MERGE TECHNOLOGIES INCORPORATED
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2006
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For
the transition period from
to
Commission file number 0–29486
MERGE TECHNOLOGIES INCORPORATED
(Exact name of Registrant as specified in its charter)
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| Wisconsin
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39–1600938 |
(State or other jurisdiction
of incorporation or organization)
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(I. R. S. Employer
Identification No.) |
6737 West Washington Street, Suite 2250, Milwaukee, Wisconsin 53214–5650
(Address of principal executive offices, including zip code)
(Registrant’s
telephone number, including area
code) (414) 977–4000
Securities
registered under Section 12(b) of the Exchange
Act:
Common
Stock, $0.01 par value per share
(Title of class)
Securities registered under Section 12(g) of the Exchange Act: NONE
Indicate by check mark if the Registrant is a well–known seasoned issuer, as defined in
Rule 405 of the Securities Act
Yes o No þ
Indicate by check mark if the Registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
Yes o No þ
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes o No þ
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S–K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form
10-K/A or any amendment to this Form 10-K/A. o
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated
filer, or a non–accelerated filer. See definition of “accelerated filer and large accelerated
filer” in Rule 12b–2 of the Exchange Act.
Large accelerated filer o Accelerated filer þ Non–accelerated filer o
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b–2 of
the Act).
Yes o No þ
The aggregate market value for the Registrant’s voting and non–voting common equity held by
non–affiliates of the Registrant as of June 30, 2006, based upon the closing sale price of the
Common Stock on June 30, 2006, as reported on the NASDAQ Global Market, was approximately
$346,618,800. Shares of Common Stock held by each officer and director and by each person who owns
ten percent or more of the outstanding Common Stock have been excluded in that such persons may be
deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive
determination for other purposes.
The number of shares outstanding of the Registrant’s common stock, par value $0.01 per share,
as of March 2, 2007: 30,068,907
DOCUMENTS INCORPORATED BY REFERENCE
Certain of the information required by Part III is incorporated by reference from the
Registrant’s Proxy Statement for its 2007 Annual Meeting of Shareholders.
MERGE TECHNOLOGIES INCORPORATED
EXPLANATORY NOTE – RESTATEMENTS OF FINANCIAL INFORMATION
This Annual Report on Form 10-K/A for the year ended December 31, 2006, includes (1) a
restated balance sheet as of December 31, 2005 and 2006 (2) restated consolidated statements of
operations, consolidated statements of cash flows, consolidated statements of shareholders’ equity,
and consolidated statements of comprehensive income (loss) for the years ended December 31, 2004,
2005, and 2006 and (3) restated quarterly financial information for the quarters ended March 31,
2006 and 2005, June 30, 2006 and 2005, September 30, 2006 and 2005, and December 31, 2006 and 2005.
The Company will not file amended periodic reports for any of those affected quarterly periods. The
restatement relates primarily to software license arrangements with 12 customers entered into prior
to January 1, 2006 and net deferred income tax liabilities assumed in the acquisition of Cedara
Software Corp. in June 2005. The contracts at issue include a license of software, installation
services, and related maintenance and support obligations. Management and the Audit Committee
determined that, with respect to these contracts, the Company should recognize the entire value of
the bundled contracts as revenue over the period for which maintenance and support may be provided
to the customer since fair value of the maintenance on a stand-alone basis could not be determined.
This approach is different from the Company’s historical practice of recognizing the fair value of
the software over the period of installation and the fair value of the maintenance over the
maintenance period when fair value of the maintenance on a stand-alone basis can be determined.
The Company’s restated financial statements reflect the revised method of accounting for these
contracts, income tax adjustments and other adjustments. The following items of the Form 10-K
have been modified or revised in this Amendment No. 1 to Form 10K/A to reflect the restatements:
Part II, Item 6. Selected Financial Data;
Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations;
Part II, Item 8. Financial Statements and Supplementary Data;
Part II, Item 9A. Controls and Procedures; and
Part IV, Item 15. Exhibits and Financial Statement Schedules.
This amended Annual Report on Form 10-K/A sets forth the original Annual Report on Form 10-K
in its entirety, except as required to reflect the effects of the restatements. Except for
disclosures affected by the restatements, this amended Annual Report on Form 10-K/A speaks as of
the original filing date of March 8, 2007 and does not modify or update disclosures in the Form
10-K, including the nature and character of such disclosures, to reflect events occurring or items
discovered after the original filing date of the Form 10-K. Accordingly, this amended Annual Report
on Form 10-K/A should be read in conjunction with the Company’s filings made with the Securities
and Exchange Commission subsequent to the original filing date of the Form 10-K, including any
amendments to those filings. The Company has not amended, and does not intend to amend, any of its
other previously filed reports for the periods affected by the restatement. The Company’s
previously issued financial statements included in those reports for the years ended December 31,
2004 through December 31, 2006 and for the quarter ended March 31, 2007 should no longer be relied
upon.
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PART I
Item 1. BUSINESS
Cautionary Note Regarding Forward–Looking Statements
Certain statements in this report that are not historical facts, including, without
limitation, statements that reflect our current expectations regarding our future growth, results
of operations, performance, business prospects and opportunities, constitute forward–looking
statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A
of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934. When used in
this report, the words “believes,” “intends,” “anticipates,” “expects,” “will” and similar
expressions are intended to identify forward–looking statements, but are not the exclusive means of
identifying them. These statements are based on information currently available to us and are
subject to a number of risks and uncertainties that may cause our actual growth, results of
operations, financial condition, cash flows, performance, business prospects and opportunities and
the timing of certain events to differ materially from those expressed in, or implied by, these
statements. These risks, uncertainties and other factors include, without limitation, those matters
discussed in Item 1A, “Risk Factors” of this Annual Report on Form 10-K. Except as expressly
required by the federal securities laws, we undertake no obligation to publicly update these
factors or any of the forward–looking statements to reflect future events, developments or changed
circumstances, or for any other reason.
Overview
Merge Technologies Incorporated, a Wisconsin corporation doing business as Merge Healthcare,
and its subsidiaries or affiliates (collectively, “Merge Healthcare,” “we,” “us,” or “our”),
develops medical imaging and information management software and delivers related services. Late in
2006 we reorganized our business to better reflect emerging market needs. We established three
distinct business units: Merge Healthcare North America, which primarily sells directly to the
end–user healthcare market comprised of hospitals, imaging centers and specialty clinics located in
the U.S. and Canada and also distributes certain products through the Internet via our website;
Cedara Software, which primarily sells to Original Equipment Manufacturers (“OEMs”) and Value Added
Resellers (“VARs”), comprised of companies that develop, manufacture or resell medical imaging
software or devices; and Merge Healthcare EMEA, which sells to the end–user healthcare market in
Europe, the Middle East and Africa. Our principal executive offices are located at 6737 West
Washington Street, Suite 2250, Milwaukee, Wisconsin 53214–5650, and our telephone number there is
(414) 977–4000.
We develop clinical and medical imaging software applications and development tools that are
on the forefront of medicine. We also develop medical imaging software solutions that support
end–to–end business and clinical workflow for radiology department and specialty practices, imaging
centers and hospitals. Our software technologies accelerate market delivery for our global OEM
customers, while our end–user solutions improve our customers’ productivity and enhance the quality
of the patient experience. Our diagnostic imaging workflow applications are commonly categorized as
Picture Archiving and Communication Systems (“PACS”), Radiology Information Systems (“RIS”) and
clinical applications, which include, but are not limited to, software products that support
medical imaging in many specialized areas such as orthopedics, cardiology, mammography and
oncology. We believe the combination of RIS/PACS/clinical applications and Healthcare Information
Management improves diagnostic imaging workflow. It also provides value by making images and other
information available throughout the enterprise.
We directly provide PACS, RIS and clinical medical imaging software applications and also sell
select products through our website’s eCommerce engine. Our products and solutions link business
and clinical workflow by managing and distributing diagnostic images and information throughout the
healthcare enterprise, and providing visualization tools that target improved productivity and
enhanced clinical accuracy of the diagnosis of general and specialty medical imaging exams. Our
customers can enhance the quality of healthcare provided to patients because our solutions improve
radiology workflow efficiencies and improve the clinical decision–making processes. In addition,
our solutions reduce the film, paper and labor costs involved in managing and distributing medical
images and information, which helps drive increased profitability for our customers. We deliver
value to many types of healthcare facilities of all sizes, but we specifically target imaging
centers and specialty clinics.
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We also focus on the development of custom–engineered software applications and development
tools for the global medical imaging and information OEM markets. Our software is deployed in
hospitals and clinics worldwide through our partners and our direct end–user and eCommerce channels
and is licensed by many of the world’s largest medical device and healthcare information technology
(“IT”) companies. Our technologies help our OEM customers increase revenues, create competitive
advantages, and deliver technologies to end–user markets throughout the world. We often serve as an
extended research and development team for the OEM, helping them to be first–to–market with
innovative medical imaging technologies. We leverage our global end–user distribution channels to
sell our customers existing technologies and applications, and expand the value of medical imaging
solutions by licensing additional applications for our customers to sell through their own sales
forces. Our technologies and expertise span all the major digital imaging modalities, including
computed tomography (“CT”), magnetic resonance imaging (“MRI”), digital x–ray, mammography,
ultrasound, echo–cardiology, angiography, nuclear medicine, positron emission tomography (“PET”)
and fluoroscopy. Our offerings are used in all aspects of clinical imaging workflow, including: the
capture of a patient’s digital image; the archiving, communication and manipulation of digital
images; sophisticated clinical applications to analyze digital images; the use of imaging in
minimally–invasive surgery; and the management of patient information stored as Electronic Patient
Records (“EPR”). We target OEM/VARs that serve all markets utilizing medical imaging in their
businesses, regardless of the size or scope of the market they serve, including non–radiology
markets such as oncology, pharmaceutical and EPR.
We have consistently expanded our suite of product and service offerings. We see our
RIS/PACS/clinical applications single–vendor approach as a unique advantage in our end–user target
market. Additionally, we became a leading medical imaging OEM partner–company through our
combination with Cedara Software Corp. (“Cedara”).
We believe the combined innovation model between our OEM medical imaging engineering and our
RIS/PACS/clinical application offerings positions us uniquely among our competitors in the medical
imaging and information markets, provides for a product innovation model that accelerates our
development efforts by providing software–based technologies that can be embedded in solutions for
the end–user market, and creates a product and distribution platform to allow us to explore new
clinical and geographic markets beyond radiology. We believe that leveraging this unique innovation
model and our ability to innovate new medical imaging solutions is key to our long term strategy to
expand our products and services beyond the traditional boundaries of radiology.
Our Market
Millennium Research Group, an international market research firm, reported the following
marketplace information:
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In 2005, the U.S. market for RIS and PACS, consisting of RIS and enterprise, radiology,
orthopedic and cardiology PACS, was valued at over $1.5 billion. |
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By 2010, this market will grow to over $3.0 billion, representing a compound annual
growth rate of nearly 15%. |
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Growth for the RIS market is primarily driven by imaging centers and small hospitals,
particularly those that do not already have a PACS or RIS and elect an integrated RIS/PACS
solution. |
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Growth for the PACS market is primarily driven by: |
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adoption of EPR; |
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growing customer receptiveness to PACS; |
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the conversion from radiology to enterprise PACS solutions; |
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customer demand for replacement PACS and integrated RIS/PACS solutions; |
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affordable price points for small hospitals and imaging centers; |
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growth in diagnostic capabilities for the cardiology market; and |
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growth of in–office modalities in the orthopedic market. |
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The market for our end–user solutions is highly competitive. Healthcare providers continue to
be challenged by declining reimbursements, intense competition and the increased cost of providing
healthcare services. Some customers purchase products from us and from our competitors. In the
developing area of RIS/PACS/clinical applications workflow, there are many newly emerging
competitors that offer portions of an integrated radiology solution through their RIS, PACS and
clinical applications. Additionally, certain competitors are integrating RIS, PACS and clinical
applications through development, partnership and acquisition activities. We offer a combined RIS,
PACS and clinical applications solution, providing customers with a single system that yields
strong productivity gains, attracts referrals from primary care and specialty physicians, and
yields enhanced support and technology migration by having only a single vendor relationship to
manage.
Our OEM market, which consists of organizations that use medical imaging or information in any
element of their business, is also highly competitive. Thousands of imaging–related prospective
customers exist throughout the world. In addition, we use a Technology Partnership Program, through
which we work with academic researchers and entrepreneurial companies that have developed new,
innovative medical imaging applications that are not yet fully commercialized. These technology
partnerships further accelerate the innovation of our own technologies, allowing us to approach new
clinical imaging markets inside and outside of radiology. In exchange, we can offer our partners
access to our distribution channels, commercialization of their products, and an approach to our
global OEM partners that we have developed over the last 18 years. Working with these partners, we
use our depth of medical imaging technology, global OEM distribution, and business expertise to
commercialize and launch those products.
We believe that our innovation–driven model will enable us to proactively drive new demand for
medical imaging solutions at both the OEM and end–user level. One of the main sources of
competition for our OEM products is the OEM’s own internal software development programs, where the
customer may have the ability to use internal resources to create a similar technology or
eventually replace our software employed in the customer’s marketed solution. There are also a
number of companies that specialize in one particular technology, which may compete with us in a
selected market. However, we believe that there are no direct competitors in the OEM market that
have the breadth of technologies, engineering resources and capabilities to compete with us in all
aspects of our technology portfolio.
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Recent Challenges
We continue to face significant business challenges from the informal, non–public inquiry
being conducted by the Securities and Exchange Commission and class action and other lawsuits. We
believe that these matters have adversely affected the morale of our employees, our relationships
with certain customers and potential customers and our reputation in the marketplace, and have
diverted the attention of our Board of Directors and management from our business operations. We
also have experienced significant challenges integrating the businesses and personnel of Merge
Healthcare and Cedara, with which we combined on June 1, 2005. In particular, we struggled to
realize synergistic benefits as a consequence of organizational changes, primarily within our sales
and service groups, following that business combination. However, during the fourth quarter of 2006
we commenced a rightsizing and reorganization initiative to better align our costs with our
revenue–generating strategies while at the same time eliminating redundancies within our
consolidated organization. This initiative emphasizes the offshoring of a significant portion of
our software engineering and customer support. Significant knowledge transfer efforts have occurred
since the commencement of the initiative. However, it is possible that we have not devoted adequate
resources to the development and acquisition of additional products or support of those products to
our customers. Also, we have no integrated financial systems, and we are currently in the process
of implementing a new enterprise resource planning (“ERP”) system which could divert the attention
of employees and create temporary operating inefficiencies. See Item 1A, “Risk Factors,” Item 3,
“Legal Proceedings,” Item 7, “Management’s Discussion and Analysis of Financial Condition and
Results of Operations,” and Item 9A, “Controls and Procedures” of this Annual Report on Form 10-K
for more detailed discussion regarding these matters.
History
We were founded in 1987 and built a reputation as a company that enabled the transformation of
legacy radiology (film–based) images into modern (filmless) digitized images for distribution and
diagnostic interpretation. We acquired eFilm Medical Inc. (“eFilm”) in June 2002 and began doing
business under the name of Merge eFilm in order to leverage eFilm’s international name recognition
for diagnostic medical image workstation software. In July 2003, we acquired RIS Logic, Inc. (“RIS
Logic”), a RIS company that designed software to manage business and clinical workflow for imaging
centers to streamline operations and accelerate productivity. We acquired AccuImage Diagnostics
Corp. (“AccuImage”) in January 2005. AccuImage was founded from radiology academic research, and
created products that used advanced visualization technologies for clinical specialty medical
imaging. In June 2005, we completed our business combination with Cedara Software Corp., which was
established in 1982 and creates medical imaging software for OEM and VAR customers worldwide.
We have consistently maintained a commitment to industry standards designed to benefit both
healthcare providers and technology vendors including the industry’s standard network
communications protocol known as Digital Imaging Communications in Medicine (“DICOM”), open medical
standards such as Health Level Seven, Inc. (“HL7”), and the Integrated Healthcare Enterprise
(“IHE”) framework. These standards have paved the way for healthcare organizations to begin 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 communication
and information management components. We have incorporated these standards in our radiology
workflow technologies, software applications and OEM connectivity components, establishing the
basis for seamless integration of images and healthcare information across an organization’s
computing infrastructure.
How We Benefit Our Customers
Our end–user solutions benefit hospital radiology departments, diagnostic imaging centers,
specialty clinics and their patients in a variety of ways, including:
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Accelerated productivity gained by using a single integrated software solution for most
business and clinical workflow tools designed to automate operations, including digital
dictation, billing, registration and scheduling, productivity analysis, image and report
management, and storage and distribution; |
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Increased accuracy through real–time patient demographic matching across all business
and clinical workflow tools; |
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More accountability and convenience in working with one vendor that develops, installs
and supports the entire spectrum of radiology workflow tools and integration services; |
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The creation of permanent electronic archives of diagnostic quality images that enable
the retrieval of prior and current images and reports; |
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Improved productivity and lower cost by providing the capability to centralize many
functions such as scheduling, coding, transcription, billing and radiologist reading; |
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Modular, flexible and cost–effective systems that can expand as the imaging center,
hospital or clinic’s business grows; |
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Networking of multiple image producing and image utilizing devices to eliminate
redundancies and reduce the need for capital equipment expenditures or disaster recovery;
and |
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Optimizing image–viewing and diagnostic capabilities. |
Our global OEM customers benefit from our software technologies and professional services in a
number of ways, including:
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Using our technologies and services to enhance the workflow capabilities of their
solutions; |
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Accelerating the time to market in the development of new solutions; |
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Creating greater product differentiation compared to their competitors; and |
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Leveraging our technical and deployment skills, which facilitates an increased ability
to focus on core competencies. |
Business Strategy
We continue to build upon our position as an innovative medical imaging software and
technology provider, and full solution RIS/PACS/clinical applications developer for the global
healthcare end–user and OEM markets. We maintain this position by employing more than half of our
employees in research and development activities, with total engineering costs, in thousands, of
$22,697, $13,535, and $5,446 for 2006, 2005 and 2004, respectively, which amounts include
capitalized software development costs and research and development expense. Our market position is
the result of our expertise in clinical workflow and integration, technically innovative software
products, modular software solutions, and continued focus on accelerating healthcare organizations’
productivity. Our OEM software technologies address the global market in medical imaging software
innovation. Leveraging the clinical application innovation of our OEM products, we believe that our
end–user products enable medical imaging and information to integrate more efficiently throughout
the healthcare enterprise. By effectively utilizing our research and development activities and our
global onshore–offshore engineering services, we can expand the solution set offered to both our
OEM and end–user customers, accelerate the innovation of new products, and enter new markets such
as orthopedic, veterinary, pharmaceutical clinical trials, oncology and EPR. This strategy is the
direct result of combining Cedara Software with Merge Healthcare, and is expected to form the basis
for our growth, innovation and new product and market development in the coming years.
During 2006, we focused our operational efforts on establishing an onshore–offshore product
development and service and support initiative; realigning our product development model, systems
and processes to ensure timely product delivery to our customers; developing new partnerships with
OEM customers and leveraging our product brands. We marketed and cross–sold bundled products from
across all of our combined product lines.
In line with this operational plan, we:
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Reorganized our business into three distinct business units; |
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Announced new solutions for deformable registration and image fusion; |
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Partnered with Advanced Imaging Technologies, a Washington corporation, in the
development of an innovative breast ultrasound system; |
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Released a new .NET DICOM toolkit; |
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Released Fusion RIS™ version 3.1; |
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Released a Spanish version of eFilm Workstation™; |
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Announced a distribution agreement with Medavis GmbH, a German corporation, to provide
RIS software to selected European markets; |
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Signed an agreement to deliver comprehensive digital orthopedic solutions to healthcare
providers; and |
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Entered into a partnership with CPAGE, a French public information technology group, to
deliver EPR functionality to the French hospital market based on our aXigate™ technology. |
We anticipate that any future growth will be driven primarily by continued concentration on
the following aspects of our business:
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Medical imaging innovation with our OEM partners, creating software applications,
technologies and tools that optimize the growing and evolving capabilities of imaging
acquisition devices such as multi–slice CT, PET, ultrasound and MRI; |
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End–user sales initiatives, including targeted sales/marketing activities designed to
achieve broader geographic coverage, expanded presence in other healthcare vertical
markets and expanded product purchases from current customers, ongoing solution selling
training and investment in solution selling tools like return–on–investment and
cost–benefit analyses; |
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Clinical application software and information systems development, both in partnership
with OEM and technology partners and on a direct basis to end–users, providing growth
opportunities globally and into new markets outside of radiology; |
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Creating enhanced product offerings such as FUSION MATRIX PACS™ and FUSION RIS/PACS™ MX
that expand the functionality of RIS/PACS to clinical applications beyond radiology; and |
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Innovating technologies and solutions that serve new markets such as orthopedic,
veterinary, pharmaceutical clinical trials, oncology and EPR. |
We believe our global presence and involvement in the creation of medical imaging software
technologies and open medical standards places us in a strong position to monitor medical imaging
industry and technological forces that impact both medical equipment and software application
innovations. In addition, our established OEM relationships allow us to work with leading medical
equipment manufacturers as they develop future plans for new product introductions. We sometimes
partner with leading OEM companies in the design and development of new medical imaging software
applications, and then incorporate those innovative medical imaging software modules within our
integrated RIS/PACS solutions for sale on a direct basis to our end–user customers. This unique
model of both OEM and end–user solution development accelerates our ability to innovate our
products ahead of the needs of our current and future target markets.
End–User Products and Services Description
Focusing product innovation around the functions related to image and information management
is a hallmark of our end–user product development strategy. We view our expertise as developing
software that manages the people, process, images and information workflow in such a way as to
increase productivity and reduce costs for our end–user customers. Products in place and those in
development are applied to the complex continuum of business (billing, scheduling, modality
management, practice analysis), image and information management (integrating results of CT, MRI,
x–ray, etc., and the associated patient information related to them), interpretation and reporting
(medical image visualization, analysis and management of medical imaging data, enhancing
physicians’ interpretation and reporting of data from medical imaging modalities, such as computed
tomography and magnetic resonance imaging), and the distribution of those reports and images to
referring physicians. We believe that our solutions are differentiated by the integration of all of
these elements, which enables us to create a broad data set around a single patient experience,
combined with the capability for image interpretation using advanced tools for each specialty. The
results are increased efficiency and productivity, more time devoted to accurate analysis and
diagnosis, and ultimately improved patient care
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because the waiting time from diagnosis to treatment is reduced and all pertinent information
is quickly and accurately provided to the primary care giver via the web, wherever the physician is
located. This integrated solution with enterprise–wide accessibility to images and information
reinforces our strategy of delivering end–to–end clinical and business workflow solutions that
accelerate our customers’ productivity.
We have multiple solution offerings tailored to meet the needs of various market segments. For
the international healthcare market, we continue to offer two platforms under the FUSION PACS™
brand name. We also offer our aXigate technology to address the EPR needs of the French market.
aXigate is a secure, web–based solution for patient, medical and clinical process management. With
components for patient registration, consultation, reporting, prescription, follow–up and
codification, aXigate provides a folder–based approach to medical information management,
displaying relevant information at the click of a button to different health care professionals.
Our software modules are designed to allow continuous innovation of our fully integrated
radiology workflow system product line and are sold as individual modules or as a fully integrated
solution, depending on the needs of the customer. We intend to integrate our clinical application
portfolio into our solution offerings, thereby providing even more accelerated productivity as
medical imaging moves beyond radiology. Our product innovation team is working closely with our
customers to develop next–generation products for our RIS, PACS, RIS/PACS and EPR product lines. In
addition, our software development team is integrating various clinical application and advanced
visualization software modules (like mammography and PET/CT) into our RIS/PACS workflow solutions,
further changing and enhancing the traditional definition of RIS/PACS. These products can be sold
throughout the world, and distributed through our global direct end–user and eCommerce channels.
OEM Products and Services Descriptions
Software development can be significantly accelerated with the use of powerful development
environments incorporating reusable software libraries and toolkits. We created such a development
environment, called Imaging Application Platform® (“IAP”) to accelerate our internal development as
well as that of our OEM partners. IAP provides a complete suite of technologies and capabilities
for creating advanced, high–performance medical imaging applications. IAP is one of the most widely
used medical imaging platforms available with a proven track record in all the major imaging
modalities and clinical applications. All of our major OEM partners and virtually all of their
engineering service clients, directly or indirectly, use IAP in business critical applications.
Building on the success of IAP, we have created an even more comprehensive development
platform called Cedara OpenEyes™, which provides, in addition to the benefits of IAP, support for
rapid and flexible application development using state of the art technologies and tools. Cedara
OpenEyes™ is a powerful and flexible best practices development platform that enables the rapid
creation of medical applications. Its programming model represents a paradigm shift from previous
technologies, completely insulating clients from the complexities of deep code development by
providing a single uniform set of controls and development interfaces. Cedara OpenEyes™ packages
connectivity, visualization and printing services in a flexible and transparent architecture that
can be deployed across a wide spectrum of application environments, from small “one–off” projects
to complex web solution services.
Our OEM group also offers a full spectrum of PACS solutions, workstations and plug–in modules
that can easily be tailored to the needs of different OEM customers. In addition, we develop image
acquisition console software for companies that need a workstation to drive the capture of images
from imaging devices such as x–ray or CT scanners.
Clinical applications software can have a major impact on the delivery of patient care. In the
past several decades, a rapid expansion of clinical software systems has been noted within
institutions that deliver healthcare. Today, more physicians rely on clinical applications to help
them make even routine diagnostic and therapeutic decisions. Our broad range of clinical
applications is used in general radiology and other specialty areas. Many of our clinical
applications and workflow solutions can be added by OEMs as plug–ins to existing PACS workstations
or used as dedicated, standalone workstations.
7
Merge Healthcare Product Portfolio
The breadth and depth of our products across Merge Healthcare reflects our core strategy of
blending technologies, features and functions, modules and product lines to form medical imaging
and information workflow solutions that are distributed globally and across three distribution
channels: OEM, Direct and eCommerce. Our comprehensive product portfolio consists of the following:
FUSION RIS™ allows users to realize improvements in productivity by integrating information
and automating traditional manual or paper methods related to scheduling, patient registration and
tracking, document management, dictation, report turnaround, billing, claims processing and other
mission critical operational functions in a medical imaging practice. This automation reduces
administrative workload while increasing patient, referring physician and employee satisfaction.
Additionally, the user can uncover ways to reduce bottlenecks, maximize profits and increase
revenue through practice analysis tools.
FUSION MATRIX PACS™ is an image visualization, image management, archive and web distribution
system. The workflow engine for radiologists, FUSION MATRIX PACS provides relevant clinical
information at the radiologist’s fingertips, and provides efficient distributed workflow that
allows them to work at any location without sacrificing performance, workflow or feature
functionality. The first PACS solution built on Microsoft.NET, its Smart Client™ technology,
combines the power of the personal computer with the reach of the web for easier deployment,
maintenance and improved local client performance.
FUSION PACS™ is an integrated repository of healthcare information and a suite of software
application modules that provide PACS and web distribution of images and reports on a single,
integrated PACS platform. FUSION PACS is the foundation for the integrated software application
modules that provides optimal functionality for our customers’ radiology workflow. FUSION PACS and
its modules are designed to allow the user to customize the way images and information are
delivered and viewed, supporting user–centric workflow.
FUSION RIS/PACS™ was created through our comprehensive integration approach, fusing our RIS
workflow with our image visualization, distribution and storage technologies into a unified,
intelligent, distributed business and clinical workflow solution that helps our customers
accelerate their productivity while also providing a higher level of value and convenience.
Radiologists, technologists and administrators benefit from having a single solution for their
mission critical business and clinical workflow tools, all integrated into a simpler, faster,
unified desktop.
Referring Practice Portal™ allows real–time access to reports and their associated images from
within FUSION RIS/PACS or just reports from FUSION RIS via the web. Additionally, the portal
provides access to the Exam/Appointment Status, as well as offering an Emergency/Referral Access
for hospital and clinic referrals in emergency situations. The portal has Health Insurance
Portability and Accountability Act of 1996 (“HIPAA”) supportive security and auditing features, and
can be customized with a facility’s brand identity and service information. The Referring Practice
Portal is an optional module that can be purchased with FUSION RIS/PACS or FUSION RIS.
Connectivity Tools support DICOM and HL7 interfacing while providing ready–made solutions for
tackling various aspects of the hospital wide information workflow. Our connectivity tools include,
but are not limited to, MergePort™, MergeCOM3™, ExamWorks™, MergeMVP™, Cedara I–Acquire/FD™ and
DataBridge™.
eFilm Workstation is a desktop diagnostic, image and analysis tool for viewing and
interpreting medical images. eFilm Workstation is sold as standalone software that allows
radiologists to view and manipulate any digital diagnostic study, and is integrated into FUSION
RIS/PACS and FUSION PACS as its diagnostic workstation. We believe that eFilm Workstation, sold via
eCommerce from our website and through VAR distributors, is the most widely used diagnostic
workstation in the world.
Cedara I–ReadMammo™ is a universal breast imaging workstation designed for reading
mammography, ultrasound and MRI studies. Cedara I–ReadMammo eliminates the hassle of switching
between different workstations through vendor independence, multi–modality support and dedicated
tools for breast imaging workflow.
Cedara B–CAD™ is the world’s first CAD solution designed to assist radiologists in analyzing
breast ultrasound. With integrated tools for ACR BI– RADS® characterization and
automatic report generation,
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Cedara B–CAD is an ideal complement for diagnostic breast ultrasound.
Integrated with Cedara I–ReadMammo, Cedara B–CAD demonstrates functional multi–modality breast
imaging workflow.
Cedara PET/CT™ provides fast and efficient workflow by combining images from CT and PET
modalities, which is particularly useful in allowing a radiologist to see cancerous activity at a
metabolic level and pinpoint its exact location in the tissue so a biopsy can be performed and
proper treatment begun.
Cedara OrthoWorks ProPlanner™ is a diagnostic workstation for orthopedic surgical planning,
templating, archiving and web distribution. OrthoWorks includes libraries of digital orthopedic
templates from all major prosthesis vendors, delivering advanced diagnostic and planning
functionality for joint arthroplasty, trauma, deformity corrections and more.
Cedara OrthoWorks Spine Analyzer™ is an advanced application that helps spine surgeons,
orthopedists, and chiropractors analyze cervical, thoracic and lumbar spine mobility, alignment and
deformities. Spine surgeons can use OrthoWorks Spine Analyzer to assist in planning therapy, such
as surgical procedures, and help evaluate post therapy outcome.
Cedara OrthoWorks Care Manager™ is a clinical data management system that uses unique,
patented technology to help easily capture relevant clinical parameters during diagnosis, therapy
and post–therapy follow up, and automatically populate an SQL database. Powerful and intuitive
data–mining tools allow users to quickly perform outcome analyses that can be analyzed later by a
statistical package.
CalScore Review™ is an advanced calcium–scoring module. It supports lesion–by–lesion and
side–by–side comparison for follow up or repeat scanning, as well as detailed report generation.
This clinical application also has workflow tools that allow customization of a patient database,
tracking of the current referral base, comparison of prior versus current calcium scores and
capture of follow–up appointments.
Colon Review™ is a complete workflow solution with powerful tools for reviewing colon or other
luminal studies and reporting the findings. Colon Review is a practical, intuitive solution for
expanding imaging capabilities to include virtual colonoscopy.
Lung Review™ is a comprehensive lung nodule visualization and analysis package that
incorporates advanced viewing tools, nodule segmentation, decision tree based on ELCAP
recommendations and automatic report generation.
3D/4D Review™ provides comprehensive visualization for rapid and efficient everyday clinical
workflow, along with a real–time editing tool one can use in combination with standard
visualization tools such as MIP, MinIP, MPR, 3D, VRT and interactive 4D Image Review. This product
is sold to the end user market via eCommerce from our website, and through VAR distributors.
AccuStitch™ is an advanced image stitching and angle measurement application, which allows the
user to stitch thoracic and lumbar films. This product is sold to the end–user market via eCommerce
from our website, and through VAR distributors.
Cedara OpenEyes™ is an advanced software platform for the rapid development of medical imaging
applications. Cedara OpenEyes provides a structured framework on which layered and protocol–based
applications can be quickly and efficiently created without reinventing base functionality.
Packaged with sophisticated image viewing, DICOM, databasing and image manipulation capabilities,
Cedara OpenEyes allows healthcare companies to focus on the development of workflow and specific
clinical tools. OpenEyes provides an excellent framework for both plug–in integration and complete
software development.
Cedara I–SoftView™ is a family of clinically reliable, workflow–oriented PACS workstations.
Cedara I–Report™ is a radiologist’s diagnostic workstation utilizing automated workflow,
presentation protocol and advanced post–processing toolsets.
Cedara I–Report CT™ is specifically tailored for CT data sets. This software features
optimized navigation tools, easy–to–use 3D volume rendering, MPR, measurement tools, support for
orthopedic templates, and Cedara Software’s latest plug–ins.
Cedara I–Read™ is optimized for multi–modality viewing. The user preferences and intuitive
user interfaces enable reporting physicians and specialists to have efficient, effective workflow.
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Cedara I–View™ is a simple, cost–effective review station that provides DICOM connectivity
with high performance display and facilitates clinicians’ access to patient data.
Cedara I–Acquire™ is a universal software application in which multiple digital detectors,
computed radiography (CR) scanners and x–ray generators can be integrated into a powerful
acquisition console, which improves ease of use and productivity for busy technologists, as well as
giving OEMs and system integrators the freedom to choose and quickly package detectors, scanners,
and generators from different vendors into an assortment of tailored solutions, thereby addressing
a broader range of clinical applications with less effort and faster time to market.
Cedara Baby Explorer software is an application that adds 3D fetal imaging to any existing
ultrasound system, allowing expectant parents, during scheduled ultrasound examinations, to view
and record 3D images months before a baby’s arrival. This product is sold to the end–user market
via eCommerce from our website, and through VAR distributors.
Cedara I–Reach™ is a PACS web–based viewer that significantly advances the current
capabilities of PACS viewers by providing fast access to images through the use of the latest
compression techniques, while maintaining high image quality and providing complete seamless
integration with hospital PACS, HIS and RIS.
Cedara I–Store™ is a DICOM–compliant, scalable, archiving solution designed to meet the
evolving performance and redundancy requirements of a healthcare enterprise. Its scalable
architecture allows users to start small and expand the archive as their imaging requirements grow.
Cedara I–Conference™ assists healthcare professionals as a means to quickly and easily
consolidate images and data for medical presentations, activities that normally represent a tedious
and time consuming process. This allows presenters to focus on content development rather than
formatting and technical issues. This product is sold to the end–user market via eCommerce from our
website, and through VAR distributors.
ExamWorks™ and ExamWorks+™ are connectivity technologies that expand a modality’s DICOM
capabilities by providing efficient and transparent integration with departmental workflow and
allow non DICOM imaging devices to connect to a DICOM clinical network. They provide efficient and
transparent network connectivity, allowing imaging devices to share resources throughout the
department.
Cedara I–Response™ is a software solution for early detection of treatment response in brain
cancer care that capitalizes on a molecular imaging technique to assess tumor response from
cellular mechanisms. Using functional diffusion mapping (ƒDM), it provides the potential to
evaluate the impact of anti–cancer drugs and radiation therapy on tumors at an unprecedented rate.
aXigate is an electronic patient record application that scales to provide enterprise–wide
patient information–based workflow. This application is initially targeted to address the EPR needs
of the French market.
Employees
We had approximately 450 employees as of December 31, 2006 and approximately 100 full–time
contracted personnel in Pune, India. With recognition that our employees are our most important
assets, we will continue to invest in human capital development. See “Recent Challenges” above for
information regarding recent events that have impacted, and may continue to impact, our employees.
Sales, Marketing and Distribution
We use a multi–channel approach to reach our target customers. We also cross–sell RIS and PACS
solutions to existing customers. We have added sales professionals to our sales force, and continue
to refine our sales processes and tracking mechanisms to provide real–time information to manage
our sales efforts. We have reached thousands of current and prospective customers through proactive
electronic marketing, utilizing the emails and addresses captured in connection with eFilm
Workstation downloads (including 30–day free trials) from our eCommerce website that numbered over
70,000 from January 2000 through December 2006. In addition, we regularly participate in major
radiology and healthcare information system industry trade shows.
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Competition
The markets for our products in the end–user market are highly competitive. Although the
market for our OEM products may not appear to have as many third party competitors, we often
“compete” with an OEM’s internal software engineering group (to develop next generation
technologies), or single–product focused
companies. Competition is present from new competitors entering the market, as well as current
OEM partners that can offer products similar to our solutions.
In the area of RIS and PACS workflow applications, there are many newly emerging competitors
that offer portions of the integrated radiology solution through their RIS and PACS to the market
targeted by us. Additionally, certain competitors are integrating RIS and PACS technologies through
development, partnership and acquisition activities.
We rely on our extensive experience in working in all aspects of the diagnostic imaging
industry, our growing customer base, and our strong customer relations to maintain and grow our
market share. We also rely on our global brand and historical installed base as a market leader in
integration expertise. Our growing base of customers is increasingly demanding a single vendor that
can provide RIS, PACS and clinical applications. We are one of the few radiology software vendors
that can offer such comprehensive workflow solutions across many clinical specialties that utilize
medical imaging.
Many of our current and potential competitors may have greater resources than we have,
including greater financial resources, research and development capabilities, intellectual property
and marketing resources. Many of these competitors may also have broader product lines and longer
standing relationships with customers. Our ability to compete successfully depends on a number of
factors both within and outside of our control, including: product innovation; product quality and
performance; price; experienced sales, marketing and service professionals; rapid development of
new products and features; and product and policy decisions announced by competitors. There can be
no assurance that we will be able to compete successfully.
Intellectual Property Rights
We currently own 30 patents issued by the intellectual property offices of various
jurisdictions, including the U.S. Patent and Trademark Office (“PTO”) and the Canadian Intellectual
Property Office (“CIPO”), Israel & Japan. We continue to expand our intellectual property portfolio
and have applied for 20 additional patents currently under review by the PTO, CIPO or Korean
Intellectual Property Office. There can be no assurance that these patents will afford any
commercial benefits. We do not, however, rely principally on patent protection with respect to our
products. We also rely on a combination of copyright and trade secret laws, employee and third
party confidentiality agreements, product license agreements and other measures to protect
intellectual property rights pertaining to our systems and technology. We currently hold 20
registered trademarks in the United States or Canada, and have applied for at least two trademarks
currently under review by the PTO or CIPO. Our trademarks include FUSION RIS™, FUSION MATRIX PACS™,
FUSION PACS™, FUSION RIS/PACS™, Referring Practice Portal™, eFilm Workstation™, Cedara
I–ReadMammo™, Cedara B–CAD™, Cedara PET/CT™, Cedara OrthoWorks ProPlanner™, Cedara OrthoWorks Spine
Analyzer™, Cedara OrthoWorks Care Manager™, CalScore Review™, Colon Review™, Lung Review™, 3D/4D
Review™, AccuStitch™, Cedara OpenEyes™, Cedara I–SoftView™, Cedara I–Report™, Cedara I–Report CT™,
Cedara I–Read™, Cedara I–View™, Cedara I–Acquire™, Cedara I–Route™, Cedara I–Reach™, Cedara
I–Store™, Cedara I–Conference™, ExamWorks™, ExamWorks+™, Cedara I–Response™ and aXigate™. We
believe that, in the age of rapidly changing technology, our continued success primarily depends
upon the technical competence and creative skill of our personnel, in addition to our patents,
copyrights and other proprietary rights.
Medical, Regulatory and Government Standards and Reforms
The healthcare industry is subject to changing political, economic and regulatory influences
that may affect the procurement practices and operation of the entire healthcare industry.
Proposals to reform the U. S. healthcare system have been, and will continue to be, considered by
Congress. We believe we have positioned ourselves to assist our customers in the utilization,
implementation, and adherence to most major radiology standards and regulations. We cannot,
however, predict with any certainty what impact, if any, new proposals, healthcare reforms or
standards might have on the business, our financial condition and our results of
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operations. See
Item 1A, “Risk Factors” of this Annual Report on Form 10-K for a description of various industry
and regulatory risks.
The following are examples of some of the issues, standards and regulations that we monitor
and prepare ourselves to address to protect our enterprise and that of our customers:
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Changes in Medicare and private insurance reimbursement rates may affect the financial
health of our customers’ businesses. For example, on February 8, 2006, the President
signed into law the Deficit Reduction Act of 2005 (“DRA”). Effective for services provided
on or after January 1, 2007, the DRA provides that reimbursement for the technical
component for imaging services (excluding diagnostic and screening mammography) in
non–hospital based freestanding facilities will be capped at the lesser of reimbursement
under the Medicare Part B physician fee schedule or the Hospital Outpatient Prospective
Payment System (“HOPPS”) schedule. See Item 1A, “Risk Factors” of this Annual Report on
Form 10-K for a discussion of the risks and effects of the DRA. |
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The Health Insurance Portability and Accountability Act of 1996 (“HIPAA”) has mandated
the use of standard transactions and identifiers, proscribed security measures and other
provisions designed to simplify and secure the exchange of medical information. The
compliance dates for initial stages of the requirements phase began on April 14, 2003. We
have taken necessary measures to assist our customers to meet HIPAA compliance. |
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The U.S. Food and Drug Administration (“FDA”), which is responsible for assuring the
safety and effectiveness of medical devices under the Federal Food, Drug and Cosmetic Act,
has regulatory jurisdiction over computer software applications when they are labeled or
intended to be used in the diagnosis of disease or other conditions. In Canada, medical
devices are regulated under Health Canada’s Medical Devices Regulations (“Health Canada”).
Our ability to market new products and improvements to existing products depends upon the
timing of appropriate licenses, pre–market clearance or approval from the FDA, Health
Canada, or other applicable foreign regulatory authorities. |
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International sales of products outside of the U.S. are subject to foreign regulatory
requirements (in particular, the requirements of the European Union, where most of our
international sales are made), that can vary from country to country. |
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Laws and regulations may be adopted to address Internet commerce such as online
content, user privacy, pricing and characteristics and quality of applications and
services. |
We continue to allocate internal resources to industry standards committees and working groups
who are tasked with setting and promoting both technology and functionality standards within the
diagnostic imaging and healthcare information systems markets. Participating in IHE and a variety
of DICOM working groups specializing in HIPAA, HL7 and other standards helps to ensure that our
products and services align with the efforts of these committees and meet the evolving
interoperability needs of healthcare technologies.
Other Information
Our website address is www.mergehealthcare.com. We make available within the “Investor
Relations” portion of our website under the caption “SEC Filings,” free of charge, our annual
reports on Form 10–K, quarterly reports on Form 10–Q and current reports on Form 8–K, including any
amendments to those reports, as soon as reasonably practicable after we electronically file them
with, or furnish them to, the SEC. Materials we file with or furnish to the SEC may also be read
and copied at the SEC’s Public Reference Room at 100 F Street, NE, Room 1580, Washington, D.C.
20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC
at 1 800 SEC 0330. Also, the SEC maintains an Internet site at www.sec.gov that contains reports,
proxy and information statements, and other information that we file electronically with the SEC.
Item 1A. RISK FACTORS
You should carefully consider the risks, uncertainties and other factors described below, in
addition to the other information set forth in this Annual Report on Form 10-K, because they could
materially and adversely affect our business, operating results, financial condition, cash flows
and prospects, as well as adversely affect the value of an investment in our Common Stock. Also,
you should be aware that the risks and uncertainties
12
described below are not the only ones facing
us. Additional risks and uncertainties that we do not yet know of, or that we currently think are
immaterial, may also impair our business operations. You should also refer to the other information
contained in and incorporated by reference into this Annual Report on Form 10-K, including our
consolidated financial statements and the related notes.
We have identified material weaknesses in our disclosure controls and procedures and our
internal control over financial reporting, which, if not remedied effectively, could have an
adverse effect on the trading price of our Common Stock and otherwise seriously harm our
business—As discussed in Item 9A, “Controls and Procedures” of this Annual Report on Form 10-K, our
management has concluded that our disclosure controls and procedures were not effective and our
internal control over financial reporting had material weaknesses as of December 31, 2006. Although
we have taken actions to remediate the material weaknesses, our inability to remedy all such
material weaknesses promptly and effectively could have a material adverse effect on the accuracy
and completeness of our financial statements, as well as impair our ability to meet our quarterly
and annual reporting requirements in a timely manner and could also have a material adverse effect
on our business relationships and our reputation. Moreover, our remediation efforts have required,
and may continue to require, the commitment of significant financial and managerial resources.
Prior to the remediation of these material weaknesses, there remains the risk that the controls on
which we currently rely will fail to be sufficiently effective, which could result in a material
misstatement of our financial position or results of operations, delays in timely filing of our
financial statements and require restatement of our financial statements. If we are unable, or are
perceived as unable, to produce reliable financial reports due to disclosure control or internal
control deficiencies, investors could lose confidence in our reported financial information and our
operating results and the market price of our Common Stock could be adversely affected. In
addition, even if we are successful in strengthening our controls and procedures, such controls and
procedures may not be adequate to prevent or identify misstatements or to provide reasonable
assurance that our financial statements are prepared in conformity with U.S. generally accepted
accounting principles (“GAAP”) and fairly present our operating results and financial condition.
The actual costs and savings associated with our reorganization and rightsizing initiatives
may differ materially from amounts we estimate—In November 2006, we commenced various
reorganization and rightsizing initiatives intended to streamline our operations, reduce costs and
bring our staffing and structure in line with our revenue base. These initiatives included
consolidating many aspects of our operations, including centralizing the leadership of our
worldwide software development activities under one person, hiring a Senior Vice President of
worldwide product management, closing offices in San Francisco, California and Tokyo, Japan,
downsizing our operations in Burlington, Massachusetts, Cleveland, Ohio and Mississauga, Ontario
and shifting to a blended onshore–offshore delivery model by establishing a global software
engineering and customer support center in Pune, India.
We cannot provide assurance that we will be able to successfully implement these restructuring
and rightsizing initiatives or the transition to a blended onshore–offshore global delivery model,
or that such actions will produce the anticipated cost savings. Even if we are successful in our
cost reduction initiatives, we may face other risks associated with these plans, including delayed
product releases or decreased customer satisfaction, which in turn could lead to decreased revenues
and profitability.
We intend to rapidly grow our India operations, which are subject to regulatory, economic and
political uncertainties—We intend to continue to develop and expand our offshore operations in
India through outsourcing partnerships and increasing numbers of our own personnel. While wage
costs are lower in India than in the United States and other developed countries for comparably
skilled professionals, wages in India are increasing at a faster rate than in the United States,
which could result in our incurring increased costs for technical professionals and reduced
operating margins. In addition, there is intense competition in India for skilled technical
professionals and we expect that competition to increase. With the exception of a few employees, we
have limited experience in building and operating offshore development and support operations. We
may therefore have difficulty managing our employees and our service vendor’s employees in our
Indian operations and maintaining uniform standards for our product engineering and customer
service as well as other policies and procedures across our locations. Our inability to properly
manage and integrate our Indian operation into the rest of the company could materially affect our
financial results.
India has also experienced civil unrest and terrorism and has been involved in conflicts with
neighboring countries. In recent years, there have been military confrontations between India and
Pakistan that have
13
occurred in the region of Kashmir and along the India–Pakistan border. The
potential for hostilities between the two countries has been high in light of tensions related to
recent terrorist incidents in India and the unsettled nature of the regional geopolitical
environment, including events in and related to Afghanistan and Iraq. If India were to become
engaged in armed hostilities, particularly if these hostilities were protracted or involved the
threat or use of weapons of mass destruction, our operations could be materially adversely
affected. In addition,
U.S. companies may decline to contract with us for services in light of international
terrorist incidents or armed hostilities, even where India is not involved, because of more
generalized concerns about relying on a service provider utilizing international resources.
In the past, the Indian economy has experienced many of the problems confronting the economies
of developing countries, including high inflation, erratic gross domestic product growth and
shortages of foreign exchange. The Indian government has exercised and continues to exercise
significant influence over many aspects of the Indian economy, and Indian government actions
concerning the economy could have a material adverse effect on private sector entities, including
us.
Anti–outsourcing legislation, if adopted, could adversely affect our business, financial
condition and results of operations and impair our ability to service our customers and develop
products—The issue of outsourcing of services abroad by U.S. companies is a topic of political
discussion in the United States. Measures aimed at limiting or restricting outsourcing by U.S.
companies are under discussion in Congress and in numerous state legislatures. While no substantive
anti–outsourcing legislation has been introduced to date, given the ongoing debate over this issue,
the introduction of such legislation is possible. If new measures are introduced that impact the
private sector, such as tax disincentives or intellectual property transfer restrictions, our
financial condition and results of operations could be adversely affected and our ability to
service our customers could be impaired.
Our recent headcount reductions have placed additional strain on our resources, may impair our
operations and may adversely impact our ability to attract and retain qualified technical,
managerial and sales personnel—In connection with our efforts to streamline our operations, reduce
costs and bring our staffing and cost structure in line with our revenue base, we restructured our
organization and reduced our workforce by approximately 150 employees (including consultants and
temporary workforce), or approximately 28% of our workforce, in the fourth quarter of 2006.
Offsetting this reduction, we have moved approximately 100 of these positions to our offshore
software engineering and customer support center in Pune, India and intend to increase this number
to 200 or more positions during 2007. Further reductions and possible offshore increases could
occur if we are unable to grow our revenues. There have been and may continue to be substantial
severance and other employee–related costs associated with the workforce reduction and our
restructuring plan may yield unanticipated consequences, such as attrition beyond the planned
reduction. In addition, many of the employees who were terminated possessed specific knowledge or
expertise, and we may be unable to transfer that knowledge or expertise to others in our Indian or
domestic operations. In that case, the absence of such employees creates significant operational
difficulties. Further, the reduction in workforce may reduce employee morale, may create concern
among potential and existing employees about job security, which may lead to difficulty in hiring
and increased turnover in our current workforce and place undue strain upon our operational
resources. As a result, our ability to respond to unexpected challenges may be impaired, and we may
be unable to take advantage of new opportunities.
Changes in the healthcare industry, including the changes to reimbursement schedules under the
Deficit Reduction Act of 2005, could negatively impact our business—The healthcare industry is
highly regulated and is subject to changing political, economic and regulatory influences. These
factors affect the purchasing practices and operation of healthcare organizations. Federal and
state legislatures have periodically considered programs to reform the U.S. healthcare system and
to change healthcare financing and reimbursement systems. In 2005, Congress legislated an increase
(fee schedule update) of approximately 1.5% in the overall federal reimbursement rates for
physician and outpatient services, including diagnostic imaging services. On February 8, 2006, the
President signed the DRA into law. Effective for services provided on or after January 1, 2007, the
DRA provides that reimbursement for the technical component for imaging services (excluding
diagnostic and screening mammography) in non–hospital–based freestanding facilities will be capped
at the lesser of reimbursement under the Medicare Part B physician fee schedule or the HOPPS
schedule. The DRA also codifies the reduction in reimbursement for multiple images on contiguous
body parts previously announced by the Centers for Medicare and Medicaid Services (“CMS”).
Effective January 1, 2007, CMS is paying 100% of the technical component of the higher–priced
imaging procedure and 75% for the
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technical component of each additional procedure for imaging
procedures within a family of codes involving contiguous body parts when the multiple procedures
are performed in the same session.
A significant portion of our net sales are derived directly or indirectly from sales to
end–users, including hospitals, diagnostic imaging centers and specialty clinics, many of which
generate some or all of their revenues
from government sponsored healthcare programs (principally, Medicare and Medicaid). We believe
that the implementation of the reimbursement reductions contained in the DRA will adversely impact
our end–user customers’ revenues per examination, which may cause some of them to respond by
reducing their investments or postponing investment decisions, including investments in our
software solutions and services.
Our operating results may be impacted by actions related to the implementation of a new
information technology (or accounting) system—We are in the process of implementing certain
financial modules of an enterprise resource planning system. Our implementation process will
include the migration of data and users from multiple legacy systems to a common platform. If we
were to suffer any significant problems related to this system implementation, our ability to
fulfill and ship end–user customer orders might be hindered or stopped and our ability to access
and report financial information in a timely manner might be impaired. Because of the complexity of
this initiative, we are subject to the risks that (1) we may be unable to complete the
implementation in accordance with our timeline and incur additional costs, (2) the implementation
could result in operating inefficiencies which could impact operating results, and (3) the
implementation could impact our ability to perform necessary business transactions. All of these
risks could adversely impact our results of operations, financial condition and cash flows.
Litigation or regulatory actions could adversely affect our financial condition—We and certain
of our former officers are defendants in several lawsuits relating to our accounting and financial
disclosure. These lawsuits and other legal matters in which we have become involved are described
in Item 3, “Legal Proceedings” of this Annual Report on Form 10-K. These lawsuits present material
and significant risks to us. We are unable at this time to predict the outcome of these actions or
reasonably estimate a range of damages in the event plaintiffs in these or other potential matters
relating to the same events prevail under one or more of their claims.
The Midwest Office of the SEC has notified us that we are the subject of an informal,
non–public inquiry. We are cooperating with the SEC in response to its request for information. The
inquiry generally concerns our financial statement restatements and the anonymous letters we have
received regarding our accounting and financial disclosure. We cannot predict whether the SEC will
expand the scope of its inquiry or obtain a formal order of investigation. These lawsuits and
regulatory matters are having, and will continue to have, a disruptive effect upon the operations
of the business, including the diversion of significant time and attention of our senior
management, which adversely affected our results of operations for 2006 and may continue to
adversely affect our results of operations in 2007. In addition, we have incurred and are likely to
continue to incur substantial expenses in connection with such matters, including substantial fees
for attorneys and other professional advisors, as well as amounts paid to settle certain actions,
including the $0.5 million we recently paid to Brian Pedlar, the former President of Cedara, in
settlement of the action he brought against us.
Our ability to obtain directors’ and officers’ liability insurance in the future and to
maintain coverage under existing policies may be adversely affected by the lawsuits and regulatory
actions against us and certain of our executive officers—The Company has purchased directors’ and
officers’ liability insurance that may provide coverage for some or all of the matters described
immediately above. However, the facts alleged in the lawsuits and the regulatory actions described
above may make directors’ and officers’ liability insurance extremely expensive or unavailable for
us now or in the future and may also jeopardize existing coverage. Certain of the D&O insurers have
indicated they may seek to rescind the existing policies. If such insurance policies were
rescinded, our results of operations and liquidity may be significantly impaired. Further, the
insurers may take the position that some or all of the claims will not be covered by such policies.
Moreover, even if there is full coverage, there is a chance that our ultimate liability will exceed
the available insurance limits. Future D&O insurance coverage may entail increased premiums which
could materially harm our financial results in future periods. The inability to obtain this
coverage due to its unavailability or prohibitively expensive premiums would make it more difficult
to retain and attract officers and directors and expose us to potentially self–funding any
potential future liabilities ordinarily mitigated by directors’ and officers’ liability insurance.
15
The turnover in our management team could negatively impact our business and the trading price
of our Common Stock—As previously disclosed, in 2006 we lost the services of most of our senior
executive officers, including our Chief Executive Officer, our founder and interim Chief Executive
Officer, our Chief Financial Officer, our Senior Vice President, Strategic Business Development and
two of our business unit presidents. In addition, several other members of our senior management
team have assumed new roles in our
organization. With the departures, we lost persons with a significant amount of experience and
knowledge about our business, and industry, and who maintained strong relationships with our
customers, suppliers and employees. Further, we believe that our management turnover and the
uncertainty it has generated has adversely affected our relationships with customers and employees
and impaired our reputation in the marketplace. Kenneth D. Rardin, our President and Chief
Executive Officer, and Steven R. Norton, our Executive Vice President and Chief Financial Officer,
have only been with us for a short time (since September 2006 and January 2007, respectively) and
each of them continues to learn our business. The new members of our management team, and the
persons now serving in new positions, may need to devote a significant amount of time to learning
about aspects of our business and our markets, which could limit their effectiveness in managing
our business for a period of time. If our management team cannot effectively manage and operate our
business, our net sales and profitability and the trading price of our Common Stock may be
adversely affected.
Our performance and future success depends on our ability to attract, integrate and retain
qualified technical, managerial and sales personnel—We are dependent, in part, upon the services of
our senior executives, some of whom are new hires or have recently assumed new roles, and other key
business and technical personnel. We do not currently maintain key–man life insurance on our senior
executives. The loss of the services of any of our senior executives or key employees could have a
material adverse effect on our business. Our commercial success will depend upon, among other
things, the successful recruiting and retention of highly skilled technical, managerial and sales
personnel with experience in business activities such as ours. Competition for the type of highly
skilled individuals sought by us is intense. We may not be able to retain existing key employees or
be able to find, attract and retain skilled personnel on acceptable terms.
Relationships with our customers, potential customers and suppliers have been adversely
affected, and our competitors’ competitive position improved, by our restatement of our financial
results, related litigation and regulatory proceedings and management turnover—Due to our
restatement of our financial statements, related litigation and regulatory proceedings, uncertainty
regarding changes in our senior management team, and the former threat of a potential NASDAQ
delisting, our customers and potential customers, new or existing suppliers or others have had
concerns that we have become unreliable in operating our business. As a result, we have
experienced, and may continue to experience, a decrease in the number of new customers or
reluctance on the part of existing customers to renew their contracts with us. In addition, we have
experienced and may continue to experience, a loss of other important business relationships. As a
result, our business has been materially harmed and our competitors’ competitive positions relative
to us have been improved.
Our quarterly net sales may vary significantly—Our quarterly operating results have varied in
the past and may continue to vary in future periods. Quarterly operating results may vary for a
number of reasons, including, but not limited to, demand for our software solutions and services,
our sales cycle, economic cycles, the level of reimbursements to our end–user customers from
government sponsored healthcare programs (principally, Medicare and Medicaid), accounting policy
changes mandated by regulating entities, and other factors described in this section and elsewhere
in this report. As a result of healthcare industry trends and the market for our RIS, PACS or
RIS/PACS solutions, a large percentage of our revenues are generated by sale and installation of
systems sold directly to healthcare institutions. These sales may be subject to delays due to
customers’ internal budgets and procedures for approving capital expenditures and by competing
needs for other capital expenditures, the deployment of new technologies and personnel resources.
Delays in the expected sale or installation of these contracts may have a significant impact on our
anticipated quarterly revenues and consequently, our earnings, since a significant percentage of
our expenses are relatively fixed. Additionally, we sometimes depend, in part, upon large contracts
with a small number of OEMs to meet our sales goals in any particular quarter. For example, one
customer accounted for approximately 37% of our total net sales for the three months ended
September 30, 2005, and during the three months ended December 31, 2005, another single customer
accounted for approximately 27% of our total net sales. Delays in the expected sale or installation
of solutions under these large contracts may have a significant impact on our quarterly net sales
and consequently our earnings, particularly because a significant percentage of our expenses are
fixed.
16
The length of our sales and implementation cycles may adversely affect our future operating
results—We have experienced long sales and implementation cycles. How and when to implement,
replace, expand or substantially modify medical imaging management software, or modify or add
business processes, are major decisions for our end–user target market. Furthermore, our software
generally requires significant capital expenditures by our customers, especially OEMs. The sales
cycle for our software ranges from six to 18 months or more from initial contact to contract
execution. Our end–user implementation cycle has generally ranged
from three to nine months from contract execution to completion of implementation. During the
sales and implementation cycles, we will expend substantial time, effort and resources preparing
contract proposals, negotiating the contract and implementing the software. We may not realize any
revenues to offset these expenditures. Additionally, any decision by our customers to delay or
cancel purchases or the implementation of our software may adversely affect our net sales.
We face aggressive competition in many areas of our business, and our business will be harmed
if we fail to compete effectively—The market for medical imaging solutions is highly competitive
and subject to rapid technological change. We may be unable to maintain our competitive position
against our current and potential competitors. Many of our current and potential competitors have
greater financial, technical, product development, marketing and other resources than we have, and
we may not be able to compete effectively with them. In addition, new competitors may emerge and
our system and software solution offerings may be threatened by new technologies or market trends
that reduce the value of our solutions. Further, our recent challenges may have weakened our
competitive position.
The development and acquisition of additional products and technologies, and the improvement
of our existing products requires significant investments in research and development. For example,
our current product candidates are in various stages of development, and may require significant
further research, development, pre–clinical or clinical testing, regulatory approval and
commercialization. If we fail to successfully sell new products and update our existing products,
our operating results may decline as our existing products reach the end of their commercial life
cycles.
Our proprietary technology may be subjected to infringement claims or may be infringed upon
which could result in additional costs or lost sales—Our success depends, in part, on our ability,
and the ability of our licensors, to obtain, assert and defend patent rights, protect trade secrets
and operate without infringing the proprietary rights of others. We currently own or have rights to
a number of U.S. patents and have a number of outstanding patent applications. We may not, however,
be able to obtain additional licenses to patents of others or be able to develop additional
patentable technology of our own. Any patents issued to us may not provide us with competitive
advantages, or the patents or proprietary rights of others may have an adverse effect on our
ability to do business. Others may independently develop similar products or design around such
patents or proprietary rights owned by or licensed to us. Any patent obtained or licensed by us may
not be held to be valid and enforceable if challenged by another party. We also have operations in
China and India, whose laws do not protect intellectual property rights to the same extent as those
in the United States. Accordingly, our efforts to protect our intellectual property in such
countries may be inadequate.
Although we endeavor to protect our patent rights from infringement, we may not be aware, or
become aware, of patents issued to our competitors or others that conflict with our own. Such
conflicts could result in a rejection of important patent applications or the invalidation of
important patents, which could have a materially adverse effect on our competitive position. In the
event of such conflicts, or in the event we believe that competitive products infringe patents to
which we hold rights or others believe that our products infringe patents to which they hold
rights, we may pursue patent infringement litigation or interference proceedings against, or may be
required to defend against such litigation or proceedings involving holders of such conflicting
patents or competing products. Such litigation or proceedings may have a materially adverse effect
on our competitive position, and there can be no assurance that we will be successful in any such
litigation or proceeding. Litigation and other proceedings relating to patent matters, whether
initiated by us or a third party, can be expensive and time consuming, regardless of whether the
outcome is favorable to us, and can result in the diversion of substantial financial, managerial
and other resources. An adverse outcome could subject us to significant liabilities to third
parties or require us to cease any related development or commercialization activities. In
addition, if patents that contain dominating or conflicting claims have been or are subsequently
issued to others and such claims are ultimately determined to be valid, we may be required to
obtain licenses under patents or other proprietary rights of others. Any licenses required under
any such patents or proprietary rights may not be made available on terms acceptable to us, if at
all. If we do not obtain such licenses, we could
17
encounter delays or could find that the
development, manufacture or sale of products requiring such licenses is foreclosed.
We also rely on proprietary know how and confidential information and employ various methods,
such as entering into confidentiality and non–compete agreements with our current employees and
with certain third parties to whom we have divulged proprietary information, to protect the
processes, concepts, ideas and
documentation associated with our solutions. Such methods may not afford sufficient protection
to us, and we may not be able to adequately protect our trade secrets or ensure that other
companies would not acquire information that we consider proprietary.
We depend on licenses from third parties for rights to some technology we use, and if we are
unable to continue these relationships and maintain our rights to this technology, our business
could suffer—For some of the technology used in our software, we depend upon licenses from a number
of third party vendors. These licenses are provided to us under contracts that typically expire
within one to five years, can be renewed only by mutual consent and may be terminated if we breach
the terms of the contract and fail to cure the breach within a specified period of time. We may not
be able to continue using the technology made available to us under these contracts on commercially
reasonable terms or at all. As a result, we may have to discontinue, delay or reduce software
shipments until we obtain equivalent technology, which could hurt our business. Most of our third
party licenses are nonexclusive. Our competitors may obtain the right to use any of the technology
covered by these licenses and use the technology to compete directly with us. In addition, if our
vendors choose to discontinue support of the licensed technology in the future or are unsuccessful
in their continued research and development efforts, particularly with regard to the Microsoft
Windows/Intel platform on which most of our products operate, we may not be able to modify or adapt
our own software.
We are subject to government regulation, changes to which could negatively impact our
business—We are subject to regulation in the U.S. by the United States FDA, including periodic FDA
inspections, in Canada under Health Canada’s Medical Devices Regulations, and in other countries by
corresponding regulatory authorities. We may be required to undertake additional actions in the
U.S. to comply with the Federal Food, Drug and Cosmetic Act (the “Act”), regulations promulgated
under such act, and any other applicable regulatory requirements. For example, the FDA has
increased its focus on regulating computer software intended for the use in a healthcare setting.
If our software solutions are deemed to be actively regulated medical devices by the FDA, we could
be subject to more extensive requirements governing pre– and post–marketing activities. Complying
with these regulations could be time consuming and expensive, and may include:
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requiring us to receive FDA clearance of a pre–market notification submission
demonstrating substantial equivalence to a device already legally marketed, or to obtain
FDA approval of a pre–market approval application establishing the safety and
effectiveness of the software; |
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requiring us to comply with rigorous regulations governing the pre–clinical and
clinical testing, manufacture, distribution, labeling and promotion of medical devices;
and |
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requiring us to comply with the Act regarding general controls, including establishment
registration, device listing, compliance with good manufacturing practices, reporting of
specified malfunctions and adverse device events. |
Similar obligations may exist in other countries in which we do business, including Canada.
Any failure by us to comply with the Act and any other applicable regulatory requirements, both
domestic and foreign, could subject us to a number of enforcement actions, including warning
letters, fines, product seizures, recalls, injunctions, total or partial suspension of production,
operating restrictions or limitations on marketing, refusal of the government to grant new
clearances or approvals, withdrawal of marketing clearances or approvals and civil and criminal
penalties.
Changes in federal and state regulations relating to patient data could depress the demand for
our software and impose significant software redesign costs on us—Federal regulations under HIPAA
impose national health data standards on healthcare providers that conduct electronic health
transactions, healthcare clearinghouses that convert health data between HIPAA compliant and
non–compliant formats and health plans. Collectively, these groups are known as covered entities.
The HIPAA regulations proscribe transaction formats and code sets for electronic health
transactions; protect individual privacy by limiting the uses and disclosures
18
of individually
identifiable health information; and require covered entities to implement administrative, physical
and technological safeguards to ensure the confidentiality, integrity, availability and security of
individually identifiable health information in electronic form. Though we are not a covered
entity, most of our customers are and require that our software and services adhere to HIPAA
regulations. Any failure or perception of failure of our software or services to meet HIPAA
regulations could adversely affect demand for our software and services and force us to potentially
expend significant capital, research and development and
other resources to modify our software or services to address the privacy and security
requirements of our clients. States and foreign jurisdictions in which our clients or we operate
have adopted, or may adopt, privacy standards that are similar to or more stringent than the
federal HIPAA privacy regulations. This may lead to different restrictions for handling
individually identifiable health information. As a result, our customers may demand IT solutions
and services that are adaptable to reflect different and changing regulatory requirements, which
could increase our development costs. In the future, federal, state or foreign governmental
authorities may impose new data security regulations or additional restrictions on the collection,
use, transmission and other disclosures of health information. We cannot predict the potential
impact that these future rules may have on our business; however, the demand for our software and
services may decrease if we are not able to develop and offer software and services that can
address the regulatory challenges and compliance obligations facing our clients.
The complexity presented by international operations could negatively affect our business—Net
sales from customers outside of the U.S., which we classify as international net sales, account for
a material portion of our revenues. Net sales from our international customers accounted for
approximately 18% of our total net sales for the year ended December 31, 2006, 40% of our total net
sales for the year ended December 31, 2005, and 32% of total net sales for the year ended
December 31, 2004. While we plan to continue expanding our presence in international markets, our
international operations may not produce sufficient international sales and our overseas
development efforts may not generate saleable products. Our international operations also present a
number of other risks, including the following:
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the need to conform with local business and market norms; |
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difficulties managing and integrating new international facilities; |
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greater difficulty in collecting accounts receivable and longer collection periods; |
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potentially unfavorable economic conditions outside of the U.S.; |
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changes in local currencies may impact the attractiveness of our product
competitiveness as we invoice most of our net sales in U.S. Dollars; |
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certification requirements; |
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lack of, or limited protection of intellectual property rights in some countries; |
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potentially adverse tax consequences; |
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wage pressures, particularly in India, where wages are generally rising at a faster
rate than in the United States; |
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political instability; |
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trade protection measures and other regulatory requirements; |
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service provider and government spending patterns; |
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potential adverse impact on the demand for products and services of U.S.–based
businesses due to perceptions regarding U.S. foreign policy; |
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natural disasters, war or terrorist acts; |
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ineffective strategic relationships with international partners; and |
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political conditions which may threaten the safety of our employees or the employees of
our customers or our continued presence in foreign countries, particularly civil unrest
and hostilities among neighboring countries in South Asia, including India and Pakistan. |
19
Furthermore, our entry into additional international markets requires significant management
attention and financial resources, which could lessen our ability to manage our existing business
effectively.
We provide our customers with certain warranties which could result in higher costs than we
anticipate—Software products as complex as those offered by us and used in a wide range of clinical
and health information systems settings are likely to contain a number of errors or “bugs,”
especially early in their product
life cycle. Our products include clinical information systems used in patient care settings
where a low tolerance for bugs exists. Testing of products is difficult due to the wide range of
environments in which systems are installed. The discovery of defects or errors in our software
products may cause delays in product delivery, poor client references, payment disputes, contract
cancellations, or additional expenses and payments to rectify problems. Any of those factors may
result in delayed acceptance of, or the return of, our software products.
We may be unable to successfully integrate acquisitions, which could negatively impact our
results—We have experienced significant challenges integrating our recent acquisitions. In
particular, we have struggled to realize synergistic benefits, primarily within our product sales
and service groups, following our June 1, 2005, business combination with Cedara Software Corp. We
may continue to acquire or make investments in complementary businesses, products or technologies.
The process of integrating any acquired business, product or technology into our business and
operations may result in unforeseen operating difficulties and expenditures. Any acquisition may
involve a number of risks, including:
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an increase in our expenses and working capital requirements in connection with the
integration of the personnel, operations, technologies or products of the acquired
companies; |
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other financial risks, such as potential liabilities associated with the businesses
that we acquire; |
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diversion of capital and management’s attention from our core business; |
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adverse effects on business relationships with our existing customers and suppliers and
those of the acquired company; |
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an increased risk that we become the subject of litigation regarding intellectual
property or other matters; |
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difficulty in successfully implementing acquired operations, IT systems, customers,
supplier and partner relationships, products and business with our operations; |
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acquired assets becoming impaired as a result of technical advancements or worse than
expected performance by the acquired company; |
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entering markets in which we have no, or limited, prior experience; and |
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potential loss of our key employees and those of the acquired company. |
In addition, in connection with any business combinations, acquisitions or investments we
could:
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issue stock that would dilute existing shareholders’ percentage of ownership; |
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incur debt and assume liabilities, perhaps on terms that prove unfavorable to us or our
security holders; |
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incur significant expenditures related to office closures of the acquired companies,
including costs relating to termination of employees and leasehold improvement charges
relating to vacating the acquired companies’ or our premises; or |
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use cash that would otherwise be available to fund operations or to use for other
purposes. |
Product liability suits against us could result in expensive and time consuming litigation,
payment of substantial damages and an increase in our insurance rates—Many of our software
solutions provide data for use by healthcare providers in clinical decision making and creating
patient treatment plans. If our software fails to provide accurate and timely information, or if
our content or any other element of our software is associated with faulty clinical decisions or
treatment, we could be exposed to claims of liability by customers, clinicians or patients against
us relating to the use of our software solutions. The assertion of such claims, whether or not
valid, and ensuing litigation, regardless of its outcome, could result in substantial cost to us,
divert management’s attention from our operations and decrease market acceptance of our software.
The allocations of
20
responsibility and limitations of liability set forth in our contracts may not
be enforceable, may not be binding upon patients, or may not otherwise protect us from liability
for damages. Although we maintain product liability insurance coverage, our coverage may not cover
a particular claim that may be brought in the future, may prove to be inadequate or may not be
available in the future on acceptable terms, if at all. A successful claim brought against us,
which is uninsured or underinsured, could materially harm our business, results of operations or
financial condition.
We may not be able to generate sufficient cash from our operations to meet our future
operating, financing and capital requirements—At December 31, 2006, our cash and cash equivalents
were approximately $45.9 million. Our uses of cash in the future will depend on a variety of
factors, such as our results of operations, the amounts we are required to devote to defend and
address our outstanding legal and regulatory proceedings (see Item 3, “Legal Proceedings” of this
Annual Report on Form 10-K) and our capital expenditure plans. If we are unable to generate
sufficient cash from our operations to meet our short–term or long–term liquidity needs, we may
need to raise additional capital. To raise such additional capital, we may sell equity or raise
debt from third–party sources. The sale of additional equity or convertible debt securities could
result in dilution to current shareholders. In addition, debt financing, if available, could
involve restrictive covenants, which could adversely affect operations. Furthermore, these
financing alternatives may not be available in amounts or on terms acceptable to us or our security
holders.
We maintain substantial deposits of cash and cash equivalents at a limited number of financial
institutions in excess of amounts covered by insurance. If one or more of these financial
institutions fail, our financial condition may be adversely affected—Substantially all of our cash
and cash equivalents are held at a few financial institutions located in the U.S., Canada and the
Netherlands. Deposits held with these banks exceed the amount of insurance, if any, provided on
such deposits and, with respect to one such banking institution, we are the largest depositor. If
one or more of these financial institutions were to fail and we were unable to timely recover the
cash and cash equivalents deposited at such institution, it could adversely affect our financial
condition.
Healthcare industry consolidation could impose pressure on our software prices, reduce our
potential client base and reduce demand for our software—Many hospitals and imaging centers have
consolidated to create larger healthcare enterprises with greater market power. If this
consolidation trend continues, it could reduce the size of our target market and give the resulting
enterprises greater bargaining power, which may lead to erosion of the prices for our software. In
addition, when hospitals and imaging centers combine, they often consolidate infrastructure, and
acquisition of our customers could erode our revenue base.
The trading price of our Common Stock has been volatile and may fluctuate substantially in the
future—The price of our Common Stock has been, and is likely to continue to be, volatile. For
example, the closing price of our Common Stock from January 1, 2006 through March 2, 2007 was as
high as $27.36 and as low as $4.75. The trading price of our Common Stock may continue to fluctuate
widely as a result of a number of factors, some of which are not in our control, including:
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our ability to meet or exceed the expectations of analysts or investors; |
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changes in our own forecasts or earnings estimates by analysts; |
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quarter–to–quarter variations in our operating results; |
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announcements regarding clinical activities or new products by our competitors or us; |
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general conditions in the healthcare IT industry; |
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governmental regulatory action and healthcare reform measures, including changes in
reimbursement rates for imaging procedures; |
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rumors about our performance or software solutions; |
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price and volume fluctuations in the overall stock market, which have particularly
affected the market prices of many software, healthcare and technology companies; and |
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general economic conditions. |
21
In addition, the market for our Common Stock may experience price and volume fluctuations
unrelated or disproportionate to our operating performance.
Anti–takeover provisions in our governing documents and under Wisconsin law and our
shareholders’ rights plan could make an acquisition of us, which may be beneficial to our
shareholders, more difficult—Our Articles of Incorporation and our Amended and Restated Bylaws
contain provisions that may delay, defer, or inhibit a future acquisition of us not approved by our
Board of Directors. These provisions would likely encourage any person interested in acquiring us
to negotiate with, and obtain the approval of, our Board of
Directors in connection with the transaction. Our Articles of Incorporation authorize our
Board of Directors to issue shares of preferred stock in one or more series with such dividend
rights, dividend rate, conversion, voting, and other rights, preferences, privileges, and
restrictions as the Board determines, without any further vote or action by our shareholders.
Pursuant to these provisions, in September 2006, we implemented a shareholders’ rights plan, also
commonly called a “poison pill,” that would substantially reduce or eliminate the expected economic
benefit to an acquirer from acquiring us in a manner or on terms not approved by our Board of
Directors. A description of the terms of our shareholder rights plan is set forth in our Current
Report on Form 8–K, filed with the SEC on September 6, 2006. The rights of the holders of our
Common Stock will be subject to, and may be harmed by, the rights of the holders of the preferred
share purchase rights and any preferred stock that may be issued in the future. We are also subject
to the provisions of Wisconsin law that could have the effect of delaying, deferring, or preventing
a change of control of our company. One of these provisions prevents us from engaging in a business
combination with any interested stockholder for a period of three years from the date the person
becomes an interested stockholder, unless specified conditions are satisfied. These and other
impediments to a third–party acquisition or change of control could limit the price investors are
willing to pay in the future for shares of our Common Stock.
Item 1B. UNRESOLVED STAFF COMMENTS
None.
Item 2. PROPERTIES
Our principal facilities are located in Milwaukee, Wisconsin in an approximately 36,000 square
foot office leased through April 2011 at a rate of approximately $0.4 million per year, and in
Mississauga, Ontario in an approximately 75,000 square foot office leased through December 31,
2009, at a rate of approximately $0.9 million per year. We also have subsidiary or branch locations
with leased facilities in Hudson, Ohio; Burlington, Massachusetts; Nuenen, the Netherlands; Paris,
France and Shanghai, China.
We actively monitor our real estate needs in light of our current utilization and projected
growth. We believe that we can acquire any necessary additional facility capacity on reasonably
acceptable terms within a relatively short timeframe. We devote capital resources to facility
improvements and expansions as we deem necessary to promote growth and most effectively serve our
customers.
Item 3. LEGAL PROCEEDINGS
Between March 22, 2006 and April 26, 2006, seven putative securities class action lawsuits
were filed in the United States District Court for the Eastern District of Wisconsin, on behalf of
a class of persons who acquired shares of our Common Stock between August 2, 2005 and March 16,
2006. Defendants in the suit include us, Richard A. Linden, our former President and Chief
Executive Officer, and Scott T. Veech, our former Chief Financial Officer; one of the suits also
names Brian E. Pedlar, former President of Cedara Software Corp. and our former Senior Vice
President, who served as our interim co–President and co–Chief Executive Officer from July 2, 2006
to August 18, 2006. One case has been voluntarily dismissed. The cases arise out of our March 17,
2006 announcement that we would revise our results of operations for the fiscal quarters ended
June 30, 2005 and September 30, 2005, as well as our investigation of allegations made in anonymous
letters received by us. The lawsuits allege that we and individual defendants violated
Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).
The complaints seek damages in unspecified amounts. On November 22, 2006, the Court consolidated
the seven cases, appointed the Southwest Carpenters Pension Trust to be the lead plaintiff and
approved the Trust’s choice of its lead counsel. Pursuant to court order, the lead plaintiff is
currently required to file its Amended Complaint on or before March 19, 2007. We intend to
vigorously defend these lawsuits, including, but not limited to, possibly moving to dismiss the
consolidated amended complaint when filed.
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On August 28, 2006, a derivative action was filed in the Circuit Court of Milwaukee County,
Civil Division, against Messrs. Linden, Mortimore and Veech, and all of the then–current members of
our Board of Directors. The plaintiffs allege that each of the individual defendants breached
fiduciary duties to us by violating generally accepted accounting principles, willfully ignoring
problems with accounting and internal control practices and procedures and participating in the
dissemination of false financial statements and also allege that we and the director defendants
failed to hold an annual meeting of shareholders for 2006 in violation of Wisconsin law. The
plaintiffs ask for unspecified amounts in damages and costs, as well as equitable relief. In response to the filing of this action, our Board of Directors formed a Special Litigation
Committee, which Committee has full authority to investigate the allegations of the derivative
complaint and determine whether pursuit of the claims against any or all of the individual
defendants would be in our best interest. The Special Litigation Committee’s investigation is
substantially complete. Pursuant to stipulations among the parties and order of the court, the
plaintiff has dismissed the claim seeking to require us to hold an annual meeting of shareholders,
and the defendants’ deadline to move, answer or otherwise respond to the remainder of operative
complaint has been extended to April 16, 2007.
On April 27, 2006, we received an informal, nonpublic inquiry from the SEC requesting
voluntary production of documents and other information. The inquiry principally relates to our
announcement on March 17, 2006 that we would revise our results of operations for the fiscal
quarters ended June 30, 2005 and September 30, 2005, as well as our investigation of allegations
made in anonymous letters received by us. The SEC has advised us that this inquiry should not be
interpreted as an adverse reflection on any entity or individual involved, nor should it be
interpreted as an indication by the SEC that any violation of the federal securities laws has
occurred. We are cooperating with the SEC.
We and our Cedara subsidiary were formerly defendants in an action commenced by Brian Pedlar.
Mr. Pedlar was formerly the President of Cedara (since the closing of our merger with Cedara) and
served, from July 2, 2006, until his departure on August 18, 2006, as co–CEO and co–President of
Merge Healthcare. In September 2006, Mr. Pedlar filed suit in Ontario, Canada, against us and
Cedara, claiming that he had been constructively discharged from his positions, and that we had
defamed him in describing his departure in public releases and filings with the SEC. Without
admitting any of the allegations of his complaint, on February 22, 2007, we agreed with Mr. Pedlar
to settle this suit. Pursuant to the settlement, we agreed to pay Mr. Pedlar approximately $500,000
(less required tax withholding) and also agreed to pay approximately $80,000 to Mr. Pedlar’s
counsel in payment of his attorneys fees and expenses in his employment proceedings. The settlement
also included customary provisions addressing non–disparagement, confidentiality, mutual releases
and dismissal of the legal action.
We, and our subsidiaries, are from time to time parties to legal proceedings, lawsuits and
other claims incident to our business activities. Such matters may include, among other things,
assertions of contract breach or intellectual property infringement, claims for indemnity arising
in the course of our business and claims by persons whose employment has been terminated. Such
matters are subject to many uncertainties and outcomes are not predictable with assurance.
Consequently, we are unable to ascertain the ultimate aggregate amount of monetary liability,
amounts which may be covered by insurance or recoverable from third parties, or the financial
impact with respect to these matters as of the date of this report.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
We held our Annual Meeting of Shareholders on December 18 and 28, 2006 (the “Annual Meeting”).
Our shareholders voted as follows to elect the following eleven (11) individuals to serve as
Directors until the next annual meeting of the shareholders or otherwise as provided in our Bylaws:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Votes |
|
|
| |
|
|
|
|
|
Against or |
|
|
| |
|
Votes For |
|
Withheld |
|
Result |
Elect Robert A. Barish, M. D. to serve as Director |
|
|
12,518,269 |
|
|
|
4,475,737 |
|
|
Elected |
Elect Dennis Brown to serve as Director |
|
|
12,706,305 |
|
|
|
4,287,701 |
|
|
Elected |
Elect Michael D. Dunham to serve as Director |
|
|
13,369,802 |
|
|
|
3,624,204 |
|
|
Elected |
Elect Robert T. Geras to serve as Director |
|
|
13,333,430 |
|
|
|
3,660,576 |
|
|
Elected |
Elect Anna Marie Hajek to serve as Director |
|
|
12,514,552 |
|
|
|
4,479,454 |
|
|
Elected |
Elect R. Ian Lennox to serve as Director |
|
|
12,909,124 |
|
|
|
4,084,882 |
|
|
Elected |
Elect Kevin E. Moley to serve as Director |
|
|
14,033,653 |
|
|
|
2,960,353 |
|
|
Elected |
Elect Ramamritham Ramkumar to serve as Director |
|
|
13,209,695 |
|
|
|
3,784,311 |
|
|
Elected |
Elect Kenneth D. Rardin to serve as Director |
|
|
14,034,747 |
|
|
|
2,959,259 |
|
|
Elected |
Elect Kevin G. Quinn to serve as Director |
|
|
14,035,293 |
|
|
|
2,958,713 |
|
|
Elected |
Elect Richard A. Reck to serve as Director |
|
|
12,870,993 |
|
|
|
4,123,013 |
|
|
Elected |
No other business was brought before the Annual Meeting.
23
PART II
Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES
Our Common Stock trades on the NASDAQ National Market (now designated the NASDAQ Global
Market) (in both cases, the “NASDAQ”).
The following table sets forth for the periods indicated, the high and low sale prices of our
Common Stock as reported by the NASDAQ:
Common Stock Market Prices
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
4th Quarter |
|
3rd Quarter |
|
2nd Quarter |
|
1st Quarter |
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High |
|
$ |
8.14 |
|
|
$ |
8.17 |
|
|
$ |
16.06 |
|
|
$ |
27.36 |
|
Low |
|
$ |
5.72 |
|
|
$ |
6.43 |
|
|
$ |
11.31 |
|
|
$ |
15.01 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High |
|
$ |
30.05 |
|
|
$ |
20.49 |
|
|
$ |
20.00 |
|
|
$ |
22.90 |
|
Low |
|
$ |
16.29 |
|
|
$ |
16.50 |
|
|
$ |
14.90 |
|
|
$ |
17.05 |
|
According to the records of American Stock Transfer & Trust Company, our registrar and
transfer agent, we had 254 shareholders of record of Common Stock as of March 2, 2007. As of the
same date, we estimate that there were in excess of 11,600 beneficial holders of our Common Stock.
Dividend Policy
We have not paid any cash dividends on our Common Stock since formation. We currently do not
intend to declare or pay any cash dividends on our Common Stock in the foreseeable future.
Recent Sales of Unregistered Securities
We did not sell any shares of our Common Stock in transactions not registered under the
Securities Act of 1933, as amended (the “Securities Act”) during the fourth quarter of 2006.
On September 6, 2006, we announced a stock repurchase plan providing for the purchase of up to
$20 million of our Common Stock over a two-year period. As of December 31, 2006, we had not made
any repurchases under this plan. This repurchase program replaces a previous plan that expired on
August 24, 2006, two years after its initial implementation, without any shares having been
repurchased.
24
Item 6. SELECTED FINANCIAL DATA
The following selected historical financial data are qualified in their entirety by reference
to, and should be read in conjunction with, our consolidated financial statements and the related
notes thereto appearing elsewhere herein and Item 7, “Management’s Discussion and Analysis of
Financial Condition and Results of Operations,” in this Annual Report on Form 10-K/A.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, |
| |
|
2006(4) |
|
2005(1)(4) |
|
2004(4) |
|
2003(4) |
|
2002 |
| |
|
(As restated) |
|
(As restated) |
|
(As restated) |
|
(As restated) |
|
|
|
|
| |
|
|
|
|
|
(in thousands, except for share and per share data) |
|
|
|
|
Statements of Operations Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
74,322 |
|
|
$ |
82,538 |
|
|
$ |
25,477 |
|
|
$ |
24,268 |
|
|
$ |
19,147 |
|
Operating income (loss)(2)(3) |
|
|
(252,087 |
) |
|
|
4,377 |
|
|
|
(250 |
) |
|
|
3,064 |
|
|
|
2,782 |
|
Income (loss) before income taxes |
|
|
(249,473 |
) |
|
|
5,113 |
|
|
|
219 |
|
|
|
2,962 |
|
|
|
2,846 |
|
Income tax expense (benefit) |
|
|
9,450 |
|
|
|
8,373 |
|
|
|
(1,444 |
) |
|
|
(1,325 |
) |
|
|
79 |
|
Net income (loss) |
|
|
(258,923 |
) |
|
|
(3,260 |
) |
|
|
1,663 |
|
|
|
4,287 |
|
|
|
2,767 |
|
Earnings (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
(7.68 |
) |
|
$ |
(0.13 |
) |
|
$ |
0.13 |
|
|
$ |
0.37 |
|
|
$ |
0.29 |
|
Diluted |
|
|
(7.68 |
) |
|
|
(0.13 |
) |
|
|
0.12 |
|
|
|
0.34 |
|
|
|
0.25 |
|
Weighted average shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
33,701,735 |
|
|
|
24,696,762 |
|
|
|
13,013,927 |
|
|
|
11,566,054 |
|
|
|
8,840,059 |
|
Diluted |
|
|
33,701,735 |
|
|
|
24,696,762 |
|
|
|
13,827,522 |
|
|
|
12,586,900 |
|
|
|
10,383,651 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
As of December 31, |
| |
|
2006 |
|
2005 |
|
2004 |
|
2003 |
|
2002 |
| |
|
(As restated) |
|
(As restated) |
|
(As restated) |
|
(As restated) |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
(in thousands) |
|
|
|
|
|
|
|
|
Balance Sheet Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital |
|
$ |
27,101 |
|
|
$ |
56,964 |
|
|
$ |
22,786 |
|
|
$ |
18,165 |
|
|
$ |
7,010 |
|
Total assets(5) |
|
|
234,875 |
|
|
|
500,045 |
|
|
|
85,853 |
|
|
|
66,110 |
|
|
|
27,481 |
|
Long-term debt
obligations |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Shareholders’ equity(5) |
|
|
189,925 |
|
|
|
442,592 |
|
|
|
54,949 |
|
|
|
50,709 |
|
|
|
20,821 |
|
|
|
|
| (1) |
|
Includes the results of Cedara Software Corp. from June 1, 2005, the date of our business
combination. |
| |
| (2) |
|
For the years ended December 31, 2005 and 2002, we incurred a charge for acquired in-process
research and development of $13.0 million and $0.1 million, respectively. |
| |
| (3) |
|
For the year ended December 31, 2006, we incurred charges of $214.1 million related to the
impairment of goodwill and $6.7 million related to the impairment of trade names. In addition,
for the years ended December 31, 2006 and 2005, we incurred restructuring charges of
$2.7 million and $0.5 million, respectively. |
| |
| (4) |
|
As disclosed under “Explanatory Note—Restatements of Financial Information” immediately
preceding Part I, Item 1 of this Annual Report on Form 10-K/A, we have restated certain
financial data for the years ended December 31, 2006, 2005, 2004, and 2003. The effects of
these restatements on net sales were a decrease of $0.7 million, $0.1 million, $0.9 million,
and $0.3 million, respectively, for the years ended December 31, 2006, 2005, 2004, and 2003.
The effects on income before income taxes related to these restatements were an increase
(decrease) of $6.5 million, $(0.1) million, $(0.7) million,
and $(0.2) million, respectively, for the
years ended December 31, 2006, 2005, 2004, and 2003. The effects on net
income for |
25
|
|
|
| |
|
the periods ended December 31, 2006, 2005, 2004, and 2003 were a decrease of $0.5
million, $0.6 million, $0.5 million, and $0.1 million, respectively. Refer to Note 2 of notes
to consolidated financial statements for additional information. |
| |
| (5) |
|
As disclosed under “Explanatory Note—Restatements of Financial Information” immediately
preceding Part I, Item 1 of this Annual Report on Form 10-K/A, we have restated certain
financial data as of December 31, 2006, 2005, 2004, and 2003. The effects on total assets were
an increase (decrease) of $0.2 million, $(1.6) million, $0.4 million, and $0.0 million, as of
December 31, 2006, 2005, 2004, and 2003, respectively. The effects on shareholders’ equity
were a decrease of $1.8 million, $1.2 million, $0.7 million, and $0.1 million as of December
31, 2006, 2005, 2004, and 2003, respectively. |
26
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The discussion below contains “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
Exchange Act. We have used words such as “believes,” “intends,” “anticipates,” “expects” and
similar expressions to identify forward-looking statements. These statements are based on
information currently available to us and are subject to a number of risks and uncertainties that
may cause our actual growth, results of operations, financial condition, cash flows, performance,
business prospects and opportunities and the timing of certain events to differ materially from
those expressed in, or implied by, these statements. These risks, uncertainties and other factors
include, without limitation, those matters discussed in Item 1A, “Risk Factors” in this Annual
Report on Form 10-K/A. Except as expressly required by the federal securities laws, we undertake no
obligation to update such factors or to publicly announce the results of any of the forward-looking
statements contained herein to reflect future events, developments, or changed circumstances, or
for any other reason. The following discussion should be read in conjunction with the consolidated
financial statements and notes thereto appearing elsewhere in this report.
Restatement of Previously Issued Consolidated Financial Statements
On August 13, 2007, we announced that the audited financial statements for the years ended
December 31, 2006, 2005 and 2004 and other financial information included in our Annual Report on
Form 10-K for the year ended December 31, 2006 and the unaudited financial statements included in
our Quarterly Report on Form 10-Q for the quarter ended March 31, 2007 should no longer be relied
upon. The errors identified in previously issued financial statements are described below.
Revenue Recognition
We have determined that our previously filed financial statements contained errors resulting
from the incorrect recognition of revenue on software license arrangements with 12 customers that
were signed between July of 2003 and June of 2004 following the acquisition of RIS Logic. As a
result, we determined that the revenue associated with these arrangements should have been
recognized ratably over the lesser of the maintenance period or the economic life of the software
following the first productive use of the software at the customer site. The original value of
these contracts, excluding the multiple years of maintenance,
aggregated approximately $2 million.
Goodwill and Deferred Income Taxes
In connection with the accounting for the acquisition of Cedara in June of 2005, we did
not appropriately record purchase accounting for deferred income taxes. As a result, both acquired
goodwill and net deferred tax liabilities were overstated. The impact of these purchase accounting
adjustments recorded in the consolidated financial statements included herein have been restated.
Other Adjustments
We have also restated for other errors generally related to our accrual for bonuses, accrual
for state and franchise taxes, accrual for subsequent credit memos, and correction of clerical
errors in accumulating and recording transactions. These adjustments included changes to the
following financial statement line items: revenue, as well as related accounts including cost of
goods sold, accounts receivable and related reserves, and deferred revenue; accrued wages; various
operating expenses; goodwill; other assets; accumulated other comprehensive income; income tax
expense; and income taxes payable.
Please refer to Note 2 of our accompanying consolidated financial statements for a discussion
of the restatement of certain of our previously reported financial information, and Note 15 for a
summary of the impact of the restatement on our previously reported quarterly financial information
in 2005 and 2006.
27
We, by means of this Annual Report on Form 10-K/A, have restated our previously issued
consolidated financial statements and financial information for each of the fiscal years ended
December 31, 2006, 2005, 2004, including unaudited interim quarterly financial statements and
financial information for each of the quarters of 2005 and 2006. We have not amended our Annual
Reports on Form 10-K or Quarterly Reports on Form 10-Q for any of the affected periods other than
those included in this Annual Report on Form 10-K/A. The information that has been previously filed
or otherwise reported for these periods is superseded by the information contained in this Annual
Report on Form 10-K/A, and the financial statements and related financial information contained in
such previously-filed reports should no longer be relied upon.
Overview
Operating under the name Merge Healthcare, we develop medical imaging and information
management software and deliver related services. Late in 2006, we reorganized our business to
better reflect emerging market needs. We established three distinct business units: Merge
Healthcare North America, which primarily sells directly to the end-user healthcare market
comprised of hospitals, imaging centers and specialty clinics located in the U.S. and Canada and
also distributes certain products through the Internet via our website; Cedara Software, our OEM
business unit, which primarily sells to OEMs and VARs, comprised of companies that develop,
manufacture or resell medical imaging software or devices; and Merge Healthcare EMEA, which sells
to the end-user healthcare market in Europe, the Middle East and Africa.
Healthcare providers continue to be challenged by declining reimbursements, competition and
reduced operating profits brought about by the increasing costs of delivering healthcare services.
In the U.S., we are focusing our direct sales efforts on single and multi-site imaging centers that
complete more than 10,000 studies per year, small-to-medium sized hospitals (fewer than 400 beds),
and certain specialty clinics like orthopedic practices that offer imaging services. Millennium
Research Group, an international market research firm, reported that, in 2005, the U.S. market for
RIS and PACS, consisting of RIS and enterprise, radiology, orthopedic and cardiology PACS, was
valued at over $1.5 billion; that by 2010 this market will grow to over $3.0 billion, representing
a compound annual growth rate of nearly 15%; and that growth for the RIS market is primarily driven
by imaging centers and small hospitals, particularly those that do not already have a PACS or RIS
and elect for an integrated RIS/PACS solution.
We have aggressively expanded our product offerings through our acquisitions of eFilm in 2002,
RIS Logic in 2003 and AccuImage in January 2005 and our business combination with Cedara Software
Corp. in June 2005.
Recent Developments
Late in 2006, we commenced a rightsizing and reorganization initiative designed to reduce
costs in our global development, delivery and support model through expanding our investment in
onshore-offshore initiatives; to expand our direct sales presence in North America and Europe; to
eliminate redundancies within our consolidated organization from not having benefited from the
economies of scale and synergies that should have resulted from our business combination with
Cedara Software; to better align our cost structure with our revenue-generating strategies; and to
reduce time-to-market for new products and ultimately lower costs for our clients. In addition, we
announced several changes to our senior management team.
The following are some of the key details of the initiative:
| |
• |
|
Reduction of approximately 150 jobs (including consultants and temporary workforce), or
28% of the then-current workforce, with plans to add more than 200 technical personnel
offshore in our Pune, India software engineering and customer support center by the end of
2007. |
| |
| |
• |
|
Strategic transition to a blended onshore-offshore global delivery model to improve
quality and customer satisfaction, to decrease costs, to increase capacity, and to improve
delivery and customer support. At December 31, 2006, we had approximately 100 persons
employed by our partner in India, dedicated to this effort. |
| |
| |
• |
|
Operational consolidation of the Merge Healthcare and Cedara Software organizations,
encompassing most administrative functions, as well as software engineering and product
management.
|
28
| |
• |
|
Formation of Cedara Software Services (India) Pvt. Ltd. for the purpose of expanding
our capacity for performing custom engineering services on behalf of our OEM customers,
led by Managing Director Avinash Agrawal. |
| |
| |
• |
|
Closing of offices in San Francisco, CA, and Tokyo, Japan, and downsizing operations in
Burlington, MA, Cleveland, OH and Mississauga, Ontario. |
| |
| |
• |
|
Formation of three business units: |
| |
• |
|
Merge Healthcare North America (formerly Merge eMed, U.S. and Canada direct
market), led by recently hired President Gary Bowers, former Senior Vice President,
Strategic Business Initiatives at Merge Healthcare. |
| |
| |
• |
|
Cedara Software (Global OEM market), led by President Loris Sartor, former Vice
President of Sales at Cedara. |
| |
| |
• |
|
Merge Healthcare EMEA (Europe, Middle East, and Africa direct market), led by
President Jacques Cornet, former Vice President of Marketing and Business Development
at Cedara Software. |
| |
• |
|
Consolidation of two existing engineering groups into a single consolidated
organization. Peter Bascom, former Vice President of Engineering for Cedara Software, was
promoted to Senior Vice President of Engineering for Merge Healthcare. |
| |
| |
• |
|
Promotion of Tim Kulbago, former Chief Technical Officer of Merge eMed, to Chief
Technical Officer and Chief Strategy Officer for Merge Healthcare with responsibility for
strategic business initiatives, including merger and acquisition activities. |
| |
| |
• |
|
Consolidation of two existing product management groups into one consolidated
organization. Recently-hired Senior Clinical Consultant, Cory Hall, was promoted to Senior
Vice President of Product Management for Merge Healthcare. |
We also entered into several strategic partnerships and ventures in new markets during 2006.
In addition, we:
| |
• |
|
Announced an agreement with Medavis GmbH to distribute their Radiology Information
System in conjunction with our FUSION PACS offering to selected European markets. |
| |
| |
• |
|
Entered into a strategic relationship with Foresight Imaging to deliver the next
generation “Merge Box” to the market. |
| |
| |
• |
|
Entered into a partnership with CPAGE, a French public information technology group, to
deliver EPR functionality to the French hospital market based on our aXigate technology. |
In 2006, we continued to enhance our product portfolios with the release of Matrix 2.1,
RIS 3.1, Efilm 2.1, PET/CT 1.3, a beta version of ProPlanner (orthopedic workstation), the next
generation ExamWorks, MergeMammo and Softview 6.2. In addition, a Spanish version of eFilm was
developed for eCommerce and a veterinary-specific version of eFilm was released. This year also saw
the introduction of a .NET version of the industry standard MergeCOM3 DICOM toolkit and a 64 bit
version of OpenEyes.
Innovation also continued in 2006 with a focus on developing technology to enable the
automation of clinical workflow wherever possible. Our goal is ultimately to reduce user
interaction, and enhance their experience by having our software make intelligent choices based on
the image content, thereby allowing the user to focus on solving the clinical issue at hand. The
need for these tools has become even more acute in light of the trend towards increased dataset
sizes in medical imaging. Specifically we:
| |
• |
|
Developed the Cedara Clinical Control Center (“C4”) to enable us and our partners to
easily integrate clinical applications into existing products. A prototype of C4 was shown
at RSNA and was initially released as part of I-Softview 6.2. |
| |
| |
• |
|
Developed a number of novel oncology prototypes to handle prostate and tumor
segmentation. The tumor segmentation algorithms were added to Cedara’s oncology
workstation I-Response that will be released in 2007.
|
29
| |
• |
|
Created an automatic mammography skin line detection algorithm that will be used in the
I-ReadMammo product to be released in 2007. This algorithm enables the automation of the
comparison of prior images and automatically maximizing the displayable area. |
| |
| |
• |
|
Developed an automatic module to stitch overlapping X-Ray images for orthopedics. In
addition, we worked to enhance the autotemplating functionality to improve accuracy and
performance while adding support for the coverage of full-hip images. |
| |
| |
• |
|
Developed a complete X-Ray Pipeline solution that implements shutter detection, image
enhancement (“CIE”) and the setting of the optimal window width and level. |
| |
| |
• |
|
Developed a novel graphical processing unit (“GPU”)-based image enhancement filter for
use on ultrasound and angiography datasets. |
Our North American business held its third annual users’ group meeting in Boston on May 7-9,
2006. More than 150 customers spent time sharing their business challenges, discussing product
features and sharing best-practices. Our customers continued to re-iterate how vital the Merge
Healthcare solutions are in improving their business.
We continue to face challenges including the informal, non-public inquiry being conducted by
the SEC and class action and other lawsuits. In addition, we have had significant changes in our
senior management team during 2006, including the resignations of our former CEO, Rich Linden, our
former CFO, Scott Veech, our founder and former Chief Strategist, William C. Mortimore, our former
President of Cedara, Brian Pedlar, our former President of Merge Healthcare North America, Robert
White, our former Senior Vice President of Strategic Business Development, David Noshay, and
several others as well. We believe that these matters have caused confusion internally and
adversely affected the morale of our employees, our relationships with certain customers and
potential customers and our reputation in the marketplace, and have diverted the attention of our
Board of Directors and management from our business operations. We also have experienced challenges
integrating the businesses and personnel of Merge Healthcare and Cedara. In particular, we
struggled to realize synergistic benefits as a consequence of organizational changes, primarily
within our sales and service groups, following that business combination. These challenges led to
significant attrition at both Merge Healthcare and Cedara during the latter half of 2005 and also
in 2006. In late 2006, we hired Ken Rardin as our new Chief Executive Officer and in January of
2007, we hired Steve Norton as our Executive Vice President and Chief Financial Officer. We
anticipate that these and other significant changes made during the latter half of 2006, as
discussed under our rightsizing and reorganization initiative above, will have significant positive
effects for us going forward. However, we believe that it will take time for these initiatives and
hirings to have an impact on our net sales and operating income. See Item 1A, “Risk Factors,” and
Item 3, “Legal Proceedings,” in this Annual Report on Form 10-K/A for more detailed discussion
regarding these matters.
Revenues and Expenses
The following is a brief discussion of our revenues and expenses:
Net Sales
Net sales consist of software and other sales, net of estimated product returns, and
professional services and maintenance. Software and other sales consist of software and purchased
component revenue recognized in sales to OEM customers, healthcare facilities and imaging centers.
Professional services and maintenance consists of installation and engineering services, training,
consulting, and software maintenance and support.
Cost of Sales
Cost of sales consists of purchased components, third-party royalties, costs to service and
support our customers, and amortization of purchased and developed software. The cost of software
and other includes purchased components and third-party royalties included in software and hardware
sales to our customers. The cost of services and maintenance includes headcount and related costs
incurred in our performance of installation and engineering services, training, consulting, and
software maintenance and support. Purchased and developed software is amortized over its estimated
useful life. Each quarter we test our purchased and developed software for impairment by comparing
its fair value (estimated using future cash flows) to the
30
carrying value of the software. If the carrying value of the software exceeds its fair value,
we record an impairment charge in the period in which the impairment is incurred equal to the
amount of the difference between the carrying value and estimated future cash flows.
Sales and Marketing Expense
Sales and marketing expense includes the costs of our sales and marketing departments,
commissions and costs associated with trade shows.
Research and Development Expense
Research and development expense consists of expenses incurred for the development of our
proprietary technologies, included in Item 1, “Business” in this Annual Report on Form 10-K/A. The
costs reflected in this category are reduced by software development costs capitalized in
accordance with Statement of Financial Accounting Standard (“SFAS”) No. 86, Accounting for the
Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed. The amortization of
capitalized software development costs is included in cost of sales.
General and Administrative Expense
General and administrative expense includes costs for information systems, accounting,
administrative support, management personnel, bad debt expense, legal fees and general corporate
matters.
Acquired In-Process Research and Development
In connection with our business combination with Cedara Software Corp. in 2005, we incurred a
charge for acquired in-process research and development.
The value we 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 transaction date, (2) there was
no alternative future use, and (3) the fair value was estimable with reasonable reliability. At the
date of the business combination, Cedara Software Corp. had in-process projects meeting this
definition associated with the Cedara next-generation PACS workstation, OEM imaging platforms and
image acquisition console projects.
Goodwill Impairment, Restructuring and Other Expenses
Goodwill impairment, restructuring and other expenses consist of impairment of goodwill and
trade names (see Note 4 of the notes to consolidated financial statements included herein),
severance to involuntarily terminated employees and impairment of non-cancelable building leases
associated with restructuring activities.
Depreciation and Amortization
Depreciation and amortization is assessed on capital equipment, leasehold improvements and
intangible assets with estimable useful lives. The amortization of capitalized software and
acquired technology, which is a component of cost of sales, is excluded.
Other Income, Expense
Other income, expense is comprised of interest income earned on cash and cash equivalent
balances, interest expense incurred from borrowings and foreign exchange gains or losses on foreign
currency payables for Cedara Software and on foreign currency payables and receivables at our
Nuenen, Netherlands branch.
Critical Accounting Policies
Our consolidated financial statements are impacted by the accounting policies used and the
estimates, judgments, and assumptions made by management during their preparation. We base our
estimates and judgments on our experience, our current knowledge (including terms of existing
contracts), our beliefs of what could occur in the future, our observation of trends in the
industry, information provided by our customers and information available from other sources.
Actual results may differ from these estimates under different assumptions or conditions.
31
We have identified the following accounting policies and estimates as those that we believe
are most critical to our financial condition and results of operations and that require
management’s most subjective and complex judgments in estimating the effect of inherent
uncertainties: revenue recognition, allowance for doubtful accounts, software capitalization, other
long-lived assets, goodwill and other intangible asset valuation, share-based compensation expense,
income taxes, guarantees and loss contingencies.
Revenue Recognition
We derive revenues primarily from the licensing of software, sales of hardware and related
ancillary products, installation, engineering services, training, consulting, and software
maintenance and support. Inherent to software revenue recognition are significant management
estimates and judgments in the interpretation and practical application of the complex rules to
individual contracts. These interpretations generally would not influence the amount of revenue
recognized, but could influence the timing of such revenues. Typically our contracts contain
multiple elements, and while the majority of our contracts contain standard terms and conditions,
there are instances where our contracts contain non-standard terms and conditions. As a result,
contract interpretation is sometimes required to determine the appropriate accounting, including
whether the deliverables specified in a multiple element arrangement should be treated as separate
units of accounting for revenue recognition purposes in accordance with Statement of Position
(“SOP”) No. 97-2, Software Revenue Recognition, or Emerging Issues Task Force (“EITF”) Issue
No. 00-21, Revenue Arrangements with Multiple Deliverables, and if so, the relative fair value that
should be allocated to each of the elements as well as when to recognize revenue for each element.
For software arrangements, we recognize revenue in accordance with SOP No. 97-2. This
generally requires revenue recognized on software arrangements involving multiple elements,
including separate arrangements with the same customer executed within a short time frame of each
other, to be allocated to each element based on the vendor-specific objective evidence (“VSOE”) of
fair values of those elements. Revenue from multiple-element software arrangements is recognized
using the residual method, pursuant to SOP No. 98-9, Modification of SOP No. 97-2, Software Revenue
Recognition, With Respect to Certain Transactions (“SOP No. 98-9”). Under the residual method,
revenue is recognized in a multiple-element arrangement when VSOE of fair value exists for all of
the undelivered elements in the arrangement, even if vendor-specific objective evidence of fair
value does not exist for one or more of the delivered elements in the arrangement, assuming all
other conditions for revenue recognition have been satisfied. For sales transactions where the
software is incidental, the only contract deliverable is custom engineering or installation
services, and hardware transactions where no software is involved, we recognize revenue in
accordance with EITF Issue No. 00-21 and Staff Accounting Bulletin (“SAB”) No. 104, Revenue
Recognition.
We allocate revenue to each undelivered element in a multiple-element arrangement based on its
respective 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 substantive renewal price of the maintenance offered to customers, which generally is stated in
the contract. The fair value of installation, engineering services, training, and consulting is
based upon the price charged when these services are sold separately. If evidence of the fair value
cannot be established for undelivered elements of a sale, the entire amount of revenue under the
arrangement is deferred until elements without VSOE of fair value have been delivered or VSOE of
fair value can be established. If evidence of fair value cannot be established for the maintenance
element of a sale, and it represents the only undelivered element, the software, hardware, or
software maintenance elements of the sale are deferred and recognized ratably over the lesser of
the related maintenance period or the economic life of the software.
Revenue from 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 probable. We assess
collectibility based on a number of factors, including past transaction history with the customer
and the credit worthiness of the customer. We must exercise our judgment when we assess the
probability of collection and the current credit worthiness of each customer. If the financial
condition of our customers were to deteriorate, it could affect the timing and the amount of
revenue we recognize on a contract. In addition, in certain transactions we may negotiate that the
customer provides common stock ownership in consideration as part of the sale. We generally do not
request collateral from customers.
32
Revenue from software licenses sold through annual contracts that include software maintenance
and support is deferred and recognized ratably over the contract period. Revenue from installation,
engineering services, training, and consulting services is recognized as services are performed.
Revenue from sales of RIS and from RIS/PACS solutions, and other specific arrangements where
professional services are considered essential to the functionality of the solution sold, is
recognized on the percentage-of-completion method, as prescribed by SOP No. 81-1, Accounting for
Performance on Construction-Type and Certain Production-Type Contracts. Percentage of completion is
determined by the input method based upon the amount of labor hours expended compared to the total
labor hours expended plus the estimated amount of labor hours to complete the project. Total
estimated labor hours are based on management’s best estimate of the total amount of time it will
take to complete a project. These estimates require the use of judgment. A significant change in
one or more of these estimates could affect the profitability of one or more of our contracts. We
review our contract estimates periodically to assess revisions in contract values and estimated
labor hours and reflect changes in estimates in the period that such estimates are revised under
the cumulative catch-up method. At times, we have had difficulty accurately estimating the number
of days required to complete the consulting and installation services and, accordingly, accurately
estimating the percentages of completion.
Our OEM software products are typically fully functional upon delivery and do not require
significant modification or alteration. Fees for services to OEM customers are billed separately
from licenses of our software products. For sales transactions involving only the delivery of
custom engineering services, we recognize revenue under proportional performance guidelines of SAB
No. 104.
For certain contracts accounted for under SAB No. 104 and EITF No. 00-21, the arrangement
dictates that we invoice the customer for 10% of the contract value of the products delivered upon
completion of hardware installation and acceptance by the customer. As a result of this specific
performance obligation and acceptance criteria, we defer the related amount of product fair value
and recognize it upon completion of installation and acceptance.
Our policy is to allow returns when we have preauthorized the return. Based on our historical
experience of returns and customer credits, we have provided for an allowance for estimated returns
and credits.
Deferred revenue is comprised of deferrals for license fees, support and maintenance, and
other services. Long-term deferred revenue as of December 31, 2006, represents license fees,
support and maintenance, and other services to be earned or provided after January 1, 2008.
We record reimbursable out-of-pocket expenses in both services and maintenance net sales and
as a direct cost of services and maintenance in accordance with EITF Issue No. 01-14, Income
Statement Characterization of Reimbursements Received for “Out-of-Pocket” Expenses Incurred. In
accordance with EITF Issue No. 00-10, Accounting for Shipping and Handling Fees, the reimbursement
by customers of shipping and handling costs are recorded in software and other net sales and the
associated cost as a cost of sale.
Allowance for Doubtful Accounts
Based upon past experience and judgment, we establish an allowance for doubtful accounts with
respect to our accounts receivable. We determine collection risk and record allowances for bad
debts based on the aging of accounts and past transaction history with customers. We monitor our
collections and write-off experience to assess whether adjustments to our allowance estimates are
necessary. Changes in trends in any of the factors that we believe impact the realizability of our
receivables, or modifications to our credit standards, collection practices, or other related
policies may impact our estimate of our allowance for doubtful accounts and our financial results.
Software Capitalization
Software capitalization commences when we determine that projects have achieved technological
feasibility, unless the costs expected to be incurred after achieving technological feasibility
until general release are immaterial. Our determination that a project has achieved technological
feasibility does not ensure that the project can be commercially salable. Amounts capitalized
include direct labor and estimates of overhead attributable to the projects. The useful lives of
capitalized software projects are assigned by management, based upon the expected life of the
software. We also estimate the realizability of capitalized values based on
33
projections of future net operating cash flows through the sale of products related to each
capitalized project. If we determine in the future that the value of capitalized software cannot be
recovered, a write down of the value of the capitalized software to its recoverable value may be
required. If the actual achieved revenues are lower than our estimates or the useful life of a
project is shorter than the estimated useful life, the asset may be deemed to be impaired and,
accordingly, a write down of the value of the asset or a shorter amortization period may be
required.
Other Long-Lived Assets
Other long-lived assets, including property and equipment, and other intangibles, are
amortized over their expected lives, which are estimated by us. We also make estimates of the
impairment of long-lived assets whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable based primarily upon whether expected future
undiscounted cash flows are sufficient to support the assets recovery. If the actual useful life of
a long-lived asset is shorter than the useful life estimated by us, the assets may be deemed to be
impaired and, accordingly, a write down of the value of the assets or a shorter depreciation or
amortization period may be required, generally determined by a discounted cash flow analysis.
Goodwill and Other Intangible Assets
SFAS No. 142, Goodwill and Other Intangible Assets, requires that goodwill and indefinite
lived intangible assets be reviewed for impairment annually, or more frequently if impairment
indicators arise. Our policy provides that goodwill and indefinite lived intangible assets will be
reviewed for impairment as of December 31 of each year. In calculating potential impairment losses,
we evaluate the fair value of goodwill and intangible assets using either quoted market prices or,
if not available, by estimating the expected present value of their future cash flows.
Identification of, and assignment of assets and liabilities to, a reporting unit require our
judgment and estimates. In addition, future cash flows are based upon our assumptions about future
sales activity and market acceptance of our products. If these assumptions change, we may be
required to write down the carrying value of the asset to a revised amount. See Note 4 in notes to
consolidated financial statements for a discussion of the impairment of goodwill and trade names in
2006 which were previously recorded at the time of our business combination with Cedara Software
Corp.
Share-based Compensation Expense
Effective January 1, 2006, we adopted SFAS No. 123(R), Share-Based Payment, which is a
revision of SFAS No. 123, Accounting for Stock-Based Compensation, as amended, to replace our
previous method of accounting for share-based awards under APB Opinion No. 25, Accounting for Stock
Issued to Employees, for periods beginning in 2006. We are using the modified prospective
transition method. Under that transition method, compensation cost recognized in 2006 includes:
(1) compensation cost for all share-based awards granted prior to, but not yet vested as of
January 1, 2006, based on the grant-date fair value estimated in accordance with the original
provisions of SFAS No. 123; and (2) compensation cost for all share-based awards granted subsequent
to January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions
of SFAS No. 123(R). We use the Black-Scholes option pricing model to estimate the fair value of
stock-based awards on the date of grant utilizing certain assumptions including expected
volatility, which we base on the historical volatility of our stock and other factors, and
estimated option life, which represents the period of time the options granted are expected to be
outstanding and is based, in part, on historical data. We also estimate employee terminations
(option forfeiture rate) which is based, in part, on historical data. Although we believe our
assumptions used to calculate share-based compensation expense are reasonable, these assumptions
can involve complex judgments about future events, which are open to interpretation and inherent
uncertainty. In addition, significant changes to our assumptions could significantly impact the
amount of expense recorded in a given period.
Income Taxes
As part of the process of preparing our consolidated financial statements, we are required to
estimate income taxes in each of the jurisdictions in which we operate. The provision for income
taxes is determined using the asset and liability approach for accounting for income taxes in
accordance with SFAS No. 109, Accounting for Income Taxes. A current liability is recognized for
the estimated taxes payable for the current year. Deferred tax assets and liabilities are
recognized for the estimated future tax consequences attributable to
34
differences between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using
the enacted tax rates in effect for the year in which the timing differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of changes in tax rates or
tax laws are recognized in the provision for income taxes in the period that includes the enactment
date.
Valuation allowances are established when necessary to reduce deferred tax assets to the
amount more-likely-than-not to be realized. To the extent we establish or change the valuation
allowance in a period, the tax effect will flow through the statement of operations. However, in
the case of deferred tax assets of an acquired or merged entity with a valuation allowance recorded
for purchase accounting, any change in that valuation allowance will be recorded as an adjustment
to goodwill to the extent goodwill exists. Otherwise, such valuation allowance will be reflected in
the Statement of Operations.
The determination of our provision for income taxes requires significant judgment, the use of
estimates and the interpretation and application of complex tax laws. We are subject to income
taxes in the U.S. and numerous foreign jurisdictions. Significant judgment is required in
determining our worldwide provision for income taxes and recording the related tax assets and
liabilities. In the ordinary course of our business, there are transactions and calculations for
which the ultimate tax determination is uncertain. In spite of our belief that we have appropriate
support for all the positions taken on our tax returns, we acknowledge that certain positions may
be successfully challenged by the taxing authorities. Therefore, an accrual for tax contingencies
is provided for, when necessary, in accordance with the requirements of SFAS No. 5, Accounting for
Contingencies. These tax contingency accruals are reviewed quarterly and reversed upon being
sustained under audit, the expiration of the statute of limitations, new information, or other
determination by the taxing authorities. The provision for income taxes includes the impact of
changes in the tax contingency accrual. Although we believe our recorded tax assets and liabilities
are reasonable, tax laws and regulations are subject to interpretation and inherent uncertainty;
therefore our assessments can involve both a series of complex judgments about future events and
rely on estimates and assumptions. Although we believe these estimates and assumptions are
reasonable, the final determination could be materially different than that which is reflected in
our provision for income taxes and recorded tax assets and liabilities.
In the calculation of our quarterly provision for income taxes, we use an annual effective
rate based on expected annual income and statutory tax rates. The tax (or benefit) applicable to
significant unused or infrequently occurring items, discontinued operations or extraordinary items
are separately recognized in the income tax provision in the quarter in which they occur.
Guarantees
In accordance with FASB Interpretation (“FIN”) No. 45, Guarantor’s Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others
(“FIN No. 45”), we recognize the fair value of guarantee and indemnification arrangements issued or
modified by us, if these arrangements are within the scope of the interpretation. In addition, we
must continue to monitor the conditions that are subject to the guarantees and indemnifications, as
required under the previously existing GAAP, in order to identify if a loss has occurred. If we
determine it is probable that a loss has occurred, then any such estimable loss would be recognized
under those guarantees and indemnifications. Under our standard Software License, Services and
Maintenance Agreement, we agree to indemnify, defend and hold harmless our licensees from and
against certain losses, damages and costs arising from claims alleging the licensees’ use of our
software infringes the intellectual property rights of a third party. Historically, we have not
been required to pay material amounts in connection with claims asserted under these provisions
and, accordingly, we have not recorded a liability relating to such provisions.
Under our Software License, Services and Maintenance Agreement, we also represent and warrant
to licensees that our software products will operate substantially in accordance with published
specifications, and that the services we perform will be undertaken by qualified personnel in a
professional manner conforming to generally accepted industry standards and practices.
Historically, only minimal costs have been incurred relating to the satisfaction of product
warranty claims.
Other guarantees include promises to indemnify, defend and hold harmless each of our executive
officers, non-employee directors and certain key employees from and against losses, damages and
costs incurred by each such individual in administrative, legal or investigative proceedings
arising from alleged wrongdoing by the
35
individual while acting in good faith within the scope of his or her job duties on our behalf.
Historically, minimal costs have been incurred relating to such indemnifications and, as such, no
accrual for these guarantees have been made. However, we, Richard A. Linden, our former President
and Chief Executive Officer and Scott T. Veech, our former Chief Financial Officer, are defendants
in several lawsuits relating to our accounting and financial disclosure; one of these suits also
names Brian E. Pedlar, former President of Cedara Software Corp. and former Senior Vice President
of Merge Healthcare, who served as interim co-President and co-Chief Executive Officer from July 2,
2006 to August 18, 2006. These lawsuits and other legal matters in which we have become involved,
including our receipt of a shareholder demand for derivative action, are described in Note 10 of
notes to consolidated financial statements. We have accrued for indemnification costs as of
December 31, 2006 for certain of these individuals for their expenses in connection with such
matters and may be required to accrue for additional guarantee related costs in future periods.
Loss Contingencies
We have accrued for costs as of December 31, 2006 and may, in the future, accrue for costs
associated with certain contingencies, including, but not limited to settlement of legal
proceedings and regulatory compliance matters, when such costs are probable and reasonably
estimable. Liabilities established to provide for contingencies are adjusted as further information
develops, circumstances change, or contingencies are resolved. See Item 3, “Legal Proceedings,” in
this Annual Report on Form 10-K/A for a discussion of matters for which we may be required, in the
future, to accrue costs.
Recent Accounting Pronouncements
In June 2006, the FASB issued EITF No. 06-3, How Sales Taxes Collected from Customers and
Remitted to Governmental Authorities Should be Presented in the Income Statement (That Is, Gross
Versus Net Presentation) (“EITF No. 06-3”), which discusses taxes imposed on, and imposed
concurrent with, a specific revenue-producing transaction between a seller and its customer. It
requires entities to disclose, if significant, on an interim and annual basis for all periods
presented: (a) the accounting policy elected for these taxes; and (b) the amounts of the taxes
reflected gross (as revenue) in the income statement. EITF No. 06-3 will become effective during
the first quarter of 2007. We do not expect EITF No. 06-3 to have a material impact on our
financial condition or results of operations.
In June 2006, FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes— an Interpretation of FASB Statement No. 109 (“FIN No. 48”). FIN No. 48 is effective for the
first interim or annual reporting period for the first fiscal year beginning on or after
December 15, 2006, although earlier adoption is encouraged. FIN No. 48 applies to all tax positions
for income taxes accounted for in accordance with SFAS No. 109. We are currently evaluating the
impact of the adoption of FIN No. 48.
In September 2006, the SEC issued SAB No. 108, Considering the Effects of Prior Year
Misstatements When Quantifying Misstatements in Current Year Financial Statement (“SAB No. 108”),
which provides interpretive guidance on how registrants should quantify financial statement
misstatements. SAB No. 108 requires companies to evaluate the materiality of identified unadjusted
errors on each financial statement and related disclosures using both the rollover and the iron
curtain approach. SAB No. 108 applies to annual financial statements for fiscal years ending after
November 15, 2006. The adoption of SAB No. 108 did not have a material impact on our financial
condition or results of operations.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“SFAS No. 157”).
SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally
accepted accounting principles and expands disclosures about fair value measurements. SFAS No. 157
applies to previous accounting pronouncements that require or permit fair value measurements.
SFAS No. 157 is principally effective for fiscal years beginning after November 15, 2008. We are
currently evaluating the impact of the adoption of SFAS No. 157.
36
Results of Operations
(in thousands)
Year Ended December 31, 2006 Compared to Year Ended December 31, 2005
The results of operations for the year ended December 31, 2005 include those of AccuImage for
the period after the acquisition date of January 28, 2005 and Cedara Software Corp. after the
business combination on June 1, 2005. The following table sets forth selected, unaudited
consolidated financial data for the periods indicated, expressed as a percentage of net sales.
| |
|
|
|
|
|
|
|
|
| |
|
Twelve Months Ended |
| |
|
December 31, |
| |
|
2006 |
|
2005 |
| |
|
(As restated) |
Net sales |
|
|
100 |
% |
|
|
100 |
% |
Cost of sales |
|
|
40 |
|
|
|
31 |
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
|
60 |
|
|
|
69 |
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses: |
|
|
|
|
|
|
|
|
Sales and marketing |
|
|
27 |
|
|
|
17 |
|
Product research and development |
|
|
27 |
|
|
|
12 |
|
General and administrative |
|
|
39 |
|
|
|
14 |
|
Acquired in-process research and development |
|
|
— |
|
|
|
16 |
|
Goodwill impairment, restructuring and other expenses |
|
|
301 |
|
|
|
1 |
|
Depreciation and amortization |
|
|
5 |
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses |
|
|
399 |
|
|
|
64 |
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
(339 |
) |
|
|
5 |
|
Total other income, net |
|
|
3 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
(336 |
) |
|
|
6 |
|
Income tax expense |
|
|
13 |
|
|
|
10 |
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
(349 |
)% |
|
|
(4 |
)% |
|
|
|
|
|
|
|
|
|
Net Sales
The following table sets forth net sales component data for the twelve months ended
December 31, 2006 and December 31, 2005:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, |
|
|
| |
|
2006 |
|
2005 |
|
% Change |
| |
|
(As restated) |
|
|
|
|
Software and other |
|
$ |
40,275 |
|
|
$ |
60,019 |
|
|
|
(33 |
)% |
As a percentage of total net sales |
|
|
54 |
% |
|
|
73 |
% |
|
|
|
|
Services and maintenance |
|
$ |
34,047 |
|
|
$ |
22,519 |
|
|
|
51 |
% |
As a percentage of total net sales |
|
|
46 |
% |
|
|
27 |
% |
|
|
|
|
Total net sales |
|
$ |
74,322 |
|
|
$ |
82,538 |
|
|
|
(10 |
)% |
Software and other sales for 2006 were $40,275, a decrease of $19,744, or 33%, from net
software and other sales of $60,019 for 2005. This decrease was primarily attributable to
approximately $18,800 of net sales recognized from contracts with two international customers in
2005, compared to no such significant customer sales in 2006 and a significant decrease in new
customer contracts signed during 2006, offset by $18,500 of
37
revenue recognized in 2006 as a result of the factors below and the inclusion of sales to
Cedara’s OEM and end-user customers for the entire twelve-month period in 2006. We believe the
reduction in sales also resulted in part from a lack of clarity in the marketplace and in our sales
channel regarding our integrated product strategy for direct sales following the business
combination with Cedara Software Corp. In addition, as a result of the adverse business
circumstances during 2006 following our delayed filings and delisting notification from NASDAQ (we
regained compliance with the SEC rules and were notified of our continued listing by NASDAQ in
September 2006), we believe that many prospective customers reacted by either deferring their
buying decision to a later date or by excluding us as a potential vendor from their buying
decisions during 2006. These circumstances contributed to the overall decrease in our net sales.
Net sales from services and maintenance for 2006 were $34,047, an increase of $11,528, or 51%,
from 2005 net services and maintenance sales of $22,519. This increase in net sales from services
and maintenance was primarily attributable to the factors discussed below, as well as to services
performed in connection with Cedara OEM’s and end-user customers, which were included in sales for
the entire twelve month period in 2006, offset by the factors resulting in decreased net sales
indicated above.
Net sales in any period may be impacted by whether or not we have satisfied the applicable
criteria for software revenue recognition and have established VSOE of fair value for any
undelivered contract elements.
The following factors also affected our net sales results for 2006 and 2005:
| |
• |
|
We recognized net sales of approximately $16,300 for 2006, due to the ultimate delivery
of certain software product functionality on certain customer contracts entered into in
previous years. Net sales were reduced by approximately $1,800 for 2005 due to our
delivery of certain software products to end-user customers that did not fully meet the
functionality that we believe our customers expected. We deferred such revenue until the
delivery of the expected product functionality. |
| |
| |
• |
|
We recognized approximately $900 in net sales in 2006 related to customer contracts
where collectibility was not reasonably assured at time of delivery of the software, but
which became reasonably assured in 2006. Net sales for 2005 were reduced by approximately
$1,000 related to customer contracts where collectibility was not reasonably assured at
time of delivery of the software. |
| |
| |
• |
|
We recognized approximately $300 in net sales in 2006 related to contracts under which
we delivered certain software products remaining on prior orders for which partial
shipment had previously occurred. Net sales in 2005 were reduced by approximately $300 due
to contracts under which we did not deliver all of the contracted software products. |
| |
| |
• |
|
We recognized approximately $900 in net sales in 2006 due to ratable recognition of
sales from prior periods related to customer contracts for which we did not have VSOE of
fair value of maintenance. Net sales decreased in 2005 by approximately $900 related to
contracts for sales that we did not have VSOE of fair value of maintenance. |
Cost of Sales
The following table sets forth cost of sales data for the periods indicated:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, |
|
|
|
|
| |
|
2006 |
|
|
2005 |
|
|
% Change |
|
| |
|
(As restated) |
|
|
|
|
|
Software and other |
|
$ |
9,605 |
|
|
$ |
6,941 |
|
|
|
38 |
% |
Services and maintenance |
|
|
14,472 |
|
|
|
11,087 |
|
|
|
31 |
% |
Amortization |
|
|
5,532 |
|
|
|
7,740 |
|
|
|
(29 |
)% |
|
|
|
|
|
|
|
|
|
|
Total cost of sales |
|
$ |
29,609 |
|
|
$ |
25,768 |
|
|
|
15 |
% |
The cost of software and other sales for 2006 was $9,605, an increase of $2,664, or 38%, from
the cost of software and other sales for 2005 of $6,941. Approximately $2,589, or 97%, of this
increase was attributable to costs that were associated with net sales recognized during 2006 which
were previously deferred based on the
38
factors described above. As a percentage of net software and other sales, the cost of software
and other for 2006 was 24%, compared to 12% for 2005, as a result of the significant decrease in
mix of software-only sales, such as the two significant customer sales in the twelve months ended
December 31, 2005.
The cost of services and maintenance sales for 2006 was $14,472, an increase of $3,385, or
31%, from the cost of services and maintenance sales for 2005 of $11,087. This increase was
primarily the result of the inclusion of costs associated with Cedara’s OEM and end-user customer
professional services, custom engineering and maintenance and support departments for twelve months
in 2006 compared to seven months in 2005. As a percentage of net services and maintenance sales,
the cost of services and maintenance for 2006 was 43%, compared to 49% for 2005. The costs to
provide all services to our customers are recognized as a period cost. The relatively low cost of
services and maintenance as a percentage of net services and maintenance sales for the twelve
months ended December 31, 2006 was primarily attributable to our recognition of services revenue
related to sales of certain software products upon ultimate delivery of specified software product
functionality under certain customer contracts entered into in previous years (as described above
in the Net Sales section), while the related costs, treated as a period expense, were recognized in
prior years.
Amortization of purchased and developed software was $5,532 for 2006, a decrease of $2,208, or
29%, from amortization of $7,740 for 2005. This decrease was attributable to the impairment charge
of $3,547 for 2005 related to prior purchased technology and capitalized software development
projects (due to overlapping technologies) as compared with the impairment charge of $982 for 2006
(as we no longer anticipate future sales of such products), offset by amortization of purchased
software associated with the business combination with Cedara Software Corp. for the entire period
in 2006. As a percentage of total net sales, amortization of purchased and developed software
decreased to 7% in 2006 from 9% in 2005.
Gross Margin
Gross margin was $44,713 for 2006, a decrease of $12,057, or 21%, from $56,770 for 2005. As a
percentage of net sales, gross margin decreased to 60% of net sales for 2006 compared to 69% for
2005, due primarily to the decrease in software-only sales, which are typically contracted with our
OEM customers. Sales relating to our OEM customers are primarily sales of imaging software without
services, which generally carry higher margins than our solutions that may also include a service
or hardware component. The decrease in gross margin as a percentage of net sales for 2006 was also
offset by revenue recognized due to the factors described under Net Sales above.
Sales and Marketing
Sales and marketing expense for 2006 was $20,100, an increase of $6,454, or 47%, from $13,646
for 2005. The increase is to due to expenses incurred by Cedara’s OEM and end-user sales and
marketing groups for twelve months in 2006 compared to seven months in 2005, our new business
initiatives in Europe (which generated 2006 expenses of $1,248) and SFAS No. 123(R) stock-based
compensation expense for 2006 of $1,047. Sales and marketing expense for 2006 as a percentage of
sales increased to 27%, compared to 17% for 2005 primarily for the same reasons and as a result of
the decrease in net sales.
Product Research and Development
Product research and development expense for 2006 was $20,410, an increase of $10,496, or
106%, from $9,914 for 2005. As a percentage of net sales, research and development expense
increased from 12% for 2005 to 27% for 2006. The majority of this increase was the result of the
inclusion of expenses for Cedara’s OEM operations, which have a significant engineering department
engaged in development of innovative software technologies in our OEM business, for twelve months
in 2006 compared to seven months in 2005, a decrease in capitalized software development costs, and
SFAS No. 123(R) stock-based compensation expense for 2006 of $1,186. Capitalization of software
development costs decreased $1,364, or 38%, to $2,257 for 2006, from $3,621 for 2005, as we spent a
greater percentage of time on development of software product updates for our end-user products,
which are generally not capitalizable.
General and Administrative
General and administrative expense for 2006 was $28,752, an increase of $17,043, or 146%, from
$11,709 for 2005. The increase was primarily attributable to the inclusion of expenses associated
with Cedara’s OEM
39
and end-user operations for twelve months in 2006 compared to seven months in 2005, legal and
accounting costs related to the completion of our 2005 annual audit (including the restatement of
previously issued financial statements) and the review of our quarterly reports for the first two
quarters of 2006 as well as other litigation related matters (including certain settlements) of
$8,909 and SFAS No. 123(R) stock-based compensation expense for 2006 of $3,136. General and
administrative expense as a percentage of net sales increased to 39% for 2006, compared to 14% for
2005 primarily for the same reasons and as a result of the decrease in net sales. We expect to
incur additional expenses, including substantial fees for attorneys and other professional
advisors, in connection with the class action, derivative and other lawsuits and regulatory
matters, the completion of our audit and Annual Report on Form 10-K (originally filed in the first
quarter of 2007) and implementation of our remediation plan for internal control weaknesses
identified.
Acquired In-Process Research and Development
We incurred no acquired in-process research and development cost for 2006, compared to $13,046
for 2005. The in-process research and development costs incurred for 2005 related to the fair value
of the projects acquired in June 2005 associated with the business combination with Cedara Software
Corp.
Goodwill Impairment, Restructuring and Other Expenses
Goodwill impairment, restructuring and other expenses for 2006 were $223,505, an increase of
$222,975, from $530 for 2005. During 2006, we determined that the fair value of goodwill had been
impaired by $214,095 and the fair value of our trade names had been impaired (in the fourth quarter
of 2006) by $6,685. In addition, we recorded restructuring charges of $2,725 in 2006 as a result of
our right sizing and restructuring initiative in the fourth quarter, primarily related to severance
costs. In 2005, we recorded restructuring and other related charges of $530 related to our business
combination with Cedara Software Corp. We anticipate that we will incur additional restructuring
costs of approximately $580 in the first two quarters of 2007 due to the manner in which certain
costs associated with our right-sizing and reorganization in the fourth quarter of 2006 are
recognized under GAAP. See Note 4 of the notes to our consolidated financial statements for more
information regarding our goodwill and trade name impairments.
Depreciation and Amortization
Depreciation and amortization expense for 2006 was $4,033, an increase of $485, or 14%, from
$3,548 for 2005. This increase was primarily due to the amortization of customer contracts
associated with the Cedara transaction for twelve months in 2006 compared to seven months in 2005,
offset by a $610 impairment of certain customer relationships as the result of triggering events
that occurred in 2005. Depreciation and amortization expense as a percentage of net sales was 5% in
2006 and 4% in 2005.
Other Income, Expense
Our interest income was $2,548 in 2006, compared to $1,061 in 2005, while interest expense
increased to $67 in 2006, compared to $38 in 2005. The increase in interest income was directly
attributable to our average cash and cash equivalent balance during 2006 compared to 2005,
attributed to the fact that our cash balance increased significantly in June 2005 from cash
acquired from Cedara, as well as increased interest yield (from increased interest rates) on our
cash balance during 2006 compared to 2005. Other income, net, was $133 in 2006, compared to other
expense, net, of $287 in 2005. The change in other income, expense was primarily attributed to
unrealized foreign exchange gains on foreign currency payables in 2006 compared to losses in 2005
at Cedara, where the functional currency is the U.S. Dollar.
Income Taxes
We recorded income tax expense of $9,450 for 2006, an increase of $1,077, or 13%, from the
expense of $8,373 recorded for 2005.
Our effective tax rate for 2006 was approximately 4%. Our effective rate differed
significantly from the statutory rate primarily due to the impairment of non-tax deductible
goodwill, and the recording of a valuation allowance for deferred tax assets, which we have
concluded are not more-likely-than-not to be realized.
40
Our effective tax rate for 2005 was approximately 164%. Our effective tax rate differed
significantly from the statutory rate primarily due to the in-process research and development cost
which is not deductible for income tax purposes and a $1,308 accrual associated with
transaction-related legal restructuring during 2005.
Our expected effective income tax rate is volatile and may move up or down with changes in,
among other items, operating income, the results of our purchase accounting, and changes in tax law
and regulation of the United States and foreign jurisdictions in which we operate.
Year Ended December 31, 2005 Compared to Year Ended December 31, 2004
The results of operations for the year ended December 31, 2005 include those of AccuImage for
the period after the acquisition date of January 28, 2005 and Cedara Software Corp. after the
business combination on June 1, 2005. The following table sets forth selected, unaudited
consolidated financial data for the periods indicated, expressed as a percentage of net sales.
| |
|
|
|
|
|
|
|
|
| |
|
Twelve Months Ended |
| |
|
December 31, |
| |
|
2005 |
|
2004 |
| |
|
(As restated) |
Net sales |
|
|
100 |
% |
|
|
100 |
% |
Cost of sales |
|
|
31 |
|
|
|
42 |
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
|
69 |
|
|
|
58 |
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses: |
|
|
|
|
|
|
|
|
Sales and marketing |
|
|
17 |
|
|
|
27 |
|
Product research and development |
|
|
12 |
|
|
|
8 |
|
General and administrative |
|
|
14 |
|
|
|
19 |
|
Acquired in-process research and development |
|
|
16 |
|
|
|
— |
|
Goodwill impairment, restructuring and other expenses |
|
|
1 |
|
|
|
— |
|
Depreciation and amortization |
|
|
4 |
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses |
|
|
64 |
|
|
|
59 |
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
5 |
|
|
|
(1 |
) |
Total other income, net |
|
|
1 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
6 |
|
|
|
1 |
|
Income tax expense (benefit) |
|
|
10 |
|
|
|
(6 |
) |
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
|
(4 |
)% |
|
|
7 |
% |
|
|
|
|
|
|
|
|
|
Net Sales
The following table sets forth net sales component data for the twelve months ended
December 31, 2005 and December 31, 2004:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, |
|
|
| |
|
2005 |
|
2004 |
|
% Change |
| |
|
(As restated) |
|
|
|
|
Software and other |
|
$ |
60,019 |
|
|
$ |
16,952 |
|
|
|
254 |
% |
As a percentage of total net sales |
|
|
73 |
% |
|
|
67 |
% |
|
|
|
|
Services and maintenance |
|
$ |
22,519 |
|
|
$ |
8,525 |
|
|
|
164 |
% |
As a percentage of total net sales |
|
|
27 |
% |
|
|
33 |
% |
|
|
|
|
Total net sales |
|
$ |
82,538 |
|
|
$ |
25,477 |
|
|
|
224 |
% |
41
Software and other sales for 2005 were $60,019, an increase of $43,067, or 254%, from net
software and other sales of $16,952 for 2004. This increase was primarily attributable to revenue
recognized as a result of the inclusion of sales to Cedara OEM and end-user customers after the
date of the business combination with Cedara Software Corp. and by the factors below, which
primarily resulted in a greater amount of net sales deferred in 2004 compared to 2005.
Sales from services and maintenance for 2005 were $22,519, an increase of $13,994, or 164%,
from 2004 net sales of $8,525. This increase in sales from services and maintenance was primarily
attributable to services performed in connection with Cedara’s OEM and end-user customers, while
the rest of the increase was primarily attributable to the increase in sales made directly to
healthcare facilities and imaging centers, where such sales are accompanied by installation
services and service contracts.
Of our net sales in 2005, approximately 16% and 10%, respectively, were attributable to two
customers, Toshiba Medical Systems Corporation and Hitachi Medical Corporation.
The following factors also affected our net sales for 2005 and 2004:
| |
• |
|
We deferred approximately $1,800 and $10,700 for 2005 and 2004, respectively, due to
current year and prior years’ contracts, for which the software product sold did not meet
functionality we believe was expected by the customer and as to which revenue was
therefore deferred into future periods. |
| |
| |
• |
|
Net sales for 2005 were reduced by approximately $1,000 related to customer contracts
where collectibility was not reasonably assured at time of delivery of the software. |
| |
| |
• |
|
Net sales for 2005 were reduced by approximately $300 due to contracts in which we did
not deliver all contracted software products. |
| |
| |
• |
|
Net sales were reduced by approximately $900 for 2005 due to contracts for which we did
not have vendor specific objective evidence of fair value of maintenance. |
Cost of Sales
The following table sets forth cost of sales data:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, |
|
|
|
|
| |
|
2005 |
|
|
2004 |
|
|
% Change |
|
| |
|
(As restated) |
|
|
|
|
|
Software and other |
|
$ |
6,941 |
|
|
$ |
2,239 |
|
|
|
210 |
% |
Services and maintenance |
|
|
11,087 |
|
|
|
6,050 |
|
|
|
83 |
% |
Amortization |
|
|
7,740 |
|
|
|
2,492 |
|
|
|
211 |
% |
|
|
|
|
|
|
|
|
|
|
Total cost of sales |
|
$ |
25,768 |
|
|
$ |
10,781 |
|
|
|
139 |
% |
The cost of software and other for 2005 was $6,941, an increase of $4,702, or 210%, from the
cost of software and other for 2004 of $2,239. Approximately $3,100 or 66%, of this increase was
attributable to costs incurred as a result of the inclusion of sales to Cedara OEM and end-user
customers since the date of the business combination with Cedara Software Corp. As a percentage of
net software and other sales, the cost of software and other for 2005 was 12%, compared to 13% for
2004.
The cost of services and maintenance for 2005 was $11,087, an increase of $5,037, or 83%, from
the cost of services and maintenance for 2004 of $6,050. Approximately $4,228, or 84% of this
increase was the result of the inclusion of costs associated with Cedara’s OEM and end-user
professional services, custom engineering and maintenance and support departments. As a percentage
of net services and maintenance sales, the cost of services and maintenance for 2005 was 49%,
compared to 71% for 2004. The costs to provide all services to our customers are recognized as a
period cost. The unusually high percentage of net sales for 2004 was attributed to our deferral of
service revenue related to sales of certain software products until ultimate delivery of certain
software products functionality under certain customer contracts entered into in the current and
previous years
42
(as described above, under Net Sales), while the related costs, treated as a period expense,
were recognized in the year incurred.
Amortization of purchased and developed software was $7,740 for 2005, an increase of $5,248,
or 211%, from amortization of $2,492 for 2004. This increase was attributable to the impairment of
certain of our capitalized software projects of approximately $3,547, attributed to overlapping
technologies due to the Cedara Software Corp. transaction, as well as the amortization of seven
months of acquired technology associated with the Cedara Software Corp. transaction. As a
percentage of total net sales, amortization of purchased and developed software for 2005 was 9%,
compared to 10% in 2004.
Gross Margin
Gross margin was $56,770 for 2005, an increase of $42,074, or 286%, from $14,696 for 2004. As
a percentage of net sales, gross margin increased to 69% for 2005 compared to 58% for 2004. The
increase in gross margin as a percentage of net sales was primarily due to the greater percentage
of software-only sales in 2005 as a result of the inclusion of Cedara Software Corp.’s OEM and
end-user customer sales. Sales relating to our OEM customers are primarily sales of imaging
software without services, which generally carry higher margins than our solutions that may also
include a service or hardware component. The relatively low percentage for 2004 was primarily
attributed to our deferral of service net sales, in addition to the software and other net sales,
to sales of certain software products until ultimate delivery of certain software product
functionality on certain customer contracts entered into in the current and previous years (as
described under Net Sales), sales in which we did not ship all software products, and sales where
collectibility was not reasonably assured, while the related costs, treated as a period expense
were recognized in the year incurred.
Sales and Marketing
Sales and marketing expense for 2005 was $13,646, an increase of $6,640, or 95%, from $7,006
for 2004, as a result of expenses incurred by the historic Cedara Software Corp. business for seven
months in 2005. Sales and marketing expense for 2005 as a percentage of sales decreased to 17%
compared to 27% for 2004. The relatively high percentage for 2004 was primarily a result of the
deferral of net sales based on the factors discussed in Net Sales.
Product Research and Development
Research and development expense for 2005 was $9,914, an increase of $7,947, or 404%, from
$1,967 for 2004. As a percentage of net sales, research and development expense increased from 8%
for 2004 to 12% for 2005. The majority of these increases were the result of the inclusion of
expenses for Cedara’s OEM operations. Capitalization of software development costs increased $142,
or 4%, to $3,621 for 2005, from $3,479 for 2004.
General and Administrative
General and administrative expense for 2005 was $11,709, an increase of $6,889, or 143%, from
$4,820 for 2004. The $6,889 increase was primarily attributable to the inclusion of expenses
associated with Cedara’s OEM and direct sales operations since the acquisition of $3,825, increased
net bad debt charges during 2005 of $729 compared to $147 in 2004, and legal and accounting fees
incurred subsequent to the business combination with Cedara Software Corp. General and
administrative expense as a percentage of net sales decreased slightly to 14% for 2005, compared to
19% for 2004.
Acquired In-Process Research and Development
We estimated the fair value of the Cedara Software Corp. projects acquired in June 2005 to be
$13,046, based on the work performed by independent valuation specialists, and recorded an expense
in the consolidated statements of operations for the year ended December 31, 2005.
Goodwill impairment, Restructuring and Other Expenses
We incurred $530 of restructuring and other expenses in 2005, consisting of the lease exit
costs of approximately $175 associated with a non-cancelable building lease which we ceased using
during 2005 as we combined two of our offices located in the same geographic region, severance to
involuntarily terminated
43
employees of $263 and option acceleration expense of $92 related to such employees, based on
the intrinsic value of options at the time of termination. We did not incur restructuring and other
expenses in 2004.
Depreciation and Amortization
Depreciation and amortization expense for 2005 was $3,548, an increase of $2,395, or 208%,
from $1,153 for 2004. Depreciation and amortization expense as a percentage of total net sales was
4% in 2005, compared to 5% in 2004. These increases were primarily due to the $610 impairment of
certain customer relationships as the result of triggering events that occurred in 2005 and
amortization of customer contracts associated with the Cedara Software Corp. transaction.
Other Income, Expense
Our interest income was $1,061 in 2005, compared to $344 in 2004, while interest expense
increased to $38 in 2005, compared to $21 in 2004. The interest income was directly attributable to
our increased cash and cash equivalent balances, and increased interest rates on our cash balances
in 2005 compared to 2004. Other expense, net, was $287 in 2005 compared to other income, net, of
$146 in 2004. Net other expense for 2005 was primarily attributable to foreign exchange losses on
foreign currency payables at Cedara Software Corp., where the functional currency is the U.S.
Dollar. Net other income for 2004 was primarily attributable to the recovery from an insurance
claim that was filed in 2003 for business interruption. As a percentage of net sales, total net
other income decreased slightly to 1% for 2005 compared to 2% for 2004.
Income Taxes
We recorded income tax expense of $8,373 for 2005, an increase of $9,817, from the benefit of
$1,444 recorded for 2004.
Our effective tax rate for 2005 was approximately 164%. Our effective tax rate differed from
the statutory rate primarily due to the in-process research and development cost which is not
deductible for income tax purposes and a $1,308 accrual associated with transaction-related legal
restructuring during 2005. Excluding these two items, our 2005 effective tax rate would have been
approximately 49%.
Our effective tax rate for 2004 was approximately (659)%. Our effective tax rate differed from
the statutory rate primarily due to an extraterritorial income tax benefit and research and
experimentation credit.
Liquidity and Capital Resources
(in thousands)
Our cash and cash equivalents were $45,945 at December 31, 2006, a decrease of $18,333, or
29%, from our balance of $64,278 at December 31, 2005. In addition, our working capital, defined as
the amount by which our current assets exceed our current liabilities, was $27,101 at December 31,
2006, a decrease of $29,863, or 52%, from our working capital of $56,964 at December 31, 2005.
Operating Cash Flows
Cash used in operating activities was $14,960 in 2006, an increase of $38,562, from cash
provided by operations of $23,602 in 2005. Our negative operating cash flow in 2006 was due to the
loss from operations, primarily attributed to our decreased net sales during the year, while our
operating expenses were not rightsized to meet such decreased net sales until the fourth quarter of
2006. In addition, we incurred substantial legal, accounting and advisor costs (as discussed below)
which we would not anticipate incurring in a normal operating environment.
In 2006, we incurred legal and accounting costs related to the completion of our 2005 annual
audit (including the restatement of previously issued financial statements) and the review of our
quarterly reports for the first two quarters of 2006 as well as other litigation matters (including
certain settlements) of $8,909. We also anticipate that we will pay approximately $1,960 of
severance related restructuring costs in the future as well as incur and pay additional
restructuring costs of $580 in the first two quarters of 2007 due to the manner in which certain
costs associated with our rightsizing and restructuring initiative announced in the fourth quarter
of 2006 are recognized under GAAP. We expect to incur additional expenses, including substantial
fees for
44
attorneys and other professional advisors, in connection with the class action, derivative and
other lawsuits and regulatory matters, the completion of our audit and Annual Report on Form 10-K
(originally filed in the first quarter of 2007) and implementation of our remediation plan for
internal control weaknesses.
Investing Cash Flows
Cash used in investing activities was $3,876 in 2006, attributable to capitalized software
development costs of $2,257, purchases of capital equipment of $1,252 and $367 related to the
purchase of technology.
Financing Cash Flows
Cash provided by financing activities was $504 in 2006. We received net proceeds of $471 from
employee and director stock option exercises and $33 from purchases of Common Stock under our
employee stock purchase plan.
Contractual Obligations
Total outstanding commitments at December 31, 2006, were as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Payment due by period |
| |
|
|
|
|
|
Less than |
|
|
|
|
|
|
|
|
|
More than |
| Contractual Obligations |
|
Total |
|
1 Year |
|
1 – 3 Years |
|
3 – 5 Years |
|
5 Years |
Operating leases |
|
$ |
6,816 |
|
|
$ |
2,110 |
|
|
$ |
3,564 |
|
|
$ |
890 |
|
|
$ |
252 |
|
The contractual obligations table above reflects amounts due under all our leases, net of
sub-lease income that is contractually owed to us of $180 in each of 2007, 2008 and 2009. 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.
Share Repurchase Program
On September 6, 2006, we announced a stock repurchase plan providing for the purchase of up to
$20,000 of our Common Stock over a two-year period. As of December 31, 2006, we had not made any
repurchases under this plan. This repurchase program replaces a previous plan that expired on
August 24, 2006, two years after its initial implementation, without any shares having been
repurchased.
General
We believe that our existing cash and cash equivalents will be sufficient to otherwise meet
our liquidity needs in 2007. However, any projections of future cash inflows and outflows are
subject to uncertainty. In particular, our uses of cash in 2007 will depend on a variety of factors
such as, the extent of losses from operations, the amount of cash that we are required to devote to
defend and address our outstanding legal and regulatory proceedings, and potential merger and
acquisition activities. We believe our current cash and investment balances, will be sufficient to
meet our operating, financing and capital requirements through at least the next 12 months. We also
believe our cash and investment balances will be sufficient on a longer term basis; however, that
will depend on numerous factors, including the uncertainty created by, the adverse impact on
relationships with customers, potential customers, suppliers and investors potentially resulting
from, and other risks associated with, the changes in our senior management; costs, risks and
effects of legal proceeding and investigations, including the informal, non-public inquiry being
conducted by the SEC and class action, derivative, and other lawsuits; costs and risks associated
with our restructuring efforts; risks in product and technology development; market acceptance of
new products and continuing product demand; the impact of competitive products and pricing; our
ability to integrate acquisitions; changing economic conditions; our credit and payment risks
associated with our end-users sales; our dependence on major customers; dependence on key
personnel, and other risk factors detailed in Item 1A, “Risk Factors.” If we need to raise
additional capital to meet our short term or long term liquidity needs, such capital 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 shareholders. In
addition, debt financing, if available, could involve restrictive covenants, which could adversely
affect operations. However, these financing alternatives, including raising additional capital, may
not be available in amounts or on terms acceptable to us.
45
Material Off Balance Sheet Arrangements
We have no material off balance sheet arrangements.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
Our cash and cash equivalents are exposed to financial market risk due to fluctuations in
interest rates, which may affect our interest income. As of December 31, 2006, our cash and cash
equivalents included money market funds and short-term deposits totaling approximately $45.9
million, and earned interest at a weighted average rate of 4.4%. The value of the principal amounts
is equal to the fair value for these instruments. Due to the short-term nature of our investment
portfolio, our interest income is vulnerable to changes in short-term interest rates. At current
investment levels, our pre-tax results of operations would vary by approximately $459 for every 100
basis point change in our weighted average short-term interest rate. We do not use our portfolio
for trading or other speculative purposes.
Foreign Currency Exchange Risk
We have sales and expenses in Canada, China and Europe that are denominated in currencies
other than the U.S. Dollar and, as a result, we have exposure to foreign currency exchange risk. We
have periodically entered into forward exchange contracts to hedge exposures denominated in foreign
currencies. We did not have any forward contracts outstanding at December 31, 2006. We do not enter
into derivative financial instruments for trading or speculative purposes. In the event our
exposure to foreign currency risk increases to levels that we do not deem acceptable, we may choose
to hedge those exposures.
46
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
Merge Technologies Incorporated:
We have audited
the accompanying consolidated balance sheets of Merge Technologies
Incorporated and subsidiaries (the Company) as of December 31, 2006 and 2005, and the related
consolidated statements of operations, shareholders’ equity, comprehensive income (loss), and cash
flows for each of the years in the three-year period ended December 31, 2006. These consolidated
financial statements are the responsibility of the Company’s management. Our responsibility is to
express an opinion on these consolidated financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion,
the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Merge Technologies Incorporated and subsidiaries as of
December 31, 2006 and 2005, and the results of their operations and their cash flows for each of
the years in the three-year period ended December 31, 2006, in conformity with U.S. generally
accepted accounting principles.
As discussed
in Notes 1 and 7 to the consolidated financial statements, effective January 1,
2006, the Company adopted the provisions of Statement of Financial Accounting Standards No. 123
(revised 2004), Share-Based Payment.
As discussed
in Note 2 to the consolidated financial statements, the Company has restated the
accompanying consolidated financial statements as of December 31, 2006 and 2005 and for each of the
years in the three-year period ended December 31, 2006.
We also have audited,
in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the effectiveness of the Company’s internal control over financial
reporting as of December 31, 2006, based on criteria established in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO),
and our report dated March 8, 2007 expressed an unqualified opinion on management’s assessment of,
and an adverse opinion on the effective operation of, internal control over financial reporting.
/s/ KPMG LLP
Chicago, Illinois
March 8, 2007, except as to Note 2,
which is as of December 27, 2007
47
MERGE TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except for share data)
(As restated)
| |
|
|
|
|
|
|
|
|
| |
|
December 31, |
|
|
December 31, |
|
| |
|
2006 |
|
|
2005 |
|
ASSETS |
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
45,945 |
|
|
$ |
64,278 |
|
Accounts receivable, net of allowance
for doubtful accounts and sales
returns of $2,553 and $2,222 at
December 31, 2006 and December 31,
2005, respectively |
|
|
16,427 |
|
|
|
23,294 |
|
Inventory |
|
|
2,164 |
|
|
|
2,440 |
|
Prepaid expenses |
|
|
1,660 |
|
|
|
2,646 |
|
Deferred income taxes |
|
|
196 |
|
|
|
11,735 |
|
Other current assets |
|
|
812 |
|
|
|
3,208 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
67,204 |
|
|
|
107,601 |
|
|
|
|
|
|
|
|
Property and equipment: |
|
|
|
|
|
|
|
|
Computer equipment |
|
|
5,017 |
|
|
|
4,025 |
|
Office equipment |
|
|
1,919 |
|
|
|
1,759 |
|
Leasehold improvements |
|
|
1,460 |
|
|
|
1,372 |
|
|
|
|
|
|
|
|
|
|
|
8,396 |
|
|
|
7,156 |
|
Less accumulated depreciation |
|
|
4,456 |
|
|
|
2,716 |
|
|
|
|
|
|
|
|
Net property and equipment |
|
|
3,940 |
|
|
|
4,440 |
|
Purchased and developed software, net of
accumulated amortization of $11,235 and
$6,759 at December 31, 2006 and
December 31, 2005, respectively |
|
|
16,628 |
|
|
|
19,539 |
|
Other intangibles, net of accumulated
amortization of $3,966 and $1,687 at
December 31, 2006 and December 31, 2005,
respectively |
|
|
9,511 |
|
|
|
11,789 |
|
Goodwill |
|
|
124,231 |
|
|
|
345,121 |
|
Deferred income taxes |
|
|
4,326 |
|
|
|
3,490 |
|
Other assets |
|
|
9,035 |
|
|
|
8,065 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
234,875 |
|
|
$ |
500,045 |
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
8,284 |
|
|
$ |
5,938 |
|
Accrued wages |
|
|
6,162 |
|
|
|
5,870 |
|
Income taxes payable |
|
|
4,398 |
|
|
|
4,206 |
|
Other accrued liabilities |
|
|
2,573 |
|
|
|
3,503 |
|
Deferred revenue |
|
|
18,686 |
|
|
|
31,120 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
40,103 |
|
|
|
50,637 |
|
Deferred income taxes |
|
|
502 |
|
|
|
2,015 |
|
Deferred revenue |
|
|
3,712 |
|
|
|
4,317 |
|
Other |
|
|
633 |
|
|
|
484 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
44,950 |
|
|
|
57,453 |
|
|
|
|
|
|
|
|
Shareholders’ equity: |
|
|
|
|
|
|
|
|
Preferred stock, $0.01 par value: 2,999,997 and 3,999,997 shares
authorized at December 31, 2006 and
December 31, 2005; zero shares issued
and outstanding at December 31, 2006
and December 31, 2005 |
|
|
— |
|
|
|
— |
|
Series A Preferred Stock, $0.01 par
value: 1,000,000 shares authorized;
zero shares issued and outstanding at
December 31, 2006 and December 31,
2005 |
|
|
— |
|
|
|
— |
|
Series B Junior Participating
Preferred Stock, $0.01 par value: 1,000,000 shares authorized and zero
shares authorized at December 31, 2006
and December 31, 2005; zero shares
issued and outstanding at December 31,
2006 and December 31, 2005 |
|
|
— |
|
|
|
— |
|
Series 3 Special Voting Preferred
stock, no par value: one share
authorized; one share issued; one
share and zero shares issued and
outstanding at December 31, 2006 and
December 31, 2005 |
|
|
— |
|
|
|
— |
|
Common Stock, $0.01 par value: 100,000,000 shares authorized;
29,291,030 shares and 26,500,140
shares issued and outstanding at
December 31, 2006 and December 31,
2005, respectively |
|
|
293 |
|
|
|
265 |
|
Common Stock subscribed: 5,242 and 706
shares at December 31, 2006 and
December 31, 2005, respectively |
|
|
33 |
|
|
|
17 |
|
Additional paid-in capital |
|
|
451,130 |
|
|
|
445,954 |
|
Deferred stock compensation |
|
|
— |
|
|
|
(1,245 |
) |
Accumulated deficit |
|
|
(263,390 |
) |
|
|
(4,467 |
) |
Accumulated other comprehensive income |
|
|
1,859 |
|
|
|
2,068 |
|
|
|
|
|
|
|
|
Total shareholders’ equity |
|
|
189,925 |
|
|
|
442,592 |
|
|
|
|
|
|
|
|
Total liabilities and shareholders’ equity |
|
$ |
234,875 |
|
|
$ |
500,045 |
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
48
MERGE TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except for share and per share data)
(As restated)
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, |
|
| |
|
2006 |
|
|
2005 |
|
|
2004 |
|
Net sales: |
|
|
|
|
|
|
|
|
|
|
|
|
Software and other |
|
$ |
40,275 |
|
|
$ |
60,019 |
|
|
$ |
16,952 |
|
Services and maintenance |
|
|
34,047 |
|
|
|
22,519 |
|
|
|
8,525 |
|
|
|
|
|
|
|
|
|
|
|
Total net sales |
|
|
74,322 |
|
|
|
82,538 |
|
|
|
25,477 |
|
|
|
|
|
|
|
|
|
|
|
Cost of sales: |
|
|
|
|
|
|
|
|
|
|
|
|
Software and other |
|
|
9,605 |
|
|
|
6,941 |
|
|
|
2,239 |
|
Services and maintenance |
|
|
14,472 |
|
|
|
11,087 |
|
|
|
6,050 |
|
Amortization |
|
|
5,532 |
|
|
|
7,740 |
|
|
|
2,492 |
|
|
|
|
|
|
|
|
|
|
|
Total cost of sales |
|
|
29,609 |
|
|
|
25,768 |
|
|
|
10,781 |
|
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
|
44,713 |
|
|
|
56,770 |
|
|
|
14,696 |
|
|
|
|
|
|
|
|
|
|
|
Operating costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing |
|
|
20,100 |
|
|
|
13,646 |
|
|
|
7,006 |
|
Product research and development |
|
|
20,410 |
|
|
|
9,914 |
|
|
|
1,967 |
|
General and administrative |
|
|
28,752 |
|
|
|
11,709 |
|
|
|
4,820 |
|
Acquired in-process research and development |
|
|
— |
|
|
|
13,046 |
|
|
|
— |
|
Goodwill impairment, restructuring and other expenses |
|
|
223,505 |
|
|
|
530 |
|
|
|
— |
|
Depreciation and amortization |
|
|
4,033 |
|
|
|
3,548 |
|
|
|
1,153 |
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses |
|
|
296,800 |
|
|
|
52,393 |
|
|
|
14,946 |
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
(252,087 |
) |
|
|
4,377 |
|
|
|
(250 |
) |
|
|
|
|
|
|
|
|
|
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
(67 |
) |
|
|
(38 |
) |
|
|
(21 |
) |
Interest income |
|
|
2,548 |
|
|
|
1,061 |
|
|
|
344 |
|
Other, net |
|
|
133 |
|
|
|
(287 |
) |
|
|
146 |
|
|
|
|
|
|
|
|
|
|
|
Total other income |
|
|
2,614 |
|
|
|
736 |
|
|
|
469 |
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
(249,473 |
) |
|
|
5,113 |
|
|
|
219 |
|
Income tax expense (benefit) |
|
|
9,450 |
|
|
|
8,373 |
|
|
|
(1,444 |
) |
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(258,923 |
) |
|
$ |
(3,260 |
) |
|
$ |
1,663 |
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share—basic |
|
$ |
(7.68 |
) |
|
$ |
(0.13 |
) |
|
$ |
0.13 |
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares of Common Stock
outstanding—basic |
|
|
33,701,735 |
|
|
|
24,696,762 |
|
|
|
13,013,927 |
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share—diluted |
|
$ |
(7.68 |
) |
|
$ |
(0.13 |
) |
|
$ |
0.12 |
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares of Common Stock
outstanding—diluted |
|
|
33,701,735 |
|
|
|
24,696,762 |
|
|
|
13,827,522 |
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
49
MERGE TECHNOLOGIES INCORPORATED
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
Years Ended December 31, 2004, 2005 and 2006
(in thousands, except for share data)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Preferred Stock |
|
|
Common Stock |
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
Deferred |
|
|
|
|
|
|
Other |
|
|
Total |
|
| |
|
Shares |
|
|
Issued |
|
|
Shares |
|
|
Subscribed |
|
|
Shares |
|
|
Issued |
|
|
Paid-in |
|
|
Stock |
|
|
Accumulated |
|
|
Comprehensive |
|
|
Shareholders’ |
|
| |
|
Issued |
|
|
Amount |
|
|
Subscribed |
|
|
Amount |
|
|
Issued |
|
|
Amount |
|
|
Capital |
|
|
Compensation |
|
|
Deficit |
|
|
Income |
|
|
Equity |
|
Balance at December 31, 2003 |
|
|
2 |
|
|
$ |
— |
|
|
|
8,058 |
|
|
$ |
47 |
|
|
|
12,485,646 |
|
|
$ |
125 |
|
|
$ |
53,175 |
|
|
$ |
— |
|
|
$ |
(2,723 |
) |
|
$ |
232 |
|
|
$ |
50,856 |
|
Adjustments (see Note 2) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(147 |
) |
|
|
— |
|
|
|
(147 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2003 (as restated) |
|
|
2 |
|
|
$ |
— |
|
|
|
8,058 |
|
|
$ |
47 |
|
|
|
12,485,646 |
|
|
$ |
125 |
|
|
$ |
53,175 |
|
|
$ |
— |
|
|
$ |
(2,870 |
) |
|
$ |
232 |
|
|
$ |
50,709 |
|
Accretion of put value |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
68 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
68 |
|
Exchange of share rights into Common Stock |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
352,261 |
|
|
|
4 |
|
|
|
(4 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Stock issued under ESPP |
|
|
— |
|
|
|
— |
|
|
|
(7,241 |
) |
|
|
(33 |
) |
|
|
11,806 |
|
|
|
— |
|
|
|
101 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
68 |
|
Exercise of stock options |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
336,472 |
|
|
|
3 |
|
|
|
1,483 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,486 |
|
Retirement of preferred shares |
|
|
(2 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Tax benefit on exercise of stock options |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
595 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
595 |
|
Net income (as restated) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,663 |
|
|
|
— |
|
|
|
1,663 |
|
Other comprehensive income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
360 |
|
|
|
360 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2004 (as restated) |
|
|
— |
|
|
$ |
— |
|
|
|
817 |
|
|
$ |
14 |
|
|
|
13,186,185 |
|
|
$ |
132 |
|
|
$ |
55,418 |
|
|
$ |
— |
|
|
$ |
(1,207 |
) |
|
$ |
592 |
|
|
$ |
54,949 |
|
Cedara Exchange of share rights into
Common Stock |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
6,080,922 |
|
|
|
61 |
|
|
|
(61 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Stock issued and options granted for
acquisitions, net of costs to issue
shares |
|
|
1 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
5,581,517 |
|
|
|
56 |
|
|
|
380,794 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
380,850 |
|
Shares retired |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(90,000 |
) |
|
|
(1 |
) |
|
|
(1,603 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(1,604 |
) |
Stock issued under ESPP |
|
|
— |
|
|
|
— |
|
|
|
(111 |
) |
|
|
3 |
|
|
|
3,573 |
|
|
|
— |
|
|
|
62 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
65 |
|
Exercise of stock options |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,737,943 |
|
|
|
17 |
|
|
|
9,491 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
9,508 |
|
Share-based compensation expense |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
92 |
|
|
|
(1,245 |
) |
|
|
— |
|
|
|
— |
|
|
|
(1,153 |
) |
Legal fees S3/S8 filings |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(45 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(45 |
) |
Nasdaq fees for increased trading shares |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(5 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(5 |
) |
Tax benefit on exercise of stock options |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,811 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,811 |
|
Net loss (as restated) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(3,260 |
) |
|
|
— |
|
|
|
(3,260 |
) |
Other comprehensive income (as restated) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,476 |
|
|
|
1,476 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005 (as restated) |
|
|
1 |
|
|
$ |
— |
|
|
|
706 |
|
|
$ |
17 |
|
|
|
26,500,140 |
|
|
$ |
265 |
|
|
$ |
445,954 |
|
|
$ |
(1,245 |
) |
|
$ |
(4,467 |
) |
|
$ |
2,068 |
|
|
$ |
442,592 |
|
Cedara Exchange of share rights into
Common Stock |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2,561,085 |
|
|
|
26 |
|
|
|
(26 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Stock issued under ESPP |
|
|
— |
|
|
|
— |
|
|
|
4,536 |
|
|
|
16 |
|
|
|
706 |
|
|
|
— |
|
|
|
17 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
33 |
|
Exercise of stock options |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
229,099 |
|
|
|
2 |
|
|
|
469 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
471 |
|
Share-based compensation expense |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
5,961 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
5,961 |
|
Reduction of deferred stock compensation
for application of FAS 123R |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(1,245 |
) |
|
|
1,245 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Net loss (as restated) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(258,923 |
) |
|
|
— |
|
|
|
(258,923 |
) |
Other comprehensive income (as restated) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(209 |
) |
|
|
(209 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2006 (as restated) |
|
|
1 |
|
|
$ |
— |
|
|
|
5,242 |
|
|
$ |
33 |
|
|
|
29,291,030 |
|
|
$ |
293 |
|
|
$ |
451,130 |
|
|
$ |
— |
|
|
$ |
(263,390 |
) |
|
$ |
1,859 |
|
|
$ |
189,925 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
50
MERGE TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(As restated)
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, |
|
| |
|
2006 |
|
|
2005 |
|
|
2004 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(258,923 |
) |
|
$ |
(3,260 |
) |
|
$ |
1,663 |
|
Adjustments to reconcile net income (loss) to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
9,565 |
|
|
|
11,288 |
|
|
|
3,646 |
|
Amortization of discount on note assumed in merger |
|
|
— |
|
|
|
— |
|
|
|
12 |
|
Provision for doubtful accounts receivable and sales returns, net of recoveries |
|
|
829 |
|
|
|
978 |
|
|
|
147 |
|
Deferred income taxes |
|
|
11,160 |
|
|
|
7,661 |
|
|
|
(1,969 |
) |
In-process research and development |
|
|
— |
|
|
|
13,046 |
|
|
|
— |
|
Stock-based compensation |
|
|
5,961 |
|
|
|
979 |
|
|
|
— |
|
Goodwill and trade name impairment charge |
|
|
218,810 |
|
|
|
— |
|
|
|
— |
|
Change in assets and liabilities, excluding effects from acquisitions: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
6,038 |
|
|
|
(5,421 |
) |
|
|
(2,030 |
) |
Inventory |
|
|
276 |
|
|
|
(439 |
) |
|
|
(189 |
) |
Prepaid expenses |
|
|
986 |
|
|
|
(76 |
) |
|
|
(404 |
) |
Accounts payable |
|
|
2,370 |
|
|
|
(3,474 |
) |
|
|
711 |
|
Accrued wages |
|
|
268 |
|
|
|
765 |
|
|
|
500 |
|
Other accrued liabilities |
|
|
(780 |
) |
|
|
(19 |
) |
|
|
221 |
|
Deferred revenue |
|
|
(13,040 |
) |
|
|
6,789 |
|
|
|
14,465 |
|
Other assets |
|
|
1,328 |
|
|
|
(5,117 |
) |
|
|
(2,646 |
) |
Other |
|
|
192 |
|
|
|
(98 |
) |
|
|
(215 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities |
|
|
(14,960 |
) |
|
|
23,602 |
|
|
|
13,912 |
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash acquired in acquisitions, net of cash paid |
|
|
— |
|
|
|
9,644 |
|
|
|
— |
|
Purchases of property, equipment, and leasehold improvements |
|
|
(1,252 |
) |
|
|
(2,996 |
) |
|
|
(565 |
) |
Purchased technology |
|
|
(367 |
) |
|
|
— |
|
|
|
— |
|
Capitalized software development |
|
|
(2,257 |
) |
|
|
(3,621 |
) |
|
|
(3,479 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities |
|
|
(3,876 |
) |
|
|
3,027 |
|
|
|
(4,044 |
) |
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from exercise of stock options |
|
|
471 |
|
|
|
9,508 |
|
|
|
1,486 |
|
Proceeds from employee stock purchase plan |
|
|
33 |
|
|
|
65 |
|
|
|
68 |
|
Principal payment of notes |
|
|
— |
|
|
|
— |
|
|
|
(231 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
504 |
|
|
|
9,573 |
|
|
|
1,323 |
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash |
|
|
(1 |
) |
|
|
9 |
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash |
|
|
(18,333 |
) |
|
|
36,211 |
|
|
|
11,196 |
|
Cash and cash equivalents, beginning of period |
|
|
64,278 |
|
|
|
28,067 |
|
|
|
16,871 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period |
|
$ |
45,945 |
|
|
$ |
64,278 |
|
|
$ |
28,067 |
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosures of Cash Flow Information |
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for income taxes |
|
$ |
69 |
|
|
$ |
286 |
|
|
$ |
1,119 |
|
Equity securities received in sales transactions |
|
$ |
2,010 |
|
|
$ |
4,606 |
|
|
$ |
— |
|
Non Cash Investing and Financing Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Redemption value related to exchangeable Common Stock |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
1 |
|
Value of Common Stock and options issued for acquisitions |
|
$ |
— |
|
|
$ |
381,689 |
|
|
$ |
— |
|
See accompanying notes to consolidated financial statements.
51
MERGE TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
(As restated)
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years ended December 31, |
|
| |
|
2006 |
|
|
2005 |
|
|
2004 |
|
Net income (loss) |
|
$ |
(258,923 |
) |
|
$ |
(3,260 |
) |
|
$ |
1,663 |
|
Accumulated other comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative translation adjustment(1) |
|
|
(89 |
) |
|
|
815 |
|
|
|
215 |
|
Unrealized gain (loss) on marketable securities(2) |
|
|
(58 |
) |
|
|
79 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss) |
|
$ |
(259,070 |
) |
|
$ |
(2,366 |
) |
|
$ |
1,878 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1) |
|
Net of income tax expense (benefit) of $(60), $547, and $145 for the twelve months ended
December 31, 2006, 2005, and 2004, respectively. |
| |
| (2) |
|
Net of income tax expense (benefit) of $(2), $60, and $0 for the twelve months ended
December 31, 2006, 2005, and 2004, respectively. |
52
Merge Technologies Incorporated and Subsidiaries
Notes to Consolidated Financial Statements
(In thousands, except for share and per share data)
(1) Basis of Presentation and Significant Accounting Policies
(a) Nature of Operations
Merge Technologies Incorporated, a Wisconsin corporation, and its subsidiaries (which we
sometimes refer to collectively as “Merge Healthcare,” “we,” “us,” or “our”) are in the business of
development and delivery of medical imaging and information management software and services. We
provide innovative solutions for Original Equipment Manufacturers (“OEMs”), Value Added Resellers
(“VARs”) and the end-user healthcare markets. We custom engineer clinical and imaging applications
and development tools that are on the forefront of medicine and its use of medical imaging for OEM
customers. We develop innovative medical imaging software solutions that support end-to-end
business and clinical workflow for radiology department and specialty practices, imaging centers
and hospitals in North America and internationally. Our innovative software solutions use our
leading-edge imaging software technologies that accelerate market delivery for our OEM customers,
while our end-user solutions improve our customers’ productivity and enhance the quality of patient
care they provide.
(b) Principles of Consolidation
The consolidated financial statements include the financial statements of our wholly owned
subsidiaries. Our principal operating subsidiaries are Cedara Software and Merge eMed, Inc. All
intercompany balances and transactions have been eliminated in consolidation.
We have certain minority equity stakes in various companies accounted for as cost method
investments. The operating results of these companies are not included in our results of
operations.
(c) Reporting Periods Presented
The accompanying consolidated financial statements include the results of Cedara Software
Corp. subsequent to the date of the transaction between Merge Healthcare and Cedara Software on
June 1, 2005, and the results of AccuImage Diagnostics Corp. (“AccuImage”) subsequent to our
acquisition of AccuImage on January 28, 2005.
(d) Use of Estimates
Our consolidated financial statements are prepared in accordance with U.S generally accepted
accounting principles. These accounting principles require us to make certain estimates, judgments
and assumptions that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Estimates are used when accounting for items
and matters such as revenue recognition and allowances for uncollectible accounts receivable,
inventory obsolescence, amortization, asset valuations, impairment assessments, taxes and related
valuation allowance, income tax provisions, stock-based compensation, and contingencies. We believe
that the estimates, judgments and assumptions are reasonable, based on information available at the
time they are made. Actual results could differ from those estimates.
(e) Reclassifications
Where appropriate, certain reclassifications have been made to the prior years financial
statements to conform to the current year presentation.
(f) Segment Reporting
Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standard
(“SFAS”) No. 131, Disclosures about Segments of an Enterprise and Related Information (“SFAS
No. 131”) establishes annual and interim reporting standards for operating segments of a company.
It also requires entity-wide disclosures about the products and services an entity provides, the
material countries in which it holds assets and reports revenues, and its major customers.
In order to apply SFAS No. 131, the enterprise must first identify the chief operating
decision maker (“CODM”). The CODM is usually the highest level of management responsible for the
enterprise’s overall resource allocation. Our principal executive officer has been identified as
the CODM in assessing the
53
Merge Technologies Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In thousands, except for share and per share data)
performance and the allocation of resources within the Company. The next
step in the application of SFAS No. 131 is to identify the operating segments reported to the CODM.
The operating segments are identified
based on the way financial information is organized and reported to the CODM. The principal
executive officer relies on the information derived directly from our reporting system. The primary
financial measure used by the principal executive officer in assessing performance and allocating
resources was revenue based on consolidated financial statements; therefore, we operate as a single
segment.
(g) Functional Currency
The functional currency of our foreign subsidiaries, with the exception of our subsidiaries in
Japan, France and China, is the United States of America dollar (“U.S. Dollar”).
On June 1, 2005, we changed the functional currency of our subsidiary, eFilm Medical, Inc.
(“eFilm”), from the Canadian dollar to the U.S. Dollar. This change was due to significant changes
in the economic facts and circumstances surrounding the operational environment of this subsidiary.
As a result of this change, certain long-lived assets, which were previously translated from
Canadian dollars to U.S. Dollars at the historical exchange rate on the date the asset was
acquired, were revalued based upon the exchange rate as of June 1, 2005, leading to a currency
translation adjustment, reflected in accumulated other comprehensive income, and an increase in the
value of applicable assets of approximately $1,507.
Foreign currency denominated revenues and expenses are translated at weighted average exchange
rates throughout the year. Foreign currency denominated monetary assets and liabilities are
translated at rates prevailing at the balance sheet dates. Foreign exchange gains and losses on
transactions during the year are reflected in the consolidated statements of operations, as a
component of other income (expense), net.
(h) Fair Value of Financial Instruments
Our financial instruments include cash and cash equivalents, accounts receivable, marketable
and non-marketable securities, accounts payable and certain accrued liabilities. The carrying
amounts approximate fair value due to the short maturity of these instruments except the
non-marketable equity securities. The carrying value of long-term receivables or long-term deferred
revenues is not materially different from the fair value. The estimated fair values of the
non-marketable equity securities have been determined from information obtained from independent
valuations and management estimates.
(i) Derivative Financial Instruments
Fluctuating foreign exchange rates may negatively impact the accompanying consolidated
financial statements. Substantially all of our billings are in U.S. Dollars, however, due to our
Canadian operations, substantial salary and other expenses are payable in Canadian dollars. To
effectively manage these market risks, we may enter into foreign currency forward contracts. We do
not hold or issue derivative instruments for trading purposes. We have elected not to apply hedge
accounting under the provision of SFAS No. 133 Accounting for Derivative Instruments and Hedging
Activities and accordingly, recognize any change in fair value through current earnings. As of
December 31, 2006 and 2005, we had no derivative financial instruments outstanding.
(j) Cash and Cash Equivalents
Cash and cash equivalents consist of balances with banks and liquid short-term investments
with original maturities of ninety days or less and are carried on the balance sheet at cost plus
accrued interest.
(k) Inventory
Inventory, consisting principally of raw materials and finished goods (primarily purchased
third-party hardware), is stated at the lower of cost or market. Cost is determined using the
first-in, first-out method.
(l) Property and Equipment
Property and equipment are stated at cost.
Depreciation on property and equipment is calculated on the straight-line method over the
estimated useful lives of the assets. Useful lives of our major classes of property and equipment
are: two to three years for
54
Merge Technologies Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (contined)
(In thousands, except for share and per share data)
computer and equipment and five to seven years for office equipment.
Leasehold improvements are amortized using the straight-line method over the shorter of the
estimated life of the asset or the term of the lease.
(m) Long-Lived Assets
We account for long-lived assets in accordance with SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. Long-term assets, including property and equipment and
other intangibles, are amortized over their expected lives, which are estimated by us. We also make
estimates of the impairment of long-term assets whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable, based primarily upon whether
expected future undiscounted cash flows are sufficient to support the asset’s recovery. If the
actual useful life of a long-term asset is shorter than the useful life estimated by us, the asset
may be deemed to be impaired and, accordingly, a write-down of the value of the asset or a shorter
amortization period may be required, determined by a discounted cash flow analysis. We have
reviewed long-lived assets and certain intangible assets with estimable useful lives and determined
that their carrying values as of December 31, 2006 are recoverable in future periods.
(n) Developed Software
All research and development costs incurred prior to the point at which management believes a
project has reached technological feasibility are expensed as incurred. Software development costs
incurred subsequent to reaching technological feasibility are capitalized and reported at the lower
of unamortized cost or net realizable value in accordance with SFAS No. 86, Accounting for the
Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed. Amortization of purchased and
developed software is provided on a product-by-product basis over the expected economic life of the
related software, generally five years, using the straight-line method. This method generally
results in greater amortization than the method based on the ratio that current gross revenues for
a product bear to the total of current and anticipated future gross revenues for that product.
During 2006, 2005 and 2004, we capitalized software development costs of $2,257, $3,621 and $3,479,
respectively. Amortization expense related to developed software for 2006, 2005 and 2004, was
$2,520, $5,632 and $1,838, respectively. The 2006 amortization expense includes the impairment of
certain of our capitalized software projects of approximately $982 as we no longer anticipate
future sales of such products. The 2005 amortization expense includes the impairment of certain of
our capitalized software projects of approximately $3,547 attributed to overlapping technologies as
a result of the Cedara Software transaction.
We assess the recoverability of these costs periodically by determining whether the
unamortized capitalized costs can be recovered through future net operating cash flows through the
sale of that product.
(o) Investments
At December 31, 2006, we held certain securities in both publicly traded entities of $387 and
private companies of $7,974, which are included in other non-current assets. The investments in
publicly traded equity securities over which we do not exert significant influence are classified
as “available-for-sale” and are reported at fair value. Unrealized gains and losses are reported
within the accumulated other comprehensive income component of shareholders’ equity. The
investments in equity securities of private companies over which we do not exert significant
influence are reported at cost. The estimated fair values have been determined from information
obtained from market sources, independent valuations, and estimates by us. Any loss due to
impairment in value is recorded when such loss occurs. We have recorded a loss of $186 in other
expenses, net, in our 2006 consolidated statement of operations due to the impairment of one of our
investments.
(p) Goodwill and Other Intangible Assets
SFAS No. 142, Goodwill and Other Intangible Assets, requires that goodwill and indefinite
lived intangible assets be reviewed for impairment annually, or more frequently if impairment
indicators arise. Our policy provides that goodwill and indefinite lived intangible assets will be
reviewed for impairment as of December 31 of each year. In calculating potential impairment losses,
we evaluate the fair value of goodwill and intangible assets using either quoted market prices or,
if not available, by estimating the expected present value of their future cash flows.
Identification of, and assignment of assets and liabilities to, a reporting unit require our
judgment and estimates. In addition, future cash flows are based upon our assumptions about future
55
Merge Technologies Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In thousands, except for share and per share data)
sales activity and market acceptance of our products. If these assumptions change, we may be
required to write down the carrying value of the asset to a revised amount.
(q) Warranties
We generally provide up to twelve months of warranty on our hardware sales. We have provided
for expected hardware warranty costs based on our historical experience. Accrued warranty was $194,
$267 and $17 at December 31, 2006, 2005 and 2004, respectively.
(r) Guarantees
In accordance with FASB Interpretation (“FIN”) No. 45, Guarantor’s Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others
(“FIN No. 45”), we recognize the fair value for guarantee and indemnification arrangements issued
or modified by us, if these arrangements are within the scope of the interpretation. In addition,
we must continue to monitor the conditions that are subject to the guarantees and indemnifications,
as required under the previously existing GAAP, in order to identify if a loss has occurred. If we
determine it is probable that a loss has occurred, then any such estimable loss would be recognized
under those guarantees and indemnifications. Under our standard Software License, Services and
Maintenance Agreement, we agree to indemnify, defend and hold harmless our licensees from and
against certain losses, damages and costs arising from claims alleging the licensees’ use of our
software infringes the intellectual property rights of a third party. Historically, we have not
been required to pay material amounts in connection with claims asserted under these provisions
and, accordingly, have not recorded a liability relating to such provisions.
Under our Software License, Services and Maintenance Agreement, we also represent and warrant
to licensees that our software products operate substantially in accordance with published
specifications, and that the services we perform will be undertaken by qualified personnel in a
professional manner conforming to generally accepted industry standards and practices.
Historically, only minimal costs have been incurred relating to the satisfaction of product
warranty claims.
Other guarantees include promises to indemnify, defend and hold harmless each of our executive
officers, non-employee directors and certain key employees from and against losses, damages and
costs incurred by each such individual in administrative, legal or investigative proceedings
arising from alleged wrongdoing by the individual while acting in good faith within the scope of
his or her job duties on our behalf. Historically, minimal costs have been incurred relating to
such indemnifications and, as such, no accrual for these guarantees have been made. However, Merge
Healthcare, Richard A. Linden, our former President and Chief Executive Officer, Scott T. Veech,
our former Chief Financial Officer, and Brian E. Pedlar, our former President of Cedara Software
and Senior Vice President of Merge Healthcare, who served as co-President and co-Chief Executive
Officer from July 2, 2006 to August 18, 2006, are defendants in several lawsuits relating to our
accounting and financial disclosure. These lawsuits and other legal matters in which we have become
involved, including our receipt of a shareholder demand for derivative action, are described in
Note 10. We have accrued for indemnification costs as of December 31, 2006 for certain of these
individuals for their expenses in connection with such matters and may be required to accrue for
additional guarantee related costs in future periods.
(s) Income Taxes
As part of the process of preparing our consolidated financial statements, we are required to
estimate income taxes in each of the jurisdictions in which we operate. The provision for income
taxes is determined using the asset and liability approach for accounting for income taxes in
accordance with SFAS No. 109, Accounting for Income Taxes. A current liability is recognized for
the estimated taxes payable for the current year. Deferred tax assets and liabilities are
recognized for the estimated future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using the enacted tax rates in effect for
the year in which the timing differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of changes in tax rates or tax laws are recognized in the
provision for income taxes in the period that includes the enactment date.
56
Merge Technologies Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In thousands, except for share and per share data)
Valuation allowances are established when necessary to reduce deferred tax assets to the
amount more-likely-than-not to be realized. To the extent we establish or change the valuation
allowance in a period, the tax effect will flow through the statement of operations. However, in
the case of deferred tax assets of an acquired or merged entity with a valuation allowance recorded
for purchase accounting, any change in that asset valuation allowance will be recorded as an
adjustment to goodwill.
The determination of our provision for income taxes requires significant judgment, the use of
estimates, and the interpretation and application of complex tax laws. We are subject to income
taxes in the U.S. and numerous foreign jurisdictions. Significant judgment is required in
determining our worldwide provision for income taxes and recording the related tax assets and
liabilities. In the ordinary course of our business, there are transactions and calculations for
which the ultimate tax determination is uncertain. In spite of our belief that we
have appropriate support for all the positions taken on our tax returns, we acknowledge that
certain positions may be successfully challenged by the taxing authorities. Therefore, an accrual
for tax contingencies is provided for in accordance with the requirements of SFAS No. 5, Accounting
for Contingencies. These tax accruals are reviewed quarterly and reverse upon being sustained under
audit, the expiration of the statute of limitations, new information, or other determination by the
taxing authorities. The provision for income taxes includes the impact of changes in the tax
contingency accrual. Although we believe our recorded tax assets and liabilities are reasonable,
tax laws and regulations are subject to interpretation and inherent uncertainty; therefore, our
assessments can involve both a series of complex judgments about future events and rely on
estimates and assumptions. Although we believe these estimates and assumptions are reasonable, the
final determination could be materially different than that which is reflected in our provision for
income taxes and recorded tax assets and liabilities.
(t) Share-Based Compensation
Effective January 1, 2006, we adopted SFAS No. 123(R), Share-Based Payment (“SFAS No.
123(R)”), which is a revision of SFAS No. 123, Accounting for Stock-Based Compensation, as amended,
to replace our previous method of accounting for share-based awards under APB Opinion No. 25,
Accounting for Stock Issued to Employees, for periods beginning in 2006. In accordance with APB
Opinion No. 25, we had previously recognized no compensation expense for options that were granted
at or above fair market value on the date of grant.
We adopted SFAS No. 123(R) using the modified-prospective-transition method. Under that
transition method, compensation cost recognized in 2006 includes: (1) compensation cost for all
share-based awards granted prior to, but not yet vested as of January 1, 2006, based on the
grant-date fair value estimated in accordance with the original provisions of SFAS No. 123, and
(2) compensation cost for all share-based awards granted subsequent to January 1, 2006, based on
the grant-date fair value estimated in accordance with the provisions of SFAS No. 123(R). Under the
modified-prospective-transition method, the provisions of SFAS No. 123(R) were not applied to
periods prior to adoption, and thus, prior period financial statements were not restated to reflect
our adoption of SFAS No. 123(R). SFAS No. 123(R) requires that we report the tax benefit from the
tax deduction related to share-based compensation that is in excess of recognized compensation
costs, as a financing cash flow rather than as an operating cash flow in our consolidated
statements of cash flows. Prior to January 1, 2006, APB Opinion No. 25 required that we report the
entire tax benefit related to the exercise of stock options as an operating cash flow.
(u) Revenue Recognition
Revenues are derived primarily from the licensing of software, sales of hardware and related
ancillary products, installation and engineering services, training, consulting, and software
maintenance and support. Inherent to software revenue recognition are significant management
estimates and judgments in the interpretation and practical application of the complex rules to
individual contracts. These interpretations generally would not influence the amount of revenue
recognized, but could influence the timing of such revenues. Typically our contracts contain
multiple elements, and while the majority of our contracts contain standard terms and conditions,
there are instances where our contracts contain non-standard terms and conditions. As a result,
contract interpretation is sometimes required to determine the appropriate accounting, including
whether the deliverables specified in a multiple-element arrangement should be treated as separate
units of accounting for revenue recognition purposes in accordance with Statement of Position
(“SOP”) No. 97-2,
57
Merge Technologies Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In thousands, except for share and per share data)
Software Revenue Recognition, or Emerging Issues Task Force (“EITF”) Issue
No. 00-21, Revenue Arrangements with Multiple Deliverables, and if so, the relative fair value that
should be allocated to each of the elements and when to recognize revenue for each element.
For software arrangements, we recognize revenue in accordance with SOP No. 97-2. This
generally requires revenue recognized on software arrangements involving multiple elements,
including separate arrangements with the same customer executed within a short time frame of each
other, to be allocated to each element based on the vendor-specific objective evidence (“VSOE”) of
fair values of those elements. Revenue from multiple-element software arrangements is recognized
using the residual method, pursuant to SOP No. 98-9, Modification of SOP No. 97-2, Software Revenue
Recognition, With Respect to Certain Transactions (“SOP No. 98-9”). Under the residual method,
revenue is recognized in a multiple element arrangement when VSOE of fair value exists for all of
the undelivered elements in the arrangement, even if vendor-specific objective evidence of fair
value does not exist for one or more of the delivered elements in the arrangement,
assuming all other conditions for revenue recognition have been satisfied. For sales
transactions where the software is incidental, the only contract deliverable is custom engineering
or installation services, and hardware transactions where no software is involved, we recognize
revenue in accordance with EITF Issue No. 00-21 and Staff Accounting Bulletin (“SAB”) No. 104,
Revenue Recognition.
We allocate revenue to each undelivered element in a multiple-element arrangement based on its
respective 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 substantive renewal price of the maintenance offered to customers, which generally is stated in
the contract. The fair value of installation, engineering services, training, and consulting is
based upon the price charged when these services are sold separately. If evidence of the fair value
cannot be established for undelivered elements of a sale, the entire amount of revenue under the
arrangement is deferred until elements without VSOE of fair value have been delivered or VSOE of
fair value can be established. If evidence of fair value cannot be established for the maintenance
element of a sale, and it represents the only undelivered element, the software, hardware, or
software maintenance elements of the sale are deferred and recognized ratably over the lesser of
the related maintenance period or the economic life of the software.
Revenue from 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 probable. We assess
collectibility based on a number of factors, including past transaction history with the customer
and the credit worthiness of the customer. We must exercise our judgment when we assess the
probability of collection and the current credit worthiness of each customer. If the financial
condition of our customers were to deteriorate, it could affect the timing and the amount of
revenue we recognize on a contract. In addition, in certain transactions we may negotiate that the
customer provides common stock ownership in consideration as part of the sale. We generally do not
request collateral from customers.
Revenue from software licenses sold through annual contracts that include software maintenance
and support is deferred and recognized ratably over the contract period. Revenue from installation,
engineering services, training, and consulting services is recognized as services are performed.
Revenue from sales of Radiology Information Systems (“RIS”) and from RIS/Picture Archiving and
Communication Systems (“PACS”) solutions, and other specific arrangements where professional
services are considered essential to the functionality of the solution sold, is recognized on the
percentage-of-completion method, as prescribed by AICPA Statement of Position 81-1, Accounting for
Performance on Construction-Type and Certain Production-Type Contracts. Percentage of completion is
determined by the input method based upon the amount of labor hours expended compared to the total
labor hours expended plus the estimated amount of labor hours to complete the project. Total
estimated labor hours are based on management’s best estimate of the total amount of time it will
take to complete a project. These estimates require the use of judgment. A significant change in
one or more of these estimates could affect the profitability of one or more of our contracts. We
review our contract estimates periodically to assess revisions in contract values and estimated
labor hours and reflect changes in estimates in the period that such estimates are revised under
the cumulative catch-up method.
58
Merge Technologies Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In thousands, except for share and per share data)
Our Original Equipment Manufacturer (“OEM”) software products are typically fully functional
upon delivery and do not require significant modification or alteration. Fees for services to OEM
customers are billed separately from licenses of our software products. For sales transactions
involving only the delivery of custom engineering services, we recognize revenue under proportional
performance guidelines of SAB No. 104.
For certain contracts accounted for under SAB No. 104 and EITF No. 00-21, the arrangement
dictates that we invoice the customer for 10% of the contract value of the products delivered upon
completion of hardware installation and acceptance by the customer. As a result of this specific
performance obligation and acceptance criteria, we defer the related amount of product fair value
and recognize it upon completion of installation and acceptance.
Our policy is to allow returns when we have preauthorized the return. Based on our historical
experience of returns and customer credits, we have provided for an allowance for estimated returns
and credits.
Deferred revenue is comprised of deferrals for license fees, support and maintenance, and
other services. Long-term deferred revenue as of December 31, 2006 represents license fees, support
and maintenance, and other services to be earned or provided beginning January 1, 2008.
We record reimbursable out-of-pocket expenses in both services and maintenance net sales and
as a direct cost of services and maintenance in accordance with EITF Issue No. 01-14, Income
Statement Characterization of Reimbursements Received for “Out-of-Pocket” Expenses Incurred. In
accordance with EITF Issue No. 00-10, Accounting for Shipping and Handling Fees, the reimbursement
by customers of shipping and handling costs are recorded in software and other net sales and the
associated cost as a cost of sale.
(v) Recent Accounting Pronouncements
In June 2006, the FASB issued EITF No. 06-3, How Sales Taxes Collected from Customers and
Remitted to Governmental Authorities Should be Presented in the Income Statement (That Is, Gross
Versus Net Presentation) (“EITF No. 06-3”), which discusses taxes imposed on, and imposed
concurrent with, a specific revenue-producing transaction between a seller and its customer. It
requires entities to disclose, if significant, on an interim and annual basis for all periods
presented: (a) the accounting policy elected for these taxes; and (b) the amounts of the taxes
reflected gross (as revenue) in the income statement. EITF No. 06-3 will become effective during
the first quarter of 2007. We do not expect EITF No. 06-3 to have a material impact on our
financial condition or results of operations.
In June 2006, FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes—an Interpretation of FASB Statement No. 109 (“FIN No. 48”). FIN No. 48 is effective for the
first interim or annual reporting period for the first fiscal year beginning on or after
December 15, 2006, although earlier adoption is encouraged. FIN No. 48 applies to all tax positions
for income taxes accounted for in accordance with SFAS No. 109. We are currently evaluating the
impact of the adoption of FIN No. 48.
In September 2006, the SEC issued SAB No. 108, Considering the Effects of Prior Year
Misstatements When Quantifying Misstatements in Current Year Financial Statement (“SAB No. 108”),
which provides interpretive guidance on how registrants should quantify financial statement
misstatements. SAB No. 108 requires companies to evaluate the materiality of identified unadjusted
errors on each financial statement and related disclosures using both the rollover and the iron
curtain approach. SAB No. 108 applies to annual financial statements for fiscal years ending after
November 15, 2006. The adoption of SAB No. 108 did not have a material impact on our financial
condition or results of operations.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“SFAS No. 157”).
SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally
accepted accounting principles and expands disclosures about fair value measurements. SFAS No. 157
applies to previous accounting pronouncements that require or permit fair value measurements. SFAS
No. 157 is principally effective for fiscal years beginning after November 15, 2008. We are
currently evaluating the impact of the adoption of SFAS No. 157.
(2) Restatement of Consolidated Financial Statements
On August 13, 2007, we announced that the audited financial statements for the years ended
December 31, 2006, 2005 and 2004 and other financial information included in our Annual Report on
Form 10-K for the year
59
Merge Technologies Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In thousands, except for share and per share data)
ended December 31, 2006 should no longer be relied upon. The errors
identified in previously issued financial statements are described below.
Revenue Recognition
We have determined that our previously filed financial statements contained errors resulting
from the incorrect recognition of revenue on software license arrangements with 12 customers that
were signed between July of 2003 and June of 2004 following the acquisition of RIS Logic. As a
result, we determined that the revenue associated with these arrangements should have been
recognized ratably over the lesser of the maintenance period or the economic life of the software
following the first productive use of the software at the customer site. The original value of
these contracts, excluding the multiple years of maintenance, aggregated approximately $2,000.
Goodwill and Deferred Income Taxes
In connection with the accounting for the acquisition of Cedera in June 2005, we did not
appropriately record purchase accounting for deferred income taxes. As a result, both acquired
goodwill and net deferred tax liabilities were overstated by approximately $5,500. This was
primarily the result of the Company incorrectly including the deferred tax liabilities related to
the value assigned to the Cedara intangible assets in its analysis of “domestic” deferred taxes
rather than “foreign” deferred taxes when establishing a valuation allowance for acquired foreign
net operating loss carryforwards. As a result of the purchase accounting error, during the second
quarter of 2006, when the Company recorded an impairment charge and adjusted its recorded goodwill
to fair value, the impairment charge was overstated by approximately $5,338. This also impacted the
Company’s fourth quarter of 2006 when it was determined that a full valuation allowance was
required on its domestic tax attribute carry forwards. The adjustments to correct for these
misstatements are included in the financial statements included herein.
Other Adjustments
We
have also restated for other errors generally related to our accrual
for bonuses (decreasing the accrual by $82 as of December 31,
2006 and $0 as of December 31, 2005), accrual
for state and franchise taxes (increasing the accrual by $537 and
$368 as of December 31, 2006 and 2005, respectively), accrual for subsequent credit memos
(increasing the accrual by $735 and $195 as of December 31, 2006
and 2005, respectively), and correction of clerical
errors in accumulating and recording transactions. These adjustments included changes to the
following financial statement line items: revenue, as well as related accounts including cost of
goods sold, accounts receivable and related reserves, and deferred revenue; accrued wages; various
operating expenses; goodwill; other assets; accumulated other comprehensive income; income tax
expense; and income taxes payable.
The effects of these changes on the consolidated balance sheets, consolidated statements of
operations, and consolidated statements of cash flows are set forth below. Opening accumulated
deficit at December 31, 2003 has been restated by $(147) to reflect deferral of net sales, net of
deferred costs, and income tax adjustments. Explanations for adjustments (a) through (d) in the
following tables may be found on the last page of this Note 2. To the extent that an individual
balance sheet, statement of operations, or statement of cash flows line item classification has
been affected by more than one adjustment as described in (a) through (d), and one of such
adjustments is greater than $1,000, each adjustment is listed separately. The restatement also
affected Notes 3, 4, 5, 6, 7, 8, 14, and 15 to our Consolidated Financial Statements.
60
Merge Technologies Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In thousands, except for share and per share data)
MERGE TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, 2006 |
|
|
|
|
|
|
December 31, 2006 |
|
| |
|
(As reported) |
|
|
(Adjustments) |
|
|
(As restated) |
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
45,945 |
|
|
|
|
|
|
$ |
45,945 |
|
Accounts receivable, net |
|
|
17,210 |
|
|
|
(783 |
)(b) |
|
|
16,427 |
|
Inventory |
|
|
2,164 |
|
|
|
|
|
|
|
2,164 |
|
Prepaid expenses |
|
|
1,660 |
|
|
|
|
|
|
|
1,660 |
|
Deferred income taxes |
|
|
196 |
|
|
|
|
|
|
|
196 |
|
Other current assets |
|
|
812 |
|
|
|
|
|
|
|
812 |
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
67,987 |
|
|
|
(783 |
) |
|
|
67,204 |
|
Net property and equipment |
|
|
3,940 |
|
|
|
|
|
|
|
3,940 |
|
Purchased and developed software, net |
|
|
16,628 |
|
|
|
|
|
|
|
16,628 |
|
Acquired intangibles, net |
|
|
9,511 |
|
|
|
|
|
|
|
9,511 |
|
Goodwill |
|
|
124,407 |
|
|
|
(176 |
)(b,d) |
|
|
124,231 |
|
Other assets |
|
|
8,887 |
|
|
|
148 |
(b) |
|
|
9,035 |
|
Deferred income taxes |
|
|
3,303 |
|
|
|
673 |
(d) |
|
|
|
|
|
|
|
|
|
|
|
350 |
(c) |
|
|
4,326 |
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
234,663 |
|
|
$ |
212 |
|
|
$ |
234,875 |
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
8,284 |
|
|
|
|
|
|
$ |
8,284 |
|
Accrued wages |
|
|
6,244 |
|
|
|
(82 |
)(b) |
|
|
6,162 |
|
Other accrued liabilities |
|
|
2,381 |
|
|
|
192 |
(b) |
|
|
2,573 |
|
Deferred revenue |
|
|
18,175 |
|
|
|
511 |
(a,b) |
|
|
18,686 |
|
Income taxes payable |
|
|
4,033 |
|
|
|
365 |
(b,c) |
|
|
4,398 |
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
39,117 |
|
|
|
986 |
|
|
|
40,103 |
|
Deferred income taxes |
|
|
|
|
|
|
502 |
(d) |
|
|
502 |
|
Deferred revenue |
|
|
3,218 |
|
|
|
494 |
(a) |
|
|
3,712 |
|
Other |
|
|
633 |
|
|
|
|
|
|
|
633 |
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
42,968 |
|
|
|
1,982 |
|
|
|
44,950 |
|
Total shareholders’ equity |
|
|
191,695 |
|
|
|
(1,770 |
) |
|
|
189,925 |
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders’ equity |
|
$ |
234,663 |
|
|
$ |
212 |
|
|
$ |
234,875 |
|
|
|
|
|
|
|
|
|
|
|
61
Merge Technologies Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In thousands, except for share and per share data)
MERGE TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, 2005 |
|
|
|
|
|
|
December 31, 2005 |
|
| |
|
(As reported) |
|
|
(Adjustments) |
|
|
(As restated) |
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
64,278 |
|
|
|
|
|
|
$ |
64,278 |
|
Accounts receivable, net |
|
|
23,624 |
|
|
|
(330 |
)(b) |
|
|
23,294 |
|
Inventory |
|
|
2,440 |
|
|
|
|
|
|
|
2,440 |
|
Prepaid expenses |
|
|
2,646 |
|
|
|
|
|
|
|
2,646 |
|
Deferred income taxes |
|
|
11,213 |
|
|
|
522 |
(b,c) |
|
|
11,735 |
|
Other current assets |
|
|
3,208 |
|
|
|
|
|
|
|
3,208 |
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
107,409 |
|
|
|
192 |
|
|
|
107,601 |
|
Net property and equipment |
|
|
4,440 |
|
|
|
|
|
|
|
4,440 |
|
Purchased and developed software, net |
|
|
19,539 |
|
|
|
|
|
|
|
19,539 |
|
Acquired intangibles, net |
|
|
11,789 |
|
|
|
|
|
|
|
11,789 |
|
Goodwill |
|
|
350,634 |
|
|
|
(176 |
)(b) |
|
|
|
|
|
|
|
|
|
|
|
(5,337 |
)(d) |
|
|
345,121 |
|
Other assets |
|
|
7,862 |
|
|
|
203 |
(b) |
|
|
8,065 |
|
Deferred income taxes |
|
|
|
|
|
|
3,460 |
(d) |
|
|
|
|
|
|
|
|
|
|
|
30 |
(b) |
|
|
3,490 |
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
501,673 |
|
|
$ |
(1,628 |
) |
|
$ |
500,045 |
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
5,938 |
|
|
|
|
|
|
$ |
5,938 |
|
Accrued wages |
|
|
5,870 |
|
|
|
|
|
|
|
5,870 |
|
Other accrued liabilities |
|
|
3,453 |
|
|
|
50 |
(b) |
|
|
3,503 |
|
Deferred revenue |
|
|
30,918 |
|
|
|
202 |
(a) |
|
|
31,120 |
|
Income taxes payable |
|
|
3,894 |
|
|
|
312 |
(b,c) |
|
|
4,206 |
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
50,073 |
|
|
|
564 |
|
|
|
50,637 |
|
Deferred income taxes |
|
|
3,491 |
|
|
|
(1,476 |
)(d) |
|
|
2,015 |
|
Deferred revenue |
|
|
3,784 |
|
|
|
533 |
(a) |
|
|
4,317 |
|
Other |
|
|
484 |
|
|
|
|
|
|
|
484 |
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
57,832 |
|
|
|
(379 |
) |
|
|
57,453 |
|
Total shareholders’ equity |
|
|
443,841 |
|
|
|
(1,249 |
) |
|
|
442,592 |
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders’ equity |
|
$ |
501,673 |
|
|
$ |
(1,628 |
) |
|
$ |
500,045 |
|
|
|
|
|
|
|
|
|
|
|
62
Merge Technologies Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In thousands, except for share and per share data)
MERGE TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended |
|
|
|
|
|
|
Year Ended |
|
| |
|
December 31, 2006 |
|
|
|
|
|
|
December 31, 2006 |
|
| |
|
(As reported) |
|
|
(Adjustments) |
|
|
(As restated) |
|
Net sales: |
|
|
|
|
|
|
|
|
|
|
|
|
Software and other |
|
$ |
40,635 |
|
|
$ |
(360 |
)(a,b) |
|
$ |
40,275 |
|
Services and maintenance |
|
|
34,407 |
|
|
|
(360 |
)(a,b) |
|
|
34,047 |
|
|
|
|
|
|
|
|
|
|
|
Total net sales |
|
|
75,042 |
|
|
|
(720 |
) |
|
|
74,322 |
|
Cost of sales: |
|
|
|
|
|
|
|
|
|
|
|
|
Software and other |
|
|
9,611 |
|
|
|
(6 |
)(a,b) |
|
|
9,605 |
|
Services and maintenance |
|
|
14,464 |
|
|
|
8 |
(a) |
|
|
14,472 |
|
Amortization |
|
|
5,532 |
|
|
|
|
|
|
|
5,532 |
|
|
|
|
|
|
|
|
|
|
|
Total cost of sales |
|
|
29,607 |
|
|
|
2 |
|
|
|
29,609 |
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
45,435 |
|
|
|
(722 |
) |
|
|
44,713 |
|
Operating costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing |
|
|
20,132 |
|
|
|
(32 |
)(b) |
|
|
20,100 |
|
Product research and development |
|
|
20,440 |
|
|
|
(30 |
)(b) |
|
|
20,410 |
|
General and administrative |
|
|
28,629 |
|
|
|
123 |
(b) |
|
|
28,752 |
|
Goodwill impairment, restructuring
and other expenses |
|
|
230,813 |
|
|
|
(7,308 |
)(d) |
|
|
223,505 |
|
Depreciation and amortization |
|
|
4,033 |
|
|
|
|
|
|
|
4,033 |
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses |
|
|
304,047 |
|
|
|
(7,247 |
) |
|
|
296,800 |
|
|
|
|
|
|
|
|
|
|
|
Operating loss |
|
|
(258,612 |
) |
|
|
6,525 |
|
|
|
(252,087 |
) |
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
(67 |
) |
|
|
|
|
|
|
(67 |
) |
Interest income |
|
|
2,548 |
|
|
|
|
|
|
|
2,548 |
|
Other, net |
|
|
133 |
|
|
|
|
|
|
|
133 |
|
|
|
|
|
|
|
|
|
|
|
Total other income |
|
|
2,614 |
|
|
|
|
|
|
|
2,614 |
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes |
|
|
(255,998 |
) |
|
|
6,525 |
|
|
|
(249,473 |
) |
Income tax expense (benefit) |
|
|
2,460 |
|
|
|
6,990 |
(b,c,d) |
|
|
9,450 |
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(258,458 |
) |
|
$ |
(465 |
) |
|
$ |
(258,923 |
) |
|
|
|
|
|
|
|
|
|
|
| |
Net loss per share — basic |
|
$ |
(7.67 |
) |
|
$ |
(0.01 |
) |
|
$ |
(7.68 |
) |
|
|
|
|
|
|
|
|
|
|
Weighted average number of common
shares outstanding — basic |
|
|
33,701,735 |
|
|
|
|
|
|
|
33,701,735 |
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net loss per share — diluted |
|
$ |
(7.67 |
) |
|
$ |
(0.01 |
) |
|
$ |
(7.68 |
) |
|
|
|
|
|
|
|
|
|
|
Weighted average number of common
shares outstanding — diluted |
|
|
33,701,735 |
|
|
|
|
|
|
|
33,701,735 |
|
|
|
|
|
|
|
|
|
|
|
|
63
Merge Technologies Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In thousands, except for share and per share data)
MERGE TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (Continued)
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended |
|
|
|
|
|
|
Year Ended |
|
| |
|
December 31, 2005 |
|
|
|
|
|
|
December 31, 2005 |
|
| |
|
(As reported) |
|
|
(Adjustments) |
|
|
(As restated) |
|
Net sales: |
|
|
|
|
|
|
|
|
|
|
|
|
Software and other |
|
$ |
60,120 |
|
|
$ |
(101 |
)(a,b) |
|
$ |
60,019 |
|
Services and maintenance |
|
|
22,481 |
|
|
|
38 |
(a,b) |
|
|
22,519 |
|
|
|
|
|
|
|
|
|
|
|
Total net sales |
|
|
82,601 |
|
|
|
(63 |
) |
|
|
82,538 |
|
Cost of sales: |
|
|
|
|
|
|
|
|
|
|
|
|
Software and other |
|
|
6,921 |
|
|
|
20 |
(a) |
|
|
6,941 |
|
Services and maintenance |
|
|
11,105 |
|
|
|
(18 |
)(a) |
|
|
11,087 |
|
Amortization |
|
|
7,740 |
|
|
|
|
|
|
|
7,740 |
|
|
|
|
|
|
|
|
|
|
|
Total cost of sales |
|
|
25,766 |
|
|
|
2 |
|
|
|
25,768 |
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
56,835 |
|
|
|
(65 |
) |
|
|
56,770 |
|
Operating costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing |
|
|
13,646 |
|
|
|
|
|
|
|
13,646 |
|
Product research and development |
|
|
9,914 |
|
|
|
|
|
|
|
9,914 |
|
General and administrative |
|
|
11,624 |
|
|
|
85 |
(b) |
|
|
11,709 |
|
Acquired in process R&D |
|
|
13,046 |
|
|
|
|
|
|
|
13,046 |
|
Goodwill impairment, restructuring
and other expenses |
|
|
530 |
|
|
|
|
|
|
|
530 |
|
Depreciation and amortization |
|
|
3,548 |
|
|
|
|
|
|
|
3,548 |
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses |
|
|
52,308 |
|
|
|
85 |
|
|
|
52,393 |
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
4,527 |
|
|
|
(150 |
) |
|
|
4,377 |
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
(38 |
) |
|
|
|
|
|
|
(38 |
) |
Interest income |
|
|
1,061 |
|
|
|
|
|
|
|
1,061 |
|
Other, net |
|
|
(317 |
) |
|
|
30 |
(b) |
|
|
(287 |
) |
|
|
|
|
|
|
|
|
|
|
Total other income |
|
|
706 |
|
|
|
30 |
|
|
|
736 |
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
5,233 |
|
|
|
(120 |
) |
|
|
5,113 |
|
Income tax expense (benefit) |
|
|
7,890 |
|
|
|
483 |
(b,c,d) |
|
|
8,373 |
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(2,657 |
) |
|
$ |
(603 |
) |
|
$ |
(3,260 |
) |
|
|
|
|
|
|
|
|
|
|
| |
Net loss per share — basic |
|
$ |
(0.11 |
) |
|
$ |
(0.02 |
) |
|
$ |
(0.13 |
) |
|
|
|
|
|
|
|
|
|
|
Weighted average number of common
shares outstanding — basic |
|
|
24,696,762 |
|
|
|
|
|
|
|
24,696,762 |
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net loss per share — diluted |
|
$ |
(0.11 |
) |
|
$ |
(0.02 |
) |
|
$ |
(0.13 |
) |
|
|
|
|
|
|
|
|
|
|
Weighted average number of common
shares outstanding — diluted |
|
|
24,696,762 |
|
|
|
|
|
|
|
24,696,762 |
|
|
|
|
|
|
|
|
|
|
|
|
64
Merge Technologies Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In thousands, except for share and per share data)
MERGE TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (Continued)
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended |
|
|
|
|
|
|
Year Ended |
|
| |
|
December 31, 2004 |
|
|
|
|
|
|
December 31, 2004 |
|
| |
|
(As reported) |
|
|
(Adjustments) |
|
|
(As restated) |
|
Net sales: |
|
|
|
|
|
|
|
|
|
|
|
|
Software and other |
|
$ |
17,444 |
|
|
$ |
(492 |
)(a) |
|
$ |
16,952 |
|
Services and maintenance |
|
|
8,903 |
|
|
|
(378 |
)(a) |
|
|
8,525 |
|
|
|
|
|
|
|
|
|
|
|
Total net sales |
|
|
26,347 |
|
|
|
(870 |
) |
|
|
25,477 |
|
Cost of sales: |
|
|
|
|
|
|
|
|
|
|
|
|
Software and other |
|
|
2,302 |
|
|
|
(63 |
)(a) |
|
|
2,239 |
|
Services and maintenance |
|
|
6,108 |
|
|
|
(58 |
)(a) |
|
|
6,050 |
|
Amortization |
|
|
2,492 |
|
|
|
|
|
|
|
2,492 |
|
|
|
|
|
|
|
|
|
|
|
Total cost of sales |
|
|
10,902 |
|
|
|
(121 |
) |
|
|
10,781 |
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
15,445 |
|
|
|
(749 |
) |
|
|
14,696 |
|
Operating costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing |
|
|
7,006 |
|
|
|
|
|
|
|
7,006 |
|
Product research and development |
|
|
1,967 |
|
|
|
|
|
|
|
1,967 |
|
General and administrative |
|
|
4,820 |
|
|
|
|
|
|
|
4,820 |
|
Depreciation and amortization |
|
|
1,153 |
|
|
|
|
|
|
|
1,153 |
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses |
|
|
14,946 |
|
|
|
|
|
|
|
14,946 |
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
499 |
|
|
|
(749 |
) |
|
|
(250 |
) |
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
(21 |
) |
|
|
|
|
|
|
(21 |
) |
Interest income |
|
|
344 |
|
|
|
|
|
|
|
344 |
|
Other, net |
|
|
146 |
|
|
|
|
|
|
|
146 |
|
|
|
|
|
|
|
|
|
|
|
Total other income |
|
|
469 |
|
|
|
|
|
|
|
469 |
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
968 |
|
|
|
(749 |
) |
|
|
219 |
|
Income tax expense (benefit) |
|
|
(1,222 |
) |
|
|
(222 |
)(b,c) |
|
|
(1,444 |
) |
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
2,190 |
|
|
$ |
(527 |
) |
|
$ |
1,663 |
|
|
|
|
|
|
|
|
|
|
|
| |
Net income per share — basic |
|
$ |
0.17 |
|
|
$ |
(0.04 |
) |
|
$ |
0.13 |
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common
Shares outstanding — basic |
|
|
13,013,927 |
|
|
|
|
|
|
|
13,013,927 |
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net income per share — diluted |
|
$ |
0.16 |
|
|
$ |
(0.04 |
) |
|
$ |
0.12 |
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common
shares outstanding — diluted |
|
|
13,827,522 |
|
|
|
|
|
|
|
13,827,522 |
|
|
|
|
|
|
|
|
|
|
|
|
65
Merge Technologies Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In thousands, except for share and per share data)
MERGE TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended |
|
|
|
|
|
|
Year Ended |
|
| |
|
December 31, 2006 |
|
|
|
|
|
|
December 31, 2006 |
|
| |
|
(As reported) |
|
|
(Adjustments) |
|
|
(As restated) |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(258,458 |
) |
|
$ |
(465 |
) |
|
$ |
(258,923 |
) |
Adjustments to reconcile net loss to net cash used in
operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
9,565 |
|
|
|
|
|
|
|
9,565 |
|
Provision for doubtful accounts receivable and sales
returns, net of recoveries |
|
|
289 |
|
|
|
540 |
(b) |
|
|
829 |
|
Deferred income taxes |
|
|
4,223 |
|
|
|
6,937 |
(c,d) |
|
|
11,160 |
|
Stock compensation expenses |
|
|
5,961 |
|
|
|
|
|
|
|
5,961 |
|
Goodwill and trade name impairment charge |
|
|
226,118 |
|
|
|
(7,308 |
)(d) |
|
|
218,810 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
6,125 |
|
|
|
(87 |
)(b) |
|
|
6,038 |
|
Inventory |
|
|
276 |
|
|
|
|
|
|
|
276 |
|
Prepaid expenses |
|
|
986 |
|
|
|
|
|
|
|
986 |
|
Accounts payable |
|
|
2,370 |
|
|
|
|
|
|
|
2,370 |
|
Accrued wages |
|
|
350 |
|
|
|
(82 |
)(b) |
|
|
268 |
|
Other accrued liabilities |
|
|
(923 |
) |
|
|
143 |
(b) |
|
|
(780 |
) |
Deferred revenue |
|
|
(13,309 |
) |
|
|
269 |
(a,b) |
|
|
(13,040 |
) |
Other assets |
|
|
1,328 |
|
|
|
|
|
|
|
1,328 |
|
Other |
|
|
139 |
|
|
|
53 |
(b,c) |
|
|
192 |
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities |
|
|
(14,960 |
) |
|
|
|
|
|
|
(14,960 |
) |
Net cash used in investing activities |
|
|
(3,876 |
) |
|
|
|
|
|
|
(3,876 |
) |
Net cash provided by financing activities |
|
|
504 |
|
|
|
|
|
|
|
504 |
|
Effect of exchange rates on cash and cash equivalents |
|
|
(1 |
) |
|
|
|
|
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents |
|
|
(18,333 |
) |
|
|
|
|
|
|
(18,333 |
) |
Cash and cash equivalents, beginning of period |
|
|
64,278 |
|
|
|
|
|
|
|
64,278 |
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period |
|
$ |
45,945 |
|
|
|
|
|
|
$ |
45,945 |
|
|
|
|
|
|
|
|
|
|
|
|
66
Merge Technologies Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In thousands, except for share and per share data)
MERGE TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended |
|
|
|
|
|
|
Year Ended |
|
| |
|
December 31, 2005 |
|
|
|
|
|
|
December 31, 2005 |
|
| |
|
(As reported) |
|
|
(Adjustments) |
|
|
(As restated) |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(2,657 |
) |
|
$ |
(603 |
) |
|
$ |
(3,260 |
) |
Adjustments to reconcile net loss to net cash provided
by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
11,288 |
|
|
|
|
|
|
|
11,288 |
|
Provision for doubtful accounts receivable and sales
returns, net of recoveries |
|
|
723 |
|
|
|
255 |
(b) |
|
|
978 |
|
Deferred income taxes |
|
|
7,374 |
|
|
|
287 |
(c,d) |
|
|
7,661 |
|
In-process research and development |
|
|
13,046 |
|
|
|
|
|
|
|
13,046 |
|
Stock compensation expenses |
|
|
979 |
|
|
|
|
|
|
|
979 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(5,421 |
) |
|
|
|
|
|
|
(5,421 |
) |
Inventory |
|
|
(439 |
) |
|
|
|
|
|
|
(439 |
) |
Prepaid expenses |
|
|
(76 |
) |
|
|
|
|
|
|
(76 |
) |
Accounts payable |
|
|
(3,474 |
) |
|
|
|
|
|
|
(3,474 |
) |
Accrued wages |
|
|
765 |
|
|
|
|
|
|
|
765 |
|
Other accrued liabilities |
|
|
(69 |
) |
|
|
50 |
(b) |
|
|
(19 |
) |
Deferred revenue |
|
|
6,973 |
|
|
|
(184 |
)(a) |
|
|
6,789 |
|
Other assets |
|
|
(5,117 |
) |
|
|
|
|
|
|
(5,117 |
) |
Other |
|
|
(293 |
) |
|
|
195 |
(b,c) |
|
|
(98 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
23,602 |
|
|
|
|
|
|
|
23,602 |
|
Net cash provided by investing activities |
|
|
3,027 |
|
|
|
|
|
|
|
3,027 |
|
Net cash provided by financing activities |
|
|
9,573 |
|
|
|
|
|
|
|
9,573 |
|
Effect of exchange rates on cash and cash equivalents |
|
|
9 |
|
|
|
|
|
|
|
9 |
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents |
|
|
36,211 |
|
|
|
|
|
|
|
36,211 |
|
Cash and cash equivalents, beginning of period |
|
|
28,067 |
|
|
|
|
|
|
|
28,067 |
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period |
|
$ |
64,278 |
|
|
|
|
|
|
$ |
64,278 |
|
|
|
|
|
|
|
|
|
|
|
|
67
Merge Technologies Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In thousands, except for share and per share data)
MERGE TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended |
|
|
|
|
|
|
Year Ended |
|
| |
|
December 31, 2004 |
|
|
|
|
|
|
December 31, 2004 |
|
| |
|
(As reported) |
|
|
(Adjustments) |
|
|
(As restated) |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
2,190 |
|
|
$ |
(527 |
) |
|
$ |
1,663 |
|
Adjustments to reconcile net income to net cash provided
by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
3,646 |
|
|
|
|
|
|
|
3,646 |
|
Amortization of discount on note assumed in merger |
|
|
12 |
|
|
|
|
|
|
|
12 |
|
Provision for doubtful accounts receivable and sales
returns, net of recoveries |
|
|
147 |
|
|
|
|
|
|
|
147 |
|
Deferred income taxes |
|
|
(1,631 |
) |
|
|
(338 |
)(b,c) |
|
|
(1,969 |
) |
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(2,030 |
) |
|
|
|
|
|
|
(2,030 |
) |
Inventory |
|
|
(189 |
) |
|
|
|
|
|
|
(189 |
) |
Prepaid expenses |
|
|
(404 |
) |
|
|
|
|
|
|
(404 |
) |
Accounts payable |
|
|
711 |
|
|
|
|
|
|
|
711 |
|
Accrued wages |
|
|
500 |
|
|
|
|
|
|
|
500 |
|
Other accrued liabilities |
|
|
221 |
|
|
|
|
|
|
|
221 |
|
Deferred revenue |
|
|
13,717 |
|
|
|
748 |
(a) |
|
|
14,465 |
|
Other assets |
|
|
(2,646 |
) |
|
|
|
|
|
|
(2,646 |
) |
Other |
|
|
(332 |
) |
|
|
117 |
(b,c) |
|
|
(215 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
13,912 |
|
|
|
|
|
|
|
13,912 |
|
Net cash used in investing activities |
|
|
(4,044 |
) |
|
|
|
|
|
|
(4,044 |
) |
Net cash provided by financing activities |
|
|
1,323 |
|
|
|
|
|
|
|
1,323 |
|
Effect of exchange rates on cash and cash equivalents |
|
|
5 |
|
|
|
|
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents |
|
|
11,196 |
|
|
|
|
|
|
|
11,196 |
|
Cash and cash equivalents, beginning of period |
|
|
16,871 |
|
|
|
|
|
|
|
16,871 |
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period |
|
$ |
28,067 |
|
|
|
|
|
|
$ |
28,067 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (a) |
|
Impact of deferral and recognition of net sales and related costs attributed to factors
discussed in the Revenue Recognition section of Note 2 for the period, including cumulative
effect of all periods on deferred revenue. |
| |
| (b) |
|
Impact of adjustments discussed in the Other Adjustments section of Note 2 for the current
period, primarily consisting of items previously deemed immaterial for restatement purposes.
Balance sheet impact is cumulative for all periods impacted. |
| |
| (c) |
|
Impact on income tax expense, net, of all adjustments in (a) and (b) during the period at
the effective tax rate, including cumulative effect of all periods on current and long-term
deferred income tax assets and liabilities. Also includes reclassification of the net current
and long-term deferred tax position on the balance sheet as a result of the effects of (d). |
68
Merge Technologies Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In thousands, except for share and per share data)
| (d) |
|
Impact of adjustments on deferred income taxes and goodwill related to the acquisition
accounting adjustments described in the Goodwill and Deferred Income Taxes section of Note 2,
as well as related effects on income tax expense. |
(3) Earnings Per Share
Basic earnings per share is computed by dividing income (loss) available to common
shareholders by the weighted average number of shares outstanding. Diluted earnings per share
reflects the potential dilution that could occur based on the exercise of stock options, except for
options with an exercise price of more than the average market price of our Common Stock, because
such exercise would be anti–dilutive. The following table sets forth the computation of basic and
diluted earnings per share for the years ended December 31, 2006, 2005 and 2004.
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, |
|
| |
|
2006 |
|
|
2005 |
|
|
2004 |
|
| |
|
(As restated) |
|
|
(As restated) |
|
|
(As restated) |
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
(258,923 |
) |
|
$ |
(3,260 |
) |
|
$ |
1,663 |
|
Accretion of redemption value related to
exchangeable shares |
|
|
— |
|
|
|
— |
|
|
|
(1 |
) |
Allocation of income to exchangeable shares |
|
|
— |
|
|
|
— |
|
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
Numerator for net income (loss) per
share—basic and diluted |
|
$ |
(258,923 |
) |
|
$ |
(3,260 |
) |
|
$ |
1,661 |
|
|
|
|
|
|
|
|
|
|
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number shares of Common Stock
outstanding |
|
|
33,701,735 |
|
|
|
24,696,762 |
|
|
|
13,013,927 |
|
Effect of stock options |
|
|
— |
|
|
|
— |
|
|
|
813,595 |
|
|
|
|
|
|
|
|
|
|
|
Denominator for net income (loss) per share—diluted |
|
|
33,701,735 |
|
|
|
24,696,762 |
|
|
|
13,827,522 |
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share—basic |
|
$ |
(7.68 |
) |
|
$ |
(0.13 |
) |
|
$ |
0.13 |
|
Net income (loss) per share—diluted |
|
$ |
(7.68 |
) |
|
$ |
(0.13 |
) |
|
$ |
0.12 |
|
The weighted average number of shares of Common Stock outstanding used to calculate basic net
income (loss) includes exchangeable share equivalent securities for the years ended December 31,
2006, 2005, and 2004 of 4,749,969, 6,653,815, and 167,589, respectively.
As a result of the losses during the twelve months ended December 31, 2006 and 2005,
incremental shares from the assumed conversion of employee stock options totaling 602,696 and
1,237,210, respectively, have been excluded from the calculation of diluted loss per share as their
inclusion would have been anti–dilutive.
For the years ended December 31, 2006, 2005 and 2004, options to purchase 1,218,053, 19,000
and 39,500 shares of our Common Stock, respectively, had exercise prices greater than the average
market price of the shares of Common Stock, and, therefore, are not included in the above
calculations of net income (loss) per share.
The following potentially dilutive Common Stock equivalent securities, including securities
that may be considered in the calculation of diluted earnings per share, were outstanding at
December 31, 2006, 2005 and 2004.
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2006 |
|
2005 |
|
2004 |
Stock options |
|
|
3,571,799 |
|
|
|
2,979,139 |
|
|
|
1,590,085 |
|
Exchangeable shares |
|
|
4,568,155 |
|
|
|
7,129,246 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,139,954 |
|
|
|
10,108,385 |
|
|
|
1,590,085 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
69
Merge Technologies Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In thousands, except for share and per share data)
(4) Goodwill and Other Intangibles
Our intangible assets, other than developed software, subject to amortization are summarized
as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Weighted |
|
|
|
|
|
|
|
| |
|
Average |
|
|
December 31, 2006 |
|
|
December 31, 2005 |
|
| |
|
Remaining |
|
|
Gross |
|
|
|
|
|
|
Gross |
|
|
|
|
| |
|
Amortization |
|
|
Carrying |
|
|
Accumulated |
|
|
Carrying |
|
|
Accumulated |
|
| |
|
Period (Years) |
|
|
Amount |
|
|
Amortization |
|
|
Amount |
|
|
Amortization |
|
Purchased technology |
|
|
3.7 |
|
|
$ |
16,990 |
|
|
$ |
(6,130 |
) |
|
$ |
16,633 |
|
|
$ |
(3,118 |
) |
Patents |
|
|
9.0 |
|
|
|
117 |
|
|
|
(10 |
) |
|
|
101 |
|
|
|
(1 |
) |
Customer relationships |
|
|
4.2 |
|
|
|
13,477 |
|
|
|
(3,966 |
) |
|
|
13,477 |
|
|
|
(1,688 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
3.9 |
|
|
$ |
30,584 |
|
|
$ |
(10,106 |
) |
|
$ |
30,211 |
|
|
$ |
(4,807 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchased technology amortization expense, which is being recorded ratably over the life of
the related intangible asset, was $3,012, $2,107, and $654 for the years ended 2006, 2005 and 2004,
respectively. Included in the amortization expense above for 2005 is an impairment charge for
purchased technology of $67, which is recorded in cost of goods sold. Customer relationships and
patent amortization expense, which is being recorded ratably over the life of the related
intangible asset, was $2,287, $1,411 and $195 for 2006, 2005 and 2004, respectively, including a
charge for 2005 of $610 related to customer relationships, which is recorded in depreciation and
amortization operating costs and expenses. Estimated aggregate amortization expense for the
remaining periods is as follows:
| |
|
|
|
|
For the year ended: 2007 |
|
$ |
5,156 |
|
2008 |
|
$ |
4,807 |
|
2009 |
|
$ |
4,401 |
|
2010 |
|
$ |
4,277 |
|
2011 |
|
$ |
1,782 |
|
Thereafter |
|
$ |
55 |
|
The changes in the carrying amount of goodwill for the year ended December 31, 2006, were as
follows:
| |
|
|
|
|
| |
|
(As restated) |
|
Balance as of January 1, 2006 |
|
$ |
345,121 |
|
Adjustments to goodwill(1) |
|
|
(110 |
) |
Goodwill impairment charge |
|
|
(214,095 |
) |
Trade name impairment charge |
|
|
(6,685 |
) |
|
|
|
|
Balance as of December 31, 2006 |
|
$ |
124,231 |
|
|
|
|
|
|
|
|
| (1) |
|
Comprised of $(110) of normal purchase price allocation adjustments to acquired assets and
liabilities. |
We review goodwill and indefinite lived intangible assets for impairment annually, as of
December 31 of each year. In addition, we test an intangible asset or group for impairment between
annual tests whenever events or changes in circumstances indicate that we may not be able to
recover the asset’s carrying amount. Goodwill of a reporting unit is tested for impairment between
annual tests if an event occurs or circumstances change that would more likely than not reduce the
fair value of a reporting unit below its carrying amount.
During 2006, several material events occurred that resulted in an environment of uncertainty
creating significant business challenges, and diverted the attention of our Board of Directors and
management from our business operations. These events included the resignation of certain members of our senior
management, the completion of an independent investigation conducted by the Audit Committee of our
Board of Directors during which the Audit Committee concluded that several of our previously issued
financial statements would require restatement, the possible delisting of our Common Stock from the
NASDAQ Global Market and notice of an
70
Merge Technologies Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In thousands, except for share and per share data)
informal non–public inquiry with the Securities Exchange
Commission. These events, which did not exist as of December 31, 2005, resulted in circumstances
which indicated that we may not be able to recover the intangible assets’ carrying amounts or that
the fair value of our single reporting unit does not support the carrying value of goodwill.
In accordance with SFAS No. 142, Goodwill and Other Intangible Assets, an impairment of
goodwill is deemed to exist if the carrying value of a reporting unit exceeds its estimated fair
value. We performed Step I of
the impairment test by estimating the Company’s fair value using what we considered to be the
most reliable and readily available indicator of fair value, that being the quoted market prices of
our shares of Common Stock. The results of Step I of the impairment test indicated that we had a
potential impairment of our goodwill since the carrying value of our single reporting unit exceeded
the reporting unit’s estimated fair value. On August 29, 2006, the Audit Committee of our Board of
Directors determined that there was such an impairment.
We completed Step II to measure the amount of impairment loss relating to goodwill, by
comparing the implied fair value of our reporting unit goodwill with the carrying amount of that
goodwill. The estimate of fair value of our reporting unit was reduced by the fair value of all
other assets to determine the implied fair value of reporting unit goodwill. We completed our
assessment of the fair value utilizing the assistance of independent valuation specialists. As a
result of our Step II analysis, we recorded a non–cash goodwill impairment charge for the second
quarter of 2006, of $214,095.
On December 31, 2006, we tested our indefinite lived intangible assets and concluded that
while there was no further impairment of our goodwill, the trade names associated with our Cedara
Software Corp. business transaction had been impaired. We recorded a charge within goodwill
impairment, restructuring and other expenses of our consolidated statement of operations of $6,685
due, in part, to our restructuring in the fourth quarter of 2006 in which we decided to rename the
business unit responsible for end–user sales in North America to Merge Healthcare North America
(thus discontinuing the eMed trade name). We measured this impairment charge based on the relief
from royalty approach utilizing the assistance of independent valuation specialists.
(5) Acquisitions
(a) Cedara Software
On June 1, 2005, we completed our business combination with Cedara Software, a leader in the
development of custom engineered software applications and development tools for the medical
imaging OEM and international markets. The transaction was announced on January 17, 2005 upon the
execution of a definitive agreement and closed on June 1, 2005, following approval by both Merge
Healthcare and Cedara Software shareholders and receipt of necessary regulatory approvals. The
business combination was effected through an exchange of stock, in which Cedara Software
shareholders received 0.587 shares of our Common Stock for each Cedara Software common share. Also,
Cedara Software shareholders who are Canadian residents were permitted to receive either our Common
Stock or newly created exchangeable shares of our wholly owned subsidiary, Merge Cedara ExchangeCo
Limited (“ExchangeCo Exchangeable Shares”). Canadian residents who received ExchangeCo Exchangeable
Shares in the transaction defer paying income taxes on the transaction until such time as they
exchange the shares for Common Stock or otherwise dispose of them. The ExchangeCo Exchangeable
Shares are freely tradable on the Toronto Stock Exchange (TSX) under the ticker symbol “MRG.” The
ExchangeCo Exchangeable Shares are exchangeable into shares of Merge Healthcare Common Stock on a
one–for–one basis at any time at the option of the holder (see Note 12(h) for updated status).
Holders of Cedara Software stock options exchanged each option to purchase one common share of
Cedara Software for an option to purchase 0.587 shares of Merge Healthcare Common Stock , and we
adjusted strike prices for the stock and currency conversion rates, with no changes to the vesting
terms of the option. We issued replacement options to purchase approximately 1.9 million shares of
Common Stock as a result of this exchange.
Reasons for the Transaction
The business combination with Cedara Software placed us as a market leader in the development
and delivery of medical imaging and information management software and services for the OEM market
and end–user imaging centers, and small–to medium–sized hospitals. Cedara Software had a
substantial customer base
71
Merge Technologies Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In thousands, except for share and per share data)
and had experienced continued sales growth over the few years prior to
the acquisition. As a result, we acquired the Cedara Software common shares at a premium, based on
the price of the Cedara Software common share price prior to the date of announcement.
Purchase Accounting
The transaction consideration was valued at approximately $386,899, including the exchange of
approximately 18.8 million equivalent shares at a market price of $18.97 per share, estimated fair
value for outstanding options at the date of closing and direct transaction costs incurred by us.
The fair value of stock issued was based upon the 0.587 exchange ratio and a four–day weighted average of our stock
price two days prior, the day of and one day after the announcement, based on NASDAQ closing
prices. The fair value of the outstanding options are estimated at approximately $25,211, based on
a 1.247 U.S. Dollar to Canadian dollar currency exchange ratio, the 0.587 exchange ratio and the
four–day weighted average indicated above. The total purchase price was as follows:
| |
|
|
|
|
| Form of Consideration |
|
Fair Value |
|
Stock issued |
|
$ |
356,478 |
|
Estimated fair value of options assumed |
|
|
25,211 |
|
Direct transaction costs |
|
|
5,210 |
|
|
|
|
|
Total consideration |
|
$ |
386,899 |
|
|
|
|
|
The acquisition was accounted for using the purchase method of accounting. Merge Healthcare
was considered the accounting acquirer in the business combination, requiring the purchase
consideration to be allocated to Cedara Software’s net tangible and intangible assets based on
their respective fair values as of the date of transaction close, with the residual reflected as
goodwill. We allocated the purchase price to Cedara Software’s assets and liabilities. The
allocation of the purchase consideration was based in part upon a valuation of the intangible
assets performed by independent valuation specialists, primarily through the use of discounted cash
flow techniques. The estimated purchase price allocation, based on Cedara Software’s assets and
liabilities as of June 1, 2005, was as follows:
| |
|
|
|
|
| |
|
Fair Value |
|
| |
|
(As restated) |
|
Assets acquired |
|
$ |
52,728 |
|
Liabilities assumed |
|
|
(25,033 |
) |
Purchased and developed technologies |
|
|
13,019 |
|
Customer relationships |
|
|
12,500 |
|
In–process research and development |
|
|
13,046 |
|
Deferred stock compensation |
|
|
2,132 |
|
Goodwill, including trade names |
|
|
318,507 |
|
|
|
|
|
Total consideration |
|
$ |
386,899 |
|
|
|
|
|
The amounts allocated to in–process research and development, purchased and developed software
and customer relationships were estimated based on the work performed by independent valuation
specialists. The estimated fair value of the purchased and developed software was determined by the
utilization of a combination of the excess earnings and relief from royalty approaches. The
estimated fair value of the customer relationships was determined by the utilization of the cost
savings approach. Appraisal assumptions utilized under these methods 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 17% discount rate for both purchased and developed software and customer
relationships, which was calculated using an industry beta and capital structure. These amounts are
being amortized over a six–year period. The estimated asset lives were determined based on
projected future economic benefits and expected life cycles of the technologies and customer
relationships.
The amount assigned to goodwill includes $8,545 associated with trade names and is not being
amortized, but will be tested for impairment annually or under certain circumstances that may
indicate a potential
72
Merge Technologies Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In thousands, except for share and per share data)
impairment. At December 31, 2006 we determined that an impairment existed and
as such recorded an impairment charge of $6,685 in 2006.
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. The
nature of the efforts to develop the in–process technology into the commercially viable products
are expected to principally relate to the completion of all planning, designing, prototyping,
verification and testing activities that are necessary to establish that the technology can be
produced to meet its design specification, including function, features and technical performance
requirements. At the date of the business combination, Cedara Software had in–process projects
meeting the above definition associated with the Cedara Software next generation PACS
workstation, OEM imaging platforms and image acquisition console projects.
We estimated the fair value of the Cedara Software projects to be $13,046, based on the work
performed by independent valuation specialists. Accordingly, this amount was immediately expensed
in the consolidated statement of operations upon the acquisition date. The estimated fair value of
the Cedara Software projects was determined by the utilization of the excess earnings 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 20%
discount rate, which was calculated using an industry beta and capital structure.
The $2,132 allocated to deferred stock compensation was valued based on the intrinsic value of
each outstanding and unvested stock option assumed on the closing date. The charge for stock
compensation for the twelve months ended December 31, 2005 was $887 and was classified in the
statement of operations based on each applicable employee’s position. Upon our adoption of SFAS
No. 123(R) on January 1, 2006, we reclassified the December 31, 2005 balance to additional paid–in
capital.
The $318,507 assigned to goodwill and $13,046 estimated fair value of in–process research and
development will not be deductible for federal income tax purposes.
Pro forma Results
As discussed in Note 1, the results of Cedara Software have been included in the consolidated
financial statements since June 1, 2005.
The following unaudited pro forma condensed combined results of operations for the twelve
months ended December 31, 2005 are based on the historical financial statements of Merge Healthcare
and Cedara Software giving effect to the business combination as if it had occurred at the
beginning of the periods presented. Therefore, this pro forma data has been adjusted to exclude
Cedara Software pre–acquisition intangible amortization and the in–process research and development
expense, while including amortization of intangible assets and expense of deferred stock
compensation during the entire applicable periods. This data also reflects only the historical
Merge Healthcare and Cedara Software tax expense. These data are not indicative of the results of
operations that would have arisen if the transaction had occurred at the beginning of the
respective periods. Moreover, these data are not intended to be indicative of future results of
operations.
| |
|
|
|
|
| |
|
Year Ended |
| |
|
December 31, 2005 |
Revenue |
|
$ |
107,466 |
|
Net income from continuing operations |
|
$ |
6,624 |
|
Earnings per share: |
|
|
|
|
Basic |
|
$ |
0.15 |
|
Diluted |
|
$ |
0.15 |
|
(b) AccuImage
On January 28, 2005, we acquired all of the outstanding capital stock of AccuImage in an all
cash transaction. The total purchase price for the acquisition was $6,978. AccuImage was in the
business of the
73
Merge Technologies Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In thousands, except for share and per share data)
development, marketing and support of software for advanced visualization, analysis
and management of medical imaging data from medical imaging modalities.
We paid a significant premium above the fair value of AccuImage’s tangible net assets,
principally because we determined that AccuImage’s software development ability and advanced
visualization products would contribute to future products offered to our end–user customers.
An escrow of $1,000 of the purchase price was established as a reserve for 24 months against
any claims regarding breaches of representations and warranties, as well as adjustments to the net
asset value of the AccuImage balance sheet at the date of closing. This escrow was fully settled in
the seller’s favor on January 3, 2006.
The acquisition was accounted for using the purchase method of accounting. The accompanying
consolidated statements of operations include the results of operations for AccuImage since the
acquisition date,
January 28, 2005. The amount allocated to purchased and developed software and customer
relationships are being amortized over a five–year period. The estimated asset lives were
determined based on projected future economic benefits and expected life cycles of the technologies
and customer relationships. The amount assigned to goodwill is not being amortized, but will be
tested for impairment annually or under certain circumstances that may indicate a potential
impairment.
The following table represents the allocation of the total purchase consideration for the
purchase of AccuImage. The allocation of the purchase consideration is based in part upon an
independent valuation.
| |
|
|
|
|
| |
|
Fair Value |
|
Assets acquired |
|
$ |
584 |
|
Purchased and developed technologies |
|
|
763 |
|
Customer relationship |
|
|
80 |
|
Goodwill |
|
|
4,248 |
|
Deferred tax asset |
|
|
1,676 |
|
Liabilities assumed |
|
|
(1,385 |
) |
Debt assumed and paid |
|
|
1,012 |
|
|
|
|
|
Total consideration |
|
$ |
6,978 |
|
|
|
|
|
The $4,248 assigned to goodwill in the acquisition will not be deductible for federal income
tax purposes. We have not included pro forma results of operations for AccuImage, as the impact on
our results for 2005 and 2004 are not significant.
As a result of the Cedara Software transaction, there were overlapping technologies, which led
to the write–off of approximately $73 of purchased and developed technologies. In addition, a
trigger event, outside of our control, occurred during 2005 that resulted in the write–off of the
$80 customer relationship.
(6) Accounts Receivable
Substantially all receivables are derived from sales and related support and maintenance of
our products to healthcare providers located throughout the U.S. and in certain foreign countries
as indicated in Note 14.
Our accounts receivable balance is reported net of an allowance for doubtful accounts and
sales returns. We provide for an allowance for estimated uncollectible accounts and sales returns
based upon historical experience and management’s judgment. At the end of 2006 and 2005, the
allowance for estimated uncollectible accounts and sales returns was $2,553 and $2,222,
respectively.
74
Merge Technologies Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In thousands, except for share and per share data)
The following table shows the changes in our allowance for doubtful accounts and sales
returns.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Additions |
|
|
|
|
|
|
|
|
| |
|
Balance at |
|
|
|
|
|
|
charged to |
|
|
|
|
|
|
Balance at |
|
| |
|
beginning of |
|
|
Additions |
|
|
costs and |
|
|
|
|
|
|
end of |
|
| |
|
period |
|
|
due to |
|
|
expenses |
|
|
|
|
|
|
period |
|
| Description |
|
(As restated) |
|
|
acquisitions |
|
|
(As restated) |
|
|
Deductions |
|
|
(As restated) |
|
For
year ended December 31, 2006
|
Allowance for doubtful accounts
and sales returns |
|
$ |
2,222 |
|
|
$ |
— |
|
|
$ |
829 |
|
|
$ |
(498 |
) |
|
$ |
2,553 |
|
For year ended December 31, 2005
|
Allowance for doubtful accounts and sales returns |
|
$ |
525 |
|
|
$ |
719 |
|
|
$ |
1,267 |
|
|
$ |
(289 |
) |
|
$ |
2,222 |
|
For year ended December 31, 2004
|
Allowance for doubtful accounts and sales returns |
|
$ |
378 |
|
|
$ |
— |
|
|
$ |
158 |
|
|
$ |
(11 |
) |
|
$ |
525 |
|
(7) Share–Based Compensation
We maintain four stock–based employee compensation plans (including our employee stock
purchase plan) and one director option plan under which we grant options to acquire shares of our
Common Stock to certain employees, non–employees, non–employee directors and to existing stock
option holders in connection with the consolidation of option plans following an acquisition.
Options generally have an exercise price equal to the fair market value of our Common Stock at the
date of grant, with the exception of the options granted in 2005 to replace existing Cedara
Software Corp. options (“Replacement Options”). The Replacement Options which we granted pursuant
to the merger agreement had the same economic terms as the Cedara options which they replaced, as
adjusted for the conversion ratio and currency. The majority of these options vest over a three or
four–year period and have a contractual life of ten years.
We maintain an employee stock purchase plan that allows eligible employees to purchase shares
of our Common Stock through payroll deductions of up to 10% of eligible compensation on an
after–tax basis. The price eligible employees pay per share is at a 5% discount from the market
price at the end of each calendar quarter.
Our adoption of SFAS No. 123(R) on January 1, 2006, resulted in an increase of our loss before
income taxes and net loss for the year ended December 31, 2006, of $5,911 and $4,543, respectively.
If we had not adopted SFAS No. 123(R) but, rather, continued to account for share–based
compensation under the provisions of APB Opinion No. 25, basic net loss per share for the year
ended December 31, 2006, would have been $7.55, compared to reported basic net loss per share of
$7.68.
The following table summarizes share–based compensation expense related to share–based awards
subject to SFAS No. 123(R) recognized during the year ended December 31, 2006:
| |
|
|
|
|
| |
|
Year Ended |
|
| |
|
December 31, |
|
| |
|
2006 |
|
Share–based compensation expense included in statement of operations: |
|
|
|
|
Services and maintenance (cost of sales) |
|
$ |
542 |
|
Sales and marketing |
|
|
1,047 |
|
Product research and development |
|
|
1,186 |
|
General and administrative |
|
|
3,136 |
|
|
|
|
|
Total |
|
|
5,911 |
|
Tax benefit |
|
|
1,368 |
|
|
|
|
|
Share–based compensation expense, net of tax |
|
$ |
4,543 |
|
|
|
|
|
Decrease in basic loss per share |
|
$ |
0.13 |
|
|
|
|
|
Decrease in diluted loss per share |
|
$ |
0.13 |
|
|
|
|
|
75
Merge Technologies Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In thousands, except for share and per share data)
We attributed the difference of $50 between the $5,911 recorded as share–based compensation
expense in the statement of operations for the year ended December 31, 2006, and the $5,961 of
share–based compensation expense recorded in additional paid–in capital in the statement of
shareholders’ equity to expense incurred by product research and development personnel who worked
on capitalizable software development projects.
The table below reflects net loss and net loss per share for the year ended December 31, 2006,
compared to pro forma net income (loss) and net income (loss) per share for the years ended
December 31, 2005, and 2004, presented as if we had applied the fair value recognition provisions
of SFAS No. 123 to share–based employee compensation during the years ended December 31, 2005 and
2004:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, |
|
| |
|
2006 |
|
|
2005 |
|
|
2004 |
|
| |
|
|
|
|
|
(Pro Forma, |
|
|
(Pro Forma, |
|
| |
|
(As restated) |
|
|
as restated) |
|
|
as restated) |
|
Net income (loss)(1) |
|
$ |
(258,923 |
) |
|
$ |
(3,260 |
) |
|
$ |
1,663 |
|
Share–based employee compensation
expense included in reported net
income (loss), net of tax effect(2) |
|
|
N/A |
|
|
|
587 |
|
|
|
— |
|
Share–based employee compensation
expense determined under fair value
method for all awards, net of tax
effect(2) |
|
|
N/A |
|
|
|
(4,101 |
) |
|
|
(1,507 |
) |
|
|
|
|
|
|
|
|
|
Net income (loss), including the
effect of share–based employee
compensation expense |
|
$ |
(258,923 |
) |
|
$ |
(6,774 |
) |
|
$ |
156 |
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share—Basic: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) as reported(1) |
|
$ |
(7.68 |
) |
|
$ |
(0.13 |
) |
|
$ |
0.13 |
|
|
|
|
|
|
|
|
|
|
Net income (loss), including the
effect of share–based employee
compensation expense |
|
|
N/A |
|
|
$ |
(0.27 |
) |
|
$ |
0.01 |
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share—Diluted: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) as reported(1) |
|
$ |
(7.68 |
) |
|
$ |
(0.13 |
) |
|
$ |
0.12 |
|
|
|
|
|
|
|
|
|
|
Net income (loss), including the
effect of share–based employee
compensation expense |
|
|
N/A |
|
|
$ |
(0.27 |
) |
|
$ |
0.01 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1) |
|
Net income (loss) and net income (loss) per share prior to 2006 do not include share–based
employee compensation expense under SFAS No. 123, as we had only adopted the disclosure
provisions of SFAS No. 123. |
| |
| (2) |
|
Share–based employee compensation expense prior to 2006 was calculated in accordance with
SFAS No.123. |
We used the Black–Scholes option pricing model to estimate the fair value of stock–based
awards on the date of grant utilizing the assumptions noted in the following table. Expected
volatilities are based on the historical volatility of our stock and other factors. We use
historical data to estimate option exercises and employee terminations within the valuation model.
The expected term of options represents the period of time that options granted are expected to be
outstanding. The risk–free rate for periods during the contractual life of the option is based on
the U.S. Treasury rates in effect at the grant date.
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, |
| |
|
2006 |
|
2005 |
|
2004 |
Dividend yield |
|
|
0 |
% |
|
|
0 |
% |
|
|
0 |
% |
Expected volatility |
|
|
50% – 60 |
% |
|
|
30% – 50 |
% |
|
|
50 |
% |
Risk–free interest rate |
|
|
4.3% – 4.8 |
% |
|
|
2.8% – 4.3 |
% |
|
|
2.1% – 3.1 |
% |
Expected term (in years) |
|
|
3.5 – 4.0 |
|
|
|
0.2 – 3.5 |
|
|
|
0.0 – 4.0 |
|
Weighted–average grant date fair value |
|
$ |
3.98 |
|
|
$ |
5.34 |
|
|
$ |
5.90 |
|
The assumptions above are based on multiple factors, including the historical exercise
patterns of employees in relatively homogeneous groups with respect to exercise and post–vesting
employment termination behaviors, expected future exercise patterns for these same homogeneous
groups, and the volatility of our stock
76
Merge Technologies Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In thousands, except for share and per share data)
price. Prior to January 1, 2006, we used the actual
forfeiture method allowed under SFAS No. 123, which assumed that all options would vest and pro
forma expense was adjusted when options were forfeited prior to the vesting dates. SFAS
No. 123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in
subsequent periods if actual forfeitures differ from those estimates.
At December 31, 2006, there was $9,597 of unrecognized compensation cost related to
share–based payments. We expect this compensation cost to be recognized over a weighted–average
period of 1.8 years.
Stock option activity for the year ended December 31, 2006, was as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Weighted–Average |
|
|
| |
|
|
|
|
|
|
|
|
|
Remaining |
|
|
| |
|
Number |
|
Weighted |
|
Contractual |
|
Aggregate |
| |
|
of |
|
Average |
|
Term |
|
Intrinsic |
| |
|
Options |
|
Exercise Price |
|
(In Years) |
|
Value |
Options outstanding, December 31, 2005 |
|
|
2,979,139 |
|
|
$ |
13.24 |
|
|
|
4.7 |
|
|
$ |
35,166 |
|
Options granted |
|
|
2,193,772 |
|
|
$ |
8.50 |
|
|
|
|
|
|
|
|
|
Options exercised |
|
|
(229,099 |
) |
|
$ |
2.06 |
|
|
|
|
|
|
|
|
|
Options forfeited and expired |
|
|
(1,372,013 |
) |
|
$ |
14.71 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding, December 31, 2006 |
|
|
3,571,799 |
|
|
$ |
10.48 |
|
|
|
5.0 |
|
|
$ |
1,035 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable, December 31, 2006 |
|
|
1,382,857 |
|
|
$ |
10.60 |
|
|
|
4.8 |
|
|
$ |
697 |
|
Options exercisable, December 31, 2005 |
|
|
1,040,883 |
|
|
$ |
11.84 |
|
|
|
4.6 |
|
|
$ |
13,735 |
|
Options exercisable, December 31, 2004 |
|
|
831,416 |
|
|
$ |
6.64 |
|
|
|
3.7 |
|
|
$ |
12,980 |
|
The weighted–average remaining contractual term and aggregate intrinsic value for options
outstanding at December 31, 2004, was 4.2 years and $20,502, respectively.
Other information pertaining to option activity was as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended December 31, |
| |
|
2006 |
|
2005 |
|
2004 |
Weighted–average grant–date fair value of stock options granted |
|
$ |
3.98 |
|
|
$ |
5.34 |
|
|
$ |
5.90 |
|
Total fair value of stock options vested |
|
$ |
7,289 |
|
|
$ |
5,894 |
|
|
$ |
2,562 |
|
Total intrinsic value of stock options exercised |
|
$ |
1,446 |
|
|
$ |
24,469 |
|
|
$ |
3,940 |
|
The following table summarizes information about stock options outstanding at December 31,
2006:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Options Outstanding |
|
Options Exercisable |
| |
|
|
|
|
|
Weighted– |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
average |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
remaining |
|
Weighted– |
|
|
|
|
|
Weighted– |
| |
|
Number of |
|
contractual life |
|
average |
|
Number of |
|
average |
| Range of exercise prices |
|
shares |
|
in years |
|
exercise price |
|
shares |
|
exercise price |
$1.00 – $4.54
|
|
|
279,063 |
|
|
|
2.76 |
|
|
$ |
3.57 |
|
|
|
194,124 |
|
|
$ |
3.12 |
|
$5.18 – $7.87
|
|
|
1,024,546 |
|
|
|
5.62 |
|
|
|
6.44 |
|
|
|
209,796 |
|
|
|
6.48 |
|
$8.05 – $9.90
|
|
|
1,052,137 |
|
|
|
5.81 |
|
|
|
8.10 |
|
|
|
423,186 |
|
|
|
8.17 |
|
$12.49 – $17.84
|
|
|
1,015,635 |
|
|
|
4.32 |
|
|
|
16.47 |
|
|
|
529,604 |
|
|
|
16.49 |
|
$18.21 – $24.88
|
|
|
200,418 |
|
|
|
4.92 |
|
|
|
22.74 |
|
|
|
26,147 |
|
|
|
19.23 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,571,799 |
|
|
|
5.04 |
|
|
$ |
10.48 |
|
|
|
1,382,857 |
|
|
$ |
10.60 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
77
Merge Technologies Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In thousands, except for share and per share data)
(8) Income Taxes
Components of income (loss) before income taxes for the years ended December 31, 2006, 2005
and 2004 are as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2006 |
|
|
2005 |
|
|
2004 |
|
| |
|
|
|
|
|
(As restated) |
|
|
|
|
|
United States |
|
$ |
(218,274 |
) |
|
$ |
(4,037 |
) |
|
$ |
(693 |
) |
Foreign |
|
|
(31,199 |
) |
|
|
9,150 |
|
|
|
912 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(249,473 |
) |
|
$ |
5,113 |
|
|
$ |
219 |
|
|
|
|
|
|
|
|
|
|
|
The provision for income taxes consists of the following for the years ended December 31,
2006, 2005 and 2004.
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2006 |
|
|
2005 |
|
|
2004 |
|
| |
|
(As restated) |
Current: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
313 |
|
|
$ |
2,816 |
|
|
$ |
699 |
|
State |
|
|
(60 |
) |
|
|
963 |
|
|
|
552 |
|
Foreign |
|
|
28 |
|
|
|
669 |
|
|
|
119 |
|
|
|
|
|
|
|
|
|
|
|
Total current |
|
|
281 |
|
|
|
4,448 |
|
|
|
1,370 |
|
|
|
|
|
|
|
|
|
|
|
Deferred: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
8,332 |
|
|
|
1,588 |
|
|
|
(2,515 |
) |
State |
|
|
1,619 |
|
|
|
(299 |
) |
|
|
(528 |
) |
Foreign |
|
|
(782 |
) |
|
|
2,636 |
|
|
|
229 |
|
|
|
|
|
|
|
|
|
|
|
Total deferred |
|
|
9,169 |
|
|
|
3,925 |
|
|
|
(2,814 |
) |
|
|
|
|
|
|
|
|
|
|
Total provision |
|
$ |
9,450 |
|
|
$ |
8,373 |
|
|
$ |
(1,444 |
) |
|
|
|
|
|
|
|
|
|
|
Actual income taxes varied from the expected income taxes (computed by applying the statutory
income tax rate of 34% for 2006 and 35% for 2005 and 2004 to income before income taxes) as a
result of the following:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years Ended December 31, |
|
| |
|
2006 |
|
|
2005 |
|
|
2004 |
|
| |
|
|
|
|
|
(As restated) |
|
|
|
|
|
Expected tax expense (benefit) |
|
$ |
(84,820 |
) |
|
$ |
1,789 |
|
|
$ |
77 |
|
Total increase in income taxes resulting from: |
|
|
|
|
|
|
|
|
|
|
|
|
Nondeductible amortization and acquired in–process technology |
|
|
— |
|
|
|
4,566 |
|
|
|
— |
|
Nondeductible impairment of goodwill |
|
|
72,793 |
|
|
|
— |
|
|
|
— |
|
Change in valuation allowance allocated to income tax expense |
|
|
21,339 |
|
|
|
— |
|
|
|
— |
|
Extraterritorial income tax benefit |
|
|
(219 |
) |
|
|
(323 |
) |
|
|
(1,457 |
) |
Research and experimentation credit |
|
|
(209 |
) |
|
|
— |
|
|
|
(228 |
) |
Employee stock options |
|
|
896 |
|
|
|
— |
|
|
|
— |
|
Nondeductible expenses |
|
|
175 |
|
|
|
484 |
|
|
|
(39 |
) |
Foreign income taxes, net of federal income tax benefit |
|
|
7 |
|
|
|
(407 |
) |
|
|
74 |
|
State and local income taxes, net of federal income tax benefit |
|
|
(229 |
) |
|
|
441 |
|
|
|
21 |
|
Foreign income tax rate differential |
|
|
(753 |
) |
|
|
149 |
|
|
|
15 |
|
Business combination tax restructuring |
|
|
— |
|
|
|
1,308 |
|
|
|
— |
|
Other |
|
|
470 |
|
|
|
366 |
|
|
|
93 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual income tax expense (benefit) |
|
$ |
9,450 |
|
|
$ |
8,373 |
|
|
$ |
(1,444 |
) |
|
|
|
|
|
|
|
|
|
|
78
Merge Technologies Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In thousands, except for share and per share data)
The tax effects of temporary differences that give rise to significant portions of the
deferred tax assets and deferred tax liabilities at December 31, 2006 and 2005 are presented below:
| |
|
|
|
|
|
|
|
|
| |
|
December 31, |
|
| |
|
2006 |
|
|
2005 |
|
| |
|
(As restated) |
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
Accrued wages |
|
$ |
1,175 |
|
|
$ |
1,110 |
|
Deferred revenue |
|
|
437 |
|
|
|
5,878 |
|
Depreciation |
|
|
1,086 |
|
|
|
662 |
|
Research and experimentation credit carry forwards |
|
|
4,140 |
|
|
|
3,956 |
|
credit carry forwards |
|
|
1,515 |
|
|
|
1,470 |
|
Net operating loss carry forwards |
|
|
11,872 |
|
|
|
8,588 |
|
Foreign net operating loss carry forwards |
|
|
19,168 |
|
|
|
11,950 |
|
Nonqualified stock options |
|
|
1,381 |
|
|
|
— |
|
Other |
|
|
2,876 |
|
|
|
2,065 |
|
|
|
|
|
|
|
|
Total gross deferred tax assets |
|
|
43,650 |
|
|
|
35,679 |
|
Less: asset valuation allowance |
|
|
(30,018 |
) |
|
|
(8,653 |
) |
|
|
|
|
|
|
|
Net deferred tax asset |
|
|
13,632 |
|
|
|
27,026 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
Software development costs and intangible assets |
|
|
(5,198 |
) |
|
|
(5,981 |
) |
Intangibles—customer contracts & tradenames |
|
|
(3,554 |
) |
|
|
(7,789 |
) |
Other |
|
|
(860 |
) |
|
|
(46 |
) |
|
|
|
|
|
|
|
Total gross deferred liabilities |
|
|
(9,612 |
) |
|
|
(13,816 |
) |
|
|
|
|
|
|
|
Net deferred tax asset |
|
$ |
4,020 |
|
|
$ |
13,210 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included on balance sheet: |
|
|
|
|
|
|
|
|
Current assets: Deferred income taxes |
|
$ |
196 |
|
|
$ |
11,735 |
|
Non–current asset: Deferred income taxes |
|
|
4,326 |
|
|
|
3,490 |
|
Non–current liabilities: Deferred income taxes |
|
|
(502 |
) |
|
|
(2,015 |
) |
|
|
|
|
|
|
|
Net deferred income taxes |
|
$ |
4,020 |
|
|
$ |
13,210 |
|
|
|
|
|
|
|
|
The increase in the valuation allowance for the years ending December 31, 2006, 2005 and 2004
were, $21,365, $8,653 and $0, respectively. Management has an obligation under SFAS 109, Accounting
for Income Taxes, to review, at least annually, the components of our deferred tax assets. This
review is to ascertain that, based upon the information available at the time of the preparation of
financial statements, it is more likely than not, that we expect to utilize these future deductions
and credits. In the event that management determines that it is more likely than not these future
deductions, or credits, will not be utilized, a valuation allowance is recorded, reducing the
deferred tax asset to the amount expected to be realized.
Management’s
analysis for 2006 determined that a valuation allowance of $30,018 is necessary
at December 31, 2006 for a majority of our Canadian and U.S. deferred tax assets. This decision is
based upon many factors, both quantitative and qualitative, such as (1) substantial current year
losses, (2) significant unutilized operating loss and credit carryforwards, (3) lack of any cash
refund carryback opportunities, (4) uncertain future operating profitability, (5) substantial
organization and operating restructuring, and
(6) unsettled resolution of ongoing regulatory inquiries and litigation which may adversely
affect operations in future years.
The income tax benefit of excess tax benefits related to nonqualified stock option exercises
and disqualifying dispositions of employee incentive stock options during 2006, 2005, and 2004 were
$988, $1,811 and $595, respectively. Under SFAS No. 123(R) the income tax benefit related to excess
tax benefits occurring in 2006 will be credited to paid–in–capital when recognized by reducing
taxes payable.
79
Merge Technologies Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In thousands, except for share and per share data)
At December 31, 2006, we had federal net operating loss carryforwards and research credit
carryforwards of $30,605 and $2,510, respectively, state net operating loss carryforwards and
research credit carryforwards of $17,453 and $25, respectively, foreign tax credits of $1,034,
foreign federal and provincial net operating loss carryforwards of $56,949 and $45,315,
respectively, and foreign federal and provincial research credits carryforwards of $1,358 and $272,
respectively.
These losses and credits are available to offset taxable income and tax in the future. The
federal net operating loss and research credit carryforwards expire at varying amounts beginning in
2007 and 2012, respectively, and continuing through 2023 and 2026, respectively. The state net
operating loss carryforwards expire in varying amounts beginning in 2007, and continuing through
2026. The foreign tax credits expire in varying amounts beginning in 2007, and continuing through
2016. The foreign federal and provincial net operating loss carryforwards expire in varying amounts
beginning in 2007 and 2008, respectively, and continuing through 2016. Of the foreign federal net
operating loss carryforwards noted above, approximately $27,254 expires on December 31, 2007.
Under the Tax Reform Act of 1986 (“Code”), the amounts of, and the benefits from, net
operating loss carryforwards may be limited or impaired in certain circumstances, i.e., Code
section 382, tax benefit limitations after change in ownership. The timing and manner in which we
will be able to utilize the acquired entities net operating loss and research and development
credit carryforwards will be subject to these rules. In addition, we experienced an ownership
change, as defined under Treasury regulations, on June 1, 2005. If certain additional changes in
our ownership should occur, net operating loss and credit carryforwards may be further limited.
We have recorded income tax expense on all profits, except for undistributed profits of
non–U.S. subsidiaries, which are considered indefinitely reinvested. Determination of the amount of
unrecognized deferred tax liability related to indefinitely reinvested profits is not feasible.
(9) Leases
We have non–cancelable operating leases at various locations. Our headquarters in Milwaukee,
Wisconsin, has approximately 36,000 square feet and is leased through April 2011. We also have
significant facilities in Mississauga, Ontario, Canada, which has approximately 75,000 square feet
(of which approximately 15,000 is sub–leased) and is leased through December 2009, and in
Burlington, Massachusetts, which has approximately 24,000 square feet and is leased through
October 2008.
Total rent expense for the years ended December 31, 2006, 2005 and 2004 were $1,389, $1,473
and $324, respectively, net of sub–lease income of $180. Future minimum lease payments under all
non–cancelable operating leases (with initial or remaining lease terms in excess of one year), net
of sub–lease income that is contractually owed to us of $180 in each of 2007, 2008 and 2009, as of
December 31, 2006, are:
| |
|
|
|
|
2007 |
|
$ |
2,110 |
|
2008 |
|
|
2,052 |
|
2009 |
|
|
1,512 |
|
2010 |
|
|
585 |
|
2011 |
|
|
305 |
|
Thereafter |
|
|
252 |
|
|
|
|
|
Total minimum lease payments |
|
$ |
6,816 |
|
|
|
|
|
(10) Commitments and Contingencies
Between March 22, 2006 and April 26, 2006, seven putative securities class action lawsuits
were filed in the United States District Court for the Eastern District of Wisconsin, on behalf of
a class of persons who acquired shares of our Common Stock between August 2, 2005 and March 16,
2006. Defendants in the suit include us, Richard A. Linden, our former President and Chief
Executive Officer, and Scott T. Veech, our former Chief Financial Officer; one of the suits also
names Brian E. Pedlar, former President of Cedara Software and our former Senior Vice President,
who served as our interim co–President and co–Chief Executive
80
Merge Technologies Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In thousands, except for share and per share data)
Officer from July 2, 2006 to
August 18, 2006. One case has been voluntarily dismissed. The cases arise out of our March 17, 2006
announcement that that we would revise our results of operations for the fiscal quarters ended
June 30, 2005 and September 30, 2005, as well as our investigation of allegations made in anonymous
letters received by us. The lawsuits allege that we and individual defendants violated
Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the “Exchange Act”). The
complaints seek damages in unspecified amounts. On November 22, 2006, the Court consolidated the
seven cases and appointed the Southwest Carpenters Pension Trust to be the lead plaintiff and
approved the Trust’s choice of its lead counsel. Pursuant to court order, the lead plaintiff is
currently required to file its Amended Complaint on or before March 19, 2007. We intend to
vigorously defend these lawsuits, including, but not limited to, possibly moving to dismiss the
consolidated amended complaint when filed.
On August 28, 2006, a derivative action was filed in the Circuit Court of Milwaukee County,
Civil Division, against Messrs. Linden, Mortimore and Veech and all of the then–current members of
our Board of Directors. The plaintiffs allege that each of the individual defendants breached
fiduciary duties to us by violating generally accepted accounting principles, willfully ignoring
problems with accounting and internal control practices and procedures and participating in the
dissemination of false financial statements and also allege that we and the current director
defendants failed to hold an annual meeting of shareholders for 2006 in violation of Wisconsin law.
The plaintiffs ask for unspecified amounts in damages and costs, as well as equitable relief. In
response to the filing of this action, our Board of Directors formed a Special Litigation
Committee, which Committee has full authority to review the allegations of the derivative complaint
and determine whether pursuit of the claims against any or all of the individual defendants would
be in our best interest. The Special Litigation Committee’s investigation is substantially
complete. Pursuant to stipulations among the parties and order of the court, the plaintiff has
dismissed the claim seeking to require us to hold an annual meeting of shareholders, and the
defendants’ deadline to move, answer or otherwise respond to the remainder of operative complaint
has been extended to April 16, 2007.
On April 27, 2006, we received an informal, nonpublic inquiry from the SEC requesting
voluntary production of documents and other information. The inquiry principally relates to our
announcement on March 17, 2006 that we would revise our results of operations for the fiscal
quarters ended June 30, 2005 and September 30, 2005, as well as our investigation of allegations
made in anonymous letters received by us. The SEC has advised us that this inquiry should not be
interpreted as an adverse reflection on any entity or individual involved, nor should it be
interpreted as an indication by the SEC that any violation of the federal securities laws has
occurred. We are cooperating with the SEC.
In March 2006, a patent infringement lawsuit filed against us by ScheduleQuest, Inc. was
dismissed.
We and our Cedara subsidiary were formerly defendants in an action commenced by Brian Pedlar.
Mr. Pedlar was formerly the President of Cedara (since the closing of our merger with Cedara) and
served, from July 2, 2006, until his departure on August 18, 2006, as co–CEO and co–President of
Merge Healthcare. In September 2006, Mr. Pedlar filed suit in Ontario, Canada, against us and
Cedara claiming that he had been constructively discharged from his positions, and that we had
defamed him in describing his departure in our public releases and filing with SEC. Without
admitting any of the allegations of his complaint, on February 22, 2007, we agreed with Mr. Pedlar
to settle this suit. Pursuant to the settlement, we agreed to pay Mr. Pedlar approximately $500
(less required tax withholding) and also agreed to pay approximately $80 to Mr. Pedlar’s counsel in
payment of his attorneys fees and expenses in his employment proceedings. We have accrued for these
amounts as of December 31, 2006 and recorded the expense in General and Administrative Expenses.
The settlement also included customary provisions addressing non–disparagement, confidentiality,
mutual release and of the dismissed legal action.
We, and our subsidiaries, are from time to time parties to legal proceedings, lawsuits and
other claims incident to our business activities. Such matters may include, among other things,
assertions of contract breach or intellectual property infringement, claims for indemnity arising
in the course of our business and claims by persons whose employment has been terminated. Such
matters are subject to many uncertainties and outcomes are not predictable with assurance.
Consequently, we are unable to ascertain the ultimate aggregate amount of monetary liability,
amounts which may be covered by insurance or recoverable from third parties, or the financial
impact with respect to these matters as of the date of this report.
81
Merge Technologies Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In thousands, except for share and per share data)
(11) Restructuring
We incurred $2,725 and $530 of restructuring charges in the twelve months ended December 31,
2006, and 2005, respectively in goodwill impairment, restructuring charges and other expenses in
the Statement of Operations. Restructuring charges in 2006 are comprised of termination costs of
$2,666 and contract termination costs of $59 associated with our decision in the fourth quarter of
2006, to reorganize and consolidate our operations. As a result, approximately 150 individuals
(including temporary persons and consultants) were terminated, we ceased use of our San Francisco
and Tokyo facilities and downsized operations in Burlington, MA, Cleveland, OH, and Mississauga,
Ontario. We expect to incur approximately $580 of additional severance costs in 2007 related to the
Q4 2006 restructuring plan as such severance costs require the employees to render services through
a retention period.
Restructuring charges in 2005 are comprised of lease exit costs associated with the settlement
of our lease of approximately $175, which we ceased using during 2005 as we combined two of our
offices located in the same geographic region, severance to involuntarily terminated employees of
$263 and option acceleration expense of $92 related to such employees, based on the intrinsic value
of options at the time of termination.
The following table shows the restructure activity for 2006 and 2005:
| |
|
|
|
|
| |
|
Accrued |
|
| |
|
Restructuring |
|
Balance at December 31, 2004 |
|
$ |
— |
|
Charges to expense |
|
|
530 |
|
Payments |
|
|
(338 |
) |
|
|
|
|
Balance at December 31, 2005 |
|
$ |
192 |
|
Charges to expense |
|
|
2,725 |
|
Payments |
|
|
(920 |
) |
|
|
|
|
Balance at December 31, 2006 |
|
$ |
1,997 |
|
|
|
|
|
At December 31, 2006, the remaining costs consist of severance and as such are classified
within accrued wages. At December 31, 2005, the charges consisted of our lease settlement and, as
such, was classified within other accrued liabilities.
(12) Shareholders’ Equity
(a) Common Stock
On May 24, 2005, our shareholders approved an amendment to our Articles of Incorporation to
increase the number of authorized shares of Common Stock from 30 million to 100 million.
In June 2005, we issued 5,581,517 shares of our Common Stock to the shareholders of Cedara
Software and 13,210,168 Merge Cedara ExchangeCo Exchangeable Shares to Canadian shareholders of
Cedara Software. Through December 31, 2006, 8,642,013 Merge Cedara ExchangeCo Exchangeable Shares
were exchanged for an equal number of shares of our Common Stock.
In October 2005, 90,000 shares of our Common Stock previously held in escrow in connection
with our acquisition of RIS Logic in 2003 were returned to us as consideration for the release of
RIS Logic’s warranty and indemnification requirements under the merger agreement and such shares
were retired as of December 31, 2005.
On September 6, 2006, we announced a stock repurchase plan providing for the purchase of up to
$20,000 of our Common Stock over a two–year period. As of December 31, 2006, we have not made any
repurchases under this plan.
(b) Special Voting Preferred Stock
During 2004, the one share issued to our former transfer agent, which served as a trustee in
voting matters on behalf of the Interpra Medical Network Systems Ltd. exchangeable shareholders,
was retired.
82
Merge Technologies Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In thousands, except for share and per share data)
(c) Series 2 Special Voting Preferred Stock
During 2004, the one share issued to our former transfer agent, which served as a trustee in
voting matters on behalf of the eFilm exchangeable shareholders, was retired.
(d) Series 3 Special Voting Preferred Stock
In June 2005, we issued one share of Series 3 Special Voting Preferred Stock to Computershare
Trust Company of Canada, which serves as a trustee in voting matters on behalf of the holders of
Merge Cedara ExchangeCo exchangeable shares. As of December 31, 2006, this share was issued and
outstanding.
(e) Series B Junior Participating Preferred Stock
On September 6, 2006, we announced the implementation of a Shareholder Rights Plan. The
Shareholder Rights Plan includes the declaration of a dividend of one preferred share purchase
right on each outstanding share of our Common Stock and the distribution of one such right with
respect to each outstanding exchangeable share of our subsidiary, Merge Cedara ExchangeCo Limited.
The issuance of the rights under the plan was made on October 2, 2006, to shareholders of record at
the close of business on September 25, 2006. The adoption of the plan was intended to discourage
discriminatory, coercive or unfair take–over bids and to provide the Board of Directors time to
pursue alternatives to maximize shareholder value in the event of an unsolicited take–over bid. The
rights will become exercisable if a third party, person or group (subject to certain exceptions)
acquires 15% or more of our Common Stock outstanding or announces a tender offer, consummation of
which would result in ownership by a person or group of 15% or more of our Common Stock. Upon such
a triggering event, each right will initially entitle the holder to purchase one one–hundredth of
one share of our Series B Preferred Stock. If any person becomes a 15% or more holder of our Common
Stock, each right will entitle the other holders to purchase our Common Stock, or the stock of the
acquirer, at half of their respective then–applicable market price. We may also redeem the rights
for $0.001 per right.
The rights were not issued in response to any specific threat, and our Board is not aware of
any such threat. The rights will expire on October 2, 2016, subject to extension. The Shareholder
Rights Plan contains a so–called TIDE provision which requires independent directors to review the
plan every three years to determine whether it continues to be in shareholders’ best interest.
(f) Stock Option Plans
On May 24, 2005, our shareholders approved our 2005 Equity Incentive Plan (“EIP”). The EIP provides
for awards of Common Stock, non–statutory stock options, incentive stock options, stock unit and
performance unit grants and stock appreciation rights to eligible participants to equate to a
maximum of 7.5 million shares of our Common Stock, of which incentive stock option grants are
limited to 5.0 million shares. Under the EIP, new stock option grants have an exercise price equal
to the fair market value of our Common Stock at the date of grant. The EIP includes options granted
to replace existing Cedara Software Corp. options (“Replacement Options”) and new option grants.
Replacement Options were granted pursuant to the merger agreement with the same economic terms, as
adjusted for conversion ratio and currency. The majority of these options vest over a three or
four–year period. As of December 31, 2006, incentive stock options to purchase 464,500 shares of
our Common Stock and non–statutory stock options to purchase 2,656,875 shares of our Common Stock
were outstanding under this plan.
Our 1996 Employee Stock Option Plan provided for the grant of options to purchase a maximum of
3,265,826 shares of our Common Stock. Under this plan, options have an exercise price equal to the
fair market value of our Common Stock at the date of grant. The majority of the options vest over a
four–year period at 25% per year. The majority of the options granted under this plan expire six
years from the date of grant. At December 31, 2006, there were 801,556 shares of our Common Stock
available for option grants under this plan, however, we do not plan on issuing any more options
under this plan. At December 31, 2006, options to purchase 285,243 shares of our Common Stock were
outstanding under this plan.
Our 1998 Director Stock Option Plan, for our non–employee directors, provided for the granting
of options to purchase a maximum of 300,000 shares of our Common Stock. Under this plan, options
have an exercise
83
Merge Technologies Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In thousands, except for share and per share data)
price equal to the fair market value of our Common Stock at the date of grant. The
majority of options granted under this plan fully vested at the date of grant. Any expired or
forfeited options granted under this plan are not eligible for re–issuance. The options granted
under this plan expire ten years and one day from the date of grant. At December 31, 2006, there
were 9,592 shares of Common Stock available for option grants; however, we do not plan on issuing
any more options under this plan. At December 31, 2006, options to purchase 130,411 shares of our
Common Stock were outstanding under this plan.
Our Board of Directors adopted an equity compensation plan in connection with our acquisition
on July 17, 2003 of RIS Logic. At December 31, 2006, options to purchase 34,770 shares of our
Common Stock were outstanding under this plan.
(g) Stock Purchase Plan
We maintain an employee stock purchase plan that allowed employees to purchase stock at a 5%
discount from the market price at the end of each calendar quarter during the last quarter of 2006
and the last three quarters of 2005. During 2004 and the first quarter of 2005, employees purchased
stock at the lesser of the stock price at the start of each calendar quarter or the end of each
calendar quarter. Contributions to the employee stock purchase plan are made through payroll
deductions. Employees contributed $33, $65 and $68 during 2006, 2005 and 2004, respectively, to
purchase shares of our Common Stock under the employee stock purchase plan.
As of March 17, 2006, use of our registration statement on Form S–8 relating to the issuance
of Common Stock was suspended. Consequently, all 2006 contributions under this plan were returned
and the plan was suspended. Contributions were resumed during the fourth quarter of 2006.
(h) Exchange Rights
As part of our business combination with Cedara Software, we granted rights for the issuance of
13,210,168 shares of Common Stock to holders of Cedara Software exchangeable shares on a
one–for–one basis. As of December 31, 2006, there were 4,568,155 Cedara Software exchangeable
shares outstanding. We have the right to redeem all of the exchangeable shares at anytime after
April 29, 2010 or if less than 10% of the number of exchangeable shares issued on the effective
date of the business combination remain outstanding, provided that we give sixty days advance
written notice.
As of March 17, 2006, our registration statement on Form S–3 relating to issuance of our
Common Stock upon exchange of exchangeable shares was suspended. On February 13, 2007, we filed the
Final Prospectus related to this registration of our Common Stock, following the SEC’s Notice of
Effectiveness on February 9, 2007. As a result, the exchangeable shares of Merge Cedara ExchageCo
Limited may once again be converted into the Common Stock of Merge on a one–to–one basis.
(13) Employee Benefit Plan
We maintain defined contribution retirement plans (401(k) profit sharing plan for the U.S.
employees and RRSP for the Canadian employees), covering employees who meet the minimum service
requirements and have elected to participate. We made matching contributions (under the
401(k) profit sharing plan for the U.S. employees and DPSP for the Canadian employees) equal to a
maximum of 3.0% in 2006 and 2005, and 2.5% in 2004. Our matching contributions totaled $806, $415 and $203 for the years ended December 31,
2006, 2005 and 2004, respectively.
In 2005, we also paid a discretionary profit sharing contribution of $120 that was accrued for
at December 31, 2004 under these plans.
84
Merge Technologies Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In thousands, except for share and per share data)
(14) Concentrations of Risk
(a) Cash in Excess of Federally Insured Amount
Substantially all of our cash and cash equivalents are held at a few financial institutions
located in the U.S., Canada and the Netherlands. Deposits held with these banks exceed the amount
of insurance provided on such deposits. Generally these deposits may be redeemed upon demand and,
therefore, bear minimal risk.
(b) Net Sales and Accounts Receivable
The majority of our clients are OEM’s, imaging centers, hospitals and integrated delivery
networks. If significant adverse macro—economic factors were to impact these organizations, it
could materially adversely affect us. Our access to certain software and hardware components is
dependent upon single and sole source suppliers. The inability of any supplier to fulfill our
supply requirements could affect future results.
Foreign sales, denominated in U.S. Dollars, accounted for approximately 18%, 40% and 33% of
our net sales for the years ended December 31, 2006, 2005 and 2004, respectively. For the years
ended December 31, 2006, 2005 and 2004, sales in foreign currency represented 4%, 4% and 13%,
respectively, of our net sales.
For the years ended December 31, 2006, 2005 and 2004, we had zero, two and one individual
customer that represented more than 10% of net sales. For the year ended December 31, 2005, Toshiba
Medical Systems Corporation and Hitachi Medical Corporation accounted for 16% and 10%,
respectively, of net sales. For the years ended December 31, 2004, Philips Medical Systems
accounted for 10% of net sales. We had one customer, Hitachi Medical Corporation, which comprised
27% of the total accounts receivable as of December 31, 2005. No individual customer accounted for more than 10% of our total accounts
receivable as of December 31, 2006.
The following tables present certain geographic information, based on location of customer:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Net Sales |
|
| |
|
2006 |
|
|
2005 |
|
|
2004 |
|
| |
|
(As restated) |
United States of America |
|
$ |
60,660 |
|
|
$ |
49,181 |
|
|
$ |
17,095 |
|
Japan |
|
|
3,394 |
|
|
|
24,377 |
|
|
|
1,122 |
|
Europe |
|
|
7,024 |
|
|
|
6,626 |
|
|
|
4,704 |
|
Canada |
|
|
2,139 |
|
|
|
1,877 |
|
|
|
2,458 |
|
Other |
|
|
1,105 |
|
|
|
477 |
|
|
|
98 |
|
|
|
|
|
|
|
|
|
|
|
Total net sales |
|
$ |
74,322 |
|
|
$ |
82,538 |
|
|
$ |
25,477 |
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Long–Lived Assets |
| |
|
2006 |
|
2005 |
|
2004 |
United States of America |
|
$ |
2,576 |
|
|
$ |
2,889 |
|
|
$ |
1,128 |
|
Canada |
|
|
1,096 |
|
|
|
1,504 |
|
|
|
338 |
|
Europe |
|
|
231 |
|
|
|
45 |
|
|
|
28 |
|
Other |
|
|
37 |
|
|
|
2 |
|
|
|
4 |
|
Long–lived assets represent property, plant and equipment, net of related depreciation.
Long–lived assets in service at the China office were not material as of December 31, 2006 and
2005.
(15) Quarterly Results (unaudited)
The following selected quarterly data has been derived from our unaudited consolidated
financial statements that, in our opinion, reflect all recurring adjustments necessary to fairly
present our financial information when read in conjunction with our Consolidated Financial
Statements and Notes. This selected quarterly information has been restated for the all quarters
of 2006 and 2005 from previously reported information filed on Forms 10-Q and Form 10-K, as a
result of the restatement of our financial results as discussed in Note 2. These restatement
adjustments are described in Note 2 for the respective annual periods.
85
Merge Technologies Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In thousands, except for share and per share data)
The results of operations
for any quarter are not necessarily indicative of the results to be expected for any future period.
We have not amended our Annual Reports on Form 10-K or Quarterly Reports on Form 10-Q for the
quarterly periods affected by the restatement. The information that has been previously filed or
otherwise reported for these periods is superseded by the information in this Annual Report on Form
10-K/A, and the financial statements and related financial information contained in such reports
should no longer be relied upon.
86
Merge Technologies Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In thousands, except for share and per share data)
MERGE TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
March 31, 2005 |
|
|
|
|
|
|
March 31, 2005 |
|
| |
|
(As reported) |
|
|
(Adjustments) |
|
|
(As restated) |
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
22,569 |
|
|
|
|
|
|
$ |
22,569 |
|
Accounts receivable, net |
|
|
11,557 |
|
|
|
(75 |
)(b) |
|
|
11,482 |
|
Inventory |
|
|
1,094 |
|
|
|
|
|
|
|
1,094 |
|
Prepaid expenses |
|
|
1,350 |
|
|
|
|
|
|
|
1,350 |
|
Deferred income taxes |
|
|
8,114 |
|
|
|
450 |
(b,c) |
|
|
8,564 |
|
Other current assets |
|
|
5,182 |
|
|
|
|
|
|
|
5,182 |
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
49,866 |
|
|
|
375 |
|
|
|
50,241 |
|
Net property and equipment |
|
|
1,758 |
|
|
|
|
|
|
|
1,758 |
|
Purchased and developed software, net |
|
|
10,685 |
|
|
|
|
|
|
|
10,685 |
|
Acquired intangibles, net |
|
|
1,163 |
|
|
|
|
|
|
|
1,163 |
|
Goodwill |
|
|
25,995 |
|
|
|
|
|
|
|
25,995 |
|
Other assets |
|
|
773 |
|
|
|
|
|
|
|
773 |
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
90,240 |
|
|
$ |
375 |
|
|
$ |
90,615 |
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
2,877 |
|
|
|
|
|
|
$ |
2,877 |
|
Accrued wages |
|
|
896 |
|
|
|
|
|
|
|
896 |
|
Other accrued liabilities |
|
|
1,523 |
|
|
|
21 |
(b) |
|
|
1,544 |
|
Deferred revenue |
|
|
28,098 |
|
|
|
258 |
(a) |
|
|
28,356 |
|
Income taxes payable |
|
|
— |
|
|
|
165 |
(b,c) |
|
|
165 |
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
33,394 |
|
|
|
444 |
|
|
|
33,838 |
|
Deferred income taxes |
|
|
865 |
|
|
|
(7 |
)(b) |
|
|
858 |
|
Deferred revenue |
|
|
— |
|
|
|
657 |
(a) |
|
|
657 |
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
34,259 |
|
|
|
1,094 |
|
|
|
35,353 |
|
Total shareholders’ equity |
|
|
55,981 |
|
|
|
(719 |
) |
|
|
55,262 |
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders’ equity |
|
$ |
90,240 |
|
|
$ |
375 |
|
|
$ |
90,615 |
|
|
|
|
|
|
|
|
|
|
|
87
Merge Technologies Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In thousands, except for share and per share data)
MERGE TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Quarter Ended |
|
|
|
|
|
|
Quarter Ended |
|
| |
|
March 31, 2005 |
|
|
|
|
|
|
March 31, 2005 |
|
| |
|
(As reported) |
|
|
(Adjustments) |
|
|
(As restated) |
|
Net sales: |
|
|
|
|
|
|
|
|
|
|
|
|
Software and other |
|
$ |
4,648 |
|
|
$ |
(11 |
)(a) |
|
$ |
4,637 |
|
Services and maintenance |
|
|
2,289 |
|
|
|
(12 |
)(a) |
|
|
2,277 |
|
|
|
|
|
|
|
|
|
|
|
Total net sales |
|
|
6,937 |
|
|
|
(23 |
) |
|
|
6,914 |
|
Cost of sales: |
|
|
|
|
|
|
|
|
|
|
|
|
Software and other |
|
|
570 |
|
|
|
(1 |
)(a) |
|
|
569 |
|
Services and maintenance |
|
|
1,634 |
|
|
|
(27 |
)(a) |
|
|
1,607 |
|
Amortization |
|
|
702 |
|
|
|
|
|
|
|
702 |
|
|
|
|
|
|
|
|
|
|
|
Total cost of sales |
|
|
2,906 |
|
|
|
(28 |
) |
|
|
2,878 |
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
4,031 |
|
|
|
5 |
|
|
|
4,036 |
|
Operating costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing |
|
|
1,580 |
|
|
|
|
|
|
|
1,580 |
|
Product research and development |
|
|
753 |
|
|
|
|
|
|
|
753 |
|
General and administrative |
|
|
1,218 |
|
|
|
21 |
(b) |
|
|
1,239 |
|
Depreciation and amortization |
|
|
303 |
|
|
|
|
|
|
|
303 |
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses |
|
|
3,854 |
|
|
|
21 |
|
|
|
3,875 |
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
177 |
|
|
|
(16 |
) |
|
|
161 |
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
120 |
|
|
|
|
|
|
|
120 |
|
Other, net |
|
|
(43 |
) |
|
|
|
|
|
|
(43 |
) |
|
|
|
|
|
|
|
|
|
|
Total other income |
|
|
77 |
|
|
|
|
|
|
|
77 |
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
254 |
|
|
|
(16 |
) |
|
|
238 |
|
Income tax expense (benefit) |
|
|
89 |
|
|
|
28 |
(b,c) |
|
|
117 |
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
165 |
|
|
$ |
(44 |
) |
|
$ |
121 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share — basic |
|
$ |
0.01 |
|
|
$ |
(0.00 |
) |
|
$ |
0.01 |
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common
shares outstanding — basic |
|
|
13,208,370 |
|
|
|
|
|
|
|
13,208,370 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share — diluted |
|
$ |
0.01 |
|
|
$ |
(0.00 |
) |
|
$ |
0.01 |
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common
shares outstanding — diluted |
|
|
13,992,241 |
|
|
|
|
|
|
|
13,992,241 |
|
|
|
|
|
|
|
|
|
|
|
|
88
Merge Technologies Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In thousands, except for share and per share data)
MERGE TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
June 30, 2005 |
|
|
|
|
|
|
June 30, 2005 |
|
| |
|
(As reported) |
|
|
(Adjustments) |
|
|
(As restated) |
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
39,830 |
|
|
|
|
|
|
$ |
39,830 |
|
Accounts receivable, net |
|
|
23,754 |
|
|
|
(75 |
)(b) |
|
|
23,679 |
|
Inventory |
|
|
1,814 |
|
|
|
|
|
|
|
1,814 |
|
Prepaid expenses |
|
|
2,857 |
|
|
|
|
|
|
|
2,857 |
|
Deferred income taxes |
|
|
8,823 |
|
|
|
453 |
(b,c) |
|
|
9,276 |
|
Other current assets |
|
|
4,824 |
|
|
|
|
|
|
|
4,824 |
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
81,902 |
|
|
|
378 |
|
|
|
82,280 |
|
Net property and equipment |
|
|
3,882 |
|
|
|
|
|
|
|
3,882 |
|
Purchased and developed software, net |
|
|
22,905 |
|
|
|
|
|
|
|
22,905 |
|
Acquired intangibles, net |
|
|
12,934 |
|
|
|
|
|
|
|
12,934 |
|
Goodwill |
|
|
354,953 |
|
|
|
(162 |
) (b) |
|
|
|
|
|
|
|
|
|
|
|
(5,338 |
) (d) |
|
|
349,453 |
|
Other assets |
|
|
3,347 |
|
|
|
175 |
(b) |
|
|
3,522 |
|
Deferred income taxes |
|
|
— |
|
|
|
6,297 |
(d) |
|
|
|
|
|
|
|
|
|
|
|
15 |
(b) |
|
|
6,312 |
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
479,923 |
|
|
$ |
1,365 |
|
|
$ |
481,288 |
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
7,300 |
|
|
|
|
|
|
$ |
7,300 |
|
Accrued wages |
|
|
5,988 |
|
|
|
|
|
|
|
5,988 |
|
Other accrued liabilities |
|
|
5,113 |
|
|
|
7 |
(b) |
|
|
5,120 |
|
Deferred revenue |
|
|
34,964 |
|
|
|
266 |
(a) |
|
|
35,230 |
|
Income taxes payable |
|
|
3,464 |
|
|
|
214 |
(b,c) |
|
|
3,678 |
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
56,829 |
|
|
|
487 |
|
|
|
57,316 |
|
Deferred income taxes |
|
|
1,056 |
|
|
|
959 |
(d) |
|
|
2,015 |
|
Deferred revenue |
|
|
— |
|
|
|
616 |
(a) |
|
|
616 |
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
57,885 |
|
|
|
2,062 |
|
|
|
59,947 |
|
Total shareholders’ equity |
|
|
422,038 |
|
|
|
(697 |
) |
|
|
421,341 |
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders’ equity |
|
$ |
479,923 |
|
|
$ |
1,365 |
|
|
$ |
481,288 |
|
|
|
|
|
|
|
|
|
|
|
89
Merge Technologies Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In thousands, except for share and per share data)
MERGE TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Quarter Ended |
|
|
|
|
|
|
Quarter Ended |
|
| |
|
June 30, 2005 |
|
|
|
|
|
|
June 30, 2005 |
|
| |
|
(As reported) |
|
|
(Adjustments) |
|
|
(As restated) |
|
Net sales: |
|
|
|
|
|
|
|
|
|
|
|
|
Software and other |
|
$ |
11,037 |
|
|
$ |
20 |
(a) |
|
$ |
11,057 |
|
Services and maintenance |
|
|
4,124 |
|
|
|
18 |
(a) |
|
|
4,142 |
|
|
|
|
|
|
|
|
|
|
|
Total net sales |
|
|
15,161 |
|
|
|
38 |
|
|
|
15,199 |
|
Cost of sales: |
|
|
|
|
|
|
|
|
|
|
|
|
Software and other |
|
|
1,805 |
|
|
|
3 |
(a) |
|
|
1,808 |
|
Services and maintenance |
|
|
2,478 |
|
|
|
2 |
(a) |
|
|
2,480 |
|
Amortization |
|
|
1,887 |
|
|
|
|
|
|
|
1,887 |
|
|
|
|
|
|
|
|
|
|
|
Total cost of sales |
|
|
6,170 |
|
|
|
5 |
|
|
|
6,175 |
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
8,991 |
|
|
|
33 |
|
|
|
9,024 |
|
Operating costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing |
|
|
2,810 |
|
|
|
|
|
|
|
2,810 |
|
Product research and development |
|
|
1,648 |
|
|
|
|
|
|
|
1,648 |
|
General and administrative |
|
|
3,966 |
|
|
|
(14 |
) (b) |
|
|
3,952 |
|
Acquired in process R&D |
|
|
12,989 |
|
|
|
|
|
|
|
12,989 |
|
Goodwill impairment, restructuring
and other expenses |
|
|
589 |
|
|
|
|
|
|
|
589 |
|
Depreciation and amortization |
|
|
1,087 |
|
|
|
|
|
|
|
1,087 |
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses |
|
|
23,089 |
|
|
|
(14 |
) |
|
|
23,075 |
|
|
|
|
|
|
|
|
|
|
|
Operating loss |
|
|
(14,098 |
) |
|
|
47 |
|
|
|
(14,051 |
) |
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
169 |
|
|
|
|
|
|
|
169 |
|
Other, net |
|
|
(82 |
) |
|
|
|
|
|
|
(82 |
) |
|
|
|
|
|
|
|
|
|
|
Total other income |
|
|
87 |
|
|
|
|
|
|
|
87 |
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes |
|
|
(14,011 |
) |
|
|
47 |
|
|
|
(13,964 |
) |
Income tax expense (benefit) |
|
|
1,190 |
|
|
|
39 |
(b,c) |
|
|
1,229 |
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(15,201 |
) |
|
$ |
8 |
|
|
$ |
(15,193 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share — basic |
|
$ |
(0.79 |
) |
|
$ |
0.00 |
|
|
$ |
(0.79 |
) |
|
|
|
|
|
|
|
|
|
|
Weighted average number of common
shares outstanding — basic |
|
|
19,254,640 |
|
|
|
|
|
|
|
19,254,640 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share — diluted |
|
$ |
(0.79 |
) |
|
$ |
0.00 |
|
|
$ |
(0.79 |
) |
|
|
|
|
|
|
|
|
|
|
Weighted average number of common
shares outstanding — diluted |
|
|
19,254,640 |
|
|
|
|
|
|
|
19,254,640 |
|
|
|
|
|
|
|
|
|
|
|
|
90
Merge Technologies Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In thousands, except for share and per share data)
MERGE TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
September 30, 2005 |
|
|
|
|
|
|
September 30, 2005 |
|
| |
|
(As reported) |
|
|
(Adjustments) |
|
|
(As restated) |
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
46,465 |
|
|
|
|
|
|
$ |
46,465 |
|
Accounts receivable, net |
|
|
33,097 |
|
|
|
(140 |
)(b) |
|
|
32,957 |
|
Inventory |
|
|
1,838 |
|
|
|
|
|
|
|
1,838 |
|
Prepaid expenses |
|
|
2,849 |
|
|
|
|
|
|
|
2,849 |
|
Deferred income taxes |
|
|
7,999 |
|
|
|
480 |
(b,c) |
|
|
8,479 |
|
Other current assets |
|
|
4,846 |
|
|
|
|
|
|
|
4,846 |
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
97,094 |
|
|
|
340 |
|
|
|
97,434 |
|
Net property and equipment |
|
|
3,758 |
|
|
|
|
|
|
|
3,758 |
|
Purchased and developed software, net |
|
|
22,633 |
|
|
|
|
|
|
|
22,633 |
|
Acquired intangibles, net |
|
|
12,359 |
|
|
|
|
|
|
|
12,359 |
|
Goodwill |
|
|
349,696 |
|
|
|
(155 |
)(b) |
|
|
|
|
|
|
|
|
|
|
|
(5,337 |
) (d) |
|
|
344,204 |
|
Other assets |
|
|
3,674 |
|
|
|
160 |
(b) |
|
|
3,834 |
|
Deferred income taxes |
|
|
— |
|
|
|
6,005 |
(d) |
|
|
|
|
|
|
|
|
|
|
|
22 |
(b) |
|
|
6,027 |
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
489,214 |
|
|
$ |
1,035 |
|
|
$ |
490,249 |
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
6,071 |
|
|
|
|
|
|
$ |
6,071 |
|
Accrued wages |
|
|
6,657 |
|
|
|
|
|
|
|
6,657 |
|
Other accrued liabilities |
|
|
3,016 |
|
|
|
28 |
(b) |
|
|
3,044 |
|
Deferred revenue |
|
|
31,162 |
|
|
|
285 |
(a) |
|
|
31,447 |
|
Income taxes payable |
|
|
3,550 |
|
|
|
263 |
(b,c) |
|
|
3,813 |
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
50,456 |
|
|
|
576 |
|
|
|
51,032 |
|
Deferred income taxes |
|
|
1,074 |
|
|
|
941 |
(d) |
|
|
2,015 |
|
Deferred revenue |
|
|
— |
|
|
|
565 |
(a) |
|
|
565 |
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
51,530 |
|
|
|
2,082 |
|
|
|
53,612 |
|
Total shareholders’ equity |
|
|
437,684 |
|
|
|
(1,047 |
) |
|
|
436,637 |
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders’ equity |
|
$ |
489,214 |
|
|
$ |
1,035 |
|
|
$ |
490,249 |
|
|
|
|
|
|
|
|
|
|
|
91
Merge Technologies Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In thousands, except for share and per share data)
MERGE TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Quarter Ended |
|
|
|
|
|
|
Quarter Ended |
|
| |
|
September 30, 2005 |
|
|
|
|
|
|
September 30, 2005 |
|
| |
|
(As reported) |
|
|
(Adjustments) |
|
|
(As restated) |
|
Net sales: |
|
|
|
|
|
|
|
|
|
|
|
|
Software and other |
|
$ |
26,733 |
|
|
$ |
(23 |
)(a,b) |
|
$ |
26,710 |
|
Services and maintenance |
|
|
8,310 |
|
|
|
(4 |
)(a,b) |
|
|
8,306 |
|
|
|
|
|
|
|
|
|
|
|
Total net sales |
|
|
35,043 |
|
|
|
(27 |
) |
|
|
35,016 |
|
Cost of sales: |
|
|
|
|
|
|
|
|
|
|
|
|
Software and other |
|
|
2,587 |
|
|
|
4 |
(a) |
|
|
2,591 |
|
Services and maintenance |
|
|
3,451 |
|
|
|
2 |
(a) |
|
|
3,453 |
|
Amortization |
|
|
1,162 |
|
|
|
|
|
|
|
1,162 |
|
|
|
|
|
|
|
|
|
|
|
Total cost of sales |
|
|
7,200 |
|
|
|
6 |
|
|
|
7,206 |
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
27,843 |
|
|
|
(33 |
) |
|
|
27,810 |
|
Operating costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing |
|
|
4,256 |
|
|
|
|
|
|
|
4,256 |
|
Product research and development |
|
|
3,513 |
|
|
|
|
|
|
|
3,513 |
|
General and administrative |
|
|
4,005 |
|
|
|
21 |
(b) |
|
|
4,026 |
|
Acquired in process R&D |
|
|
57 |
|
|
|
|
|
|
|
57 |
|
Goodwill impairment, restructuring
and other expenses |
|
|
160 |
|
|
|
|
|
|
|
160 |
|
Depreciation and amortization |
|
|
1,039 |
|
|
|
|
|
|
|
1,039 |
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses |
|
|
13,030 |
|
|
|
21 |
|
|
|
13,051 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
14,813 |
|
|
|
(54 |
) |
|
|
14,759 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
(25 |
) |
|
|
|
|
|
|
(25 |
) |
Interest income |
|
|
330 |
|
|
|
|
|
|
|
330 |
|
Other, net |
|
|
(145 |
) |
|
|
|
|
|
|
(145 |
) |
|
|
|
|
|
|
|
|
|
|
Total other income |
|
|
160 |
|
|
|
|
|
|
|
160 |
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
14,973 |
|
|
|
(54 |
) |
|
|
14,919 |
|
Income tax expense (benefit) |
|
|
5,373 |
|
|
|
288 |
(b,c,d) |
|
|
5,661 |
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
9,600 |
|
|
$ |
(342 |
) |
|
$ |
9,258 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share — basic |
|
$ |
0.30 |
|
|
$ |
(0.02 |
) |
|
$ |
0.28 |
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common
Shares outstanding — basic |
|
|
32,491,717 |
|
|
|
|
|
|
|
32,491,717 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share — diluted |
|
$ |
0.28 |
|
|
$ |
(0.01 |
) |
|
$ |
0.27 |
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common
shares outstanding — diluted |
|
|
34,271,312 |
|
|
|
|
|
|
|
34,271,312 |
|
|
|
|
|
|
|
|
|
|
|
|
92
Merge Technologies Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In thousands, except for share and per share data)
MERGE TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, 2005 |
|
|
|
|
|
|
December 31, 2005 |
|
| |
|
(As reported) |
|
|
(Adjustments) |
|
|
(As restated) |
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
64,278 |
|
|
|
|
|
|
$ |
64,278 |
|
Accounts receivable, net |
|
|
23,624 |
|
|
|
(330 |
)(b) |
|
|
23,294 |
|
Inventory |
|
|
2,440 |
|
|
|
|
|
|
|
2,440 |
|
Prepaid expenses |
|
|
2,646 |
|
|
|
|
|
|
|
2,646 |
|
Deferred income taxes |
|
|
11,213 |
|
|
|
522 |
(b,c) |
|
|
11,735 |
|
Other current assets |
|
|
3,208 |
|
|
|
|
|
|
|
3,208 |
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
107,409 |
|
|
|
192 |
|
|
|
107,601 |
|
Net property and equipment |
|
|
4,440 |
|
|
|
|
|
|
|
4,440 |
|
Purchased and developed software, net |
|
|
19,539 |
|
|
|
|
|
|
|
19,539 |
|
Acquired intangibles, net |
|
|
11,789 |
|
|
|
|
|
|
|
11,789 |
|
Goodwill |
|
|
350,634 |
|
|
|
(176 |
)(b) |
|
|
|
|
|
|
|
|
|
|
|
(5,337 |
)(d) |
|
|
345,121 |
|
Other assets |
|
|
7,862 |
|
|
|
203 |
(b) |
|
|
8,065 |
|
Deferred income taxes |
|
|
— |
|
|
|
3,460 |
(d) |
|
|
|
|
|
|
|
|
|
|
|
30 |
(b) |
|
|
3,490 |
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
501,673 |
|
|
$ |
(1,628 |
) |
|
$ |
500,045 |
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
5,938 |
|
|
|
|
|
|
$ |
5,938 |
|
Accrued wages |
|
|
5,870 |
|
|
|
|
|
|
|
5,870 |
|
Other accrued liabilities |
|
|
3,453 |
|
|
|
50 |
(b) |
|
|
3,503 |
|
Deferred revenue |
|
|
30,918 |
|
|
|
202 |
(a) |
|
|
31,120 |
|
Income taxes payable |
|
|
3,894 |
|
|
|
312 |
(b,c) |
|
|
4,206 |
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
50,073 |
|
|
|
564 |
|
|
|
50,637 |
|
Deferred income taxes |
|
|
3,491 |
|
|
|
(1,476 |
)(d) |
|
|
2,015 |
|
Deferred revenue |
|
|
3,784 |
|
|
|
533 |
(a) |
|
|
4,317 |
|
Other |
|
|
484 |
|
|
|
|
|
|
|
484 |
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
57,832 |
|
|
|
(379 |
) |
|
|
57,453 |
|
Total shareholders’ equity |
|
|
443,841 |
|
|
|
(1,249 |
) |
|
|
442,592 |
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders’ equity |
|
$ |
501,673 |
|
|
$ |
(1,628 |
) |
|
$ |
500,045 |
|
|
|
|
|
|
|
|
|
|
|
93
Merge Technologies Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In thousands, except for share and per share data)
MERGE TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Quarter Ended |
|
|
|
|
|
|
Quarter Ended |
|
| |
|
December 31, 2005 |
|
|
|
|
|
|
December 31, 2005 |
|
| |
|
(As reported) |
|
|
(Adjustments) |
|
|
(As restated) |
|
Net sales: |
|
|
|
|
|
|
|
|
|
|
|
|
Software and other |
|
$ |
17,702 |
|
|
$ |
(87 |
)(a.b) |
|
$ |
17,615 |
|
Services and maintenance |
|
|
7,758 |
|
|
|
36 |
(a,b) |
|
|
7,794 |
|
|
|
|
|
|
|
|
|
|
|
Total net sales |
|
|
25,460 |
|
|
|
(51 |
) |
|
|
25,409 |
|
Cost of sales: |
|
|
|
|
|
|
|
|
|
|
|
|
Software and other |
|
|
1,959 |
|
|
|
14 |
(a) |
|
|
1,973 |
|
Services and maintenance |
|
|
3,542 |
|
|
|
5 |
(a) |
|
|
3,547 |
|
Amortization |
|
|
3,989 |
|
|
|
|
|
|
|
3,989 |
|
|
|
|
|
|
|
|
|
|
|
Total cost of sales |
|
|
9,490 |
|
|
|
19 |
|
|
|
9,509 |
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
15,970 |
|
|
|
(70 |
) |
|
|
15,900 |
|
Operating costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing |
|
|
5,000 |
|
|
|
|
|
|
|
5,000 |
|
Product research and development |
|
|
4,000 |
|
|
|
|
|
|
|
4,000 |
|
General and administrative |
|
|
2,435 |
|
|
|
57 |
(b) |
|
|
2,492 |
|
Goodwill impairment, restructuring
and other expenses |
|
|
(219 |
) |
|
|
|
|
|
|
(219 |
) |
Depreciation and amortization |
|
|
1,119 |
|
|
|
|
|
|
|
1,119 |
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses |
|
|
12,335 |
|
|
|
57 |
|
|
|
12,392 |
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
3,635 |
|
|
|
(127 |
) |
|
|
3,508 |
|
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
(13 |
) |
|
|
|
|
|
|
(13 |
) |
Interest income |
|
|
442 |
|
|
|
|
|
|
|
442 |
|
Other, net |
|
|
(47 |
) |
|
|
30 |
(b) |
|
|
(17 |
) |
|
|
|
|
|
|
|
|
|
|
Total other income |
|
|
382 |
|
|
|
30 |
|
|
|
412 |
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
4,017 |
|
|
|
(97 |
) |
|
|
3,920 |
|
Income tax expense (benefit) |
|
|
1,238 |
|
|
|
128 |
(b,c,d) |
|
|
1,366 |
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
2,779 |
|
|
$ |
(225 |
) |
|
$ |
2,554 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share — basic |
|
$ |
0.08 |
|
|
$ |
(0.00 |
) |
|
$ |
0.08 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common
shares outstanding — basic |
|
|
33,523,440 |
|
|
|
|
|
|
|
33,523,440 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per share — diluted |
|
$ |
0.08 |
|
|
$ |
(0.01 |
) |
|
$ |
0.07 |
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common
shares outstanding — diluted |
|
|
34,930,278 |
|
|
|
|
|
|
|
34,930,278 |
|
|
|
|
|
|
|
|
|
|
|
|
94
Merge Technologies Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In thousands, except for share and per share data)
MERGE TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
March 31, 2006 |
|
|
|
|
|
|
March 31, 2006 |
|
| |
|
(As reported) |
|
|
(Adjustments) |
|
|
(As restated) |
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
65,128 |
|
|
|
|
|
|
$ |
65,128 |
|
Accounts receivable, net |
|
|
20,061 |
|
|
|
(398) |
(b) |
|
|
19,663 |
|
Inventory |
|
|
2,838 |
|
|
|
|
|
|
|
2,838 |
|
Prepaid expenses |
|
|
3,276 |
|
|
|
|
|
|
|
3,276 |
|
Deferred income taxes |
|
|
11,213 |
|
|
|
550 |
(b,c) |
|
|
11,763 |
|
Other current assets |
|
|
2,947 |
|
|
|
|
|
|
|
2,947 |
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
105,463 |
|
|
|
152 |
|
|
|
105,615 |
|
Net property and equipment |
|
|
4,254 |
|
|
|
|
|
|
|
4,254 |
|
Purchased and developed software, net |
|
|
19,147 |
|
|
|
|
|
|
|
19,147 |
|
Acquired intangibles, net |
|
|
11,219 |
|
|
|
|
|
|
|
11,219 |
|
Goodwill |
|
|
350,521 |
|
|
|
(176 |
)(b) |
|
|
|
|
|
|
|
|
|
|
|
(5,337 |
)(d) |
|
|
345,008 |
|
Other assets |
|
|
7,312 |
|
|
|
173 |
(b) |
|
|
7,485 |
|
Deferred income taxes |
|
|
|
|
|
|
4,765 |
(d) |
|
|
|
|
|
|
|
|
|
|
|
45 |
(b) |
|
|
4,810 |
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
497,916 |
|
|
$ |
(378 |
) |
|
$ |
497,538 |
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
5,650 |
|
|
|
|
|
|
$ |
5,650 |
|
Accrued wages |
|
|
5,198 |
|
|
|
|
|
|
|
5,198 |
|
Other accrued liabilities |
|
|
3,762 |
|
|
|
94 |
(b) |
|
|
3,856 |
|
Deferred revenue |
|
|
33,517 |
|
|
|
276 |
(a) |
|
|
33,793 |
|
Income taxes payable |
|
|
3,894 |
|
|
|
325 |
(b,c) |
|
|
4,219 |
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
52,021 |
|
|
|
695 |
|
|
|
52,716 |
|
Deferred income taxes |
|
|
1,839 |
|
|
|
176 |
(d) |
|
|
2,015 |
|
Deferred revenue |
|
|
3,396 |
|
|
|
449 |
(a) |
|
|
3,845 |
|
Other |
|
|
453 |
|
|
|
|
|
|
|
453 |
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
57,709 |
|
|
|
1,320 |
|
|
|
59,029 |
|
Total shareholders’ equity |
|
|
440,207 |
|
|
|
(1,698 |
) |
|
|
438,509 |
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders’ equity |
|
$ |
497,916 |
|
|
$ |
(378 |
) |
|
$ |
497,538 |
|
|
|
|
|
|
|
|
|
|
|
95
Merge Technologies Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In thousands, except for share and per share data)
MERGE TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Quarter Ended |
|
|
|
|
|
|
Quarter Ended |
|
| |
|
March 31, 2006 |
|
|
|
|
|
|
March 31, 2006 |
|
| |
|
(As reported) |
|
|
(Adjustments) |
|
|
(As restated) |
|
Net sales: |
|
|
|
|
|
|
|
|
|
|
|
|
Software and other |
|
$ |
9,545 |
|
|
$ |
(21 |
)(a,b) |
|
$ |
9,524 |
|
Services and maintenance |
|
|
6,651 |
|
|
|
(35 |
)(a,b) |
|
|
6,616 |
|
|
|
|
|
|
|
|
|
|
|
Total net sales |
|
|
16,196 |
|
|
|
(56 |
) |
|
|
16,140 |
|
Cost of sales: |
|
|
|
|
|
|
|
|
|
|
|
|
Software and other |
|
|
1,372 |
|
|
|
2 |
(a) |
|
|
1,374 |
|
Services and maintenance |
|
|
3,686 |
|
|
|
|
|
|
|
3,686 |
|
Amortization |
|
|
1,277 |
|
|
|
|
|
|
|
1,277 |
|
|
|
|
|
|
|
|
|
|
|
Total cost of sales |
|
|
6,335 |
|
|
|
2 |
|
|
|
6,337 |
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
9,861 |
|
|
|
(58 |
) |
|
|
9,803 |
|
Operating costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing |
|
|
5,221 |
|
|
|
|
|
|
|
5,221 |
|
Product research and development |
|
|
5,129 |
|
|
|
|
|
|
|
5,129 |
|
General and administrative |
|
|
5,841 |
|
|
|
44 |
(b) |
|
|
5,885 |
|
Goodwill impairment, restructuring
and other expenses |
|
|
22 |
|
|
|
|
|
|
|
22 |
|
Depreciation and amortization |
|
|
1,042 |
|
|
|
|
|
|
|
1,042 |
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses |
|
|
17,255 |
|
|
|
44 |
|
|
|
17,299 |
|
|
|
|
|
|
|
|
|
|
|
Operating loss |
|
|
(7,394 |
) |
|
|
(102 |
) |
|
|
(7,496 |
) |
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
(4 |
) |
|
|
|
|
|
|
(4 |
) |
Interest income |
|
|
660 |
|
|
|
|
|
|
|
660 |
|
Other, net |
|
|
20 |
|
|
|
|
|
|
|
20 |
|
|
|
|
|
|
|
|
|
|
|
Total other income |
|
|
676 |
|
|
|
|
|
|
|
676 |
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes |
|
|
(6,718 |
) |
|
|
(102 |
) |
|
|
(6,820 |
) |
Income tax expense (benefit) |
|
|
(1,818 |
) |
|
|
318 |
(b,c,d) |
|
|
(1,500 |
) |
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(4,900 |
) |
|
$ |
(420 |
) |
|
$ |
(5,320 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share — basic |
|
$ |
(0.15 |
) |
|
$ |
( 0.01 |
) |
|
$ |
(0.16 |
) |
|
|
|
|
|
|
|
|
|
|
Weighted average number of common
shares outstanding — basic |
|
|
33,634,778 |
|
|
|
|
|
|
|
33,634,778 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share — diluted |
|
$ |
(0.15 |
) |
|
$ |
( 0.01 |
) |
|
$ |
(0.16 |
) |
|
|
|
|
|
|
|
|
|
|
Weighted average number of common
shares outstanding — diluted |
|
|
33,634,778 |
|
|
|
|
|
|
|
33,634,778 |
|
|
|
|
|
|
|
|
|
|
|
|
96
Merge Technologies Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In thousands, except for share and per share data)
MERGE TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
June 30, 2006 |
|
|
|
|
|
|
June 30, 2006 |
|
| |
|
(As reported) |
|
|
(Adjustments) |
|
|
(As restated) |
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
60,689 |
|
|
|
|
|
|
$ |
60,689 |
|
Accounts receivable, net |
|
|
15,359 |
|
|
|
(511 |
)(b) |
|
|
14,848 |
|
Inventory |
|
|
2,616 |
|
|
|
|
|
|
|
2,616 |
|
Prepaid expenses |
|
|
2,670 |
|
|
|
|
|
|
|
2,670 |
|
Deferred income taxes |
|
|
5,652 |
|
|
|
639 |
(b,c) |
|
|
6,291 |
|
Other current assets |
|
|
555 |
|
|
|
|
|
|
|
555 |
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
87,541 |
|
|
|
128 |
|
|
|
87,669 |
|
Net property and equipment |
|
|
4,078 |
|
|
|
|
|
|
|
4,078 |
|
Purchased and developed software, net |
|
|
18,752 |
|
|
|
|
|
|
|
18,752 |
|
Acquired intangibles, net |
|
|
10,650 |
|
|
|
|
|
|
|
10,650 |
|
Goodwill |
|
|
131,092 |
|
|
|
(176 |
)(b,d) |
|
|
130,916 |
|
Other assets |
|
|
9,238 |
|
|
|
181 |
(b) |
|
|
9,419 |
|
Deferred income taxes |
|
|
2,442 |
|
|
|
6,256 |
(d) |
|
|
|
|
|
|
|
|
|
|
|
61 |
(b) |
|
|
8,759 |
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
263,793 |
|
|
$ |
6,450 |
|
|
$ |
270,243 |
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
5,552 |
|
|
|
|
|
|
$ |
5,552 |
|
Accrued wages |
|
|
4,829 |
|
|
|
|
|
|
|
4,829 |
|
Other accrued liabilities |
|
|
3,418 |
|
|
|
138 |
(b) |
|
|
3,556 |
|
Deferred revenue |
|
|
15,935 |
|
|
|
359 |
(a) |
|
|
16,294 |
|
Income taxes payable |
|
|
3,894 |
|
|
|
338 |
(b,c) |
|
|
4,232 |
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
33,628 |
|
|
|
835 |
|
|
|
34,463 |
|
Deferred income taxes |
|
|
— |
|
|
|
2,015 |
(d) |
|
|
2,015 |
|
Deferred revenue |
|
|
4,671 |
|
|
|
542 |
(a) |
|
|
5,213 |
|
Other |
|
|
420 |
|
|
|
|
|
|
|
420 |
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
38,719 |
|
|
|
3,392 |
|
|
|
42,111 |
|
Total shareholders’ equity |
|
|
225,074 |
|
|
|
3,058 |
|
|
|
228,132 |
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders’ equity |
|
$ |
263,793 |
|
|
$ |
6,450 |
|
|
$ |
270,243 |
|
|
|
|
|
|
|
|
|
|
|
97
Merge Technologies Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In thousands, except for share and per share data)
MERGE TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Quarter Ended |
|
|
|
|
|
|
Quarter Ended |
|
| |
|
June 30, 2006 |
|
|
|
|
|
|
June 30, 2006 |
|
| |
|
(As reported) |
|
|
(Adjustments) |
|
|
(As restated) |
|
Net sales: |
|
|
|
|
|
|
|
|
|
|
|
|
Software and other |
|
$ |
18,770 |
|
|
$ |
(127 |
)(a,b) |
|
$ |
18,643 |
|
Services and maintenance |
|
|
12,952 |
|
|
|
(158 |
)(a,b) |
|
|
12,794 |
|
|
|
|
|
|
|
|
|
|
|
Total net sales |
|
|
31,722 |
|
|
|
(285 |
) |
|
|
31,437 |
|
Cost of sales: |
|
|
|
|
|
|
|
|
|
|
|
|
Software and other |
|
|
4,470 |
|
|
|
2 |
(a) |
|
|
4,472 |
|
Services and maintenance |
|
|
3,787 |
|
|
|
2 |
(a) |
|
|
3,789 |
|
Amortization |
|
|
1,068 |
|
|
|
|
|
|
|
1,068 |
|
|
|
|
|
|
|
|
|
|
|
Total cost of sales |
|
|
9,325 |
|
|
|
4 |
|
|
|
9,329 |
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
22,397 |
|
|
|
(289 |
) |
|
|
22,108 |
|
Operating costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing |
|
|
5,233 |
|
|
|
|
|
|
|
5,233 |
|
Product research and development |
|
|
5,083 |
|
|
|
|
|
|
|
5,083 |
|
General and administrative |
|
|
6,345 |
|
|
|
44 |
(b) |
|
|
6,389 |
|
Goodwill impairment, restructuring
and other expenses |
|
|
219,462 |
|
|
|
(5,338 |
)(d) |
|
|
214,124 |
|
Depreciation and amortization |
|
|
1,142 |
|
|
|
|
|
|
|
1,142 |
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses |
|
|
237,265 |
|
|
|
(5,294 |
) |
|
|
231,971 |
|
|
|
|
|
|
|
|
|
|
|
Operating loss |
|
|
(214,868 |
) |
|
|
5,005 |
|
|
|
(209,863 |
) |
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
(21 |
) |
|
|
|
|
|
|
(21 |
) |
Interest income |
|
|
696 |
|
|
|
|
|
|
|
696 |
|
Other, net |
|
|
(216 |
) |
|
|
|
|
|
|
(216 |
) |
|
|
|
|
|
|
|
|
|
|
Total other income |
|
|
459 |
|
|
|
|
|
|
|
459 |
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes |
|
|
(214,409 |
) |
|
|
5,005 |
|
|
|
(209,404 |
) |
Income tax expense (benefit) |
|
|
1,360 |
|
|
|
255 |
(b,c,d) |
|
|
1,615 |
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(215,769 |
) |
|
$ |
4,750 |
|
|
$ |
(211,019 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share — basic |
|
$ |
(6.41 |
) |
|
$ |
0.14 |
|
|
$ |
(6.27 |
) |
|
|
|
|
|
|
|
|
|
|
Weighted average number of common
shares outstanding — basic |
|
|
33,637,779 |
|
|
|
|
|
|
|
33,637,779 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share — diluted |
|
$ |
(6.41 |
) |
|
$ |
0.14 |
|
|
$ |
(6.27 |
) |
|
|
|
|
|
|
|
|
|
|
Weighted average number of common
shares outstanding — diluted |
|
|
33,637,779 |
|
|
|
|
|
|
|
33,637,779 |
|
|
|
|
|
|
|
|
|
|
|
|
98
Merge Technologies Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In thousands, except for share and per share data)
MERGE TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
September 30, 2006 |
|
|
|
|
|
|
September 30, 2006 |
|
| |
|
(As reported) |
|
|
(Adjustments) |
|
|
(As restated) |
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
52,159 |
|
|
|
|
|
|
$ |
52,159 |
|
Accounts receivable, net |
|
|
15,148 |
|
|
|
(649 |
)(b) |
|
|
14,499 |
|
Inventory |
|
|
2,229 |
|
|
|
|
|
|
|
2,229 |
|
Prepaid expenses |
|
|
2,879 |
|
|
|
|
|
|
|
2,879 |
|
Deferred income taxes |
|
|
1,297 |
|
|
|
648 |
(b,c) |
|
|
1,945 |
|
Other current assets |
|
|
751 |
|
|
|
|
|
|
|
751 |
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
74,463 |
|
|
|
(1 |
) |
|
|
74,462 |
|
Net property and equipment |
|
|
3,976 |
|
|
|
|
|
|
|
3,976 |
|
Purchased and developed software, net |
|
|
18,158 |
|
|
|
|
|
|
|
18,158 |
|
Acquired intangibles, net |
|
|
10,080 |
|
|
|
|
|
|
|
10,080 |
|
Goodwill |
|
|
131,092 |
|
|
|
(176 |
)(b,d) |
|
|
130,916 |
|
Other assets |
|
|
9,702 |
|
|
|
167 |
(b) |
|
|
9,869 |
|
Deferred income taxes |
|
|
5,488 |
|
|
|
5,909 |
(d) |
|
|
|
|
|
|
|
|
|
|
|
76 |
(b) |
|
|
11,473 |
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
252,959 |
|
|
$ |
5,975 |
|
|
$ |
258,934 |
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
4,261 |
|
|
|
|
|
|
$ |
4,261 |
|
Accrued wages |
|
|
4,894 |
|
|
|
|
|
|
|
4,894 |
|
Other accrued liabilities |
|
|
2,218 |
|
|
|
182 |
(b) |
|
|
2,400 |
|
Deferred revenue |
|
|
16,790 |
|
|
|
365 |
(a) |
|
|
17,155 |
|
Income taxes payable |
|
|
4,034 |
|
|
|
351 |
(b,c) |
|
|
4,385 |
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
32,197 |
|
|
|
898 |
|
|
|
33,095 |
|
Deferred income taxes |
|
|
— |
|
|
|
2,015 |
(d) |
|
|
2,015 |
|
Deferred revenue |
|
|
3,657 |
|
|
|
471 |
(a) |
|
|
4,128 |
|
Other |
|
|
392 |
|
|
|
|
|
|
|
392 |
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
36,246 |
|
|
|
3,384 |
|
|
|
39,630 |
|
Total shareholders’ equity |
|
|
216,713 |
|
|
|
2,591 |
|
|
|
219,304 |
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders’ equity |
|
$ |
252,959 |
|
|
$ |
5,975 |
|
|
$ |
258,934 |
|
|
|
|
|
|
|
|
|
|
|
99
Merge Technologies Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In thousands, except for share and per share data)
MERGE TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Quarter Ended |
|
|
|
|
|
|
Quarter Ended |
|
| |
|
September 30, 2006 |
|
|
|
|
|
|
September 30, 2006 |
|
| |
|
(As reported) |
|
|
(Adjustments) |
|
|
(As restated) |
|
Net sales: |
|
|
|
|
|
|
|
|
|
|
|
|
Software and other |
|
$ |
6,632 |
|
|
$ |
(20) |
(a,b) |
|
$ |
6,612 |
|
Services and maintenance |
|
|
7,318 |
|
|
|
(41) |
(a,b) |
|
|
7,277 |
|
|
|
|
|
|
|
|
|
|
|
Total net sales |
|
|
13,950 |
|
|
|
(61 |
) |
|
|
13,889 |
|
Cost of sales: |
|
|
|
|
|
|
|
|
|
|
|
|
Software and other |
|
|
1,800 |
|
|
|
9 |
(a) |
|
|
1,809 |
|
Services and maintenance |
|
|
3,512 |
|
|
|
3 |
(a) |
|
|
3,515 |
|
Amortization |
|
|
1,243 |
|
|
|
|
|
|
|
1,243 |
|
|
|
|
|
|
|
|
|
|
|
Total cost of sales |
|
|
6,555 |
|
|
|
12 |
|
|
|
6,567 |
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
7,395 |
|
|
|
(73 |
) |
|
|
7,322 |
|
Operating costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing |
|
|
4,352 |
|
|
|
|
|
|
|
4,352 |
|
Product research and development |
|
|
4,847 |
|
|
|
|
|
|
|
4,847 |
|
General and administrative |
|
|
8,148 |
|
|
|
44 |
(b) |
|
|
8,192 |
|
Depreciation and amortization |
|
|
854 |
|
|
|
|
|
|
|
854 |
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses |
|
|
18,201 |
|
|
|
44 |
|
|
|
18,245 |
|
|
|
|
|
|
|
|
|
|
|
Operating loss |
|
|
(10,806 |
) |
|
|
(117 |
) |
|
|
(10,923 |
) |
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
(10 |
) |
|
|
|
|
|
|
(10 |
) |
Interest income |
|
|
646 |
|
|
|
|
|
|
|
646 |
|
Other, net |
|
|
207 |
|
|
|
|
|
|
|
207 |
|
|
|
|
|
|
|
|
|
|
|
Total other income |
|
|
843 |
|
|
|
|
|
|
|
843 |
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes |
|
|
(9,963 |
) |
|
|
(117 |
) |
|
|
(10,080 |
) |
Income tax expense (benefit) |
|
|
788 |
|
|
|
337 |
(b,c,d) |
|
|
1,125 |
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(10,751 |
) |
|
$ |
(454 |
) |
|
$ |
(11,205 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share — basic |
|
$ |
(0.32 |
) |
|
$ |
(0.01 |
) |
|
$ |
(0.33 |
) |
|
|
|
|
|
|
|
|
|
|
Weighted average number of common
shares outstanding — basic |
|
|
33,683,231 |
|
|
|
|
|
|
|
33,683,231 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share — diluted |
|
$ |
(0.32 |
) |
|
$ |
(0.01 |
) |
|
$ |
(0.33 |
) |
|
|
|
|
|
|
|
|
|
|
Weighted average number of common
shares outstanding — diluted |
|
|
33,683,231 |
|
|
|
|
|
|
|
33,683,231 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100
Merge Technologies Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In thousands, except for share and per share data)
MERGE TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, 2006 |
|
|
|
|
|
|
December 31, 2006 |
|
| |
|
(As reported) |
|
|
(Adjustments) |
|
|
(As restated) |
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
45,945 |
|
|
|
|
|
|
$ |
45,945 |
|
Accounts receivable, net |
|
|
17,210 |
|
|
|
(783 |
)(b) |
|
|
16,427 |
|
Inventory |
|
|
2,164 |
|
|
|
|
|
|
|
2,164 |
|
Prepaid expenses |
|
|
1,660 |
|
|
|
|
|
|
|
1,660 |
|
Deferred income taxes |
|
|
196 |
|
|
|
|
|
|
|
196 |
|
Other current assets |
|
|
812 |
|
|
|
|
|
|
|
812 |
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
67,987 |
|
|
|
(783 |
) |
|
|
67,204 |
|
Net property and equipment |
|
|
3,940 |
|
|
|
|
|
|
|
3,940 |
|
Purchased and developed software, net |
|
|
16,628 |
|
|
|
|
|
|
|
16,628 |
|
Acquired intangibles, net |
|
|
9,511 |
|
|
|
|
|
|
|
9,511 |
|
Goodwill |
|
|
124,407 |
|
|
|
(176 |
)(b,d) |
|
|
124,231 |
|
Other assets |
|
|
8,887 |
|
|
|
148 |
(b) |
|
|
9,035 |
|
Deferred income taxes |
|
|
3,303 |
|
|
|
673 |
(d) |
|
|
|
|
|
|
|
|
|
|
|
350 |
(c) |
|
|
4,326 |
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
234,663 |
|
|
$ |
212 |
|
|
$ |
234,875 |
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
8,284 |
|
|
|
|
|
|
$ |
8,284 |
|
Accrued wages |
|
|
6,244 |
|
|
|
(82 |
)(b) |
|
|
6,162 |
|
Other accrued liabilities |
|
|
2,381 |
|
|
|
192 |
(b) |
|
|
2,573 |
|
Deferred revenue |
|
|
18,175 |
|
|
|
511 |
(a,b) |
|
|
18,686 |
|
Income taxes payable |
|
|
4,033 |
|
|
|
365 |
(b,c) |
|
|
4,398 |
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
39,117 |
|
|
|
986 |
|
|
|
40,103 |
|
Deferred income taxes |
|
|
— |
|
|
|
502 |
(d) |
|
|
502 |
|
Deferred revenue |
|
|
3,218 |
|
|
|
494 |
(a) |
|
|
3,712 |
|
Other |
|
|
633 |
|
|
|
|
|
|
|
633 |
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
42,968 |
|
|
|
1,982 |
|
|
|
44,950 |
|
Total shareholders’ equity |
|
|
191,695 |
|
|
|
(1,770 |
) |
|
|
189,925 |
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders’ equity |
|
$ |
234,663 |
|
|
$ |
212 |
|
|
$ |
234,875 |
|
|
|
|
|
|
|
|
|
|
|
101
Merge Technologies Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In thousands, except for share and per share data)
MERGE TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Quarter Ended |
|
|
|
|
|
|
Quarter Ended |
|
| |
|
December 31, 2006 |
|
|
|
|
|
|
December 31, 2006 |
|
| |
|
(As reported) |
|
|
(Adjustments) |
|
|
(As restated) |
|
Net sales: |
|
|
|
|
|
|
|
|
|
|
|
|
Software and other |
|
$ |
5,688 |
|
|
$ |
(192 |
)(a,b) |
|
$ |
5,496 |
|
Services and maintenance |
|
|
7,486 |
|
|
|
(126 |
)(a,b) |
|
|
7,360 |
|
|
|
|
|
|
|
|
|
|
|
Total net sales |
|
|
13,174 |
|
|
|
(318 |
) |
|
|
12,856 |
|
Cost of sales: |
|
|
|
|
|
|
|
|
|
|
|
|
Software and other |
|
|
1,969 |
|
|
|
(19 |
)(a,b) |
|
|
1,950 |
|
Services and maintenance |
|
|
3,479 |
|
|
|
3 |
(a) |
|
|
3,482 |
|
Amortization |
|
|
1,944 |
|
|
|
|
|
|
|
1,944 |
|
|
|
|
|
|
|
|
|
|
|
Total cost of sales |
|
|
7,392 |
|
|
|
(16 |
) |
|
|
7,376 |
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
5,782 |
|
|
|
(302 |
) |
|
|
5,480 |
|
Operating costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Sales and marketing |
|
|
5,326 |
|
|
|
(32 |
)(b) |
|
|
5,294 |
|
Product research and development |
|
|
5,381 |
|
|
|
(30 |
)(b) |
|
|
5,351 |
|
General and administrative |
|
|
8,295 |
|
|
|
(9 |
)(b) |
|
|
8,286 |
|
Goodwill impairment, restructuring
and other expenses |
|
|
11,329 |
|
|
|
(1,970 |
)(d) |
|
|
9,359 |
|
Depreciation and amortization |
|
|
995 |
|
|
|
|
|
|
|
995 |
|
|
|
|
|
|
|
|
|
|
|
Total operating costs and expenses |
|
|
31,326 |
|
|
|
(2,041 |
) |
|
|
29,285 |
|
|
|
|
|
|
|
|
|
|
|
Operating loss |
|
|
(25,544 |
) |
|
|
1,739 |
|
|
|
(23,805 |
) |
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
(32 |
) |
|
|
|
|
|
|
(32 |
) |
Interest income |
|
|
546 |
|
|
|
|
|
|
|
546 |
|
Other, net |
|
|
122 |
|
|
|
|
|
|
|
122 |
|
|
|
|
|
|
|
|
|
|
|
Total other income |
|
|
636 |
|
|
|
|
|
|
|
636 |
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes |
|
|
(24,908 |
) |
|
|
1,739 |
|
|
|
(23,169 |
) |
Income tax expense (benefit) |
|
|
2,130 |
|
|
|
6,080 |
(b,c,d) |
|
|
8,210 |
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(27,038 |
) |
|
$ |
(4,341 |
) |
|
$ |
(31,379 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share — basic |
|
$ |
(0.80 |
) |
|
$ |
(0.13 |
) |
|
$ |
(0.93 |
) |
|
|
|
|
|
|
|
|
|
|
Weighted average number of common
shares outstanding — basic |
|
|
33,848,978 |
|
|
|
|
|
|
|
33,848,978 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share — diluted |
|
$ |
(0.80 |
) |
|
$ |
(0.13 |
) |
|
$ |
(0.93 |
) |
|
|
|
|
|
|
|
|
|
|
Weighted average number of common
shares outstanding — diluted |
|
|
33,848,978 |
|
|
|
|
|
|
|
33,848,978 |
|
|
|
|
|
|
|
|
|
|
|
|
102
Merge Technologies Incorporated and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(In thousands, except for share and per share data)
|
|
|
| (a) |
|
Impact of deferral and recognition of net sales and related costs attributed to factors
discussed in the Revenue Recognition section of Note 2 for the period, including cumulative
effect of all periods on deferred revenue. |
| |
| (b) |
|
Impact of adjustments discussed in the Other Adjustments section of Note 2 for the current
period, primarily consisting of items previously deemed immaterial for restatement purposes.
Balance sheet impact is cumulative for all periods impacted. |
| |
| (c) |
|
Impact on income tax expense, net, of all adjustments in (a) and (b) during the period at
the effective tax rate, including cumulative effect of all periods on current and long-term
deferred income tax assets and liabilities. Also includes reclassification of the net current
and long-term deferred tax position on the balance sheet as a result of the effects of (d). |
| |
| (d) |
|
Impact of adjustments on deferred income taxes and goodwill related to the acquisition
accounting adjustments described in the Goodwill and Deferred Income Taxes section of Note 2,
as well as related effects on income tax expense. |
103
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
Item 9A. CONTROLS AND PROCEDURES
(a) Disclosure Controls and Procedures
Disclosure controls and procedures are controls and other procedures of a registrant designed
to ensure that information required to be disclosed by the registrant in the reports that it files
or submits under the Exchange Act is properly recorded, processed, summarized and reported, within
the time periods specified in the Securities and Exchange Commission’s (“SEC”) rules and forms.
Disclosure controls and procedures include processes to accumulate and evaluate relevant
information and communicate such information to a registrant’s management, including its principal
executive and financial officers, as appropriate, to allow for timely decisions regarding required
disclosures.
We evaluated the effectiveness of the design and operation of our disclosure controls and
procedures as of December 31, 2006, as required by Rule 13a–15 of the Exchange Act. This
evaluation was carried out under the supervision and with the participation of our management,
including our principal executive officer and principal financial officer. As described below,
under “Management’s Report on Internal Control Over Financial Reporting,” material weaknesses were
identified in our internal control over financial reporting as of December 31, 2006 relating to our
control environment, revenue recognition, accounting for income taxes, accounting for business
combinations and the implementation of a new accounting system. Based on the evaluation described
above, our principal executive officer and principal financial officer have concluded that, as of
December 31, 2006, our disclosure controls and procedures were not effective to ensure (1) that
information required to be disclosed by us in the reports we file or submit under the Exchange Act
is recorded, processed, summarized and reported, within the time periods specified in the SEC’s
rules and forms, and (2) information required to be disclosed by us in our reports that we file or
submit under the Exchange Act is accumulated and communicated to our management, including our
principal executive officer and principal financial officer, or persons performing similar
functions, as appropriate to allow timely decisions regarding required disclosure.
The errors that led to the restatement of our consolidated financial statements in this Form
10-K/A were the result of material weaknesses in revenue recognition, accounting for income taxes,
and accounting for business combinations. These material weaknesses existed as of December 31, 2006
and were previously identified by management.
(b) Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over
financial reporting. Our internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of our
financial statements for external reporting purposes in accordance with GAAP.
Internal control over financial reporting cannot provide absolute assurance of achieving
financial reporting objectives because of its inherent limitations. Internal control over financial
reporting is a process that involves human diligence and compliance and is subject to lapses in
judgment and breakdowns resulting from human failures. Internal control over financial reporting
also can be circumvented by collusion or improper management override. Because of such limitations,
there is a risk that material misstatements may not be prevented or detected on a timely basis by
internal control over financial reporting. However, these inherent limitations are known features
of the financial reporting process. Therefore, it is possible to design into the process safeguards
to reduce, though not eliminate, this risk.
A material weakness in internal control over financial reporting (as defined in Auditing
Standard No. 2 of the Public Company Accounting Oversight Board) is a significant deficiency, or
combination of significant deficiencies, that results in more than a remote likelihood that a
material misstatement of the annual or interim financial statements will not be prevented or
detected. A significant deficiency is a control deficiency, or combination of control deficiencies,
that adversely affects a company’s ability to initiate, authorize, record, process or report
external financial data reliably in accordance with GAAP such that there is more than a remote
104
likelihood that a misstatement of the company’s annual or interim financial statements that is
more than inconsequential will not be prevented or detected.
Management assessed the effectiveness of our internal control over financial reporting as of
December 31, 2006, using the criteria set forth by the Committee of Sponsoring Organizations of the
Treadway Commission (“COSO”) in Internal Control—Integrated Framework. In assessing the
effectiveness of our internal control over financial reporting, management identified the following
material weaknesses in internal control over financial reporting as of December 31, 2006:
| |
1. |
|
We did not maintain an effective control environment. Specifically, we lacked an
appropriate control consciousness and sufficient resources to address and remediate
certain control deficiencies on a timely basis. These deficiencies resulted in more than a
remote likelihood that a material misstatement of our annual or interim financial
statements would not be prevented or detected. |
| |
| |
2. |
|
We did not maintain effective policies and procedures relating to revenue
recognition. Specifically, the lack of effective policies and procedures surrounding the
review and determination of revenue recognition associated with our sales contracts and
accurate recording of revenue contributed to incorrect recognition of revenue in our
preliminary 2006 consolidated financial statements, which were corrected prior to
issuance. These deficiencies resulted in more than a remote likelihood that a material
misstatement of our annual or interim financial statements would not be prevented or
detected. |
| |
| |
3. |
|
We did not maintain effective policies and procedures relating to the preparation of
current and deferred income tax provisions and related balance sheet accounts.
Specifically, we did not prepare account analyses and perform account reconciliation
procedures in a timely manner. In addition we lacked sufficient personnel with
institutional knowledge and technical expertise in the accounting for income taxes. These
deficiencies resulted in more than a remote likelihood that a material misstatement of our
annual or interim financial statements would not be prevented or detected. |
| |
| |
4. |
|
We did not maintain effective policies and procedures over the accounting for
business combinations. Specifically, we did not have formal policies and procedures to
provide for sufficient analysis to identify all net assets acquired in a prior period
business combination and allowable adjustments to goodwill, which resulted in an
adjustment to correct an error that we have recorded in the fourth quarter of 2006 in our
consolidated financial statements. These deficiencies resulted in more than a remote
likelihood that a material misstatement of our annual or interim financial statements
would not be prevented or detected. |
| |
| |
5. |
|
We did not maintain effective policies and procedures over the implementation of our
new accounting system for our U.S. operations, which we commenced in the fourth quarter.
Specifically, we failed to apply procedures with respect to program development to ensure
that certain financial reports that impact our financial reporting were developed and
maintained appropriately. As a result, controls over the access to, and completeness,
accuracy and validity of transactions processed through and reports generated from our
accounting system were not designed appropriately or did not operate as designed. These
deficiencies resulted in more than a remote likelihood that a material misstatement of our
annual or interim financial statements would not be prevented or detected and contributed
to the revenue recognition deficiency described above. |
As a result of the material weaknesses described above, our management concluded that we did
not maintain effective internal control over financial reporting as of December 31, 2006, based on
the criteria established by COSO.
KPMG LLP, our independent registered public accounting firm that audited our consolidated
financial statements included in this Annual Report on Form 10-K/A, has issued an audit report on
management’s assessment of our internal control over financial reporting. This report can be found
below.
105
(c) Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
Merge Technologies Incorporated:
We have audited management’s assessment, included in the accompanying Management’s Report on
Internal Control Over Financial Reporting (Item 9A(b)), that Merge Technologies Incorporated
(the Company) did not maintain effective internal control over financial reporting as of December
31, 2006, because of the effect of material weaknesses identified in management’s assessment, based
on criteria established in Internal Control—Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible
for maintaining effective internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our responsibility is to express an
opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal
control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating management’s assessment, testing and evaluating the
design and operating effectiveness of internal control, and performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a reasonable basis
for our opinion.
A company’s internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting
principles. A company’s internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and
directors of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s assets that could have
a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
A material weakness is a control deficiency, or combination of control deficiencies, that
results in more than a remote likelihood that a material misstatement of the annual or interim
financial statements will not be prevented or detected. The following material weaknesses have been
identified and included in management’s assessment:
| |
1. |
|
The Company did not maintain an effective control environment. Specifically, the
Company lacked an appropriate control consciousness and sufficient resources to address
and remediate certain control deficiencies on a timely basis. These deficiencies resulted
in more than a remote likelihood that a material misstatement of the Company’s annual or
interim financial statements would not be prevented or detected. |
| |
| |
2. |
|
The Company did not maintain effective policies and procedures relating to revenue
recognition. Specifically, the lack of effective policies and procedures surrounding the
review and determination of revenue recognition associated with the Company’s sales
contracts and accurate recording of revenue contributed to incorrect recognition of
revenue in the Company’s preliminary 2006 consolidated financial statements. These
deficiencies resulted in more than a remote likelihood that a material misstatement of the
Company’s annual or interim financial statements would not be prevented or detected. |
106
| |
3. |
|
The Company did not maintain effective policies and procedures relating to the
preparation of current and deferred income tax provisions and related balance sheet
accounts. Specifically, the Company did not prepare account analyses and perform account
reconciliation procedures in a timely manner. In addition, the Company lacked sufficient
personnel with institutional knowledge and technical expertise in the accounting for
income taxes. These deficiencies resulted in more than a remote likelihood that a material misstatement of the Company’s annual or interim financial
statements would not be prevented or detected. |
| |
| |
4. |
|
The Company did not maintain effective policies and procedures over the accounting
for business combinations. Specifically, the Company did not have formal policies and
procedures to provide for sufficient analysis to identify all net assets acquired in a
prior period business combination and allowable adjustments to goodwill, which resulted in
an error in the Company’s preliminary 2006 financial statements. These deficiencies
resulted in more than a remote likelihood that a material misstatement of the Company’s
annual or interim financial statements would not be prevented or detected. |
| |
| |
5. |
|
The Company did not maintain effective policies and procedures over the
implementation of the Company’s new accounting system for the Company’s U.S. operations,
which the Company commenced in the fourth quarter. Specifically, the Company failed to
apply procedures with respect to program development to ensure that certain financial
reports that impact the Company’s financial reporting were developed and maintained
appropriately. As a result, controls over the access to, and completeness, accuracy and
validity of transactions processed through and reports generated from the Company’s
accounting system were not designed appropriately or did not operate as designed. These
deficiencies resulted in more than a remote likelihood that a material misstatement of the
Company’s annual or interim financial statements would not be prevented or detected and
contributed to the revenue recognition deficiency described above. |
In our opinion, management’s assessment that the Company did not maintain effective internal
control over financial reporting as of December 31, 2006, is fairly stated, in all material
respects, based on criteria established in Internal Control—Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also, in our opinion,
because of the effect of the material weaknesses described above on the achievement of the objectives
of the control criteria, the Company has not maintained effective internal control over financial
reporting as of December 31, 2006, based on criteria established in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
We also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the accompanying consolidated balance sheets of Merge Technologies
Incorporated and subsidiaries as of December 31, 2006 and 2005, and the related consolidated
statements of operations, shareholders’ equity, comprehensive income (loss), and cash flows for
each of the years in the three—year period ended December 31, 2006. The aforementioned material
weaknesses were considered in determining the nature, timing, and extent of audit tests applied in
our audit of the 2006 consolidated financial statements, and this report does not affect our report
dated March 8, 2007, which expressed an unqualified opinion on the consolidated financial
statements.
/s/ KPMG LLP
Chicago, Illinois
March 8, 2007
(d) Changes in Internal Control Over Financial Reporting
The following significant changes in our internal control over financial reporting occurred
during the quarter ended December 31, 2006 that have materially affected, or are reasonably likely
to materially affect, our internal control over financial reporting:
| |
1. |
|
We have restructured our organization such that we have three business units, with
presidents, that report to our CEO and controllers that report to members of the finance
department under the direct responsibility of the Chief Accounting Officer. |
107
| |
2. |
|
We have created an internal audit function that reports directly to the Audit
Committee of our Board of Directors and is responsible for, among other things, a
quarterly review of each of our sales contracts under which we expect to receive revenue
in excess of $100,000. |
| |
| |
3. |
|
We commenced an accounting system replacement initiative for our U.S. operations. The
project
scope includes a replacement of certain aspects of our financial systems (general ledger,
accounts payable, accounts receivable, order entry and fulfillment) as a first phase of the
overall project plan. The above named aspects of our financial systems and related control
processes and procedures were operating, to a limited extent, as of December 31, 2006. |
| (e) |
|
Remediation Efforts to Address Material Weaknesses in Internal Control Over Financial
Reporting |
We have substantially completed the items outlined in the remediation plan that was previously
approved by the Audit Committee of our Board (see the 2005 Annual Report on Form 10–K for a full
description of the remediation plan). Based on a review conducted by our internal audit function,
we continue to address the following steps from the 2005 remediation plan, as well as additional
items that we will address as a result of our 2006 assessment of internal control over financial
reporting:
| |
1. |
|
We continue to enhance our contract review processes to include a cross functional
group that is responsible for reviewing contracts and providing information required to
assist us in our determination of revenue recognition. |
| |
| |
2. |
|
We continue to formalize our procedures for project status determination and customer
acceptance sign–off. |
| |
| |
3. |
|
We continue to enhance our education program for our sales and service organization
to educate them regarding our revenue recognition policies. We continue to implement
formal representation and verification procedures with sales staff as of December 31,
2006. |
| |
| |
4. |
|
We continue to refine our contract review process, related to contracts with
non–standard or complex terms, with a goal of determining the appropriate accounting
treatment prior to quarter–end. We have refined our contract review processes and
procedures as of December 31, 2006. In addition, we have refined our goal with respect to
this remediation item to determining the appropriate accounting treatment prior to
providing our quarterly results to our external auditors. |
Based on our assessment of our internal control over financial reporting as of December 31,
2006, management has committed to the following additional remediation items:
| |
1. |
|
The formalization of policies and procedures to provide for sufficient analysis to
identify all net assets acquired in a business combination. Specifically, the institution
of a formal checklist that we will use to ensure that we have considered applicable issues
and considerations associated with purchase price allocation, including income tax related
items. |
| |
| |
2. |
|
The expansion of our policies and procedures surrounding the program development or
implementation of internal–use software applications. Specifically, we will adjust our
current policies and procedures to ensure that more significant testing procedures,
including the testing of multiple transactions and reports over an extended period of
time, are performed prior to implementing significant changes to our internal–use
software applications (including our accounting systems) that directly impact our
financial reporting process. |
In addition to our continued institution, refinement and improvement of our remediation plan,
the Audit Committee has committed to expanding the resources of our accounting and finance
organization. Most notably, we have hired, subsequent to December 31, 2006, a Chief Financial
Officer, Vice President of Finance, Director of SEC Financial Reporting, and a Corporate Controller
and plan to expand the finance department further during 2007. In addition, it is anticipated that
our current Chief Accounting Officer will transition his responsibilities to the Vice President of
Finance and he will become the leader of our Internal Audit function. We will also utilize external
professional accounting resources to assist with the identification and proper application of
generally accepted accounting principles in all of our ongoing tax activities (in addition to
complex transactions).
108
Item 9B. OTHER INFORMATION
None.
PART III
As permitted by SEC rules, we have omitted certain information required by Part III from this
Report on Form 10-K, because we will file (pursuant to Section 240.14a–101) our definitive proxy
statement for our 2007 annual shareholder meeting (the “Proxy Statement”) not later than April
30, 2007, and are therefore incorporating by reference in this Annual Report on Form 10-K such
information from the Proxy Statement.
Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Executive Officers
The following table sets forth the names of our Executive Officers, and their respective ages
and positions with us, followed by a brief biography of each individual, including his business
experience during the past five years.
| |
|
|
|
|
|
|
| Name |
|
Age |
|
Position |
Kenneth D. Rardin
|
|
|
56 |
|
|
President and Chief Executive Officer, Director |
Gary D. Bowers
|
|
|
54 |
|
|
President, Merge Healthcare North America |
Jacques F. Cornet
|
|
|
51 |
|
|
President, Merge Healthcare EMEA |
Steven R. Norton
|
|
|
45 |
|
|
Executive Vice President and Chief Financial Officer |
Loris Sartor
|
|
|
49 |
|
|
President, Cedara Software |
Kenneth D. Rardin, was appointed as a Director and our President and Chief Executive Officer
on September 6, 2006. Mr. Rardin has over 25 years of senior executive management experience in the
healthcare information technology, computer software and computer services industries. From October
2004 to January 2006, Mr. Rardin served as Chairman and Chief Executive Officer of Park City
Solutions, a leading eHealth company that specialized in electronic health records, systems
integration and consulting. Prior to joining Park City Solutions, Mr. Rardin was the Managing
Partner of Rardin Capital Management, a technology and financial consulting company. From October
1992 to October 1998, Mr. Rardin served as Chairman and Chief Executive Officer of IMNET Systems,
Inc., an electronic healthcare information management system company.
Gary D. Bowers was appointed President, Merge Healthcare North America on February 12, 2007.
He had earlier served as our Senior Vice President for Strategic Business Initiatives from November
2006, from which position he led the Company’s onshore–offshore development, service and support
initiative in Pune, India. He joined the Company as Vice President in September 2006. Previously,
Mr. Bowers was Senior Vice President, Product Technology, for Park City Solutions from October 2004
to November 2005, and was a General Partner of Rardin Capital Management from December 1999 to
September 2004. From October 1992 to April 1999, Mr. Bowers held various senior executive positions
at IMNET Systems, Inc., including Executive Vice President of Product Technology and Chief
Operating Officer. Mr. Bowers holds a B.A. in Statistics (magna cum laude) from the University of
Rochester.
Jacques F. Cornet was appointed President, Merge Healthcare EMEA (Europe, Middle East, Africa)
in November 2006. He was formerly Vice President Business Development and Strategic Marketing of
Cedara. Before joining Cedara in mid–2000, Mr. Cornet held several strategic business management
positions at ADAC Laboratories (now part of Philips Medical Systems) in the U.S., GE HealthCare in
Europe and the U.S. and GE Calma in Europe. Mr. Cornet holds a M. Sc. Degree in ElectroMechanical
and Computer Sciences and Executive Marketing from HEC France.
Steven R. Norton joined the Company as Executive Vice President and Chief Financial Officer
effective January 8, 2007. Mr. Norton manages all financial areas of the Company, as well as human
resources, legal, information technology, and investor relations. Previously, Mr. Norton was Senior
Vice President and Chief Financial Officer at Manhattan Associates, a publicly traded supplier of
supply chain management software and systems, from January 2005 to March 2006. From November 1999
to January 2005, he was an Executive Vice President and Chief Financial Officer for Concurrent
Computer Corporation. Additionally, Mr. Norton has held
109
senior management positions at LHS Group,
Ernst & Young, and KPMG. Mr. Norton earned his Bachelor of Arts degree from Michigan State
University in 1983.
Loris Sartor was appointed President, Cedara Software in November 2006. He formerly held
various positions with Cedara, including Director of the Platforms Products Division, Product Vice
President, Divisional Vice President of Engineering and Customer Solutions, and most recently Vice
President of Sales. Prior to joining Cedara in December 1993, Mr. Sartor held several technical and
management positions in the
Sietec Open Systems Division at Siemens Electric Ltd., as well as various other technical
positions within the software industry. Mr. Sartor holds a Bachelor of Applied Science and
Engineering Degree (Computer Science Option) and an M.B.A. from the University of Toronto.
The remaining information required by this item is incorporated herein by reference to the
information set forth under the caption “Directors and Executive Officers” in our Proxy
Statement.
Item 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated herein by reference to the information
set forth under the caption “Compensation of Executive Officers and Directors” in our Proxy
Statement.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
The information required by this item is incorporated herein by reference to the information
set forth under the caption “Security Ownership and Certain Beneficial Owners and Management” in
our Proxy Statement.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this item is incorporated herein by reference to the information
set forth under the caption “Related Party Transactions” in our Proxy Statement.
Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this item is incorporated herein by reference to the information
set forth under the caption “Accounting Fees and Services” in our Proxy Statement.
110
PART IV
Item 15. EXHIBITS AND FINANCIAL STATEMENTS SCHEDULES
(a) The following documents are filed as part of this annual report:
Financial Statements filed as part of this report pursuant to Part II, Item 8 of this
Annual Report on Form 10-K/A:
| |
• |
|
Restated Consolidated Balance Sheets at December 31, 2006 and December 31, 2005; |
| |
| |
• |
|
Restated Consolidated Statements of Operations for each of the three years ended
December 31, 2006, December 31, 2005 and December 31, 2004; |
| |
| |
• |
|
Restated Consolidated Statements of Shareholders’ Equity for each of the three
years ended December 31, 2006, December 31, 2005 and December 31, 2004; |
| |
| |
• |
|
Restated Consolidated Statements of Cash Flows for each of the three years ended
December 31, 2006, December 31, 2005 and December 31, 2004; |
| |
| |
• |
|
Restated Consolidated Statements of Comprehensive Income (Loss) for each of the
three years ended December 31, 2006, December 31, 2005 and December 31, 2004; and |
| |
| |
• |
|
Notes to Consolidated Financial Statements, as restated. |
(b) See Exhibit Index that follows.
Exhibit Index
| |
|
|
2.1
|
|
Merger Agreement by and among Merge Technologies Incorporated, AccuImage
Diagnostics Corp., ADI Acquisition Corp. and the Principal Shareholder of AccuImage
Diagnostics Corp. dated November 24, 2004(B) |
|
|
|
2.2
|
|
Merger Agreement by and among Merge Technologies Incorporated, Cedara Software Corp. and
Corrida, Ltd. dated January 17, 2005(C) |
|
|
|
3.1
|
|
Articles of Incorporation of Registrant(D), Articles of Amendment as filed on
December 28, 1998 (E) Articles of Amendment as filed on September 2, 1999(F), Articles of
Amendment as filed on February 23, 2001(F), Articles of Amendment as filed on August 9,
2002(G), Articles of Amendment as filed on May 27, 2005(H), and Articles of Amendment as
filed on September 6, 2006(J) |
|
|
|
3.2
|
|
Amended and Restated Bylaws of Registrant(J) |
|
|
|
4.1
|
|
Rights Agreement, dated as of September 6, 2006, between the Registrant and American
Stock Transfer & Trust Co.(J) |
|
|
|
10.1
|
|
Employment Agreement entered into as of March 1, 2004, between Registrant and Richard A.
Linden(G)* |
|
|
|
10.2
|
|
Employment Agreement entered into as of March 1, 2004, between Registrant and William C.
Mortimore(G)* |
|
|
|
10.3
|
|
Employment Agreement entered into as of March 1, 2004, between Registrant and Scott T.
Veech(G)* |
|
|
|
10.4
|
|
Letter Agreement dated May 12, 2006, between Registrant and Scott T. Veech(K)* |
|
|
|
10.5
|
|
Employment Agreement entered into as of April 1, 2006, between Registrant and David M.
Noshay(L)* |
|
|
|
10.6
|
|
Employment Agreement entered into as of April 1, 2006, between Registrant and Robert J.
White(L)* |
|
|
|
10.7
|
|
Key Officer Agreement entered into as of October 12, 2005, by and between Registrant and
Steven M. Oreskovich(M)* |
|
|
|
10.8
|
|
Letter Agreement dated July 2, 2006 by and between Registrant and Steven M. Oreskovich(N)* |
|
|
|
10.9
|
|
1996 Stock Option Plan for Employees of Registrant dated May 13, 1996(D), as amended and
restated in its entirety as of September 1, 2003(O)* |
|
|
|
10.10
|
|
Employment Agreement entered into as of September 6, 2006, between the Registrant and
Kenneth D. Rardin (J)* |
|
|
|
10.11
|
|
Employment Agreement entered into as of January 8, 2007 between the Registrant and Steven
R. Norton(P)* |
111
| |
|
|
10.12
|
|
Employment Agreement entered into as of February 5, 2007 between the Registrant and Gary
Bowers(T)* |
|
|
|
10.13
|
|
1998 Stock Option Plan For Directors(Q)* |
|
|
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10.14
|
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2003 Stock Option Plan of Registrant dated June 24, 2003, and effective July 17, 2003(O)* |
|
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10.15
|
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2005 Equity Incentive Plan adopted March 4, 2005, and effective May 24, 2005(R)* |
|
|
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10.16
|
|
Termination Agreement between Cedara Software Corp., Abe Schwartz and Merge Technologies
Incorporated dated June 1, 2005(S)* |
|
|
|
10.17
|
|
Form of Non–Qualified Stock Option Agreement under Registrant’s 2005 Equity Incentive
Plan(M)* |
|
|
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10.18
|
|
Form of Employee Incentive Stock Option Agreement under Registrant’s 2005 Equity
Incentive Plan(M)* |
|
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10.19
|
|
Form of Director Non–Qualified Stock Option Agreement under Registrant’s 2005 Equity
Incentive Plan(M)* |
|
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14.1
|
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Code of Ethics(G) |
|
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14.2
|
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Whistleblower Policy(G) |
|
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21
|
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Subsidiaries of Registrant(T) |
|
|
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23.1
|
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Consent of KPMG LLP |
|
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31.1
|
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Certification of Chief Executive Officer (principal executive officer) Pursuant to
Rule 13a–14(a) under the Securities Exchange Act of 1934 |
|
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31.2
|
|
Certification of Chief Financial Officer (principal accounting officer) Pursuant to
Rule 13a–14(a) under the Securities Exchange Act of 1934 |
|
|
|
32
|
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Certification of Chief Executive Officer (principal executive officer) and Chief
Financial Officer (principal accounting officer) Pursuant to Section 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes–Oxley Act of 2002 |
|
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99
|
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Amended and Restated Audit Committee Charter(M) |
|
|
|
| (A) |
|
Intentionally omitted. |
| |
| (B) |
|
Incorporated by reference from Current Report on Form 8–K dated November 24, 2004. |
| |
| (C) |
|
Incorporated by reference from Current Report on Form 8–K dated January 18, 2005. |
| |
| (D) |
|
Incorporated by reference from Registration Statement on Form SB–2 (No. 333–39111), effective
January 29, 1998. |
| |
| (E) |
|
Incorporated by reference from Quarterly Report on Form 10–QSB for the three months ended
March 31, 1999. |
| |
| (F) |
|
Incorporated by reference from Annual Report on Form 10–KSB for the year ended December 31,
2000. |
| |
| (G) |
|
Incorporated by reference from Annual Report on Form 10–K for the year ended December 31,
2003. |
| |
| (H) |
|
Incorporated by reference from Current Report on Form 8–K dated June 7, 2005. |
| |
| (J) |
|
Incorporated by reference from Current Report on Form 8–K dated September 6, 2006. |
| |
| (K) |
|
Incorporated by reference from Current Report on Form 8–K dated May 12, 2006. |
| |
| (L) |
|
Incorporated by reference from Current Report on Form 8–K dated April 1, 2006. |
| |
| (M) |
|
Incorporated by reference from Annual Report on Form 10–K for the year ended December 31,
2005. |
| |
| (N) |
|
Incorporated by reference from Current Report on Form 8–K dated June 29, 2006. |
| |
| (O) |
|
Incorporated by reference from Quarterly Report on Form 10–Q for the three months ended
September 30, 2003. |
| |
| (P) |
|
Incorporated by reference from the Registrant’s Current Report on Form 8–K dated January 16,
2007. |
| |
| (Q) |
|
Incorporated by reference from Annual Report on Form 10–KSB for the fiscal year ended
December 31, 1997. |
| |
| (R) |
|
Incorporated by reference from Registration Statement on Form S–8 (No. 333–125386) effective
June 1, 2005. |
112
|
|
|
| (S) |
|
Incorporated by reference from Quarterly Report on Form 10–Q for the six months ended
June 30, 2005. |
| |
| (T) |
|
Previously filed and incorporated by reference from Annual Report on Form 10-K for the year
ended December 31, 2006. |
| |
| * |
|
Management contract, or compensatory plan, or arrangement, required to be filed as an exhibit
to this Annual Report on Form 10-K/A. |
113
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange of 1934, the
Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
| |
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|
| |
Merge Technologies Incorporated
|
|
| Date: December 27, 2007 |
By: |
/s/ Kenneth D. Rardin
|
|
| |
|
Kenneth D. Rardin |
|
| |
|
President and Chief Executive Officer
(principal executive officer) |
|
| |
| |
|
|
|
|
| |
|
|
| Date: December 27, 2007 |
By: |
/s/ Steven R. Norton
|
|
| |
|
Steven R. Norton |
|
| |
|
Executive Vice President & Chief
Financial Officer
(principal financial officer and
principal accounting officer) |
|
| |
114