation, amortization and impairment
    2,228       2,805       7,074       8,510  
Total cost of sales
    23,949       20,738       64,783       43,168  
Gross margin
    36,128       24,451       103,558       50,994  
Operating costs and expenses:
                               
Sales and marketing
    10,235       5,776       26,781       12,784  
Product research and development
    7,195       5,621       20,964       14,629  
General and administrative
    7,500       6,043       22,354       15,485  
Acquisition-related expenses
    743       854       1,222       9,213  
Restructuring and other expenses
    1,151       1,213       1,115       4,696  
Depreciation, amortization and impairment
    2,352       1,816       10,225       4,837  
Total operating costs and expenses
    29,176       21,323       82,661       61,644  
Operating income (loss)
    6,952       3,128       20,897       (10,650 )
Other income (expense):
                               
Interest expense
    (8,014 )     (6,475 )     (21,120 )     (10,796 )
Interest income
    75       28       248       51  
Other, net
    (268 )     (140 )     (1,683 )     (71 )
Total other expense, net
    (8,207 )     (6,587 )     (22,555 )     (10,816 )
Income (loss) before income taxes
    (1,255 )     (3,459 )     (1,658 )     (21,466 )
Income tax expense (benefit)
    (242 )     (13 )     2,629       93  
Net loss
    (1,013 )     (3,446 )     (4,287 )     (21,559 )
Less:  noncontrolling interest's share
    (18 )     -       (18 )     -  
Net loss attributable to Merge
    (995 )     (3,446 )     (4,269 )     (21,559 )
Less:  preferred stock dividends
    -       1,566       3,153       17,510  
Net loss available to common shareholders
  $ (995 )   $ (5,012 )   $ (7,422 )   $ (39,069 )
Net loss per share attributable to Merge - basic
  $ (0.01 )   $ (0.06 )   $ (0.09 )   $ (0.49 )
Weighted average number of common shares outstanding - basic
    87,675,038       82,813,533       85,422,352       79,265,227  
Net loss per share attributable to Merge - diluted
  $ (0.01 )   $ (0.06 )   $ (0.09 )   $ (0.49 )
Weighted average number of common shares outstanding - diluted
    87,675,038       82,813,533       85,422,352       79,265,227  
 
See accompanying notes to unaudited condensed consolidated financial statements.
 
2

 
MERGE HEALTHCARE INCORPORATED AND SUBSIDIARIES
(Unaudited)
(in thousands)

   
Nine Months Ended
September 30,
 
   
2011
   
2010
 
Cash flows from operating activities:
           
Net loss
  $ (4,287 )   $ (21,559 )
Adjustments to reconcile net loss to net cash provided by operating activities:
               
Depreciation, amortization and impairment
    17,299       13,347  
Share-based compensation
    3,043       1,326  
Change in contingent consideration for acquisitions
    128       226  
Amortization of notes payable issuance costs & discount
    1,765       889  
Provision for doubtful accounts receivable and sales returns, net of recoveries
    785       503  
Deferred income taxes
    7,190       (3 )
Realized gain on sale of equity security
    (405 )     -  
Changes in operating assets and liabilities, net of effects of acquisitions:
               
Accounts receivable
    (12,746 )     (8,242 )
Inventory
    1,248       (1,372 )
Prepaid expenses
    (270 )     2,118  
Accounts payable
    (2,472 )     1,749  
Accrued wages
    2,396       (833 )
Restructuring accrual
    (448 )     1,615  
Deferred revenue
    (8,092 )     7,734  
Interest payable and other liabilities
    10,030       6,769  
Taxes payable and accrued taxes
    (5,253 )     -  
Other
    (3,977 )     2,406  
Net cash provided by operating activities
    5,934       6,673  
Cash flows from investing activities:
               
Cash paid for acquisitions, net of cash acquired
    (477 )     (212,721 )
Purchases of property, equipment, and leasehold improvements
    (1,569 )     (871 )
Change in restricted cash
    940       (53 )
Distribution from investment in equity security
    405       76  
Net cash used in investing activities
    (701 )     (213,569 )
Cash flows from financing activities:
               
Proceeds from issuance of term notes
    53,560       194,532  
Proceeds from issuance of stock
    -       41,750  
Note and stock issuance costs paid
    (1,528 )     (9,017 )
Proceeds from exercise of stock options and employee stock purchase plan
    878       102  
Principal payments on capital leases
    (5 )     (26 )
Principal payments on notes payable
    (4,591 )     -  
Redemption and retirement of preferred stock
    (41,750 )     -  
Preferred stock dividends
    (7,328 )     (122 )
Net cash provided by (used in) financing activities
    (764 )     227,219  
Effect of exchange rates on cash and cash equivalents
    127       -  
Net increase in cash and cash equivalents
    4,596       20,323  
Cash and cash equivalents (net of restricted cash), beginning of period (1)
    39,382       19,062  
Cash and cash equivalents (net of restricted cash), end of period (2)
  $ 43,978     $ 39,385  
                 
Supplemental Disclosures of Cash Flow Information:
               
Cash paid for interest, net of receipts
  $ 10,920     $ 10  
Cash paid for income taxes, net of refunds
    714       (207 )
                 
Non-Cash Investing and Financing Activities
               
Value of common stock issued for acquisitions
  $ 29,820     $ 1,350  

    (1)Net of restricted cash of $1,647 and $559 at December 31, 2010 and 2009, respectively.
    (2)Net of restricted cash of $707 and $613 at September 30, 2011 and 2010, respectively.
 
See accompanying notes to unaudited condensed consolidated financial statements.
 
 
3


MERGE HEALTHCARE INCORPORATED AND SUBSIDIARIES
(Unaudited)
(in thousands, except for share and per share data)

   
Preferred Stock
   
Common Stock
         
Accumulated
                   
                                       
Additional
         
Other
   
Total Merge
   
Non-
   
Total
 
   
Shares
   
Issued
   
Shares
   
Subscribed
   
Shares
   
Issued
   
Paid–in
   
Accumulated
   
Comprehensive
   
Shareholders’
   
controlling
   
Shareholders’
 
   
Issued
   
Amount
   
Subscribed
   
Amount
   
Issued
   
Amount
   
Capital
   
Deficit
   
Income
   
Equity
   
Interest
   
Equity
 
Balance at December 31, 2010
    41,750     $ 41,750       991,053     $ 3,323       83,258,123     $ 833     $ 527,228     $ (469,872 )   $ 1,544     $ 104,806     $ -     $ 104,806  
Stock issued under ESPP
    -       -       (3,494 )     16       43,607       -       188       -       -       204       -       204  
Exercise of stock options
    -       -       -       -       225,500       2       672       -       -       674       -       674  
Share-based compensation expense
    -       -       -       -       -       -       3,043       -       -       3,043       -       3,043  
Shares issued for acquisitions
    -       -       (974,701 )     (3,265 )     6,247,787       63       33,022       -       -       29,820       -       29,820  
Preferred stock dividends paid
    -       -       -       -       -       -       (7,328 )     -       -       (7,328 )     -       (7,328 )
Redemption and cancellation of
                                                                                               
Series A Preferred Stock
    (41,750 )     (41,750 )     -       -       -       -       -       -       -       (41,750 )     -       (41,750 )
Net loss
    -       -       -       -       -       -       -       (4,269 )     -       (4,269 )     (18 )     (4,287 )
Other comprehensive income
    -       -       -       -       -       -       -       -       373       373       -       373  
Noncontrolling interest acquired
    -       -       -       -       -       -       -       -       -       -       478       478  
Balance at September 30, 2011
    -     $ -       12,858     $ 74       89,775,017     $ 898     $ 556,825     $ (474,141 )   $ 1,917     $ 85,573     $ 460     $ 86,033  
 
See accompanying notes to unaudited condensed consolidated financial statements.
 
 
4

 
MERGE HEALTHCARE INCORPORATED AND SUBSIDIARIES
(Unaudited)
(in thousands)

   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2011
   
2010
   
2011
   
2010
 
Net loss
  $ (1,013 )   $ (3,446 )   $ (4,287 )   $ (21,559 )
Translation adjustment
    15       -       190       -  
Unrealized gain (loss) on marketable security, net of taxes
    (10 )     11       183       (31 )
Comprehensive loss
    (1,008 )     (3,435 )     (3,914 )     (21,590 )
Less:  noncontrolling interest's share
    (18 )     -       (18 )     -  
Comprehensive loss attributable to Merge Healthcare Incorporated
  $ (990 )   $ (3,435 )   $ (3,896 )   $ (21,590 )

See accompanying notes to unaudited condensed consolidated financial statements.
 
 
5

 
Merge Healthcare Incorporated and Subsidiaries
(Unaudited and in thousands, except for share and per share data)
 
(1)
Basis of Presentation and Significant Accounting Policies
 
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (SEC) for reporting on Form 10-Q. Accordingly, certain information and notes required by United States of America generally accepted accounting principles (GAAP) for annual financial statements are not included herein. These interim statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Annual Report on Form 10-K for the year ended December 31, 2010 of Merge Healthcare Incorporated, a Delaware corporation, and its subsidiaries and affiliates (which we sometimes refer to collectively as Merge, we, us or our).
 
 Principles of Consolidation
 
Our unaudited condensed consolidated financial statements reflect all adjustments, which are, in the opinion of management, necessary for a fair presentation of our financial position and results of operations.  Such adjustments are of a normal recurring nature, unless otherwise noted.  The results of operations for the three and nine month periods ended September 30, 2011 are not necessarily indicative of the results to be expected for any future period.
 
Our unaudited condensed consolidated financial statements are prepared in accordance with GAAP. These accounting principles require us to make certain estimates, judgments and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. We believe that the estimates, judgments and assumptions are reasonable, based on information available at the time they are made. Actual results could differ materially from those estimates.
 
(2)
Other Current Assets and Other Accrued Liabilities
 
Other current assets consist primarily of revenue recognized that has not yet been billed to a customer, taxes receivable and other non-trade receivables, all of which are due within the next twelve months.  The balances are comprised of the following as of September 30, 2011 and December 31, 2010:
 
   
Balance at 
September 30,
2011
   
Balance at
December 31,
2010
 
Revenue recognized in excess of billings
  $ 16,805     $ 8,337  
Taxes receivable
    16       848  
Other non-trade receivables
    374       151  
    $ 17,195     $ 9,336  
 
Other accrued liabilities consist primarily of leases payable, deferred tax liability, accrued taxes, customer deposits and other non-trade payables, all of which are due within the next twelve months.  The balances are comprised of the following as of September 30, 2011 and December 31, 2010:
 
   
Balance at 
September
30, 2011
   
Balance at
December
31, 2010
 
Leases payable
  $ 472     $ 679  
Deferred tax liability
    -       732  
Accrued taxes and taxes payable
    1,006       1,296  
Customer deposits
    3,192       655  
Other current liabilities
    3,553       3,513  
    $ 8,223     $ 6,875  
 
 (3)
Goodwill and Other Intangible Assets
 
Goodwill
 
Changes in the carrying amount of goodwill for the nine months ended September 30, 2011, are as follows:
 
 
6

 
Merge Healthcare Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited and in thousands, except for share and per share data)
 
   
Total
 
Balance at December 31, 2010
  $ 169,533  
Changes due to insignificant acquisitions
    30,173  
Change due to effect of foreign currency
    50  
Balance at September 30, 2011
  $ 199,756  
 
 Other Intangible Assets
 
Our intangible assets subject to amortization are summarized as of September 30, 2011 as follows:
 
   
Weighted
             
   
Average
             
   
Remaining
Amortization
Period (Years)
   
Gross Carrying
Amount
   
Accumulated
Amortization
 
Purchased software
    5.5     $ 32,675     $ (6,859 )
Capitalized software
    2.9       1,825       (1,275 )
Customer relationships
    7.9       41,505       (6,051 )
Backlog
    3.3       8,100       (5,044 )
Trade names
    7.9       2,033       (337 )
Non-competes
    5.5       3,230       (676 )
Total
          $ 89,368     $ (20,242 )

                In the nine months ended September 30, 2011, we increased the gross carrying amount of purchased software, customer relationships, trade names and non-competes by $3,704, $3,346, $660 and $130, respectively, related to insignificant acquisitions in 2011.  In the second quarter of 2011, we wrote off $5,635 and $3,476, respectively, of the gross carrying amount and accumulated amortization of certain purchased software assets and customer relationship assets which were fully amortized.
 
Upon completion of a product rebranding initiative in the second quarter of 2011, we recorded a $2,805 charge due to the impairment of our trade names associated with certain products.  We also wrote off fully amortized gross carrying amounts and accumulated amortization of $3,157 in trade name assets.  In the second quarter of 2010, as a result of decisions related to overlapping products, we recorded $2,271 of impairment expense to fully write off certain purchased software assets related to products from which we expect no future cash flows.
 
Estimated aggregate amortization expense for our intangible assets, which become fully amortized in 2022, is as follows:
 
For the remaining 3 months of the year ended:
2011
  $ 3,721  
For the year ended December 31:
2012
    13,513  
 
2013
    12,562  
 
2014
    11,464  
 
2015
    9,232  
 
Thereafter
    18,634  
 
Total
  $ 69,126  

 
7

 
Merge Healthcare Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited and in thousands, except for share and per share data)
 
Amortization expense for the three and nine months ended September 30, 2011 and 2010 is set forth in the following table:
 
   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2011
   
2010
   
2011
   
2010
 
Amortization and impairment included in cost of sales:
                       
Purchased software
  $ 1,122     $ 1,337     $ 3,775     $ 5,753  
Capitalized software
    37       91       139       505  
Backlog
    936       1,124       2,809       1,397  
Total
    2,095       2,552       6,723       7,655  
                                 
Amortization and impairment included in operating expenses:
                               
Customer relationships
    1,302       860       4,074       2,173  
Trade names
    42       121       3,119       209  
Non-competes
    128       110       380       184  
Total
    1,472       1,091       7,573       2,566  
Total amortization and impairment
  $ 3,567     $ 3,643     $ 14,296     $ 10,221  
 
(4)
Fair Value Measurement
 
Our financial instruments include cash and cash equivalents, accounts receivable, marketable and non-marketable securities, accounts payable, notes 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 amount of our marketable equity security is 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 notes payable approximates fair value due to the interest rates and terms approximating those available to us for similar obligations.
 
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 us to develop our 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.  
 
Non-Current Investments
 
At September 30, 2011, we held certain securities in a publicly traded entity and a private company which are classified within other assets on our condensed consolidated balance sheet.  The investment in the publicly traded equity security, over which we do not exert significant influence, is classified as “available-for-sale” and reported at fair value on a recurring basis.  Unrealized gains and losses are reported within the accumulated other comprehensive income component of shareholders’ equity.  The investment in equity securities of a private company, over which we do not exert significant influence, is classified as a Level 3 investment and is reported at cost or fair value, if an other-than-temporary loss has been determined.  Any loss due to impairment in value is recorded when such loss occurs.  We performed the evaluation of our Level 3 investment as of September 30, 2011, and concluded that there was no significant change in its fair value.
 
In the second quarter of 2011, we received proceeds of $405 from the sale of an investment in equity securities of a private company, which had a carrying value of zero, and recorded a $405 gain in other income (expense) in our statement of operations.
 
 
8

 
Merge Healthcare Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited and in thousands, except for share and per share data)
 
The following table sets forth the change in the fair value of our Level 1 publicly traded equity security:
 
Rollforward of Level 1 Investment
 
Nine Months Ended
September 30,
 
   
2011
   
2010
 
Balance at January 1
  $ 55     $ 110  
Unrealized gain (loss)
    216       (31 )
Balance at September 30
  $ 271     $ 79  
 
Unrealized gains or losses on our Level 1 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:
 
   
September 30,
 2011
   
December 31,
2010
 
Cumulative translation adjustment
  $ 2,126     $ 1,936  
Unrealized loss on available-for-sale security, net of taxes
    (209 )     (392 )
Total accumulated other comprehensive income
  $ 1,917     $ 1,544  
 
(5)
Restructuring
 
On August 5, 2011, we committed to a restructuring initiative to reduce our workforce by approximately 30 individuals.  This action was taken based upon our assessment of ongoing personnel needs.  
 
The following table sets forth the activity in the nine months ended September 30, 2011, related to restructuring activities:
 
   
Employee
Termination
Costs
   
Contract Exit
Costs
   
Relocation
   
Total
 
    Prior Year Initiatives              
Balance at December 31, 2010
  $ 449     $ 1,698     $ 42     $ 2,189  
Adjustments to expense
    (28 )     -       (27 )     (55 )
Payments
    (103 )     (1,028 )     (15 )     (1,146 )
Foreign exchange
    (7 )     -       -       (7 )
Balance at September 30, 2011
  $ 311     $ 670     $ -     $ 981  
                                 
      Third Quarter 2011 Initiative                  
Balance at December 31, 2010
  $ -     $ -     $ -     $ -  
Charges to expense
    1,170       -       -       1,170  
Payments
    (411 )     -       -       (411 )
Foreign exchange
    -       -       -       -  
Balance at September 30, 2011
  $ 759     $ -     $ -     $ 759  
                                 
      Total Initiatives                  
Balance at December 31, 2010
  $ 449     $ 1,698     $ 42     $ 2,189  
Charges and adjustments to expense
    1,142       -       (27 )     1,115  
Payments
    (514 )     (1,028 )     (15 )     (1,557 )
Foreign exchange
    (7 )     -       -       (7 )
Balance at September 30, 2011
  $ 1,070     $ 670     $ -     $ 1,740  

                As of September 30, 2011, $1,629 of the remaining balance was recorded in the restructuring accrual in current liabilities, with the remainder recorded in other non-current liabilities.  
 
(6)
Debt
 
In April 2010, we issued $200,000 of Senior Secured Notes (Notes) at 97.266% of the principal amount, which bear interest at 11.75% of principal (payable on May 1st and November 1st of each year) and will mature 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.  In connection with the Notes, we incurred issuance costs of $9,015 (which are recorded in other assets on the condensed consolidated balance sheet).  These issuance costs are recorded as a long-term asset and amortized over the life of the Notes using the effective interest method.  
 
 
9

 
Merge Healthcare Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited and in thousands, except for share and per share data)
 
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 will be amortized over the remaining life of the Notes using the effective interest method.  We also incurred $1,548 in costs related to the issuance of the additional Notes that did not qualify for capitalization.  These costs are recorded in “other expense, net” of our statements of operations for the nine months ended September 30, 2011.
 
In the three and nine months ended September 30, 2011, we recorded $8,011 and $21,104, respectively, of interest expense related to the Notes, including $458 and $1,187, respectively, in amortization of debt issuance costs and $151 and $578, respectively, in amortization of debt discount.  In the three and nine months ended September 30, 2010, we recorded $6,508 and $10,876, respectively, of interest expense related to the Notes, including $331 and $557, respectively, in amortization of debt issuance costs and $201 and $332, respectively, in amortization of debt discount.  As of September 30, 2011 and December 31, 2010, the notes payable balances on our balance sheet included $2,785 and $4,923, respectively, of unamortized net discount.
 
In the third quarter of 2011, we repaid $4,591 in debt obligations which we assumed from an insignificant acquisition.
 
(7)
Shareholders’ Equity
 
In the nine months ended September 30, 2011, we recorded dividends of $3,153 related to our Series A Preferred Stock.  These dividends are reflected as an increase to net loss available to common shareholders in our condensed statement of operations.
 
In June 2011, we redeemed and retired all 41,750 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 nine months ended September 30, 2011, we 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.  We also issued 5,273,086 shares of our common stock, valued at $29,820, as partial consideration for two insignificant acquisitions completed in 2011, and we will issue up to an additional 120,674 shares of our common stock.  The value of the shares issued for acquisitions was based on the closing price of our common stock as of the respective acquisition dates, with certain of the shares discounted based upon holdback provisions.
 
In the nine months ended September 30, 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.
 
(8)
Share-Based Compensation
 
The following table summarizes share-based compensation expense recognized during the periods indicated:
 
 
10

 
Merge Healthcare Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited and in thousands, except for share and per share data)
 
   
Three Months Ended
September 30,
   
Nine Months Ended
September 30,
 
   
2011
   
2010
   
2011
   
2010
 
                         
Share-based compensation expense included in the statement of operations:
                       
Professional services cost of sales
  $ 8     $ 51     $ 27     $ 79  
Maintenance and EDI cost of sales
    42       25       153       28  
Sales and marketing
    346       155       1,181       305  
Product research and development
    5       18       14       173  
General and administrative
    522       261       1,668       741  
Total
  $ 923     $ 510     $ 3,043     $ 1,326  

              Stock option activity in the nine months ended September 30, 2011 is set forth in the following table: 
 
   
Number of
 
   
Options
 
Options outstanding, December 31, 2010
    7,959,110  
Options granted
    1,567,286  
Options exercised
    (225,500 )
Options forfeited and expired
    (258,222 )
Options outstanding, September 30, 2011
    9,042,674  
         
Options exercisable, September 30, 2011
    3,832,102  
 
As of September 30, 2011, there was approximately $9,081 of unrecognized compensation cost related to stock options that may be recognized in future periods.
 
On June 2, 2011, our shareholders approved an amendment to our 2005 Equity Incentive Plan to increase the number of shares of common stock authorized for issuance thereunder by 3,000,000 to 16,500,000 shares of our common stock.
 
(9)
Commitments and Contingencies
 
On June 1, 2009, Merge Healthcare was sued in the Milwaukee County Circuit Court, State of Wisconsin, by William C. Mortimore and David M. Noshay with respect to the separation of Mortimore’s and Noshay’s employment and our subsequent refusal to indemnify them with respect to litigation related to their services as officers of Merge.  The plaintiffs allege that we breached their employment agreements, unreasonably refused their requests for indemnification and breached other covenants of good faith and fair dealing.  The plaintiffs seek indemnification and unspecified monetary damages.  Discovery in this case is on-going.  On April 6, 2011, the Milwaukee County Circuit Court rendered a decision in which it concluded that Merge and Mortimore had entered into an oral employment contract on or about June 15, 2006, but the Court did not make any decision as to damages, which damages would be addressed in a later phase of the litigation.  On May 9, 2011, Merge appealed the Circuit Court’s decision.  The appeal is ongoing and the Circuit Court litigation has been stayed pending appeal.  We have retained litigation counsel, intend to continue to defend this action vigorously and have filed a counterclaim for fraud, among other claims, against both Mortimore and Noshay.  We will also continue to pursue the appeal.
 
In January 2010, a purported stockholder class action complaint was filed in the Superior Court of Suffolk County, Massachusetts in connection with AMICAS Inc.’s (AMICAS) proposed acquisition by Thoma Bravo, LLC (the “Thoma Bravo Merger”).  A second similar action was filed in the same Court in February 2010 and consolidated with the first action.  In March 2010, because AMICAS had terminated the Thoma Bravo Merger and agreed to be acquired by us, the Court dismissed the plaintiffs’ claims as moot.  Subsequently, counsel for the plaintiffs filed an application for approximately $5,000 of attorneys’ fees for its work on this case, which fee petition AMICAS opposed.  We retained litigation counsel to defend against the fee petition.  On December 4, 2010, the Court awarded plaintiffs approximately $3,200 in attorneys’ fees and costs.  AMICAS has filed a notice of appeal from this judgment, and the plaintiffs have cross-appealed.  We previously tendered the defense in this matter to our appropriate insurers, which have provided coverage against the claims asserted against AMICAS.  After receipt of the Court’s attorneys’ fee award decision, the applicable insurer denied policy coverage for approximately $2,500 of the fee award.  We do not believe that the insurer’s denial has merit and have retained counsel to contest it.  We will vigorously assert all of our rights under our applicable insurance policies, which we believe cover the claims and expenses incurred by AMICAS or us in connection with the fee award.  On June 6, 2011, the insurer filed an action against AMICAS and Merge in U.S. District Court for the Northern District of Illinois seeking a declaration that it is not responsible for the $2,500 portion of the judgment rendered on December 4, 2010 by the Superior Court of Suffolk County, Massachusetts.  Merge filed a counterclaim seeking a declaration that the insurer must pay the full amount of the Superior Court’s fee award, plus additional damages.  An adverse outcome could negatively impact our operating results and financial condition.
 
 
11

 
Merge Healthcare Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited and in thousands, except for share and per share data)
 
On February 1, 2010, Merge filed a complaint against its former CEO, Richard Linden, and its former CFO, Scott Veech, in the U.S. District for the Eastern District of Wisconsin, seeking a declaration that we do not have to indemnify either Linden or Veech for liabilities they incurred in connection with SEC investigation and enforcement actions and various securities fraud and shareholder derivative litigation.  Merge also seeks to recover from both defendants all costs incurred by Merge associated with defending Linden and Veech in those prior actions.  On October 15, 2010, the Court concluded that it did not have subject matter jurisdiction over Merge’s claims and dismissed the claims in their entirety.  The Court rendered no opinion on the merits of Merge’s claims.  Merge is evaluating its further options with respect to the Scott Veech matter in Wisconsin state court.  On February 8, 2011, Merge filed a complaint in the U.S. District Court for the Eastern District of Wisconsin captioned Merge Healthcare Incorporated v. Richard Linden, Case no. 11-CV-001541.  On May 4, 2011, Merge and Linden entered into a confidential settlement agreement resolving all claims against Mr. Linden and through which Linden agreed to issue a statement of regret and apology to Merge’s Board of Directors and reimburse Merge for a portion of the Company’s legal fees to defend Linden in prior legal actions.  Merge believes that it has numerous meritorious claims against Mr. Veech and will continue to pursue these claims, which have not been affected by the settlement with Mr. Linden.
 
In August, 2010, Merge Healthcare was sued in the Northern District of Texas by the Court-appointed receiver for Stanford International Bank, Ltd.  The receiver alleges that Merge was a recipient of a fraudulent conveyance as a result of a Ponzi scheme orchestrated by Robert Stanford and Stanford International Bank, Ltd. (SIBL).  Merge is not alleged to have participated in the Ponzi scheme.  The receiver’s claims arise from the failed acquisition of Emageon, Inc. (Emageon) by Health Systems Solutions, Inc. (HSS), an affiliate of SIBL, in February 2009, which resulted in the payment of a $9,000 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.  An adverse outcome could negatively impact our operating results and financial condition.
 
In addition to the matters discussed above, we are, from time to time, parties to legal proceedings, lawsuits and other claims incident to our business activities.  Such matters may include, among other things, assertions of contract breach or intellectual property infringement, claims for indemnity arising in the course of our business and claims by persons whose employment has been terminated.  Such matters are subject to many uncertainties and outcomes are not predictable.  We are unable to estimate the ultimate aggregate amount of monetary liability, amounts which may be covered by insurance or recoverable from third parties, or the financial impact with respect to these matters as of the date of this report.
 
Guarantees
 
As a result of the acquisition of AMICAS, we assumed a guarantee to a lender on behalf of a customer.  At September 30, 2011, the balance outstanding on the loan was approximately $805.  As the customer makes loan payments to the lender, the guarantee is reduced.
 
 (10)
Transactions with Related Party
 
Effective January 1, 2009, we entered into a consulting agreement with Merrick RIS, LLC (Merrick), an affiliate of Merrick Ventures, LLC (Merrick Ventures).  We amended the agreement effective January 1, 2010 to extend the term through December 31, 2011, and modify the payment terms from a flat fee arrangement per quarter to a per transaction or success based arrangement.  Michael W. Ferro, Jr. and trusts for the benefit of Mr. Ferro’s family members beneficially own a majority of the equity interest in Merrick Ventures.  Mr. Ferro, who is the Chairman of our Board of Directors, also serves as the Chairman and Chief Executive Officer of Merrick Ventures.  Accordingly, Mr. Ferro indirectly owns or controls all of the shares owned by Merrick.  As of September 30, 2011, Merrick and its affiliates owned approximately 35.4% of our common stock.  
 
 
12

 
Merge Healthcare Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited and in thousands, except for share and per share data)
 
In the three and nine month periods ended September 30, 2011, we incurred $296 and $840, respectively, in expenses and paid $344 and $898, respectively, to Merrick for such services.  In the three and nine month periods ended September 30, 2010, we incurred $477 and $1,785, respectively, in expenses and paid $423 and $1,675, respectively, to Merrick for such services.  As of September 30, 2011 and December 31, 2010, we have $246 and $304, respectively, recorded in accounts payable covering all obligations under this agreement.  
 
On April 1, 2010, we entered into a Securities Purchase Agreement with Merrick, under which Merrick subscribed to purchase 10,000 shares of Series A Non-Voting Preferred Stock, par value $0.01 per share (Series A Preferred Stock) and 1,800,000 shares of common stock for an aggregate purchase price of $10,000, under the same terms and conditions as other investors.  On June 20, 2011, we redeemed all outstanding Series A Preferred Stock and paid Merrick the $10,000 face value as well as $1,755 in cumulative dividends, under the same terms and conditions as other investors.
 
On April 28, 2010, Merrick purchased, at the same purchase price per Note as the other investors in the offering, $5,000 of the $200,000 aggregate principal amount of Notes that we issued to complete our acquisition of AMICAS.  On June 20, 2011, Merrick purchased, at the same purchase price per Note as the other investors in the offering, $5,000 of the $52,000 aggregate principal amount of additional Notes.
 
(11)
Income Taxes
 
We are subject to tax in multiple jurisdictions and record income tax expense on an interim basis using an estimated annual effective tax rate.  The estimated annual effective tax rate is modified to exclude the effect of losses for those jurisdictions where the tax benefit cannot be recognized and a separate estimated annual tax rate is required.  Items discrete to a specific quarter are reflected in tax expense for that interim period.  A valuation allowance is established when necessary to reduce deferred tax assets to the amount more-likely-than-not to be realized.  Further limitations may apply to deferred tax assets if ownership changes occur.  In the three and nine month periods ended September 30, 2011, unrecognized tax benefits, included within long-term income taxes payable, and the offsetting long-term deferred tax asset decreased by $4,830 due to statute of limitations expirations.  We do not expect a significant change in unrecognized tax benefits within the next twelve months.
 
(12)
Earnings Per Share Available to Common Shareholders
 
Basic and diluted net earnings or loss per share are computed by dividing earnings or loss available to common shareholders by the weighted average number of shares of common stock outstanding.  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, during the periods such stock was outstanding, in the respective periods.  The computation of earnings or loss available to common shareholders is presented in our condensed 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 the three months ended September 30, 2011 and 2010, options to purchase 463,196 and 2,179,704 shares of our common stock, respectively, had exercise prices greater than the average market price of our common stock, and, therefore, are not considered in the calculations of diluted net loss per share.  In the nine months ended September 30, 2011 and 2010, options to purchase 528,196 and 2,404,704 shares of our common stock, respectively, had exercise prices greater than the average market price of our common stock, and, therefore, are not considered in the calculations of diluted net loss per share.
 
As a result of the losses in the three months ended September 30, 2011 and 2010, incremental shares from the assumed conversion of employee stock options and restricted stock awards totaling 8,579,478 and 4,716,665 shares, respectively, have been excluded from the calculation of diluted loss per share as their inclusion would have been anti-dilutive.  As a result of the losses in the nine months ended September 30, 2011 and 2010, incremental shares from the assumed conversion of employee stock options and restricted stock awards totaling 8,514,478 and 4,491,665 shares, respectively, have been excluded from the calculation of diluted loss per share as their inclusion would have been anti-dilutive.
 
 
13

 
Merge Healthcare Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited and in thousands, except for share and per share data)
 
 (13)
Guarantor Subsidiaries
 
The obligations under the Notes are fully and unconditionally guaranteed (except for certain release provisions which are considered customary), jointly and severally, by all of our current and future 100% owned domestic restricted subsidiaries (Guarantors).  No other subsidiaries guarantee the Notes.  The Notes and guarantees are secured by a first-priority lien on certain collateral which comprises substantially all of the Parent and Guarantors’ tangible and intangible assets, subject to certain exceptions.  The following tables present the balance sheets, statements of operations and statements of cash flows of the Parent, Guarantor and Non-Guarantor entities along with the eliminations necessary to arrive at the information on a consolidated basis.
 
 General corporate expenses, including public company costs, certain amortization, corporate administration costs, acquisition-related expenses and net interest expense are included in the results of the Parent.
 
CONDENSED CONSOLIDATING BALANCE SHEET
 
   
September 30, 2011
 
   
Parent
   
Guarantors
   
Non-Guarantors
   
Eliminations
   
Consolidated
 
ASSETS
                             
Current assets:
       
 
                   
Cash and cash equivalents (including restricted cash)
  $ 9,259     $ 32,196     $ 3,230     $ -     $ 44,685  
Accounts receivable, net
    -       58,246       8,292       -       66,538  
Intercompany receivables
    11,021       15,795       733       (27,549 )     -  
Other current assets
    770       23,822       2,471       -       27,063  
Total current assets
    21,050       130,059       14,726       (27,549 )     138,286  
Net property and equipment
    123       4,210       530       -       4,863  
Purchased and developed software, net
    -       25,689       677       -       26,366  
Other intangible assets, net
    -       42,022       738       -       42,760  
Goodwill
    -       197,873       1,883       -       199,756  
Investment in and advances to subsidiaries
    326,244       (75 )     -       (326,169 )     -  
Other assets
    8,086       5,910       13,864       (2,879 )     24,981  
Total assets
  $ 355,503     $ 405,688     $ 32,418     $ (356,597 )   $ 437,012  
LIABILITIES AND SHAREHOLDERS' EQUITY
                                       
Current liabilities:
                                       
Accounts payable
  $ 2,559     $ 14,195     $ 1,382     $ -     $ 18,136  
Deferred revenue
    -       43,588       1,225       -       44,813  
Intercompany payables
    -       7,466       25,135       (32,601 )     -  
Other accrued liabilities
    12,865       15,873       1,255       -       29,993  
Total current liabilities
    15,424       81,122       28,997       (32,601 )     92,942  
Notes payable
    249,215       -       -       -       249,215  
Other long-term liabilities
    4,831       4,657       2,214       (2,880 )     8,822  
Total liabilities
    269,470       85,779       31,211       (35,481 )     350,979  
Total shareholders' equity
    86,033       319,909       1,207       (321,116 )     86,033  
Total liabilities and shareholders' equity
  $ 355,503     $ 405,688     $ 32,418     $ (356,597 )   $ 437,012  
 
 
14

 
Merge Healthcare Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited and in thousands, except for share and per share data)
 
CONDENSED CONSOLIDATING BALANCE SHEET
 
   
December 31, 2010
 
   
Parent
   
Guarantors
   
Non-Guarantors
   
Eliminations
   
Consolidated
 
ASSETS
                             
Current assets:
       
 
                   
Cash and cash equivalents (including restricted cash)
  $ 870     $ 35,877     $ 4,282     $ -     $ 41,029  
Accounts receivable, net
    -       48,201       5,053       -       53,254  
Intercompany receivables
    14,170       14,168       961       (29,299 )     -  
Other current assets
    791       14,844       3,923       -       19,558  
Total current assets
    15,831       113,090       14,219       (29,299 )     113,841  
Net property and equipment
    156       4,949       667       -       5,772  
Purchased and developed software, net
    601       25,210       808       -       26,619  
Other intangible assets, net
    395       48,053       509       -       48,957  
Goodwill
    -       167,957       1,576       -       169,533  
Investment in and advances to subsidiaries
    284,893       1,830       -       (286,723 )     -  
Other assets
    13,615       8,829       12,101       (2,879 )     31,666  
Total assets
  $ 315,491     $ 369,918     $ 29,880     $ (318,901 )   $ 396,388  
LIABILITIES AND SHAREHOLDERS' EQUITY
                                       
Current liabilities:
                                       
Accounts payable
  $ 2,054     $ 14,155     $ 2,161     $ -     $ 18,370  
Deferred revenue
    -       48,216       1,660       -       49,876  
Intercompany payables
    -       13,767       25,580       (39,347 )     -  
Other accrued liabilities
    4,965       10,902       936       -       16,803  
Total current liabilities
    7,019       87,040       30,337       (39,347 )     85,049  
Notes payable
    195,077       -       -       -       195,077  
Other long-term liabilities
    8,589       4,885       861       (2,879 )     11,456  
Total liabilities
    210,685       91,925       31,198       (42,226 )     291,582  
Total shareholders' equity
    104,806       277,993       (1,318 )     (276,675 )     104,806  
Total liabilities and shareholders' equity
  $ 315,491     $ 369,918     $ 29,880     $ (318,901 )   $ 396,388  

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
 
   
Three Months Ended September 30, 2011
 
   
Parent
   
Guarantor
   
Non-Guarantor
   
Eliminations
   
Consolidated
 
Net sales
  $ -     $ 54,690     $ 5,387     $ -     $ 60,077  
Cost of sales
    -       22,653       1,296       -       23,949  
Gross margin
    -       32,037       4,091       -       36,128  
                                         
Selling, research and development, general and administrative expenses
    (2,713 )     22,302       5,341       -       24,930  
Acquisition-related expenses
    743       -       -       -       743  
Restructuring and other expenses
    -       1,006       145       -       1,151  
Depreciation, amortization and impairment
    10       2,278       64       -       2,352  
Total operating costs and expenses
    (1,960 )     25,586       5,550       -       29,176  
Operating income (loss)
    1,960       6,451       (1,459 )     -       6,952  
Equity in net income of subsidiaries
    5,741       (26 )     -       (5,715 )     -  
Other, net
    (8,257 )     (30 )     80       -       (8,207 )
Other income (expense)
    (2,516 )     (56 )     80       (5,715 )     (8,207 )
Income (loss) before income taxes
    (556 )     6,395       (1,379 )     (5,715 )     (1,255 )
Income tax expense (benefit)
    457       (215 )     (484 )     -       (242 )
Net income (loss)
  $ (1,013 )   $ 6,610     $ (895 )   $ (5,715 )   $ (1,013 )

 
15

 
Merge Healthcare Incorporated and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited and in thousands, except for share and per share data)
 
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
 
   
Three Months Ended September 30, 2010
 
   
Parent
   
Guarantor
   
Non-Guarantor
   
Eliminations
   
Consolidated
 
Net sales
  $ -     $ 40,741     $ 4,448     $ -     $ 45,189  
Cost of sales
    -       19,387       1,351       -       20,738  
Gross margin
    -       21,354       3,097       -       24,451  
Selling, research and development, general and administrative expenses
    657       14,946       1,837       -       17,440  
Acquisition-related expenses
    848       6       -       -       854  
Restructuring and other expenses
    (91 )     1,304       -       -       1,213  
Depreciation and amortization
    174       1,565       77       -       1,816  
Total operating costs and expenses
    1,588       17,821       1,914       -       21,323  
Operating income (loss)
    (1,588 )     3,533       1,183       -       3,128  
Equity in net income of subsidiaries
    4,711       (1 )     -       (4,710 )     -  
Other, net
    (6,582 )     79       (84 )     -       (6,587 )
Other income (expense)
    (1,871 )     78       (84 )     (4,710 )     (6,587 )
Income (loss) before income taxes
    (3,459 )     3,611       1,099       (4,710 )     (3,459 )
Income tax benefit
    (13 )     -       -       -       (13 )
Net income (loss)
  $ (3,446 )   $ 3,611     $ 1,099     $ (4,710 )   $ (3,446 )
 
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
 
   
Nine Months Ended September 30, 2011
 
   
Parent
   
Guarantor
   
Non-Guarantor