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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2004
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 Registrant as specified in its charter.)
Wisconsin 39-1600938
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
1126 South 70th Street, Milwaukee, WI 53214-3151
(Address of principal executive offices)
(414) 977-4000
(Issuer's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). Yes X No
----- -----
As of August 6, 2004, the issuer had 13,008,739 shares of Common Stock
outstanding.
INDEX
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Page
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PART I FINANCIAL INFORMATION
- -------------------------------
Item 1. Consolidated Financial Statements............................ 1
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................... 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk... 22
Item 4. Controls and Procedures...................................... 23
PART II OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings............................................ 23
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases
of Equity Securities......................................... 23
Item 3. Defaults upon Senior Securities.............................. 23
Item 4. Submission of Matters to a Vote of Security Holders.......... 24
Item 5. Other Information............................................ 24
Item 6. Exhibits and Reports on Form 8-K............................. 24
PART I
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
MERGE TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except for share data)
June 30, December 31,
2004 2003
----------- ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents............................................ $ 20,683 $ 16,871
Accounts receivable, net of allowance for doubtful accounts of
$385 and $374 at June 30, 2004 and December 31, 2003,
respectively....................................................... 8,751 8,359
Inventory............................................................ 958 893
Prepaid expenses..................................................... 469 288
Deferred tax asset................................................... 2,850 3,541
Other current assets................................................. 491 156
----------- ------------
Total current assets.................................................. 34,202 30,108
----------- ------------
Property and equipment:
Computer equipment................................................... 4,963 4,819
Office equipment..................................................... 724 718
Leasehold improvements............................................... 345 259
----------- ------------
6,032 5,796
Less accumulated depreciation and amortization....................... 4,502 4,122
----------- ------------
Net property and equipment............................................ 1,530 1,674
Long-term accounts receivable......................................... 87 101
Purchased and developed software, net of accumulated amortization
of $8,344 and $7,314 at June 30, 2004 and December 31, 2003,
respectively........................................................ 9,170 8,420
Intangibles - customer contracts, net of accumulated amortization of
$565 and $371 at June 30, 2004 and December 31, 2003, respectively.. 1,378 1,572
Goodwill.............................................................. 21,714 21,846
Other................................................................. 47 174
----------- ------------
Total assets.......................................................... $ 68,128 $ 63,895
=========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable..................................................... $ 1,042 $ 1,294
Accrued wages........................................................ 817 911
Notes payable........................................................ 221 219
Redemption value related to exchangeable Common Stock................ 5 68
Other accrued liabilities............................................ 1,003 795
Deferred revenue..................................................... 4,585 3,717
Billings in excess of revenues - contracts in progress............... 1,212 1,381
----------- ------------
Total current liabilities............................................. 8,885 8,385
Deferred tax liability............................................... 2,106 1,987
----------- ------------
Total liabilities..................................................... 10,991 10,372
----------- ------------
Shareholders' equity:
Preferred stock, $0.01 par value: 3,999,998 shares authorized; zero
shares issued and outstanding at June 30, 2004 and December 31, 2003 $ ---- $ ----
Series A Preferred Stock, $0.01 par value: 1,000,000 shares
authorized; zero shares issued and outstanding at June 30, 2004 and
December 31, 2003................................................... ---- ----
Special Voting Preferred stock, no par value: one share authorized;
one share issued and outstanding at June 30, 2004 and December 31,
2003................................................................ ---- ----
Series 2 Special Voting Preferred stock, no par value: one share
authorized; one share issued and outstanding at June 30, 2004 and
December 31, 2003................................................... ---- ----
Common Stock, $0.01 par value: 30,000,000 shares authorized;
12,983,143 shares and 12,485,646 shares issued and outstanding at
June 30, 2004 and December 31, 2003, respectively................... 130 125
Common Stock subscribed: 1,196 and 8,058 shares at June 30, 2004
and December 31, 2003, respectively................................. 18 47
Additional paid-in capital........................................... 53,977 53,175
Retained earnings (accumulated deficit).............................. 2,795 (56)
Accumulated other comprehensive income - cumulative translation
adjustment.......................................................... 217 232
----------- ------------
Total shareholders' equity............................................ 57,137 53,523
----------- ------------
Total liabilities and shareholders' equity............................ $ 68,128 $ 63,895
=========== ============
See accompanying notes to consolidated financial statements.
MERGE TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except for share data)
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------- ---------------------------
2004 2003 2004 2003
----------- ----------- ------------ -----------
Net sales............................... $ 8,907 $ 6,434 $ 17,544 $ 12,552
Cost of sales........................... 3,172 1,628 6,391 3,680
----------- ----------- ------------ -----------
Gross profit............................ 5,735 4,806 11,153 8,872
----------- ----------- ------------ -----------
Operating costs and expenses:
Sales and marketing.................... 1,711 1,477 3,405 2,802
Product research and development....... 423 397 905 836
General and administrative............. 1,024 865 1,936 1,587
Depreciation and amortization.......... 196 117 385 223
----------- ----------- ------------ -----------
Total operating costs and expenses...... 3,354 2,856 6,631 5,448
----------- ----------- ------------ -----------
Operating income........................ 2,381 1,950 4,522 3,424
----------- ----------- ------------ -----------
Other income (expense):
Interest expense....................... (5) (4) (10) (8)
Interest income........................ 49 12 103 25
Other, net............................. 64 (249) 67 (236)
----------- ----------- ------------ -----------
Total other income (expense)............ 108 (241) 160 (219)
----------- ----------- ------------ -----------
Income before income taxes.............. 2,489 1,709 4,682 3,205
Income tax expense...................... 992 309 1,831 489
----------- ----------- ------------ -----------
Net income.............................. $ 1,497 $ 1,400 $ 2,851 $ 2,716
=========== =========== ============ ===========
Net income per share - basic............ $ 0.12 $ 0.13 $ 0.22 $ 0.25
=========== =========== ============ ===========
Weighted average number of common
shares outstanding - basic............. 12,968,889 10,762,195 12,927,877 10,612,970
=========== =========== ============ ===========
Net income per share - diluted.......... $ 0.11 $ 0.12 $ 0.21 $ 0.23
=========== =========== ============ ===========
Weighted average number of common
shares outstanding - diluted........... 13,782,440 11,677,051 13,773,980 11,479,134
=========== =========== ============ ===========
See accompanying notes to consolidated financial statements.
MERGE TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Six Months Ended
June 30,
---------------------------
2004 2003
------------ -----------
Cash flows from operating activities:
Net income................................................... $ 2,851 $ 2,716
Adjustments to reconcile net income to net cash provided by
operating activities
Depreciation and amortization............................. 1,665 1,107
Amortization of discount on note acquired in merger....... 8 7
Provision for (recoveries of) doubtful accounts
receivable............................................... 11 (1)
Deferred income taxes..................................... 885 ----
Change in assets and liabilities:
Accounts receivable...................................... (413) 1,362
Inventory................................................ (65) (375)
Prepaid expenses......................................... (185) (231)
Accounts payable......................................... (186) (844)
Accrued wages............................................ (92) 165
Other accrued expenses................................... 284 27
Deferred revenue and billings in excess of revenues...... 720 553
Other.................................................... (9) 438
----------- -----------
Net cash provided by operating activities..................... 5,474 4,924
----------- -----------
Cash flows from investing activities:
Purchases of property and equipment.......................... (253) (440)
Capitalized software development............................. (1,873) (1,004)
----------- -----------
Net cash used in investing activities........................ (2,126) (1,444)
----------- -----------
Cash flows from financing activities:
Proceeds from notes receivable from related party............ ---- 25
Proceeds from exercise of stock options...................... 454 1,046
Proceeds from employee stock purchase plan................... 37 61
Principal payments under capital leases...................... ---- (7)
----------- -----------
Net cash provided by financing activities..................... 491 1,125
----------- -----------
Effect of exchange rate changes on cash....................... (27) 134
----------- -----------
Net increase in cash and cash equivalents..................... 3,812 4,739
Cash and cash equivalents, beginning of period................ 16,871 4,411
----------- -----------
Cash and cash equivalents, end of period...................... $ 20,683 $ 9,150
=========== ===========
Supplemental Disclosures of Cash Flow Information:
Cash paid for income taxes................................... $ 813 $ 146
Cash paid for interest....................................... ---- 1
Non-cash Financing and Investing Activities:
Redemption value related to exchangeable Common Stock........ 1 33
See accompanying notes to consolidated financial statements.
MERGE TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(in thousands)
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------- ---------------------------
2004 2003 2004 2003
----------- ----------- ------------ -----------
Net income............................ $ 1,497 $ 1,400 $ 2,851 $ 2,716
Accumulated other comprehensive
income - Cumulative translation
adjustment.......................... 33 155 (15) 252
----------- ----------- ------------ -----------
Comprehensive net income.............. $ 1,530 $ 1,555 $ 2,836 $ 2,968
=========== =========== ============ ===========
See accompanying notes to consolidated financial statements.
MERGE TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited and in thousands, except for share data)
(1) BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited consolidated financial statements have been
prepared pursuant to the rules and regulations for reporting on Form 10-Q.
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 consolidated financial statements and notes
thereto included in the latest Annual Report on Form 10-K of Merge Technologies
Incorporated, a Wisconsin corporation doing business as Merge eFilm, and its
subsidiaries and affiliates ("we," "us" or "our").
Our accompanying unaudited consolidated financial statements reflect
all adjustments of a normal recurring nature, which are, in the opinion of
management, necessary to present a fair statement of our financial position
and results of operations.
Stock-Based Compensation
- -------------------------
We maintain three stock-based employee compensation plans and one
director option plan. We apply the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 123, Accounting for Stock-Based Compensation,
as amended ("SFAS No. 123"), 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 allows entities to continue to apply
the provisions of Accounting Principles Board Opinion No. 25 ("APB Opinion No.
25") and provide pro forma disclosures as if the fair value-based method
defined in SFAS No. 123 had been applied.
We have elected to continue to apply the provisions of APB Opinion No.
25 in accounting for our plans. All stock options under the plans have been
granted at exercise prices of not less than the market value at the date of
grant, and as a result, no compensation expense has been recorded under APB
Opinion No. 25. Had we determined compensation cost based on the fair value
at the grant date under SFAS No. 123, our net income would have been decreased
in the three and six months ended June 30, 2004 and 2003, to the pro forma
amounts indicated below:
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------- ---------------------------
2004 2003 2004 2003
----------- ----------- ------------ -----------
Net income, as reported................ $ 1,497 $ 1,400 $ 2,851 $ 2,716
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax benefits........... (225) (253) (407) (386)
----------- ----------- ------------ -----------
Pro forma net income................... $ 1,272 $ 1,147 $ 2,444 $ 2,330
=========== =========== ============ ===========
Earnings per share:
Basic - as reported................... $ 0.12 $ 0.13 $ 0.22 $ 0.25
=========== =========== ============ ===========
Basic - pro forma..................... $ 0.10 $ 0.10 $ 0.19 $ 0.21
=========== =========== ============ ===========
Diluted - as reported................. $ 0.11 $ 0.12 $ 0.21 $ 0.23
=========== =========== ============ ===========
Diluted - pro forma................... $ 0.09 $ 0.10 $ 0.18 $ 0.20
=========== =========== ============ ===========
Guarantees
- -----------
In November 2002, the Financial Accounting Standards Board (FASB)
issued Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others ("FIN 45").
MERGE TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited and in thousands, except for share data)
FIN 45 requires that we recognize the fair value for guarantee and
indemnification arrangements issued or modified by us after December 31,
2002, if these arrangements are within the scope of the interpretation.
In addition, we must continue to monitor the conditions that are subject
to the guarantees and indemnifications, as required under the previously
existing generally accepted accounting principles, in order to identify if
a loss has occurred. If we determine it is probable that a loss has
occurred then any such estimable loss would be recognized under those
guarantees and indemnifications. Under our standard Software License,
Services and Maintenance Agreement, we agree to indemnify, defend and hold
harmless our licensees from and against certain losses, damages and costs
arising from claims alleging the licensees' use of our software infringes the
intellectual property rights of a third party. Historically, we have not been
required to pay material amounts in connection with claims asserted under
these provisions and, accordingly, we have not recorded a liability relating
to such provisions. Under our standard Software License, Services and
Maintenance Agreement, we also represent and warrant to licensees that our
software products operate substantially in accordance with published
specifications, and that the services we perform will be undertaken by
qualified personnel in a professional manner conforming to generally accepted
industry standards and practices. Historically, only minimal costs have been
incurred relating to the satisfaction of product warranty claims and, as such,
no accrual for warranty claims have been made. Other guarantees include
promises to indemnify, defend and hold harmless each of our executive officers,
non-employee directors and certain key employees from and against losses,
damages and costs incurred by each such individual in administrative, legal
or investigative proceedings arising from alleged wrongdoing by the individual
while acting in good faith within the scope of his or her job duties on our
behalf. Historically, minimal costs have been incurred relating to such
indemnifications and, as such, no accrual for these guarantees have been
made.
(2) GOODWILL AND OTHER INTANGIBLES
Goodwill is our only unamortizable intangible asset. In the six months
ended June 30, 2004, we reduced goodwill by $132 due to the refund of Canadian
tax credits associated with software development efforts related to periods
prior to our acquisition of eFilm Medical Inc. ("eFilm"). The changes in the
carrying amount of goodwill in the six months ended June 30, 2004, are as
follows:
Balance as of January 1, 2004....................... $ 21,846
Goodwill related to eFilm acquisition............... (132)
--------------
Balance as of June 30, 2004......................... $ 21,714
==============
Our intangible assets, other than internally developed software, subject
to amortization are summarized as of June 30, 2004, as follows:
Weighted
Average
Remaining Gross
Amortization Carrying Accumulated
Period (Years) Amount Amortization
------------- ------------ ------------
Purchased software..................... 3.4 $ 2,901 $ (941)
Customer contracts..................... 3.5 1,943 (565)
------------ ------------
Total.................................. 3.4 $ 4,844 $ (1,506)
============ ============
MERGE TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited and in thousands, except for share data)
Amortization expense was $490 for the six months ended June 30, 2004.
Estimated aggregate amortization expense for each of the next five years is as
follows:
For the remaining six months: 2004 $ 484
For the year ended: 2005 $ 935
2006 $ 924
2007 $ 708
2008 $ 287
(3) INCOME PER SHARE
Basic earnings per share are computed by dividing income available to
common shareholders by the weighted average number of common shares and share
exchange rights outstanding if conversion is dilutive to the calculation.
Diluted earnings per share reflects the potential dilution that could occur
based on the exercise of stock options and warrants with an exercise price of
less than the average market price of our Common Stock. The following table
sets forth the computation of basic and diluted earnings per share for the
three and six months ended June 30, 2004 and 2003.
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------- ---------------------------
2004 2003 2004 2003
----------- ----------- ------------ -----------
Numerator:
Net Income............................ $ 1,497 $ 1,400 $ 2,851 $ 2,716
Accretion of redemption value related
to Interpra exchangeable shares...... ---- (12) (1) (33)
Allocation of income to Interpra
exchangeable shares.................. ---- (17) (1) (48)
----------- ----------- ------------ -----------
Numerator for net income per shares
- basic and diluted.................. $ 1,497 $ 1,371 $ 2,849 $ 2,635
=========== =========== ============ ===========
Denominator:
Weighted average number of shares of
Common Stock and participating
securities outstanding............... 12,968,889 10,762,195 12,927,877 10,612,970
----------- ----------- ------------ -----------
Effect of stock option................ 813,551 857,477 846,103 788,230
Effect of warrants.................... ---- 57,379 ---- 77,934
----------- ----------- ------------ -----------
Denominator for net income per
share - diluted...................... 13,782,440 11,677,051 13,773,980 11,479,134
=========== =========== ============ ===========
Net income per share - basic........... $ 0.12 $ 0.13 $ 0.22 $ 0.25
Net income per share - diluted......... $ 0.11 $ 0.12 $ 0.21 $ 0.23
For the three months ended June 30, 2004 and 2003, 43,000 and 35,000,
respectively, of options and warrants to purchase shares of our Common Stock had
exercise prices greater than the average market price of the shares of Common
Stock.
For the six months ended June 30, 2004 and 2003, 130,000 and 35,000,
respectively, of options and warrants to purchase shares of our Common Stock
had exercise prices greater than the average market price of the shares of
Common Stock.
(4) ACQUISITIONS
On July 17, 2003, we acquired all of the outstanding capital stock of
RIS Logic, Inc. ("RIS Logic") pursuant to a Merger Agreement dated July 9, 2003,
for a total purchase price of $16,984 consisting primarily of cash, vested
options and 771,804 shares of Common Stock. RIS Logic has been in the business
of the development and sales of Radiology Information System ("RIS") products
to end user imaging centers.
We paid a significant premium above the fair value of RIS Logic's
tangible net assets principally because we determined that RIS Logic's software
development ability and trade name are particularly important to us. As we
MERGE TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited and in thousands, except for share data)
looked to the future, we foresaw the need to expand our software product
offerings to healthcare institutions and imaging centers as many of our
competitors are developing more integrated solutions. In addition, we expect
to be able to sell our software products to RIS Logic's customers. The fair
value of each share issued to RIS Logic was determined to be $14.305 using a
four-day average of the closing price of our Common Stock before and after
the signing of the definitive agreement.
An escrow of 173,093 shares of Common Stock was established as a
reserve for 18 months, which will terminate on January 16, 2005, against any
claims regarding breaches or representations and warranties.
The acquisition was accounted for using the purchase method of
accounting. The accompanying consolidated statements of operations include
the results of operations for RIS Logic since the acquisition date, July 17,
2003. The amount allocated to purchased and developed software is being
amortized over a five-year period. The estimated asset life is determined
based on projected future economic benefits and expected life cycles of the
technologies. The amount assigned to goodwill is not being amortized, but
will be tested for impairment annually or under certain circumstances that
may indicate a potential impairment. The following is a summary of purchase
consideration for the acquisition of RIS Logic:
Form of Consideration Fair Value
------------------------------------- -------------
Cash................................ $ 4,311
771,804 shares of Common Stock...... 11,041
Vested stock options................ 1,452
Transaction costs................... 180
-------------
Total consideration................. $ 16,984
=============
The total purchase consideration of approximately $16,984 was allocated
to the fair value of the net assets acquired as follows:
Fair Value
------------
Current assets...................... $ 2,184
Other assets........................ 247
Purchased and developed technologies 1,483
Customer contracts.................. 977
Goodwill............................ 14,469
Liabilities assumed................. (2,376)
------------
Total consideration................. $ 16,984
============
Of the amount assigned to goodwill in the acquisition, the $14,469
will not be deductible for federal income tax purposes.
The following unaudited pro forma information shows the results of our
operations for the six months ended June 30, 2003, as if the RIS Logic business
combination had occurred at the beginning of the period. This data is not
indicative of the results of operations that would have arisen if the business
combination had occurred at the beginning of 2003. Moreover, this data is not
intended to be indicative of future results of operations.
Revenue............................. $ 14,520
Net income.......................... $ 1,751
Earnings per share:
Basic.............................. $ 0.15
Diluted............................ $ 0.14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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 of Financial Condition and
Results of Operations, as well as within this report generally. In addition,
when used in this report, the words: believes, intends, anticipates, expects
and similar expressions are intended to identify forward-looking statements.
These statements are subject to a number of risks and uncertainties, including,
among others and in addition to those listed under Factors That May Affect
Future Results of Operations, Financial Condition or Business, our lack of
consistent profitability, fluctuations in operating results, credit and payment
risks associated with end-user sales, involvement with rapidly developing
technology in highly competitive markets, acquisition and development of new
technologies, dependence on major customers, expansion of our international
sales effort, broad discretion of management and dependence on key personnel,
risks associated with product liability and product defects, risks of loss
associated with potential infringement of our products or services on the
intellectual property rights of others, costs of complying with government
regulation, changes in external competitive market factors which might impact
trends in our results of operation, unanticipated working capital and other
cash requirements, general changes in the industries in which we compete, and
various other competitive factors that may prevent us from competing
successfully in the marketplace. Actual results could differ materially from
those projected in the forward-looking statements. We undertake 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. Our actual results and the timing of certain events may
differ materially from those reflected in the forward-looking statements. The
following discussion should be read in conjunction with the condensed
consolidated financial statements and notes thereto appearing elsewhere in
this report.
Overview
- ----------
We started operations in 1987 and are a leading provider of Picture
Archiving and Communications Systems ("PACS") and RIS software to imaging
centers, specialty clinics, small and medium sized hospitals, and PACS component
and connectivity technologies to many Original Equipment Manufacturers ("OEM's")
throughout the world. We have been an active leader in the development in the
industry standard network communications protocol known as Digital Imaging
Communications in Medicine ("DICOM") technology which defines the standard
configuration for digital imaging. DICOM is used by virtually all OEM's
building modalities for healthcare.
Our products fuse business and clinical workflow by intelligently
managing and distributing diagnostic images and information throughout the
healthcare enterprise. By utilizing our products, our customers enhance the
quality of healthcare provided to patients because they improve radiology
workflow efficiencies and improve the clinical decision making processes. In
addition, our products reduce the film, paper and labor costs involved in
managing and distributing medical images and information, thereby contributing
to the profitability of our customers' businesses. We deliver this tangible
value to facilities of all sizes, but we specifically target imaging centers,
small to medium size hospitals, multi-hospital groups, and specialty clinics.
Healthcare providers continue to be challenged by declining
reimbursements, competition and reduced operating profits brought about by the
double-digit increases in healthcare expenditures. Within the United States
of America, we are focusing our direct sales efforts on single and multi-site
imaging centers with more than 10,000 studies per year, small to medium sized
hospitals (less than 400 beds), and certain specialty clinics like orthopedic
practices that offer imaging services. The Frost and Sullivan 2002 survey
indicated that less than 30% of those markets are currently using a PACS to
achieve a filmless workflow environment and an even smaller percentage has
a fully integrated RIS/PACS delivering filmless and paperless workflow.
The markets for our products are highly competitive. Many customers
purchase products from us and from our competitors as well. Our historical
connectivity solutions product line has been the mainstay, which pioneered our
development. The competitive challenge is that similar products are readily
available and the connectivity products are incorporated into most imaging
modalities. In the developing area of RIS and PACS workflow software
applications, there are many newly emerging competitors who offer portions
of the integrated radiology solution through their RIS and PACS to the market
targeted by us. Additionally, certain competitors are integrating RIS and
PACS technologies through development, partnership and acquisition activities.
We rely on our global brand and historical installation base as the market
leader in connectivity products and desktop software image viewing
applications, eFilm Workstation(tm). This installed base, reputation for
clinical and technical quality and long-term service is a key differentiator
among the competition. In addition, our software modular technique to
implementing a customized, fully integrated solution is appealing to our
target market and is the foundation of our approach.
We have aggressively expanded our product offering, especially in the
past two years, through our acquisitions of eFilm and RIS Logic. We became a
full PACS provider in June 2002 through our acquisition of eFilm which provided
the visualization platform, which when combined with our existing PACS
components, allowed us to release our first integrated PACS system for the
small and medium sized hospital and imaging center market. The eFilm
Workstation(tm) also is core to our strategy to "own" the clinician desktop
market. We sell our eFilm Workstation(tm) on the Internet for a small annual
subscription. This strategy allows radiologists or clinicians reluctant to
move to reading images digitally, to do so easily and very inexpensively,
particularly relative to other similar clinical diagnostic tools on the market.
Our July 2003 acquisition of RIS Logic allowed us to become one of the
first providers of integrated RIS/PACS solutions in our target market. We saw
this as a growing need of our target market. The integrated RIS/PACS solution
positions us to fundamentally own the technology necessary to run an imaging
center by having PACS deliver filmless workflow and a RIS deliver paperless
workflow. We see these products as core elements behind our success in
achieving our results in the three and six months ended June 30, 2004, and
for the foreseeable future.
SIGNIFICANT EVENTS IN THE THREE MONTHS ENDED JUNE 30, 2004
During the three months ended June 30, 2004, we placed continued
emphasis on North American direct sales, the design and development of our next
generation RIS/PACS in close collaboration with our customers, and the
strengthening of our professional services organization. We continue to see
accelerating interest from our target market for a comprehensive workflow
solution from a single, trusted healthcare software solutions provider. In
response to this trend, we are driving our North American distribution strategy
through a combination of direct sales and new business development relationships
that broaden our market coverage. We have remained consistent in our focus on
imaging centers, small to medium size hospitals, and specialty clinics,
including a growing target market of orthopedic groups and neurosurgery centers
that recognize the value of integrating PACS solutions into their clinical
practice.
Our OEM/value added resellers ("VARs") channel continued to experience
challenges achieving their financial goals; however, we are encouraged by
progress with key OEM customers and our European VARs. A new software product
line customized for a leading OEM in Europe was released and began generating
sales in the three months ended June 30, 2004. Several European VARs purchased
FUSION(tm) PACS software modules and components for their customers in the
three months ended June 30, 2004. Additionally, we believe that the recent new
leadership of our OEM and international team will produce improved results in
the second half of 2004.
During the three months ended June 30, 2004, we successfully closed 20
new FUSION(tm) RIS, PACS or RIS/PACS contracts, growing our total number of
FUSION(tm) solution customers to 160, representing over 320 healthcare
facilities.
During the three months ended June 30, 2004, we released several new
FUSION(tm) software products, including our next generation RIS/PACS with
single desktop integration, enhanced versions of FUSION(tm) PACS with web
capabilities and new modules of functionality such as FUSION(tm) PACS voice
recognition and FUSION(tm) RIS document management.
In July 2004, we signed a distribution agreement with SourceOne
Healthcare Technologies ("SourceOne") to sell our FUSION(tm) PACS, RIS and
RIS/PACS software products as part of our strategy to rapidly expand our
ability to cover the North American healthcare market. SourceOne brings
over 120 sales professionals to the relationship. With the combined
strengths of both organizations, this partnership provides our target
market and SourceOne's customers with the radiology workflow expertise to
deliver a solution aligned with the customers' current needs, along with
a future growth towards seamless digital, paperless and filmless, workflow.
RESULTS OF OPERATIONS
(in thousands)
Three Months Ended June 30, 2004 Compared to Three Months Ended June 30, 2003
- -----------------------------------------------------------------------------
The following table sets forth selected unaudited consolidated
financial data for the periods indicated, expressed as a percentage of net
sales.
Three Months Ended
June 30,
--------------------
2004 2003
---- ----
Net sales..................................... 100% 100%
Cost of sales................................. 36 25
---- ----
Gross profit.................................. 64 75
---- ----
Operating costs and expenses:
Sales and marketing.......................... 19 24
Product research and development............. 5 6
General and administrative................... 11 13
Depreciation and amortization................ 2 2
---- ----
Total operating costs and expenses............ 37 45
---- ----
Operating income.............................. 27 30
Total other income (expense), net............. 1 (4)
---- ----
Income before income taxes.................... 28 26
Income tax expense............................ 11 4
---- ----
Net income.................................... 17% 22%
==== ====
Net Sales
- ----------
Net sales consist of sales made directly to healthcare facilities,
the professional services associated with those sales and sales made to
OEM/VARs, net of estimated product returns. Net sales for the three months
ended June 30, 2004 include the results of our acquisition of RIS Logic on
July 17, 2003. The following table sets forth net sales component data.
Three Months Ended
June 30,
-------------------------
2004 2003 % Change
--------- --------- --------
Direct sales................................. $ 3,738 $ 1,869 100%
As a percentage of total net sales.......... 42% 29%
Professional services........................ $ 2,794 $ 1,389 101%
As a percentage of total net sales.......... 31% 22%
OEM/VARs..................................... $ 2,375 $ 3,176 (25%)
As a percentage of total net sales.......... 27% 49%
Total net sales.............................. $ 8,907 $ 6,434 38%
Direct sales consist of software and purchased components delivered in
PACS, RIS and RIS/PACS sales to healthcare facilities and imaging centers. The
$1,869 increase in direct sales in the three months ended June 30, 2004 compared
to June 30, 2003 is attributed to increased revenue recognized on RIS, PACS or
RIS/PACS deals, including 20 new sales closed during the three months ended June
30, 2004.
Net sales from the professional services group increased $1,405 in the
three months ended June 30, 2004 compared to the three months ended June 30,
2003. The net sales growth from the professional services group is due to the
growth in sales made directly to healthcare facilities and imaging centers,
where such sales are accompanied by installation services and service
contracts.
Net sales to OEM/VARs and dealers decreased $801 in the three months
ended June 30, 2004 attributed to the continued shift in our focus from regional
VARs to targeting a national business development relationship in the United
States of America and an overall decrease in international OEM/VAR sales.
Cost of Sales
- --------------
Cost of sales consists of purchased components and service costs
associated with net sales, amortization of purchased and developed software
and acquired customer contracts.
The cost of purchased components increased to $962 in the three months
ended June 30, 2004 compared to $533 in the three months ended June 30, 2003,
as a result of the purchased components included in RIS, PACS, and RIS/PACS
sales during the three months ended June 30, 2004. The three months ended June
30, 2003 include the recovery of a provision of $270 associated with inventory
returned from a 2002 sale and an unusually high number of PACS sales with no
associated hardware components (i.e. software only sales).
The cost of professional services increased to $1,568 in the three
months ended June 30, 2004 compared to $648 in the three months ended June 30,
2003. The increase is due to the growing number of RIS, PACS and RIS/PACS
sales in 2004 and required headcount growth to install and maintain ongoing
service and support for direct sales customers. The costs for the three
months ended June 30, 2003 do not reflect headcount from our acquisition of
RIS Logic in the third quarter of 2003.
Amortization of purchased and developed software increased to $642
in the three months ended June 30, 2004 compared to $447 in the three months
ended June 30, 2003. As a percentage of net sales, amortization of purchased
and developed software remained constant at 7% in the three months ended June
30, 2004 and June 30, 2003. The dollar increase in the three months ended
June 30, 2004 is a result of 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 RIS Logic.
Gross Profit
- -------------
Gross profit increased 19% to $5,735 in the three months ended June 30,
2004 from $4,806 in the three months ended June 30, 2003. As a percentage of
net sales, gross profit decreased to 64% of net sales in the three months ended
June 30, 2004 compared to 75% in the three months ended June 30, 2003. The
gross profit for the three months ended June 30, 2003 is unusually high as the
result of the previously mentioned $270 provision recovery in addition to the
fact that direct sales in the three months ended June 30, 2003 consisted of an
unusually high percentage of software only PACS sales.
Sales and Marketing
- --------------------
Sales and marketing expense increased 16% to $1,711 in the three months
ended June 30, 2004 from $1,477 in the three months ended June 30, 2003. The
increase is the result of our objective to invest in sales and marketing
activities, particularly for sales team efforts in connection with sales made
directly to healthcare facilities and imaging centers. In addition, sales
staff headcount increased in the three months ended June 30, 2004, compared
to the three months ended June 30, 2003, as a result of normal hiring and
sales people assumed in connection with the acquisition of RIS Logic.
Product Research and Development
- ---------------------------------
Research and development expense as a percentage of net sales remained
relatively consistent at 5% for the three months ended June 30, 2004 compared to
6% for the three months ended June 30, 2003. Research and development expense
increased 7% to $423 in the three months ended June 30, 2004 from $397 in the
three months ended June 30, 2003. Capitalization of software development costs
increased $379 to $915 in the three months ended June 30, 2004, from $536 in
the three months ended June 30, 2003, as a result of our developing FUSION(tm)
application modules and further integration of our RIS/PACS technologies.
General and Administrative
- ---------------------------
General and administrative expense as a percentage of net sales
decreased slightly to 11% for the three months ended June 30, 2004 compared to
13% for the three months ended June 30, 2003. General and administrative
expense increased 18% to $1,024 in the three months ended June 30, 2004 from
$865 in the three months ended June 30, 2003. General and administrative
expense includes costs for information systems, accounting, administrative
support, management personnel, bad debt expenses and general corporate
matters. The $159 increase is primarily attributed to increased costs
associated with corporate governance and compliance with the Sarbanes - Oxley
Act of 2002, as well as recruiting fees associated with the continued hiring
of sales and service personnel.
Depreciation and Amortization
- ------------------------------
Depreciation and amortization expense as a percentage of net sales
remained constant at 2% for the three months ended June 30, 2004 and June 30,
2003. Depreciation and amortization expense increased 68% to $196 in the three
months ended June 30, 2004 from $117 in the three months ended June 30, 2003.
Depreciation and amortization is assessed on capital equipment and intangible
assets with estimable useful lives. This is net of the amortization of
capitalized software, which is a component of cost of sales.
Other Income, Expense
- ----------------------
Our interest expense remained consistent at $5 in the three months ended
June 30, 2004 from $4 in the three months ended June 30, 2003, and interest
income was $49 in the three months ended June 30, 2004 compared to $12 in the
three months ended June 30, 2003. The increase in interest income is directly
attributed to our increased cash and cash equivalents balance at June 30, 2004.
Other income, net, was $64 in the three months ended June 30, 2004 compared to
other expense, net of $249 in the three months ended June 30, 2003. The other
income, net for the three months ended June 30, 2004 is primarily attributed
to the recovery from an insurance claim filed in 2003 for business
interruption. The other expense, net for the three months ended June 30, 2003
is primarily attributed to unrealized foreign exchange losses on United States
dollar receivables and cash held in our Canadian subsidiary, where the
functional currency is the Canadian dollar.
Income Taxes
- -------------
We recorded income tax expense of $992 in the three months ended June
30, 2004 and $309 in the three months ended June 30, 2003. The increase is
attributable to an adjustment of our estimated domestic and international
effective rate for the full fiscal year of 39%, compared to the adjustment for
the estimated full 2003 fiscal year rate of 15%. The 2003 effective tax was
benefited by the reduction of valuation allowances associated with net
operating loss and tax credit carryforwards.
Six Months Ended June 30, 2004 Compared to Six Months Ended June 30, 2003
- -------------------------------------------------------------------------
The following table sets forth selected unaudited consolidated financial
data for the periods indicated, expressed as a percentage of net sales.
Six Months Ended
June 30,
-------------------
2004 2003
---- ----
Net sales..................................... 100% 100%
Cost of sales................................. 36 29
---- ----
Gross profit.................................. 64 71
---- ----
Operating costs and expenses:
Sales and marketing.......................... 20 22
Product research and development............. 5 7
General and administrative................... 11 13
Depreciation and amortization................ 2 2
---- ----
Total operating costs and expenses............ 38 44
---- ----
Operating income.............................. 26 27
Total other income (expense), net............. 1 (2)
---- ----
Income before income taxes.................... 27 25
Income tax expense............................ 11 4
---- ----
Net income.................................... 16% 21%
==== ====
Net Sales
- ----------
Net sales consist of sales made directly to healthcare facilities, the
professional services associated with those sales and sales made to OEM/VARs,
net of estimated product returns. Net sales for the six months ended June 30,
2004 include the results of our acquisition of RIS Logic on July 17, 2003.
The following table sets forth net sales component data.
Six Months Ended
June 30,
-------------------------
2004 2003 % Change
--------- --------- --------
Direct sales................................. $ 7,411 $ 3,207 131%
As a percentage of total net sales.......... 42% 26%
Professional services........................ $ 5,275 $ 2,746 92%
As a percentage of total net sales.......... 30% 22%
OEM/VARs..................................... $ 4,858 $ 6,599 (26%)
As a percentage of total net sales.......... 28% 53%
Total net sales.............................. $ 17,544 $ 12,552 40%
Direct sales consist of software and purchased components delivered in
PACS, RIS and RIS/PACS sales to healthcare facilities and imaging centers. The
$4,204 increase in direct sales in the six months ended June 30, 2004 compared
to June 30, 2003 is attributed to increased revenue recognized on RIS, PACS or
RIS/PACS deals, including 37 new sales closed during the six months ended June
30, 2004.
Net sales from the professional services group increased $2,529 in the
six months ended June 30, 2004 compared to the six months ended June 30, 2003.
The net sales growth from the professional services group is due to the growth
in sales made directly to healthcare facilities and imaging centers, where
such sales are accompanied by installation services and service contracts. We
anticipate net sales from the professional services group to continue to grow
as part of the overall growth in sales made directly to healthcare facilities
and imaging centers.
Net sales to OEM/VARs and dealers decreased $1,741 in the six months
ended June 30, 2004 attributed to the continued shift in our focus from
regional VARs to targeting national business development relationships in the
United States of America and unusually low sales from European VARs in 2004
in addition to a long-term OEM component business with one customer reaching
the end of its contractual life during 2004. We anticipate growth in the
OEM/VAR group for the remainder of 2004 compared to the first six months.
Cost of Sales
- --------------
Cost of sales consists of purchased components and service costs
associated with net sales, amortization of purchased and developed software
and acquired customer contracts.
The cost of purchased components increased to $2,077 in the six months
ended June 30, 2004 compared to $1,518 in the six months ended June 30, 2003,
as a result of the purchased components included in RIS/PACS deals recognized
under the percentage-of-completion method of contract accounting and PACS only
sales during the six months ended June 30, 2004.
The cost of professional services increased to $3,034 in the six
months ended June 30, 2004 compared to $1,253 in the six months ended June
30, 2003. The increase is due to the growing number of RIS, PACS and
RIS/PACS sales in 2004 and required headcount growth to install and maintain
ongoing service and support for direct sales customers. In addition, we
re-assigned several pre-sales and technical staff to the professional services
group in first three months of 2004 to keep pace with the increased
installation demand. The costs for the six months ended June 30, 2003 do not
reflect headcount from our acquisition of RIS Logic in the third quarter of
2003.
Amortization of purchased and developed software increased to $1,280 in
the six months ended June 30, 2004 compared to $909 in the six months ended
June 30, 2003. As a percentage of net sales, amortization of purchased and
developed software remained constant at 7% in the six months ended June 30,
2004 and June 30, 2003. The dollar increase in the six months ended June 30,
2004 is a result of 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 RIS Logic.
Gross Profit
- -------------
Gross profit increased 26% to $11,153 in the six months ended June 30,
2004 from $8,872 in the six months ended June 30, 2003. As a percentage of net
sales, gross profit decreased to 64% of net sales in the six months ended June
30, 2004 compared to 71% in the six months ended June 30, 2003. The decrease
in gross profit as a percentage of sales is due to the increased professional
service costs previously discussed and the fact that direct sales in the six
months ended June 30, 2003 consisted of an unusually high percentage of
software only PACS sales which resulted in a high gross margin.
Sales and Marketing
- --------------------
Sales and marketing expense increased 22% to $3,405 in the six months
ended June 30, 2004 from $2,802 in the six months ended June 30, 2003. The
increase is the result of our objective to invest in sales and marketing
activities, particularly for sales team efforts in connection with sales made
directly to healthcare facilities and imaging centers. In addition, sales
staff headcount increased in the six months ended June 30, 2004, compared to
the six months ended June 30, 2003, as a result of normal hiring and sales
people assumed in connection with the acquisition of RIS Logic.
Product Research and Development
- ---------------------------------
Research and development expense as a percentage of net sales remained
relatively consistent at 5% for the six months ended June 30, 2004 compared to
7% for the six months ended June 30, 2003. Research and development expense
increased 8% to $905 in the six months ended June 30, 2004 from $836 in the six
months ended June 30, 2003. Capitalization of software development costs
increased $869 to $1,873 in the six months ended June 30, 2004, from $1,004 in
the six months ended June 30, 2003, as a result of our developing FUSION(tm)
application modules and further integration of our RIS/PACS technologies during
2004.
General and Administrative
- ---------------------------
General and administrative expense as a percentage of net sales
decreased slightly to 11% for the six months ended June 30, 2004 compared to
13% for the six months ended June 30, 2003. General and administrative expense
increased 22% to $1,936 in the six months ended June 30, 2004 from $1,587 in the
six months ended June 30, 2003. General and administrative expense includes
costs for information systems, accounting, administrative support, management
personnel, bad debt expenses and general corporate matters. The $349 increase
is primarily attributed to increased costs associated with corporate governance
and compliance with the Sarbanes - Oxley Act of 2002, as well as recruiting
fees associated with the continued hiring of sales and service personnel.
Depreciation and Amortization
- ------------------------------
Depreciation and amortization expense as a percentage of net sales
remained constant at 2% for the six months ended June 30, 2004 and June 30,
2003. Depreciation and amortization expense increased $162 to $385 in the
three months ended June 30, 2004 from $223 in the three months ended June 30,
2003. Depreciation and amortization is assessed on capital equipment and
intangible assets with estimable useful lives. This is net of the
amortization of capitalized software, which is a component of cost of
sales. Depreciation and amortization expense is expected to increase in
2004 over 2003 as we increase our capital expenditures to support our
growth.
Other Income, Expense
- ----------------------
Our interest expense remained consistent at $10 in the six months
ended June 30, 2004 from $8 in the six months ended June 30, 2003, and
interest income was $103 in the six months ended June 30, 2004 compared to
$25 in the six months ended June 30, 2003. The increase in interest income
is directly attributed to our increased cash and cash equivalent balance
throughout the first six months of 2004 compared to the first six months
of 2003. Other income, net, was $67 in the six months ended June 30, 2004
compared to other expense, net of $236 in the six months ended June 30,
2003. The other income, net for the six months ended June 30, 2004 is
primarily attributed to the recovery from an insurance claim filed in 2003
for business interruption. The other expense, net for the six months
ended June 30, 2003 is primarily attributed to unrealized foreign exchange
losses on United States dollar receivables and cash held in our Canadian
subsidiary, where the functional currency is the Canadian dollar.
Income Taxes
- -------------
We recorded income tax expense of $1,831 in the six months ended
June 30, 2004 and $489 in the six months ended June 30, 2003. The increase
is attributed to our estimated domestic and international effective rate of
39%, which has been applied to the six months ended June 30, 2004, compared
to the 15% rate applied to the six months ended June 30, 2003. The 2003
effective tax was benefited by the reduction of valuation allowances
associated with net operating loss and tax credit carryforwards.
LIQUIDITY AND CAPITAL RESOURCES
(in thousands, except for share data)
Operating Cash Flows
- ---------------------
Cash provided by operating activities was $5,474 in the six months
ended June 30, 2004 compared to $4,924 in the in the six months ended June 30,
2003. Our positive operating cash flow in the six months ended June 30, 2004
was due primarily to net income of $2,851, depreciation and amortization
expense of $1,665, a decrease in net deferred income taxes of $1,033 and an
increase in deferred revenue and billings in excess of revenues of $720,
offset by a $413 increase in accounts receivable, a $185 increase in prepaid
assets, and a decrease of $186 in accounts payable.
The total days sales outstanding for the six months ended June 30,
2004 remained relatively consistent at 91 days compared to 88 days for the
six months ended June 30, 2003.
Although we anticipate recording income tax expense using a 39%
effective income tax rate in 2004, the cash flow impact is expected to be
less, due to tax benefits associated with utilizing net operating losses,
tax credits and tax deductions associated with certain stock option
exercises or disqualifying sales of Common Stock associated with stock
options.
Investing Cash Flows
- ---------------------
Cash used in investing activities was $2,126 in the six months ended
June 30, 2004, due to cash outflows for capitalized software development
costs of $1,873 and purchases of capital equipment of $253. We expect to
continue to invest in software development projects to increase sales.
Financing Cash Flows
- ---------------------
Cash provided by financing activities was $491 in the six months
ended June 30, 2004. We received net proceeds of $454 from employee and
director stock option exercises and $37 from purchases of our Common Stock
by employees under our employee stock purchase plan.
Total outstanding commitments at June 30, 2004 were as follows:
Less than 1 - 3 4 - 6 7 - 10
Contractual Obligations Total 1 Year Years Years Years
------------------------------ ------- -------- -------- -------- -------
Short-term debt............... $ 225 $ 225 $ ---- $ ---- $ ----
Operating leases.............. 3,304 720 1,243 779 562
------- -------- -------- -------- -------
Total contractual cash
obligations................. $ 3,529 $ 945 $ 1,243 $ 779 $ 562
We also have a liability recorded of $5 for put options on the remaining
1,000 of 420,000 exchangeable shares of eFilm, formerly known as Merge
Technologies Canada Ltd., further formerly known as Interpra Medical Imaging
Network Ltd. ("Interpra exchangeable shares"), which may be exercised for a
price of $4.50 per share during the period from August 31, 2004 until September
30, 2004.
In November 2003, we negotiated a new unsecured revolving line of credit
agreement with our bank, increasing our line to $15 million from $5 million
effective November 21, 2003, and maturing December 31, 2006. 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. At
June 30, 2004, the loan's interest rate was 3.25%. No amounts were outstanding
on the line of credit as of June 30, 2004.
We do not have any other significant long-term obligations, contractual
obligations, lines of credit, standby letters of credit, standby repurchase
obligations or other commercial commitments.
We believe that existing cash, together with the availability under
our revolving line of credit and future cash flows from operations will be
sufficient to execute our business plan in 2004. However, any projections of
future cash inflows and outflows are subject to uncertainty. In 2004, it may
be necessary to raise additional capital for activities necessary to meet our
business objectives or our long-term liquidity needs. If it is determined
that additional capital is needed, it may be raised by selling additional
equity or raising debt from third party sources. The sale of additional
equity or convertible debt securities could result in dilution to current
stockholders. In addition, debt financing, if available, could involve
restrictive covenants, which could adversely affect operations. There can
be no assurance that any of these financing alternatives, including raising
additional capital, will be available in amounts or on terms acceptable to
us.
CRITICAL ACCOUNTING POLICIES
Our consolidated financial statements are impacted by the accounting
policies used and the estimates and assumptions made by management during their
preparation. Critical accounting policies in which management makes
significant estimates are revenue recognition, accounts receivable, software
capitalization, goodwill and intangible asset valuation, other long-lived
assets and income taxes.
Revenue Recognition
- --------------------
Revenues are derived primarily from the sublicensing and licensing of
computer software, installations, training, consulting, software maintenance
and sales of PACS, RIS and RIS/PACS solutions. Inherent in the revenue
recognition process are significant management estimates and judgments, which
influence the timing and amount of revenue recognized.
For software arrangements, we recognize revenue according to the
American Institute of Certified Public Accountants ("AICPA") Statement of
Position No. 97-2, Software Revenue Recognition, and related amendments
("SOP No. 97-2"). SOP No. 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, pursuant to Statement of Position No. 98-9, Modification of SOP No.
97-2, Software Revenue Recognition, With Respect to Certain Transactions.
Under the residual method, revenue is recognized in a multiple element
arrangement when vendor-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. We allocate
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, we determine
the fair value of the maintenance portion of the arrangement based on the
renewal price of the maintenance offered to customers, 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 undelivered elements 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 sales of RIS and from RIS/PACS solutions sold directly to
customers, where professional services are considered essential to the
functionality of the solution sold, is recognized on a percentage-of-completion
method, as prescribed by AICPA Statement of Position 81-1, Accounting for
Performance on Construction-Type and Certain Production-Type Contracts.
Percentage-of-completion is determined by the input method based upon the
amount of labor hours expended compared to the total estimated amount of labor
hours to complete the project. Total estimated labor hours is based on
management's best estimate of the total amount of time it takes to complete
a project. These estimates require the use of judgment. A significant
change in one or more of these estimates could affect the profitability of
one or more of our contracts. We review our contract estimates periodically
to assess revisions in contract values and estimated labor hours expended
and reflect changes in estimates in the period that such estimates are
revised under the cumulative catch-up method.
Revenue from sublicenses sold on an individual basis and computer
software licenses is recognized upon shipment provided that evidence of an
arrangement exists, delivery has occurred and risk of loss has 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.
Our policy is to allow returns when we have preauthorized the
return. Based on our historical experience of a limited number of returns
and our expectation that returns, if any, will be insignificant, we have
provided for an allowance for specific potential items only.
Accounts Receivable
- --------------------
Our accounts receivable balance is reported net of an allowance for
bad debts. Our management determines collection risk and records allowances
for bad debts based on the aging of accounts and past transaction history with
customers. If the financial condition of our customers were to deteriorate,
resulting in an impairment of their ability to make payments, additional
allowances may be required.
Software Capitalization
- -------------------------
Software capitalization commences when management determines that
projects have achieved technological feasibility. Management's determination
that a project has achieved technological feasibility does not ensure that
the project can be commercially salable. Amounts capitalized include direct
labor and estimates of overhead attributable to the projects. The useful
lives of capitalized software projects are assigned by management, based
upon the expected life of the software. Management also estimates the
realizability of capitalized values based on projections of future net
operating cash flows through the sale of products related to each capitalized
project. If we determine in the future that the value of capitalized
software cannot be recovered, a write-down of the value of the capitalized
software to its recoverable value may be required. If the actual achieved
revenues are lower than our estimates or the useful life of a project is
shorter than the estimated useful life, the asset may be deemed to be
impaired and, accordingly, a write-down of the value of the asset or a
shorter amortization period may be required.
Other Long-Lived Assets
- ------------------------
Other long-term assets, including property and equipment, and other
intangibles, are amortized over their expected lives, which are estimated by
management. Management also makes estimates of the impairment of long-term
assets whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. If the actual useful life of a
long-term asset is shorter than the useful life estimated by us, the assets
may be deemed to be impaired and, accordingly, a write-down of the value of
the assets may be required.
Goodwill and Other Intangible Assets
- -------------------------------------
Effective January 1, 2002, we adopted SFAS No. 142, Goodwill and
Other Intangible Assets ("SFAS No. 142"). SFAS No. 142 requires that
goodwill and indefinite lived intangible assets be reviewed for impairment
annually, or more frequently if impairment indicators arise. Our policy
provides that goodwill and indefinite lived intangible assets will be
reviewed for impairment as of December 31 of each year. In calculating
potential impairment losses, we evaluated the fair value of goodwill and
intangible assets by estimating the expected present value of their future
cash flows. The future cash flows are based upon management's assumptions
about future sales activity and market acceptance of our products. If
these assumptions change, we may be required to write down the carrying
value to a revised amount.
Income Taxes
- -------------
As part of the process of preparing our consolidated financial
statements, we are required to estimate income taxes in each of the
jurisdictions in which we operate. This process involves estimating our current
tax rate together with assessing temporary differences resulting from differing
treatment of items for tax and accounting purposes. These differences result
in deferred tax assets and liabilities. Significant management judgment is
required in determining our provision for income taxes, deferred tax assets
and liabilities.
FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS, FINANCIAL
CONDITION OR BUSINESS
Quarterly Operating Results May Vary - Our quarterly operating results
have varied in the past and may continue to vary in future periods. Quarterly
operating results may vary for a number of reasons, including accounting policy
changes mandated by regulating entities (including, but not limited to, any
accounting policy change concerning the expensing of options), demand for our
software solutions and services, our sales cycle, and other factors described
in this section and elsewhere in this report. As a result of healthcare
industry trends and the market for our RIS, PACS or RIS/PACS solutions, a large
percentage of our revenues are generated by the sale and installation of
systems sold directly to healthcare institutions. The sale may be subject to
delays due to clients' internal budgets and procedures for approving capital
expenditures and by competing needs for other capital expenditures and
deploying new technologies or personnel resources. Delays in the expected
sale or installation of these contracts may have a significant impact on our
anticipated quarterly revenues and consequently our earnings, since a
significant percentage of our expenses are relatively fixed.
In addition, software revenue from sales of PACS solutions are
generally recognized at the time of shipment to our customers. Software
revenue from sales of RIS and RIS/PACS solutions are recognized on the
percentage-of-completion method as the installation services are performed.
As a result, significant changes in the sales mix of our FUSION(tm) solutions
may have an impact on our quarterly revenues and consequently, our earnings.
Stock Price May Be Volatile - The trading price of our Common Stock may
be volatile. The market for our Common Stock may experience significant price
and volume fluctuations in response to a number of factors including actual or
anticipated quarterly variations in operating results, rumors about our
performance or software solutions, changes in expectations of future financial
performance or changes in estimates of securities analysts, governmental
regulatory action, healthcare reform measures, client relationship developments,
changes occurring in the securities markets in general and other factors, many
of which are beyond our control. As a matter of policy, we do not generally
comment on rumors.
Furthermore, the stock market in general, and the market for software,
healthcare and technology companies in particular, has experienced volatility
that often has been unrelated to the operating performance of particular
companies. These broad market and industry fluctuations may adversely affect
the trading price of our Common Stock, regardless of actual operating
performance.
Changes in the Healthcare Industry - The healthcare industry is highly
regulated and is subject to changing political, economic and regulatory
influences. For example, the Health Insurance Portability and Accountability
Act of 1996 (HIPAA) will impact the healthcare industry by requiring
identifiers and standardized transactions/code sets and necessary security and
privacy measures in order to ensure the protection of patient health
information. These factors affect the purchasing practices and operation of
healthcare organizations. Federal and state legislatures have periodically
considered programs to reform the United States of America healthcare system
at both the federal and state level and to change healthcare financing and
reimbursement systems. These programs may contain proposals to increase
governmental involvement in healthcare, lower reimbursement rates or
otherwise change the environment in which healthcare industry participants
operate. Healthcare industry participants may respond by reducing their
investments or postponing investment decisions, including investments in
our software solutions and services.
Significant Competition - The market for RIS, PACS and RIS/PACS systems
is competitive and subject to technological change. We believe that the
principal competitive factors in this market include the breadth and quality
of system and software solution offerings, the stability of the systems
provider, the features and capabilities of the information system, the ongoing
support for the system and the potential for enhancements and future compatible
software solutions. Certain of our competitors have greater financial,
technical, product development, marketing and other resources than us and some
of our competitors offer software solutions that we do not offer.
Proprietary Technology May Be Subjected to Infringement Claims or May
Be Infringed Upon - We rely upon a combination of license agreements,
confidentiality procedures, employee nondisclosure agreements and technical
measures to maintain the confidentiality and trade secrecy of our proprietary
information. We also rely on trademark and copyright laws to protect our
intellectual property. We currently have a very limited patent portfolio.
As a result, we may not be able to protect against misappropriation of our
intellectual property.
In addition, we could be subject to intellectual property infringement
claims as the number of competitors grow and the functionality of our software
solutions and services overlap with competitive offerings. These claims, even
if not meritorious, could be expensive to defend. If we become liable to
third parties for infringing their intellectual property rights, we could be
required to pay a substantial damage award and to develop noninfringing
technology, obtain a license or cease selling the software solutions that
contain the infringing intellectual property.
Dependence on Key Employees - Our continued success will depend to a
significant degree upon the efforts and abilities of our senior management, in
particular, Richard A. Linden, our President and Chief Executive Officer. We
carry key man life insurance in the amount of $5,000,000 on Richard A. Linden
and $2,000,000 on Scott T. Veech, our Chief Financial Officer. We do not carry
key man life insurance on any other of our officers or directors. The loss of
the services of any of these persons could have a material adverse effect on
us.
Government Regulation - We are subject to regulation by the Federal
Drug Administration ("FDA"). If our software solutions are deemed to be
actively regulated medical devices by the FDA, we could be subject to more
extensive requirements governing pre- and post-marketing requirements.
Complying with these FDA regulations could be time consuming and expensive.
It is possible that the FDA may become more active in regulating computer
software that is used in healthcare.
Following an inspection by the FDA in November of 2003, we received a
FDA warning letter and Form 483 (Notice of Inspectional Observations) listing
observations of non-compliance with certain aspects of the FDA's Quality System
Regulation. We responded to the FDA on February 5, 2004, and undertook a
number of corrective actions in response to the Form 483 and the FDA warning
letter.
There can be no assurance, however, that our actions taken in response
to the Form 483 and warning letter will be deemed adequate by the FDA or that
additional actions will not be required by us. In addition, we remain subject
to periodic FDA inspections and there can be no assurances that we will not be
required to undertake additional actions to comply with the Federal Food,
Drug and Cosmetic Act ("Act") and any other applicable regulatory requirements.
Any failure by us to comply with the Act and any other applicable regulatory
requirements could have a material adverse effect on our ability to continue
to manufacture and distribute our software solutions. The FDA has many
enforcement tools including recalls, seizures, injunctions, civil fines and/or
criminal prosecutions. Any of the foregoing could have a material adverse
effect on our business, results of operations or financial condition.
Product Related Liabilities - Many of our software solutions provide
data for use by healthcare providers in providing care to patients. Although
no such claims have been brought against us to date regarding injuries related
to the use of our software solutions, such claims may be made in the future.
Although we maintain product liability insurance coverage in an amount that
we believe is sufficient for our business, there can be no assurance that
such coverage will cover a particular claim that may be brought in the future,
prove to be adequate or that such coverage will continue to remain available
on acceptable terms, if at all. A successful claim brought against us,
which is uninsured or underinsured, could materially harm our business,
results of operations or financial condition.
Risks Associated with Our Global Operations - We market, sell and
service our software solutions globally. We have established offices
around the world, including North America, the Netherlands and Japan. We
will continue to expand our global operations and enter new global markets.
This expansion will require significant management attention and financial
resources to develop successful indirect global sales and support channels.
Our success will depend, in part, on our ability to form relationships with
local partners. For these reasons, we may not be able to maintain or increase
global market demand for our software solutions.
Global operations are subject to inherent risks, and our future
results could be adversely affected by a variety of uncontrollable and changing
factors. These include:
* Greater difficulty in collecting accounts receivable and
longer collection periods.
* The impact of economic conditions outside the United States
of America.
* Changes in foreign currency exchange.
* Unexpected changes in regulatory requirements.
* Certification requirements.
* Reduced protection of intellectual property rights in some
countries.
* Potentially adverse tax consequences.
* Political instability.
* Trade protection measures and other regulatory requirements.
* Service provider and government spending patterns.
* Natural disasters, war or terrorist acts.
* Poor selection of a partner in a country.
* Political conditions which may threaten the safety of associates
or our continued presence in foreign countries.
Concentrations - Substantially all of our cash and cash equivalents is
held at one United States of America financial institution. Deposits held with
the bank exceed the amount of insurance provided on such deposits. Generally
these deposits may be redeemed upon demand and, therefore, bear minimal risk.
Substantially all of our clients are imaging centers, hospitals and integrated
delivery networks. If significant adverse macro-economic factors were to
impact these organizations, it could materially adversely affect us. Our
access to certain software and hardware components is dependent upon single
and sole source suppliers. The inability of any supplier to fulfill our
supply requirements could affect future results.
MATERIAL OFF BALANCE SHEET ARRANGEMENTS
We have no material off balance sheet arrangements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk. Our cash equivalents are exposed to financial
market risk due to fluctuations in interest rates, which may affect our interest
income. As of June 30, 2004, our cash equivalents and short-term investments
include money market funds and short term deposits totaling $19,489, and earned
interest at a weighted average rate of 0.6%. The value of the principal
amounts are equal to the fair value for these instruments. Due to the relative
short-term nature of our investment portfolio, our interest income is vulnerable
to sudden changes in market interest rates. We do not use our portfolio for
trading or other speculative purposes.
Foreign Currency Exchange Risk. We have sales and expenses in Canada
and Europe that are denominated in currencies other than the United States
dollar and as a result have exposure to foreign currency exchange risk. We do
not currently enter into forward exchange contracts to hedge exposures
denominated in foreign currencies or any other derivative financial instruments
for trading or speculative purposes. However, in the event our exposure to
foreign currency risk increases to levels that we do not deem acceptable, we
may choose to hedge those exposures.
ITEM 4. CONTROLS AND PROCEDURES
Our Chief Executive Officer and Chief Financial Officer have concluded,
based on their evaluation as of a date within 90 days prior to the filing date
of this report, that our disclosure controls and procedures are effective for
gathering, analyzing and disclosing the information we are required to disclose
in our reports filed under the Exchange Act. There have been no significant
changes in our internal controls or in other factors that could significantly
affect these controls subsequent to the date of the previously mentioned
evaluation.
INTERNAL CONTROL OVER FINANCIAL REPORTING
There have not been any changes in our internal control over financial
reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the
Exchange Act) during the most recent fiscal quarter that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
PART II
ITEM 1. LEGAL PROCEEDINGS
On October 24, 2003, ScheduleQuest, Inc. filed a patent infringement
lawsuit (Civil Action No. 03-5900) against us in the United States District
Court for the Eastern District of Pennsylvania alleging that our "RIS Logic
CS Scheduling System" product infringes upon their United States of America
Patent No. 6,389,454 for their "Multi-Facility Appointment Scheduling System"
product. We cannot currently predict the outcome of the litigation or the
amount of any potential loss if our defense is unsuccessful. Our merger
agreement with RIS Logic contains a representation that the RIS Logic
technology does not infringe others' proprietary rights and 173,093 shares
of our Common Stock conveyed to the former RIS Logic owners are in an escrow
holdback to cover any claims of breach of representation or warranty. We
believe that all the claims in the lawsuit are without merit and we intend
to vigorously defend against such claims. However, we cannot provide any
assurances as to the outcome of this litigation or whether the escrow
holdback will be adequate to satisfy any costs, expenses or losses that
we may incur in connection with such litigation.
ITEM 2. CHANGES IN SECURIITES, USE OF PROCEEDS AND ISSUER PURCHASES OF
EQUITY SECURITIES
In the three months ended June 30, 2004, we sold no shares of our
Common Stock in transactions that were not registered under the Securities
Act.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Our Annual Meeting of Shareholders was held on May 20, 2004. Matters
voted on and the results of such votes are listed below.
Votes
Against or
Votes For Withheld Abstained Result
--------- --------- --------- -------
Elect William C. Mortimore to serve as
Director until the next annual meeting
of Shareholders.............................. 9,299,550 992,665 ---- Elected
Elect Robert A. Barish, M.D. to serve as
Director until the next annual meeting of
Shareholders................................. 10,012,232 279,983 ---- Elected
Elect Dennis Brown to serve as Director
until the next annual meeting of
Shareholders................................. 10,012,232 279,983 ---- Elected
Elect Michael D. Dunham to serve as
Director until the next annual meeting of
Shareholders................................. 10,012,232 279,983 ---- Elected
Elect Robert T. Geras to serve as Director
until the next annual meeting of
Shareholders................................. 10,012,232 279,983 ---- Elected
Elect Anna M. Hajek to serve as Director
until the next annual meeting of
Shareholders................................. 10,010,953 281,262 ---- Elected
Elect Richard A. Linden to serve as Director
until the next annual meeting of
Shareholders................................. 10,012,232 279,983 ---- Elected
Elect Richard A. Reck to serve as Director
until the next annual meeting of
Shareholders................................. 9,071,719 1,220,496 ---- Elected
Elect Frank E. Seidelmann, D. O. to serve
as Director until the next annual meeting of
Shareholders................................. 10,012,232 279,983 ---- Elected
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
See Exhibit Index.
(b) On April 29, 2004, we filed a Form 8-K to report in Item 12,
press release announcing financial results for the first
quarter of our fiscal year 2004.
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.
Registrant:
MERGE TECHNOLOGIES INCORPORATED
August 6, 2004 By: /s/ Richard A. Linden
-------------------------------------
Richard A. Linden
President and Chief Executive Officer
August 6, 2004 By: /s/ Scott T. Veech
-------------------------------------
Scott T. Veech
Chief Financial Officer, Secretary
and Treasurer (Principal Financial
Officer and Principal Accounting
Officer)
EXHIBIT INDEX
2.1 Purchase Agreement, dated as of September 1, 1999, by and among Merge
Technologies Incorporated, 3032854 Nova Scotia Company and Interpra
Medical Imaging Network Ltd.(11)
2.2 Reorganization Agreement between Merge Technologies Incorporated, Merge
Technologies Holdings Co., eFilm Medical Inc., Patrice Bret, Gregory
Couch and Catherine McCallum, dated as of April 15, 2002(13)
2.3 Merger Agreement by and among Merge Technologies Incorporated, RL
Acquisition Corp, RIS Logic Incorporated, and the Principal Shareholders
of RIS Logic Incorporated dated July 9, 2003(14)
3.1 Articles of Incorporation of Registrant(2), Articles of Amendment as
filed on December 28, 1998(3), Articles of Amendment as filed on
September 2, 1999(6), Articles of Amendment as filed on February 23,
2001(6), and Articles of Amendment as filed on August 9, 2002(15)
3.2 Amended and Restated Bylaws of Registrant as of February 3, 1998(1)
10.1 Employment Agreement entered into as of March 1, 2004, between
Registrant and Richard A. Linden(15)
10.2 Employment Agreement entered into as of March 1, 2004, between
Registrant and William C. Mortimore(15)
10.3 Employment Agreement entered into as of March 1, 2004, between
Registrant and Scott T. Veech(15)
10.4 Employment Agreement entered into as of March 1, 2004, between
Registrant and David M. Noshay(15)
10.5 1996 Stock Option Plan for Employees of Registrant dated May 13,
1996(2), as amended and restated in its entirety as of September
1, 2003(10)
10.6 Office Lease for West Allis Center dated May 24, 1996, between
Registrant and Whitnall Summit Company, LLC, Supplemental Office
Lease dated July 3, 1997(1), Supplemental Office Space Lease dated
January 30, 1999(2), Supplemental Office Space Lease for 1126 West
Allis Operating Associates Limited Partnership dated April 11,
2000(4) and Second Amendment to Lease dated January 11, 2002,
between Registrant and 1126 West Allis Operating Associates, Limited
Partnership(7)
10.7 1998 Stock Option Plan For Directors(1)
10.8 2003 Stock Option Plan of Registrant dated June 24, 2003, and
effective July 17, 2003(10)
10.9 Merge Technologies Incorporated 2000 Employee Stock Purchase Plan,
as amended(5)
10.10 Loan Agreement dated as of November 21, 2003, by and between
Registrant and Lincoln State Bank(15)
10.11 Asset Purchase Agreement by and among Signal Stream, Inc., a wholly
owned subsidiary of Merge Technologies Incorporated, and Aurora
Technology Inc., entered into as of April 18, 2002(12)
31.1 Certification of Chief Executive Officer Pursuant to Section 13(a)
of the Securities Exchange Act of 1934
31.2 Certification of Chief Financial Officer Pursuant to Section 13(a)
of the Securities Exchange Act of 1934
32 Certification of Chief Executive Officer and Chief Financial Officer
Pursuant to Section 13(a) of the Securities Exchange Act of 1934
(Section 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906
of the Sarbanes - Oxley Act of 2002)
99.1 Code of Ethics(15)
99.2 Whistleblower Policy(15)
_________________________
(1) Incorporated by reference from Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1997.
(2) Incorporated by reference from Registration Statement on Form SB-2
(No. 333-39111) effective January 29, 1998.
(3) Incorporated by reference from Quarterly Report on Form 10-QSB for the
three months ended June 30, 1999.
(4) Incorporated by reference from Quarterly Report on Form 10-QSB for the
three months ended June 30, 2000.
(5) Incorporated by reference from Proxy Statement for 2000 Annual Meeting
of Shareholders dated May 9, 2000.
(6) Incorporated by reference from Annual Report on Form 10-KSB for the
fiscal year ended December 31, 2000.
(7) Incorporated by reference from Annual Report on Form 10-KSB for the
fiscal year ended December 31, 2001.
(8) Incorporated by reference from Annual Report on Form 10-KSB for the
fiscal year ended December 31, 2002.
(9) Incorporated by reference from Quarterly Report on Form 10-Q for the
three months ended June 30, 2003.
(10) Incorporated by reference from Quarterly Report on Form 10-Q for the
three months ended September 30, 2003.
(11) Incorporated by reference from Current Report on Form 8-K dated
September 3, 1999.
(12) Incorporated by reference from Current Report on Form 8-K dated
May 22, 2002.
(13) Incorporated by reference from Current Report on Form 8-K dated
June 28, 2002.
(14) Incorporated by reference from Current Report on Form 8-K dated
July 17, 2003.
(15) Incorporated by reference from Annual Report on Form 10-K for the
fiscal year ended December 31, 2003.
- -------------
EXHIBIT 31.1
- -------------
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-Q of Merge Technologies
Incorporated (the "Registrant");
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-15(e) and 15d-15(e)) and internal control over financial reporting
(as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
Registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, 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; and
(b) Designed such internal control over financial reporting, or
caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in
accordance with generally accepted accounting principles; and
(c) Evaluated the effectiveness of the Registrant's disclosure
controls and procedures and presented in this quarterly report
our conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period covered
by this quarterly report based on such evaluation; and
(d) Disclosed in this quarterly report any change in the
Registrant's internal control over financial reporting that
occurred during the Registrant's most recent fiscal quarter
that has materially affected, or is reasonably likely to
materially affect, the Registrant's internal control over
financial reporting; and
5. The Registrant's Certifying Officers have disclosed, based on the
Certifying Officers' most recent evaluation of internal control over
financial reporting, to the Registrant's auditors and the Audit
Committee of the Registrant's Board of Directors:
(a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial
reporting which are reasonably likely to adversely affect
the Registrant's ability to record, process, summarize and
report financial information; and
(b) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
Registrant's internal control over financial reporting.
Date: August 6, 2004
/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 included as an exhibit to this report.
- -------------
EXHIBIT 31.2
- -------------
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-Q of Merge Technologies
Incorporated (the "Registrant");
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-15(e) and 15d-15(e)) and internal control over financial reporting
(as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
Registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, 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; and
(b) Designed such internal control over financial reporting, or
caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in
accordance with generally accepted accounting principles; and
(c) Evaluated the effectiveness of the Registrant's disclosure
controls and procedures and presented in this quarterly report
our conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period covered
by this quarterly report based on such evaluation; and
(d) Disclosed in this quarterly report any change in the
Registrant's internal control over financial reporting that
occurred during the Registrant's most recent fiscal quarter
that has materially affected, or is reasonably likely to
materially affect, the Registrant's internal control over
financial reporting; and
5. The Registrant's Certifying Officers have disclosed, based on the
Certifying Officers' most recent evaluation of internal control over
financial reporting, to the Registrant's auditors and the Audit
Committee of the Registrant's Board of Directors:
(a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial
reporting which are reasonably likely to adversely affect
the Registrant's ability to record, process, summarize and
report financial information; and
(b) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
Registrant's internal control over financial reporting.
Date: August 6, 2004
/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 included as an exhibit to this report.
- ------------
EXHIBIT 32
- ------------
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
In connection with the Quarterly Report on Form 10-Q of MERGE
TECHNOLOGIES INCORPORATED (the "Company") for the quarterly period ended
June 30, 2004, 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 certify, 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 their 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: August 6, 2004 By: /s/ Richard A. Linden
-------------------------
Richard A. Linden
Chief Executive Officer
Date: August 6, 2004 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 certifications pursuant to Section 302 of the Sarbanes - Oxley
Act of 2002, which are included in this quarterly report on Form 10-Q.