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 September 30, 2003
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 of (IRS Employer
incorporation or organization) Identification Number)
1126 South 70th Street, Milwaukee, WI 53214-3151
(Address of principal executive offices)
(414) 977-4000
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
---- ----
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 November 12, 2003, the issuer had 12,432,835 shares of common
stock outstanding.
INDEX
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Page
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PART I FINANCIAL INFORMATION
------------------------------
Item 1. Financial Statements.......................................... 1
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................... 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk.... 18
Item 4. Controls and Procedures....................................... 18
PART II OTHER INFORMATION
-----------------------------
Item 1. Legal Proceedings............................................. 18
Item 2. Changes in Securities and Use of Proceeds..................... 18
Item 3. Defaults upon Senior Securities............................... 19
Item 4. Submission of Matters to a Vote of Security Holders........... 19
Item 5. Other Information............................................. 19
Item 6. Exhibits and Reports on Form 8-K.............................. 19
Signatures.................................................... 20
Exhibit Index
PART I
--------
ITEM 1. FINANCIAL STATEMENTS
------------------------------
CAPTION>
MERGE TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except for share data)
September 30, December 31,
2003 2002
------------ ------------
(Unaudited)
------------ ------------
ASSETS
Current assets:
Cash............................................................... $ 15,238 $ 4,411
Accounts receivable, net of allowance for doubtful accounts of
$363 and $293 at September 30, 2003 and December 31, 2002,
respectively...................................................... 7,763 7,069
Unbilled accounts receivable....................................... 344 79
Inventory.......................................................... 693 453
Prepaid expenses................................................... 358 176
Other current assets............................................... 77 25
----------- -----------
Total current assets................................................. 24,473 12,213
----------- -----------
Property and equipment:
Computer equipment................................................. 4,580 3,725
Office equipment................................................... 663 501
Leasehold improvements............................................. 232 147
----------- -----------
5,475 4,373
Less accumulated depreciation and amortization.................... 3,925 3,531
----------- -----------
Net property and equipment........................................... 1,550 842
Purchased and developed software, net of accumulated amortization
of $6,765 and $5,522 at September 30, 2003 and December 31, 2002,
respectively........................................................ 8,171 5,703
Intangibles - customer contracts, net of accumulated amortization
of $269 and $97 at September 30, 2003 and December 31, 2002,
respectively........................................................ 1,507 869
Long-term accounts receivable........................................ 116 144
Goodwill............................................................. 21,971 7,406
Other................................................................ 55 69
----------- -----------
Total assets......................................................... $ 57,843 $ 27,246
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................... $ 979 $ 1,493
Current portion of obligations under capital leases................ ---- 7
Accrued compensation............................................... 1,238 685
Other accrued liabilities.......................................... 1,166 264
Billings in excess of revenue - contracts in progress.............. 814 ----
Deferred revenue................................................... 3,778 1,892
----------- -----------
Total current liabilities............................................ 7,975 4,341
Notes payable........................................................ 207 167
Put options related to redeemable common stock....................... 94 1,038
Other................................................................ 52 17
----------- -----------
Total liabilities.................................................... 8,328 5,563
----------- -----------
Shareholders' equity:
Preferred stock, $0.01 par value: 3,999,998 shares authorized;
zero shares issued and outstanding at September 30, 2003 and
December 31, 2002................................................. $ ---- $ ----
Series A Preferred stock, $0.01 par value: 1,000,000 shares
authorized; zero shares issued and outstanding at September 30,
2003 and December 31, 2002........................................ ---- ----
Special Voting Preferred stock, no par value: one share
authorized; one share issued and outstanding at September 30,
2003 and December 31, 2002........................................ ---- ----
Series 2 Special Voting Preferred stock, no par value: one share
authorized; one share issued and outstanding at September 30, 2003
and December 31, 2002............................................. ---- ----
Common stock, $0.01 par value: 30,000,000 shares authorized;
12,403,436 shares and 9,481,683 shares issued and outstanding at
September 30, 2003 and December 31, 2002, respectively............ 124 95
Common stock subscribed: 7,768 and 3,542 shares at September 30,
2003 and December 31, 2002, respectively.......................... 45 15
Additional paid-in capital......................................... 51,162 28,035
Common stock subscription receivable............................... ---- (25)
Accumulated deficit................................................ (1,953) (6,295)
Accumulated other comprehensive income (loss) - cumulative
translation adjustment............................................ 137 (142)
----------- -----------
Total shareholders' equity........................................... 49,515 21,683
----------- -----------
Total liabilities and shareholders' equity........................... $ 57,843 $ 27,246
=========== ===========
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 Nine Months Ended
September 30, September 30,
-----------------------------------------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
Net sales............................. $ 7,619 $ 5,322 $ 20,170 $ 14,040
Cost of sales......................... 2,586 2,079 6,266 5,513
----------- ----------- ----------- -----------
Gross profit.......................... 5,033 3,243 13,904 8,527
----------- ----------- ----------- -----------
Operating costs and expenses:
Sales and marketing.................. 1,669 1,043 4,470 2,792
Product research and development..... 566 451 1,402 1,164
General and administrative........... 901 544 2,487 1,693
Depreciation and amortization........ 159 145 383 377
Acquired in-process research and
development......................... ---- ---- ---- 148
----------- ----------- ----------- -----------
Total operating costs and expenses.... 3,295 2,183 8,742 6,174
----------- ----------- ----------- -----------
Operating income...................... 1,738 1,060 5,162 2,353
----------- ----------- ----------- -----------
Other income (expense):
Interest expense..................... (4) (5) (13) (17)
Interest income...................... 35 16 60 32
Other, net........................... 66 (13) (169) 28
----------- ----------- ----------- -----------
Total other income (expense).......... 97 (2) (122) 43
----------- ----------- ----------- -----------
Income before income taxes............ 1,835 1,058 5,040 2,396
Income tax expense.................... 210 12 698 46
----------- ----------- ----------- -----------
Net income............................ $ 1,625 $ 1,046 $ 4,342 $ 2,350
=========== =========== =========== ===========
Net income per share - basic.......... $ 0.13 $ 0.10 $ 0.38 $ 0.26
=========== =========== =========== ===========
Weighted average number of common
shares outstanding - basic........... 12,233,517 10,131,406 11,158,830 8,330,855
=========== =========== =========== ===========
Net income per share - diluted........ $ 0.12 $ 0.09 $ 0.35 $ 0.22
=========== =========== =========== ===========
Weighted average number of common
shares outstanding - diluted......... 13,333,497 10,977,879 12,155,375 10,146,516
=========== =========== =========== ===========
See accompanying notes to consolidated financial statements.
MERGE TECHNOLOGIES INCORPORATED
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(Unaudited)
Nine Months Ended September 30, 2003
(in thousands, except for share data)
Series 2
Special Voting Special Voting
Preferred Stock Preferred Stock
---------------------- ----------------------
Shares Issued Shares Issued
issued amount issued amount
---------- ---------- ---------- ----------
Balance at December 31, 2002 1 $ ------ 1 $ -----
---------- ---------- ---------- ----------
Accretion of put value................ ---- ---- ---- ----
Issuance of common stock.............. ---- ---- ---- ----
Shares issued for acquisitions........ ---- ---- ---- ----
Exchange of share rights into common
stock............................... ---- ---- ---- ----
Shares issued for services rendered... ---- ---- ---- ----
Stock purchased under ESPP............
Exercise of stock options............. ---- ---- ---- ----
Exercise of stock warrants............ ---- ---- ---- ----
Reduction of stock subcription
receivable from related party....... ---- ---- ---- ----
Net income............................ ---- ---- ---- ----
Foreign currency cumulative
translation adjustment............... ---- ---- ---- ----
---------- ---------- ----------- ---------
Balance at September 30, 2003......... 1 $ ---- 1 ----
========== ========== =========== =========
Common Stock
---------------------------------------------- ------------------------
Additional
Shares Subscribed Shares Issued paid-in Accumulated
subscribed amount issued amount capital deficit
---------- ---------- ---------- ---------- ----------- -----------
Balance at December 31, 2002 3,542 $ 15 9,481,683 $ 95 $ 28,035 $ (6,295)
---------- ---------- ---------- ---------- ----------- -----------
Accretion of put value................ ---- ---- ---- ---- 945 ----
Issuance of common stock.............. ---- ---- 701,664 7 7,738 ----
Shares issued for acquisitions........ ---- ---- 771,804 8 12,485 ----
Exchange of share rights into Common
Stock............................... ---- ---- 846,555 8 (8) ----
Shares issued for services rendered... ---- ---- 28 ---- ---- ----
Stock purchased under ESPP............ 4,226 30 14,107 ---- 76 ----
Exercise of stock options............. ---- ---- 483,504 5 1,823 ----
Exercise of stock warrants............ ---- ---- 104,001 1 68 ----
Reduction of stock subcription
receivable from related party....... ---- ---- ---- ---- ---- ----
Net income............................ ---- ---- ---- ---- ---- 4,342
Foreign currency cumulative
translation adjustment............... ---- ---- ---- ---- ---- ----
---------- ---------- ---------- ---------- ----------- -----------
Balance at September 30, 2003......... 7,768 $ 45 12,403,436 $ 124 $ 51,162 $ (1,953)
========== ========== ========== ========== =========== ===========
Common stock
---------------------------------------
Stock Cummulative Total
subscription translation shareholders'
receivable adjustment equity
------------ ------------ -----------
Balance at December 31, 2002 $ (25) $ (142) $ 21,683
------------ ------------ -----------
Accretion of put value................ ---- ---- 945
Issuance of common stock.............. ---- ---- 7,745
Shares issued for acquisitions........ ---- ---- 12,493
Exchange of share rights into common
stock............................... ---- ---- ----
Shares issued for services rendered... ---- ---- ----
Stock purchased under ESPP............ ---- ---- 106
Exercise of stock options............. ---- ---- 1,828
Exercise of stock warrants............ ---- ---- 69
Reduction of stock subcription
receivable from related party....... 25 ---- 25
Net income............................ ---- ---- 4,342
Foreign currency cumulative
translation adjustment............... ---- 279 279
------------ ------------ -----------
Balance at September 30, 2003......... $ ---- $ 137 $ 49,515
============ ============ ===========
See accompanying notes to consolidated financial statements
MERGE TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Nine Months Ended
September 30,
---------------------------
2003 2002
------------ -----------
Cash flows from operating activities:
Net income................................................... $ 4,342 $ 2,350
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization.............................. 1,803 1,290
Acquired in-process research and development write-off..... ---- 148
Amortization of discount on note acquired in merger........ 11 10
Issuance of stock for services rendered.................... ---- 44
Change in assets and liabilities, net of effects of
acquisitions:
Accounts receivable, net.............................. 1,182 (1,961)
Inventory............................................. (240) (214)
Prepaid expenses...................................... (125) (133)
Accounts payable...................................... (797) 524
Accrued compensation.................................. (43) (396)
Other accrued expenses................................ 836 (8)
Deferred revenue...................................... 273 806
Billings in excess of revenues - contracts in
progress............................................ 814 ----
Other................................................. (12) (13)
------------ -----------
Net cash provided by operating activities..................... 8,044 2,447
------------ -----------
Cash flows from investing activities:
Acquisitions, net of cash acquired........................... (4,416) (200)
Purchases of property and equipment.......................... (814) (466)
Capitalized software development............................. (1,902) (1,329)
------------ -----------
Net cash used in investing activities......................... (7,132) (1,995)
------------ -----------
Cash flows from financing activities:
Proceeds from notes receivable from related party............ 25 ----
Proceeds from sale of common stock........................... 7,745 ----
Proceeds from exercise of stock options...................... 1,828 914
Proceeds from exercise of warrants........................... 69 1,118
Proceeds from employee stock purchase plan................... 106 60
Principal payments under capital leases...................... (7) (19)
------------ -----------
Net cash provided by financing activities..................... 9,766 2,073
------------ -----------
Effect of exchange rate changes on cash....................... 149 (8)
Net increase in cash and cash equivalents..................... 10,827 2,517
Cash, beginning of period..................................... 4,411 1,043
------------ -----------
Cash, end of period........................................... $ 15,238 $ 3,560
============ ===========
Supplemental Disclosures of Cash Flow Information:
Cash paid for income taxes.................................. $ 174 $ 55
Cash paid for interest...................................... $ 1 $ 9
Non-cash Investing and Financing Activities:
Payment of preferred stock dividends through issuance of
common stock............................................... $ ---- $ 32
Common stock and options issued for acquisitions............ $ 12,493 $ 792
Redemption value related to exchangeable common stock....... $ 39 $ 77
See accompanying notes to consolidated financial statements.
MERGE TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(in thousands)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- -------------------------
2003 2002 2003 2002
--------- --------- --------- ---------
Net income............................. $ 1,625 $ 1,046 $ 4,342 $ 2,350
Accumulated other comprehensive
income - Cumulative translation
adjustment........................... 28 (29) 279 2
--------- --------- --------- ---------
Comprehensive income................... $ 1,653 $ 1,017 $ 4,621 $ 2,352
========= ========= ========= =========
See accompanying notes to consolidated financial statements.
MERGE TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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-KSB 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 the SFAS 123, Accounting for
Stock-Based Compensation ("SFAS No. 123"), as amended, 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 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, 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 nine months ended September 30, 2003 and 2002 to the pro forma
amounts indicated below:
Three Months ended Nine Months ended
September 30, September 30,
------------------------- --------------------------
2003 2002 2003 2002
--------- --------- --------- ----------
Net income, as reported............... $ 1,625 $ 1,046 $ 4,342 $ 2,350
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all
awards, net of related tax benefits.. (296) (184) (682) (295)
--------- --------- --------- ----------
Pro forma net income.................. $ 1,329 $ 862 $ 3,660 $ 2,055
========= ========= ========= ==========
Earnings per share:
Basic - as reported.................. $ 0.13 $ 0.10 $ 0.38 $ 0.26
========= ========= ========= ==========
Basic - pro forma.................... $ 0.11 $ 0.08 $ 0.32 $ 0.23
========= ========= ========= ==========
Diluted - as reported................ $ 0.12 $ 0.09 $ 0.35 $ 0.22
========= ========= ========= ==========
Diluted - pro forma.................. $ 0.10 $ 0.07 $ 0.29 $ 0.19
========= ========= ========= ==========
Revenue Recognition
--------------------
Revenues are derived primarily from the sublicensing and licensing of
computer software, installations, training, consulting, software maintenance
and sales of Picture Archiving and Communication Systems ("PACS") solutions.
Inherent in the revenue recognition process are significant management
estimates and judgments, which influence the timing and amount of revenue
recognition.
MERGE TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except for share data)
For software arrangements, we recognize revenue according to the
American Institute of Certified Public Accountants Statement of Position 97-2
("SOP 97-2"), Software Revenue Recognition, and related amendments. SOP 97-2,
as amended, generally requires revenue earned on software arrangements
involving multiple elements to be allocated to each element based on the
relative fair values of those elements. Revenue from multiple-element software
arrangements is recognized using the residual method. Under the residual
method, revenue is recognized in a multiple element arrangement when
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 clients, which is stated in the contract, and
fair value of the installation based upon the price charged when the services
are sold separately. If evidence of the fair value cannot be established
for an undelivered element of a software sale, the entire amount of revenue
under the arrangement is deferred until these elements have been delivered
or vendor-specific objective evidence of fair value can be established.
Revenue from 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.
Revenue from sales of Radiology Information Systems ("RIS") solutions
sold directly to imaging centers, where professional services are considered
essential to the functionality of the solution sold, is recognized on a
percentage-of-completion method, as prescribed by the American Institute of
Certified Public Accountants Statement of Position 81-1, Accounting for
Performance on Construction-Type and Certain Production-Type Contracts.
Percentage-of-completion is determined by the input method based upon labor
hours expended.
Our policy is to allow returns when we have preauthorized the return.
Based on our historical experience of very limited returns and our expectation
that returns, if any, will be insignificant, we have not provided for an
allowance for potential items to be returned.
(2) 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 effect of the conversion of outstanding convertible preferred
shares and the exercise of stock options and warrants with an exercise price
of less than the average market price of our common stock. The following
table sets forth the computation of basic and diluted earnings per share for
the three and nine months ended September 30, 2003 and 2002.
MERGE TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except for share data)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- -------------------------
2003 2002 2003 2002
----------- ---------- ---------- ---------
Numerator:
Net income............................ $ 1,625 $ 1,046 $ 4,342 $ 2,350
Preferred stock dividends............. ---- ---- ---- (20)
Accretion of redemption value related
to Interpra exchangeable shares...... (6) (22) (39) (77)
Allocation of income to Interpra
exchangeable shares.................. (4) (27) (49) (83)
----------- ---------- ---------- ---------
Numerator for net income per share -
basic................................ $ 1,615 $ 997 $ 4,254 $ 2,170
----------- ---------- ---------- ---------
Adjustment for effect of assumed
conversion of preferred stock........ ---- ---- ---- 20
Numerator for net income per share -
diluted.............................. $ 1,615 $ 997 $ 4,254 $ 2,190
----------- ---------- ---------- ----------
Denominator:
Weighted average number of shares of
common stock and participating
securities outstanding............... 12,233,517 10,131,406 11,158,830 8,330,855
----------- ---------- ---------- ----------
Effect of convertible preferred stock. ---- ---- ---- 395,368
Effect of stock options............... 1,086,554 760,150 934,304 1,019,635
Effect of warrants.................... 13,426 85,323 62,241 400,658
----------- ---------- ---------- ----------
Denominator for net income per share -
diluted.............................. 13,333,497 10,976,879 12,155,375 10,146,516
----------- ---------- ---------- ----------
Net income per share - basic.......... $ 0.13 $ 0.10 $ 0.38 $ 0.26
Net income per share - diluted........ $ 0.12 $ 0.09 $ 0.35 $ 0.22
For the three months ended September 30, 2003 and 2002, zero and
686,963, respectively, weighted average options and warrants to purchase shares
of our common stock had exercise prices greater than the average market price
of our common stock.
For the nine months ended September 30, 2003 and 2002, 44,703 and
497,598, respectively, weighted average options and warrants to purchase shares
of our common stock had exercise prices greater than the average market price
of our common stock.
(3) 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. RIS Logic has been in the business of the development and sales of RIS
to end user imaging centers.
We paid a significant premium above RIS Logic's tangible and intangible
assets principally because we determined that RIS Logic's software development
ability and trade name is 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 of the shares was established as a reserve for 18
months, which will terminate on January 16, 2005, against any claims regarding
breaches or representations and warranties.
On June 28, 2002, we acquired all the outstanding capital stock of
eFilm Medical Inc. ("eFilm") pursuant to a Stock Acquisition Agreement dated
MERGE TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except for share data)
April 15, 2002. eFilm has been in the business of development of medical
imaging workflow products and services, developing innovative medical image
viewing and related solutions within a clinical environment. Its assets
included accounts receivable, inventory, capital equipment and intangible
assets.
We paid a significant premium above eFilm's tangible and intangible
assets principally for two reasons: eFilm's knowledge of our software products
through the joint development projects that were undertaken prior to the
acquisition and the ability to sell our products to existing eFilm customers.
Also, eFilm's software development ability is particularly important because
as we looked to the future, we foresaw the need to expand our software
product offerings to healthcare institutions as many of our competitors are
promising more integrated solutions. In addition, we expect to be able to
sell our higher price and high margin software products to eFilm's customers
and to use the eFilm WorkstationTM as a way to have the healthcare
institutions become aware of us. The fair value of each exchangeable share
issued in the eFilm acquisition was determined to be $7.736, using a
three-day average closing price of our common stock after signing the
definitive agreement.
Each holder of eFilm exchangeable shares has the right, at any
time within five years of the acquisition date, to exchange their shares
for our common stock on a one for one basis, subject to adjustment
provisions. At June 28, 2007, any remaining shares will automatically be
converted to our common stock. Each eFilm exchangeable share is entitled
to vote together with our common stock on our matters and be included in
dividend rights equivalent to our common stock.
We also established an escrow holdback of 116,590 exchangeable
shares for 18 months, which will terminate on December 28, 2003, for
indemnification with respect to certain potential claims.
For eFilm, the value assigned to acquired in-process technology
was determined by identifying the acquired specific in-process research
and development projects that would be continued, and for which (1)
technological feasibility had not been established at the acquisition
date, (2) there was no alternative future use, and (3) the fair value was
estimable with reasonable reliability. We estimated the fair value of the
eFilm project to be $148. Accordingly, this amount was immediately expensed
in the consolidated statement of operations upon the acquisition date.
The estimated fair value of the eFilm projects was determined by the
utilization of the income or consumption approach. Appraisal assumptions
utilized under this method included a forecast of estimated future net cash
flows, as well as discounting the future net cash flows to their present
value. We used a 25% discount rate, which was calculated using an industry
beta and capital structure.
In May 2002, we acquired certain assets of Aurora Technologies, Inc.
("Aurora") pursuant to an Asset Acquisition Agreement dated April 18, 2002.
Aurora was in the business of design, production and sale of diagnostic
radiology products and software that facilitate the viewing, distribution
and storage of digital images. Its assets included accounts receivable,
inventory, capital equipment and intangible assets. The fair value of shares
issued to Aurora was determined to be $8.43 per share or equal to the
closing price of our common stock as of May 17, 2002, the signing date of
the definitive agreement.
An escrow holdback of 18,780 shares was established for 12 months,
for indemnification with respect to certain potential claims. As of
September 30, 2003, the escrow holdback has been released.
The acquisitions were accounted for using the purchase method of
accounting. The accompanying consolidated statements of operations include
the results of operations for RIS Logic, acquired July 17, 2003, for eFilm,
acquired on June 28, 2002, and for Aurora, acquired on May 28, 2002, since
the respective acquisition dates. The amounts allocated to purchased and
developed software are being amortized over periods ranging from three to
five years. The estimated asset lives are determined based on projected
future economic benefits and expected life cycles of the technologies. The
amounts assigned to goodwill are 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 acquisitions:
MERGE TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except for share data)
RIS Logic eFilm Aurora
Form of Consideration Fair Value Fair Value Fair Value
------------------------------- ---------- ---------- ----------
Cash........................... $ 4,311 $ ---- $ 100
93,901 shares of common stock.. ---- ---- 792
771,804 shares of common stock. 11,041 ---- ----
1,000,000 eFilm exchangeable
shares....................... ---- 7,737 ----
Vested stock options........... 1,452 437 ----
Transaction costs.............. 180 186 25
--------- ---------- ----------
Total Consideration............ $ 16,984 $ 8,360 $ 917
========= ========== ==========
The total purchase consideration of approximately $16,984, $917
and $8,360 were allocated to the fair value of the net assets acquired in
each of these transactions as follows:
RIS Logic Aurora eFilm
Current assets................. $ 2,134 $ 51 $ 403
Other assets................... 247 29 44
Purchased and developed
technologies................. 1,576 85 1,193
Customer contracts............. 809 ---- 966
Goodwill....................... 14,594 752 6,269
In-process research and
development.................. ---- ---- 148
Liabilities assumed............ (2,376) ---- (663)
--------- ---------- ---------
Total consideration:........... $ 16,984 $ 917 $ 8,360
========= ========== =========
The purchase price allocation for RIS Logic may change due to
estimates made for transaction costs and the final valuation of
intangibles.
Of the amounts assigned to goodwill in the acquisitions, the
$14,594 relating to the RIS Logic transaction and the $6,269 relating to
the eFilm transaction will not be deductible for federal income tax purposes,
and the $752 relating to the Aurora transaction will be deductible for
federal income tax purposes.
The following unaudited pro forma information shows our results of
operations as if the business combinations had occurred at the beginning
of the periods presented. This data is not indicative of the results of
operations that would have arisen if the business combinations had occurred
at the beginning of the respective periods. Moreover, this data is not
intended to be indicative of future results of operations.
Three Months ended Nine Months ended
September 30, September 30,
------------------------- -------------------------
2003 2002 2003 2002
--------- --------- --------- ---------
Revenue........................ $ 7,953 $ 6,767 $ 23,031 $ 18,258
Net income..................... 1,034 1,152 3,453 1,484
Earnings per share:
Basic........................ $ 0.08 $ 0.10 $ 0.29 $ 0.13
Diluted...................... $ 0.07 $ 0.09 $ 0.26 $ 0.11
(4) GOODWILL AND OTHER INTANGIBLES
Due to the acquisition of RIS Logic, goodwill and the carrying amount
of amortizable intangible assets increased during the nine months ended
September 30, 2003.
MERGE TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except for share data)
Our amortizable intangible assets, other than internally developed
software, are summarized as follows:
September 30, 2003
--------------------------------------------
Weighted
Average
Remaining Gross
Amortization Carrying Accumulated
Period (Years) Amount Amortization
------------- --------- ------------
Purchased and developed technologies.. 4.13 $ 2,994 $ (500)
Customer contracts.................... 4.24 $ 1,775 $ (269)
------------ --------- -----------
Total................................. 4.17 $ 4,769 $ (769)
============ ========= ===========
Amortization expense was $202 and $47 in the three months ended September
30, 2003 and 2002, respectively, and $446 and $62 in the nine months ended
September 30, 2003 and 2002, respectively. Estimated aggregate amortization
expense for each of the next five years is as follows:
For the remaining three months: 2003 $ 241
For the year ended: 2004 $ 958
2005 $ 921
2006 $ 909
2007 $ 693
The changes in the carrying amount of goodwill for the nine months
ended September 30, 2003, are as follows:
Balance as of January 1, 2003................. $ 7,406
Goodwill acquired in RIS Logic acquisition.... 14,594
Goodwill acquired in Aurora acquisition....... 8
Goodwill acquired in eFilm acquisition........ (37)
---------
Balance as of September 30, 2003.............. $ 21,971
=========
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,
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, 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.
OVERVIEW
---------
We are in the business of integrating digital radiology images and
information into healthcare enterprise networks, and providing software
solutions that manage diagnostic imaging workflow processes. Our solutions
and services improve radiology workflow efficiencies, reduce healthcare
operating costs and improve clinical decision making processes. We deliver
this tangible value to healthcare facilities of all sizes, but specifically
target small to medium size hospitals, multi-hospital groups, clinics and
diagnostic imaging centers. We offer modular, cost effective software
solutions that improve our customers' image and information management and
radiology workflow. Our product and service offerings are commonly
categorized as PACS and RIS. We believe the combination of PACS and RIS
define the breadth and depth of integrated radiology workflow, with the
added value of enterprise image and information access. This broader
definition is our focus and the manner in which our solutions are
positioned to our target market.
Founded in 1987, we have historically been viewed as a leading
provider of medical diagnostic imaging and information connectivity
technologies and professional consulting services for original equipment
manufacturers ("OEMs"), value added resellers ("VARs") and healthcare
facilities worldwide. Now doing business as Merge eFilm, we believe we are
at the forefront of integrated radiology workflow research and development,
bringing modular software applications to the marketplace that will enable
the seamless integration of images, information, technology and people across
the electronic healthcare enterprise.
Through our founder and Chairman, William C. Mortimore, we have been
a key contributor to the development of the industry's standard network
communications protocol known as Digital Imaging Communications in Medicine
("DICOM"), open medical standards such as HL-7, and the Integrated Healthcare
Enterprise ("IHE") framework that has been created through an initiative
co-sponsored by the Radiological Society of North America ("RSNA") and the
Healthcare Information and Management Systems Society ("HIMSS"). The IHE
initiative represents a consortium of more than 30 companies in the Radiology
and Healthcare Information Systems fields. This set of requirements has paved
the way for healthcare organizations to begin in earnest to integrate the
complex workflow systems of the radiology department with the entire
healthcare system by using equipment and software applications that connect
the various image and communication components. We have incorporated these
standards in all our radiology workflow technologies and software applications
establishing the basis for seamless integration of images and healthcare
information across an organization's intranet or over the internet.
Radiology departments, diagnostic imaging centers and their patients
benefit from our solutions in a variety of ways including: (i) networking of
multiple image-producing and image-using devices to eliminate duplication and
reduce the need for capital equipment expenditures to build digital image and
information networks; (ii) creating permanent electronic archives of
diagnostic-quality images to enable the retrieval of these images and reports
at any time in the future; (iii) accessing our modular architecture of software
products that allow radiology departments, clinics and diagnostic imaging
centers to build their electronic image and information management systems
in a modular, flexible and cost-effective way; (iv) delivering the capability
to integrate diagnostic radiology images into the radiologist's report to
make it a permanent part of the patient's electronic medical record; and
(v) providing the means to view images and reports from any number of remote
locations.
RESULTS OF OPERATIONS
----------------------
(in thousands, except for share data)
Three Months Ended September 30, 2003 Compared to Three Months Ended
September 30, 2002
NET SALES
Net sales increased 43% to $7,619 in the three months ended September
30, 2003 from $5,321 in the three months ended September 30, 2002. Net sales
of products and software made directly to healthcare facilities increased 33%
to $2,085 in the three months ended September 30, 2003 from $1,569 in the three
months ended September 30, 2002. Net sales to OEM/VARs and dealers increased
20% to $3,158 in the three months ended September 30, 2003 from $2,635 in the
three months ended September 30, 2002. We anticipate continued growth in the
OEM/VAR group, although at a lower rate than sales made directly to healthcare
facilities and from the professional services group. Net sales from the
professional services group increased 113% to $2,376 in the three months ended
September 30, 2003 from $1,118 in the three months ended September 30, 2002.
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, and to
the revenue related to the acquisition of RIS Logic completed in July 2003.
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. Given our sales growth during 2003 and our
assessment of the market, we believe information technology spending on new
technologies by our targeted customer base will continue to grow. Based upon
this expected demand and customer receptiveness to the our suite of products,
we anticipate sales for the remainder of 2003 to continue to increase, largely
driven by sales made directly to healthcare facilities and imaging centers
and the services to be provided relating to these customers.
COST OF SALES
Cost of sales consists of purchased components, service costs
associated with revenues, amortization of purchased and developed software
and amortization of customer contracts. The cost of purchased components
decreased as a percentage of net sales to 14% in the three months ended
September 30, 2003 from 22% in the three months ended September 30, 2002.
This decrease in the cost of purchased components as a percentage of net sales
is primarily due to our sales mix, which consists of a greater percentage of
higher margin products and services and reduced component costs. Service costs
associated with revenues increased to $1,014 in the three months ended
September 30, 2003 from $499 in the three months ended September 30, 2002. The
increase is due to our acquisition of RIS Logic and additional service
department staff. Amortization of purchased and developed software increased
to $511 or 7% of net sales in the three months ended September 30, 2003 from
$386 or 7% of net sales in the three months ended September 30, 2002. The
increase is due to the commencement of amortization on software available for
general release and the amortization of the intellectual property and customer
contracts acquired in the acquisition of RIS Logic.
GROSS PROFIT
Gross profit increased 55% to $5,033 in the three months ended
September 30, 2003 from $3,243 in the three months ended September 30, 2002.
As a percentage of net sales, gross profit increased to 66% of net sales in
the three months ended September 30, 2003 compared to 61% in the three months
ended September 30, 2002. The increase in gross profit percentage is the
result of our initiative to gradually shift our product mix to higher margin
software applications. We anticipate that this initiative will continue to
increase overall margins in 2003 in comparison to 2002.
SALES AND MARKETING
Sales and marketing expense increased 60% to $1,669 in the three
months ended September 30, 2003 from $1,043 in the three months ended September
30, 2002. The increase is the result of our acquisition of RIS Logic and our
objective to invest in sales and marketing activities by participating in
more trade shows and increasing our staff in order to grow net sales.
PRODUCT RESEARCH AND DEVELOPMENT
Research and development expense increased 26% to $566 in the three
months ended September 30, 2003 from $451 in three months ended September 30,
2002. We anticipate research and development costs will continue to increase
in 2003 as we increase our new product development, particularly related to
developing our FUSION ServiceTM ("Fusion") application modules and integrating
our RIS/PACS technologies. Capitalization of software development costs
increased $303 to $748 in the three months ended September 30, 2003 from $445
in the three months ended September 30, 2002.
GENERAL AND ADMINISTRATIVE
General and administrative expense increased 66% to $901 in the three
months ended September 30, 2003 from $544 in the three months ended September
30, 2002. The increase is due mainly to the acquisition of RIS Logic,
increases in travel due to increased airfares, and increases in professional
fees related to compliance with the Sarbanes-Oxley Act of 2002. General and
administrative expense includes costs for information systems, accounting,
human resources, administrative support, management personnel, bad debt
expenses and general corporate matters.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense increased 10% or $14 to $159
in the three months ended September 30, 2003 from $145 in the three months
ended September 30, 2002. The increase is due primarily to acquisition of
RIS Logic offset by certain assets becoming fully depreciated. Depreciation
and amortization is assessed on capital equipment and intangible assets with
estimable useful lives. This category excludes the amortization of
capitalized software and acquired intangibles, which are a component of cost
of sales.
OTHER INCOME, EXPENSE
Interest expense decreased to $4 in the three months ended September
30, 2003 from $5 in three months ended September 30, 2002, and interest income
was $35 compared to interest income of $16 in three months ended September
30, 2002. The increase in interest income was relatively small compared to
the increase in our cash balance due to declining interest rates. Other
income, net, was $66 in the three months ended September 30, 2003 compared to
other expense, net, in the three months ended September 30, 2002 of $13. The
decrease in other expense, net, is due primarily to a decrease in 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 an income tax expense of $210 in the three months ended
September 30, 2003 and $12 in the three months ended September 30, 2002. The
2003 expense reflects our estimated domestic and international effective tax
rate of 13.9%, which has been applied to the nine month period, ended
September 30, 2003, as compared with our 15% estimated annual tax rate as of
June 30, 2003.
Nine Months Ended September 30, 2003 Compared to Nine Months Ended
September 30, 2002.
NET SALES
Net sales increased 44% to $20,170 in the nine months ended September
30, 2003 from $14,040 in the nine months ended September 30, 2002. Net sales
of products and software made directly to healthcare facilities increased 27%
to $5,292 in the nine months ended September 30, 2003 from $4,159 in the nine
months ended September 30, 2002. Net sales in the nine months ended September
30, 2003 were reduced by a $430 return from one customer related to a sale made
in 2002. Net sales to OEM/VARs and dealers increased 31% to $9,756 in the nine
months ended September 30, 2003 from $7,426 in the nine months ended September
30, 2002. We anticipate continued growth in the OEM/VAR group, although at a
lower rate than sales made directly to healthcare facilities and from the
professional services group. Net sales from the professional services group
increased 109% to $5,122 in the nine months ended September 30, 2003 from
$2,455 in the nine months ended September 30, 2002. 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, and to the revenue
related to the acquisitions of eFilm, completed in June 2002, and RIS Logic,
completed in July 2003. 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. Given our sales
growth during 2003 and our assessment of the market, we believe information
technology spending on new technologies by our targeted customer base will
continue to grow. Based upon this expected demand and customer receptiveness
to the our suite of products, we anticipate sales for the remainder of 2003
to continue to increase, largely driven by sales made directly to healthcare
facilities and imaging centers and the services to be provided relating to
these customers.
COST OF SALES
Cost of sales consists of purchased components, service costs
associated with revenues, amortization of purchased and developed software and
amortization of customer contracts. The cost of purchased components decreased
as a percentage of net sales to 13% in the nine months ended September 30,
2003 from 24% in the nine months ended September 30, 2002. This decrease in
the cost of purchased components as a percentage of net sales is primarily due
to our sales mix, which consists of a greater percentage of higher margin
products and services and reduced component costs. Costs associated with
professional services increased to $2,267 in the nine months ended September
30, 2003 from $1,225 in the nine months ended September 30, 2002. The increase
is due to our acquisitions of RIS Logic and eFilm and additional service
department staff. Amortization of purchased and developed software increased
to $1,421 or 7% of net sales in the nine months ended September 30, 2003 from
$913 or 7% of net sales in the nine months ended September 30, 2002. The
increase is due to the commencement of amortization on software available for
general release and the amortization of the intellectual property and customer
contracts acquired in the acquisitions of RIS Logic and eFilm.
GROSS PROFIT
Gross profit increased 63% to $13,904 in the nine months ended September
30, 2003 from $8,526 in the nine months ended September 30, 2002. As a
percentage of net sales, gross profit increased to 69% of net sales in the
nine months ended September 30, 2003 compared to 61% in the nine months ended
September 30, 2002. The increase in gross profit percentage is the result of
our initiative to gradually shift our product mix to higher margin software
applications. We anticipate that this initiative will continue to increase
overall margins in 2003 in comparison to 2002.
SALES AND MARKETING
Sales and marketing expense increased 60% to $4,470 in the nine months
ended September 30, 2003 from $2,792 in the nine months ended September 30,
2002. The increase is the result of our acquisition of RIS Logic and our
objective to invest in sales and marketing activities by participating in
more trade shows and increasing our staff in order to grow net sales.
PRODUCT RESEARCH AND DEVELOPMENT
Research and development expense increased 20% to $1,402 in the nine
months ended September 30, 2003 from $1,164 in nine months ended September
30, 2002. We anticipate research and development costs will continue to
increase in 2003 as we increase our new product development, particularly
related to developing our Fusion application modules and integrating our
RIS/PACS technologies. Capitalization of software development costs
increased $573 to $1,902 in the nine months ended September 30, 2003 from
$1,329 in the nine months ended September 30, 2002.
GENERAL AND ADMINISTRATIVE
General and administrative expense increased 47% to $2,487 in the
nine months ended September 30, 2003 from $1,693 in the nine months ended
September 30, 2002. The increase is due mainly to the acquisition of RIS
Logic, increases in travel due to increased airfares, and increases in
professional fees related to compliance with the Sarbanes-Oxley Act of
2002. General and administrative expense includes costs for information
systems, accounting, human resources, administrative support, management
personnel, bad debt expenses and general corporate matters.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense increased 2% or $6 to $383 in
the nine months ended September 30, 2003 from $377 in the nine months ended
September 30, 2002. The increase is due primarily to acquisition of RIS
Logic offset by certain assets becoming fully depreciated. Depreciation and
amortization is assessed on capital equipment and intangible assets with
estimable useful lives. This category excludes the amortization of capitalized
software and acquired intangibles, which are a component of cost of sales.
OTHER INCOME, EXPENSE
Interest expense decreased to $13 in the nine months ended September
30, 2003 from $17 in nine months ended September 30, 2002, and interest income
was $60 compared to interest income of $32 in nine months ended September 30,
2002. The increase in interest income was relatively small compared to the
increase in our cash balance due to declining interest rates. Other expense,
net, was $169 in the nine months ended September 30, 2003 compared to other
income, net, in the nine months ended September 30, 2002 of $28. The increase
in other expense, net, is due primarily 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 an income tax expense of $698 in the nine months ended
September 30, 2003 and $46 in the nine months ended September 30, 2002. We
have estimated our domestic and international effective rate to be 13.9%,
which has been applied to the nine month period ended September 30, 2003.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------------
(in thousands, except for share data)
OPERATING CASH FLOWS
Cash provided by operating activities was $8,044 in the nine months
ended September 30, 2003. Our positive operating cash flow in the nine months
ended September 30, 2003 is due primarily to our net income of $4,342,
depreciation and amortization expense of $1,803, a decrease of $1,182 in
accounts receivable and a $1,087 increase in aggregate deferred revenues,
offset by a decrease of $797 in accounts payable. The aggregate deferred
revenue increase is a result of the increase in net sales.
The total days sales outstanding for the nine months ended September
30, 2003 improved to 114 days compared to 130 days for the year ended December
31, 2002. The decrease in days sales outstanding is attributed to the improved
collection of receivables from healthcare facilities in 2003.
INVESTING CASH FLOW
Cash used in investing activities was $7,132 in the nine months ended
September 30, 2003, due primarily to cash outflows for the acquisition of RIS
Logic of $4,416, capitalized software development costs of $1,902 and purchases
of property and equipment of $814. 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 $9,766 in the nine months
ended September 30, 2003. We received net proceeds of $7,745 from the private
offering of 667,000 shares of our common stock, $1,828 from employee and
director stock option exercises and $106 from purchases of common stock under
our employee stock purchase plan.
Total outstanding commitments at September 30, 2003 were as follows:
Less than 1 - 3 4 - 6 7 - 10
Contractual Obligations Total 1 Year Years Years Years
------------------------------ ------- -------- -------- -------- -------
Long Term Debt................ $ 222 $ 222 $ ---- $ ---- $ ----
Operating Leases.............. 3,536 469 1,516 841 710
------- ------- -------- -------- -------
Total Contractual Cash
Obligations................. $ 3,758 $ 691 $ 1,516 $ 841 $ 710
======= ======= ======== ======== =======
We also recorded a liability of $94 for put options on the remaining
22,462 of 420,000 Interpra exchangeable shares, which may be exercised for a
price of $4.50 per share during the period from August 31, 2004, through
September 30, 2004.
In December 2002, we negotiated a new revolving line of credit
agreement with our bank, increasing our line to $5,000 effective December 30,
2002, and maturing December 30, 2005. The interest rate on the line of credit
is a variable rate that is equal to the prime rate as published in The Wall
Street Journal, less 0.75 percentage points, and is collateralized by our
assets. At September 30, 2003, the interest rate on the line of credit was
3.25%. Availability under the new line of credit is subject to a borrowing
base consisting of 50% of inventory balances under $2,000, 80% of qualified
accounts receivable under 90 days and 100% of our depository cash balances
held at the bank if borrowings exceed the existing base of inventory and
qualified accounts receivable. Under the formula, $5,000 was calculated to
be available at September 30, 2003. No amounts were outstanding on the
line of credit as of September 30, 2003.
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 credit agreement and future cash flows from operations will be
sufficient to execute our business plan in 2003, and meet the anticipated
cash needs of our current business for at least the next twelve months.
However, any projections of future cash inflows and outflows are subject to
uncertainty. In the future, 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 will be available in amounts or on terms acceptable to us.
RECENTLY ISSUED ACCOUNTING STANDARDS
In May 2003, the Emerging Issues Task Force ("EITF") reached consensus
on EITF Issue No. 00-21, Revenue arrangements with Multiple Deliverables ("EITF
00-21"). EITF 00-21's criteria govern how to identify whether goods or services
or both that are to be delivered separately in a bundled sales arrangement
should be accounted for separately. Specifically, the purpose of EITF 00-21
is to determine if separation is necessary and, if so, how to measure and
allocate the arrangement consideration. For publicly traded companies, EITF
00-21 is applicable for revenue arrangements entered into in periods
beginning after June 15, 2003. Accordingly, we adopted EITF 00-21 on July
1, 2003 for all new revenue arrangements. The adoption of EITF 00-21 did
not have a significant effect on our financial position, results of operations
or cash flows.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity
("SFAS No. 150"). SFAS No. 150 establishes standards for how an issuer
classifies and measures in its statement of financial position certain
financial instruments with characteristics of both liabilities and equity.
It requires that an issuer classify a financial instrument that is within
the scope as a liability (or an asset in some circumstances) because that
financial instrument embodies an obligation of the issuer. SFAS No. 150
is effective for financial instruments entered into or modified after May
31, 2003, and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003. This statement is not expected to
have a significant impact on our financial position or results of
operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
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 Securities Exchange Act
of 1934. There have been no significant changes in our internal controls or
in other factors that could significantly affect these controls subsequent
to the date of the previously mentioned evaluation.
PART II
---------
ITEM 1. LEGAL PROCEEDINGS
On October 24, 2003, ScheduleQuest, Inc. filed a patent infringement
lawsuit (Civil Action No. 03-5900) against us alleging that our "RIS Logic CS
Scheduling System" product infringes upon their US 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 are in an
escrow holdback to cover any claims of breach of representation or warranty.
We believe that all the claims in the lawsuits are without merit and we intend
to vigorously defend against such claims but can provide no assurances at to
the outcome of this litigation or whether the escrow holdback will be adequate
to satisfy any cost, expense or loss that we may incur in connection with such
litigation.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In the three months ended September 30, 2003, we sold shares of our
common stock in transactions not registered under the Securities Act of 1933,
as amended (the "Securities Act"), as follows:
In July 2003, we issued 772,000 shares of our common stock to the
shareholders of RIS Logic to acquire 100% of their outstanding stock. We did
not use any underwriters to complete the transaction. The transaction was
exempt from registration as a private offering under Regulation D and Section
4 (2) of the Securities Act.
In July 2003, we sold 667,000 shares of our common stock in an
offering exempt from registration as a private offering, which raised
$8,000,000 of gross proceeds before any expenses associated with the offering
of these shares. The monies raised are for general corporate purposes. Fees
of $240,000 and 35,000 shares of our common stock were paid to Belle Haven
Investments, L. P., a placement agent. All shares were sold in a private
offering exempt under Regulation D and Section 4 (2) of the Securities Act
and only to persons who were accredited investors.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
See Exhibit Index.
(b) On July 10, 2003, we filed a Form 8-K to report in Item 5 that
we signed a definitive agreement to acquire RIS Logic,
Incorporated.
On July 29, 2003, we filed a Form 8-K to report in Item 2 our
acquisition of RIS Logic, Incorporated and to report in Item 5
our private offering of 667,000 shares of our common stock.
On July 30, 2003, we filed a Form 8-K to report in Item 12 the
financial results for the second quarter of our fiscal year
2003.
On September 29, 2003, we filed an amendment to the Form 8-K
filed on July 29, 2003 to report in Item 7 the financial
statements and pro forma financial information as required
for the acquisition of RIS Logic, Incorporated.
SIGNATURES
------------
In accordance with the requirements of the Securities Exchange Act of
1934, the Registrant caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MERGE TECHNOLOGIES INCORPORATED
November 14, 2003 By: /s/ Richard A. Linden
--------------------------------------
Richard A. Linden
President and Chief Executive Officer
November 14, 2003 By: /s/ Scott T. Veech
------------------------------------------------
Scott T. Veech
Chief Financial Officer, Treasurer and Secretary
(Principal Financial Officer and Principal
Accounting Officer)
EXHIBIT INDEX
---------------
3.1 Articles of Incorporation of Registrant(2), Articles of Amendment as
of June 16, 1998(3), Articles of Amendment as of September 1, 1999(6),
and Articles of Amendment as of November 29, 2000(6)
3.2 Amended and Restated Bylaws of Registrant as of February 3, 1998(1)
10.2 Employment Agreement entered into as of November 29, 2001, between
Registrant and Richard A. Linden(7)
10.3 Employment Agreement entered into as of December 21, 2001, between
Registrant and William C. Mortimore(7)
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)
10.8 1999 Stock Option Plan For Directors(1)
10.9 Merge Technologies Incorporated 2000 Employee Stock Purchase Plan(5)
10.10 Loan Agreement dated as of December 30, 2002, by and between
Registrant and Lincoln State Bank(8)
10.11 Employment Agreement entered into as of July 15, 2002, between
Registrant and Scott T. Veech(8)
10.12 First Amendment to Employment Agreement entered into as of May 21,
2003, between Registrant and Richard A. Linden(9)
10.13 First Amendment to Employment Agreement entered into as of May 21,
2003, between Registrant and William C. Mortimore(9)
10.14 1996 Stock Option Plan for Employees of Registrant dated May 13,
1996, as amended and restated in its entirety as of September 1, 2003
10.15 2003 Stock Option Plan of Registrant dated June 24, 2003, and
effective July 17, 2003
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)
-----------------------------------------
(1) Incorporated by reference to Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1997.
(2) Incorporated by reference to Registration Statement on Form SB-2
(No. 333-39111) effective January 29, 1998.
(3) Incorporated by reference to Quarterly Report on Form 10-QSB for
the three months ended March 31, 1999.
(4) Incorporated by reference to Quarterly Report on Form 10-QSB for
the three months ended March 31, 2000.
(5) Incorporated by reference to Proxy Statement for 2000 Annual Mailing
of Shareholders dated May 9, 2000.
(6) Incorporated by reference to Annual Report on Form 10-KSB for the
fiscal year ended December 31, 2000.
(7) Incorporated by reference to Annual Report on Form 10-KSB for the
fiscal year ended December 31, 2001.
(8) Incorporated by reference to Annual Report on Form 10-KSB for the
fiscal year ended December 31, 2002.
(9) Incorporated by reference to Quarterly Report on Form 10-Q for
the three months ended June 30, 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
13(a)-14 and 15(d)-14) for the Registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the Registrant, including its
consolidated subsidiaries (collectively, the "Company"), is
made known to the Certifying Officers by others within the
Company, particularly during the period in which this
quarterly report is being prepared; and
b) evaluated the effectiveness of the Registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as the Evaluation Date; and
5. The Registrant's Certifying Officers have disclosed, based on the
Certifying Officers' most recent evaluation, to the Registrant's
auditors and the Audit Committee of the Registrant's Board of
Directors:
a) all significant deficiencies in the design or operation of
internal controls that would adversely affect the Registrant's
ability to record, process, summarize and report financial
data and have identified for the Registrant's auditors any
material weakness in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
Registrant's internal controls; and
6. The Certifying Officers have indicated in the quarterly report
whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and
material weaknesses.
Date: November 14, 2003
/s/ Richard A. Linden
-------------------------------------------
Richard A. Linden, Chief Executive Officer
See also the certification pursuant to Section 906 of the Sarbanes - Oxley
Act of 2002, which is 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
13(a)-14 and 15(d)-14) for the Registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the Registrant, including its
consolidated subsidiaries (collectively, the "Company"), is
made known to the Certifying Officers by others within the
Company, particularly during the period in which this
quarterly report is being prepared; and
b) evaluated the effectiveness of the Registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as the Evaluation Date; and
5. The Registrant's Certifying Officers have disclosed, based on the
Certifying Officers' most recent evaluation, to the Registrant's
auditors and the Audit Committee of the Registrant's Board of
Directors:
a) all significant deficiencies in the design or operation of
internal controls that would adversely affect the Registrant's
ability to record, process, summarize and report financial
data and have identified for the Registrant's auditors any
material weakness in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
Registrant's internal controls; and
6. The Certifying Officers have indicated in the quarterly report
whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and
material weaknesses.
Date: November 14, 2003
/s/ Scott T. Veech
----------------------------------------
Scott T. Veech, Chief Financial Officer
See also the certification pursuant to Section 906 of the Sarbanes - Oxley
Act of 2002, which is 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
September 30, 2003, 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: November 14, 2003 By: /s/ Richard A. Linden
----------------------------
Richard A. Linden
Chief Executive Officer
Date: November 14, 2003 By: /s/ Scott T. Veech
----------------------------
Scott T. Veech
Chief Financial Officer
This certification accompanies the Report pursuant to Section 906 of
the Sarbanes - Oxley Act of 2002 and shall not, except to the extent required
by the Sarbanes - Oxley Act of 2002, be deemed filed by the Company for
purposes of Section 18 of the Securities Exchange Act of 1934, as amended.
See also the certifications pursuant to Section 302 of the Sarbanes -
Oxley Act of 2002, which are included in this quarterly report on Form 10-Q.
---------------
EXHIBIT 10.14
---------------
AMENDED AND RESTATED STOCK OPTION PLAN FOR
EMPLOYEES OF MERGE TECHNOLOGIES INCORPORATED
--------------------------------------------
MERGE TECHNOLOGIES INCORPORATED, a corporation organized under the laws
of the State of Wisconsin, adopted the Stock Option Plan for Employees of Merge
Technologies Incorporated on July 11, 1997, which was approved by its
shareholders. The Company hereby amends and restates the Plan in its entirety
as of September 1, 2003, pursuant to the authority granted to the Board in
Section 7.2 in order to codify all increases to the number of shares authorized
for issuance pursuant to Section 2.1 since the inception of the Plan (as
previously approved by the Company's Shareholders), and to make certain
technical corrections and reformations as authorized by the Plan.
The Board of Directors ratifies all grants of options made under the
Plan since the Plan's inception.
The purposes of this Plan are as follows:
1. To further the growth, development and financial success of the
Company by providing additional incentives to certain of its Employees who have
been or will be given responsibility for the management or administration of
the Company's business affairs, by assisting them to become owners of capital
stock of the Company and thus to benefit directly from its growth, development
and financial success.
2. To enable the Company to obtain and retain the services of
the type of professional, technical and managerial employees considered
essential to the long-range success of the Company by providing and offering
them an opportunity to become owners of capital stock of the Company under
options, including options that are intended to qualify as "incentive stock
options" under Section 422(b) of the Internal Revenue Code of 1986, as
amended.
ARTICLE I
DEFINITIONS
-------------
Whenever the following terms are used in this Plan, they shall have
the meaning specified below unless the context clearly indicates to the
contrary. The masculine pronoun shall include the feminine and neuter and the
singular shall include the plural, where the context so indicates.
Section 1.1 - Board
"Board" shall mean the Board of Directors of the Company.
Section 1.2 - Code
"Code" shall mean the Internal Revenue Code of 1986, as amended.
Section 1.3 - Committee
"Committee" shall mean the Stock Option Committee of the Board or
alternate named or responsible Committee of the Board, appointed as provided
in Section 6.1.
Section 1.4 - Common Stock
"Common Stock" shall mean the Common Stock, one cent ($0.01) par
value, of the Company.
Section 1.5 - Company
"Company" shall mean MERGE TECHNOLOGIES INCORPORATED.
Section 1.6 - Director
"Director" shall mean a member of the Board.
Section 1.7 - Disability
"Disability" shall have the meaning set forth in Section 2.2(e)(3) of
the Code.
Section 1.8 - Employee
"Employee" shall mean any employee (as defined in accordance with
the regulations and revenue rulings then applicable under Section 3401(c)
of the Code) of the Company, or of any corporation which is then a
Subsidiary, whether such employee is so employed at the time this Plan is
adopted or becomes so employed subsequent to the adoption of this Plan.
Section 1.9 - Exchange Act
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
Section 1.10 - Incentive Stock Option
"Incentive Stock Option" shall mean an Option which qualifies under
Section 422(b) of the Code and which is designated as an Incentive Stock
Option by the Committee.
Section 1.11 - Non-Qualified Option
"Non-Qualified Option" shall mean an Option which is not an Incentive
Stock Option.
Section 1.12 - Officer
"Officer" shall mean an officer of the Company or any Subsidiary.
Section 1.13 - Option
"Option" shall mean an option to purchase Common Stock of the Company,
granted under the Plan. "Options" includes both Incentive Stock Options and
Non-Qualified Options.
Section 1.14 - Optionee
"Optionee" shall mean an Employee to whom an Option is granted under
the Plan.
Section 1.15 - Plan
"Plan" shall mean this Stock Option Plan for Employees of MERGE
TECHNOLOGIES INCORPORATED.
Section 1.16 - Secretary
"Secretary" shall mean the Corporate Secretary of the Company.
Section 1.17 - Securities Act
"Securities Act" shall mean the Securities Act of 1933, as amended.
Section 1.18 - Subsidiary
"Subsidiary" shall mean any corporation in an unbroken chain of
corporations beginning with the Company if each of the corporations other
than the last corporation in the unbroken chain then owns stock possessing
fifty percent (50%) or more of the total combined voting power of all
classes of stock in one of the other corporations in such chain.
Section 1.19 - Termination of Employment
"Termination of Employment" shall mean the time when the
employee-employer relationship between the Optionee and the Company or a
Subsidiary is terminated for any reason, with or without cause, including, but
not by way of limitation, a termination by resignation, discharge, death or
retirement, but excluding terminations where there is a simultaneous
reemployment of the Optionee by the Company or a Subsidiary. The Committee,
in its absolute discretion, shall determine the effect of all other matters
and questions relating to Termination of Employment, including, but not by
way of limitation, the question of whether a Termination of Employment
resulted from a discharge for good cause, and all questions of whether
particular leaves of absence constitute Terminations of Employment; provided,
however, that, with respect to Incentive Stock Options, a leave of absence
shall constitute a Termination of Employment if, and to the extent that,
such leave of absence interrupts employment for the purposes of
Section 422(a)(2) of the Code and the then applicable regulations and
revenue rulings under said Section.
ARTICLE II
SHARES SUBJECT TO PLAN
------------------------
Section 2.1 - Shares Subject to Plan
The shares of stock subject to Options shall be shares of the Company's
Common Stock. The aggregate number of such shares which may be issued upon
exercise of Options shall not exceed 3,265,826. For purposes of the foregoing
limitation, any reduction in shares issuable to an Optionee in full or part
payment of the option price in accordance with the provisions of Section 5.3(b)
or (c) shall nevertheless be deemed to have been issued.
Section 2.2 - Unexercised Options
If any Option expires or is cancelled without having been fully
exercised, the number of shares subject to such Option but as to which such
Option was not exercised prior to its expiration or cancellation may again be
optioned hereunder, subject to the limitations of Section 2.1.
Section 2.3 - Changes in Common Stock
In the event that the outstanding shares of Common Stock of the Company
are hereafter changed into or exchanged for a different number or kind of
shares or other securities of the Company, or of another corporation, by
reason of reorganization, merger, consolidation, recapitalization,
reclassification, stock split-up, stock dividend, combination of shares or
otherwise, appropriate adjustments shall be made by the Committee in the
number and kind of shares for the purchase of which Options may be granted,
including adjustments of the limitations in Section 2.1 on the maximum number
and kind of shares which may be issued on exercise of Options.
ARTICLE III
GRANTING OF OPTIONS
---------------------
Section 3.1 - Eligibility
Any Employee of the Company or of any corporation which is then a
Subsidiary shall be eligible to be granted Options, except as provided in
Section 3.2.
Section 3.2 - Qualification of Incentive Stock Options
No Incentive Stock Option shall be granted unless such Option, when
granted, qualifies as an "incentive stock option" under Section 422(b) of the
Code.
Section 3.3 - Granting of Options
(a) The Committee shall from time to time, in its absolute discretion:
(i) Determine which Employees are Employees and select from
among the Employees (including those to whom Options have been
previously granted under the Plan) such of them as in its opinion
should be granted Options; and
(ii) Determine the number of shares to be subject to such
Options granted to such selected Employees, and determine whether such
Options are to be Incentive Stock Options or Non-Qualified Options;
and
(iii) Determine the terms and conditions of such Options,
consistent with the Plan.
Notwithstanding the above, the Committee may delegate certain
powers relating to the granting of Options as it deems appropriate to executive
officers of the Company including the power to determine the number of shares
to be subject to Options (subject to a maximum amount set by the Committee),
whether such Options are to be Incentive Stock Options or Non-Qualified Options
and to determine the terms and conditions of such Options, including the
imposition of one more conditions to exercise such as the execution by the
Optionee of a non-competition agreement in favor of the Company or a
Subsidiary; provided, however, that the Committee shall not delegate any
powers that are required to be exercised by the Committee under Section
16(b) of the Exchange Act or any rules promulgated thereunder.
(b) Upon the selection of an Employee to be granted an Option, the
Committee shall instruct the Secretary to issue such Option and may impose
such conditions on the grant of such Option as it deems appropriate. Without
limiting the generality of the preceding sentence, the Committee may, in its
discretion and on such terms as it deems appropriate, require as a condition
on the grant of any Option to an Employee that the Employee surrender for
cancellation some or all of the unexercised Options which have been
previously granted to him. An Option, the grant of which is conditioned
upon such surrender, may have an option price lower (or higher) than the
option price of the surrendered Option, may cover the same (or a lesser or
greater) number of shares as the surrendered Option, may contain such other
terms as the Committee deems appropriate and shall be exercisable in
accordance with its terms, without regard to the number of shares, price,
option period or any other term or condition of the surrendered Option.
ARTICLE IV
TERM OF OPTIONS
-----------------
Section 4.1 - Option Agreement
Each Option shall be evidenced by a written Stock Option Agreement,
which shall be executed by the Optionee and an authorized Officer of the
Company and which shall contain such terms and conditions as the Committee
shall determine, consistent with the Plan. Stock Option Agreements evidencing
Incentive Stock Options shall contain such terms and conditions as may be
necessary to qualify such Options as "incentive stock options" under Section
422(b) of the Code.
Section 4.2 - Option Price
(a) The price of the shares subject to each Option shall be set by
the Committee; provided, however, that: (i) the price per share of a
Non-Qualified Option shall be not less than the lesser of eighty five percent
(85%) of the fair market value of such shares on the date such Option is
granted or the average of the fair market values of such shares on the five (5)
most recent trading days prior to the date that such Option is granted; and
(ii) the price per share of an Incentive Stock Option shall not be less than
one hundred percent (100%) of the fair market value of such shares on the date
such Option is granted.
(b) For purposes of the Plan, the fair market value of a share of the
Company's stock as of a given date shall be: (i) the closing price of the
Common Stock on the principal national stock exchange on which the shares are
listed on such date or, if shares were not traded on such date, then on the
next preceding trading day during which a sale occurred; or (ii) if such stock
is not listed on an exchange but is quoted on NASDAQ or a successor quotation
system, (1) the last sales price (if the stock is then listed as a National
Market Issue under the NASD National Market System) or (2) the mean between
the closing representative bid and asked prices (in all other cases) for the
stock on such date as reported by NASDAQ or such successor quotation system;
or (iii) if such stock is not listed on an exchange and not quoted on NASDAQ
or a successor quotation system, the mean between the closing bid and asked
prices for the stock on such date, as determined in good faith by the
Committee; or (iv) if the Company's stock is not publicly traded, the fair
market value established by the Committee acting in good faith. In
determining the fair market value of the Company's Common Stock under
subsection 1(b) of this Section 4.2, the Committee may rely on the closing
price as reported in The Wall Street Journal.
Section 4.3 - Commencement of Exercisability
(a) Subject to the provisions of Sections 4.3(b), 4.3(c) and 7.3,
Options shall become exercisable at such times and in such installments (which
may be cumulative) as the Committee shall provide in the terms of each
individual Option; provided, however, that by a resolution adopted after an
Option is granted the Committee may, on such terms and conditions as it may
determine to be appropriate and subject to Sections 4.3(b), 4.3(c) and 7.3,
accelerate the time at which such Option or any portion thereof may be
exercised.
(b) No portion of an Option which is unexercisable at Termination of
Employment shall thereafter become exercisable.
(c) Notwithstanding any other provision of this Plan, in the case of
an Incentive Stock Option, the aggregate fair market value (determined at the
time the Incentive Stock Option is granted) of the shares of the Company's
stock with respect to which "incentive stock options" (within the meaning of
Section 422(b) of the Code) are exercisable for the first time by the Optionee
during any calendar year (under the Plan and all other incentive stock option
plans of the Company and any Subsidiary) shall not exceed One Hundred Thousand
Dollars ($100,000).
Section 4.4 - Expiration of Options
(a) No Option may be exercised to any extent by anyone after the first
to occur of the following events:
(i) In the case of an Incentive Stock Option, the expiration of
ten (10) years from the date the Option was granted; or in the case of
an Optionee owning (within the meaning of Section 425(d) of the Code),
at the time the Incentive Stock Option was granted, more than ten
percent (10%) of the total combined voting power of all classes of
stock of the Company or any Subsidiary, the expiration of five (5)
years from the date the Incentive Stock Option was granted; or
(ii) In the case of a Non-Qualified Option, the expiration of
fifteen (15) years and one (1) day from the date the Option was
granted; or
(iii) The expiration of three (3) months from the date of the
Optionee's Termination of Employment; or
(iv) The engagement by the Employee in willful misconduct
which injures the Company or any of its Subsidiaries.
(b) Subject to the provisions of Section 4.4(a), the Committee shall
provide, in the terms of each individual Option, when such Option expires and
become unexercisable; and (without limiting the generality of the foregoing)
the Committee may provide in the terms of individual Options that said Options
expire immediately upon a Termination of Employment for any reason.
Section 4.5 - Tenure of Employment
Nothing in this Plan or in any Stock Option Agreement hereunder shall
confer upon any Optionee any right to continue in the employ of the Company or
any Subsidiary or shall interfere with or restrict in any way the rights of
the Company and its Subsidiaries, which are hereby expressly reserved, to
discharge any Optionee at any time for any reason whatsoever, with or without
cause.
Section 4.6 - Adjustments in Outstanding Options
In the event that the outstanding shares of the stock subject to
Options are changed into or exchanged for a different number or kind of shares
of the Company or other securities of the Company by reason of merger,
consolidation, recapitalization, reclassification, stock split-up, stock
dividend, combination of shares or otherwise, the Committee shall make an
appropriate and equitable adjustment in the number and kind of shares as to
which all outstanding Options, or portions thereof then unexercised, shall be
exercisable, to the end that after such event the Optionee's proportionate
interest shall be maintained as before the occurrence of such event. Such
adjustment in an outstanding Option shall be made without change in the total
price applicable to the Option or the unexercised portion of the Option (except
for any change in the aggregate price resulting from rounding-off of share
quantities or prices) and with any necessary corresponding adjustment in Option
price per share; provided, however, that, in the case of Incentive Stock
Options, each such adjustment shall be made in such manner as not to
constitute a "modification" within the meaning of Section 425(h)(3) of the
Code. Any such adjustment made by the Committee shall be final and binding
upon all Optionees, the Company and all other interested persons.
Section 4.7 - Merger, Consolidation, Acquisition, Liquidation or Dissolution
In the event of: (1) a merger or consolidation in which the Company is
not the surviving corporation; or (2) a reverse merger in which the Company is
the surviving corporation but the shares of the Company's common stock
outstanding immediately preceding the merger are converted by virtue of the
merger into other property, whether in the form of securities, cash or
otherwise, then to the extent permitted by applicable law: (i) any surviving
corporation shall assume any of the options outstanding under the Plan or shall
substitute similar options for those outstanding under the Plan; or (ii) such
Options shall continue in full force and effect. In the event any surviving
corporation refuses to assume or continue such Options, or to substitute
similar Options for those outstanding under the Plan, then the time at which
such options may first be exercised shall accelerate and the Options terminated
if not exercised prior to such event. In the event of a dissolution or
liquidation of the Company, any Options outstanding under the Plan shall
terminate if not exercised prior to such event.
ARTICLE V
EXERCISE OF OPTIONS
--------------------
Section 5.1 - Person Eligible to Exercise
During the lifetime of the Optionee, only he may exercise an Option
granted to him, or any portion thereof. After the death of the Optionee, any
exercisable portion of an Option may, prior to the time when such portion
becomes unexercisable under Section 4.4 or Section 4.7, be exercised by his
personal representative or by any person empowered to do so under the deceased
Optionee's will or under the then applicable laws of descent and distribution.
Section 5.2 - Partial Exercise
At any time and from time to time prior to the time when any
exercisable Option or exercisable portion thereof become unexercisable under
Section 4.4 or Section 4.7, such Option or portion thereof may be exercised in
whole or in part; provided, however, that the Company shall not be required to
issue fractional shares and the Committee may, by the terms of the Option,
require any partial exercise to be with respect to a specified minimum number
of shares.
Section 5.3 - Manner of Exercise
An Exercisable Option, or any exercisable portion thereof, may be
exercised solely by delivery to the Secretary or his office of all of the
following prior to the time when such Option or such portion becomes
unexercisable under Section 4.4 or Section 4.7:
(a) Notice in writing signed by the Optionee or other person then
entitled to exercise such Option or portion, stating that such Option or
portion is exercised, such notice complying with all applicable rules
established by the Committee; and
(b) (i) Full payment (in cash or by check) for the shares with respect
to which such Option or portion is thereby exercised; or
(ii) Subject to the Committee's consent, shares of Common Stock
owned by the Optionee duly endorsed for transfer to the Company, or
issuable to the Optionee upon exercise of the Option, with a fair
market value (as determinable under Section 4.2(b)) on the date of
delivery equal to the aggregate Option Price of the shares with respect
to which such Option or portion is thereby exercised; or
(iii) Subject to the Committee's consent, full payment in any
other form approved by the Committee, consistent with applicable law
and the Plan; or
(iv) Any combination of the consideration provided in the
foregoing subsections (i) (ii) and (iii); and
(c) On or prior to the date the same is required to be with held:
(i) Full payment (in cash or by check) of any amount that must
be withheld by the Company for federal, state and/or local tax
purposes; or
(ii) Subject to the Committee's consent, full payment by
delivery to the Company of shares of the Common Stock owned by the
Optionee duly endorsed for transfer to the Company by the Optionee or
other person then entitled to exercise such Option or portion with an
aggregate fair market value (as determinable under Section 4.2(b))
equal to the amount that must be withheld by the Company for federal,
state and/or local tax purposes; or
(iii) Subject to the Committee's consent, full payment by
retention by the Company of shares of Common Stock to be issued
pursuant to such Option exercise with an aggregate fair market value
(as determinable under Section 4.2(b)) equal to the amount that must
be withheld by the Company for federal, state and/or local tax
purposes; or
(iv) Any combination of payments provided for in the foregoing
subsections (i) (ii) or (iii); provided that if the Company is subject
to the reporting requirements under the Exchange Act, if and to the
extent required by Rule 16(b)-3 promulgated under Section 16 of the
Exchange Act ("Rule 16(b)-3"), an election to make full payment by
the means described in Section 5.3(c)(ii) or 5.3(c)(iii) shall be
made more than six (6) months after grant of the Option and either
(x) made and the Option exercised only during the period beginning of
the third (3rd) business day following the date of release of quarterly
or annual summary statements of sales and earnings of the Company and
ending on the twelfth (12th) business day following such date, or (y)
irrevocably made more than six (6) months prior to the date the amount
of tax to be withheld is determined in the case of Sections 5.3(c)(ii)
and 5.3(iii); and
(d) Such representations and documents as the Committee, in its
absolute discretion, deems necessary or advisable to effect compliance with all
applicable provisions of the Securities Act and any other federal or state
securities laws or regulations. The Committee may, in its absolute discretion,
also take whatever additional actions it deems appropriate to effect such
compliance including, without limitation, placing legends on share certificates
and issuing stop-transfer orders to transfer agents and registrars; and
(e) In the event that the Option or portion thereof shall be exercised
pursuant to Section 5.1 by any person or persons other than the Optionee,
appropriate proof of the right of such person or persons to exercise the
Option or portion thereof.
Section 5.4 - Conditions to Issuance of Stock Certificates
The shares of stock issuable and deliverable upon the exercise of an
Option, or any portion thereof, may be either previously authorized but
unissued shares or issued shares which have then been reacquired by the
Company. The Company shall not be required to issue or deliver any certificate
or certificates for shares of stock purchased upon the exercise of any Option
or portion thereof prior to fulfillment of all of the following conditions:
(a) The admission of such shares to listing on all stock exchanges on
which such class of stock is then listed; and
(b) The completion of any registration or other qualification of such
shares under any state or federal law or under the rulings or regulations of
the Securities and Exchange Commission or any other governmental regulatory
body, which the Committee shall, in its absolute discretion, deem necessary or
advisable; and
(c) The obtaining of any approval or other clearance from any state or
federal governmental agency which the Committee shall, in its absolute
discretion, determine to be necessary or advisable; and
(d) The payment to the Company (or other employer corporation) of all
amounts which it is required to withhold under federal, state or local law in
connection with the exercise of the Option; and
(e) The lapse of such reasonable period of time following the exercise
of the Option as the Committee may establish from time to time for reasons of
administrative convenience.
Section 5.5 - Rights as Stockholders
The holders of Options shall not be, nor have any of the rights or
privileges of, stockholders of the Company in respect of any shares purchasable
upon the exercise of any part of an Option unless and until certificates
representing such shares have been issued by the Company to such holders.
Section 5.6 - Transfer Restrictions
The Committee, in its absolute discretion, may impose such restrictions
on the transferability of the shares purchasable upon the exercise of an Option
as it deems appropriate, including a commitment on behalf of the Optionee to
afford the Company first refusal rights upon a proposed sale of shares of
Common Stock or restrictions on transfer necessary or desirable, as the
Committee in its sole discretion may determine. Any such restriction shall
be set forth in the respective Stock Option Agreement or in a separate written
agreement and may be referred to on the certificates evidencing such shares.
The Committee may require the Employee to give the Company prompt notice of
any disposition of shares of stock acquired by exercise of an Incentive Stock
Option, within two (2) years from the date of granting such Option or one (1)
year after the transfer of such shares to such Employee. The Committee may
direct that the certificates evidencing shares acquired by exercise of an
Incentive Stock Option refer to such requirement to give prompt notice of
disposition.
ARTICLE VI
ADMINISTRATION
----------------
Section 6.1 - Stock Option Committee
(a) The Stock Option Committee shall consist of at least two Directors
of the Company (or such smaller number as may be permitted under Rule 16(b)-3,
if and as such Rule is then in effect) appointed by and holding office during
the pleasure of the Board. No Options may be granted to any member of the
Committee during the term of his membership on the Committee unless said
issuance shall be approved by a majority of the Directors of the Company
exclusive of said Committee member. No person shall be eligible to serve on
the Committee unless he is then a "disinterested person" within the meaning
of paragraph (e)(2)(1) of Rule 16(b)-3.
(b) Appointment of Committee members shall be effective upon acceptance
of appointment. Committee members may resign at any time by delivering written
notice to the Board. Vacancies in the Committee shall be filled by the Board.
Should no Committee be established or standing, then the Board shall constitute
the Committee.
Section 6.2 - Duties and Powers of Committee
It shall be the duty of the Committee to conduct the general
administration of the Plan in accordance with its provisions. The Committee
shall have the power to interpret the Plan and the Options and to adopt such
rules for the administration, interpretation and application of the Plan as
are consistent therewith and to interpret, amend or revoke any such rules. Any
such interpretations and rules in regard to Incentive Stock Options shall be
consistent with the basic purpose of the Plan to grant "incentive stock
options" within the meaning of Section 422(b) of the Code. In its absolute
discretion, the Board may at any time and from time to time exercise any and
all rights and duties of the Committee under the Plan.
Section 6.3 - Majority Rule
The Committee shall act by a majority of its members in office. The
Committee may act either by vote at a meeting or by a memorandum or other
written instrument signed by a majority of the Committee.
Section 6.4 - Compensation; Professional Assistance; Good Faith Actions
Members of the Committee shall receive such compensation for their
services as members as may be determined by the Board. All expenses and
liabilities incurred by members of the Committee in connection with the
administration of the Plan shall be borne by the Company. The Committee may,
with the approval of the Board, employ attorneys, consultants, accountants,
appraisers, brokers or other persons. The Committee, the Company and its
Officers and Directors shall be entitled to rely upon the advice, opinions or
valuations of any such persons. All actions taken and all interpretations and
determinations made by the Committee in good faith shall be final and binding
upon all Optionees, the Company and all other interested persons. No member
of the Committee shall be personally liable for any action, determination or
interpretation made in good faith with respect to the Plan or the Options,
and all members of the Committee shall be fully protected by the Company in
respect to any such action, determination or interpretation.
ARTICLE VII
OTHER PROVISIONS
------------------
Section 7.1 - Options Not Transferable
No Option or interest or right therein or part thereof shall be liable
for the debts, contracts or engagements of the Optionee or his successors in
interest or shall be subject to disposition by transfer, alienation, pledge,
encumbrance, assignment or any other means whether such disposition be voluntary
or involuntary or by operation of law by judgment, levy, attachment, garnishment
or any other legal or equitable proceedings (including bankruptcy), and any
attempted disposition thereof shall be null and void and of no effect; provided,
however, that nothing in this Section 7.1 shall prevent transfers by will or by
the applicable laws of descent and distribution.
Section 7.2 - Amendment, Suspension or Termination of the Plan
The Plan may be wholly or partially amended or otherwise modified,
suspended or terminated at any time or from time to time by the Board.
However, to the extent required by Rule 16(b)-3 or the Code, no action of the
Board may, except as provided in Section 2.3, increase any limit imposed in
Section 2.1 on the maximum number of shares which may be issued on exercise of
Options, modify the eligibility requirements of Section 3.1, reduce the minimum
Option price requirements of Section 4.2(a) or extend the limit imposed in this
Section 7.2 on the period during which Options may be granted without approval
of the Company's shareholders given within twelve (12) months before or after
the action by the Board. Neither the amendment, suspension nor termination
of the Plan shall, without the consent of the holder of the Option, impair any
rights or obligations under any Option theretofore granted. No Option may be
granted during any period of suspension nor after termination of the Plan,
and in no event may any Option be granted under this Plan after the first to
occur of the following events:
(a) The expiration of ten (10) years from the date the Plan is adopted
by the Board; or
(b) The expiration of ten (10) years from the date the Plan is approved
by the Company's shareholders under Section 7.4.
Section 7.3 - Compliance with Section 16 of the Exchange Act
With respect to persons subject to Section 16 of the Exchange Act,
transactions under this Plan are intended to comply with all applicable
conditions of Rule 16(b)-3 or its successors under the Exchange Act. To the
extent any provision of this Plan or action by the Committee fails to so
comply at such time that the Company is subject to the reporting requirements
of the Exchange Act, it shall be deemed null and void to the extent permitted
by law and deemed advisable by the Committee.
Section 7.4 - Approval of Plan by Shareholders
This Plan will be submitted for the approval of the Company's
shareholders within twelve (12) months after the date of the Board's adoption
of this Plan. Options may be granted prior to such shareholder approval;
provided, however, that Options granted after the adoption of this Plan by the
Board but prior to such shareholder approval shall not be exercisable prior to
the time when this Plan is approved by the shareholders; provided, further,
that if such approval has not been obtained at the end of said twelve (12)
month period, all such Options granted hereunder following adoption of this
Plan by the Board shall thereupon be cancelled and become null and void.
Effective as of the date of amendment and restatement of this Plan, this
document hereby confirms that: (i) the approval of this Plan was effected by
Shareholders prior to the end of the twelfth (12th) month following its
initial adoption.; (ii) all subsequent increases in the number of shares
subject to this Plan have been approved by the shareholders of the Company;
(iii) the remaining amendment to the Plan have been adopted in accordance
with Section 7.2 hereof ; and (iv) all issuances of options from inception
of the Plan through the date of its amendment and restatement have been duly
approved by the Committee and the Board.
Section 7.5 - Effect of Plan Upon Other Option and Compensation Plans
The adoption of this Plan shall not affect any other compensation or
incentive plans in effect for the Company or any Subsidiary. Nothing in this
Plan shall be construed to limit the right of the Company or any Subsidiary
(a) to establish any other forms of incentives or compensation for employees
of the Company or any Subsidiary or (b) to grant or assume options otherwise
than under this Plan in connection with any proper corporate purpose,
including, but not by way of limitation, the grant or assumption of options
in connection with the acquisition by purchase, lease, merger, consolidation
or otherwise, of the business, stock or assets of any corporation, firm or
association.
Section 7.6 - Titles
Titles are provided herein for convenience only and are not to serve
as a basis for interpretation or construction of the Plan.
* * * * *
I hereby certify that the foregoing Plan was duly adopted by the Board
of Directors of MERGE TECHNOLOGIES INCORPORATED on May 13, 1996, as hereby
amended and restated in its entirety as of September 1, 2003, pursuant to the
authority granted to the Board of Directors of MERGE TECHNOLOGIES INCORPORATED.
Corporate Secretary
---------------
EXHIBIT 10.15
---------------
2003 STOCK OPTION PLAN OF
MERGE TECHNOLOGIES INCORPORATED
----------------------------------
MERGE TECHNOLOGIES INCORPORATED, a corporation organized under the laws
of the State of Wisconsin, hereby adopts this 2003 Stock Option Plan of Merge
Technologies Incorporated. The purposes of this Plan are as follows:
1. To provide a means whereby selected persons employed by
entities acquired by the Company or any Subsidiary will receive Options in
place of their existing options as well as receiving new options negotiated as
part of, or advisable in connection with, such acquisitions and thereby to
facilitate acquisitions.
2. To further the growth, development and financial success of the
Company by providing additional incentives to certain of its Eligible
Participants who have been or will be given responsibility for the management
or administration of the Company's business affairs, by assisting them to
become owners of capital stock of the Company and thus to benefit directly from
its growth, development and financial success.
ARTICLE I
DEFINITIONS
Whenever the following terms are used in this Plan, they shall have the
meaning specified below unless the context clearly indicates to the contrary.
The masculine pronoun shall include the feminine and neuter and the singular
shall include the plural, where the context so indicates.
SECTION 1.1 - BOARD
"Board" shall mean the Board of Directors of the Company.
SECTION 1.2 - CODE
"Code" shall mean the Internal Revenue Code of 1986, as amended.
SECTION 1.3 - COMMITTEE
"Committee" shall mean the Stock Option Committee of the Board,
appointed as provided in Section 6.1.
SECTION 1.4 - COMMON STOCK
"Common Stock" shall mean the Common Stock, One Cent ($.01) par value,
of the Company.
SECTION 1.5 - COMPANY
"Company" shall mean MERGE TECHNOLOGIES INCORPORATED.
SECTION 1.6 - DIRECTOR
"Director" shall mean a member of the Board.
SECTION 1.7 - DISABILITY
"Disability" shall have the meaning set forth in Section 2.2(e)(3) of
the Code.
SECTION 1.8 - ELIGIBLE PARTICIPANT
"Eligible Participant" shall mean selected employees, officers, agents,
consultants, advisors and independent contractors of the Company, or of any
corporation which is then a Subsidiary, who become such as a result of an
acquisition described in Section 3.2(b) of this Plan whether such Eligible
Participant becomes so employed or related to the Company at the time this Plan
is adopted or becomes so employed or related subsequent to the adoption of this
Plan, provided however, that Eligible Participant shall not include any person
who is at the time an Option is granted a director or executive officer (as
defined in Rule 16a-1 of the Securities Exchange Act of 1934) of the Company.
SECTION 1.9 - EXCHANGE ACT
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
SECTION 1.10 - NON-QUALIFIED OPTION
"Non-Qualified Option" shall mean an Option which is not an Incentive
Stock Option which qualifies under Section 422(b) of the Code.
SECTION 1.11 - OFFICER
"Officer" shall mean an officer of the Company or any Subsidiary.
SECTION 1.12 - OPTION
"Option" shall mean an option to purchase Common Stock of the Company,
granted under the Plan. Options may also include Rollover Options as the
context requires. "Options" are limited to Non-Qualified Options.
SECTION 1.13 - OPTIONEE
"Optionee" shall mean an Eligible Participant to whom an Option is
granted under the Plan.
SECTION 1.14 - PLAN
"Plan" shall mean this 2003 Stock Option Plan of MERGE TECHNOLOGIES
INCORPORATED.
SECTION 1.15- ROLLOVER OPTIONS
"Rollover Options" shall mean Options granted to persons pursuant to
the provisions of Section 3.2 (b).
SECTION 1.16 - SECRETARY
"Secretary" shall mean the Secretary of the Company.
SECTION 1.17 - SECURITIES ACT
"Securities Act" shall mean the Securities Act of 1933, as amended.
SECTION 1.18 - SUBSIDIARY
"Subsidiary" shall mean any corporation in an unbroken chain of
corporations beginning with the Company if each of the corporations other than
the last corporation in the unbroken chain then owns stock possessing fifty
percent (50%) or more of the total combined voting power of all classes of
stock in one of the other corporations in such chain, and, as of the date of
closing, shall include a corporation or other acquired entity described in
Section 3.2(b).
SECTION 1.19 - TERMINATION OF PARTICIPATION
"Termination of Participation" in the case of (i) an employee, shall
mean the time when the employee-employer relationship between the Optionee and
the Company or a Subsidiary is terminated for any reason, with or without
cause, including, but not by way of limitation, a termination by resignation,
discharge, death or retirement, but excluding terminations where there is a
simultaneous reemployment of the Optionee by the Company or a Subsidiary, and
(ii) any other Eligible Participant, shall mean the time when the consulting or
other relationship with the Company and all Subsidiaries terminates. The
Committee, in its absolute discretion, shall determine the effect of all other
matters and questions relating to Termination of Participation, including, but
not by way of limitation, the question of whether a Termination of
Participation resulted from a discharge for good cause, and all questions of
whether particular leaves of absence constitute Terminations of Participation.
ARTICLE II
SHARES SUBJECT TO PLAN
SECTION 2.1 - SHARES SUBJECT TO PLAN
The shares of stock subject to Options shall be shares of the Company's
Common Stock. The aggregate number of such shares which may be issued upon
exercise of Options shall not exceed Three Hundred Thousand (300,000) shares of
Common Stock.
SECTION 2.2 - UNEXERCISED OPTIONS
If any Option expires or is cancelled without having been fully
exercised, the number of shares subject to such Option but as to which such
Option was not exercised prior to its expiration or cancellation may again be
optioned hereunder to an Eligible Participant, subject to the limitations of
Section 2.1.
SECTION 2.3 - CHANGES IN COMMON STOCK
In the event that the outstanding shares of Common Stock of the Company
are hereafter changed into or exchanged for a different number or kind of
shares or other securities of the Company, or of another corporation, by reason
of reorganization, merger, consolidation, recapitalization, reclassification,
stock split-up, stock dividend, combination of shares or otherwise, appropriate
adjustments shall be made by the Committee in the number and kind of shares for
the purchase of which Options may be granted, including adjustments of the
limitations in Section 2.1 on the maximum number and kind of shares which may
be issued on exercise of Options.
ARTICLE III
GRANTING OF OPTIONS
SECTION 3.1 - ELIGIBILITY
Any Eligible Participant of the Company or of any corporation which is
then a Subsidiary and any person eligible to receive Rollover Options shall be
eligible to be granted Options.
SECTION 3.2 - GRANTING OF OPTIONS
(a) The Committee shall from time to time, in its absolute
discretion:
(i) determine which persons are Eligible Participants and
select from among the Eligible Participants (including those to whom
Options have been previously granted under the Plan) such of them as
in its opinion should be granted Options; and
(ii) determine the number of shares to be subject to such
Options granted to such selected Eligible Participants; and
(iii) determine the terms and conditions of such Options,
consistent with the Plan.
Notwithstanding the above, the Committee may delegate certain powers relating
to the granting of Options as it deems appropriate to executive officers of the
Company including the power to determine the number of shares to be subject to
Options (subject to a maximum amount set by the Committee), and to determine
the terms and conditions of such Options including the imposition of one more
conditions to exercise such as the execution by the Optionee of a
non-competition agreement in favor of the Company or a Subsidiary; provided,
however, that the Committee shall not delegate any powers that are required to
be exercised by the Committee under Section 16(b) of the Exchange Act or any
rules promulgated thereunder.
(b) In the event of an acquisition by the Company or any
Subsidiary by means of a merger, consolidation, acquisition of property or
stock, reorganization or otherwise, the Committee shall be authorized to cause
the Company to issue Options or assume stock options issued by the acquired
company, whether or not in a transaction to which Section 424 (a) of the Code
applies, by means of issuance of new Options in substitution for, or an
assumption of, previously issued options or rights, but only if and to the
extent such issuance or assumption is consistent with the other provisions of
this Plan and any applicable law. Options rolled over or assumed and described
in this Section 3.2(b) are herein sometimes referred to as "Rollover Options."
(c) Upon the selection of an Eligible Participant to be granted an
Option, the Committee shall instruct the Secretary to issue such Option and may
impose such conditions on the grant of such Option as it deems appropriate.
Without limiting the generality of the preceding sentence, the Committee may,
in its discretion and on such terms as it deems appropriate, require as a
condition on the grant of any Option to an Eligible Participant that the
Eligible Participant surrender for cancellation some or all of the unexercised
Options which have been previously granted to him. An Option, the grant of
which is conditioned upon such surrender, may have an option price lower (or
higher) than the option price of the surrendered Option, may cover the same (or
a lesser or greater) number of shares as the surrendered Option, may contain
such other terms as the Committee deems appropriate and shall be exercisable
in accordance with its terms, without regard to the number of shares, price,
option period or any other term or condition of the surrendered Option.
ARTICLE IV
TERMS OF OPTIONS
SECTION 4.1 - OPTION AGREEMENT
Each Option shall be evidenced by a written Stock Option Agreement,
which shall be executed by the Optionee and an authorized Officer of the
Company and which shall contain such terms and conditions as the Committee
shall determine, consistent with the Plan.
SECTION 4.2 - OPTION PRICE
(a) The price of the shares subject to each Option shall be set by
the Committee; provided, however, that the price per share of an Option shall
be not less than the lesser of eighty five percent (85%) of the fair market
value of such shares on the date such Option is granted or the average of the
fair market values of such shares on the five (5) most recent trading days
prior to the date that such Option is granted. In the case of Rollover Options,
the Committee shall take into account the exercise price of the options being
replaced but shall not be required to grant Rollover Options at a price equal
to or greater than such previous exercise price.
(b) For purposes of the Plan, the fair market value of a share of
the Company's stock as of a given date shall be: (i) the closing price of the
Common Stock on the principal national stock exchange on which the shares are
listed on such date or, if shares were not traded on such date, then on the
next preceding trading day during which a sale occurred; or (ii) if such stock
is not listed on an exchange but is quoted on NASDAQ or a successor quotation
system, (1) the last sales price (if the stock is then listed on NASDAQ) or
(2) the mean between the closing representative bid and asked prices (in all
other cases) for the stock on such date as reported by NASDAQ or such successor
quotation system; or (iii) if such stock is not listed on an exchange and not
quoted on NASDAQ or a successor quotation system, the mean between the closing
bid and asked prices for the stock, on such date, as determined in good faith
by the Committee; or (iv) if the Company's stock is not publicly traded, the
fair market value established by the Committee acting in good faith. In
determining the fair market value of the Company's Common Stock under
subsection l (b) of this Section 4.2, the Committee may rely on the closing
price as reported in the Wall Street Journal.
SECTION 4.3 - COMMENCEMENT OF EXERCISABILITY
(a) Subject to the provisions of Sections 4.3(b) and 7.3, Options
shall become exercisable at such times and in such installments (which may be
cumulative) as the Committee shall provide in the terms of each individual
Option; provided, however, that by a resolution adopted after an Option is
granted the Committee may, on such terms and conditions as it may determine to
be appropriate and subject to Sections 4.3(b and 7.3, accelerate the time at
which such Option or any portion thereof may be exercised.
(b) No portion of an Option which is unexercisable at Termination of
Participation shall thereafter become exercisable.
SECTION 4.4 - EXPIRATION OF OPTIONS
(a) No Option may be exercised to any extent by anyone after the
first to occur of the following events:
(i) The expiration of fifteen (15) years and one (1) day
from the date the Option was granted; or
(ii) The expiration of three (3) months from the date of
the Optionee's Termination of Participation; or
(iii) The engagement by the Employee in willful misconduct
which injures the Company or any of its Subsidiaries.
(b) Subject to the provisions of Section 4.4(a), the Committee
shall provide, in the terms of each individual Option, when such Option expires
and become unexercisable; and (without limiting the generality of the
foregoing) the Committee may provide in the terms of individual Options that
said Options expire immediately upon a Termination of Participation for any
reason.
SECTION 4.5 - TENURE OF EMPLOYMENT
Nothing in this Plan or in any Stock Option Agreement hereunder shall
confer upon any Optionee any right to continue in the employ of the Company or
any Subsidiary or shall interfere with or restrict in any way the rights of the
Company and its Subsidiaries, which are hereby expressly reserved, to discharge
any Optionee at any time for any reason whatsoever, with or without cause.
SECTION 4.6 - ADJUSTMENTS IN OUTSTANDING OPTIONS
In the event that the outstanding shares of the stock subject to
Options are changed into or exchanged for a different number or kind of shares
of the Company or other securities of the Company by reason of merger,
consolidation, recapitalization, reclassification, stock split-up, stock
dividend, combination of shares or otherwise, the Committee shall make an
appropriate and equitable adjustment in the number and kind of shares as to
which all outstanding Options, or portions thereof then unexercised, shall be
exercisable, to the end that after such event the Optionee's proportionate
interest shall be maintained as before the occurrence of such event. Such
adjustment in an outstanding Option shall be made without change in the total
price applicable to the Option or the unexercised portion of the Option
(except for any change in the aggregate price resulting from rounding-off of
share quantities or prices) and with any necessary corresponding adjustment
in Option price per share. Any such adjustment made by the Committee shall be
final and binding upon all Optionees, the Company and all other interested
persons.
SECTION 4.7 - MERGER, CONSOLIDATION, ACQUISITION, LIQUIDATION OR DISSOLUTION
In the event of: (1) a merger or consolidation in which the Company is
not the surviving corporation; or (2) a reverse merger in which the Company is
the surviving corporation but the shares of the Company's common stock
outstanding immediately preceding the merger are converted by virtue of the
merger into other property, whether in the form of securities, cash or
otherwise, then to the extent permitted by applicable law: (i) any surviving
corporation shall assume any of the options outstanding under the Plan or shall
substitute similar options for those outstanding under the Plan, or (ii) such
options shall continue in full force and effect. In the event any surviving
corporation refuses to assume or continue such options, or to substitute
similar options for those outstanding under the Plan, then, the time at which
such options may first be exercised shall accelerated and the options
terminated if not exercised prior to such event. In the event of a dissolution
or liquidation of the Company, any options outstanding under the Plan shall
terminate if not exercised prior to such event.
ARTICLE V
EXERCISE OF OPTIONS
SECTION 5.1 - PERSON ELIGIBLE TO EXERCISE
During the lifetime of the Optionee, only he or she may exercise an
Option granted to him or her, or any portion thereof. After the death of the
Optionee, any exercisable portion of an Option may, prior to the time when such
portion becomes unexercisable under Section 4.4 or Section 4.7, be exercised
by his personal representative or by any person empowered to do so under the
deceased Optionee's will or under the then applicable laws of descent and
distribution.
SECTION 5.2 - PARTIAL EXERCISE
At any time and from time to time prior to the time when any
exercisable Option or exercisable portion thereof become unexercisable under
Section 4.4 or Section 4.7, such Option or portion thereof may be exercised in
whole or in part; provided, however, that the Company shall not be required to
issue fractional shares and the Committee may, by the terms of the Option,
require any partial exercise to be with respect to a specified minimum number
of shares.
SECTION 5.3 - MANNER OF EXERCISE
An exercisable Option, or any exercisable portion thereof, may be
exercised solely by delivery to the Secretary or his or her office of all of
the following prior to the time when such Option or such portion becomes
unexercisable under Section 4.4 or Section 4.7:
(a) Notice in writing signed by the Optionee or other person then
entitled to exercise such Option or portion, stating that such Option or
portion is exercised, such notice complying with all applicable rules
established by the Committee; and
(b) (i) Full payment (in cash or by check) for the shares
with respect to which such Option or portion is thereby exercised; or
(ii) Subject to the Committee's consent, full payment in any
other form approved by the Committee, consistent with applicable law and the
Plan; or
(iii) Any combination of the consideration provided in the
foregoing subsections (i) and (ii); and
(c) On, or prior to the date the same is required to be withheld,
full payment (in cash or by check) of any amount that must be withheld by the
Company for federal, state and/or local tax purposes.
(d) Such representations and documents as the Committee, in its
absolute discretion, deems necessary or advisable to effect compliance with all
applicable provisions of the Securities Act and any other federal or state
securities laws or regulations. The Committee may, in its absolute
discretion, also take whatever additional actions it deems appropriate to
effect such compliance including, without limitation, placing legends on
share certificates and issuing stop-transfer orders to transfer agents and
registrars; and
(e) In the event that the Option or portion thereof shall be
exercised pursuant to Section 5.1 by any person or persons other than the
Optionee, appropriate proof of the right of such person or persons to exercise
the Option or portion thereof.
SECTION 5.4 - CONDITIONS TO ISSUANCE OF STOCK CERTIFICATES
The shares of stock issuable and deliverable upon the exercise of an
Option, or any portion thereof, may be either previously authorized but
unissued shares or issued shares which have then been reacquired by the Company.
The Company shall not be required to issue or deliver any certificate or
certificates for shares of stock purchased upon the exercise of any Option or
portion thereof prior to fulfillment of all of the following conditions:
(a) The admission of such shares to listing on all stock exchanges
on which such class of stock is then listed; and
(b) The completion of any registration or other qualification of
such shares under any state or federal law or under the rulings or regulations
of the Securities and Exchange Commission or any other governmental regulatory
body, which the Committee shall, in its absolute discretion, deem necessary or
advisable; and
(c) The obtaining of any approval or other clearance from any state
or federal governmental agency which the Committee shall, in its absolute
discretion, determine to be necessary or advisable; and
(d) The payment to the Company (or other employer corporation) of
all amounts which it is required to withhold under federal, state or local law
in connection with the exercise of the Option; and
(e) The lapse of such reasonable period of time following the
exercise of the Option as the Committee may establish from time to time for
reasons of administrative convenience.
SECTION 5.5 - RIGHTS AS STOCKHOLDERS
The holders of Options shall not be, nor have any of the rights or
privileges of, stockholders of the Company in respect of any shares purchasable
upon the exercise of any part of an Option unless and until certificates
representing such shares have been issued by the Company to such holders.
SECTION 5.6 - TRANSFER RESTRICTIONS
In addition to the transfer restrictions set forth in Section 7.1, the
Committee, in its absolute discretion, may impose such restrictions on the
transferability of the shares purchasable upon the exercise of an Option as it
deems appropriate, including a commitment on behalf of the Optionee to afford
the Company first refusal rights upon a proposed sale of shares of Common Stock
or restrictions on transfer necessary or desirable, as the Committee in its sole
discretion may determine Any such restriction shall be set forth in the
respective Stock Option Agreement or in a separate written agreement and may be
referred to on the certificates evidencing such shares.
ARTICLE VI
ADMINISTRATION
SECTION 6.1 - STOCK OPTION COMMITTEE
(a) The Stock Option Committee shall consist of at least two
Directors of the Company (or such smaller number as may be permitted under Rule
16b-3, if and as such Rule is then in effect) appointed by and holding office
during the pleasure of the Board. No Options may be granted to any member of
the Committee during the term of his membership on the Committee. No person
shall be eligible to serve on the Committee unless he is then a "disinterested
person" within the meaning of paragraph (e)(2)(i) of Rule 16b-3.
(b) Appointment of Committee members shall be effective upon
acceptance of appointment. Committee members may resign at any time by
delivering written notice to the Board. Vacancies in the Committee shall be
filled by the Board.
SECTION 6.2 - DUTIES AND POWERS OF COMMITTEE
It shall be the duty of the Committee to conduct the general
administration of the Plan in accordance with its provisions. The Committee
shall have the power to interpret the Plan and the Options and to adopt such
rules for the administration, interpretation and application of the Plan as are
consistent therewith and to interpret, amend or revoke any such rules. In its
absolute discretion, the Board may at any time and from time to time exercise
any and all rights and duties of the Committee under the Plan.
SECTION 6.3 - MAJORITY RULE
The Committee shall act by a majority of its members in office. The
Committee may act either by vote at a meeting or by a memorandum or other
written instrument signed by a majority of the Committee.
SECTION 6.4 - COMPENSATION: PROFESSIONAL ASSISTANCE: GOOD FAITH ACTIONS
Members of the Committee shall receive such compensation for their
services as members as may be determined by the Board. All expenses and
liabilities incurred by members of the Committee in connection with the
administration of the Plan shall be borne by the Company. The Committee may,
with the approval of the Board, employ attorneys, consultants, accountants,
appraisers, brokers or other persons. The Committee, the Company and its
Officers and Directors shall be entitled to rely upon the advice, opinions or
valuations of any such persons. All actions taken and all interpretations and
determinations made by the Committee in good faith shall be final and binding
upon all Optionees, the Company and all other interested persons. No member of
the Committee shall be personally liable for any action, determination or
interpretation made in good faith with respect to the Plan or the Options, and
all members of the Committee shall be fully protected by the Company in respect
to any such action, determination or interpretation.
ARTICLE VII
OTHER PROVISIONS
SECTION 7.1 - OPTIONS NOT TRANSFERABLE
No Option or interest or right therein or part thereof shall be liable
for the debts, contracts or engagements of the Optionee or his successors in
interest or shall be subject to disposition by transfer, alienation, pledge,
encumbrance, assignment or any other means whether such disposition be
voluntary or involuntary or by operation of law by judgment, levy, attachment,
garnishment or any other legal or equitable proceedings (including bankruptcy),
and any attempted disposition thereof shall be null and void and of no effect;
provided, however, that nothing in this Section 7.1 shall prevent transfers by
will or by the applicable laws of descent and distribution.
SECTION 7.2 - AMENDMENT, SUSPENSION OR TERMINATION OF THE PLAN
The Plan may be wholly or partially amended or otherwise modified,
suspended or terminated at any time or from time to time by the Board. Neither
the amendment, suspension nor termination of the Plan shall, without the
consent of the holder of the Option, impair any rights or obligations under any
Option theretofore granted. No Option may be granted during any period of
suspension nor after termination of the Plan, and in no event may any Option
be granted under this Plan after the expiration of ten (10) years from the date
the Plan is adopted by the Board.
SECTION 7. 3 - COMPLIANCE WITH SECTION 16 OF THE EXCHANGE ACT
With respect to persons subject to Section 16 of the Exchange Act,
transactions under this Plan are intended to comply with all applicable
conditions of Rule 16b-3 or its successors under the Exchange Act. To the
extent any provision of this Plan or action by the Committee fails to so comply
at such time that the Company is subject to the reporting requirements of the
Exchange Act, it shall be deemed null and void to the extent permitted by law
and deemed advisable by the Committee.
SECTION 7.4 - EFFECT OF PLAN UPON OTHER OPTION AND COMPENSATION PLANS
The adoption of this Plan shall not affect any other compensation or
incentive plans in effect for the Company or any Subsidiary or modify the
rights of any person holding options issued pursuant to the Original Plan.
Nothing in this Plan shall be construed to limit the right of the Company or
any Subsidiary (a) to establish any other forms of incentives or compensation
for employees of the Company or any Subsidiary or (b) to grant or assume options
otherwise than under this Plan in connection with any proper corporate purpose,
including, but not by way of limitation, the grant or assumption of options in
connection with the acquisition by purchase, lease, merger, consolidation or
otherwise, of the business, stock or assets of any corporation, firm or
association.
SECTION 7.5 - TITLES
Titles are provided herein for convenience only and are not to serve
as a basis for interpretation or construction of the Plan.
Adopted by the Board of Directors of Merge Technologies Incorporated
on June 24, 2003 and effective July 17, 2003.