FORM-10-KSB
United States Securities and Exchange Commission
Washington, D. C. 20549
[ X ] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2002
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ....... to .......
Commission file number 0-29486
MERGE TECHNOLOGIES INCORPORATED
Name of small business issuer in its charter
Wisconsin 39-1600938
(State or other jurisdiction (IRS Employer Identification Number)
of incorporation or organization)
1126 South 70th Street, Milwaukee, Wisconsin 53214-3151
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (414) 977-4000
Securities registered under Section 12(b) of the Exchange Act:
Title of each class: Common Name of each exchange on which registered:
Nasdaq SmallCap
Securities registered under Section 12(g) of the Exchange Act: (Title of class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 X No
----- -----
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B is not contained in this form, and no disclosure
will be contained, to the best of registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. [ ]
Issuer's revenues for its most recent fiscal year. $20,786,369
The aggregate market value for the Registrant's stock held by
non-affiliates of the Registrant based upon the closing sale price of the
common stock on March 28, 2003, as reported on the Nasdaq SmallCap Market,
was approximately $6.70. Shares of common stock held by each officer and
director and by each person who owns five percent or more of the outstanding
common stock have been excluded in that such persons may be deemed to be
affiliates. This determination of affiliate status is not necessarily a
conclusive determination for other purposes.
The number of shares outstanding of each of the issuer's classes of
common equity, as of March 28, 2003: 9,634,466
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III is incorporated by reference
from the Registrant's Proxy statement for the 2003 Annual Meeting of
Stockholders.
Transitional Small Business Disclosure Format (check one): Yes No X
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INDEX
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Page
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PART I
Item 1. Description of Business................................... 1
Item 2. Description of Properties................................. 8
Item 3. Legal Proceedings......................................... 9
Item 4. Submission of Matters to a Vote of Security Holders....... 9
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.. 9
Item 6. Management's Discussion and Analysis of Financial
Condition and Results of Operations..................... 10
Item 7. Financial Statements...................................... 20
Item 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure..................... 40
PART III
Item 9. Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the Exchange
Act..................................................... 41
Item 10. Executive Compensation.................................... 41
Item 11. Security Ownership of Certain Beneficial Owners and
Management.............................................. 41
Item 12. Certain Relationships and Related Transactions............ 41
Item 13. Exhibits and Reports on Form 8-K.......................... 42
Item 14. Controls and Procedures................................... 43
PART I
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Item 1. DESCRIPTION OF BUSINESS
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Overview
Merge Technologies Incorporated, a Wisconsin corporation dba Merge
eFilm, and its subsidiaries or affiliates (the "Company" or "Merge eFilm"),
is in the business of integrating digital radiology images and information
into healthcare enterprise networks, and providing software solutions that
manage diagnostic imaging workflow processes. Merge eFilm solutions and
services improve radiology workflow efficiencies, reduce healthcare operating
costs and improve clinical decision making processes. The Company delivers
this tangible value to healthcare facilities of all sizes, but it specifically
targets small to medium size hospitals, multi-hospital groups, clinics and
diagnostic imaging centers. The Company offers modular, cost effective
software solutions that improve its customers' image and information
management and radiology workflow. The Company's product and service
offerings are commonly categorized as Picture Archiving and Communication
Systems ("PACS") and Radiology Information Systems ("RIS"). The Company
believes the combination of PACS and RIS define the breadth and depth of
integrated radiology workflow, with the added value of enterprise image and
information access. This broader definition is the Company's focus and the
manner in which our solutions are positioned to our target market.
The Company, which was founded in 1987 and known as Merge Technologies
Incorporated ("Merge") prior to its acquisition of eFilm Medical Inc. ("eFilm")
in 2002. The Company has historically been viewed as a leading provider of
medical diagnostic imaging and information connectivity technologies and
professional consulting services for original equipment manufacturers
("OEMs"), value added resellers ("VARs") and healthcare facilities worldwide.
Now doing business as Merge eFilm, the Company believes it is at the forefront
of integrated radiology workflow research and development, bringing modular
software applications to the marketplace that will enable the seamless
integration of images, information, technology and people across the
electronic healthcare enterprise.
Through its founder and Chairman, William C. Mortimore, the Company
has been a key contributor to the development of the industry's standard
network communications protocol known as Digital Imaging Communications in
Medicine ("DICOM"), open medical standards such as HL-7, and the Integrated
Healthcare Enterprise ("IHE") framework that has been created through an
initiative co-sponsored by the Radiological Society of North America ("RSNA")
and the Healthcare Information and Management Systems Society ("HIMSS"). The
IHE initiative represents a consortium of more than 30 companies in the
Radiology and Healthcare Information Systems fields. This set of requirements
has paved the way for healthcare organizations to begin in earnest to
integrate the complex workflow systems of the radiology department with the
entire healthcare system by using equipment and software applications that
connect the various image and communication components. Merge eFilm has
incorporated these standards in all its radiology workflow technologies and
software applications establishing the basis for seamless integration of
images and healthcare information across an organization's intranet or over
the Internet.
Radiology departments, diagnostic imaging centers and their patients
benefit from the Company's solutions in a variety of ways including: (i)
networking of multiple image-producing and image-using devices to eliminate
duplication and reduce the need for capital equipment expenditures to build
digital image and information networks; (ii) creating permanent electronic
archives of diagnostic-quality images to enable the retrieval of these images
and reports at any time in the future; (iii) accessing the Company's modular
architecture of software products that allow radiology departments, clinics
and diagnostic imaging centers to build their electronic image and information
management systems in a modular, flexible and cost-effective way; (iv)
delivering the capability to integrate diagnostic radiology images into the
radiologist's report to make it a permanent part of the patient's electronic
medical record; and (v) providing the means to view images and reports from
any number of remote locations.
Business Strategy
The Company is building on its global leadership position through its
market leading eFilm Workstation(Trademark) ("eFilm Workstation"), its
reputation for exceptional customer service, its expertise in radiology
workflow integration and its technically innovative products, by offering
modular software solutions that complete the implementation of a full
radiology workflow solution. This fully integrated, standards-based workflow
solution enables radiology to integrate with the rest of the healthcare
enterprise. To accomplish this goal, the Company is exercising the financial
and operational discipline necessary to attain the right combination of
resources, products and strategic partnerships. Those efforts will accelerate
its ability to deploy and service a fully integrated radiology workflow
solution to the healthcare and OEM/VAR marketplace.
In the last year, the Company has focused on completing its fully
integrated PACS, teleradiology and web distribution solution, strengthening
its financial foundation, enhancing its sales and distribution channels,
leveraging the global brand associated with the Merge and eFilm names, and
moving steadily towards being recognized as a comprehensive radiology workflow
solution provider. In line with this tightly focused operational plan, the
Company:
* Reached its financial goals, as is described in this report;
* Acquired and integrated two businesses, eFilm and Aurora
Technologies, Inc. ("Aurora"). eFilm, in particular, vaulted the
Company forward by providing the breadth and depth of product, brand
recognition and staff skill to offer an integrated product line
called FUSION Service(Trademark) ("FUSION") and move rapidly into the full
PACS, teleradiology and web distribution solution marketplace;
* Expanded sales and marketing resources to provide broader coverage
in the United States of America;
* Formed several new value-added reseller ("VAR") partnerships
globally to expand our distribution and service capabilities;
* Integrated the technologies of Merge and eFilm, and announced a
number of new products designed around the FUSION platform - an
integrated PACS, teleradiology and web distribution software
solution ideally designed for the needs of our target market; and
* Expanded its line of credit to $5 million, with improved terms and
broader usage provisions.
The disciplined management of the Company's resources, strong
financial foundation and comprehensive product offering with our FUSION
product line has created momentum within the Company that it believes will
increase throughout 2003. Future growth will be driven by a continued
concentration on the core aspects of the business: targeted sales/marketing
activities with broader geographic coverage, modular software product
innovation, exceptional professional services and expanded strategic
partnerships that complement our internal efforts.
Core to our business strategy are partnerships that contribute to our
product innovation efforts or expand the distribution of our products and
professional services. Tactics were launched in 2002 to formalize a VAR
partnership program that entailed a selection, vetting, contracting and
training process. The goal is to have partners in certain target markets
focused on distributing and servicing the FUSION products. Additionally,
several technology partnerships were formed in 2002 designed to expand our
product offering or enhance our existing products to appeal to a specific
market. An example of such a partnership was the VAR and localization
agreement with Infocom Corporation of Japan. Under this agreement, Infocom
Corporation will localize eFilm Workstation and provide distribution and
support services for eFilm in the Japanese market. This relationship builds
on over ten years of working with Infocom Corporation and expands the reach
of the most widely used diagnostic software desktop product in the world -
eFilm Workstation.
Merge eFilm continues to benefit from long-term and growing OEM/VAR
partnerships that have been in existence for over 15 years. Building on
these relationships is important to the Company's future development. Merge
eFilm anticipates expanding key OEM/VAR relationships with existing customers
to include a broader offering of our FUSION radiology workflow products, well
beyond our traditional connectivity and development toolkits. These
important long-term partnerships represent an endorsement of the value of
the Company's technologies and overall customer satisfaction, as well as
opportunity for continued revenue growth.
In 2002, the Company completed important strategic acquisitions of
eFilm and Aurora. Merge and eFilm entered into a co-development and
distribution agreement in 2001. Based on the success of that partnership,
Merge completed the acquisitions of eFilm on June 28, 2002, and Aurora on May
22, 2002, for several reasons.
* The combination of the Company's backend connectivity and server
technologies with eFilm's desktop diagnostic workstation
applications created a complete PACS solutions, called FUSION.
FUSION was launched in the latter half of 2002 through the
integration and porting of respective technologies from both Merge
and eFilm.
* eFilm has extensive radiology workflow and RIS experience through
their multi-year service and software licensing agreements with key
Toronto hospitals.
* eFilm enjoys a market leading position in desktop diagnostic
imaging software with over 20,000 users worldwide.
* The global presence of eFilm Workstation represents an ideal
target market for upselling integrated PACS and RIS solutions such
as our FUSION product, as these customers contemplate the next
steps in evolving towards a filmless workflow operation and fully
electronic patient record.
* Aurora added several new customers and VAR distribution
relationships designed to accelerate our market presence and enhance
future revenue generating capabilities.
The strong operating leverage of eFilm's software licensing and
service business model led to reaching earnings per share accretion from the
transaction within one quarter following the close of the acquisition.
Products and Services
The Company, which has 130 employees, 126 who are full time, is a
recognized leader in the engineering of radiology workflow solutions. It has
assembled a staff with deep expertise, global presence and a thorough
understanding of radiology workflow processes. It also has allocated
resources to the design and development of IHE concepts, which are gaining
acceptance as the standard for interoperability between imaging and healthcare
information systems throughout the healthcare enterprise.
Focusing product innovation around the functions related to radiology
image and information management is a hallmark of the Company's product
development strategy. It views its expertise as developing technologies that
fit into the customer's workflow to achieve processing and communications
efficiencies. Products in place and those in development are applied to all
aspects of the complex continuum of radiology image studies and the associated
information that touch the patient, integrating them to create a broad data
set around a single patient experience. The results are increased efficiency
and productivity, more time devoted to accurate analysis and diagnosis and
improved patient care because all pertinent information is provided to the
primary care giver from radiology in a single report.
The Company's global presence and immersion into the creation of
radiology communications and open medical standards place it in a strong
position to monitor healthcare and technological forces that impact both
equipment and software application innovations for the radiology industry.
In addition, the Company's established OEM/VAR relationships allow it to work
with leading modality manufacturers as they develop plans for new product
introductions. The product planning cycle is such that the Company can build
on this knowledge and be prepared to meet market demand at the appropriate
time. This strategy is allowing the Company to move its resources and
attention to the development of software applications that can be integrated
into the broader continuum of radiology workflow.
The Company's products fall into three distinct categories:
connectivity products; radiology workflow software applications; and
professional services. The Company's connectivity products continue to be a
core competency of the Company to maintain its market-leading position and
long-term OEM/VAR relationships. The Company continues its product innovation
in this area in order to provide flexible, state-of-the-art solutions to its
OEM/VAR partners who incorporate these products directly into their PACS
solutions and/or new modality equipment offerings. While the OEM/VAR
relationships are central to the distribution of these products, there is an
equal interest from healthcare organizations to purchase radiology workflow
solutions, including connectivity products, directly from the Company to
complete their individual image management strategies.
A shift in product mix occurred in 2002 as the Company completed
development on the first version of its fully integrated PACS, teleradiology
and web distribution solution, FUSION. The software modules within FUSION are
designed to complete the Company's fully integrated radiology workflow system
product line and are sold as individual modules or a fully integrated
solution, depending on the needs of the customer. These software modules
consist of the following:
* FUSION Server Base Module. Provides database management, security
services, performance monitoring, scalability and load balancing.
* FUSION Archive Module. Provides image and information storage
management and archiving through a variety of storage devices such
as RAID, NAS, SAN, tape, DVD and CD.
* FUSION Image Visualization and Distribution Module. Distributes
images on-demand through wavelet streaming technology, and provides
desktop Visualization Tools with unlimited access via network or the
World Wide Web ("web").
* FUSION HIS/RIS Interface Module. Provides an HL7 message interface
between FUSION and the hospital, imaging center or radiology
information system. This interface drives the workflow for
technologists and radiologists by integrating the patient's prior
radiology reports, demographic and scheduled procedure information
with their medical images. This alleviates redundant data entry
and assures information accuracy.
* FUSION Radiologist Workspace Module. Provides an integrated,
worklist-driven workspace for the radiologist including their
customized "to do" list and diagnostic image viewing and reading
tools.
* FUSION Order Entry & Patient Registration Module. Provides
customers without an automated RIS with the ability to enter new
patient information, and schedule procedures. This information
drives the worklist activities for radiologists and technicians.
Additionally, this module in combination with Image Visualization,
can be used by referring physicians to request orders, view images
and report results.
The Company continues to innovate its FUSION product line with both
new software modules and module upgrades scheduled for regular releases
throughout the year, consistent with historical practice of accelerating the
product innovation cycle and shortening the time from design to revenue
event.
Professional services consists of consultants, service engineers and
project managers who provide training, advisory services, solution design
consulting, solution installation, project management, on-going help desk and
on-site service and medical standards validation to healthcare organizations,
healthcare professionals and medical equipment manufacturers. Proprietary
training materials are used to complement project planning, management tools
and diagnostic testing products. Annual customer service packages are offered
to meet the unique needs and configuration requirements of each client. These
service packages are priced according to service intensity required and are
reviewed annually to assure all customer needs are met. The Company offers
this suite of professional services on a global basis, with twenty-four hours
per day, seven days per week ("24/7") coverage, and through a combination of
remote and on-site delivery. Growing the revenues from the sale of
professional services continues to be an important focal point for the
Company as it embraces an integrated customer service model and enhances
product offerings with the completion of its radiology workflow applications.
Additionally, in 2002 the Company launched on-line technology designed to
proactively monitor the status of deployed FUSION solutions. ViewCheck
(Trademark) is designed to proactively monitor key elements of the FUSION
product, capture statistics and route alarms to the Company's service division
for prompt attention. This service is core to our ability to provide a level
of assurance and 24/7 coverage to our full FUSION solution customers as they
rely on our products and services to run their operations.
Markets and Customers
Healthcare providers continue to recover from the managed care
strategies and government reimbursement pressures resulting from the Balanced
Budget Act put in place through the 1990s, and have returned their focus to
the operations of their healthcare delivery organizations. Key areas of
emphasis are high quality diagnostic and treatment protocols for the care of
the patients in their communities and operational efficiencies to increase
patient satisfaction, address patient safety concerns and mitigate rising
costs. The expenditures to re-tool the infrastructure of healthcare are
significant and are directed at making more comprehensive use of the advances
in medical technology and telecommunications. This is seen as a cost
effective means to reach optimum efficiency and market their services to the
broadest population. Radiology image and information management (PACS and
RIS solutions) plays a central role in the revamping of the healthcare
delivery system.
* PACS is an image storage, retrieval, and viewing system for X-ray,
CT, MRI, nuclear medicine and ultrasound. Users are linked with
display workstations over a high speed network to an image server,
archives and printers. Customers use the PACS to store, view,
manage, and distribute images and reports.
* RIS is a specialized system that supports radiology charge capture
and billing, storage of patient data, scheduling and reporting.
* The combined PACS/RIS, when integrated with the hospital's Hospital
Information System ("HIS") provides all the information and images
necessary for complete digital workflow, both clinical and
operational. This integrated PACS/RIS/HIS combination is the
comprehensive solution that the Company provides to its customers.
The Merge eFilm Market
Within the United States of America, the Company is focusing its
direct sales efforts on the small to middle market healthcare organizations:
hospitals with less than 400 beds; radiology imaging centers with more than
10,000 studies per year; and orthopedic practice clinics with more than 6
physicians. It is estimated less than 25% of those markets are currently
using a PACS.
This market represents a segment of healthcare providers that desires
imaging modality connectivity and the integration of radiology workflow,
particularly as it relates to communicating throughout the healthcare
enterprise and over long distances. This market has traditionally been
underserved by image management and radiology systems companies due to the
high cost of a traditional hardware centric and proprietary PACS and RIS
solutions. To capitalize on this under served market, the Company's focus
is on providing flexible radiology workflow solutions with modular software,
with a phased-in approach that allows for meeting short-term needs quickly
and offering additional products to complete the film-less radiology workflow
solution over time. Currently, 75% of the Company's existing customers are
part of the small to medium sized hospital market segment. Overall the
Company provides products and services directly to approximately 15% of the
hospital target market. The Company believes there is substantial room for
growing market share and for additional product sales to existing customers,
especially the over 20,000 clinical users of eFilm Workstation, a low-cost,
desktop application for viewing and interpreting medical images.
eFilm Workstation is used by more clinicians to view and diagnose
digital images than any other single diagnostic quality workstation. The
eFilm Workstation market presence and install base is a primary target for
our direct sales activities, with the focus being the introduction of FUSION
as the next logical step in deploying an integrated film-less workflow
solution. Merge eFilm accelerated the distribution of eFilm Workstation as
both a revenue annuity product offering and a marketing tool to further
expand Merge eFilm's presence in 2002. Leads and revenues generated by this
strategy exceeded our expectations in 2002 and will continue to be a core
component of our marketing and sales activities in 2003.
The Company places a strong emphasis on sustaining its reputation for
high quality services and well engineered products. The Company maintains
strict compliance with the tenets of ISO 9001 and EN 46001, both in its North
American and European operations. The certification covers its product
development activities, manufacturing and worldwide service operations. These
ongoing certifications to the ISO standard are a reflection of its commitment
to maintaining service and product quality for its customers. The Company
recently completed its ISO 9001 and EN 46001 re-certification in January 2003,
further demonstrating its ongoing commitment to quality processes that
translate into internal efficiencies and quality products for our customers.
Sales, Marketing and Distribution
Several market studies have been conducted, which results supported
the significant market opportunity in PACS, teleradiology and web distribution
solutions. A recent study by Frost & Sullivan estimates that within the
decade annual expenditures for electronic image and information management
systems, or PACS will be approximately $1.1 Billion. The Concord Consulting
Group has released data which indicates that with service and upgrades the
total PACS and teleradiology market will exceed $2.7 Billion annually. In
addition, the Technology Marketing Group study estimated that expenditures for
RIS were approximately $220 Million in 2001, growing at over 20% annually. Of
this RIS market, more than 60% of the Company's target market segment
indicated they would acquire new systems. Driving these expenditures is the
realization that approximately 15% to 18% of the diagnostic imaging procedures
are processed digitally, with the remaining portion still produced on film.
Market studies indicate an acceleration in converting the healthcare
diagnostic imaging setting to digital workflow now that modular, integrated
and cost effective solutions like those offered by the Company are now
available.
Additional studies indicate that the money being spent by healthcare
organizations for these technologies is increasing 18% to 20% annually, with
European data suggesting an annual growth rate of 20% to 25%. The Company's
strategy is to provide a full suite of radiology workflow solutions to its
target market and the Company's existing domestic client base of over 400
healthcare facilities, and to deliver functionality and value that taps into
this combined PACS/RIS $1.3 Billion annual market.
The Company uses a multi-channel approach to reach its target
customers. Over the last three years the Company has invested in building
an international sales force to increase its market presence among both its
OEM/VAR and healthcare end-user customers, with particular emphasis on small
to medium sized hospitals and imaging centers. This Company's sales staff has
extensive experience in radiology and diagnostic imaging services and has the
ability to work in a consultative manner to design and customize the right
solution for each customer.
Expanding its OEM/VAR partnerships is an important strategy to the
Company's sales success. During 2002, sales through this channel represent
approximately 52% of the Company's annual revenue, and are expected to grow
in dollar volume. This is down from 65% of annual revenues in 2001 as planned
given our growth in direct sales and services, along with are increasing
emphasis on complete software solutions bundled with services. The Company's
direct sales force continues to focus on healthcare customers in the small to
medium size hospital market and imaging centers, where the Company's modular,
software-centric solutions create compelling value propositions. The
Company's professional services group was expanded this year with the
acquisition of eFilm to provide pre-sale assistance as well as post-sale
project management. The contribution to total revenue from direct sales and
professional services activities increased substantially in 2002 to nearly
48% and is expected to increase its contribution again in 2003.
Continued visibility in the marketplace is also important to the
Company's overall marketing strategy. The Company expanded its marketing
activities in 2002 to coincide with the acquisition of eFilm, positioning of
the Company as a full solution provider under the corporate brand of Merge
eFilm. This allowed the company to leverage the extensive installation base
of Merge and eFilm products, and launch our new FUSION flagship product. The
Company successfully touched thousands of current and prospective customers
through a core strategy of proactive electronic marketing. This form of
creating market awareness, generating leads and following up on our historical
customer base is expected to continue in 2003. In addition, the Company
regularly participates in major radiology and healthcare information system
industry trade shows. RSNA 2002 was a highly visible launch for the new
Company name, our new product offering and our value proposition for VAR
partners and direct end-user customers. The Company was very pleased with
the reception at the trade show and generated a 100% increase in inquiries
and leads compared to 2001. Finally, the Company's ongoing participation in
the IHE initiative and radiology industry panels regarding open communications
and medical standards is an added opportunity to maintain the Company's
thought-leader position, which is recognized by the healthcare industry and
enables the Company to demonstrate its value on many levels.
The value proposition to the Merge eFilm customer is aimed at
improving the organization's efficiency and quality of patient care while
reducing cost. The Company emphasizes how the implementation of various
radiology workflow strategies reduces operational costs. Cost savings are
attributed to a reduction of the cycle of time involved in acquiring,
interpreting and distributing diagnostic studies. This time efficiency
improves patient care through increasing the speed with which the radiologist
and primary caregiver can discuss diagnostic findings and institute
appropriate treatment. Additionally, the Company's systems can enhance
revenue due to increased referral activity from primary care physicians and
increased accuracy of radiology billing and coding.
Competition
The markets for the Company's products are highly competitive. Many
customers purchase products from Merge eFilm and from its competitors as well.
Competition is present from film vendors who offer certain components of the
radiology workflow application and from current OEM partners who can offer
products similar to Merge eFilm solutions. Analyzing the competitive
environment by product line is illustrative of the Company's perspective and
its strategies to mitigate the impact of competition on the Company's sales or
market penetration.
The historical connectivity solutions product line has been the
mainstay of the Company, which pioneered its development. The competitive
danger to this product today is that it is readily available and largely
incorporated into most imaging modalities. The Company views its value added
services, global operations, recognized brand and engineering strength as the
way to protect its market share in this area. In addition, it has adopted an
approach to engineering these products into the OEM's medical device through
proprietary Application Program Interface ("API") that protects its
intellectual capital. Upgrades to its products are continuous as changes are
made by the radiology industry in the DICOM and HL-7 standards. The Company's
customers can receive full benefit of these upgrades through annual service
contracts.
In the developing area of radiology workflow applications, there are
many newly emerging competitors who offer portions of the integrated radiology
solution through their RIS and PACS to the market targeted by the Company.
Additionally, certain competitors are integrating RIS and PACS technologies
through development, partnership and acquisition activities. An integrated
RIS/PACS offering from a single vendor is a growing desire among the Company's
target market and will be an important offering by the Company in the future
in order to remain competitive.
Merge eFilm relies on its 15 years experience in working in all
aspects of the radiology industry, its strong customer relations and its
growing healthcare customer base as barriers to losing its market potential
for its fully integrated solution. Merge eFilm also relies on its global
brand and historical installation base as the market leader in connectivity
products (Merge Boxes) and desktop software image viewing applications,
eFilm Workstation. This install base, reputation for clinical and technical
quality and long term service is a key differentiator among the competition.
In addition, the FUSION software modular approach to implementing a
customized, fully-integrated solution is appealing to the Company's target
market and is the foundation of the Company's approach to this emerging area.
Many of the current and potential competitors have greater resources
than those that exist at the Company, including financial wherewithal,
research and development, intellectual property and marketing. Many of these
competitors may also have broader product lines and longer standing
relationships with customers. The Company's ability to compete successfully
depends on a number of factors both within and outside its control,
including: product innovation; product quality and performance; price;
experienced sales, marketing and service professionals; rapid development
of new products and features; continued active involvement in the development
of DICOM and other medical communication standards; and product and policy
decisions announced by competitors. There can be no assurance that the Company
will be able to compete successfully.
Intellectual Property Rights
The Company has received and maintains United States Patent No.
5,740,428 dated April 14, 1998, United States Patent No. 5,950,207 dated
September 7, 1999, New Zealand Patent No. 306009 dated February 7, 1996 and
Australia Patent No. 704804 dated August 12, 1999. However, the Company
generally does not rely solely on patent protection with respect to its
products. Instead, it relies on a combination of copyright and trade secret
laws, employee and third party confidentiality agreements and other measures
to protect intellectual property rights pertaining to its systems and
technology.
Medical, Regulatory and Government Standards and Reforms
The healthcare industry is subject to changing political, economic
and regulatory influences that may affect the procurement practices and
operation of the entire healthcare industry. Proposals to reform the United
States of America healthcare system have been, and will continue to be,
considered by the United States Congress. The Company embraces the general
philosophy that it will accept and utilize all appropriate industry standards
in the development of its product and service offerings. Merge eFilm has
positioned itself to assist its customers in the utilization, implementation,
and adherence to most major radiology standards and regulations. The Company,
however, cannot predict with any certainty what impact, if any, new proposals,
healthcare reforms or standards might have on the business, its financial
condition and its results of operations.
The following are examples of some of the environmental issues,
standards and regulations that Merge eFilm monitors and prepares itself to
address to protect its enterprise and that of its customers.
* The Health Insurance Portability and Accountability Act of 1996
("HIPAA") has mandated the use of standard transactions and
identifiers, prescribed security measures and other provisions
designed to simplify and secure the exchange of medical information.
The compliance date for implementation of security and
confidentiality measures will go into effect on April 14, 2003.
Merge eFilm has taken the necessary measures to help enable its
customers to meet HIPAA guidelines for data management;
* The United States Food and Drug Administration, which is responsible
for assuring the safety and effectiveness of medical devices under
the Federal Food, Drug and Cosmetic Act, has regulatory jurisdiction
over computer software applications when they are labeled or
intended to be used in the diagnosis of disease or other conditions;
* International sales of products outside the United States of America
are subject to foreign regulatory requirements that can vary from
country to country.
* Laws and regulations may be adopted to address internet commerce
such as online content, user privacy, pricing and characteristics
and quality of applications and services; and
* The tax treatment of the internet and e-commerce is currently
unsettled.
The Company continues to allocate internal resources to industry
standards committees and working groups who are tasked with setting and
promoting both technology and functionality standards within the diagnostic
imaging and healthcare information systems markets. Participating in IHE and
a variety of DICOM working groups specializing in HIPAA, HL7 and other
standards helps to ensure that the Company's products and services align with
the efforts of these committees and meets the evolving interoperability needs
of healthcare technologies.
Item 2. DESCRIPTION OF PROPERTIES
-------------------------------------------
The Company's principal facilities are located in Milwaukee,
Wisconsin, in an approximately 27,000 square foot office leased through June
2005 at a rate of approximately $300,000 per year. The Company also leases a
sales, administrative and service support office in Nuenen, the Netherlands,
a sales and engineering facility in Toronto, Canada and a sales office in
Tokyo, Japan.
Item 3. LEGAL PROCEEDINGS
-----------------------------------
The Company is not involved in any material legal proceedings.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
--------------------------------------------------------------------
The Company did not submit any matters to its shareholders for their
vote during the fourth quarter of 2002.
PART II
---------
Item 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
-------------------------------------------------------------------------
The Company's common stock commenced trading on the Nasdaq SmallCap
Market on January 29, 1998, under the symbol MRGE.
The following table sets forth for the periods indicated, the high and low
closing sale prices of our common stock as reported by Nasdaq:
Common Stock Market Prices
---------------------------
2002 4th Quarter 3rd Quarter 2nd Quarter 1st Quarter
----- ----------- ----------- ----------- -----------
High........ $7.920 $6.650 $9.080 $7.250
Low......... $3.670 $3.840 $5.791 $3.740
2001
-----
High........ $5.550 $2.000 $1.450 $1.410
Low......... $1.500 $1.250 $0.750 $0.660
According to the transfer agent's records, the Company has 186
stockholders of record of common stock as of March 28, 2003. As of the same
date, the Company estimates that there are in excess of 3,500 beneficial
holders of its common stock.
Dividend Policy
The Company has not paid any cash dividends on its common stock since
formation. The Company currently does not intend to declare or pay any cash
dividends on its common stock in the foreseeable future.
The Company's revolving line of credit with Lincoln State Bank
restricts payment of dividends if it is not in compliance with the loan
covenant of its borrowing document to maintain a funded debt to equity ratio
of 0.4 to 1.
Securities Authorized for Issuance under Equity Compensation Plans
The Company has no equity compensation plans that issue securities
other than employee benefit plans intended to meet the qualification
requirements of Section 401(a) of the Internal Revenue Code.
Recent Sales of Unregistered Securities During 2002
During the fourth quarter of 2002 the Company sold no shares of its
common stock in transactions not registered under the Securities Act of 1933,
as amended (the "Securities Act").
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION
-----------------------------------------------------------------------------
Special Note on Forward-Looking Statements
Certain statements in this report that are not historical facts
constitute forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995, Section 27A of the Securities Act,
and Section 21E of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). Discussions containing such forward-looking statements may
be included herein in the material set forth under Management's Discussion and
Analysis of Financial Condition and Results of Operations, as well as within
this report generally. In addition, when used in this report, the words:
believes, intends, anticipates, expects, and similar expressions are intended
to identify forward-looking statements. These statements are subject to a
number of risks and uncertainties, including, among others, the Company's
lack of consistent profitability, fluctuations in operating results, credit
and payment risks associated with end-user sales, involvement with rapidly
developing technology in highly competitive markets, acquisition and
development of new technologies, dependence on major customers, expansion of
the Company's international sales effort, broad discretion of management and
dependence on key personnel, risks associated with product liability and
product defects, costs of complying with government regulation, changes in
external competitive market factors which might impact trends in the Company's
results of operation, unanticipated working capital and other cash
requirements, general changes in the industries in which the Company
competes, and various other competitive factors that may prevent the Company
from competing successfully in the marketplace. Actual results could differ
materially from those projected in the forward-looking statements. The
Company undertakes no obligation to publicly release the result of any
revisions to these forward-looking statements that may be made to reflect
any future events or circumstances.
Overview
Merge eFilm is in the business of integrating digital radiology images
and information into healthcare enterprise networks, and providing software
solutions that manage diagnostic imaging workflow processes. Merge eFilm
solutions and services improve radiology workflow efficiencies, reduce
healthcare operating costs and improve clinical decision making processes.
The Company delivers this tangible value to healthcare facilities of all
sizes, but it specifically targets small to medium size hospitals,
multi-hospital groups, clinics and diagnostic imaging centers. The Company
offers modular, cost effective software solutions that improve its customers'
image and information management and radiology workflow. The Company's
product and service offerings are commonly categorized as PACS and RIS. The
Company believes the combination of PACS and RIS define the breadth and depth
of integrated radiology workflow, with the added value of enterprise image and
information access. This broader definition is the Company's focus and the
manner in which our solutions are positioned to our target market.
The Company, which was founded in 1987, has historically been viewed
as a leading provider of medical diagnostic imaging and information
connectivity technologies and professional consulting services for OEMs,
VARs, and healthcare facilities worldwide. Now doing business as Merge
eFilm, the Company believes it is at the forefront of integrated radiology
workflow research and development, bringing modular software applications to
the marketplace that will enable the seamless integration of images,
information, technology and people across the electronic healthcare
enterprise.
Through its founder and Chairman, William C. Mortimore, the Company
has been a key contributor to the development of the industry's standard
network communications protocol known as Digital Imaging Communications in
Medicine ("DICOM"), open medical standards such as HL-7, and the Integrated
Healthcare Enterprise ("IHE") framework that has been created through an
initiative co-sponsored by the Radiological Society of North America ("RSNA")
and the Healthcare Information and Management Systems Society ("HIMSS"). The
IHE initiative represents a consortium of more than 30 companies in the
Radiology and Healthcare Information Systems fields. This set of
requirements has paved the way for healthcare organizations to begin in
earnest to integrate the complex workflow systems of the radiology department
with the entire healthcare system by using equipment and software applications
that connect the various image and communication components. Merge eFilm has
incorporated these standards in all its radiology workflow technologies and
software applications establishing the basis for seamless integration of
images and healthcare information across an organization's intranet or over
the internet.
Radiology departments, diagnostic imaging centers and their patients
benefit from the Company's solutions in a variety of ways including: (i)
networking of multiple image-producing and image-using devices to eliminate
duplication and reduce the need for capital equipment expenditures to build
digital image and information networks; (ii) creating permanent electronic
archives of diagnostic-quality images to enable the retrieval of these images
and reports at any time in the future; (iii) accessing the Company's modular
architecture of software products that allow radiology departments, clinics
and diagnostic imaging centers to build their electronic image and information
management systems in a modular, flexible and cost-effective way; (iv)
delivering the capability to integrate diagnostic radiology images into the
radiologist's report to make it a permanent part of the patient's electronic
medical record; and (v) providing the means to view images and reports from
any number of remote locations.
Results of Operations
Year Ended December 31, 2002, Compared to Year Ended December 31, 2001
Net Sales. Net sales increased 32% to $20,786,000 in 2002 from
$15,741,000 in 2001. Net sales of products and software made directly to
healthcare facilities increased 114% to $6,264,000 in 2002 from $2,922,000 in
2001. The Company is continuing its strategic objective that it began in
late 2000, to further growth of sales made directly to healthcare facilities
and imaging centers. The Company intends to accomplish this by hiring
additional sales staff in this area and continuing its established marketing
programs to highlight to potential customers the technological and economic
benefits of our product and service offerings. Net sales to OEM/VARs and
dealers increased 2% to $10,787,000 in 2002 from $10,534,000 in 2001. The
Company anticipates continued growth in the OEM/VAR group, although at a
lower percentage than sales to direct channels and the professional services
group. Net sales from the professional services group increased 63% to
$3,735,000 in 2002 from $2,285,000 in 2001. The net sales growth from the
professional services group has been tied to the growth in sales made directly
to healthcare facilities and imaging centers, where such sales are accompanied
by installation services and service contracts, and to the added value of the
acquisition of eFilm completed in June of 2002. The Company anticipates net
sales from the professional services group to continue to grow as part of the
overall growth in the sales made directly to healthcare facilities and imaging
centers. Given our sales growth during 2002 and our assessment of the
market, the Company believes information technology spending on new
technologies by our targeted customer base will continue to grow. Based upon
this expected demand and customer receptiveness to the Merge eFilm suite of
products, the Company anticipates sales in 2003 to continue to increase,
largely driven by sales made directly to healthcare facilities and imaging
centers and the services to be provided related to these customers.
Cost of Sales. Cost of sales consists of purchased components,
service costs associated with revenues, amortization of purchased and
developed software and amortization of customer contracts. The cost of
purchased components decreased as a percentage of net sales to 24% in 2002
from 28% in 2001. This decrease in the cost of purchased components as a
percentage of net sales, is primarily due to the Company's sales mix, which
consists of a greater percentage of higher margin products and services and
reduced component costs. Service costs associated with revenues increased to
$1,768,000 in 2002 from $1,208,000 in 2001. The increase is due to the
Company's acquisition of eFilm and additional service department staff.
Amortization of purchased and developed software increased to $1,344,000 or
6% of net sales in 2002 from $773,000 or 5% of net sales in 2001. The
increase is due to the commencement of amortization on software available
for general release and the amortization of the intellectual property and
customer contracts acquired in the acquisition of eFilm.
As a result of the eFilm acquisition on June 28, 2002, the Company
has presented costs associated with service revenues as a component of cost
of sales. All periods compared have been reclassified to conform to the
current year presentation.
Gross Profit. Gross profit increased 35% to $12,788,000 in 2002
from $9,480,000 in 2001. As a percentage of net sales, gross profit
increased to 62% of net sales in 2002 compared to 60% in 2001. The Company
implemented a number of initiatives to improve gross profit in 2002,
including the acquisition of eFilm, increasing sales made directly to
healthcare facilities, targeted price increases, reductions in component
costs and a gradual shift in product mix to higher margin software
applications. The Company anticipates these initiatives will continue to
slightly increase overall margins in 2003.
Sales and Marketing. Sales and marketing expense increased 33% to
$4,305,000 in 2002 from $3,227,000 in 2001. The increase is the result of
the Company's objective to invest in sales and marketing activities and staff
count in order to grow net sales.
Product Research and Development. Research and development expense
decreased 13% to $1,620,000 in 2002 from $1,870,000 in 2001. The Company
anticipates research and development costs will increase in 2003 as the
Company increases its new product development and finishes its efforts to
commercialize products acquired in the eFilm acquisition. The decrease is
due primarily to an increase in capitalization of costs related to software
development. Capitalization of software development costs increased $414,000
to $1,850,000 in 2002 from $1,436,000 in 2001. The increase in capitalized
software development is a direct result of focusing engineering resources on
modular software development designed to accelerate the development cycle,
commercialization of technologies acquired in the eFilm acquisition and the
release of new product for revenue generation.
General and Administrative. General and administrative expense
increased 12% to $2,553,000 in 2002 from $2,286,000 in 2001. The majority
of the increase is due to an increase in allowance for bad debts of $116,000.
General and administrative expense includes costs for information systems,
accounting, administrative support, management personnel, bad debt expenses
and general corporate matters.
Depreciation and Amortization. Depreciation and amortization expense
decreased 32% or $247,000 to $518,000 in 2002 from $765,000 in 2001. The
decrease is due primarily to certain assets becoming fully depreciated and
the discontinuation of amortization of goodwill. Depreciation and
amortization is assessed on capital equipment and intangible assets with
estimable useful lives. This is net of amortization of capitalized software
of $1,344,000 and $773,000 in 2002 and 2001, respectively.
Restructuring and Related Items. The Company recorded an expense of
$36,000 in 2001 for restructuring and related items. The restructuring
expense was an additional expense that related to the restructuring the
Company underwent in the fourth quarter of 2000.
Acquired In-process Technology and Software Write-off. Acquired
in-process research and development was $148,000 in 2002. The write-off was
due to the eFilm acquisition the Company completed on June 28, 2002.
Other Income, Expense. During 2002, the Company had no amounts
outstanding on the line of credit which resulted in a decrease in interest
expense to $22,000 from $119,000 in 2001, and interest income was $50,000
compared to interest income of $45,000 in 2001. The increase in interest
income was relatively small compared to the increase in the Company's cash
balance due to declining interest rates. Other income, net, was $36,000 in
2002 compared to other income, net in 2001 of $137,000. Other income, net
for 2001 includes a gain of $197,000 for settlement of accounts payable
obligations for less than recorded book value.
Income Taxes. The Company recorded income tax expense of $79,000 in
2002 and $87,000 in 2001, primarily representing Japanese income tax
withholding on software royalties. The Company anticipates becoming a
taxpayer in 2003 and has begun utilizing its remaining net operating loss
carryforwards to offset income tax liabilities.
Year Ended December 31, 2001, Compared to Year Ended December 31, 2000
Net Sales. Net sales increased by 25% to $15,741,000 in 2001 from
$12,613,000 in 2000. Net sales of products and software made directly to
healthcare facilities increased 167% to $2,922,000 from $1,095,000 in 2000.
Increasing sales made directly to healthcare facilities is the continuation
of our strategic objectives that began in late 2000 so the Company could take
advantage of a perceived market opportunity. To increase sales made directly
to healthcare facilities, the Company has hired additional sales staff in this
area and established marketing programs to highlight to potential customers
the technological and economic benefits or our product and service offerings.
The Company expects to continue hiring sales staff in this area to support
further growth. Net sales to OEM/VARs and dealers increased 4% to $10,534,000
from $10,141,000 in 2000. The Company anticipates continued growth in the
OEM/VAR group, although at a lower percentage than sales to direct channels
and the professional services group. Net sales from the professional services
group increased 30% to $1,430,000 in 2001 from $1,104,000 in 2000. The net
sales growth from the professional services group has been tied to the growth
in the sales made directly to healthcare facilities, where such sales are
accompanied by installation services and service contracts. The Company
anticipates net sales from the professional services group to grow as part
of the overall growth in the sales made directly to healthcare facilities.
Net sales from the products sold through our service group, including
upgrades, hardware replacement and service parts, increased 213% to $855,000
in 2001 from $273,000 in 2000. This growth is attributable to growth in the
Company's installation base and an effort to sell updated versions of the
Company's products to the installed base. Given our sales growth during
2001 and our assessment of the market, the Company believes information
technology spending on new technologies by our targeted customer base will
continue to grow.
Cost of Sales. Cost of sales consists of purchased components,
service costs associated with revenues and amortization of purchased and
developed software. The cost of purchased components decreased as a
percentage of net sales to 28% in 2001 from 32% in 2000. The decrease in the
cost of purchased components as a percentage of net sales is due primarily to
the Company's sales mix, which consists of a greater percentage of higher
margin products and services and reduced component costs. Service costs
associated with revenues increased to $1,208,000 in 2001 from $1,194,000 in
2001. Also, cost of sales as a percentage of net sales was higher in 2000 in
part due to inventory provisions of $390,000 for obsolescence related to
inventory parts that were determined to have no future value due to technology
upgrades in the Company's products and a variance to physical count in both
the Unites States and European offices. Amortization of purchased and developed
software decreased to $773,000 or 5% of net sales in 2001 from $992,000 or
8% of net sales in 2000, due primarily to the write-down of the carrying
value of developed software to its estimated net realizable value in the
third quarter of 2000.
Gross Profit. Gross profit increased by 54% to $9,480,000 in 2001
from $6,140,000 in 2000. As a percentage of net sales, gross profit increased
to 60% of net sales in 2001 compared to 49% in 2000 due to sales of higher
margin products and to an increase in net sales from the professional services
group. The Company implemented a number of initiatives to improve gross
profit in 2001, including targeted price increases, reductions in component
costs and a gradual shift in product mix to higher margin software
applications.
Sales and Marketing. Sales and marketing expense decreased by 25% to
$3,227,000 in 2001 from $4,326,000 in 2000, due primarily to the reallocation
of certain marketing resources to other departments as part of the Company's
reduction in workforce and job redefinition plans to improve the Company's
financial performance.
Product Research and Development. Research and development expense
decreased by 22% to $1,870,000 in 2001 from $2,411,000 in 2000 due primarily
to a decrease in personnel costs effective with the Company's October 2000
reduction in workforce. Capitalization of software development costs
decreased to $1,436,000 in 2001 from $1,584,000 in 2000. However,
engineering costs included in capitalization of software increased as a
percentage of total engineering costs to 43% in 2001 from 40% in 2000.
This increase was the result of engineering management's focus on near-term
software development deliverables and a more efficient allocation of
engineering resources to the design and construction of new software
products.
General and Administrative. General and administrative expense
decreased by 14% to $2,286,000 in 2001 from $2,663,000 in 2000, due primarily
to decreases in personnel and external consultant expenses and a gain of
$225,000 from derecognition of a liability relating to a change in the
Company's vacation policy in which the maximum payment to terminated employees
for unused vacation time was reduced.
Depreciation and Amortization. Depreciation and amortization expense
decreased by 11% or $95,000 to $765,000 in 2001 from $860,000 in 2000. The
decrease was due in part to a write-down of certain non-performing intangible
assets in the fourth quarter of 2000. Depreciation and amortization was
recognized on capital equipment, goodwill, and other intangible assets.
Restructuring and Related Items. The Company recorded an expense of
$36,000 in 2001 and $255,000 in 2000 for restructuring and related items. In
2000, the restructuring expenses were $88,000 and reflected severance charges
for eighteen positions eliminated in a workforce reduction in October 2000.
Related expenses were $167,000 and primarily reflect the write-down of the
assembled workforce capitalized as part of the 1999 acquisition of Interpra
Medical Imaging Network Ltd., now know as Merge Technologies Canada Ltd.
("Interpra".)
Acquired In-process Technology and Software Write-off. In September
2000, the Company recorded a charge of $975,000 for technologies replaced by
the Merge WorkFlow platform. The Company also wrote down a $155,000 prepaid
software license for which future product delivery from its vendor was at
risk.
Other income, Expense. In 2001, interest expense was $119,000 and
interest income was $45,000 compared to interest expense of $74,000 and
interest income of $24,000 in 2000. Other income, net, which was $137,000
in 2001, includes a gain of $197,000 for settlement of accounts payable
obligations. Other expense, net in 2000 was $89,000, which included $115,000
in charges for impairment of non-operating assets.
Income Taxes. The Company recorded income tax expense of $87,000 in
2001, which reflects Japanese income tax withholding on software royalties
and an anticipated alternative minimum tax obligation. The Company recognized
income tax expense in 2000 of $63,000, despite incurring losses for financial
reporting purposes, due primarily to Japanese income tax withholding on
software royalties.
Liquidity and Capital Resources.
Operating Cash Flows. Cash provided by operating activities was
$3,805,000 in 2002. The Company's positive operating cash flow in 2002 was
due primarily to its net income of $3,629,000, depreciation and amortization
expense of $1,862,000, an increase of $759,000 in accounts payable, a
$1,015,000 increase in deferred revenue, offset by an increase of $3,988,000
in accounts receivable. Accounts payable increased due to the timing of
purchases to fulfill orders. Accounts receivable and deferred revenue
increases are a direct result of the increase in net sales.
The total days sales outstanding for the year ended December 31,
2002, is 130 days, compared to 76 days for the year ended December 31,
2001. The increase in days sales outstanding is attributed to the change
in business mix to sales made directly to healthcare facilities, in which
payment terms are offered over greater periods of time, as compared to sales
in the OEM/VAR channel.
Investing Cash Flows. Cash used in investing activities was
$2,651,000 in 2002, due primarily to cash outflows for capitalized software
development costs of $1,850,000, purchases of capital equipment and leasehold
improvements of $558,000 and acquisition costs, net of cash acquired of
$243,000. The Company expects to continue to invest in software development
projects that will continue to accelerate sales.
Financing Cash Flows. Cash provided by financing activities was
$2,216,000 in 2002. The Company received net proceeds of $1,036,000 from
employee and director stock option exercises and $76,000 from purchases of
common stock under its employee stock purchase plan. The Company also
received net proceeds of $1,118,000 in cash as a result of the exercise of
722,943 warrants during the quarter ended June 30, 2002.
Total outstanding commitments at December 31, 2002, were as follows:
Contractual Less than 1 - 3
Obligations Total 1 Year Years
-----------------------------------------------------------------
Long Term Debt........ $ 190,803 $ ---- $ 190,803
Capital Lease
Obligations......... 7,717 7,717 ----
Operating Leases...... 1,021,509 402,558 618,951
---------- ---------- ---------
Total Contractual
Cash Obligations.... $1,220,029 $ 410,276 $ 809,754
========== ========== =========
The Company also has a liability recorded of $1,038,282 for put
options on the remaining 265,172 of 420,000 Interpra exchangeable shares,
which may be exercised for a price of $4.50 per share during the period from
August 31, 2004, until September 30, 2004.
In December 2002, the Company negotiated a new revolving line of
credit agreement with its bank, increasing its line to $5,000,000, effective
December 30, 2002, and maturing December 30, 2005. The interest rate on the
line of credit is at a variable rate that is equal to the prime rate as
published in the Wall Street Journal, less 0.75 percentage points and is
collateralized by the Company's assets. At December 31, 2002, the loan's
interest rate was 3.50%. Availability under the new line of credit is
subject to a borrowing base consisting of 50% of inventory balances under
$2,000,000, 80% of qualified accounts receivable under 90 days and 100%
of the Company's depository cash balances held at the bank if borrowings
exceed the existing base of inventory and qualified accounts receivable.
Under the formula, $5,000,000 was calculated to be available at December 31,
2002. No amounts were outstanding on the line of credit as of December 31,
2002.
The Company does not have any other significant long-term
obligations, contractual obligations, lines of credit, standby letters of
credit, guarantees, standby repurchase obligations or other commercial
commitments.
The Company believes that existing cash, together with the
availability under its revolving credit agreement and future cash flows from
operations will be sufficient to execute the business plan in 2003. However,
any projections of future cash inflows and outflows are subject to
uncertainty. In 2003, it may be necessary to raise additional capital for
activities necessary to meet the Company's business objectives or its
long-term liquidity needs. If it is determined that additional capital is
needed, it may be raised by selling additional equity or raising debt from
third party sources. The sale of additional equity or convertible debt
securities could result in dilution to current stockholders. In addition,
debt financing, if available, could involve restrictive covenants, which
could adversely affect operations. There can be no assurance that any of
these financing alternatives, including raising additional capital, will be
available in amounts or on terms acceptable to the Company.
Critical Accounting Policies
The Company's consolidated financial statements are impacted by the
accounting policies used and the estimates and assumptions made by management
during their preparation. Critical accounting policies in which management
makes significant estimates are revenue recognition, accounts receivable,
software capitalization, goodwill valuation, other long-lived assets and
income taxes.
Revenue Recognition. Revenues are derived primarily from the
sublicensing and licensing of computer software, installations, training,
consulting, software maintenance and sales of PACS solutions. Inherent in
the revenue recognition process are significant management estimates and
judgements, which influence the timing and amount of revenue recognition.
For sales of software arrangements, the Company recognizes revenue
according to the American Institute of Certified Public Accountants Statement
of Position 97-2 (SOP 97-2), Software Revenue Recognition, and related
amendments. SOP 97-2, as amended, generally requires revenue earned on
software arrangements involving multiple elements to be allocated to each
element based on the relative fair values of those elements. Revenue from
multiple-element software arrangements is recognized using the residual
method. Under the residual method, revenue is recognized in a multiple
element arrangement when Company-specific objective evidence of fair value
exists for all of the undelivered elements in the arrangement, but does not
exist for one or more of the delivered elements in the arrangement. The
Company allocates revenue to each undelivered element in a multiple element
arrangement based on its respective fair value, with the fair value
determined by the price charged when that element is sold separately.
Specifically, the Company determines the fair value of the maintenance
portion of the arrangement based on the renewal price of the maintenance
offered to clients, which is stated in the contract and fair value of the
installation based upon the price charged when the services are sold
separately. If evidence of the fair value cannot be established for an
undelivered element of a software sale, the entire amount of revenue under
the arrangement is deferred until these elements have been delivered or
vendor-specific objective evidence of fair value can be established.
Revenue from the sale of sublicenses sold on an individual basis and
computer software licenses is recognized upon shipment provided that evidence
of an arrangement exists, title and risk of loss have passed to the customer,
fees are fixed or determinable and collection of the related receivable is
reasonably assured.
Revenue from software usage sublicenses sold through annual contracts
and software maintenance is deferred and recognized ratably over the contract
period. Revenue from installation, training, and consulting services is
recognized as services are performed.
Revenue from sales of PACS solutions sold directly to healthcare
institutions where installation services are considered essential to the
functionality of the solution sold is recognized on a percentage-of-completion
method, as prescribed by the American Institute of Certified Public
Accountants Statement of Position 81-1, Accounting for Performance on
Construction-Type and Certain Production-Type Contracts.
Percentage-of-completion is determined by the output method based upon the
achievement of delivery milestones.
The Company's policy is to allow returns when the Company has
preauthorized the return. Based on the Company's historical experience of
very limited returns and the Company's expectation that returns, if any, will
be insignificant, the Company has not provided for an allowance for potential
items to be returned.
Accounts Receivable. The Company's accounts receivable balance is
reported net of an allowance for bad debt. The Company's management
("Management") determines collection risk and records allowances for bad
debt based on the aging of accounts and past transaction history with
customers. If the financial condition of the Company's customers were to
deteriorate, resulting in an impairment of their ability to make payments,
additional allowances would be required.
Software Capitalization. Software capitalization commences when
management determines that projects have achieved technological feasibility.
Management's determination that a project has achieved technical feasibility
does not ensure that the project can be commercially salable. Amounts
capitalized include estimates of overhead attributable to the projects. The
useful lives of capitalized software projects are assigned by Management,
based upon the expected life of the software. Management also estimates the
realizability of capitalized values based on projections of future net
operating cash flows through the sale of products related to each capitalized
project. If the Company determines in the future that the value of
capitalized software cannot be recovered, a write-down of the value of the
capitalized software to its recoverable value may be required. If the actual
achieved revenues are lower than our estimates or the useful life of a
project is shorter than the estimated useful life, the asset may be deemed to
be impaired and, accordingly, a write-down of the value of the asset may be
required. The Company recorded a write down of $1,130,000 in 2000.
Other Long-Lived Assets. Other long-term assets, including property
and equipment, and other intangibles, are amortized over their expected
lives, which are estimated by management. Management also makes estimates of
the impairment of long-term assets whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. If the
actual useful life of a long-term asset is shorter than the useful life
estimated by the Company, the assets may be deemed to be impaired and,
accordingly, a write-down of the value of the assets may be required.
Goodwill and Other Intangible Assets. Effective January 1, 2002, the
Company adopted Statement of Financial Accounting Standards ("SFAS") No. 142,
goodwill and Other Intangible Assets ("SFAS No. 142"). SFAS No. 142 requires
that goodwill and indefinite lived intangible assets be reviewed for
impairment annually, or more frequently if impairment indicators arise. Our
policy provides that goodwill and indefinite lived intangible assets will be
reviewed for impairment on December 31 of each year. In calculating our
impairment losses, the Company evaluated the fair value by estimating the
expected present value of their future cash flows.
Income Taxes. As part of the process of preparing our consolidated
financial statements, the Company is required to estimate income taxes in
each of the countries in which we operate. This process involves estimating
our current tax exposure together with assessing temporary differences
resulting from differing treatment of items for tax and accounting purposes.
These differences result in deferred tax assets and liabilities. The Company
must then assess the likelihood that our deferred tax assets will be
recovered from future taxable income, and, to the extent we believe that
recovery is not likely, the Company must establish a valuation allowance.
To the extent the Company establish a valuation allowance or increase this
allowance in a period, the Company must include an expense within the tax
provision in the statement of operations. Significant management judgment
is required in determining our provision for income taxes, deferred tax
assets and liabilities and any valuation allowance recorded against our net
deferred tax assets. The Company provided full valuation allowances on
deferred tax assets in 2000, 2001 and 2002 because of our uncertainty
regarding their realizability based on our estimates.
Recently Issued Accounting Standards
In December 2002, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 148, Accounting for Stock-Based Compensation - Transition and
Disclosure, an amendment of FASB Statement No. 123. This Statement amends
FASB Statement No. 123, Accounting for Stock-Based Compensation ("FASB
Statement No. 123"), to provide alternative methods of transition for a
voluntary change to the fair value method of accounting for stock-based
employee compensation. In addition, this statement amends the disclosure
requirements of FASB Statement No. 123 to require prominent disclosures in
both annual and interim financial statements. Certain of the disclosure
modifications are required for fiscal years ending after December 15, 2002,
and are included in the notes to these consolidated financial statements.
In January 2003, the FASB issued EITF No. 00-21, Revenue Arrangements
with Multiple Deliverables ("EITF 00-21"). EITF 00-21 provides guidance on
how to determine whether an arrangement involving multiple deliverables
contains more than one unit of accounting and how arrangement consideration
should be measured and allocated to the separate units of accounting in the
arrangement. EITF 00-21 will be effective for arrangements entered into in
fiscal periods beginning after June 15, 2003. The Company does not expect
that the provisions of EITF 00-21 will have a material impact on the
Company's results of operations or financial position.
Item 7. FINANCIAL STATEMENTS
-------------------------------------
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Merge Technologies Incorporated:
We have audited the accompanying consolidated balance sheets of Merge
Technologies Incorporated and subsidiaries as of December 31, 2002 and 2001,
and the related consolidated statements of operations, shareholders' equity,
cash flows, and comprehensive income (loss) for each of the years in the
three-year period ended December 31, 2002. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards
generally accepted in the United States of America. Those standards require
that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
Merge Technologies Incorporated and subsidiaries as of December 31, 2002
and 2001, and the results of their operations and their cash flows for each
of the years in the three-year period ended December 31, 2002, in
conformity with accounting principles generally accepted in the United
States of America.
As discussed in Note 1 to the consolidated financial statements,
the Company adopted the provisions of Statement of Financial Accounting
Standards Board No. 142, Goodwill and Other Intangible Assets, on January
1, 2002.
/s/ KPMG LLP
------------------------------
Chicago, Illinois
March 28, 2003
MERGE TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
Years Ended December 31,
------------------------------
2002 2001
------------- -------------
Current assets:
Cash......................................................... $ 4,410,939 $ 1,042,893
Accounts receivable, net of allowance for doubtful accounts..
of $292,645 and $170,572 at December 31, 2002 and
2001, respectively......................................... 7,069,163 2,669,408
Unbilled accounts receivable................................. 79,109 472,912
Inventory.................................................... 452,978 542,136
Prepaid expenses............................................. 175,673 93,831
Other current assets......................................... 25,526 30,906
------------ -------------
Total current assets.......................................... 12,213,388 4,852,086
------------ -------------
Computer equipment........................................... 3,725,264 3,410,170
Office equipment............................................. 500,609 416,216
Leasehold improvements....................................... 146,855 ----
------------ -------------
4,372,728 3,826,386
Less accumulated depreciation................................ 3,530,715 3,101,960
------------ -------------
Net property and equipment.................................... 842,013 724,426
Long-term receivable.......................................... 143,654 193,475
Purchased and developed software, net of accumulated
amortization of $5,522,307 and $4,342,779 at December 31,
2002 and 2001 respectively.................................. 5,703,247 3,824,483
Intangibles - customer contract, net of accumulated
amortization of $96,613 at December 31, 2002................ 869,519 ----
Goodwill...................................................... 7,405,650 354,999
Other assets.................................................. 68,536 106,127
------------ -------------
Total assets.................................................. $ 27,246,007 $ 10,055,596
============ =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of obligations under capital leases.......... $ 7,254 $ 23,384
Accounts payable............................................. 1,492,736 815,177
Accrued wages................................................ 685,014 645,588
Other accrued liabilities.................................... 264,122 258,989
Deferred revenue............................................. 1,892,001 480,446
------------ -------------
Total current liabilities..................................... 4,341,127 2,223,584
------------ -------------
Notes payable................................................ 166,911 152,141
Redemption value related to exchangeable common stock........ 1,038,282 1,504,230
Obligations under capital leases, excluding current portion.. ---- 7,131
Other liabilities............................................ 16,546 ----
------------ -------------
Total liabilities............................................. 5,562,866 3,887,086
------------ -------------
Shareholders' equity:
Special Voting Preferred Stock, $0.01 par value: 4,000,000
shares authorized; one share issued and outstanding at
December 31, 2002 and 2001.................................. ---- ----
Series A Preferred Stock, $0.01 par value: 1,000,000 shares
authorized; zero and 637,236 shares issued and outstanding
at December 31, 2002 and 2001, respectively................. ---- 6,372
Series 2 Special Voting Preferred Stock, $0.01 par value:
1,000,000 shares authorized; one share and zero shares issued
and outstanding at December 31, 2002 and 2001, respectively. ---- ----
Common stock, $0.01 par value: 30,000,000 shares authorized;
9,481,683 and 7,019,493 shares issued and outstanding at
December 31, 2002 and 2001, respectively.................... 94,817 70,195
Common stock subscribed; 3,542 shares and 22,173 shares at
December 31, 2002 and 2001, respectively.................... 15,656 17,082
Additional paid-in capital................................... 28,035,152 16,182,483
Common stock subscription receivable, due from related party. (25,000) (35,000)
Accumulated deficit.......................................... (6,295,160) (9,924,055)
Accumulated other comprehensive income (loss) -
cumulative translation adjustment.......................... (142,324) (148,567)
------------ -------------
Total shareholders' equity.................................... 21,683,141 6,168,510
------------ -------------
Total liabilities and shareholders' equity.................... $ 27,246,007 $ 10,055,596
============ =============
See accompanying notes to consolidated financial statements.
MERGE TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31,
---------------------------------------------
2002 2001 2000
---------------------------------------------
Net sales...................................... $ 20,786,369 $ 15,741,059 $ 12,612,575
Cost of sales.................................. 7,998,190 6,261,109 6,472,460
------------- ------------- -------------
Gross profit................................... 12,788,179 9,479,950 6,140,115
------------- ------------- -------------
Operating costs and expenses:
Sales and marketing........................... 4,305,427 3,226,719 4,326,178
Product research and development.............. 1,619,778 1,869,809 2,411,386
General and administrative.................... 2,553,016 2,286,217 2,662,906
Depreciation and amortization................. 517,618 765,494 859,805
Restructuring and related items............... ---- 35,825 254,970
Software write-off............................ ---- ---- 1,129,871
Acquired in-process research and development.. 148,050 ---- ----
------------- ------------- -------------
Total operating costs and expenses............. 9,143,889 8,184,064 11,645,116
------------- ------------- -------------
Operating income (loss)........................ 3,644,290 1,295,886 (5,505,001)
Other income (expense):
Interest expense.............................. (21,979) (118,929) (73,670)
Interest income............................... 49,662 44,567 23,617
Other, net.................................... 35,851 136,520 (89,061)
------------- ------------- -------------
Total other income (expense)................... 63,534 62,158 (139,114)
------------- ------------- -------------
Income (loss) before income taxes.............. 3,707,824 1,358,044 (5,644,115)
Income tax expense............................. 78,929 87,286 63,279
------------- ------------- -------------
Net income (loss).............................. 3,628,895 1,270,758 (5,707,394)
Net income (loss) per share - basic............ $ 0.38 $ 0.17 $ (1.01)
============= ============= =============
Weighted average number of common shares
outstanding - basic.......................... 8,840,059 6,178,821 5,792,945
============= ============= =============
Net income (loss) per share - diluted.......... $ 0.33 $ 0.15 $ (1.01)
============= ============= =============
Weighted average number of common shares
outstanding - diluted........................ 10,383,651 7,310,731 5,792,945
============= ============= =============
See accompanying notes to consolidated financial statements.
MERGE TECHNOLOGIES INCORPORATED AND SUBSIDARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
For Years Ended December 31, 2000, 2001 and 2002
Special Voting Series A
Preferred Stock Preferred Stock
---------------------- ----------------------------------------------
Shares Issued Shares Subscribed Shares Issued
issued amount subscribed amount issued Amount
---------- ---------- ---------- ---------- ---------- ----------
Balance at December 31, 1999 1 $ ------ ----- $ ----- ----- $ -----
---------- ---------- ---------- ---------- ---------- ----------
Accretion of put value......... ------ ------ ----- ----- ----- -----
Issuance of options for service ------ ------ ----- ----- ----- -----
Issuance of common stock....... ------ ------ ----- ----- ----- -----
Exchange of share rights into
common stock................. ------ ------ ----- ----- ----- -----
Shares to be issued for
services rendered............ ------ ------ ----- ----- ----- -----
Stock purchased under ESPP.....
Common stock subscriptions..... ------ ------ ----- ----- ----- -----
Series A Preferred Stock
subscriptions................ ------ ------ 613,236 467,316 ----- -----
Issuance of common stock
warrants..................... ------ ------ ----- ----- ----- -----
Net income..................... ------ ------ ----- ----- ----- -----
Foreign currency cumulative
translation adjustment....... ------ ------ ----- ----- ----- -----
---------- ---------- ---------- --------- ---------- ----------
Balance at December 31, 2000... 1 $ ------ 613,236 $ 467,316 ----- -----
========== ========== ========== ========= ========== ==========
Accretion of put value......... ------ ------ ----- ----- ----- -----
Issuance of common stock....... ------ ------ ----- ----- ----- -----
Issuance of preferred stock.... ------ ------ (613,236) (467,316) 622,236 6,222
Issuance of common stock
warrants..................... ------ ------ ----- ----- ----- -----
Stock purchased under ESPP ------ ------ ----- ----- ----- -----
Exchange of share rights into
common stock................. ------ ------ ----- ----- ----- -----
Shares issued for services
rendered..................... ------ ------ ----- ----- 15,000 150
Exercise of stock options...... ------ ------ ----- ----- ----- -----
Exercise of stock warrants..... ------ ------ ----- ----- ----- -----
Preferred stock dividends
declared..................... ------ ------ ----- ----- ----- -----
Issuance of preferred stock
dividend..................... ------ ------ ----- ----- ----- -----
Reduction of stock subscription
receivable from related party ------ ------ ----- ----- ----- -----
Net income..................... ------ ------ ----- ----- ----- -----
Foreign currency cumulative
translation adjustment....... ------ ------ ----- ----- ----- -----
---------- ---------- ----------- --------- ---------- ----------
Balance at December 31, 2001... 1 $ ------ ----- $ ----- 637,236 $ 6,372
========== ========== =========== ========= ========== ==========
Accretion of put value......... ------ ------ ----- ----- ----- -----
Issuance of common stock....... ------ ------ ----- ----- (637,236) (6,372)
Shares issued for acquisitions. ------ ------ ----- ----- ----- -----
Exchange of share rights into
common stock................. ------ ------ ----- ----- ----- -----
Stock purchased under ESPP..... ------ ------ ----- ----- ----- -----
Exercise of stock options...... ------ ------ ----- ----- ----- -----
Exercise of stock warrants..... ------ ------ ----- ----- ----- -----
Preferred stock dividends
declared..................... ------ ------ ----- ----- ----- -----
Issuance of preferred stock
dividend..................... ------ ------ ----- ----- ----- -----
Reduction of stock subscription
receivable from related party ------ ------ ----- ----- ----- -----
Net income..................... ------ ------ ----- ----- ----- -----
Foreign currency cumulative
translation adjustment....... ------ ------ ----- ----- ----- -----
---------- ---------- ----------- --------- ---------- ----------
Balance at December 31, 2002... 1 $ ------ ----- $ ----- ----- $ -----
========== ========== =========== ========= ========== ==========
MERGE TECHNOLOGIES INCORPORATED AND SUBSIDARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
For Years Ended December 31, 2000, 2001 and 2002
Series 2
Special Voting
Preferred stock
----------------------
shares issued
issued amount
---------- ----------
Balance at December 31, 1999 ----- $ ------
---------- ----------
Accretion of put value......... ------ ------
Issuance of options for service ------ ------
Issuance of common stock....... ------ ------
Exchange of share rights into
common stock................. ------ ------
Shares to be issued for
services rendered............ ------ ------
Stock purchased under ESPP..... ------ ------
Common stock subscriptions..... ------ ------
Series A Preferred Stock
subscriptions................ ------ ------
Issuance of common stock
warrants..................... ------ ------
Net income..................... ------ ------
Foreign currency cumulative
translation adjustment....... ------ ------
---------- ----------
Balance at December 31, 2000... ------ $ ------
========== ==========
Accretion of put value......... ------ ------
Issuance of common stock....... ------ ------
Issuance of preferred stock.... ------ ------
Issuance of common stock
warrants..................... ------ ------
Stock purchased under ESPP..... ------ ------
Exchange of share rights into
common stock................. ------ ------
Shares issued for services
rendered..................... ------ ------
Exercise of stock options...... ------ ------
Exercise of stock warrants..... ------ ------
Preferred stock dividends
declared..................... ------ ------
Issuance of preferred stock
dividend..................... ------ ------
Reduction of stock subscription
receivable from related party ------ ------
Net income..................... ------ ------
Foreign currency cumulative
translation adjustment....... ------ ------
---------- ----------
Balance at December 31, 2001... ------ $ ------
========== ==========
Accretion of put value......... ------ ------
Issuance of common stock....... ------ ------
Shares issued for acquisitions. 1 ------
Exchange of share rights into
common stock................. ------ ------
Stock purchased under ESPP..... ------ ------
Exercise of stock options...... ------ ------
Exercise of stock warrants..... ------ ------
Preferred stock dividends
declared..................... ------ ------
Issuance of preferred stock
dividend..................... ------ ------
Reduction of stock subscription
receivable from related party ------ ------
Net income (loss).............. ------ ------
Foreign currency cumulative
translation adjustment....... ------ ------
---------- ----------
Balance at December 31, 2002... 1 $ ------
========== ==========
MERGE TECHNOLOGIES INCORPORATED AND SUBSIDARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
For Years Ended December 31, 2000, 2001 and 2002
Common Stock
---------------------------------------------- -------------------------
Additional
Shares Subscribed Shares Issued paid-in Accumulated
subscribed amount issued amount capital deficit
---------- ---------- ---------- ---------- ----------- ------------
Balance at December 31, 1999 ----- $ ------ 5,781,389 $ 57,814 $14,333,392 $ (5,487,419)
---------- ---------- ---------- ---------- ----------- ------------
Accretion of put value......... ------ ------ ----- ----- (140,280) -----
Issuance of options for service ------ ------ ----- ----- 49,875 -----
Issuance of common stock....... ------ ------ 12,011 120 706 -----
Exchange of share rights into
common stock................. ------ ------ 952 10 (10) -----
Shares to be issued for
services rendered............ 23,459 36,667 ----- ----- ----- -----
Stock purchased under ESPP..... 20,861 16,082 10,818 108 15,121 -----
Common stock subscriptions..... 145,350 100,001 ------ ----- ----- -----
Series A Preferred Stock
subscriptions................ ------ ------ ----- ----- ----- -----
Issuance of common stock
warrants..................... ------ ------ ----- ----- 114,994 -----
Net income..................... ------ ------ ----- ----- ----- (5,707,394)
Foreign currency cumulative
translation adjustment....... ------ ------ ----- ----- ----- -----
---------- ---------- ----------- --------- ----------- ------------
Balance at December 31, 2000... 189,670 $ 152,750 5,805,170 $ 58,052 $14,373,798 $(11,194,813)
========== ========== =========== ========= =========== ============
Accretion of put value......... ------ ------ ----- ----- (140,280) -----
Issuance of common stock....... (168,809) (136,668) 1,005,734 10,057 1,330,262 -----
Issuance of preferred stock.... ------ ------ ----- ----- 470,094 -----
Issuance of common stock
warrants..................... ------ ------ ----- ----- 9,879 -----
Stock purchased under ESPP 1,312 1,000 94,037 940 68,425 -----
Exchange of share rights into
common stock................. ------ ------ 31,096 311 (311) -----
Shares issued for services
rendered..................... ------ ------ 20,163 202 43,138 -----
Exercise of stock options...... ------ ------ 20,622 206 26,477 -----
Exercise of stock warrants..... ------ ------ 12,500 125 12,375 -----
Preferred stock dividends
declared..................... ------ ------ ----- ----- (44,236) -----
Issuance of preferred stock
dividend..................... ------ ------ 30,171 302 32,862 -----
Reduction of stock subscription
receivable from related party ------ ------ ----- ----- ----- -----
Net income..................... ------ ------ ----- ----- ----- 1,270,758
Foreign currency cumulative
translation adjustment....... ------ ------ ----- ----- ----- -----
---------- ---------- ----------- --------- ----------- ------------
Balance at December 31, 2001... 22,173 $ 17,082 7,019,493 $ 70,195 $16,182,483 $ (9,924,055)
========== ========== =========== ========= =========== ============
Accretion of put value......... ------ ------ ----- ----- 465,948 -----
Issuance of common stock....... ------ ------ 645,222 6,452 44,224 -----
Shares issued for acquisitions. ------ ------ 93,901 939 9,117,873 -----
Exchange of share rights into
common stock................. ------ ------ 179,603 1,796 (1,805) -----
Stock purchased under ESPP..... (18,631) (1,426) 36,976 371 76,713 -----
Exercise of stock options...... ------ ------ 778,571 7,786 1,028,276 -----
Exercise of stock warrants..... ------ ------ 722,943 7,229 1,110,433 -----
Preferred stock dividends
declared..................... ------ ------ ----- ----- (20,471) -----
Issuance of preferred stock
dividend..................... ------ ------ 4,974 49 31,478 -----
Reduction of stock subscription
receivable from related party ------ ------ ----- ----- ----- -----
Net income..................... ------ ------ ----- ----- ----- 3,628,895
Foreign currency cumulative
translation adjustment....... ------ ------ ----- ----- ----- -----
---------- ---------- ----------- --------- ----------- ------------
Balance at December 31, 2002... 3,542 $ 15,656 9,481,683 $ 94,817 $28,035,152 $ (6,295,160)
========== ========== =========== ========= =========== ============
MERGE TECHNOLOGIES INCORPORATED AND SUBSIDARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
For Years Ended December 31, 2000, 2001 and 2002
Common stock
----------------------------------------
Stock Cummulative Total
subscription translation shareholders'
receivable adjustment equity
------------ ------------ ------------
Balance at December 31, 1999 ----- $ 60,452 $ 8,964,239
---------- ------------ ------------
Accretion of put value......... ------ ------ (140,280)
Issuance of options for service ------ ------ 49,875
Issuance of common stock....... ------ ------ 826
Exchange of share rights into
common stock................. ------ ------ ------
Shares to be issued for
services rendered............ ------ ------ 36,667
Stock purchased under ESPP..... ------ ------ 31,311
Common stock subscriptions..... (50,000) ------ 50,001
Series A Preferred Stock
subscriptions................ ------ ------ 467,316
Issuance of common stock
warrants..................... ------ ------ 114,994
Net income (loss).............. ------ ------ (5,707,394)
Foreign currency cumulative
translation adjustment....... ------ ------ (114,675)
---------- ----------- -----------
Balance at December 31, 2000... (50,000) $ (54,223) $3,752,880
========== =========== ===========
Accretion of put value......... ------ ------ (140,280)
Issuance of common stock....... (10,000) ------ 1,193,651
Issuance of preferred stock.... ------ ------ 9,000
Issuance of common stock
warrants..................... ------ ------ 9,879
Stock purchased under ESPP..... ------ ------ 70,365
Exchange of share rights into
common stock................. ------ ------ ------
Shares issued for services
rendered..................... ------ ------ 43,490
Exercise of stock options...... ------ ------ 26,683
Exercise of stock warrants..... ------ ------ 12,500
Preferred stock dividends
declared..................... ------ ------ (44,236)
Issuance of preferred stock
dividend..................... ------ ------ 33,164
Reduction of stock subscription
receivable from related party 25,000 ------ 25,000
Net income (loss).............. ------ ------ 1,270,758
Foreign currency cumulative
translation adjustment....... ------ (94,344) (94,344)
---------- ---------- ----------
Balance at December 31, 2001... (35,000) $ (148,567) $6,168,510
========== ========== ==========
Accretion of put value......... ------ ------ 465,948
Issuance of common stock....... ------ ------ 44,304
Shares issued for acquisitions. ------ ------ 9,118,812
Exchange of share rights into
common stock................. ------ ------ (9)
Stock purchased under ESPP..... ------ ------ 75,658
Exercise of stock options...... ------ ------ 1,036,062
Exercise of stock warrants..... ------ ------ 1,117,662
Preferred stock dividends
declared..................... ------ ------ (20,471)
Issuance of preferred stock
dividend..................... ------ ------ 31,527
Reduction of stock subscription
receivable from related party 10,000 ------ 10,000
Net income (loss).............. ------ ------ 3,628,895
Foreign currency cumulative
translation adjustment....... ------ 6,243 6,243
---------- ---------- -----------
Balance at December 31, 2002... (25,000) $ (142,324) $21,683,141
========== ========== ===========
See accompanying notes to consolidated financial statements.
MERGE TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
----------------------------------------
2002 2001 2000
------------ ------------ -------------
Cash flows from operating activities:
Net income (loss)................................................ $ 3,628,895 $ 1,270,758 $ (5,707,394)
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
Depreciation and amortization................................... 1,862,275 1,697,955 2,086,423
Amortization of discount on note assumed in merger.............. 12,891 18,681 12,400
Provision for doubtful accounts receivable...................... 264,319 132,986 (13,055)
Impairment of other intangibles................................. ---- ---- 142,399
Acquired in-process technology and software write-off........... 148,050 ---- 1,129,871
Issuance of options and stock for services rendered............. 44,304 68,490 143,852
Issuance of warrants for financing transactions................. ---- 9,879 ----
Change in assets and liabilities, net of acquisition:
Accounts receivable............................................ (3,987,522) (1,272,761) 1,049,947
Inventory...................................................... 89,158 613,783 349,945
Prepaid and other expenses..................................... (80,389) (35,913) (336,018)
Accounts payable............................................... 758,821 (1,158,717) (142,685)
Accrued wages.................................................. (38,071) 193,600 51,109
Other accrued expenses......................................... (34,719) 45,840 (14,241)
Deferred revenue............................................... 1,015,479 269,539 9,167
Other.......................................................... 121,257 45,045 (25,770)
------------ ----------- ------------
Net cash provided by (used in) operating activities.............. 3,804,748 1,899,165 (1,264,050)
------------ ----------- ------------
Cash flows from investing activities:
Acquisitions of businesses, net of cash acquired................ (242,927) ---- ----
Leasehold improvements.......................................... (146,855) ---- ----
Purchases of property and equipment............................. (410,515) (148,318) (383,092)
Development of software......................................... (1,850,222) (1,436,345) (1,584,607)
------------ ----------- ------------
Net cash used in investing activities............................ (2,650,519) (1,584,663) (1,967,699)
------------ ----------- ------------
Cash flows from financing activities:
Proceeds from revolving credit agreement........................ ---- ---- 1,350,000
Repayment of revolving credit agreement......................... ---- (1,350,000) ----
Proceeds from note receivable................................... 10,000 ---- ----
Proceeds from sale of Series A Preferred Stock.................. ---- 9,000 525,000
Proceeds from exercise of stock options......................... 1,036,053 26,683 826
Proceeds from exercise of warrants.............................. 1,117,662 12,500 ----
Proceeds from sale of common stock.............................. 75,658 1,264,017 81,312
Principal payments under capital leases......................... (23,296) (30,768) (20,779)
------------ ----------- -----------
Net cash provided by (used in) financing activities.............. 2,216,077 (68,568) 1,936,359
------------ ----------- -----------
Effect of exchange rate changes on cash.......................... (2,260) (14,951) 63,265
Net increase (decrease) in cash.................................. 3,368,046 230,983 (1,232,125)
Cash, beginning of period........................................ 1,042,893 811,910 2,044,035
------------ ----------- -----------
Cash, end of period.............................................. $ 4,410,939 $ 1,042,893 $ 811,910
============ =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for income taxes....................................... $ 90,752 $ 69,286 $ 63,279
Cash paid for interest........................................... 10,054 116,129 52,269
NON CASH INVESTING AND FINANCING ACTIVITIES:
Property and equipment acquired through capital leases........... ---- 3,343 39,396
Payment of preferred stock dividends through issuance of common
stock........................................................... 31,527 33,164 ----
Redemption value related to exchangeable common stock............ 98,953 140,280 140,280
Exchangeable shares issued for acquisition of 1,000,000 shares... 7,736,667 ---- ----
Common stock issued for acquisition of 93,301 shares............. 791,585 ---- ----
See accompanying notes to consolidated financial statements.
MERGE TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Years ended December 31,
---------------------------------------------
2002 2001 2000
------------ ------------ -------------
Net income (loss).................................. $ 3,628,895 $ 1,270,758 $ (5,707,394)
Accumulated other comprehensive income (loss) -
Cumulative translation adjustment................. 6,243 (94,344) (114,675)
------------ ------------ -------------
Comprehensive net income (loss).................... $ 3,635,138 $ 1,176,414 $ (5,822,069)
============ ============ =============
See accompanying notes to consolidated financial statements.
MERGE TECHNOLOGIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Nature of Operations.
Merge eFilm is in the business of integrating radiology images and
information into healthcare enterprise networks. Merge eFilm products and
services enhance the quality of healthcare provided to patients because they
improve radiology workflow efficiencies, reduce healthcare operating costs and
improve clinical decision making processes. The Company delivers this tangible
value both to OEM/VARs and directly to healthcare facilities of all sizes, but
it specifically targets small to medium size hospitals, multi-hospital groups,
clinics and diagnostic imaging centers by working with its customers to offer
modular, cost effective solutions to solve their image and information
management and radiology workflow needs.
(b) Principles of Consolidation.
The consolidated financial statements include the financial statements
of the Company and its wholly owned subsidiaries, Aurora and eFilm. All
significant intercompany balances and transactions have been eliminated in
consolidation.
(c) Inventory.
Inventory, consisting principally of raw materials and finished goods,
is stated at the lower of cost or market. Cost is determined using the
first-in, first-out method.
(d) Property and Equipment.
Property and equipment are stated at cost. Equipment under capital
leases is stated at the present value of minimum lease payments.
Depreciation on property and equipment is calculated on the
straight-line method over the estimated useful lives of the assets. Useful
lives of the Company's major classes of property and equipment are: five years
for computer equipment placed in service prior to December 31, 1997, and three
years for computer equipment acquired after December 31, 1997; and seven years
for office equipment. Equipment held under capital leases is amortized using
the straight-line method over the shorter of the estimated useful life of the
asset or the term of the lease, depending on the lease terms. Leasehold
improvements are amortized using the straight-line method over the shorter of
the estimated vested life of the asset or the term of the lease.
(e) Purchased and Developed Software.
All research and development costs incurred prior to the point at which
management believes a project has reached technological feasibility are
expensed as incurred. Engineering costs incurred subsequent to reaching
technological feasibility are capitalized and reported at the lower of
unamortized cost or net realizable value in accordance with SFAS No. 86,
Accounting for the Costs of Computer Software to be Sold, Leased, or Otherwise
Marketed. Amortization of purchased and developed software is provided on a
product-by-product basis over the expected economic life of the related
software, generally five years, using the straight-line method. This method
results in greater amortization than the method based on the ratio that current
gross revenues for a product bear to the total of current and anticipated
future gross revenues for that product. During 2002, 2001 and 2000, the
Company capitalized $1,850,000, $1,436,000 and $1,584,000, respectively.
Amortization expense of purchased and developed software for 2002, 2001 and
2000, was $1,344,000, $773,000 and $992,000, respectively.
The Company assesses the recoverability of these costs each period by
determining whether the unamortized capitalized costs can be recovered through
future net operating cash flows through the sale of that product.
MERGE TECHNOLOGIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(f) Fair Value of Financial Instruments.
The Company's financial instruments include cash, accounts receivable,
line of credit, accounts payable and certain accrued expenses. The carrying
amounts approximate fair value because of the short maturity of these
instruments or the rate is variable. The carrying value of notes payable is
not materially different from its fair value.
(g) Long-Lived Assets.
The Company accounts for long lived assets in accordance with SFAS
No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, under
which the Company has reviewed long-lived assets and certain intangible assets
with estimable useful lives and determined that their carrying values as of
December 31, 2002, are recoverable in future periods.
(h) Goodwill and Other Intangibles.
Effective January 1, 2002, the Company adopted SFAS No. 142, Goodwill
and Other Intangible Assets ("SFAS No. 142"). The standard requires that
goodwill and intangible assets with indefinite useful lives no longer be
amortized, but instead be tested for impairment at least annually. The
standard also specifies criteria that intangible assets must meet to be
recognized and reported apart from goodwill.
As of the date of adoption of SFAS 142, the Company has discontinued
amortization of all existing goodwill. Additionally, pursuant to the
provisions of SFAS 142, the Company confirmed its recorded purchased software
as an other intangible asset that must be recognized apart from goodwill and
amortized over its estimated useful lives of three to five years. Purchased
software is included as part of purchased and developed software and the
classification and useful life is consistent with the Company's presentation
at December 31, 2001. The Company has not identified any other intangible
assets that must be recognized apart from goodwill as of the adoption date.
The Company's intangible assets, other than developed software,
subject to amortization are summarized as follows:
December 31, 2002 December 31, 2001
------------- ----------------------- -------------------------
Weighted
Average
Remaining Gross Gross
Amortization Carrying Accumulated Carrying Accumulated
Period (Years) Amount Amortization Amount Amortization
------------- --------- ------------ --------- -------------
Purchased software 2.9 1,418,000 (227,000) 140,000 (63,000)
Customer contracts 4.5 966,000 (97,000) ---- ----
------------- --------- --------- -------- --------
Total 3.3 2,384,000 (324,000) 140,000 (63,000)
========= ========= ========= ==========
Amortization expense was $261,000, $28,000 and $75,000 for the years
ended 2002, 2001 and 2000, respectively. Estimated aggregate amortization
expense for each of the next five years is as follows:
For the year ended: 2003 $ 488,000
2004 $ 481,000
2005 $ 444,000
2006 $ 432,000
2007 $ 216,000
MERGE TECHNOLOGIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The provisions of SFAS 142 require that goodwill and other intangible
assets with indefinite useful lives be tested at least annually for impairment
or when indicators of potential impairment exist, using a fair-value-based
approach. Additionally, a transitional impairment evaluation must be completed
within the first six months of adoption. During the second quarter of 2002,
the Company completed the transitional impairment test, which did not result in
impairment of recorded goodwill. The Company will continue to monitor the
carrying value of goodwill through annual impairment tests. At December 31,
2002, the Company performed its annual impairment tests and found none of its
goodwill to be impaired.
The changes in the carrying amount of goodwill for the year ended
December 31, 2002, are as follows:
Balance as of January 1, 2002............ $ 355,000
Goodwill acquired in Aurora acquisition.. 744,000
Goodwill acquired in eFilm acquisition... 6,306,000
------------
Balance as of December 31, 2002.......... $ 7,405,000
============
The following table shows the impact on the Company's financial
statements as if SFAS 142 were adopted on January 1, 2000:
Years Ended December 31,
---------------------------------------------
2002 2001 2000
------------ ------------ -------------
Reported net income.......................... $ 3,628,895 $ 1,270,758 $ (5,707,394)
Goodwill amortization........................ ---- 73,924 57,375
------------ ------------ -------------
Adjusted net income.......................... $ 3,628,895 $ 1,344,682 $ (5,650,019)
Reported net income (loss) per share - basic. $ 0.38 $ 0.17 $ (1.01)
Goodwill amortization........................ ---- 0.01 0.01
------------ ------------ -------------
Adjusted net income per share - basic........ $ 0.38 $ 0.18 $ (1.00)
Reported net income (loss) per share -
diluted.................................... $ 0.33 $ 0.15 $ (1.01)
Goodwill amortization........................ ---- 0.01 0.01
------------ ------------ -------------
Adjusted net income per share - diluted...... $ 0.33 $ 0.16 $ (1.00)
(i) Income Taxes.
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases, operating losses and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
(j) Stock Option Plan.
As of December 31, 2002, the Company maintains two stock-based employee
compensation plans and one director option plan, which are described more fully
in Note 7. The Company applies the provisions of the SFAS 123, Accounting for
Stock-Based Compensation ("SFAS No. 123"), as amended ("SFAS No. 148"), which
requires entities to recognize as expense over the vesting period the fair
value of all stock-based awards on the date of grant. Alternatively, SFAS No.
123 also allows entities to continue to apply the provision of APB Opinion No.
25 and provide pro forma disclosures as if the fair-value-based method defined
in SFAS No. 123 had been applied.
The Company has elected to continue to apply the provisions of APB
Opinion No. 25 in accounting for its plans. All stock options under the plans
have been granted at exercise prices of not less than the market value at the
MERGE TECHNOLOGIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
date of the grant. Had the Company determined compensation cost based on the
fair value at the grant date for its stock options under SFAS No. 123, the
Company's net income would have been decreased in 2002 and 2001 and its net
loss increased in 2000 to the pro forma amounts indicated below:
2002 2001 2000
------------- ------------- -------------
Net income (loss), as reported.............. $ 3,628,895 $ 1,270,758 $ (5,707,394)
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax benefits............... (456,311) (299,719) (376,947)
------------- ------------- -------------
Pro forma net income (loss)................. $ 3,172,584 $ 971,039 $ (6,084,341)
============= ============= =============
Earnings per share:
Basic - as reported........................ $ 0.38 $ 0.17 $ (1.01)
============= ============= =============
Basic - pro forma.......................... $ 0.33 $ 0.12 $ (1.07)
============= ============= =============
Diluted - as reported...................... $ 0.33 $ 0.15 $ (1.01)
============= ============= =============
Diluted - pro forma........................ $ 0.29 $ 0.11 $ (1.07)
============= ============= =============
(k) Revenue Recognition.
Revenues are derived primarily from the sublicensing and licensing of
computer software, installations, training, consulting, software maintenance,
and sales of PACS solutions. Inherent in the revenue recognition process, are
significant management estimates and judgements, which influence the timing and
amount of revenue recognition.
For sales of software arrangements, the Company recognizes revenue
according to the American Institute of Certified Public Accountants Statement
of Position 97-2 (SOP 97-2), Software Revenue Recognition, and related
amendments. SOP 97-2, as amended, generally requires revenue earned on
software arrangements involving multiple elements to be allocated to each
element based on the relative fair values of those elements. Revenue from
multiple-element software arrangements is recognized using the residual
method. Under the residual method, revenue is recognized in a multiple
element arrangement when Company-specific objective evidence of fair value
exists for all of the undelivered elements in the arrangement, but does not
exist for one or more of the delivered elements in the arrangement. The
Company allocates revenue to each undelivered element in a multiple element
arrangement based on its respective fair value, with the fair value
determined by the price charged when that element is sold separately.
Specifically, the Company determines the fair value of the maintenance
portion of the arrangement based on the renewal price of the maintenance
offered to clients, which is stated in the contract and fair value of the
installation based upon the price charged when the services are sold
separately. If evidence of the fair value cannot be established for an
undelivered element of a software sale, the entire amount of revenue under
the arrangement is deferred until these elements have been delivered or
vendor-specific objective evidence of fair value can be established.
Revenue from the sale of sublicenses sold on an individual basis and
computer software licenses is recognized upon shipment provided that evidence
of an arrangement exists, title and risk of loss have passed to the customer,
fees are fixed or determinable and collection of the related receivable is
reasonably assured.
Revenue from software usage sublicenses sold through annual contracts
and software maintenance is deferred and recognized ratably over the contract
period. Revenue from installation, training, and consulting services is
recognized as services are performed.
Revenue from sales of PACS solutions sold directly to healthcare
institutions where installation services are considered essential to the
functionality of the solution sold is recognized on a percentage-of-completion
method, as prescribed by the American Institute of Certified Public Accountants
Statement of Position 81-1, Accounting for Performance on Construction-Type and
MERGE TECHNOLOGIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Certain Production-Type Contracts. Percentage-of-completion is determined by
the output method based upon the achievement of delivery milestones.
The Company's policy is to allow returns when the Company has
preauthorized the return. Based on the Company's historical experience of
very limited returns and the Company's expectation that returns, if any, will
be insignificant, the Company has not provided for an allowance for potential
items to be returned.
(l) Warranties.
The Company provides twelve months of hardware warranty on its
connectivity sales. The Company has provided for expected warranty costs
based on its historical experience. Accrued warranty was $67,000 at December
31, 2002 and 2001.
(m) Use of Estimates.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates 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. Actual results could differ from
those estimates.
(n) Income (Loss) Per Share.
Basic earnings per share is computed by dividing income available to
common shareholders by the weighted average number of shares outstanding. The
Company has made an accounting policy election to use the if-converted method
for convertible securities that participate in common stock dividends; however,
the two-class method must be used if the effect is more dilutive. Diluted
earnings per share reflects the potential dilution that could occur based on
the effect of the conversion of outstanding convertible preferred shares and
the exercise of stock options and warrants with an exercise price of less than
the average market price of the Company's common stock. The following table
sets forth the computation of basic and diluted earnings per share for the
years ended December 31, 2002, 2001 and 2000.
December 31,
---------------------------------------------
2002 2001 2000
------------ ------------- ------------
Numerator:
Net income (loss)............................. $ 3,628,895 $ 1,270,758 $ (5,707,394)
Preferred stock dividends..................... (20,471) (44,236) ----
Accretion of redemption value related to
Interpra exchangeable common stock.......... (98,952) (140,280) (140,280)
Allocation of income to Interpra exchangeable
shares...................................... (117,498) (66,920) ----
------------ ------------- ------------
Numerator for net income (loss) per share
- basic..................................... $ 3,391,974 $ 1,019,322 $ (5,847,674)
------------ ------------- ------------
Adjustment for effect of assumed conversion
of preferred stock.......................... 20,471 44,236 ----
------------ ------------- ------------
Numerator for net income (loss) per share -
diluted..................................... $ 3,412,445 $ 1,063,558 $ (5,847,674)
------------ ------------- ------------
Denominator:
Weighted average number shares of common
stock outstanding........................... 8,840,059 6,178,821 5,792,945
------------ ------------- ------------
Effect of convertible preferred stock......... 295,714 634,203 ----
Effect of stock options....................... 925,277 312,373 ----
Effect of warrants............................ 322,601 185,334 ----
------------ ------------- ------------
Denominator for net income (loss) per share
- diluted................................... 10,383,651 7,310,731 5,792,945
------------ ------------- ------------
Net income (loss) per share - basic........... $ 0.38 $ 0.17 $ ( 1.01)
Net income (loss) per share - diluted......... $ 0.33 $ 0.15 $ ( 1.01)
MERGE TECHNOLOGIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2002 and 2001, 544,341 and 648,594,
respectfully, weighted average options and warrants to purchase shares of the
Company's common stock had exercise prices greater than the average market
price of the shares of common stock.
The following potentially dilutive common stock equivalent securities,
including securities considered in the calculation of diluted earnings per
share, were outstanding at December 31, 2002, 2001 and 2000.
2002 2001 2000
--------- --------- ---------
Stock options.......... 1,435,298 1,844,274 1,806,663
Exchangeable shares.... 1,205,172 384,779 415,875
Warrants............... 301,667 1,024,610 596,618
Preferred stock........ ---- 634,203 ----
--------- --------- ---------
2,942,137 3,887,866 2,819,156
========= ========= =========
(o) Reclassifications.
Where appropriate, certain items relating to the prior years have been
reclassified to conform to the current year presentation.
As a result of the eFilm acquisition on June 28, 2002, the Company has
presented costs associated with service revenues as a component of cost of
sales.
(p) Segment Reporting.
In June 1997, the Financial Accounting Standards Board issued Statement
No. 131, Disclosures about Segments of an Enterprise and Related Information
("SFAS No. 131"). SFAS No. 131 establishes annual and interim reporting
standards for operating segments of a company. It also requires entity-wide
disclosures about the products and services an entity provides, the material
countries in which it holds assets and reports revenues, and its major
customers. The Company is not organized by multiple operating segments for
the purpose of making operating decisions or assessing performance.
Accordingly, the Company operates in one operating segment and reports only
certain enterprise-wide disclosures.
(q) Foreign Currency Translation.
The Company uses the United States of America Dollar ("U. S. Dollar")
for financial reporting purposes as substantially all of the Company's billings
are in U. S. Dollars. The balance sheets of the Company's foreign subsidiaries
are translated into U. S. Dollars using the balance sheet date exchange rate,
and revenues and expenses are translated using the average exchange rate for
the period. The resulting translation gains and losses are recorded as a
component of stockholders' equity. Foreign currency transaction gains and
losses are reflected in the consolidated statements of income, as a component
of other income (expense) net.
On January 1, 2002, the Company changed the functional currency for the
sales office in Nuenen, The Netherlands to the U. S. Dollar from the Dutch
Guilder, as the majority of sales to customers transacted in U. S. Dollars
continues to increase. The functional currency for the Company's operations
in Japan and Canada remain the Yen and Canadian Dollar, respectively.
MERGE TECHNOLOGIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(2) ACQUISITIONS
During May 2002, the Company acquired certain assets of Aurora,
pursuant to an Asset Acquisition Agreement dated April 18, 2002. On June 28,
2002, the Company acquired all the outstanding capital stock of eFilm pursuant
to a Stock Acquisition Agreement dated April 15, 2002.
The acquisitions were accounted for using the purchase method of
accounting. Accordingly, the assets and liabilities of the acquired businesses
are included in the consolidated balance sheet as of December 31, 2002. The
accompanying consolidated statement of operations for the year ended December
31, 2002, include the results of operations from the May 22, 2002, through
December 31, 2002, for Aurora operations and the results of operations from
the June 28, 2002, through December 31, 2002, for eFilm operations. The
amounts allocated to purchased and developed software are being amortized
over periods ranging from three to five years. The estimated asset lives
are determined based on projected future economic benefits and expected life
cycles of the technologies. The amounts allocated to goodwill are not being
amortized, but will be tested for impairment annually or under certain
circumstances that may indicate a potential impairment, and written-off when
impaired. The following is a summary of purchase consideration for the
acquisition:
Aurora eFilm
Form of Consideration Fair Value Fair Value
-------------------------------------- ----------- ----------
Cash................................... $ 100,000 ----
93,901 shares of Company common stock.. 792,000 ----
1,000,000 eFilm exchangeable shares.... ---- 7,737,000
Vested stock options................... ---- 437,000
Transaction costs...................... 25,000 223,000
----------- ----------
TOTAL: $ 917,000 $8,397,000
=========== ==========
The fair value of shares issued to Aurora was determined to be $8.43
per share or equal to the closing price of the Company's common shares as of
May 17, 2002. The fair values of exchangeable shares issued in the eFilm
acquisition was determined using a three-day average $7.736 closing price of
the Company's common stock after signing the definitive agreement.
The Company paid a significant premium above eFilm's tangible and
intangible assets principally for two reasons: eFilm's knowledge of the
Company's software products through the joint development projects that were
undertaken prior to the acquisition and the ability to sell the Company's
products into existing eFilm customers. Also, eFilm's software development
ability is particularly important because as the Company looked to the future,
it foresaw the need to expand the Company's software product offerings to its
healthcare institutions as many of the Company's competitors are promising
more integrated solutions. In addition, the Company expected to be able to
sell its higher price and high margin software products to eFilm's customers
and to use the eFilm Workstation as a way to have the healthcare institutions
become aware of the Company.
Each holder of eFilm exchangeable shares has the right, at any time
within five years of the acquisition date, to exchange their shares for the
Company's common shares on a one for one basis, subject to adjustment
provisions. At June 28, 2007, any remaining shares will automatically be
converted to common stock of the Company.
Each eFilm exchangeable share is entitled to vote together with the
Company's common shares on matters relating to the Company and include
dividend rights equivalent to the Company's common shares. The Company
established an escrow holdback of 116,590 exchangeable shares for 18 months,
for indemnification with respect to certain potential claims.
The Company established an escrow holdback of 18,780 shares related
to the Aurora transaction for 12 months, for indemnification with respect to
certain potential claims.
MERGE TECHNOLOGIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The total purchase considerations of approximately $917,000 and
$8,397,000 was allocated to the fair value of the net assets acquired as
follows (in thousands):
Aurora eFilm
----------- ----------
Current assets........................ $ 59,000 $ 403,000
Other assets.......................... 29,000 44,000
Purchased and developed technologies.. 85,000 1,193,000
Purchased contracts................... ---- 966,000
Goodwill.............................. 744,000 6,306,000
In-process research and development... ---- 148,000
Liabilities assumed................... ---- (663,000)
---------- ----------
Total consideration: $ 917,000 $8,397,000
========== ==========
The value assigned to acquire in-process technology was determined
by identifying the acquired specific in-process research and development
projects that would be continued, and for which (1) technological feasibility
had not been established at the acquisition date, (2) there was no alternative
future use, and (3) the fair value was estimable with reasonable reliability.
The Company estimated the fair value of the eFilm eRis ("eRIS") project to be
$148,000. Accordingly, this amount was immediately expenses in the
consolidated statement of income upon the acquisition date.
The estimated fair value of these projects was determined by the
utilization of the income or consumption approach. Appraisal assumptions
utilized under this method included a forecast of estimated future net cash
flows, as well as discounting the future net cash flows to their present
value. The Company used a 25% discount rate, which was calculated using an
industry beta and capital structure.
Of the amounts allocated to goodwill in the acquisitions of eFilm and
Aurora, $6,306,000 and $744,000, respectively, the $6,306,000 relating to the
eFilm transaction will not be deductible for federal income tax purposes, and
the $744,000 relating to the Aurora transaction will be deductible for
federal income tax purposes.
Additionally, in the Aurora acquisition, the Company assumed an
operating lease obligation for office space located in the Chicago, Illinois
metropolitan area. The aggregate minimum lease payment assumed amounted to
$122,000. In October of 2002, the Company terminated the operating lease
acquired in the Aurora acquisition. The total cost to terminate the lease
was $13,905.
The following unaudited pro forma information shows the results of
operations of the Company for the years ended December 31, 2002 and 2001, as
if the business combinations had occurred at the beginning of each period.
This data is not indicative of the results of operations that would have
arisen if the business combinations had occurred at the beginning of the
respective periods. Moreover, this data is not intended to be indicative of
future results of operations.
Years Ended December 31,
2002 2001
------------ ------------
(in thousands, except per share amounts)
Revenue $ 22,347 $ 18,086
Net income 3,356 402
Earnings per share:
Basic 0.10 $ 0.03
Diluted $ 0.09 $ 0.03
(3) INDEBTEDNESS
(a) Line of Credit.
In May 2000, the Company entered into a $3,000,000 revolving credit
agreement with a bank. In November 2001, the Company re-negotiated the
revolving credit agreement and obtained more favorable advance ratios
increasing the borrowing base to 25% of inventory, 75% of qualified domestic
accounts receivable and 65% of qualified foreign accounts receivable effective
January 2, 2002. The revolving credit agreement matures in April 2003. The
Company incurred interest expense under the agreements of $87,000 and $43,000
in 2001 and 2000, respectively.
In December 2002, the Company negotiated a new revolving line of
credit agreement with its bank, increasing its line to $5,000,000, effective
December 30, 2002 and maturing December 30, 2005. The interest rate on the
line of credit is at a variable rate that is equal to the prime rate as
published in the Wall Street Journal, less 0.75 percentage points and is
collateralized by substantially all of the Company's assets. At December
31, 2002, the loan's interest rate was 3.50%. Availability under the new
line of credit is subject to a borrowing base consisting of 50% of inventory
balances under $2,000,000, 80% of qualified accounts receivable under 90
days and 100% of the Company's depository cash balances held at the bank
if borrowings exceed the existing base of inventory and qualified accounts
MERGE TECHNOLOGIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
receivable. Under the formula, $5,000,000 was calculated to be available at
December 31, 2002. No amounts were outstanding on the line of credit as of
December 31, 2002.
(b) Note Payable to Investor
The Company has a $300,000 Canadian dollar five-year non-interest
bearing note assumed in the 1999 acquisition of Interpra. At December 31,
2002, the U. S. Dollar equivalent of the note was approximately $191,000.
The note was discounted to reflect the current interest rate of 8% at the
time the note was assumed. The discount is being amortized over a five-year
period. The Company recognized interest expense related to this note of
approximately $13,000, $19,000 and $12,000 in 2002, 2001 and 2000,
respectively. The note is due and payable in August 2004.
(4) EMPLOYEE BENEFIT PLAN
The Company maintains a defined contribution retirement plan (401(k))
covering employees who meet the minimum service requirements and have elected
to participate. Company contributions, which are at the discretion of the
Board of Directors, totaled $77,000, $70,000 and $78,000 for the years ended
December 31, 2002, 2001 and 2000, respectively.
(5) INCOME TAXES
The provision for income tax consists of the following for the years
ended December 31, 2002, 2001 and 2000.
2002 2001 2000
---------- ---------- -----------
Current:
Federal $ (18,000) $ 18,000 $ ----
State 2,000 2,000 2,000
Foreign 95,000 67,000 61,000
---------- ---------- -----------
Total Current 79,000 87,000 63,000
Deferred:
Federal ----- ----- ----
State ----- ----- ----
Total Deferred ----- ----- ----
========== ========== ===========
Total Provision $ 79,000 $ 87,000 $ 63,000
========== ========== ===========
MERGE TECHNOLOGIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Actual income taxes vary from the expected income taxes (computed by
applying the statutory income tax rate of 34% to income (loss) before income
taxes) as a result of the following:
Years ended
December 31,
---------------------------------------------
2002 2001 2000
------------ ----------- -------------
Expected tax expense (benefit)................ $ 1,261,000 $ 462,000 $ (1,919,000)
Total increase (decrease) in income taxes
resulting from:
Nondeductible amortization and acquired
in-process technology................... 50,000 32,000 109,000
Change in the valuation allowance
allocated to income tax expense......... (1,650,000) (630,000) 2,304,000
Research and experimentation credit....... (40,000) 16,000 (376,000)
Nondeductible expenses.................... 85,000 69,000 362,000
Foreign tax credits....................... (95,000) (67,000) (61,000)
State and local income taxes, net of
federal income tax benefits............. 204,000 66,000 (145,000)
Foreign withholding taxes................. 95,000 67,000 61,000
Foreign rate differential................. 28,000 (38,000) (120,000)
Other..................................... 141,000 110,000 (152,000)
------------ ----------- -------------
Actual tax expense............................ $ 79,000 $ 87,000 $ 63,000
============ =========== =============
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December
31, 2002 and 2001 are presented below:
December 31,
------------------------------
2002 2001
------------- -------------
Deferred tax assets:
Accounts receivable, principally due to allowance
for doubtful accounts............................. $ 178,000 $ 59,000
Accrued wages....................................... 86,000 193,000
Research and experimentation credit carryforwards... 1,713,000 1,674,000
Other credit carryforwards.......................... 425,000 367,000
Net operating loss carryforwards.................... 980,000 2,054,000
Foreign net operating loss carryforwards............ 1,242,000 1,158,000
Other............................................... 148,000 39,000
------------ -------------
Total gross deferred tax assets...................... 4,772,000 5,544,000
Less valuation allowance............................ (2,660,000) (3,929,000)
Net deferred tax asset.............................. 2,112,000 1,615,000
------------ -------------
Deferred tax liabilities:
Software development costs and intangible assets.... (2,070,000) (1,606,000)
Other............................................... (42,000) (9,000)
------------ -------------
Total gross deferred liabilities..................... (2,112,000) (1,615,000)
------------ -------------
Net deferred taxes................................... $ ---- $ ----
============ =============
MERGE TECHNOLOGIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The net change in the valuation allowance for the years ended December
31, 2002, 2001 and 2000, was a decrease of $1,269,000 and $633,000 and an
increase of $2,304,000, respectively. In assessing the realizability of
deferred tax assets, management considers whether it is more likely than not
that some portion or all of the deferred tax assets will not be realized. The
ultimate realization of deferred tax assets is dependent upon the generation of
future taxable income during the periods in which those differences become
deductible. Management considers the scheduled reversal of deferred tax
liabilities, projected future taxable income, and tax planning strategies in
making this assessment. Based upon the level of historical taxable income,
management believes it is more likely than not the Company will realize the
benefits of these deductible differences net of the existing valuation
allowances.
At December 31, 2002, the Company had federal net operating loss
carryforwards and research credit carryforwards approximating $2,467,000 and
$1,373,000, respectively, state net operating loss carryforwards and research
credit carryforwards of $2,679,000 and $341,000, respectively, and foreign
federal and provincial net operating loss carryforwards of $3,124,000. These
losses and credits are available to offset future taxable income and tax, if
any. The federal net operating loss carryforwards and research credit
carryforwards expire in varying amounts beginning in 2009 and 2006,
respectively, and continuing through 2021 and 2022, respectively. The state
net operating losses and research credits expire in varying amounts beginning
in 2012 and continuing through 2016. The foreign federal and provincial net
operating loss carryforwards expire in varying amounts beginning in 2004 and
continuing through 2009. A portion of the income tax loss carryforwards and
credits are subject to certain limitations, which could impair the Company's
ability to utilize the benefits of these losses and credits in the future. In
addition, if certain substantial changes in the Company's ownership should
occur, tax loss and tax credit carryforwards may be further limited.
Included in the Company's gross deferred tax asset is approximately
$400,000 related to stock option deductions. A reduction in the valuation
allowance with regard to this amount will be included directly in the
Company's paid in capital and will not result in an income statement benefit.
(6) LEASES
The Company is obligated under various capital leases for computer
equipment that expire in early 2003. The gross amount of computer equipment
under capitalized leases and related depreciation at the following balance
sheet dates was: at December 31, 2002, equipment of $43,000 and accumulated
depreciation of $14,000; at December 31, 2001, equipment of $102,000 and
accumulated depreciation of $29,000; and at December 31, 2000, equipment of
$98,000 and accumulated depreciation of $22,000.
The Company has a non-cancelable operating lease for its main office
facility that expires in June 2005. Total rent expense associated with this
lease for the years ended December 31, 2002, 2001 and 2000, was approximately
$304,000, $334,000 and $247,000, respectively. Future minimum lease payments
under non-cancelable operating leases (with initial or remaining lease terms
in excess of one year) and future minimum capital lease payment as of
December 31, 2002, are:
Operating Capital
------------- -------------
2003.......................... $ 402,558 $ 7,717
2004.......................... 383,662 ----
2005.......................... 228,652 ----
2006.......................... 6,637 ----
------------ -------------
Total minimum lease payments.. $ 1,021,509 $ 7,717
============ =============
Less amount representing
interest.................... 463
-------------
Present value of net minimum
capital lease payments...... 7,254
Less current installments of
obligations under capital
leases...................... 7,254
-------------
Obligations under capital
leases, excluding current
installments................ $ ----
=============
MERGE TECHNOLOGIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In February 2002, the Company entered into a lease amendment for its
main office facility in which it surrendered a portion of the premises. As a
result, the aggregate minimum future lease payment commitment decreased
$240,000.
(7) SHAREHOLDER'S EQUITY
(a) Common Stock.
In August and September of 2002, the Company issued 1,910 shares of
common stock to non-employee directors as consideration for meeting fees.
In July 2002, the Company issued 2,846 shares of common stock to Series
A Preferred Stock shareholders as payment for dividends.
In July 2002, the Company issued 2,066 shares of common stock to
non-employee directors as consideration for meeting fees.
In May and June of 2002, warrants to purchase 709,343 shares of common
stock were exercised.
In May and June of 2002, the Company issued 637,236 shares of common
stock for the conversion of Series A Preferred Stock.
In May 2002, the Company issued 93,901 shares of common stock as part
of the purchase price for the Asset Purchase Agreement between Signal Stream,
Inc., a wholly owned subsidiary known know as Merge Aurora Solutions Inc., and
Aurora.
In April 2002, the Company issued 1,484 shares of common stock to
non-employee directors as consideration for meeting fees.
In January 2002, the Company issued 2,526 shares of common stock to
non-employee directors as consideration for meeting fees.
In January 2002, the Company issued 2,128 shares of common stock to
Series A Preferred Stock shareholders as payment for dividends.
In January 2002, warrants to purchase 13,600 shares of common stock
were exercised.
In October 2001, the Company received subscriptions for $1,183,651,
net of selling expenses of $66,351 as consideration for 806,452 shares of
common stock. In conjunction with the sale of common stock, the Company also
issued warrants to purchase 403,224 shares of common stock. The warrants are
exercisable six months from the date of issuance for shares of the Company's
common stock at a price of $2.00 per share and have a term of four years. The
Company may demand exercise of the warrants within 30 days after notice when
the closing bid price of its common stock is at least $4.00 for 30 consecutive
trading days and the underlying shares of common stock have been registered
under federal securities law.
In October and July 2001, the Company issued an aggregate of 30,171
shares of common stock to Series A Preferred Stock shareholders as payment for
dividends.
In September and July 2001, the Company issued an aggregate of 20,163
shares of common stock to non-employee directors as consideration for meeting
fees.
In March 2001, the Company issued 23,459 shares of common stock to one
individual, which were subscribed for in 2000, in consideration for services
rendered in 2000.
MERGE TECHNOLOGIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In February 2001, 30,473 shares of common stock were sold to William C.
Mortimore, Chairman and Chief Strategist, in connection with his employment
agreement.
(b) Special Voting Preferred Stock.
At the end of 2002 and 2001, the Company had one share of its Special
Voting Preferred Stock issued and outstanding. The one share issued to its
transfer agent, serves as a trustee in voting matters on behalf of the
exchangeable shareholders of Interpra.
(c) Series 2 Special Voting Preferred Stock.
In June of 2002, the Company issued one share of Series 2 Special
Voting Preferred Stock to its transfer agent, which serves as a trustee in
voting matters on behalf of the eFilm exchangeable shareholders.
(d) Series A Preferred Stock.
In the second quarter of 2002, the Company exercised its right to
convert all outstanding shares of Series A Preferred stock on a one-for-one
basis into 637,236 common shares.
(e) Stock Option Plan.
The Company maintains a stock option plan for employees of Merge eFilm
that provides for the grant of a maximum of 2,515,826 shares of common stock.
Under this plan, options have an exercise price equal to the fair market value
of the stock at the date of grant. The majority of the options vest over a
four-year period at 25% per year. The majority of the options granted under
this plan expire six years from the date of grant.
The Company also maintains a stock option plan for non-employee
directors of Merge, which provided for the granting of a maximum of 100,000
options to purchase common stock. In May 2000, shareholders of the Company
voted to increase the number of shares of common stock subject to the director
stock option plan to 300,000. Under this plan, options have an exercise price
equal to the fair market value of the stock at the date of grant. The
majority of options granted under this plan are vested at the date of grant.
The options granted under this plan expire ten years and one day from the date
of grant.
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following assumptions:
Expected
Option
Year of Life Excepted Dividend Risk-free
Grant (in years) Volatility Yield Interest Rate
-------- ---------- ---------- -------- -------------
1999 6 - 10 50% 0% 5.83% - 6.49%
2000 6 - 10 50% - 70% 0% 5.73% - 6.50%
2001 6 - 10 50% 0% 3.90% - 5.41%
2002 6 - 10 50% 0% 2.95% - 5.18%
MERGE TECHNOLOGIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A summary of stock options is as follows:
WEIGHTED
WEIGHTED AVERAGE
AVERAGE FAIR VALUE
EXERCISE OF OPTIONS
NUMBER PRICE GRANTED
---------- ----------- ----------
Options outstanding, December 31, 1999......... 1,409,326 $ 2.21
Options granted................................ 589,028 1.78 1.02
Options exercised.............................. (23,867) 1.48
Options forfeited.............................. (167,824) 1.88
---------- -----------
Options outstanding, December 31, 2000......... 1,806,663 $ 2.09
Options granted................................ 185,000 $ 1.60 0.89
Options exercised.............................. (23,422) 1.29
Options forfeited.............................. (123,967) 2.63
---------- -----------
Options outstanding, December 31, 2001......... 1,844,274 $ 2.01
Options granted................................ 532,281 $ 6.30 3.40
Options exercised.............................. (851,812) 1.81
Options forfeited and expired.................. (89,445) 3.21
---------- -----------
Options outstanding, December 31, 2002......... 1,435,298 $ 3.62
========== ===========
Options exercisable, December 31, 2002......... 774,603 $ 3.27
========== ===========
The following table summarizes information about stock options outstanding at
December 31, 2002:
Options Outstanding Options Exercisable
------------------------------------------------------------------------ --------------------------------
WEIGHTED
AVERAGE
RANGE OF REMAINING WEIGHTED WEIGHTED
EXERCISE NUMBER OF CONTRACTUAL LIFE AVERAGE EXERCISE NUMBER OF AVERAGE EXERCISE
PRICES SHARES IN YEARS PRICE SHARES PRICE
------------- --------- ---------------- ---------------- --------- ----------------
$1.00 - $1.47 409,250 3.45 $ 1.130 247,875 $ 1.208
$1.51 - $2.13 347,278 3.72 1.990 251,083 1.998
$2.75 - $4.00 61,000 4.28 3.423 22,500 3.167
$4.16 - $6.00 243,270 3.75 5.186 111,770 5.907
$6.72 - $8.19 374,500 5.78 6.958 141,375 7.090
--------- ---------------- ---------------- --------- ----------------
1,435,298 4.21 $ 3.644 774,603 $ 3.272
----------------------------------------------------------------------------------------------------------------
(f) Stock Purchase Plan.
The Company maintains an employee stock purchase plan which allows
employees to purchase stock at 85% of the lesser of the stock price at the
start of the plan year or the end of each calendar quarter. Contributions to
the employee stock purchase plan are made through payroll deductions
Employees contributed $75,658, $70,365, and $31,311 during 2002, 2001, and
MERGE TECHNOLOGIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2000, respectively, to purchase shares of the Company's common stock under
the employee stock purchase plan.
(g) Warrants.
In May and June of 2002, 709,343 warrants to purchase shares of common
stock were exercised. Of the 709,343 warrants exercised, 403,225 were issued
in October of 2001, 12,000 were issued in February of 2001, and the remaining
294,118 were issued in December of 2000. The warrants issued in October of
2001 were exercised at $2.00 per share and the warrants issued in February of
2001 and December of 2000 were exercised at $1.00 per share.
In January 2002, 13,600 of the 25,267 warrants to purchase shares of
common stock, issued in January of 2001, were exercised at $1.00 per share.
In October 2001, 12,500 warrants to purchase shares of common stock,
issued in December of 2000, were exercised at $1.00 per share.
In October 2001, in conjunction with the sale of common stock, the
Company issued warrants to purchase 403,225 shares of common stock at $2.00
per share. The warrants will expire in October 2005. The grant-date fair
values of warrants calculated using the Black-Scholes model ranged from $0.84
to $1.87 per warrant.
In January and February 2001, the Company issued warrants to purchase
25,267 shares of common stock at $1.00 per share to two employees in
conjunction with a bank guarantee. The warrants were valued using the
Black-Scholes option-pricing model with the following assumptions: expected
life of three years, expected volatility of 50%, dividend yield of 0% and a
risk free interest rate of 5.77% and 5.90%. The warrants will expire in
January and February 2004. The grant-date fair value of warrants calculated
using the Black-Scholes model was $0.35 and $0.44 per warrant.
In February 2001, the Company issued warrants to purchase 12,000
shares of common stock at $1.00 per share to one individual and one director
in conjunction with the sale of Series A Preferred Stock. The warrants were
valued using the Black-Scholes option-pricing model with the following
assumptions: expected life of three years, expected volatility of 50%,
dividend yield of 0% and a risk free interest rate of 4.71% and 4.72%. The
warrants will expire in February 2004. The grant-date fair value of warrants
calculated using the Black-Scholes model was $0.38 and $0.22 per warrant.
At December 31, 2002, the following warrants to purchase the Company's
common stock were outstanding. All of the warrants listed were exercisable at
December 31, 2002.
Shares
Issue Expiration Under Exercise
Date Date Warrants Price
-------------- -------------- --------- -----------
January, 1998 January, 2003 190,000 $ 7.800
October, 2000 October, 2005 100,000 1.156
February, 2001 February, 2004 11,667 1.000
---------
Total: 301,667
(h) Exchange Rights.
As part of its acquisition of eFilm, the Company granted rights for
the issuance of 1,000,000 shares of common stock to holders of eFilm
exchangeable shares on a one-for-one basis. As of December 31, 2002, there
were 940,000 eFilm exchangeable shares outstanding.
As part of its acquisition of Interpra, the Company granted rights
for the issuance of 420,000 shares of common stock to holders of Interpra
exchangeable shares on a one-for-one basis. Exchangeable shareholders also
MERGE TECHNOLOGIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
have the right to require the Company to purchase the exchangeable shares at
$4.50 per share from August 31, 2004 through September 30, 2004. As of
December 31, 2002, there were 265,172 Interpra exchangeable shares outstanding.
(8) CONCENTRATIONS
At December 2001, the Company had a long term accounts receivable
balance from one customer in the amount of $193,475. Monthly payments due
over 63 months commenced in March 2002. The receivable bears interest at a
rate of 6.3%. As of December 31, 2002, the balance due was $179,493 of which
the current portion of $35,839 is classified as accounts receivable.
Foreign sales, denominated in U. S. Dollars, accounted for
approximately 38%, 36%, and 41% of the Company's net sales for the years
ended December 31, 2002, 2001, and 2000, respectively. For the years ended
December 31, 2002, 2001 and 2000, sales in foreign currency represented 4%,
5%, and 4%, respectively, of the Company's net sales.
The Company maintains offices in Nuenen, The Netherlands and Toronto,
Ontario, Canada. Revenues are attributed to countries based on the
originating office of the related orders. Net sales for The Netherlands
sales office were approximately $5,440,000, $4,440,000 and $4,139,000 in the
years ended December 31, 2002, 2001 and 2000, respectively. Net sales for the
sales office in Canada were $1,749,000 for the year ended December 31, 2002.
For 2001 and 2000 there were no sales attributed to the Company's office in
Canada. The value of long-lived assets in service at the Nuenen and Toronto
sales offices was not material in 2002 and 2001.
Although the Company maintains a sales office in Tokyo, Japan, orders
from customers in Japan are processed in the United States of America and are
considered United States of America based sales. The value of long-lived
assets in service at the Tokyo office was not material in 2002 and 2001.
The Company had one customer that comprised 18% of net sales for the
year ended December 31, 2002. For the year ended December 31, 2001, the
Company had one customer and two distributors that comprised 16%, 13%, and
10% of net sales, respectively. One customer represented 13% of accounts
receivable at December 31, 2002. At December 31, 2001, accounts receivable
from two customers accounted for 18% and 16% of accounts receivable.
(9) RELATED PARTY TRANSACTIONS
In December 2002, William C. Mortimore, Chairman and Chief
Strategist, repaid the $10,000 promissory note, issued in February 2001.
In November 2001, the Company forgave $25,000 of a $50,000 note
receivable for a stock subscription from Richard A. Linden, President and
Chief Executive Officer. The loan forgiveness occurred pursuant to Mr.
Linden's employment contract. The remainder of the note is due in December
of 2006.
In March 2001, the Company entered into a consulting arrangement
with a director who received $35,000 in compensation for consulting services
provided in 2001. The consulting services consist of marketing, strategic
planning and investor relations. The consulting agreement ended in December
2001.
In February 2001, the Company sold 30,473 shares of non-registered
common stock to William C. Mortimore, Chairman and Chief Strategist, in
connection with his employment agreement. In consideration for these shares,
Mr. Mortimore paid $10,000 in cash and issued a promissory note in the amount
of $10,000. The promissory note is a full recourse note with a term of six
years. Interest is payable monthly at 5.07% per annum.
Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
-----------------------------------------------------------------------------
None.
PART III
----------
Certain information required by Part III is omitted from this Form
10-KSB because the Registrant will file its definitive proxy statement
pursuant to Section 240.14a-101 (the "Proxy Statement") not later than 120
days after the end of the year covered by this Report, and certain information
included therein is incorporated herein by reference.
Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
------------------------------------------------------------------------------
The information required by this item is incorporated by reference to
the information set forth under the caption "Management" in the Company's
Proxy Statement for the 2003 Annual Meeting of Stockholders.
Item 10. EXECUTIVE COMPENSATION
------------------------------------------------------------------------------
The information required by this item is incorporated by reference to
the information set forth under the caption "Management - Executive
Compensation" in the Company's Proxy Statement for the 2003 Annual Meeting of
Stockholders.
Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
------------------------------------------------------------------------------
The information required by this item is incorporated by reference to
the information set forth under the caption "Security Ownership of Certain
Beneficial Owners and Management" in the Company's Proxy Statement for the
2003 Annual Meeting of Stockholders.
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
------------------------------------------------------------------------------
The information required by this item is incorporated by reference to
the information set forth under the caption "Certain Transactions" in the
Company's Proxy Statement for the 2003 Annual Meeting of Stockholders.
Item 13. EXHIBITS AND REPORTS ON FORM 8K
------------------------------------------------------------------------------
(a) Exhibit No.
--- ------------
3.1 Articles of Incorporation of Registrant (2), Articles of Amendment as
of June 16, 1998 (3), Articles of Amendment as of September 1, 1999
(6), and Articles of Amendment as of November 29, 2000 (6)
3.2 Amended and Restated By-Laws of Registrant as of February 3, 1998 (1)
10.1 Reorganization Agreement between Merge Technologies Incorporated, Merge
Technologies Holdings Co., eFilm Medical Inc., Patrice Bret, Gregory
Couch and Catherine McCallum, dated as of April 15, 2002 (8)
10.2 Employment Agreement entered into as of November 29, 2001, between
Registrant and Richard A. Linden
10.3 Employment Agreement entered into as of December 21, 2001, between
Registrant and William C. Mortimore
10.5 1996 Stock Option Plan for Employees of Registrant dated May 13,
1996 (2)
10.6 Office Lease for West Allis Center dated May 24, 1996, between
Registrant and Whitnall Summit Company, LLC, Supplemental Office Lease
dated July 3, 1997 (1), Supplemental Office Space Lease dated January
30, 1999 (2), Supplemental Office Space Lease for 1126 West Allis
Operating Associates Limited Partnership dated April 11, 2000 (4) and
Second Amendment to Lease dated January 11, 2002, between Registrant
and 1126 West Allis Operating Associates, Limited Partnership
10.8 1999 Stock Option Plan For Directors (1)
10.9 Merge Technologies Incorporated 2000 Employee Stock Purchase Plan (5)
10.10 Loan Agreement dated as of December 30, 2002, by and between Registrant
and Lincoln State Bank
10.11 Employment Agreement entered into as of July 15, 2002, between
Registrant and Scott T. Veech
23.1 Consent of KPMG LLP
99.1 Certification of Chief Executive Officer and Chief Financial Officer
Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906
of the Sarbanes - Oxley Act of 2002
99.2 Asset Purchase Agreement by and among the Registrant, Signal Stream,
Inc. and Aurora Technology Inc. dated April 18, 2002 (7)
_________________________
(1) Incorporated by reference to Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1997.
(2) Incorporated by reference to Registration Statement on Form SB-2
(No. 333-39111) effective January 29, 1998.
(3) Incorporated by reference to Quarterly Report on Form 10-QSB for the
three months ended March 31, 1999.
(4) Incorporated by reference to Quarterly Report on Form 10-QSB for the
three months ended March 31, 2000.
(5) Incorporated by reference to Proxy Statement for 2000 Annual Mailing
of Shareholders dated May 9, 2000.
(6) Incorporated by reference to Annual Report on Form 10-KSB for the
fiscal year ended December 31, 2000.
(7) Incorporated by reference on Form 8-K for event dated May 22, 2002.
(8) Incorporated by reference on Form 8-K for event dated June 28, 2002.
(b) Reports on Form 8K
--- ------------------
No reports were issued on Form 8K in the fourth quarter of 2002.
Item 14. CONTROL AND PROCEDURES
---------------------------------------
Our Chief Executive Officer and Chief Financial Officer have concluded,
based on their evaluation as of a date within 90 days prior to the filing date
of this report, that our disclosure controls and procedures are effective for
gathering, analyzing and disclosing the information we are required to
disclose in our reports filed under the Exchange Act. There have been no
significant changes in our internal controls or in other factors that could
significantly affect these controls subsequent to the date of the previously
mentioned evaluation.
SIGNATURES
------------
In accordance with Section 13 or 15(d) of the Securities Exchange of
1934, the Registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
REGISTRANT:
MERGE TECHNOLOGIES INCORPORATED
Date: March 31, 2003 By: /s/ Richard A. Linden
-------------------------------------
Richard A. Linden
President and Chief Executive Officer
Date: March 31, 2003 By: /s/ Scott T. Veech
-------------------------------------
Scott T. Veech
Chief Financial Officer, Treasurer
and Secretary
In accordance with the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Date: March 31, 2003 By: /s/ William C. Mortimore
-------------------------------------
William C. Mortimore
Director and Chairman
Date: March 31, 2003 By: /s/ Robert A. Barish, M. D.
-------------------------------------
Robert A. Barish, M. D.
Director
Date: March 31, 2003 By: /s/ Patrice M. Bret, M. D.
-------------------------------------
Patrice M. Bret, M. D.
Director
Date: March 31, 2003 By: /s/ Michael D. Dunham
-------------------------------------
Michael D. Dunham
Director
Date: March 31, 2003 By: /s/ Robert T. Geras
-------------------------------------
Robert T. Geras
Director
Date: March 31, 2003 By: /s/ Anna M. Hajek
-------------------------------------
Anna M. Hajek
Director
Date: March 31, 2003 By: /s/ John D. Halamka, M. D.
-------------------------------------
John D. Halamka, M. D.
Director
CERTIFICATION
---------------
PURSUANT TO SECTION 302 OF THE SARBANES - OXLEY ACT OF 2002
I, Richard A. Linden, certify that:
1. I have reviewed this annual report on Form 10-KSB of Merge Technologies
Incorporated;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The Registrant's other certifying officer and I (herein, the
"Certifying Officers") are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the Registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the Registrant, including its
consolidated subsidiaries (collectively, the "Company") is
made known to the Certifying Officers by others within the
Company, particularly during the period in which this annual
report is being prepared;
b) evaluated the effectiveness of the Registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the "Evaluation Date");
and
c) presented in this annual report the conclusions of the
Certifying Officers about the effectiveness of the disclosure
controls and procedures based on our evaluation as of the
Evaluation Date.
5. The Registrant's Certifying Officers have disclosed, based on the
Certifying Officers' most recent evaluation, to the Registrant's
auditors and the audit committee of the Registrant's board of
directors:
a) all significant deficiencies, if any in the design or
operation of internal controls which could adversely affect
the Registrant's ability to record, process, summarize and
report financial data and have identified for the Registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
Registrant's internal controls; and
6. The Registrant's Certifying Officers have indicated in this annual
report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: March 31, 2003
/s/ Richard A. Linden
------------------------------------------
Richard A. Linden, Chief Executive Officer
See also the certification pursuant to Section 906 of the Sarbanes - Oxley
Act of 2002, which is also attached to this report.
CERTIFICATION
---------------
PURSUANT TO SECTION 302 OF THE SARBANES - OXLEY ACT OF 2002
I, Scott T. Veech, certify that:
1. I have reviewed this annual report on Form 10-KSB of Merge Technologies
Incorporated;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The Registrant's other certifying officer and I (herein, the
"Certifying Officers") are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the Registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the Registrant, including its
consolidated subsidiaries (collectively the "Company"), is made
known to the Certifying Officers by others within the Company,
particularly during the period in which this annual report is
being prepared;
b) evaluated the effectiveness of the Registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the "Evaluation Date");
and
c) presented in this annual report the conclusions of the
Certifying Officers about the effectiveness of the disclosure
controls and procedures based on our evaluation as of the
Evaluation Date.
5. The Registrant's Certifying Officers have disclosed, based on the
Certifying Officers' most recent evaluation, to the Registrant's
auditors and the audit committee of the Registrant's board of
directors:
a) all significant deficiencies, if any, in the design or
operation of internal controls which could adversely affect
the Registrant's ability to record, process, summarize and
report financial data and have identified for the Registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
Registrant's internal controls; and
6. The Registrant's Certifying Officers have indicated in this annual
report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: March 31, 2003
/s/ Scott T. Veech
---------------------------------------
Scott T. Veech, Chief Financial Officer
See also the certification pursuant to Section 906 of the Sarbanes - Oxley
Act of 2002, which is also attached to this report.
-------------
EXHIBIT 23.1
-------------
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Merge Technologies Incorporated:
We consent to the incorporation by reference in the registration
statements on Form S-8 (Nos. 333-93965, 333-75900 and 333-1001-3) and on
Form S-3 (Nos. 333-34884, 333-40832, 333-40882 and 333-100104) of Merge
Technologies Incorporated of our report dated March 28, 2003, with
respect to the consolidated balance sheets of Merge Technologies
Incorporated as of December 31, 2002 and 2001, and the related statements
of operations, shareholders' equity, cash flows and comprehensive income
(loss) for each of the years in the three-year period ended December 31,
2002, which report appears in or are incorporated by reference in the
annual report on Form 10-KSB of Merge Technologies Incorporated for the
year ended December 31, 2002. Our report on the consolidated financial
statements refers to the adoption of the provisions of Statement of
Financial Accounting Standards No. 142 "Goodwill and Other Intangible
Assets" on January 1, 2002.
/s/ KPMG LLP
-------------------------
KPMG LLP
Chicago, Illinois
March 28, 2003
-------------
EXHIBIT 99.1
-------------
CERTIFICATION of CHIEF EXECUTIVE OFFICER and CHIEF FINANCIAL OFFICER
PURSUANT TO U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES - OXLEY ACT OF 2002
In connection with the Annual Report on Form 10-KSB of MERGE
TECHNOLOGIES INCORPORATED (the "Company") for the year ended December 31,
2002, as filed with the Securities and Exchange Commission on the date hereof
(the "Report"), Richard A. Linden, as Chief Executive Officer of the Company,
and Scott T. Veech, as Chief Financial Officer of the Company, each hereby
certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes - Oxley Act of 2002, that, to the best of his knowledge:
(1) The Report fully complies with the requirements of
Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) the information contained in the Report fairly
presents, in all material respects, the financial condition and
results of operations of the Company.
Date: March 31, 2003 By: /s/ Richard A. Linden
---------------------------------------
Richard A. Linden
Chief Executive Officer
Date: March 31, 2003 By: /s/ Scott T. Veech
---------------------------------------
Scott T. Veech
Chief Financial Officer
This certification accompanies the Report pursuant to Section 906 of
the Sarbanes - Oxley Act of 2002 and shall not, except to the extent required
by the Sarbanes - Oxley Act of 2002, be deemed filed by the Company for purposes
of Section 18 of the Securities Exchange Act of 1934, as amended.
See also the certification pursuant to Sec. 302 of the Sarbanes - Oxley Act
of 2002, which is also attached to this Report.
-------------
EXHIBIT 10.10
-------------
LOAN AGREEMENT
----------------
Loan Agreement made this 30th day of December, 2002, by and between
MERGE TECHNOLOGIES INCORPORATED, a corporation organized and licensed under
the laws of the State of Wisconsin and which maintains its principal
offices at 1126 S. 70th St., in the City of West Allis, County of Milwaukee,
State of Wisconsin; hereinafter referred to as BORROWER; and LINCOLN STATE
BANK, a Wisconsin commercial banking corporation, which maintains its principal
office at 2266 South 13th Street, in the City of Milwaukee, county of Milwaukee,
State of Wisconsin, hereinafter referred to as BANK;
RECITALS
----------
WHEREAS, BORROWER is a corporation duly organized under the laws of
the State of Wisconsin, and is in good standing, and
WHEREAS, BORROWER is in the "E-Health" business, developing, marketing
and supporting Internet-based connectivity and information management solutions
for health care organizations and professionals, and
WHEREAS, BORROWER has requested that BANK make a "line of credit" loan
available to BORROWER not to exceed $5,000,000.00; and
WHEREAS, BANK is willing to provide financing to BORROWER on certain
terms and conditions, and
WHEREAS, it is to the economic benefit and immediate advantage of
PRINCIPALS if said financing is provided to BORROWER.
NOW THEREFORE, as an inducement to BANK to make the requested loan(s)
to BORROWER; and for other good and valuable consideration, and the terms,
provisions, and conditions hereof, the parties hereto agree as follows:
1. INCORPORATION OF RECITALS
The foregoing recitals are incorporated herein by this reference; and
this agreement shall be construed by reference thereto.
2. DEFINITIONS
The definitions of the terms used herein are set forth in APPENDIX A
attached hereto and made a part hereof.
3. LOAN(S)
The loan(s) subject to, and in accordance with the terms of this
Agreement and in reliance upon the representations, warranties, and covenants
of BORROWER hereinafter set forth, and contingent upon the further specific
conditions of the provisions and conditions of the "Commitment Letter(s)"
issued by BANK for a specific loan, BANK hereby agrees to loan a total
principal sum, not to exceed $5,000,000.00.
3.01 Disbursement of the Loan(s). BANK will credit the proceeds of
the loan(s) to BORROWER's deposit account with BANK.
3.02 Basic Terms/Line of Credit Loan(s)
A. BANK will loan to BORROWER pursuant to this Agreement and
subsequent Commitment Letter(s) a principal sum not to
exceed $5,000,000.00.
B. The line of credit loan shall be subject to the GENERAL
TERMS AND CONDITIONS as hereinafter set forth at Section
4 of this Agreement.
C. The loan terms shall be set forth in the loan Commitment
Letter(s) issued by BANK.
D. Security for the subject loan shall include the security
identified at Section 5 of this Agreement.
4. GENERAL TERMS AND CONDITIONS
The loan(s) contemplated hereby shall be made on the following
general terms and conditions:
4.01 The loan(s) will be evidenced by promissory note in the
form acceptable to, and provided by BANK.
4.02 The note(s) shall incorporate the terms, conditions,
and provisions hereof by reference.
4.03 BORROWER shall have the right of pre-payment without
penalty.
4.04 Interest shall be paid monthly, the first payment of
which shall be due thirty (30) days after the date of the
loan(s) and on the same date of each successive month
thereafter until the loan has been fully paid as to
principal, interest, and other charges.
4.05 BANK agrees to renew the note(s) hereinabove referenced,
for a total of additional months to be specified through
a series of promissory notes each with a term of months
to be specified, for so long as the payments required
under this Agreement, the Commitment Letter(s), and
the promissory note(s) remain current and BORROWER has
not otherwise defaulted with respect to any obligations
created hereby and the security required continues to be
maintained. The only items which shall be variable on
each successive note is the interest rate to be charged
by BANK, which interest rate, and the term thereof shall
be specified in the Commitment Letter(s) relating to each
specific note.
5. SECURITY
5.01. As security for payment of any and all loans made
pursuant to this Agreement, and any Commitment
Letter(s) issued by BANK in conjunction herewith,
BORROWER hereby grants and conveys to BANK a first
security position and interest in all assets of BORROWER
of whatever kind or nature, whether those assets are
presently owned by BORROWER of are hereinafter acquired,
except: to the extent of the $1,000,000 authorized at
7.02D, page 17 hereof.
5.02. BORROWER agrees to execute a General Business Security
Agreement (GBSA), Fixtures Disclaimer, and a UCC Financing
Statement(s) relating to any personal property that is
included in the assets owned by BORROWER, or subsequently
acquired, together with any ancillary documents that may
be required.
5.03. In the event of default in payment of the interest or
any of the principal installments of the note or notes
given pursuant to this Agreement when the same shall be
due either according to the terms of such notes or by
acceleration pursuant to any of the provisions of this
Agreement; on demand of BANK (at option of BANK)
BORROWER will give BANK additional security for the
payment of all installments of all of the notes issued
pursuant to this Agreement and then outstanding as BANK
may reasonably demand; or in the alternative, BANK may
proceed with its legal remedies.
5.04. BORROWER does agree to execute all appropriate documents
and pledges that BANK may require to perfect the said
security interest(s). A preliminary schedule of the
documents required at closing, and the source thereof,
is set forth at Appendix B attached hereto and made a
part hereof.
5.05. Such other, and additional security as may from time to
time be specified in the Commitment Letter(s) pertaining
to particular loan(s) and/or note(s).
6. REPRESENTATIONS AND WARRANTIES
6.01. Original. To induce BANK to enter into this Agreement,
BORROWER represents and warrants to bank as follows:
A. BORROWER is a corporation duly organized, validly
existing and in good standing under the laws of the
State of Wisconsin; BORROWER has the lawful power to
own its properties and to engage in the business it
conducts.
B. BORROWER is not in default with respect to any of its
existing indebtedness, and the making and performance
of this Agreement, the note(s) and the collateral
documents will not (immediately, with the passage of
time, the giving of notice, or otherwise);
(1) Violate the character or bylaw provisions of
BORROWER, or violate any laws or result in a
default under any contract, agreement, or
instrument to which BORROWER is a party or
by which BORROWER is bound; or,
(2) Result in the creation or imposition of any
security interest in, or lien or encumbrance
upon, any of the assets of BORROWER except in
favor of BANK;
C. BORROWER has the power and authority to enter into
and perform this Agreement, the note(s) and the
collateral documents, and to incur the obligations
herein and therein provided for, and has taken all
corporate action necessary to authorize the
execution, delivery, and performance of this
Agreement, the note(s) and the collateral documents;
D. This Agreement and the collateral documents are, and
the note(s) when delivered will be, valid, binding, and
enforceable in accordance with their respective terms,
subject to bankruptcy, insolvency, reorganization, and
other State and Federal laws of general application
affecting the enforcement of creditors' rights;
E. Except as disclosed in Appendix D attached hereto and
made a part hereof, there is no pending order, notice,
claim, litigation, proceeding, or investigation
against or affecting BORROWER whether or not covered
by insurance, that would involve the payment of
$75,000.00 or more if adversely determined;
F. BORROWER has good and marketable title to all of its
assets, subject to no security interest, encumbrance
or lien, or the claim of any third person, except for
Permitted Liens disclosed in Appendix D attached
hereto and made a part hereof; except for certain
tax liens each of which is under $75,000.00.
G. The financial statements, including any schedules and
notes pertaining thereto have been prepared in
accordance with generally accepted accounting
principles consistently applied, and fully and
fairly present the financial condition of BORROWER
at the dates thereof and the results of operations
for the periods covered thereby, and there have
been no material adverse changes in the financial
condition or business of BORROWER from September 30,
2002, to the date hereof;
H. As of September 30, 2002 , BORROWER had no material
indebtedness of any nature, including, but without
limitation, liabilities for taxes and any interest or
penalties relating thereto, except to the extent
reflected (in a footnote or otherwise) and reserved
against BORROWER (if any) in the September 30, 2002,
financial statements or as disclosed in or permitted
by this Agreement; BORROWER does not know and has no
reasonable ground to know of any basis of the assertion
against it as of September 30, 2002, of any material
indebtedness of any nature not fully reflected and
reserved against in the September 30, 2002, financial
statements;
I. Except as otherwise permitted herein, BORROWER has
filed all Federal, State, and local tax returns and
other reports that are required by law to be filed
prior to the date hereof and which are material to
the conduct of its respective businesses, except for
the returns due for 2001, has paid or caused to be
paid all taxes, assessments, and other governmental
charges that are due and payable prior to the date
hereof, except for 2001, and has made adequate
provision for the payment of such taxes, assessments
or other charges accruing but not yet payable;
BORROWER has no knowledge of any deficiency or
additional assessment in a materially important
amount (as described in paragraph E.) in connection
with any taxes, assessments or charges not provided
for on its books;
J. Except as otherwise disclosed in Appendix E, attached
hereto and made a part hereof, or except to the extent
that the failure to comply would not materially
interfere with the conduct of BORROWER's business,
BORROWER has complied with all applicable laws with
respect to:
(1) any restrictions, specifications, or other
requirements pertaining to products that
BORROWER manufactures and sells or to the
services it performs;
(2) the conduct of its respective businesses;
and
(3) the use, maintenance, and operation of the
real and personal properties owned or
leased by it in the conduct of its
respective businesses;
K. No representation or warranty by BORROWER contained
herein or in any certificate or other document
furnished by BORROWER pursuant hereto contains any
untrue statement of material fact or omits to state
a material fact necessary to make such representation
or warranty not misleading in light of the
circumstances under which it was made;
L. Each consent, approval or authorization of, filing,
registration or qualification with, any person
required to be obtained or effected by BORROWER
in connection with the execution and delivery of
this Agreement, the note(s) and the collateral
documents or the undertaking or performance of any
obligation hereunder or thereunder has been duly
obtained or effected;
M. All existing indebtedness of BORROWER:
(1) for money borrowed is described in
Appendix F attached hereto and made a
part hereof; and
(2) under any security agreement, mortgage,
or agreement covering the lease by
BORROWER as lessee of real or personal
property, is described in Appendix G,
attached hereto and made a part hereof;
N. Except as described in Securities & Exchange
Commission documentation (SEC), BORROWER has no
material lease, contract, or commitment of any kind
(such as employment agreements; collective bargaining
agreements, powers of attorney, distribution
arrangements, patient license agreements, contracts
for future purchase or delivery of goods or rendering
of services, bonus, pension, and retirement plans,
or accrued vacation pay, insurance and welfare
agreements); all parties (including BORROWER) to all
such material leases, contracts, and other
commitments to which BORROWER is a party have complied
with the provisions of such leases, contracts and
other commitments; and, no party is in default under
any provision thereof and no event has occurred
which, but for the giving of notice or the passage
of time, or both, would constitute a default;
O. BORROWER has not made any agreement nor has taken any
action which may cause anyone to become entitled to
a commission or finder's fee as a result of the
making of the loan(s);
P. The BORROWER's Federal tax returns and state tax
returns for the fiscal year ending December 31, 2001,
except as described at page 7, have been filed with
the Internal Revenue Service, and the appropriate
state department respectively; and that BORROWER has
no information or belief that any additional tax
might be owed as a result of these returns; and,
Q. All defined pension plans, as defined in the Employee
Retirement Income Security Act of 1974, as amended
("ERISA"), of BORROWER and each subsidiary meet, as
of the date hereof, the minimum funding standards of
Sec. 302 of ERISA, and no reportable event or
PAGE e1-9>
prohibited transaction, as defined in ERISA, has
occurred with respect to any such plan.
6.02. Survival. All of the representations and warranties set forth
in Paragraph 6.01 shall survive until all obligations are
satisfied in full.
7. BORROWERS COVENANTS
BORROWER does hereby covenant and agree with BANK that, so long as any
of the obligations remain unsatisfied, it will comply with the following
covenants unless such compliance is specifically waived in writing by BANK,
such writing constituting an amendment to this Agreement:
7.01 Affirmative Covenants.
A. BORROWER will use the proceeds of the loan(s) only for the
bona fide business purposes of BORROWER;
B. BORROWER will make available to BANK:
(1) Within One Hundred Five (105) days after the close of
each fiscal year:
(a) a statement of stockholders' equity and a statement
of cash flows of BORROWER for the preceding fiscal
year;
(b) income statements of BORROWER for said fiscal year;
and
(2) balance sheets of BORROWER as of the end of the
preceding fiscal year; the statements and balance
sheets to be audited by an independent certified
pubic accountant selected by BORROWER and acceptable
to BANK, and certified by such accountants to have
been prepared in accordance with generally accepted
accounting principals consistently applied by
BORROWER except for any inconsistencies explained
in such certificate. In addition, BORROWER will
obtain from such independent certified public
accountants and make available to BANK, within One
Hundred Five (105) days after the close of each
fiscal year, their written statement that in making
the examinations necessary to their certification
they have obtained no knowledge of any event of
default by BORROWER, or disclosing all events of
default of which they have obtained knowledge; or
in the alternative, BORROWER shall obtain such
information by appropriate footnotes subscribed
to the customary financial statements provided
customer by the said accountants, PROVIDED,
however, that in making their examination such
accountants shall not be required to go beyond
the bounds of generally accepted auditing
procedures for the purpose of certifying financial
statements. BANK shall have the right, from time
to time, to discuss BORROWER's affairs directly
with BORROWER's independent certified public
accountants after notice to BORROWER and
opportunity of BORROWER to be present at any such
discussions;
C. BORROWER will maintain its inventory, equipment, real
estate, and other properties in good condition and repair
(normal wear and tear excepted), and will pay and discharge
or cause to be paid and discharged when due, the cost of
repairs to or maintenance of the same, and will pay or cause
to be paid all rental or mortgage payments due on such real
estate. BORROWER hereby agrees that, in the event it fails
to pay or cause to be paid any such payment, BANK may do so
and be reimbursed by BORROWER therefor.
D. BORROWER will maintain, or cause to be maintained, public
liability insurance, fire and extended coverage insurance
on all assets owned by them, all in such form and amounts
as are consistent with industry practices and with such
insurers as may be satisfactory to BANK. BORROWER will
also maintain, or cause to be maintained professional
liability errors & omissions insurance on all appropriate
personnel of BORROWER in amount of not less than
$1,000,000.00, with an insurer satisfactory to BANK. Such
policies shall contain a provision whereby they cannot be
cancelled except after thirty (30) days' written notice to
BANK. BORROWER will furnish to BANK such evidence of
insurance as BANK may require. BORROWER hereby agrees that,
in the event it fails to pay or cause to be paid the premium
on any such insurance, BANK may do and be reimbursed by
BORROWER therefor. Where appropriate, BANK shall be
named as a loss payee on such policy or policies as BANK's
interest in BORROWER's property may appear.
E. BORROWER will pay or cause to be paid when due, all taxes,
assessments and charges or levies imposed upon it or on any
of its property or which it is required to withhold and pay
over, except where contested in good faith by appropriate
proceedings with adequate reserves therefor having been set
aside on its books. But, BORROWER shall pay or cause to be
paid all such taxes, assessments, charges or levies
forthwith whenever foreclosure on any lien that attaches
(or security therefor) appears imminent.
F. BORROWER will maintain:
(1) A ratio of Funded Debt to Equity at the end of
each quarter of BORROWER's fiscal year as follows:
(a) Through December 31, 2005 - .4 to 1.
(b) The same ratio shall be maintained
through the term of any loan term (if
extended beyond December 31, 2005).
(2) The following maximum limitations on Advances at
the end of each month:
(a) With respect to qualified accounts
receivable under 90 days, 80% thereof.
(b) Inventory shall be capped at $1,000,000.00
of discounted value. Discounted value is
deemed to be 50% of value carried on the
BORROWER'S balance sheet.
(c) One hundred percent (100%) of the
BORROWER'S depository cash balances held
at BANK. Cash balances will only be used
if borrowings exceed the existing base of
qualified accounts receivable and
inventory as previously defined. BORROWER
agrees that any component of cash used in
the actual borrowing base will be
considered pledged as collateral by the
BORROWER. BANK reserves the right to
monitor and hold in BORROWER'S accounts
sufficient cash in order to cover the
amounts borrowed on the line in excess of
qualified accounts receivable and inventory
as previously defined.
All inter-company accounts receivable are excluded from this
formula.
(3) Monitoring Requirements as follows when there is
an outstanding balance due the BANK:
(a) Monthly Borrower's Certificate;
(b) Accounts Receivable Aging;
G. BORROWER will, when requested so to do, make available for
inspection by duly authorized representatives of BANK, any
of its books and records, and will furnish BANK any
information regarding its business affairs and financial
condition within a reasonable time after written request
therefor.
H. BORROWER will take all necessary steps to preserve its
corporate existence and franchises and comply with all
present and future laws applicable to it in the operation
of its respective businesses, and all material agreements
to which it is subject.
I. BORROWER will collect its accounts and sell its inventory
only in the ordinary course of business.
J. BORROWER will keep accurate and complete records of its
accounts, inventory and equipment, consistent with sound
business practices.
K. BORROWER will give immediate notice to BANK of:
(1) any litigation or proceeding in which it is a
party if an adverse decision therein that BORROWER
believes that it would be required to pay over
more than $100,000.00 or deliver assets the value
of which exceeds such sum (whether or not the
claim is considered to be covered by insurance);
and
(2) the institution of any other suit or proceeding
involving it that might materially and adversely
affect its operations, financial condition,
property or business.
L. Within twenty (20) days of BANK's request therefor,
BORROWER will furnish BANK with copies of Federal income
tax returns filed by BORROWER.
M. BORROWER will pay when due (or within applicable grace
periods) all indebtedness due third persons, except when
the amount thereof is being contested in good faith by
appropriate proceedings and with adequate reserves therefor
being set aside on the books of BORROWER. If default be
made by BORROWER in the payment of any principal (or
installment thereof) or interest on, any such indebtedness,
BANK shall have the right, on its discretion, to pay such
interest or principal for the account of BORROWER and be
reimbursed by BORROWER therefor.
N. BORROWER will notify BANK immediately if it becomes aware
of the occurrence of any event of default or of any fact,
condition, or event that only with the giving of notice or
passage of time, or both, could become an event of default,
or of the failure by BORROWER to observe any of its
respective undertakings hereunder.
O. BORROWER will notify BANK at least sixty (60) days in
advance of any change in the location of any of its
principal places of business;
P. The BORROWER will:
(1) fund all of its defined benefit pension plans in
accordance with no less than the minimum funding
standards of Sec. 302 of ERISA;
(2) upon written request furnish BANK with copies of
all reports or other statements filed with the
United States Department of labor or the Internal
Revenue Service with respect to all such plans;
and
(3) promptly advise BANK of the occurrence of any
reportable event or prohibited transaction with
respect to any such plan.
Q. BORROWER shall maintain its primary United States deposit
accounts (except for accounts maintained under Sec. 401 of
the Internal Revenue Code, or accounts maintained by branch
offices which are located outside Milwaukee County,
Wisconsin) with BANK.
7.02 Negative Covenants.
A. BORROWER will not change its name, or reclassify its
capital stock without prior notification.
B. BORROWER will not enter into any merger, consolidation, or
reorganization without prior notification.
C. BORROWER will not sell, transfer, lease, or otherwise
dispose of all or (except in the ordinary course of
business) any material part of its assets.
D. BORROWER will not mortgage, pledge, grant, or permit to
exist a security interest in or lien upon any of its assets
of any kind, now owned or hereafter acquired, except for
permitted liens or subordinated indebtedness currently
listed on Appendix F or G or purchase money security
interest in connection with capital expenditures not
exceeding $1,000,000 per calendar year.
E. BORROWER will not incur, create, assume, or permit to
exist any indebtedness to the extent that such indebtedness
would violate the provisions of Paragraph 7.01(F).
F. BORROWER will not declare or pay any dividends, or make any
other payment or distribution on account of its capital
stock to the extent that such payments would cause
BORROWER to violate the provisions of Paragraph 7.01(F).
G. BORROWER will not:
(1) form any subsidiary, make any investment in or
make any loan in the amount of $200,000.00 in the
nature of any investment to any person without
prior notification;
(2) purchase or otherwise invest in or hold securities,
non-operating real estate or other non-operating
assets, except:
(a) direct obligations of the United States
of America
(b) the present investment in any such assets;
and
(c) operating assets that hereafter become
non-operating assets; and
(d) acquire any stock in, or all or
substantially all of the assets of any
person.
(e) The purchase of certain bonds and mutual
funds.
(f) Or such other investments as are approved
by BANK.
H. BORROWER will not make or loan or advance to any executive
officer, shareholder, or director of BORROWER or any
subsidiary, except for temporary advances in the ordinary
course of business without the prior notice to BANK.
I. BORROWER will not furnish BANK any certificate or other
document that will contain any untrue statement of material
fact, or that will omit to state a material fact necessary
to make it not misleading in light of the circumstances
under which it was furnished.
J. BORROWER will not knowingly enter into any agreement that is
in violation of any SEC rules or regulations.
K. BORROWER will not directly or indirectly apply any part of
the proceeds of the loan(s) to the purchasing or carrying
of any "margin stock" within the meaning of Regulation U
of the Board of Governors of the Federal Reserve System, or
any regulations, interpretations or rulings thereunder.
7.03 Bank Consent Not Unreasonably Withheld. With respect to Section
7.02 herein, BORROWER may request in writing BANK's approval to
undertake the action provided for therein and BANK's consent shall
be provided in writing and shall not be unreasonably withheld.
8. EXTENSION, RENEWALS, ETC.
The provisions hereof will apply to any extensions, renewals,
continuation, or modification of the loan(s) made pursuant hereto.
9. BORROWER'S COMMITMENT
BORROWER agrees to the terms, provisions, conditions, and requirements
as herein set forth and agree to be bound thereby.
10. CONDITIONS PRECEDENT
BORROWER further agrees as conditions precedent to any loan(s) made by
BANK to BORROWER pursuant to the terms hereof:
A. Prior to any loan(s), BORROWER shall execute and deliver up to BANK
all of the documentation and evidence of said loan(s) obligation,
security, and related items that BANK may require, including, but
not limited to, the items set forth in Appendix B hereto.
B. BORROWER agrees that it shall not further encumber the assets of
the corporation without prior notification to BANK.
C. Compliance by BORROWER with all applicable rules and regulations of
any governmental unit or agency having jurisdiction over BORROWER,
and/or its operations, including, but not limited to,
"environmental" and OSHA rules and regulations.
11. ACCELERATION
The principal and interest owing under any indebtedness made and
arising under this loan Agreement shall immediately become due and payable
without notice, presentment, demand, protest, or notice of protest, or notice
of protest of any kind, all of which are expressly waived by BORROWER, in the
event that:
A. The BORROWER, without prior written notice of BANK, defaults in
the performance of observance of any of the above agreements and
right to cure the same within 20 days following written notice of
default from the BANK; or
B. The BORROWER, makes a general assignment for the benefit of
creditors, or files a petition in voluntary bankruptcy, or a
petition or answer seeking reorganization of BORROWER, or a
readjustment of its indebtedness under the Federal Bankruptcy Law,
or consents to the appointment of a receiver of its properties.
C. The BORROWER shall be adjudged bankrupt or insolvent, or a petition
or proceeding for bankruptcy, or for reorganization, shall be filed
against it; and it shall admit the material allegations thereof; or
an order, judgment, or decree shall be made approving such a
petition, and such order, judgment or decree shall not be vacated
or stayed within twenty (20) days of its entry; or a receiver or
different trustee shall be appointed for BORROWER or its properties
and remain in possession thereof for ten (10) days.
D. BORROWER shall make a misrepresentation or misstatement or a
material fact contained herein; or
E. The BORROWER shall fail to perform any warranty, agreement,
condition precedent, or other obligation contained herein.
12. REMEDIES
After any acceleration, as provided for in Paragraph 11, BANK shall
have, in addition to the rights and remedies given it by this Agreement, the
notes and the collateral documents, all those remedies allowed by all
applicable laws, including, but without limitation, the Uniform Commercial
Code as enacted in any jurisdiction in which any collateral may be located.
Without limiting the generality of the foregoing, BANK may immediately,
without demand of performance and without other notice (except as specifically
required by the Agreement or the collateral documents) or demand whatsoever to
BORROWER, all of which are hereby expressly waived, and without advertisement,
sell at public or private sale or otherwise realize upon, in whole or, from
time to time, any part of the collateral, or any interest which BORROWER may
have therein. After deducting from the proceeds of sale or other disposition
of the collateral all expenses (including all reasonable expenses for legal
services), BANK shall apply such proceeds toward the satisfaction of the
obligations. Any remainder of the proceeds after satisfaction in full of the
obligations shall be distributed as required by applicable laws. Notice of
any sale or other disposition shall be given to BORROWER at least ten(10) days
before the time of any intended public sale or of the time after which any
intended private sale or other disposition of the collateral is to be made,
which BORROWER hereby agrees shall be reasonable notice of such sale or other
disposition. BORROWER agrees to assemble, or to cause to be assembled, at its
own expense, the collateral at such place or places as BANK shall designate.
At any such purchase in whole or any part of the collateral, free from any
right of redemption on the part of BORROWER, which right of redemption is
hereby expressly waived and released. Without limiting the generality of
any of the rights and remedies conferred upon BANK under this paragraph,
BANK may, to the full extent permitted by applicable laws:
A. Enter upon the premises of BORROWER, exclude therefrom BOROWER and
take immediate possession of the collateral, either personally or
by means of a receiver appointed by a Court of competent
jurisdiction, using all necessary force to do so;
B. At BANK's option, use, operate, manage, and control the collateral
in any lawful manner;
C. Collect and receive all rents, income, revenue, earnings, issues,
and profits therefrom; and/or,
D. Maintain, repair, renovate, alter, or remove the collateral as BANK
may determine in its discretion.
13. MISCELLANEOUS
13.01 Construction. The provisions of this Agreement shall be in
addition to those of any guaranty, pledge, or security agreement,
note or other evidence of liability held by BANK, all of which
shall be construed as complementary to each other. Except as
expressly provided in this Agreement, nothing herein contained
shall prevent BANK from enforcing any or all other notes,
guarantys, pledges, or security agreements in accordance with
their respective terms.
13.02 Further Assurance. From time to time, BORROWER will execute and
deliver to BANK such additional documents and will provide such
additional information as BANK may reasonably require to carry
out the terms of this Agreement and be informed of BORROWER's
status and affairs.
13.03 Enforcement and Waiver by BANK. BANK shall have the right at
all times to enforce the provisions of this Agreement and the
collateral documents in strict accordance with there terms hereof
and thereof, notwithstanding any conduct or custom on the part of
BANK in refraining from so doing at any time or times. The
failure of BANK at any time or times to enforce its rights
under such provisions, strictly in accordance with the same,
shall not be construed as having created a custom in any way or
manner contrary to specific provisions of this Agreement or as
having in any way or manner modified or waived the same. All
rights and remedies of BANK are cumulative and concurrent and
the exercise of one right or remedy shall not be deemed a waiver
or release of any other right or remedy.
13.04 Expenses of BANK. BORROWER will, on demand, reimburse BANK for
all expenses, including the reasonable fees and expenses of legal
counsel for BANK, incurred by BANK in connection with the
preparation, administration, amendment, modification, or
enforcement of this Agreement and the collateral documents and
the collection or attempted collection of the note(s).
13.05 Notices. Any notices or consents required or permitted by this
Agreement shall be in writing and shall be deemed delivered if
delivered in person, or if sent by first class mail, postage
prepaid, or telegraph, as follows, unless such address is changed
by written notice hereunder:
A. If to BORROWER: 1126 S. 70th St., Milwaukee,
Wisconsin 53214-3151.
B. If to BANK: Lincoln State Bank, 2266 South 13th Street,
Milwaukee, Wisconsin 53215.
13.06 Waiver and Release by BORROWER. To the maximum extent permitted
by applicable laws, BORROWER:
A. Waives:
(1) protest of all commercial paper at any time held
by BANK on which BORROWER is in any way liable; and
(2) notice and opportunity to be heard, after
acceleration in the manner provided herein, before
exercise by BANK of the remedies of self-help,
set-off, or of other summary procedures permitted
by any applicable laws or by any agreement with
BORROWER, and, except where required hereby or by
any applicable laws, notice of any other action
taken by BANK; and
B. Releases BANK and its officers, attorneys, agents, and
employees from all claims for loss or damage caused by any
act or omission on the part of it except gross negligence
and/or willful misconduct.
13.07 Participation. Notwithstanding any other provision of this
Agreement, BORROWER understands that BANK may at any time enter
into participation agreements with one or more participating
banks whereby BANK will allocate certain percentages of its
commitment to them. BORROWER acknowledges that, for the
convenience of all parties, this Agreement is being entered
into with BANK only and that its obligations under this
Agreement are undertaken for the benefit of, and as an inducement
to, any such participating bank as well as BANK, and BORROWER
hereby grants to each participating bank, to the extent of its
participation in the loan(s), the right to set-off deposit
accounts maintained by BORROWER with such bank.
13.08 Applicable Law. The substantive laws of the State of Wisconsin
shall govern the construction of this Agreement and the rights
and remedies of the parties hereto.
13.09 Binding Effect, Assignment, and Entire Agreement. This Agreement
shall inure to the benefit of, and shall be binding upon, the
respective successors and permitted assigns of the parties
hereto. BORROWER has no right to assign any of its rights or
obligations hereunder without the prior written consent of
BANK. This Agreement, and the documents executed and delivered
pursuant hereto, and the appropriate Commitment Letter(s)
constitute the entire agreement between the parties, and may
be amended only by a writing signed on behalf each party.
13.10 Severability. If any provision of this Agreement shall be held
invalid under any applicable laws, such invalidity shall not
affect any other provision of this Agreement that can be given
effect without the invalid provision, and, to this end, the
provisions hereof are severable.
13.11 Counterparts. This Agreement may be executed in any manner of
counterparts, each of which shall be deemed to be an original,
but all of which together shall constitute but one and the
same instrument.
13.12 Amendment. This Agreement may be amended only in writing,
such writing to be countersigned by all parties to the original
agreement, except as specifically stated elsewhere in this
Agreement.
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement as of the day and year first above written.
LINCOLN STATE BANK
By: /s/ James F. Bomberg
----------------------------------------
James F. Bomberg, Vice President
By: /s/ Christine R. Schueller
----------------------------------------
Christine R. Schueller, Secretary
MERGE TECHNOLOGIES INCORPORATED
By: /s/ Richard A. Linden
----------------------------------------
Richard A. Linden, President
By: /s/ Scott T. Veech
----------------------------------------
Scott T. Veech, Secretary
STATE OF WISCONSIN )
) ss.
[ Waukesha ] COUNTY )
Personally came before me this 30th day of December, 2002,
Richard Linden, President, and Scott Veech, Secretary, of the above named
Corporation, to me known to be the persons who executed the foregoing
instrument, and to me known to be such President and Secretary of said
Corporation, and acknowledged that they executed the foregoing instrument
as such officers as the deed of said Corporation, by its authority.
/s/ Joseph M. Murry
----------------------------------------
Notary Public, State of Wisconsin
My Commission expires: [September 19, 2004]
--------------------
SEAL:
NOTARY PUBLIC
Joseph M. Murry
STATE OF WISCONSIN
--------------------
STATE OF WISCONSIN )
) ss.
[ Waukesha ] COUNTY )
Personally came before me this 30th day of December, 2002,
James Bomberg, President, and Christine Schueller, Secretary, of the above
named Corporation, to me known to be the persons who executed the foregoing
instrument, and to me known to be such President and Secretary of said
Corporation, and acknowledged that they executed the foregoing instrument
as such officers as the deed of said Corporation, by its authority.
/s/ Joseph M. Murry
___________________________________
Notary Public, State of Wisconsin
My Commission expires: [September 19, 2004]
--------------------
SEAL:
NOTARY PUBLIC
Joseph M. Murry
STATE OF WISCONSIN
--------------------
This instrument was drafted by:
Attorney Michael J. Duginski
KRAWCZYK & DUGINSKI, S.C.
14100 West National Avenue
P.O. Box 510377
New Berlin, WI 53151
(414) 827-5800
-------------
EXHIBIT 10.11
-------------
Merge Technologies Inc.
--------
M E M O
--------
To: Scott Veech
From: Rich Linden
Date: July 15, 2002
Re: Job Offer: Chief Financial Officer of Merge Technologies Inc.
------------------------------------------------------------------------------
Scott - I'm pleased to offer you the position of Vice President and Chief
Financial Officer for Merge Technologies Inc. The following points detail
the offer to you:
Base Salary: $150,000 per year.
Annual Bonus: You will participate in the annual Merge Corporate Bonus
program at a targeted bonus of 25% of your base pay, subject
to meeting both company and individual performance goals.
You will be enrolled in the 2002 Merge Corporate Bonus program
on a prorated basis using your start date to calculate the
prorated bonus target. Your bonus goals for 2002 will be
established no later than August 15, 2002.
Start Date: To be determined, but no later than July 22, 2002.
Annual Review: Your performance and compensation package will be reviewed
annually in the March/April timeframe, consistent with the
annual review of all officers by the CEO and Board of
Directors. As an elected officer of Merge Technologies,
adjustments to your compensation package including base pay,
annual bonus and annual stock option awards, will be
recommended by the CEO of Merge Technologies and approved by
the Compensation Committee of the Board of Directors.
Benefits: Materials describing Merge's benefit program such as health
insurance, dental coverage, life insurance, disability
insurance, flex spending plan, and the 401K plan have been
previously mailed to you. We will attempt to waive the
30-day waiting period for benefits via a special request
with our insurance company.
Stock Purchase
Plan: You will be eligible for the Merge Employee Stock Purchase
Plan on October 1, 2002.
Stock Options: You will be awarded 80,000 incentive stock options of Merge
stock at the closing market price (the "Strike price") at the
end of the day on the date the Board approves the grant. The
stock options will have a 3-year vesting schedule; 25% to vest
immediately on the date of the Board approval, and 25% to vest
on the first, second and third anniversary dates of the Board
approval (August 21, 2002.) Additional stock options may be
awarded on an annual basis pending recommendation by the CEO
and approval by the Compensation Committee of the Board of
Directors.
Change of
Control: In the event of a "change in control" of the Company ("change
in control" of the Company shall mean a change in the ownership
of fifty percent (50%) or more of the outstanding stock of the
Company in a single transaction or a change of fifty percent
(50%) or more of the members of the Board in a single
transaction, other than pursuant to nomination of a new slate
of directors where there has been no material change in
beneficial ownership of the Company within 180 days preceding
such nomination), all of the stock options will immediately
vest and become exercisable. In the event of a change in
control as (described above) and the Executive is: (i)
involuntarily terminated within 120 days following the change
in control; or (ii) voluntarily terminates his employment with
the Company within 120 days, following either: (a) any
reduction in Executive's responsibilities or authority with
respect to the Business; (b) a reduction in Executive's
compensation package, including Salary, in effect immediately
prior to the change in control; or (c) the relocation of the
Company's principal place of business more than 30 miles
from the current Merge Corporate Office as of the date of
this Agreement; then the Executive will be entitled to six
(6) months Salary as a change in control allowance, to be
paid in a single payment within thirty (30) days of the
termination of Executive's employment.
Severance: In the event that the Executive is terminated for any reason
other than gross negligence, commission of a felony in
connection with his employment or material violation of
any established Company policies, the Company shall pay the
Executive, as a severance allowance, an amount equal to three
(3) months of his then current salary. The amount of the
severance allowance provided for in this section shall be
paid in a single lump sum within thirty (30) days of the
termination of the Executive's employment. Notwithstanding
anything to the contrary contained herein, in the event the
Executive elects to receive six (6) months' Salary following
a change in control event and Executive's voluntary or
involuntary termination, then Executive shall not be entitled
to any payment of severance pursuant to this section. In the
event a change in control occurs and the Executive is not
entitled to six (6) months' Salary pursuant to the Change of
Control section above, then the Executive shall continue to be
entitled to receive severance payments per this section.
Vacation Time: Merge has implemented a "Paid Time Off Bank" - PTO, approach
to vacation and sick day accruals. Your PTO bank will accrue
at 36 days per year (1.5 days per pay period), which is
equivalent to 4 weeks of vacation per year.
Scott - I'm personally very excited about the prospect of you joining
Merge Technologies. We make a great team and I look forward to adding your
talent to the organization.
Sincerely,
MERGE TECHNOLOGIES INC.
/s/ Richard A. Linden
-------------------------
Please sign and date indicating
Richard A. Linden acceptance of this offer:
President & CEO
Dated: July 15, 2002 /s/ Scott T. Veech July 15, 2002
----------------------------------
Scott T. Veech