FORM-10-KSB-A
Amendment No. 2
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 $46,960,843. 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
----- -----
EXPLANATORY NOTE
-----------------
This Amendment No. 2 to Form 10-KSB amends Item 7 and Item 13 of the
Annual Report on Form 10-KSB, as amended, for the fiscal year ended December
31, 2002. The purpose of this amendment is to include additional disclosure
for sales of its products and services in Note 8, Concentrations of the Notes
to Consolidated Financials Statements and to include an updated consent from
KPMG. No other changes have been made to Item 7 or Item 13 as originally
filed on March 31, 2003.
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
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,
MERGE TECHNOLOGIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
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
MERGE TECHNOLOGIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
MERGE TECHNOLOGIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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.
MERGE TECHNOLOGIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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%
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
========== ===========
MERGE TECHNOLOGIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
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.
MERGE TECHNOLOGIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
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 sells it products and services to OEM/VAR's and directly
to healthcare facilities. Sales to OEM/VAR's totaled $10,787,000, $10,534,000
and $10,141,000 for the years ended December 31, 2002, 2001, and 2000,
respectively. Sales made directly to healthcare facilities totaled $6,264,000,
$2,922,000 and $1,095,000 for the years ended December 31, 2002, 2001, and 2000,
respectively. Sales from the professional services group totaled $3,735,000,
$2,285,000 and $1,377,000 for the years ended December 31, 2002, 2001 and
2000, respectively.
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.
MERGE TECHNOLOGIES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 13. EXHIBITS
-------------------------
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.
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: May 7, 2003 By: /s/ Richard A. Linden
-------------------------------------
Richard A. Linden
President and Chief Executive Officer
Date: May 7, 2003 By: /s/ Scott T. Veech
-------------------------------------
Scott T. Veech
Chief Financial Officer, Treasurer
and Secretary
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: May 7, 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: May 7, 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-3 (Nos. 333-93965, 333-75900 and 333-100103) and on
Form S-8 (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 the annual report on Form 10-KSB/A 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
May 6, 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: May 7, 2003 By: /s/ Richard A. Linden
---------------------------------------
Richard A. Linden
Chief Executive Officer
Date: May 7, 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.