United States
Securities and Exchange Commission
Washington, D.C. 20549
Form 10-QSB
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
TRANSITION REPORT PURSUANT TO 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
(Exact name of small business issuer as specified in its charter.)
Wisconsin 39-1600938
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1126 South 70th Street, Milwaukee, WI 53214-3151
(Address of principal executive offices)
414-977-4000
(Issuer's telephone number)
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
---- ----
As of November 18, 2002 the issuer had 9,424,258 shares of common stock
outstanding.
INDEX
-------
Page
PART I Financial Information
------------------------------
Item 1. Financial Statements........................... 1
Item 2. Management's Discussion and Analysis or
Plan of Operation.............................. 13
Item 3. Controls and Procedures........................ 17
PART II Other Information
---------------------------
Item 1. Legal Proceedings.............................. 18
Item 2. Changes in Securities.......................... 18
Item 3. Defaults Upon Senior Securities................ 18
Item 4. Submission of Matters to a Vote of Security
Holders...................................... 18
Item 5. Other Information.............................. 18
Item 6. Exhibits and Reports on Form 8-K............... 19
Signatures................................. 20
Certification of Chief Executive Officer... 21
Certification of Chief Financial Officer... 22
Exhibit Index.............................. 23
PART I
--------
ITEM 1. FINANCIAL STATEMENTS
MERGE TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
2002 2001
------------ ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents............................. $ 3,559,629 $ 1,042,893
Accounts receivable, net of allowance for doubtful
accounts of $80,450 and $170,572 at September 30,
2002, and December 31, 2001, respectively........... 5,366,377 2,669,408
Unbilled accounts receivable.......................... --- 472,912
Inventory............................................. 755,673 542,136
Prepaid expenses...................................... 228,141 93,831
Other current assets.................................. 56,113 30,906
------------ ------------
Total current assets................................... 9,965,933 4,852,086
------------ ------------
Property and equipment:
Computer equipment.................................... 3,548,520 3,321,304
Office equipment...................................... 499,802 416,216
Leasehold improvements................................ 146,855 ---
------------ ------------
4,195,177 3,737,520
Less accumulated depreciation......................... 3,365,451 3,097,923
------------ ------------
Property and equipment, net............................ 829,726 639,597
Long-term receivable................................... 153,735 193,475
Purchased and developed software, net of accumulated
amortization of $5,134,700 and $4,342,779 at
September 30, 2002 and December 31, 2001,
respectively......................................... 5,560,987 3,824,483
Intangibles - customer contract, net of accumulated
amortization of $48,307 at September 30, 2002........ 917,825 ---
Goodwill............................................... 7,351,587 354,999
Other assets........................................... 231,755 190,956
------------ ------------
Total assets........................................... $ 25,011,548 $ 10,055,596
============ ============
MERGE TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
Continued
September 30, December 31,
2002 2001
------------ ------------
(Unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of obligations under capital leases.. $ 11,819 $ 23,384
Accounts payable..................................... 1,293,744 815,177
Accrued wages........................................ 326,398 645,588
Other accrued liabilities............................ 232,990 258,989
Deferred revenue..................................... 1,677,151 480,446
------------ ------------
Total current liabilities............................. 3,542,102 2,223,584
Notes payable......................................... 162,080 152,141
Redemption value related to exchangeable common stock. 1,031,338 1,504,230
Obligations under capital leases, excluding current
portion............................................. --- 7,131
Other liabilities..................................... 16,415 ---
------------ ------------
Total liabilities..................................... 4,751,935 3,887,086
Shareholders' equity:
Preferred stock, $0.01 par value: 4,000,000 shares
authorized; one share issued and outstanding at
September 30, 2002 and December 31, 2001........... --- ---
Series A Preferred stock, $0.01 par value:
1,000,000 shares authorized; zero shares and
637,236 shares issued and outstanding at September
30, 2002 and December 31, 2001, respectively....... --- 6,372
Series 2 Special Voting Preferred stock, no par value:
one share authorized; one share and zero shares
issued and outstanding at September 30, 2002 and
December 31, 2002, respectively.................... --- ---
Common stock, $0.01 par value: 30,000,000 shares
authorized; 9,344,384 shares and 7,019,493 shares
issued and outstanding at September 30, 2002 and
December 31, 2001, respectively.................... 93,444 70,195
Common stock subscribed: 5,659 shares and 22,173
shares at September 30, 2002 and December 31, 2001,
respectively....................................... 19,866 17,082
Additional paid-in capital........................... 27,901,500 16,182,483
Common stock subscription receivable................. (35,000) (35,000)
Accumulated deficit.................................. (7,573,769) (9,924,055)
Accumulated other comprehensive loss - cumulative
translation adjustment............................. (146,428) (148,567)
------------ ------------
Total shareholders' equity............................ 20,259,613 6,168,510
------------ ------------
Total liabilities and shareholders' equity............ $ 25,011,548 $ 10,055,596
============ ============
See accompanying notes to consolidated financial statements.
MERGE TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- ---------------------------
2002 2001 2002 2001
--------------------------- ---------------------------
Net sales............................ $ 5,321,765 $ 4,036,459 $14,039,563 $11,143,540
Cost of sales........................ 2,079,346 1,576,576 5,513,165 4,586,274
----------- ----------- ----------- -----------
Gross profit......................... 3,242,419 2,459,883 8,526,398 6,557,266
----------- ----------- ----------- -----------
Operating costs and expenses:
Sales and marketing................. 1,042,813 726,202 2,791,654 2,137,615
Product research and development.... 450,690 498,770 1,164,329 1,469,435
General and administrative.......... 543,775 563,340 1,692,579 1,748,654
Depreciation and amortization....... 144,699 187,472 376,637 575,845
Acquired in-process research and
development........................ --- --- 148,050 ---
Restructuring and related items..... --- --- --- 35,825
----------- ----------- ----------- -----------
Total operating costs and expenses... 2,181,977 1,975,784 6,173,249 5,967,374
----------- ----------- ----------- -----------
Operating income..................... 1,060,442 484,099 2,353,149 589,892
----------- ----------- ----------- -----------
Other income (expense):
Interest expense.................... (5,573) (28,276) (17,344) (103,332)
Interest income..................... 16,328 24,308 32,235 36,422
Other, net.......................... (13,119) (22,201) 28,525 106,890
----------- ----------- ----------- -----------
Total other income (expense)......... (2,364) (26,169) 43,416 39,980
----------- ----------- ----------- -----------
Income before income taxes........... 1,058,078 457,930 2,396,565 629,872
----------- ----------- ----------- -----------
Income taxes......................... 11,910 20,553 46,278 41,372
----------- ----------- ----------- -----------
Net income........................... 1,046,168 437,377 2,350,287 588,500
=========== =========== =========== ===========
Net income per share - basic......... $ 0.10 $ 0.06 $ 0.26 $ 0.07
=========== =========== =========== ===========
Weighted average number of common
shares outstanding - basic........ 10,131,406 6,126,811 8,330,855 6,015,610
=========== =========== =========== ===========
Net income per share - diluted....... $ 0.09 $ 0.05 $ 0.22 $ 0.07
=========== =========== =========== ===========
Weighted average number of common
shares outstanding - diluted....... 10,977,879 7,116,509 10,146,516 6,787,759
=========== =========== =========== ===========
See accompanying notes to consolidated financial statements.
MERGE TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
September 30,
---------------------------
2002 2001
---------------------------
Cash flows from operating activities:
Net income................................................. $ 2,350,287 $ 588,500
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization........................... 1,290,012 1,269,902
Acquired in-process research and development write-off.. 148,050 ---
Amortization of discount on note acquired in merger..... 9,561 8,969
Provision for doubtful accounts receivable, net of
write-offs............................................ (90,123) 65,995
Issuance of stock for services rendered................. 44,304 32,500
Issuance of warrants for financing transactions......... --- 9,879
Change in assets and liabilities:
Accounts receivable................................... (1,870,714) (1,043,780)
Inventory............................................. (213,538) 450,536
Prepaid and other expenses............................ (132,924) (140,734)
Accounts payable...................................... 524,234 (839,394)
Accrued wages......................................... (396,238) 157,791
Other accrued expenses................................ (8,409) 13,176
Deferred revenue...................................... 806,252 345,057
Other................................................. (13,866) 331,066
----------- ----------
Net cash provided by operating activities................... 2,446,888 1,249,463
----------- ----------
Cash flows from investing activities:
Acquisitions of businesses, net of cash acquired........... (200,416) ---
Purchases of property and equipment........................ (465,981) (51,782)
Development of software.................................... (1,328,922) (938,531)
----------- ----------
Net cash used in investing activities....................... (1,995,319) (990,313)
----------- ----------
Cash flows from financing activities:
Proceeds from sale of Series A Preferred Stock............. --- 9,000
Proceeds from exercise of stock options.................... 913,958 2,575
Proceeds from sale of common stock......................... --- 9,015
Proceeds from exercise of warrants......................... 1,117,662 ---
Proceeds from employee stock purchase plan................. 60,002 53,300
Principal payments under capital leases.................... (18,710) (19,475)
----------- ----------
Net cash provided by financing activities................... 2,072,912 54,415
----------- ----------
Effect of exchange rate changes on cash..................... (7,745) (61,722)
Net increase in cash........................................ 2,516,736 251,843
Cash beginning of period.................................... 1,042,893 811,910
----------- -----------
Cash end of period.......................................... $ 3,559,629 $ 1,063,753
=========== ===========
Supplemental Disclosures of Cash Flow Information:
Cash paid for interest..................................... $ 8,981 $ 27,875
Cash paid for income taxes................................. $ 54,738 $ 52,268
Non-cash Financing and Investing Activities:
Accretion of redemption value related to exchangeable
common stock............................................. $ 76,810 $ 105,210
Common stock issued for acquisitions....................... $ 791,585 $ ---
Payment of preferred stock dividends through issuance of
common stock............................................. $ 31,527 $ ---
See accompanying notes to consolidated financial statements.
MERGE TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
2002 2001 2002 2001
----------- ---------- ----------- ----------
Net income........................... $ 1,046,168 $ 437,377 $ 2,350,287 $ 588,500
Other comprehensive income (loss) -
cumulative translation adjustment.. (29,141) 40,231 2,139 (61,722)
----------- ---------- ----------- ----------
Comprehensive income................. $ 1,017,027 $ 477,608 $ 2,352,426 $ 526,778
=========== ========== =========== ==========
See accompanying notes to consolidated financial statements.
MERGE TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared pursuant to the rules and regulations for reporting on Form 10-QSB.
Accordingly, certain information and footnotes required by accounting
principles generally accepted in the United States of America for complete
financial statements are not included herein. The interim statements should
be read in conjunction with the financial statements and notes thereto
included in the Company's latest Annual Report on Form 10-KSB, as amended.
The accompanying unaudited consolidated financial statements of the Company
reflect all adjustments of a normal recurring nature, which are, in the opinion
of management, necessary to present a fair statement of its financial position
and results of operations.
The Company uses the U.S. dollar for financial reporting purposes. 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. 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.
On January 1, 2002, the Company changed the functional currency for the
sales office in Nuenen, The Netherlands to the United States Dollar from the
Dutch Guilder, as the majority of sales to customers are transacted in United
States Dollars. The functional currency for the Company's operations in Japan
and Canada remain the Yen and Canadian dollar, respectively.
As a result of the eFilm Medical acquisition on June 28, 2002, the Company
has presented costs associated with service revenues as a component of cost of
sales. Where appropriate, certain items relating to the prior years have been
reclassified to conform to the presentation in the current year.
(2) REVENUE RECOGNITION
For software arrangements, the Company recognizes revenue according to the
American Institute of Certified Public Accountants Statement of Position 97-2,
Software Revenue Recognition and related amendments and Statement of Position
81-1, Accounting for Performance on Construction-Type and Certain
Production-Type Contracts. Revenue from the sale of computer hardware and
software licenses sold through indirect channels and directly to healthcare
institutions 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 sales of picture archiving communication system ("PACS")
solutions sold directly to healthcare institutions where services are essential
to the functionality of the solution sold is recognized on a percentage-of-
completion method. Percentage-of-completion is determined by the output method
based upon the achievement of delivery milestones. Revenue from software usage
licensing, software maintenance and service contracts is deferred and recognized
ratably over the contract period, which is generally one year. Revenue from
installation services is recognized upon the completion of installation.
The Company enters into multiple element software arrangements that may
include computer software, services and post-contract customer support ("PCS").
Vendor specific objective evidence ("VSOE") of fair value of each of the
elements is established by using the price charged when the each of the elements
is sold separately.
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.
MERGE TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(3) PURCHASED AND DEVELOPED SOFTWARE
All research and development costs incurred prior to the point at which
management determines 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 Statement of
Financial Accounting Standards (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 three to
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.
(4) GOODWILL
Effective January 1, 2002, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets. 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:
September 30, 2002 December 31, 2001
----------------------------- -----------------------------
Weighted
Average Gross Gross
Amortization Carrying Accumulated Carrying Accumulated
Period (Yrs) Amount Amortization Amount Amortization
----------- --------- ------------ ---------- ------------
Purchased Software 4.3 1,418,000 (153,000) 140,000 (63,000)
Customer Contracts 3 966,000 (48,000) --- ---
----------- --------- ------------ ---------- ------------
Total 4.5 2,384,000 (201,000) 140,000 (63,000)
========= ============ ========== ============
MERGE TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Aggregate amortization expense for the three months and nine months ended
September 30, 2002 was $124,000 and $138,000, respectively. Estimated aggregate
amortization expense for each of the next five years is as follows:
For the year ended: 2002 $ 260,000
2003 $ 488,000
2004 $ 481,000
2005 $ 444,000
2006 $ 432,000
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 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. SFAS 142 also
requires that intangible assets with estimable useful lives be reviewed for
impairment in accordance with SFAS 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. Adoption of SFAS 144 has not had a material
impact on the consolidated financial position or results of operations of the
Company.
The changes in the carrying amount of goodwill for the nine months ended
September 30, 2002 are as follows:
Balance as of January 1, 2002 $ 354,999
Goodwill acquired in Aurora acquisition 747,504
Goodwill acquired in eFilm acquisition 6,249,084
-----------
Balance as of September 30, 2002 $ 7,351,587
===========
The following table shows the impact on the Company's financial statements
as if SFAS 142 were adopted on January 1, 2001:
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
2002 2001 2002 2001
----------- ---------- ----------- ----------
Reported net income.................. $ 1,046,168 $ 437,377 $ 2,350,287 $ 588,500
Goodwill amortization................ --- 19,125 --- 57,375
----------- ---------- ----------- ----------
Adjusted net income.................. 1,046,168 456,502 1,304,120 645,875
Reported net income per share - basic $ 0.10 $ 0.06 $ 0.26 $ 0.07
Goodwill amortization................ --- --- --- 0.01
----------- ---------- ----------- ----------
Adjusted net income per share - basic $ 0.10 $ 0.06 $ 0.26 $ 0.08
Reported net income per share -
diluted............................ $ 0.09 $ 0.05 $ 0.22 $ 0.07
Goodwill amortization................ --- --- --- 0.01
----------- ---------- ----------- ----------
Adjusted net income per share -
diluted............................ $ 0.09 $ 0.05 $ 0.22 $ 0.08
MERGE TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(5) NET INCOME PER SHARE
Basic earnings per share is computed by dividing income available to common
shareholders by the weighted average 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. Diluted earnings per
share reflects the potential dilution that could occur based on the effect of
the conversion of outstanding 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 three and nine months ended September 30, 2002 and
September 30, 2001.
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
2002 2001 2002 2001
----------- ---------- ----------- ----------
Numerator:
-----------
Net income..............................$ 1,046,168 $ 437,377 $ 2,350,287 $ 588,500
Preferred stock dividends............... --- (11,070) (20,471) (33,165)
Accretion of redemption value related
to Interpra exchangeable common stock.. (22,473) (35,070) (76,810) (105,210)
Allocation of income to Interpra
exchangeable shares.................... (26,525) (24,085) (83,102) (28,657)
----------- ---------- ----------- ----------
Numerator for basic income per share....$ 997,170 $ 367,152 $ 2,169,904 $ 421,468
----------- ---------- ----------- ----------
Adjustment for effect of assumed
conversion of preferred stock.......... --- 11,070 20,471 33,165
----------- ---------- ----------- ----------
Numerator of diluted income per share...$ 997,170 $ 378,222 $ 2,190,375 $ 454,633
----------- ---------- ----------- ----------
Denominator:
------------
Weighted average common shares
outstanding............................ 9,136,623 6,126,811 7,984,628 6,015,610
Assumed conversion of exchangeable
shares................................. 994,783 --- 346,227 ---
----------- ---------- ----------- ----------
Denominator for basic income per share.. 10,131,406 6,126,811 8,330,855 6,015,610
Effect of convertible preferred shares.. --- 637,236 395,368 633,181
Effect of employee and director stock
options................................ 760,150 204,218 1,019,635 70,700
Effect of warrants...................... 85,323 148,244 400,658 68,268
----------- ---------- ----------- ----------
Denominator for diluted income per share 10,977,879 7,116,509 10,146,516 6,787,759
----------- ---------- ----------- ----------
Basic income per share..................$ 0.10 $ 0.06 $ 0.26 $ 0.07
Diluted income per share................$ 0.09 $ 0.05 $ 0.22 $ 0.07
For the three months and nine months ended September 30, 2002, 686,963 and
497,598 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.
For the three months and nine months ended September 30, 2001, 843,817 and
1,665,163 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.
MERGE TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(6) EMPLOYEE STOCK OPTIONS
During the three months ended September 30, 2002, 255,338 options in the
Company's 1996 Stock Option Plan for Employees were exercised for proceeds of
$220,547. At September 30, 2002, 1,488,601 employee stock options were
outstanding, 68,415 of which will expire in 2002. Subsequent to September 30,
2002, 61,304 of the 68,415 options have been exercised through the date of this
filing.
(7) ACQUISITIONS
During May 2002, Merge acquired certain assets of Aurora Technologies Inc.
("Aurora"), pursuant to an Asset Acquisition Agreement dated April 18, 2002. On
June 28, 2002, Merge acquired all the outstanding capital stock of eFilm
Medical, Inc. ("eFilm") pursuant to a Stock Acquisition Agreement dated April
15, 2002.
The Company acquired tangible assets along with technology rights,
contracts and in-process research and development. The Company paid a premium
over the fair value of net assets acquired due to its expectation that the
combined enterprise will have the ability to offer customers a more
comprehensive product suite and may attain greater shareholder value in the
future than the entities would have achieved if operated on a stand-alone
basis.
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 September 30, 2002. The
results of operations from the closing date of acquisitions through September
30, 2002 are included in the accompanying consolidated statement of operations
for the three and nine months ended September 30, 2002. 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 Merge common stock 792,000 ---
1,000,000 Merge exchangeable shares --- 7,737,000
Vested stock options --- 437,000
Transaction costs 29,000 153,000
----------- -----------
TOTAL: $ 921,000 $ 8,327,000
=========== ===========
The fair value of shares issued to Aurora Technology, Inc. was determined
to be $8.43 per share or equal to the closing price of Merge 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
Merge common stock after signing the definitive agreement.
Each holder of Merge 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 positions. At June
28, 2007, any remaining shares will be automatically be converted to common
stock of the Company.
MERGE TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Each exchangeable share is entitled to vote together with Merge common
shares on matters relating to Merge Technologies Incorporated and include
dividend rights equivalent to Merge common shares. Merge established an escrow
holdback of 116,590 exchangeable shares for 18 months, for indemnification with
respect to certain potential claims.
Merge established an escrow holdback of 18,780 shares related to the Aurora
transaction for 12 months, for indemnification with respect to certain potential
claims.
The total purchase considerations of approximately $921,000 and $8,327,000
was allocated to the fair value of the net assets acquired as follows
(in thousands):
Aurora eFilm
---------------------------
Current assets $ 59,000 $ 394,000
Other assets 29,000 45,000
Purchased and developed technologies 85,000 1,193,000
Purchased contracts --- 966,000
Goodwill 748,000 6,249,000
In-process research and development --- 148,000
Liabilities assumed --- (668,000)
---------- -----------
Total consideration: $ 921,000 $ 8,327,000
Additionally, in the Aurora acquisition, the Company assumed an operating
lease obligation for office space located in the Chicago metropolitan area.
Aggregate minimum lease payment assumed amount 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 three and nine months ended September 30,
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.
Three months ended Nine Months ended
September 30, September 30,
------------------------ -------------------------
2002 2001 2002 2001
------------------------ -------------------------
(in thousands, except per share amounts)
Revenue............... $ 5,322 $ 4,604 $ 15,601 $ 12,701
Net income............ 1,046 154 2,077 (185)
Earnings per share:
Basic............... $ 0.10 $ 0.01 $ 0.20 $ (0.05)
Diluted............. $ 0.09 $ 0.01 $ 0.17 $ (0.05)
(8) CONVERSION OF PREFEERED STOCK
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 of the
Company in second quarter of 2002.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Special Note on Forward-Looking Statements
------------------------------------------
Certain statements in this report that are not historical facts constitute
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as
amended (the Securities Act) and Section 21E of the Securities Exchange Act of
1934, as amended (the Exchange Act). Discussions containing such
forward-looking statements may be included herein in the material set forth
under "Management's Discussion and Analysis or Plan of Operation" as well as
within this report generally. In addition, when used in this report, the words
believes, intends, anticipates, expects and similar expressions are intended to
identify forward-looking statements. These statements are subject to a number
of risks and uncertainties, including, among others, the Company's lack of
consistent profitability, history of operating losses, fluctuations in operating
results, credit and payment risks associated with end-user sales, involvement
with rapidly developing technology in highly competitive markets, significant
investment in new product development, dependence on major customers, expansion
of its international sales effort, broad discretion of management and dependence
on key personnel, risks associated with product liability and product defects,
costs of complying with government regulation, changes in external competitive
market factors which might impact trends in the Company's results of
operations, acquisition closing contingencies, integration of acquisitions,
unanticipated working capital and other cash requirements, general changes in
the industries in which the Company competes, and various other competitive
factors that may prevent the Company from competing successfully in the
marketplace. Actual results could differ materially from those projected in
the forward-looking statements. The Company undertakes no obligation to
publicly release the result of any revisions to these forward-looking
statements that may be made to reflect any future events or circumstances.
OVERVIEW
--------
Merge Technologies Incorporated ("Merge") is in the business of integrating
radiology images and information into healthcare enterprise networks. Merge
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 to facilities of all sizes, but specifically
targets small to medium size healthcare facilities, multi-hospital groups,
clinics and diagnostic imaging centers by working with its customers to offer
unique, phased, cost effective solutions to solve their image and information
management and radiology workflow needs.
The Company was founded in 1987. It has historically been viewed as a
leading provider of medical diagnostic imaging and information connectivity
technologies and consulting solutions for original equipment manufacturers
("OEMs"), value added resellers ("VARs") and healthcare facilities worldwide.
Today, Merge believes that it is at the forefront of integrated radiology
workflow research and development bringing modular software applications to
the marketplace that will enable the seamless integration of images,
information, technology and people across the electronic healthcare enterprise.
The Company believes that its second quarter acquisitions of eFilm Medical, Inc.
and Aurora Technology, Inc. positions it as a global provider of integrated
image and information workflow solutions.
Radiology departments and diagnostic imaging centers and their customers
benefit from the Company's solutions in a variety of ways including: (i)
networking of multiple image-producing and image-using devices to eliminate
duplication and reduce the need for capital equipment expenditures to build
digital image and information networks; (ii) creating permanent electronic
archives of diagnostic-quality images enable the retrieval of these images
and reports at any time in the future; (iii) accessing the Company's modular
architecture of products that allow radiology departments, clinics and
diagnostic imaging centers to build their electronic image and information
management systems in a phased, flexible and cost-effective way; (iv)
delivering the capability to integrate diagnostic radiology images into the
radiologist's report to make it a permanent part of the patient's electronic
medical record; and (v) providing the means to view images and reports from
any number of remote locations.
RESULTS OF OPERATIONS
---------------------
Three Months Ended September 30, 2002 Compared to Three Months
Ended September 30, 2001
Net sales. Net sales increased $1,285,000 or 32%, in the three months
ended September 30, 2002 to $5,322,000 from $4,037,000 in the three months
ended September 30, 2001. In the three months ended September 30, 2002, net
sales of products and software made directly to healthcare facilities increased
$847,000 or 117% to $1,569,000 from $722,000 in the third quarter of 2001.
Increasing sales made directly to healthcare facilities has been a focus of the
Company. The Company has been adding additional employees to support this
growth and expects to continue hiring staff to support further growth. Net
sales to OEM/VARs and dealers decreased $17,000 or 1% in the three months ended
September 30, 2002 to $2,635,000 from $2,652,000 in the third quarter of 2001.
Net sales of professional services increased $456,000 or 69% to $1,118,000 in
the three months ended September 30, 2002 from $662,000 in the third quarter of
2001. The increase in sales is attributable to additional products and services
sold directly to healthcare institutions and the company's acquisition of eFilm
at the end of the second quarter. Net sales of products sold through our
service group include upgrades, hardware replacement and service parts.
Cost of sales. Cost of sales consists of purchased components, service
labor and operating costs, amortization of purchased and developed software and
amortization of customer contracts. The cost of purchased components
decreased as a percentage of net sales to 23% in the three months ended
September 30, 2002 from 27% in the three months ended September 30, 2001. The
decrease is the result of the Company's shift to selling higher margin products
and services. Service labor and operating costs increased to $459,000 in the
three months ended September 30, 2002 from $302,096 in the three months ended
September 30, 2001. The increase is due to the Company's acquisition of eFilm
and additional service department staff. Amortization of purchased and
developed software increased to $386,000 or 7% of net sales in the three
months ended September 30, 2002 from $202,000 or 5% of net sales in the
comparable period in 2001. The increase is due to the commencement of
amortization on software available for general release and the amortization
of the intellectual property and customer contracts acquired in the
acquisition of eFilm.
As a result of the eFilm Medical acquisition on June 28, 2002, the Company
has presented costs associated with service revenues as a component of cost of
sales.
Gross profit. Gross profit increased 32% or $782,000 to $3,242,000 in the
three months ended September 30, 2002 from $2,460,000 in the three months ended
September 30, 2001. The increase in gross profit is the result of a number
of initiatives implemented, including increases in sales made directly to
healthcare institutions and the eFilm acquisition. As a percentage of net
sales, gross profit was 61% in the both the three months ended September 30,
2002 and the three months ended September 30, 2001.
Sales and marketing. Sales and marketing expense increased $317,000 in the
three months ended September 30, 2002 to $1,043,000 from $726,000 in the three
months ended September 30, 2001. The increase is the result of the Company's
objective to invest in sales and marketing activities and staff count in order
to grow net sales. The Company expects to incur additional operating expenses
in the fourth quarter resulting from the radiologists trade show held annually
in the fourth quarter, and marketing activities associated with this annual
event.
Product research and development. Product research and development expense
decreased $48,000 in the three months ended September 30, 2002 to $451,000 from
$499,000 in the three months ended September 30, 2001. Capitalization of
software development increased $91,000 to $445,000 in the three months ended
September 30, 2002 from $354,000 in the three months ended September 30, 2001.
The increase in capitalized software development is a direct result of focusing
engineering resources on modular product development designed to accelerate the
development cycle and release of new product for revenue generation.
General and administrative. General and administrative expense decreased
$19,000 in the three months ended September 30, 2002 to $544,000 from $563,000
in the three months ended September 30, 2001. General and administrative
expense includes costs for information systems, accounting, administrative
support, management personnel and general corporate matters.
Depreciation and amortization. Depreciation and amortization expense
decreased $42,000 in the three months ended September 30, 2002 to $145,000
from $187,000 in the three months ended September 30, 2001. The decrease was
due primarily to certain assets becoming fully depreciated. Depreciation and
amortization is assessed on capital equipment and intangible assets with
estimable useful lives.
Total other income (expense). Total other income (expense) was an expense
of $2,000 in the three months ended September 30, 2002 compared to expense of
$26,000 in the three months ended September 30, 2001. The increase is
principally due to reduced interest expense.
Income taxes. The Company recognized income tax expense of $12,000 in the
three months ended September 30, 2002 and $21,000 in the three months ended
September 30, 2001, due primarily to Japanese income tax withholding on
software royalties. The Company's low effective tax rate is due to the
utilization of net operating loss carry forwards.
Nine Months Ended September 30, 2002 Compared to Nine Months Ended September
30, 2001
Net sales. Net sales increased $2,896,000, or 26%, in the nine months
ended September 30, 2002 to $14,040,000 from $11,144,000 in the nine months
ended September 30, 2001. In the nine months ended September 30, 2002, net
sales of products and software made directly to healthcare facilities increased
$2,348,000 or 130% to $4,159,000 from $1,811,000 in the nine months ended
September 30, 2001. Increasing sales made directly to healthcare facilities has
been, and will continue to be a focus of the Company. The Company has been
adding additional employees to support this growth and expects to continue
hiring staff to support further growth. Net sales to OEM/VARs and dealers
decreased $188,000 or 2% in the nine months ended September 30, 2002 to
$7,427,000 from $7,615,000 in the nine months ended September 30, 2001. Net
sales of professional services increased $737,000 or 43% to $2,454,000 in the
nine months ended September 30, 2002 from $1,717,000 in the nine months ended
September 30, 2001. The increase in sales is attributable to additional
products and services sold directly to healthcare institutions and the
company's acquisition of eFilm at the end of the second quarter. Net sales
of products sold through our service group include upgrades, hardware
replacement and service parts.
Cost of sales. Cost of sales consists of purchased components, service
labor and operating costs, amortization of purchased and developed software
and amortization of customer contracts. The cost of purchased components
decreased as a percent of net sales to 24% for the nine months ended
September 30, 2002 from 28% in the nine months ended September 30, 2001.
The decrease is the result of the Company's shift to selling higher margin
products and services. Service labor and operating costs increased to
$1,167,559 in the nine months ended September 30, 2002 from $898,646 in the
nine months ended September 30, 2001. The increase is due to the Company's
acquisition of eFilm and additional service department staff. Amortization
of purchased and developed software increased to $913,000 or 7% of net sales
in the nine months ended September 30, 2002 from $569,000 or 5% of net sales
in the comparable period in 2001. The increase is due to the commencement of
amortization on software available for general release and the amortization
of the intellectual property and customer contracts acquired in the
acquisition of eFilm.
As a result of the eFilm Medical acquisition on June 28, 2002, the Company
has presented costs associated with service revenues as a component of cost of
sales.
Gross profit. Gross profit increased to $8,526,000 in the nine months
ended September 30, 2002 from $6,557,000 in the nine months ended September
30, 2001. As a percentage of net sales, gross profit increased to 61% in the
nine months ended September 30, 2002 from 59% in the nine months ended
September 30, 2001. The increase in gross profit is the result of a number
of initiatives implemented to improve gross profit, including increases in
sales made directly to healthcare institutions, the eFilm acquisition,
reductions in component costs and a gradual shift in product mix to higher
margin software applications.
Sales and marketing. Sales and marketing expense increased $654,000 in
the nine months ended September 30, 2002 to $2,792,000 from $2,138,000 in the
nine months ended September 30, 2002 due primarily to implementing new
marketing activities and staff additions to help achieve sales goals.
Product research and development. Product research and development
expense decreased $305,000 in the nine months ended September 30, 2002 to
$1,164,000 from $1,469,000 in the nine months ended September 30, 2001.
In addition, the Company increased its capitalized software development
costs $391,000 in the nine months ended September 30, 2002 to $1,329,000
from $939,000 in the nine months ended September 30, 2001. The increase
in capitalized software development is a direct result of focusing
engineering resources on modular product development designed to accelerate
the development cycle and release of new product for revenue generation.
General and administrative. General and administrative expense decreased
$56,000 in the nine months ended September 30, 2002 to $1,693,000 from
$1,749,000 in the nine months ended September 30, 2001.
Depreciation and amortization. Depreciation and amortization expense
decreased $199,000 in the nine months ended September 30, 2002 to $377,000
from $576,000 in the nine months ended September 30, 2001. The decrease was
due primarily to certain assets becoming fully depreciated. Depreciation and
amortization is assessed on capital equipment and intangible assets with
estimable useful lives.
Total other income (expense). Total other income (expense) was income of
$43,000 in the nine months ended September 30, 2002 compared to income of
$40,000 in the nine months ended September 30, 2001. The increase is due to a
reduction in interest expense. The increase is principally due to reduced
interest expense.
Income taxes. The Company recognized income tax expense of $46,000 in the
nine months ended September 30, 2002 and of $41,000 in the nine months ended
September 30, 2001, due primarily to Japanese income tax withholding on
software royalties. The Company's low effective tax rate is due to the
utilization of net operating loss carry forwards.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
Operating cash flows. Cash provided by operating activities was
$2,447,000 in the nine months ended September 30, 2002. The Company's positive
operating cash flow in the nine months ended September 30, 2002 was due
primarily to its net income of $2,350,000, depreciation and amortization
expense of $1,290,000, an $806,000 increase in deferred revenue and was
partially offset by an increase of $1,871,000 in accounts receivable. Accounts
payable increased due to timing of purchases to fulfill orders. During the
nine months ended September 30, 2002 accrued wages decreased $396,000 as the
Company paid the 2001 bonuses to employees.
Investing cash flows. Cash used in investing activities was $1,995,000
in the nine months ended September 30, 2002 due to cash outflows for capitalized
software development costs, purchases of property and equipment, leasehold
improvements, and cash paid for acquisitions.
Financing cash flows. Cash provided by financing activities was $2,073,000
in the nine months ended September 30, 2002. The Company received proceeds of
$914,000 from employee and director stock option exercises and $60,000 from
purchases of common shares under its employee stock purchase plan. The Company
received net proceeds of $1,118,000 in cash as a result of the exercise of
722,943 warrants in the quarter ended June 30, 2002.
The Company also converted all outstanding shares of Series A Preferred
stock on a one-for-one basis into common stock of the Company upon registering
the underlying shares of common stock and achieving a 30 consecutive-day period
in which the closing bid price of its common stock was $4.00 per share or
greater.
The Company has a recorded a liability of $1,031,000 for the redemption
value related to 269,000 shares of outstanding exchangeable common stock, which
may be exercised for a price of $4.50 per share during the period from August
31, 2004 until September 30, 2004. The Company is accreting the redemption
value to the aggregate redemption value of $1,211,000.
At September 30, 2002, cash and cash equivalents were $3,560,000 compared
to $1,043,000 at December 31, 2001. The Company has a $3,000,000 revolving
credit line that expires on April 15, 2003. Amounts available under the credit
line are subject to certain advance ratios on accounts receivable and inventory
that may limit the amount available to the Company. At September 30, 2002, the
Company had $3,000,000 available, of which no amounts were drawn.
The following table summarizes out contractual obligations at September 30,
2002, and the effect such obligations are expected to have on our liquidity
and cash in future periods:
Contractual Obligations
---------------------------------------------------
Remainder of
Total 2002 2003 - 2004 2005 +
---------------------------------------------------
Notes payable....................... $ 189,000 $ --- $ 189,000 $ ---
Capital lease obligations........... 12,000 5,000 7,000 ---
Operating leases obligations........ 1,690,000 102,000 818,000 770,000
Redemption values related to
exchangeable common stock (1)..... 1,211,000 --- 1,211,000 ---
----------- ----------- ----------- -----------
Total contractual cash obligations.. $ 3,102,000 $ 107,000 $ 2,225,000 $ 770,000
==+======== =========== =========== ===========
(1) Holders of Interpra exchangeable shares can require the Company to repurchase the
exchangeable share or convert them into common stock of the Company.
The Company believes that existing cash, together with the availability
under its working capital line of credit and future cash flows from operations,
will be sufficient to execute the business of the Company for the next twelve
months. However, any projections of future cash inflows and outflows are
subject to uncertainty. It may be necessary to raise additional capital to
meet the Company's business objectives or its long-term liquidity needs. If
it is determined that additional capital is needed, funds will be raised by
selling additional equity or raising debt from third party sources. The
sale of additional equity or convertible debt securities could result in
dilution to current stockholders. In addition, debt financing, if available,
could involve restrictive covenants, which could adversely affect operations.
There can be no assurance that any of these financing alternatives, including
raising additional capital, will be available in amounts or on terms
acceptable to the Company.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
-----------------------------------------
The Financial Accounting Standards Board (FASB) has issued Statement No.
146, Accounting for Costs Associated with Exit or Disposal Activities. This
standard requires companies to recognize costs associated with exit or disposal
activities when they are incurred rather than at the date of a commitment to
an exit or disposal plan. Example of costs covered by the standard include
lease termination costs and certain employee severance costs that are
associated with restructuring, discontinued operation, plant closing, or
other exit or disposal activity. This standard will applied prospectively to
exit or disposal activities initiated after December 31, 2002. Adoption of the
standard will not have a material impact on the historical consolidated results
of operations or financial position of the Company.
Item 3. CONTROLS & PROCEDURES
Our Chief Executive Officer and Chief Financial Officer have concluded,
based on their evaluation as of a date within 90 days prior to the filing date
of this report, that our disclosure controls and procedures are effective for
gathering, analyzing and disclosing the information we are required to disclose
in our reports filed under the Securities Exchange Act of 1934. There have
been no significant changes in our internal controls or in other factors that
could significantly affect these controls subsequent to the date of the
previously mentioned evaluation.
PART II
-----------
Item 1. LEGAL PROCEEDINGS
None.
Item 2. CHANGES IN SECURITIES
In the nine months ended September 30, 2002, the Company sold shares of
its common stock in transactions not registered under the Securities Act of
1933, as amended (the "Securities Act") as follows.
In January 2002, warrants to purchase 13,600 shares of common stock were
exercised. The common stock associated with the warrants was registered for
resale on Form S-3 effective April 17, 2002.
In January 2002, the Company issued 2,128 shares of non-registered common
stock, with a value of $11,066, to four individuals as payment for dividends on
Series A Preferred Stock.
In January 2002, the Company issued 2,526 shares of non-registered common
stock with a value of $8,495 to Directors as consideration for meeting fees.
In April 2002, the Company issued 1,484 shares of non-registered common
stock with a value of $6,494 to Directors as consideration for meeting fees.
In May 2002, the Company issued 93,901 shares of non-registered common
stock as part of the purchase price for the Asset Purchase Agreement between
Signal Stream, Inc. (a wholly owned subsidiary) and Aurora Technology, Inc.
In May and June of 2002, the Company issued 637,236 shares of
non-registered common stock for the conversion of Series A Preferred Stock.
The common stock associated with the convertible shares was registered for
resale on Form S-3 effective April 17, 2002.
In May and June of 2002, warrants to purchase 709,343 shares of
common stock were exercised. The common stock associated with the warrants
was registered for resale on Form S-3 effective April 17, 2002.
In July 2002, the Company issued 2,066 shares of non-registered common
stock with a value of $15,004 to Directors as consideration for meeting fees.
In July 2002, the Company issued 2,846 shares of non-registered common
stock, with a value of $20,462, to four individuals as payment for dividends
on Series A Preferred Stock.
In August and September of 2002, the Company issued 1,910 shares of
non-registered common stock with a value of $14,302 to Directors as
consideration for services.
The Company believes that the issuance of all shares of stock and warrants
issued in the above transactions are exempt from registration under the
Securities Act pursuant to Section 4(2) and Regulation D thereunder. The
Company did not use the services of any broker-dealers in the above
transactions.
Item 3. DEFAULTS UPON SENIOR SECURITIES
None.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECRUITY HOLDERS
None.
Item 5. OTHER INFORMATION
None.
Item 6. EXHIBITS AND REPORTS ON FORM FORM 8-K
(a) Exhibits
See Exhibit Index
(b) Form 8-K
On July 8, 2002, Merge filed a Form 8-K to report the acquisition of the
eFilm Medical, Inc., a Canadian corporation, through Merge's wholly owned
subsidiary, Merge Technologies Holdings Co. Attached to the filed Form 8-K
as Exhibit 10.1 is a copy of the Reorganization Agreement by and among Merge,
Merge Technologies Holdings Co. and eFilm Medical, Inc. dated April 15, 2002.
On July 30, 2002 and August 12, 2002, the Company filed amendments to
Form 8-K, filed on May 30, 2002, to include historical financial statements
of Aurora Technology, Inc. and proforma financial statements reflecting the
acquisition of Aurora Technology, Inc.
On August 13, 2002, the Company filed an amendment to the Form 8-K, filed
on July 8, 2002 to include the historical financial statements of eFilm
Medical, Inc. and proforma financial statements reflecting the acquisition of
eFilm Medical, Inc.
SIGNATURES
------------
In accordance with the requirements of the Securities Exchange Act of 1934,
the Registrant caused this Report to be signed on its behalf by the undersigned,
thereunto duly authorized.
MERGE TECHNOLOGIES INCORPORATED
Date: November 19, 2002 By: /s/ Richard A. Linden
-------------------------------------
Richard A. Linden
President and Chief Executive Officer
Date: November 19, 2002 By: /s/ Scott T. Veech
-------------------------------------
Scott T. Veech
Chief Financial Officer, Treasurer
and Secretary
(Principal Financial Officer and
Principal Accounting Officer)
CERTIFICATION
Pursuant to Section 302 of the Sarbanes Oxley Act of 2002
I, Richard A. Linden, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Merge
Technologies Incorporated;
2. Based on my knowledge, this quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly 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 we 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 quarterly 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 quarterly report (the "Evaluation Date"); and
c) presented in this quarterly 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 our 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 quarterly
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: November 19, 2002
/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 quarterly report on Form 10-QSB of Merge
Technologies Incorporated;
2. Based on my knowledge, this quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly 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 we 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 quarterly 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 quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly 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 our 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 quarterly
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: November 19, 2002
/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 INDEX
---------------
(a) Exhibit No.
3.1 Articles of Incorporation of Registrant (2), Articles of Amendment as of
June 16, 1998 (3), Articles of Amendment as of September 1, 1999 (6),
Articles of Amendment as of November 29, 2001 (7), and Articles of
Amendment as of June 28, 2002 (8)
3.2 Amended and Restated By-Laws of Registrants as of February 3, 1998 (1)
10.2 Employment Agreement entered into as of September 1, 2001 between
Registrant and Richard A. Linden (6)
10.3 Employment Agreement entered into as of September 1, 2001 between
Registrant and William C. Mortimore (6)
10.5 1996 Stock Option Plan for Employees of Registrant dated May 13,
1996 (2)
10.6 Office Lease for West Allis Center dated May 24, 1996 between Registrant
and Whitnall Summit Company, LLC Supplemental Office Lease dated July 3,
1997 (1), Supplemental Office Space Lease dated January 30, 1999 (2)
and Supplemental Office Space Lease for 1126 Operating Associates
Limited Partnership dated April 11, 2001 (4)
10.8 1998 Stock Option Plan for Directors (1)
10.9 Merge Technologies Incorporated 2001 Employee Stock Purchase Plan (5)
99.1 Certification of CEO and CFO Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
- - - - - - - - - - -
(1) Incorporated by reference to Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1997.
(2) Incorporated by reference to Registration Statement on Form SB-2
(No. 333-39111) effective January 29, 1998.
(3) Incorporated by reference to Quarterly Report on Form 10-QSB for the
three months ended March 31, 1999.
(4) Incorporated by reference to Quarterly Report on Form 10-QSB for the
three months ended March 31, 2001.
(5) Incorporated by reference to Form 14A dated May 9, 2001.
(6) Incorporated by reference to Quarterly Report on Form 10-QSB for the
nine months ended September 30, 2001.
(7) Incorporated by reference to Annual Report on Form 10-KSB for the fiscal
year ended December 31, 2001.
(8) Incorporated by reference to Quarterly Report on Form 10-QSB for the
six months ended June 30, 2002.
EXHIBIT 99.1
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Certification of CEO and CFO Pursuant to
18 U.S.C. Section 1350, as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Quarterly Report on Form 10-QSB of Merge Technologies
Incorporated (the "Company") for the quarterly period ended September 30, 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. 1350, as adopted pursuant to 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.
/s/ Richard A. Linden
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Name: Richard A. Linden
Title: Chief Executive Officer
Date: November 19, 2002
/s/ Scott T. Veech
-------------------------------
Name: Scott T. Veech
Title: Chief Financial Officer
Date: November 19, 2002
This certification accompanies the Report pursuant to 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
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.