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 March 31, 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 May 7, 2004, the issuer had 12,611,820 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...... 19
Item 4. Controls and Procedures......................................... 19
PART II OTHER INFORMATION
--------------------------
Item 1. Legal Proceedings............................................... 19
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of
Equity Securities............................................... 20
Item 3. Defaults upon Senior Securities................................. 20
Item 4. Submission of Matters to a Vote of Security Holders............. 20
Item 5. Other Information............................................... 20
Item 6. Exhibits and Reports on Form 8-K................................ 20
PART I
--------
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
MERGE TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except for share data)
March 31, December 31,
2004 2003
----------- ------------
(Unaudited)
ASSETS
Current assets:
Cash............................................................... $ 18,113 $ 16,871
Accounts receivable, net of allowance for doubtful accounts of
$385 and $374 at March 31, 2004 and December 31, 2003,
respectively...................................................... 8,230 8,359
Inventory.......................................................... 910 893
Prepaid expenses................................................... 447 288
Deferred tax asset................................................. 2,953 3,541
Other current assets............................................... 276 156
----------- ------------
Total current assets................................................. 30,929 30,108
----------- ------------
Property and equipment:
Computer equipment................................................. 4,911 4,819
Office equipment................................................... 724 718
Leasehold improvements............................................. 345 259
----------- ------------
5,980 5,796
Less accumulated depreciation and amortization..................... 4,309 4,122
----------- ------------
Net property and equipment........................................... 1,671 1,674
Long-term accounts receivable........................................ 87 101
Purchased and developed software, net of accumulated amortization
of $7,823 and $7,314 at March 31, 2004 and December 31, 2003,
respectively....................................................... 8,828 8,420
Intangibles - customer contracts, net of accumulated amortization of
$468 and $371 at March 31, 2004 and December 31, 2003,
respectively....................................................... 1,475 1,572
Goodwill............................................................. 21,736 21,846
Other................................................................ 54 174
----------- ------------
Total assets......................................................... $ 64,780 $ 63,895
=========== ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................... $ 998 $ 1,294
Accrued wages...................................................... 803 911
Notes payable...................................................... 221 219
Redemption value related to exchangeable Common Stock.............. 5 68
Other accrued liabilities.......................................... 655 795
Deferred revenue................................................... 3,797 3,717
Billings in excess of revenues - contracts in progress............. 904 1,381
----------- ------------
Total current liabilities............................................ 7,383 8,385
Deferred tax liability............................................. 2,106 1,987
----------- ------------
Total liabilities.................................................... 9,489 10,372
----------- ------------
Shareholders' equity:
Preferred stock, $0.01 par value: 3,999,998 shares authorized;
zero shares issued and outstanding at March 31, 2004 and
December 31, 2003................................................. $ ---- $ ----
Series A Preferred Stock, $0.01 par value: 1,000,000 shares
authorized; zero shares issued and outstanding at March 31, 2004
and December 31, 2003............................................. ---- ----
Special Voting Preferred stock, no par value: one share
authorized; one share issued and outstanding at March 31, 2004
and December 31, 2003............................................. ---- ----
Series 2 Special Voting Preferred stock, no par value: one share
authorized; one share issued and outstanding at March 31, 2004
and December 31, 2003............................................. ---- ----
Common Stock, $0.01 par value: 30,000,000 shares authorized;
12,607,530 shares and 12,485,646 shares issued and outstanding at
March 31, 2004 and December 31, 2003, respectively................ 126 125
Common Stock subscribed: 1,290 and 8,058 shares at March 31, 2004
and December 31, 2003, respectively............................... 19 47
Additional paid-in capital......................................... 53,598 53,175
Retained earnings (accumulated deficit)............................ 1,298 (56)
Accumulated other comprehensive income - cumulative translation
adjustment........................................................ 250 232
----------- ------------
Total shareholders' equity........................................... 55,291 53,523
----------- ------------
Total liabilities and shareholders' equity........................... $ 64,780 $ 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
March 31,
---------------------------
2004 2003
----------- -----------
Net sales.................................................... $ 8,637 $ 6,117
Cost of sales................................................ 3,219 2,051
----------- -----------
Gross profit................................................. 5,418 4,066
----------- -----------
Operating costs and expenses:
Sales and marketing........................................ 1,694 1,325
Product research and development........................... 482 439
General and administrative................................. 912 721
Depreciation and amortization.............................. 189 106
----------- -----------
Total operating costs and expenses........................... 3,277 2,591
----------- -----------
Operating income............................................. 2,141 1,475
----------- -----------
Other income (expense):
Interest expense........................................... (5) (4)
Interest income............................................ 54 13
Other, net................................................. 3 12
----------- -----------
Total other income........................................... 52 21
----------- -----------
Income before income taxes................................... 2,193 1,496
Income tax expense........................................... 839 180
----------- -----------
Net income................................................... $ 1,354 $ 1,316
=========== ===========
Net income per share - basic................................. $ 0.10 $ 0.12
=========== ===========
Weighted average number of common shares outstanding - basic. 12,886,780 10,462,086
=========== ===========
Net income per share - diluted............................... $ 0.10 $ 0.11
=========== ===========
Weighted average number of common shares outstanding
- diluted.................................................. 13,752,543 11,238,171
=========== ===========
See accompanying notes to consolidated financial statements.
MERGE TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Three Months Ended
March 31,
---------------------------
2004 2003
------------ -----------
Cash flows from operating activities:
Net income................................................... $ 1,354 $ 1,316
Adjustments to reconcile net income to net cash provided by
operating activities
Depreciation and amortization.............................. 827 555
Amortization of discount on note acquired in merger........ 4 4
Provision for (recoveries of) doubtful accounts receivable. 11 (20)
Deferred income taxes...................................... 782 ----
Change in assets and liabilities:
Accounts receivable....................................... 118 807
Inventory................................................. (17) (284)
Prepaid expenses.......................................... (160) (101)
Accounts payable.......................................... (241) (272)
Accrued wages............................................. (108) (140)
Other accrued expenses.................................... (110) 580
Deferred revenue and billings in excess of revenues....... (386) 309
Other..................................................... 69 (3)
----------- -----------
Net cash provided by operating activities..................... 2,143 2,751
Cash flows from investing activities:
Purchases of property and equipment.......................... (191) (233)
Capitalized software development............................. (958) (468)
----------- -----------
Net cash used in investing activities......................... (1,149) (701)
----------- -----------
Cash flows from financing activities:
Proceeds from exercise of stock options...................... 238 25
Proceeds from employee stock purchase plan................... 19 28
Principal payments under capital leases...................... ---- (7)
----------- -----------
Net cash provided by financing activities..................... 257 46
----------- -----------
Effect of exchange rate changes on cash....................... (9) 63
----------- -----------
Net increase in cash and cash equivalents..................... 1,242 2,159
----------- -----------
Cash, beginning of period..................................... 16,871 4,411
----------- -----------
Cash, end of period........................................... $ 18,113 $ 6,570
=========== ===========
Supplemental Disclosures of Cash Flow Information:
Cash paid for income taxes.................................. $ 229 $ 61
Cash paid for interest...................................... ---- 1
Non-cash Financing and Investing Activities:
Redemption value related to exchangeable Common Stock....... 1 22
See accompanying notes to consolidated financial statements.
MERGE TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(in thousands)
Three Months Ended
March 31,
--------------------------
2004 2003
----------- ----------
Net income............................................. $ 1,354 $ 1,316
Accumulated other comprehensive income - cumulative
translation adjustment............................... 18 97
----------- ----------
Comprehensive income................................... $ 1,372 $ 1,413
=========== ==========
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 months ended March 31, 2004 and 2003, to the pro forma amounts
indicated below:
Three Months ended March 31,
2004 2003
----------- -----------
Net income, as reported...................... $ 1,354 $ 1,316
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax benefits................ (182) (133)
----------- -----------
Pro forma net income......................... $ 1,172 $ 1,183
=========== ===========
Earnings per share:
Basic - as reported........................ $ 0.10 $ 0.12
=========== ===========
Basic - pro forma.......................... $ 0.09 $ 0.11
=========== ===========
Diluted - as reported...................... $ 0.10 $ 0.11
=========== ===========
Diluted - pro forma........................ $ 0.09 $ 0.10
=========== ===========
(2) GOODWILL AND OTHER INTAGIBLES
Goodwill is our only unamortizable intangible asset. In the three
months ended March 31, 2004, we reduced goodwill by $110 due to a Canadian tax
credit associated with software development efforts related to periods prior to
MERGE TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited and in thousands, except for share data)
our acquisition of eFilm Medical Inc. ("eFilm"). The changes in the carrying
amount of goodwill in the three months ended March 31, 2004, are as follows:
Balance as of January 1, 2004.................... $ 21,846
Goodwill related to eFilm acquisition............ (110)
-----------
Balance as of March 31, 2004..................... $ 21,736
===========
Our intangible assets, other than internally developed software,
subject to amortization are summarized as of March 31, 2004, as follows:
Weighted
Average
Remaining Gross
Amortization Carrying Accumulated
Period (Years) Amount Amortization
------------- ------------ ------------
Purchased software..................... 3.6 $ 2,901 $ (793)
Customer contracts..................... 3.8 1,943 (468)
------------ ------------
Total.................................. 3.7 $ 4,844 $ (1,261)
============ ============
Amortization expense was $244 for the three months ended March 31,
2004. Estimated aggregate amortization expense for each of the next five years
is as follows:
For the remaining nine months: 2004 $ 729
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 months ended March 31, 2004 and 2003.
MERGE TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited and in thousands, except for share data)
March 31,
---------------------------
2004 2003
------------ -----------
Numerator:
Net income........................................... $ 1,354 $ 1,316
Accretion of redemption value related to Interpra
exchangeable shares................................ (1) (22)
Allocation of income to Interpra exchangeable shares. (1) (28)
------------ -----------
Numerator for net income per share - basic and
diluted............................................ $ 1,352 $ 1,266
============ ===========
Denominator:
Weighted average number of shares of Common Stock
and participating securities outstanding........... 12,886,780 10,462,086
Effect of stock options.............................. 865,763 682,762
Effect of warrants................................... ---- 93,323
------------ -----------
Denominator for net income per share - diluted....... 13,752,543 11,238,171
============ ===========
Net income per share - basic........................ $ 0.10 $ 0.12
Net income per share - diluted...................... $ 0.10 $ 0.11
For the three months ended March 31, 2004 and 2003, 323,500 and
205,000, 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
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
MERGE TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited and in thousands, except for share data)
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 three months ended March 31, 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 the period. Moreover,
this data is not intended to be indicative of future results of operations.
Revenue........................ $ 7,105
Net income..................... $ 935
Earnings per share:
Basic........................ $ 0.08
Diluted...................... $ 0.07
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
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(Trademark). 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 approach 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(Trademark) also is the core to our strategy to "own" the clinician
desktop market. We sell our eFilm Workstation(Trademark) 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. This strategy also positions us to be the PACS system
of choice for that healthcare system.
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 film-less workflow and a RIS deliver paperless
workflow. We see these products as core elements behind our success in
achieving our results in the three months ended March 31, 2004, and for the
foreseeable future.
Significant Events in the Three Months Ended March 31, 2004
------------------------------------------------------------
During the three months ended March 31, 2004, we placed 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 be a single-source provider for radiology business and
clinical workflow software, delivering service and support from a unified
professional service team. During the three months ended March 31, 2004, we
successfully closed 17 new FUSION(Trademark) RIS, PACS or RIS/PACS contracts,
growing our total number of FUSION(Trademark) solution customers to 143,
representing over 290 healthcare facilities.
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.
During the three months ended March 31, 2004, we released a new
version and pricing model of eFilm Workstation(Trademark), the diagnostic
imaging desktop software market leader, and we continued developing our next
generation RIS/PACS with single desktop integration, enhanced web capabilities
and new modules of functionality such as voice recognition and document
management. Finally, our professional services group has expanded both in size
and capabilities in line with our growing volume of FUSION(Trademark) RIS, PACS
and RIS/PACS implementations and our increasing number of service contracts.
Our professional services group optimizes our customers' RIS/PACS investments
through a planning and implementation process based on sharing responsibilities
and establishing long-term partnerships.
RESULTS OF OPERATIONS
(in thousands)
Three Months Ended March 31, 2004 Compared to Three Months Ended March 31, 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
March 31,
--------------------
2004 2003
---- ----
Net sales..................................... 100% 100%
Cost of sales................................. 37 34
---- ----
Gross profit.................................. 63 66
---- ----
Operating costs and expenses:
Sales and marketing......................... 20 22
Product research and development............ 6 7
General and administrative.................. 10 11
Depreciation and amortization............... 2 2
---- ----
Total operating costs and expenses............ 38 42
---- ----
Operating income.............................. 25 24
Total other income, net....................... 1 0
---- ----
Income before income taxes.................... 26 24
Income tax expense............................ 10 2
---- ----
Net income.................................... 16% 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/value
added resellers ("VARs"), net of estimated product returns. Net sales for the
three months ended March 31, 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
March 31,
-------------------------
2004 2003 % Change
--------- --------- --------
Direct sales................................. $ 3,673 $ 1,338 175%
As a percentage of total net sales......... 42% 22%
Professional services........................ $ 2,481 $ 1,357 83%
As a percentage of total net sales......... 29% 22%
OEM / VARs................................... $ 2,483 $ 3,422 -27%
As a percentage of total net sales......... 29% 56%
Total net sales.............................. $ 8,637 $ 6,117 41%
Direct sales consist of software and purchased components delivered in
PACS, RIS and RIS/PACS sales to healthcare facilities and imaging centers. The
$2,335 increase in direct sales in the three months ended March 31, 2004
compared to March 31, 2003 is attributed to increased revenue recognized on
RIS, PACS or RIS/PACS deals, including 17 new sales closed during the three
months ended March 31, 2004. Direct sales in the three months ended March 31,
2003 were reduced by a $430 provision for a sales return from one customer
related to a sale made in the third quarter of 2002.
Net sales from the professional services group increased $1,124 in the
three months ended March 31, 2004 compared to the three months ended March 31,
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 the sales made directly to
healthcare facilities and imaging centers.
Net sales to OEM/VARs and dealers decreased $939 in the three months
ended March 31, 2004 attributed to a long-term OEM component business with one
customer reaching end of life, a shift in our focus from regional VARs to
targeting national business development relationships in the United States of
America and we experienced unusually low sales from European VARs.
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 decreased as a percentage of net
sales to 13% in the three months ended March 31, 2004 compared to 16% in the
three months ended March 31, 2003. The cost of purchased components increased
to $1,115 in the three months ended March 31, 2004 compared to $984 in the
three months ended March 31, 2003, as a result of the purchased components
included in RIS/PACS deals recognized under the percentage-of-completion
method of contract accounting during the three months ended March 31, 2004.
The cost of professional services increased to $1,466 in the three
months ended March 31, 2004 compared to $605 in the three months ended March
31, 2003. The increase was due to our acquisition of RIS Logic in the third
quarter of 2003 and the reassignment of several pre-sales and technical
sales staff to the professional services group to keep pace with the increase
in RIS, PACS and RIS/PACS deals.
Amortization of purchased and developed software increased to $638 in
the three months ended March 31, 2004 compared to $462 in the three months
ended March 31, 2003. As a percentage of net sales, amortization of purchased
and developed software decreased slightly to 7% in the three months ended
March 31, 2004 compared to 8% in the three months ended March 31, 2003. The
dollar increase in the three months ended March 31, 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 33% to $5,418 in the three months ended March
31, 2004 from $4,066 in the three months ended March 31, 2003. As a percentage
of net sales, gross profit decreased to 63% of net sales in the three months
ended March 31, 2004 compared to 66% in the three months ended March 31, 2003.
The decrease in gross margin in the three months ended March 31, 2004 is a
result of the increased professional services cost of goods sold due to the
reassignments of staff to the professional service group.
SALES AND MARKETING
Sales and marketing expense increased 28% to $1,694 in the three months
ended March 31, 2004 from $1,325 in the three months ended March 31, 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. In addition, sales staff headcount
increased in the three months ended March 31, 2004, compared to the three
months ended March 31, 2003, as a result of normal hiring and sales people
retained from the acquisition of RIS Logic.
PRODUCT RESEARCH AND DEVELOPMENT
Research and development expense as a percentage of net sales remained
relatively consistent at 6% for the three months ended March 31, 2004 compared
to 7% for the three months ended March 31, 2003. Research and development
expense increased 10% to $482 in the three months ended March 31, 2004 from
$439 in three months ended March 31, 2003. Capitalization of software
development costs increased $490 to $958 in the three months ended March 31,
2004 from $468 in the three months ended March 31, 2003. We anticipate
research and development costs will continue to increase in 2004 as we increase
our new product development, particularly related to developing our
FUSION(Trademark) application modules and further integrate our RIS/PACS
technologies.
GENERAL AND ADMINISTRATIVE
General and administrative expense increased 26% to $912 in the three
months ended March 31, 2004 from $721 in the three months ended March 31,
2003. General and administrative expense includes costs for information
systems, accounting, administrative support, management personnel, bad debt
expenses and general corporate matters. The $191 increase is primarily
attributed to increased costs associated with corporate governance and
compliance with the Sarbanes - Oxley Act of 2002.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense increased 78% or $83 to $189 in
the three months ended March 31, 2004 from $106 in the three months ended
March 31, 2003. Depreciation and amortization is assessed on capital
equipment and intangible assets with estimable useful lives. This is net of
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 investment to support our growth.
OTHER INCOME, EXPENSE
Our interest expense increased to $5 in the three months ended March
31, 2004 from $4 in three months ended March 31, 2003, and interest income was
$54 in the three months ended March 31, 2004 compared to interest income of
$13 in three months ended March 31, 2003. The increase in interest income is
directly attributed to our increased cash balance at March 31, 2004. Other
income, net, was $3 in the three months ended March 31, 2004 compared to other
income, net in the three months ended March 31, 2003 of $12.
INCOME TAXES
We recorded income tax expense of $839 in the three months ended March
31, 2004 and $180 in the three months ended March 31, 2003. The increase is
attributed to our estimated domestic and international effective rate of 38%,
which has been applied to the three month period ended March 31, 2004,
compared to the 12% rate applied to the three month period ended March 31,
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 $2,143 in the three months
ended March 31, 2004 compared to $2,751 in the in the three months ended March
31, 2003. Our positive operating cash flow in the three months ended March
31, 2004 was due primarily to net income of $1,354, depreciation and
amortization expense of $827 and deferred income taxes of $782, offset by a
$386 decrease in deferred revenue and billings in excess of revenues due to
the progress made and stage of completion on contracts accounted for under
contract accounting, and a decrease of $241 in accounts payable.
The total days sales outstanding for the three months ended March 31,
2004 improved to 86 days compared to 97 days for the three months ended March
31, 2003. The decrease in days sales outstanding is attributed to the
continued effort towards collection of receivables.
Although we anticipate recording income tax expense using a 38%
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.
INVESTING CASH FLOWS
Cash used in investing activities was $1,149 in the three months ended
March 31, 2004, due primarily to cash outflows for capitalized software
development costs of $958 and purchases of capital equipment of $191. We
expect to continue to invest in software development projects that will
continue to accelerate sales.
FINANCING CASH FLOWS
Cash provided by financing activities was $257 in the three months
ended March 31, 2004. We received net proceeds of $238 from employee and
director stock option exercises and $19 from purchases of our Common Stock by
employees under our employee stock purchase plan.
Total outstanding commitments at March 31, 2004 were as follows:
Less than 1 - 3 4 - 6 7 - 10
Contractual Obligations Total 1 Year Years Years Years
------------------------------ ------- -------- -------- -------- -------
Short-term debt............... $ 229 $ 229 $ ---- $ ---- $ ----
Operating leases.............. 3,498 695 1,360 822 621
------- -------- -------- -------- -------
Total contractual cash
obligations................. $ 3,727 $ 924 $ 1,360 $ 822 $ 621
======= ======== ======== ======== =======
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 March 31, 2004, the loan's interest rate was 3.25%. No amounts
were outstanding on the line of credit as of March 31, 2004.
We do not have any other significant long-term obligations,
contractual obligations, lines of credit, standby letters of credit,
guarantees, standby repurchase obligations or other commercial commitments.
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
debt. Our management determines collection risk and records allowances for bad
debt based on the aging of accounts and past transaction history with
customers. If the financial condition of 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 technical 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 INTAGIBLE 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 our impairment losses, we
evaluated the fair value 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.
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 $2,000,000 on Richard A. Linden.
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 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
Information contained under the caption "Factors That May Affect Future
Results of Operations, Financial Condition or Business" set forth under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in Item 2 is incorporated herein by reference.
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 SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF
EQUITY SECURITIES
In the three months ended March 31, 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
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
See Exhibit Index.
(b) On February 20, 2004, we filed a Form 8-K to report in Item
12 the financial results of our fiscal year 2003.
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
May 10, 2004 By: /s/ Richard A. Linden
------------------------------------------------
Richard A. Linden
President and Chief Executive Officer
May 10, 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)
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 1996 Stock Option Plan for Employees of Registrant dated May 13, 1996,
as amended and restated in its entirety as of September 1, 2003(10)
10.9 2003 Stock Option Plan of Registrant dated June 24, 2003, and
effective July 17, 2003(10)
10.10 Merge Technologies Incorporated 2000 Employee Stock Purchase Plan, as
amended(15)
10.11 Loan Agreement dated as of November 21, 2003, by and between Registrant
and Lincoln State Bank(15)
10.12 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 March 31, 1999.
(4) Incorporated by reference from Quarterly Report on Form 10-QSB for the
three months ended March 31, 2000.
(5) Incorporated by reference from Proxy Statement for 2000 Annual Mailing
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 dated
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
(the Registrant's fourth fiscal quarter in the case of this
quarterly report) 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: May 10, 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
(the Registrant's fourth fiscal quarter in the case of this
quarterly report) 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: May 10, 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 three months ended March 31,
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: May 10, 2004 By: /s/ Richard A. Linden
------------------------------
Richard A. Linden
Chief Executive Officer
Date: May 10, 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.