Form 10-KSB
[As last amended in Release No. 34-38850, July 18, 1997,
effective September 2, 1997, 62F.R. 397SS]
U.S. Securities and Exchange Commission
Washington, DC 20549
FORM 10-KSB
[ X ] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31,1997
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ............... to ...............
Commission file number...........................................
MERGE TECHNOLOGIES INCORPORATED
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Name of small business issuer in its charter
Wisconsin 39-1600938
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1126 South 70th Street, Milwaukee, Wisconsin 53214-3151
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number: 414-475-4300
Securities registered under Section 12(b) of the Exchange Act:
Common NASDAQ Small Cap
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Title of Each Class Name of each exchange
on which registered
Securities registered under Section 12(g) of the Exchange Act:
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes [ X ] No [ ]
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B is not contained in this form, and no disclosure
will 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-KSB or any amendment to this Form 10-KSB. [ ]
State issuer's revenues for its most recent fiscal year. $9,716,111
State the aggregate market value of the voting and non-voting common
equity held by non-affiliates computed by reference to the price at which
the common equity was sold, or the average bid and asked price of such
common equity, as of a specified date within the past 60 days. (See
definition of affiliate in Rule 12b-2 of the Exchange Act.)
-- The aggregate market value for the Registrant's stock held by non-
affiliates of the Registrant based upon the closing sale price of the
Common Stock on April 15, 1998 as reported on the NASDAQ Small Cap Market
System, was approximately $27,480,961. Shares of Common Stock held by each
officer and director and by each person who owns 5% 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.
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SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS
Certain statements in this report that are not historical facts
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995, Section 27A of the Securities Act
of 1933, as amended (the "Securities Act") and Section 21E of the
Securities Exchange Act of 1934, as amended (the "Exchange Act").
Discussions containing such forward-looking statements may be included
herein in the material set forth under "Management's Discussion and
Analysis of Financial Condition and Results of Operations" as well as
within this report generally. In addition, when used in this report, the
words "believes," intends," "anticipates," "expects" and similar
expressions are intended to identify forward-looking statements. These
statements are subject to a number of risks and uncertainties, including,
among others, the Company's lack of consistent profitability, history of
operating losses, fluctuations in operating results, credit and payment
risks associated with end-user sales, involvement with rapidly developing
technology in highly competitive markets, dependence on major customers,
expansion of its international sales effort, broad discretion of management
and dependence on key personnel, risks associated with product liability
and product defects, costs of complying with government regulation, changes
in external competitive market factors which might impact trends in the
Company's results of operation, unanticipated working capital an other cash
requirements, general changes in the industries in which the Company
competes, and various other competitive factors that may prevent the
Company from competing successfully in the marketplace. Actual results
could differ materially from those projected in the forward-looking
statements. The Company undertakes no obligation to publicly release the
result of any revisions to these forward-looking statements that may be
made to reflect any future events or circumstances.
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INDEX
Page
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PART I
Item 1. Business. . . . . . . . . . . . . . . . . . . . 1
Item 2. Properties. . . . . . . . . . . . . . . . . . . 13
Item 3. Legal Proceedings . . . . . . . . . . . . . . . 13
Item 4. Submission of Matters to a Vote of
Security Holders. . . . . . . . . . . . . . . 13
PART II
Item 5. Market for Common Equity and Related
Stockholder Matters . . . . . . . . . . . . . 14
Item 6. Management's Discussion and Analysis . . . . . 17
Item 7. Financial Statements. . . . . . . . . . . . . . 23
Item 8. Changes and Disagreements with Accountants. . . 45
PART III
Item 9. Directors, Executive Officers,
Promoters and Control Persons . . . . . . . . 36
Item 10. Executive Compensation. . . . . . . . . . . . . 46
Item 11. Security Ownership of Certain
Beneficial Owners . . . . . . . . . . . . . . . 46
Item 12. Certain Relationships and
Related Transactions. . . . . . . . . . . . . . 46
Item 13. Exhibit Index . . . . . . . . . . . . . . . . . 47
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PART I
ITEM 1. BUSINESS.
OVERVIEW
The Company provides software, hardware and systems integration
products and services that enable health care organizations to network
otherwise incompatible medical image-producing and image-using devices.
Medical image-producing devices primarily include digital x-ray, computed
tomography ("CT"), magnetic resonance imaging ("MRI"), computed radiography
("CR"), ultrasound and nuclear medicine machines. Medical image-using
devices primarily include video display terminals, specialty workstations,
medical film laser printers that facilitate the use of diagnostic medical
images, and digital image archiving systems. The Company's products can
support over 200 different combinations of image-producing and image-using
devices and have been installed at over 1,000 health care facilities
throughout the world. The Company's products provide a communications
bridge between incompatible medical image-producing and image-using
devices, permit radiologists to use either video images on electronic
workstations or film as a diagnostic medium, and create a diagnostic-
quality electronic archive of imaging results. In addition, the Company's
products permit the information generated and used by medical imaging
devices to be included in a health care organization's information network
or an electronic patient record ("EPR").
The incompatibility of the various imaging devices in a typical
radiology department or diagnostic imaging center has historically created
the need for separate workstations, film printers, and other image-using
devices to support each image-producing device. The Company's products
convert the output of medical image-producing devices into an industry
standard network communications protocol, Digital Imaging Communications
for Medicine ("DICOM" or the "DICOM standard"), in order to connect these
devices to various printers and workstations, and store the images
generated by such devices in a permanent DICOM-based compact disk ("CD")
archive. Radiology departments and other diagnostic imaging centers and the
users of their images and diagnostic reports benefit in a variety of ways
including: (i) multiple image-producing devices can be connected to a
single workstation, film printer or other image-using device, resulting in
reduced equipment expenditures; (ii) permanent electronic archives of
diagnostic-quality imaging results can be created, enabling the retrieval
of these images at any time in the future; (iii) the modular architecture
of the Company's products allows radiology departments and other diagnostic
imaging centers to build their electronic image management infrastructures
in an incremental, flexible and cost-effective manner; and (iv) with the
continued development of health care information technology, diagnostic
images collected and managed with the Company's technology can readily be
incorporated into a patient's EPR.
INDUSTRY BACKGROUND
In recent years, managed care has sought to control health care costs
by attempting to introduce increased efficiency to the health care delivery
system. Any attempt to increase efficiency in this area requires a dramatic
improvement in the exchange of information between the various participants
in the health care delivery system. The EPR is a patient-specific
repository of medical and financial information that can be accessed by
various participants in the health care delivery system, including, but not
limited to, attending and consulting physicians, insurance providers,
medical laboratories, pharmacies, and the diverse departments of a
hospital, clinic, nursing home or other care providing organization. In
recent years, there has been considerable effort within the health care
industry to promote the development of the EPR to improve the exchange of
medical information.
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The health care industry is working to automate the collection and
storage of clinical and financial data within the various departments of
health care institutions, and, ultimately, to create an EPR by connecting
such departments into a networked system. In a national survey of health
care information professionals conducted in February of 1997 by the Health
Information Management Systems Society ("HIMSS") and the Hewlett-Packard
Company ("Hewlett-Packard"), the 1997 HIMSS/Hewlett-Packard Leadership
Survey, twenty percent of those professionals indicated that their
information technology budgets would grow by more than fifty percent in the
next two years and sixty-nine percent indicated that their budgets would
grow by more than ten percent in the next two years. Fifty percent of
respondents indicated that upgrading their information technology
infrastructure and integrating existing systems from multiple vendors were
their current top priorities.
Recently developed health care information technology has greatly
improved the electronic management of textual data but, with the exception
of picture archiving and communication systems ("PACS"), such systems still
lack the ability to acquire, store and manage electronically the complete
set of diagnostic images produced by each radiological examination. While
large-scale PACS permit electronic image acquisition, transmission,
storage, retrieval and display, such systems have not been widely accepted
by the diagnostic imaging community for several reasons, including: (i)
PACS are usually very expensive; a complete PACS for a hospital radiology
department or other diagnostic imaging center performing 150,000 procedures
per year may cost over $6 million; (ii) a radiology department's or other
diagnostic imaging center's existing inventory of image-producing and
image-using devices cannot typically be cost-effectively integrated into a
PACS thereby negating the department's previous capital expenditures; (iii)
there is a risk that the unedited data output of a PACS may overload an
institution's communications network; and (iv) since PACS display medical
images on video display terminals rather than film, the acceptance of PACS
has been limited by the preference of most radiologists to use film for
diagnostic purposes. Accordingly, the distribution of medical images has
continued to be a manual, labor-intensive and inefficient process based on
the sharing of a single patient film jacket filled with individual film
sets.
Electronic image management outside the PACS arena is made difficult
primarily due to the incompatibility of the communications protocols and
data formats between medical imaging devices produced by different OEMs.
The OEMs that dominate the US and international markets for medical image-
producing equipment are the GE Medical Systems Division of the General
Electric Company ("GE"), Philips Medical Systems Nederland B.V.
("Philips"), Picker International, Inc. ("Picker"), Siemens A.G.
("Siemens") and Toshiba Corp. ("Toshiba"). The OEMs that dominate the U.S.
and international markets for medical image-using equipment are Sterling
Diagnostic Imaging, Inc. ("Sterling"), the Eastman Kodak Company ("Kodak"),
Agfa-Gevaert N.V. (a division of Bayer Corporation) ("Agfa"), Imation
Corporation ("Imation"), Fuji Photo Film Co., Ltd. ("Fuji") and Konica
Medical Corporation ("Konica"). Such OEMs have historically designed their
medical imaging devices to include proprietary communications protocols and
internal data formatting technology unique to each company's products.
In non-medical communications network environments, equipment owners,
systems integrators and competing OEM vendors have been relatively free to
modify proprietary equipment in order to make such equipment connect with
devices manufactured by third party OEMs. However, modification of medical
imaging devices generally is not possible because such devices are subject
to government regulation. Further, OEMs have the ability to void the
warranty on their equipment if such equipment is attached to third party
components that have not been approved by the OEM.
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To date, no OEM has been able to maintain a commanding technological
position in all facets of diagnostic imaging. Generally, medical
institutions have focused on diagnostic quality, cost, reliability or other
attributes of specific devices in making their capital expenditure
decisions rather than on acquiring a full suite of equipment from a single
OEM. As a result, the existing equipment base includes numerous OEM-
specific communications protocols and data formats that have historically
precluded devices manufactured by different OEMs, and sometimes by the same
OEM, from communicating with each other or with various image-using
devices. This incompatibility has typically required the purchase of
redundant hardware systems, thereby increasing costs. For example, a
separate medical film printer or workstation must usually be connected
directly to each digital x-ray, MRI or CT device in a hospital radiology or
other diagnostic imaging center department instead of being shared by
several such devices.
OEM SUPPORT AGREEMENTS
In recent years, OEMs have increasingly recognized that their OEM-
specific communications protocols and data formats have interfered with the
connectivity needs of their customers and the Company has successfully
negotiated agreements under which such OEMs have supplied the Company with
the technical specifications and software algorithms necessary for
communicating with their products. Such OEMs have additionally agreed to
notify the Company of any updates to their technical specifications and
software. Currently, the Company has signed agreements with over 20 OEMs
including GE, Philips, Picker, Siemens and Toshiba, representing more than
90% of the radiological electronic imaging device market. These agreements
have permitted the Company to develop products that directly address the
connectivity problem associated with image-producing and image-using
devices. The Company considers its access to the proprietary communications
protocols and the data formatting technologies of these OEMs, while not
exclusive, to be a substantial competitive advantage for its business.
NETWORK COMMUNICATIONS PROTOCOLS FOR MEDICAL IMAGING APPLICATIONS
In order to solve the connectivity problem and eventually to replace
the proprietary communications protocols and data formats discussed above,
a joint committee of the American College of Radiology ("ACR") and the
National Electrical Manufacturers' Association ("NEMA") was formed in 1984
to create an open standard method of describing and communicating medical
images over a network. The joint committee includes representatives of many
of the major companies in the medical imaging industry including Siemens,
Philips, GE, Picker, Kodak, Agfa, Imation, Polaroid Corporation and the
Company. Version 3.0 of the DICOM standard was released in 1992 and has
become the first medical data communications standard to be adopted
worldwide. Recently ACR and NEMA agreed to create the DICOM Standards
Committee to continue the ongoing work of developing the DICOM standard.
The contents of the DICOM standard are determined by the consensus of the
membership of the DICOM Standards Committee, which includes representatives
of bio-medical professional organizations, manufacturers, trade
associations, other standards development organizations, and governmental
agencies worldwide. The activities of the Committee are administered by
NEMA, and the Committee owns the DICOM standard. The development and use of
DICOM has made possible the efficient collection and management of clinical
data that is produced and used by medical imaging devices.
William C. Mortimore, the Company's President, has been a member of
the ACR/NEMA joint committee since its establishment in 1984. In
addition, several other Company employees, as well as employees of certain
of the Company's competitors, occupy leadership positions on this
committee. The Company has found that its leadership in the setting of
standards for medical communications protocols has provided important
technological and strategic insights that have facilitated the successful
development and deployment of its products and services.
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PRODUCTS AND SERVICES
The Company's electronic imaging products and services available today
include: (i) MERGEWORKS CONNECTIVITY PRODUCTS for retrofitting legacy
radiology image-producing and image-using devices; (ii) OEM INTERFACE
PRODUCTS, including connectivity software tool kits and interface boards
for new OEM image-producing and image-using devices; and (iii) NETWORK
INTEGRATION PRODUCTS AND SERVICES -- for design and installation of DICOM
networks, including training, design assistance and testing services. An
additional line of NETWORKED IMAGE MANAGEMENT PRODUCTS for facilitation of
radiologists' selection and use of electronic images is under development.
MERGEWORKS CONNECTIVITY PRODUCTS
The Company sells MERGEWORKS CONNECTIVITY PRODUCTS for retrofitting
legacy stand-alone medical image-producing and image-using devices thereby
rendering such devices capable of communicating over a DICOM network. These
products, that comprise the Company's MERGEWORKS CONNECTIVITY PRODUCTS
line, address the incompatibility of proprietary communications protocols
used by medical image-producing and image-using devices by converting the
output from a customer's existing equipment base of image-producing devices
into the DICOM standard format. Once in DICOM, such data can be made
generally available on a network and can be converted into the particular
proprietary language required by any image-using device on the network.
Further, such products enable a radiology department or other diagnostic
imaging centers to store diagnostic quality medical images in an electronic
format for local or remote retrieval and display on film or a video
terminal. The MERGEWORKS CONNECTIVITY PRODUCTS line permits a radiology
department or other diagnostic imaging centers to upgrade its existing
medical image management system through a relatively low cost and
incremental conversion of its existing base of stand alone medical image-
producing and image-using devices. The Company's MERGEWORKS CONNECTIVITY
PRODUCTS also permit an institution to continue to benefit from its often
substantial installed base of equipment and devices and realize the
efficiencies of a network without incurring a large up-front capital cost
as would be the case with a large scale PACS solution. The Company's
MERGEWORKS CONNECTIVITY PRODUCTS for medical image acquisition, display,
printing and storage over a DICOM network include:
IMAGE ACQUISITION -- MergeMVP -- The Company developed and
introduced its first component product, the MergeMVP converter, in 1989.
The MergeMVP converter comprises software and hardware that transforms data
generated by image-producing devices into the DICOM standard or other
applicable format. Data transformed by the MergeMVP converter into DICOM
can be interpreted, processed, manipulated and managed at video display
stations, three dimensional image processing devices, teleradiology devices
and other specialty workstations.
IMAGE ACQUISITION -- MergeXPI -- The MergeXPI printer interface
converts data that is generated by image-producing devices in a variety of
proprietary languages and data formats into the DICOM standard format
specifically for the purpose of printing such data. The MergeXPI printer
interface, while similar to the MergeMVP converter in function, converts
film data or hard copy data, which is traditionally used for diagnostic
purposes, and limited patient identification data, to the DICOM format.
Hard copy data generated by the MergeXPI print interface can be stored,
managed and retrieved by other Company products. The MergeXPI product
includes two alternative interfaces: (i) the MergeDPI digital print
interface, which is used with image-producing devices that produce a
digital image; and (ii) the MergeVPI video print interface, which is used
with devices that produce an analog image.
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IMAGE PRINTING -- MergeAPS -- The MergeAPS print server permits
DICOM formatted data to be converted into the proprietary language of a
wide variety of medical laser film printers. The MergeAPS print server
plays a key role in transforming stand-alone medical laser film printers to
print networks thereby eliminating the need for individual printers for
each image-producing device. As component parts, MergeAPS print servers can
be used to network a group of existing printers to achieve systems
compatibility without requiring the purchase of new printers. In addition,
the MergeAPS print server contains a limited storage capacity permitting
images to be retained for a short period of time for later printing.
IMAGE STORAGE -- MergeARK -- The MergeARK digital image archive
is a stand-alone device that is connected to a DICOM compatible network.
The MergeARK archive can acquire images and related clinical information
from any number of image sources including imaging devices, displays and
workstations, laser print servers and other limited storage file servers.
The MergeARK archive can store images permanently, in diagnostic quality on
CDs, for later retrieval over the network, for such applications as film
reprints, supporting the EPR and telemedicine, the practice of medical
diagnostics and recommendation of treatment from remote locations by the
use of telecommunications. Without the DICOM standardization provided by
the Company's products, each incompatible device would require its own
dedicated archive. The MergeARK digital image archive is fully scalable and
a user can upgrade the size of its archive incrementally through the
installation of additional modular CD arrays.
OEM INTERFACE PRODUCTS
The Company sells software tool kits and interface board products that
enable OEMs to manufacture new radiology image-producing and image-using
devices capable of directly communicating with the DICOM standard. The
Company's OEM Interface Products include:
OEM CONNECTIVITY -- MergeCOM-3 Software -- The MergeCOM-3
software tool kit permits OEMs to design image-producing and image-using
devices capable of communicating in the DICOM format thereby rendering such
equipment network ready and avoiding the need for the MergeMVP converter,
the MergeXPI printer interface or the MergeAPS print server.
The Company licenses the MergeCOM-3 software tool kit to over 70 OEMs
of image-producing devices. The MergeCOM-3 software tool kit is available
for over 30 different computer platforms, representing nearly all of the
technologies currently employed in medical image production and use.
OEM CONNECTIVITY -- Interface Boards -- The Company's board
level interface products are sold to OEMs that want to build into their
products at the design stage the ability to connect to other OEMs'
proprietary systems, with or without DICOM conversion. The Company's
interface boards are also an integral part of several of the Company's
products such as the MergeMVP converter, the MergeXPI printer interface and
the MergeAPS print server. Direct sales of interface boards to OEMs for
inclusion in their own equipment permits the Company to achieve economies
of scale in interface board production.
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NETWORK INTEGRATION PRODUCTS AND SERVICES
The Company has offered systems integration services for the design
and installation of DICOM networks since 1996. Such services include
training, design assistance and testing, directly to radiology departments
and other diagnostic imaging centers, as well as to VARs. The Company's
purpose in offering these services is to solve the customer's connectivity
problems. The Company finds that the solution to many customers'
connectivity problems is found within the array of products offered by the
Company. The Company anticipates that offering such services will enable
the Company to enhance product sales in the future.
PRODUCTS UNDER DEVELOPMENT
NETWORKED IMAGE MANAGEMENT PRODUCTS
The Company is developing DICOM Networked Image Management Products
that enable radiologists to select specific diagnostic images. Once
selected, such images may be incorporated into a patient report or the EPR.
IMAGE MANAGEMENT -- CaseWorks -- The CaseWorks radiology work-
flow management tool builds on the Company's MergeWorks product line
to manage the large volume of image data generated in radiology departments
and other diagnostic imaging centers and to facilitate the integration of
such data into the EPR. Because of their clinical expertise and diagnostic
experience, radiologists are best positioned to determine specific images
that are pertinent for inclusion in the patient file from among the large
number of images generated for a patient. Historically, radiologists have
favored the use of film rather than computer workstations for diagnosis.
The CaseWorks management tool directly addresses this preference by
allowing radiologists to continue to use film as a primary diagnostic
medium while facilitating the electronic selection of images for inclusion
in the EPR. During the process of collecting and preparing images for
printing on film for diagnosis, each image is assigned a unique, machine-
readable identifier which is printed next to each image. A radiologist can
prepare a case by selecting the images to be included in the EPR using the
MergeReader hand-held unit. Thereafter, the selected images can be
retrieved, along with the text report, from the MergeARK archive for
consideration by various participants in the health care system. An
anticipated future option for the CaseWorks management tool is the support
of dictation within the MergeReader hand-held unit. The Company expects the
CaseWorks management tool to be available for sale in the second or third
quarter of 1998. In 1996, in anticipation of the introduction of the
CaseWorks management tool, the Company entered into an agreement with a
technology supplier under which the Company was granted a worldwide
exclusive license to duplicate and distribute decoding software embedded in
hand-held readers. The Company was also granted a worldwide non-exclusive
license to duplicate and distribute encoding software used by the Company
in recording identifying marks on x-ray film. Exclusivity under this
agreement will lapse on November 1, 2000. In the event that the Company
ceases to distribute both licensed products for a period of twenty-four
months, any license in effect will automatically terminate.
IMAGE MANAGEMENT -- ReportManager -- The ReportManager
integration tool builds upon the image collection and management capability
of the CaseWorks management tool and facilitates the automated assembly and
distribution of radiology reports containing text and pertinent diagnostic
image data. Such reports can be published in a variety of media including
facsimile, telemedicine and hypertext markup language (HTML), a format for
intranet and internet applications. The Company expects the ReportManager
integration tool to be available for sale by the end of 1998.
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OTHER PRODUCTS
The Company continues to develop new products and improve existing
products. For example, the Company is currently developing products that
provide a direct connection between DICOM imaging networks and hospital
information systems, facilitating a more complete EPR. These interface
products will also permit transmittal of patient demographic information to
the MergeMVP converter and the MergeXPI print interface where images are
initially acquired, thus reducing data entry errors and labor costs.
STRATEGY
The Company's goal is to become a leading provider of connectivity and
data management solutions that facilitate the networking of incompatible,
proprietary devices in medical imaging systems. The Company intends to
achieve this objective through the implementation of the following
strategy:
SELL MERGEWORKS CONNECTIVITY PRODUCTS FOR RETROFITTING
LEGACY RADIOLOGY IMAGE-PRODUCING AND IMAGE-USING DEVICES.
The majority of the Company's current revenue is generated through the
sale of devices that enable existing radiology image-producing and image-
using equipment to connect to a DICOM network. The Company expects sales of
such devices to grow as (i) radiology departments and other diagnostic
imaging centers that have no DICOM capability or that are partially DICOM-
compliant retrofit additional existing machines with the Company's
products, and (ii) radiology departments and other diagnostic imaging
centers install new DICOM networks that require the retrofitting of all or
some of their existing equipment base with the Company's products.
According to a study commissioned by the Company and conducted by
Technology Marketing Group, a diagnostic imaging market consulting
organization located in Des Plaines, Illinois, the number of radiology
departments at hospitals that can use the Company's products totals
approximately 5,500 in the United States and 17,000 internationally. Within
these facilities, there is an estimated total installed base of
approximately 250,000 image-producing and image-using devices.
SELL OEM INTERFACE PRODUCTS FOR NEW RADIOLOGY IMAGE-PRODUCING
AND IMAGE-USING DEVICES.
The Company currently sells software tool kits that enable
manufacturers of new radiology image-producing and image-using devices to
connect their machines directly to a DICOM network. The Company expects
sales of such software tool kits and interface boards to grow as
manufacturers of radiology image-producing and image-using devices upgrade
and expand their current product lines. According to the Technology
Marketing Group study, the estimated annual sales of new radiology image-
producing and image-using machines totals approximately 11,000 units in the
United States and 33,000 units internationally.
SELL NETWORK INTEGRATION PRODUCTS AND SERVICES.
The Company offers its customers Network Integration Products and
Services that range from the installation of DICOM connectivity devices for
image-producing and image-using equipment to the design and installation of
entire DICOM networks and the conversion of all existing radiology machines
to the DICOM communications protocol.
SELL NETWORKED IMAGE MANAGEMENT PRODUCTS TO USERS OF DICOM NETWORKS.
The Company is developing Networked Image Management Products that
enable radiologists to select and mark for retrieval specific selections of
medical imaging data. These products are anticipated to reduce the amount
of data required to be shared over a network and facilitate the development
of the EPR. The Company expects to market these products to radiology
departments and other diagnostic imaging centers that are already connected
to a DICOM network.
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EXPAND THE COMPANY'S PRODUCT AND SERVICE OFFERINGS TO OTHER
IMAGE-INTENSIVE DEPARTMENTS IN MEDICAL INSTITUTIONS.
Many devices in medical institutions produce or use images that need
to be viewed, transmitted and stored. Departments that use devices of this
type include endoscopy, pathology, radiotherapy, urology, mammography and
dialysis. The Company believes that machines used by radiology and such
other departments will ultimately be connected to the hospital's
information network and that images produced by these machines will
eventually be stored in an EPR.
The Company intends to develop connectivity products for such devices
by applying its expertise in standardized communications protocols to
bridge the gap between DICOM and HL-7, the developing standard for hospital
information technology networks, and by leveraging its strong relationships
with the manufacturers of medical image-producing and image-using devices.
Certain employees of the Company have been: (i) members of the ACR/NEMA
DICOM standard setting joint committee since its formation in 1984; (ii)
active members of the HL-7 standard setting committee for hospital
administrative information networks since 1994; and (iii) core members of
the Andover Working Group since 1997. Employees of certain competitors
maintain membership in the HL-7 committee, but no employees of the
Company's competitors are core members of the Andover Working Group. The
Andover Working Group, sponsored by Hewlett-Packard, was formed in 1995 to
develop specific implementations of medical data communication standards.
The primary work of the Andover Working Group has been conducted by
approximately twenty-five core members. The core members that represent
diagnostic imaging are Philips and the Company. The initial accomplishment
of the Andover Working Group has been agreement on an implementation of a
subset of HL-7, the developing standard for hospital information technology
networks.
SALES, MARKETING AND DISTRIBUTION
The Company markets its products and services to three types of
customers: (i) OEMs that typically design and manufacture standard model
devices such as MRIs, CTs, CRs, digital x-ray machines and other products
that are not customized by the OEM for the individual customer; (ii) VARs
that design and implement customized solutions, typically utilizing
products manufactured by third parties, for their customers' particular
needs; and (iii) dealers that act as retail distributors to end-users of
products manufactured by third parties. The medical imaging device market
is dominated by a limited number of high volume vendors with multiple
divisions. As a result, depending on the specific product being sold and
how it will be utilized, different divisions of a single customer, each
with separate relationships with the Company, may fall into more than one
of the types of customers listed above.
The Company markets its MERGEWORKS CONNECTIVITY PRODUCTS, and intends
to market its NETWORKED IMAGE MANAGEMENT PRODUCTS, to VARs, dealers and
end-users. The MERGEWORKS CONNECTIVITY PRODUCTS enable VARs to connect the
image-producing and image-using devices manufactured by different OEMs into
the customized solutions that they market to their customers. Dealers
market the MERGEWORKS CONNECTIVITY PRODUCTS directly to end-users typically
as part of a catalog of medical imaging related products.
The Company markets its MergeCOM-3 software tool kit directly to OEMs
pursuant to over 70 licensing agreements with such OEMs. Utilizing the
MergeCOM-3 software tool kit and the Company's interface boards, OEMs are
able to build DICOM capability directly into their products at the design
stage. To a more limited extent, the Company licenses the MergeCOM-3
software tool kit to end-users that have in-house systems integration
capability.
<PAGE>
The Company's marketing relationships with OEMs are based in large
part on its long-standing relationships with the engineering and research
and development personnel of such OEMs. Such relationships have grown from
the Company's past success in negotiating OEM Support Agreements (see "OEM
Support Agreements") with such OEMs and the Company's participation in the
ACR/NEMA DICOM joint committee. Because of the limited number of medical
imaging device OEMs, the Company relies heavily on repeat sales to such
OEMs. The Company's marketing efforts with respect to VARs are focused on
direct sales efforts and advertising to the sales engineering personnel of
such VARs that design and sell customized end-user solutions. The Company
has worked to leverage its relationships with the technical personnel of
such VARs to support its VAR sales efforts. The Company employs three sales
professionals to market to OEMs and VARs. Sales to OEMs and VARs accounted
for 95% of the Company's net sales in fiscal 1995, 70% in fiscal 1996 and
59% for fiscal 1997.
The Company's end-user sales initiative is predominantly focused on
sales through dealers. The Company has cultivated relationships with
dealers that permit Company personnel to participate in presentations to
potential customers. Pursuant to such relationships, once an end-user sale
is made, the Company sells its products to the dealer for resale to the
end-user. The Company markets to dealers and end-users through direct sales
efforts, advertising and repeat business generated by its customer support
efforts. At December 31, 1997, the Company employed seven sales
professionals that market to dealers and end-users. Sales to end-users
accounted for 5% of the Company's net sales in fiscal 1995, 30% in fiscal
1996 and 41% for fiscal 1997. The Company believes that sales to end-users
as a percentage of total net sales will increase in the future.
The Company supports its general marketing efforts by exhibiting its
products directly to customers in major trade shows; through its Internet
address; through direct customer support; and through its product warranty.
With respect to trade shows, the Company exhibits its products at the
Radiological Society of North America annual meeting, the European Congress
of Radiology and the Association of American Hospital Radiology
Administrators annual meeting. Because the medical imaging industry is
dominated by a few large participants, such trade shows, which employees of
most such participants attend, are viewed by the Company as an integral
part of its marketing strategy.
The Company's Internet address (www.merge.com) was established in 1995
and currently averages approximately 60,000 hits per month and provides
access to the Company's marketing materials, technical product information
and its technical support staff. The Company's technical support staff
conducts a service training course for OEM and VAR personnel on a regular
basis, providing the Company's customers with the expertise needed to
install and support the Company's products. The Company seeks to respond
quickly to customer requests for technical support and service through a
telephone hotline, on-line remote service support, which is a capability
built into the MERGEWORKS CONNECTIVITY PRODUCTS line, and overnight
exchange of defective parts or products. The Company provides a limited
one-year parts or factory repair warranty on its products. Although the
Company's warranty policy permits customers to return the Company's
products in the event of malfunction, product returns to date have not been
significant.
An important component of the Company's business plan includes
increasing sales to customers located outside the United States. The
Company operates a sales office in the Netherlands and, as of December 31,
1997 employs seven full-time staff in Europe who perform sales and
technical customer support roles.
<PAGE>
The Company sells a majority of its products to a relatively limited
number of OEMs, VARs and dealers. Aggregate sales to the Company's ten
largest customers represented approximately 75% of the Company's net sales
in 1995, 68% in 1996 and approximately 74% in 1997. During 1996,
Picker, Philips and Siemens accounted for approximately 26%, 15% and 10%,
respectively, of the Company's net sales. For 1997, Picker and Philips
accounted for approximately 23% and 14% , respectively, of the Company's
net sales. There can be no assurance that the Company's current customers
will continue to place orders with the Company or that the Company will be
able to obtain orders from new customers. The loss of any one or more of
the Company's major customers could materially adversely affect the
Company's business and operating results.
MANUFACTURING
The Company's manufacturing activities consist primarily of assembling
and testing hardware components and subassemblies acquired from vendors,
and loading and testing the Company's software products. The Company
operates under the Good Manufacturing Practices promulgated by the FDA and
is a registered medical device manufacturer. Primarily in response to the
requirements of European customers, the Company has recently commenced an
initiative to comply with the ISO 9000 class of standards promulgated by
the International Standards Organization, which involves an audit of the
Company's manufacturing processes.
The Company purchases industry standard parts and components for the
assembly of its products, generally from multiple vendors. The Company has
elected to rely on a limited number of subcontractors for certain
subassembly functions in order to achieve more advantageous pricing through
increased volume. However, the Company believes that additional
subcontractors are available to perform these subassembly functions. The
Company maintains good relationships with its vendors and, to date, has not
experienced any material supply problems. Any substantial problems with
suppliers, however, could have a material adverse effect on the Company's
business, financial condition and results of operations.
COMPETITION
The markets for the Company's products are highly competitive. Many of
the Company's customers purchase products from both the Company and its
competitors. The Company currently competes primarily with DeJarnette
Research Systems, Inc. ("DeJarnette") in the retrofitting of legacy medical
systems to enable DICOM standard connectivity. The MergeCOM-3 software tool
kit primarily competes directly with DeJarnette and Mitra Imaging Inc.
("Mitra"), and indirectly with the Radiological Society of North America,
which offers a version of DICOM, that was originally developed by
Mallinckrodt Institute of Radiology, as "freeware" available to be
downloaded without charge from the Internet, but which offers more limited
features and no user support.
In the application of MergeWorks products specifically for hardcopy
film networks, which includes MergeAPS and MergeXPI products, the Company
competes with film vendors, including Kodak, Agfa, Sterling and Imation.
However, since the MergeAPS print server works with any of the laser film
printers available from these vendors, these companies have also purchased
the Company's products when they have needed networked filming solutions
involving their competitors' products. The Company expects competition to
increase in the future from existing competitors and from other companies
that may enter the Company's existing or future markets. In addition,
although many PACS manufacturers are currently customers of the Company,
the Company faces competition from PACS manufacturers. The Company could
face competition from networking equipment and telecommuni-cations
manufacturers if these companies were either to develop DICOM capability
for their products or purchase products which provide DICOM capability from
<PAGE>
one of the Company's competitors. The Company could also face competition
from a number of companies in the health care information technology
sector, including, without limitation, Dynamic Healthcare Technologies,
Inc., Imnet Systems, Inc. and Lanvision Systems, Inc. Many of the Company's
current and potential competitors have greater resources than those of the
Company in areas including finance, research and development, intellectual
property and marketing. Many of these competitors also have broader product
lines and longer standing relationships with medical imaging customers than
those of the Company.
The Company believes that its ability to compete successfully depends
on a number of factors both within and outside of its control, including
applications innovation; product quality and performance; price;
experienced sales, marketing and service organizations; rapid development
of new products and features; continued active involvement in the
development of DICOM and other medical communication standards; and product
and policy decisions announced by its competitors. There can be no
assurance that the Company will be able to compete successfully with its
existing or any new competitors.
INTELLECTUAL PROPERTY
The Company received U.S. Patent number 5,740,248 for Caseworks on
April 14, 1998. The Company has also filed foreign patent applications on
CaseWorks. However, the Company generally does not rely on patent
protection with respect to its products. Instead, the Company relies on a
combination of copyright and trade secret law, employee and third party
nondisclosure agreements and other protective measures to protect
intellectual property rights pertaining to its systems and technology.
There can be no assurance, however, that applicable copyright or trade
secret law or these agreements will provide meaningful protection in the
event of any unauthorized use, misappropriation or disclosure of the
Company's copyrights, trade secrets, know-how or other proprietary
information.
In addition, the laws of certain foreign countries do not protect the
Company's intellectual property rights to the same extent as do the laws of
the United States. There can be no assurance that third parties will not
assert patent, copyright or other intellectual property infringement claims
against the Company with respect to its products or technology or other
matters. There may be third party patents, copyrights and other
intellectual property relevant to the Company's systems and technology
which are not known to the Company. Although no third party has asserted
that the Company is infringing such third party's patents, copyrights or
other intellectual property, there can be no assurance that litigation
asserting such claims will not be initiated, that the Company would prevail
in any such litigation, or that the Company would be able to obtain any
necessary licenses on reasonable terms if at all. Any such claims against
the Company, with or without merit, as well as claims initiated by the
Company against third parties, can be time-consuming and expensive to
defend or prosecute and to resolve. To date, the Company has not initiated
any intellectual property infringement claims and, to the Company's
knowledge, no such claims have been asserted against it.
In the year 2000, many existing computer programs that use only two
digits (rather than four) to identify a year in the date field could fail
or create erroneous results if not corrected. This computer program flaw is
expected to affect virtually all companies and organizations. The Company
cannot quantify the potential costs and uncertainties associated with this
computer program flaw at this time, but does not anticipate that the effect
of this computer program flaw on the operations of the Company will be
significant. However, the Company may be required to spend time and
monetary resources addressing any necessary computer program changes.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
<PAGE>
GOVERNMENT REGULATION
The manufacturing and marketing of the Company's products are subject
to government regulation as medical devices in the United States by the
Food and Drug Administration ("FDA") and in other countries by
corresponding foreign regulatory authorities. The process of obtaining and
maintaining required regulatory clearances and approvals is lengthy,
expensive and uncertain. The Company believes that its success depends upon
commercial sales of improved versions of its products, certain of which
cannot be marketed in the United States and other regulated markets unless
and until the Company obtains clearance or approval from the FDA and its
foreign counterparts.
The Company has registered as a medical device manufacturer with the
FDA. The Company is inspected on a routine basis by the FDA to determine
compliance with the FDA's Quality System Regulation and other applicable
regulations.
The FDA generally requires that a manufacturer seeking to market a new
medical device or an existing medical device for a new indication obtain
either a premarket notification clearance under Section 510(k) of the
Federal Food, Drug and Cosmetic Act (the "FDC Act") if the product is
substantially equivalent to a product existing at May 28,
1976, or a premarket approval under the FDC Act ("PMA") prior to the
introduction of such product into the market. Certain medical devices are
exempt from premarket notification clearance by the FDA. Material changes
to existing medical devices are also subject to FDA review and clearance or
approval prior to commercialization in the United States. The Company is
currently relying on the Section 510(k) premarket notification method to
obtain governmental clearance ("510(k) clearance") to market its medical
devices in the United States.
Although it is believed to be a shorter, less costly means of
satisfying the requirements of the FDC Act than the process to obtain a
PMA, the process of obtaining a 510(k) clearance generally requires
supporting data, which can be extensive and extend the regulatory review
process for a considerable length of time. All models of the Company's
systems that are commercially available, other than the software toolkits,
have received 510(k) clearance. The software toolkits are not freestanding
products and are incorporated as components of other medical devices. The
manufacturer of the completed medical device is responsible for obtaining
any required clearance or approval from the FDA. The CaseWorks management
tool and the ReportManager integration tool are currently under
development. Their regulatory status and premarket submission requirements
will be determined when product development is completed. There can be no
assurance that 510(k) clearance, if necessary, for any future product or
modifications of existing products will be granted by the FDA within a
reasonable time frame, if at all. Furthermore, the FDA may require that a
request for 510(k) clearance be supported by data from clinical trials
demonstrating "substantial equivalence" and the safety and effectiveness of
the device, which may prolong the Section 510(k) notification review period
for a particular device or may result in a finding that the product does
not meet the substantially equivalent test, so that a full PMA could be
required.
The Food and Drug Administration Modernization Act of 1997 (the
"Amendment") was enacted on November 21, 1997, and became effective on
February 19, 1998. The Amendment is designed, in part, to facilitate the
FDA's premarket notification clearance process for new products. The
Company believes that the new regulatory policy may enable device-makers to
introduce new products more quickly. However, the extent to which the
Amendment will speed the FDA's clearance process is not known at this time.
Failure to comply with applicable regulatory requirements could
result, among other things, in warning letters, seizures of products, total
or partial suspension of production, refusal of the government to grant
market clearance or pre-market approval, withdrawal of approvals or
criminal prosecution.
<PAGE>
The Company is also subject to other federal, state and local laws and
regulations relating to safe working conditions and manufacturing
practices. The extent of government regulation that might result from any
future legislation or administrative action cannot be predicted. Failure to
comply with regulatory requirements could have a material adverse effect on
the Company's business, financial condition and results of operations.
Sales of the Company's products outside the United States are subject
to foreign regulatory requirements that vary from country to country.
Additional approvals from foreign regulatory authorities may be required,
and there can be no assurance that the Company will be able to obtain
foreign marketing approvals on a timely basis or at all, or that it will
not be required to incur significant costs in obtaining or maintaining its
foreign regulatory approvals. In Europe, the Company has obtained the
certificates necessary to enable the CE Mark, a non-expiring, international
symbol of adherence to quality assurance standards promulgated by the
European Union and compliance with applicable European Union Medical Device
Directives, to be affixed to the Company's products for sales in member
countries. Failure to obtain or maintain any necessary certifications or
foreign regulatory approvals or any other failure to comply with regulatory
requirements outside the United States could have a material adverse effect
on the Company's business, financial condition and results of operations.
EMPLOYEES
As of December 31, 1997, the Company had 73 employees, including 30
employees in research and development, seven in manufacturing, eight in
quality control, service and support, 14 in sales, three in sales and
marketing support activities and 11 in general administration and finance.
Seven of the Company's full-time employees reside in Europe performing
sales and technical customer support roles. The Company also relies on
several part-time employees and consultants. None of the Company's
employees is represented by a collective bargaining agreement nor has the
Company experienced a work stoppage. Management believes that the Company's
relationship with its employees is good.
ITEM 2. PROPERTIES.
The Company's principle facilities are located in Milwaukee,
Wisconsin, in an approximately 12,000 square-foot office leased through
September 2004 at a rate of approximately $160,000 per year. In January,
1998, the Company amended its lease for the Milwaukee facilities to add
approximately 2,000 square feet of office space beginning on February 26,
1998 at a rate of approximately $39,000 per year. The Company also leases
a sales, administrative and service support office in Nuenen, The
Netherlands. The Company anticipates that additional space will be required
as its business expands and believes that it will be able to obtain
suitable space as needed. The Company anticipates that it will need to
acquire additional office space in fiscal 1999.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not involved in any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
DESCRIPTION OF SECURITIES
The authorized capital stock of the Company consists of 10,000,000
shares of Common Stock, par value $0.01 per share, and 5,000,000 shares of
Preferred Stock, par value $0.01 per share. As of December 31, 1997, there
were 3,908,063 shares of Common Stock outstanding, beneficially held by 81
persons, and no shares of Preferred Stock outstanding.
In January 1998, the Company completed an initial public offering of
1,900,000 shares of common stock at an offering price of $6.00 per share.
Its Registration Statement on Form SB-2 (No. 333-39111) was declared
effective on January 29, 1998 and trading commenced on the same date.
2,185,000 shares of the Company's common stock were registered under the
Registration Statement, for an aggregate offering price of $13,110,000. H.
C. Wainwright & Co., Inc. served as the principal underwriter. On
February 27, 1998, H. C. Wainwright exercised an overallotment option and
offered an additional 285,000 shares to the public at $6.00 per share.
With the sale of the shares in connection with the exercise of the
overallotment option, all of the shares of Common Stock registered under
the Registration Statement have been sold, for aggregate gross proceeds of
$13,110,000. In connection with the initial public offering, the
underwriter received an underwriting discount of 7% of the total proceeds,
a non-accountable expense allowance of 3% of total proceeds, and 190,000
warrants exercisable at 120% of the initial public offering price for a
period of four years.
As a result of the initial public offering, the Company received net
proceeds of approximately $11,800,000 and increased its total shares of
common stock outstanding by 2,185,000 shares. The net proceeds of the
offering of 1,900,000 shares of common stock were used to repay in full the
outstanding principal and interest on the $2,000,000 note with Sirrom
Capital, to redeem 424,757 shares of stock held by Alpha Capital Venture
Partners at $1.90 per share, to terminate unexercised warrants held by
Sirrom Capital for $196,000, and for general working capital. The net
proceeds received by the Company in connection with the exercise of the
underwriters' overallotment option were applied to general working capital.
The Company's common stock is included for quotation on the
NASDAQ Small Cap Market under the symbol "MRGE".
DIVIDEND POLICY
The Company has not paid any cash dividends on its Common Stock since
its formation. The Company does not currently intend to declare or pay any
cash dividends on the Common Stock in the foreseeable future and
anticipates that earnings, if any, will be used to finance the development
and expansion of its business.
The Company also anticipates that it may in the future seek to obtain
a loan, revolving credit agreement or other financing arrangement, the
terms of which may prohibit the declaration and payment of dividends
without prior lender approval. Any payment of future dividends and the
amounts thereof will be dependent upon the Company's earnings, financial
requirements and other factors deemed relevant by the Company's Board of
Directors, including the Company's contractual obligations.
<PAGE>
RECENT SALES OF UNREGISTERED SECURITIES
Effective May 1996, the Company converted $222,712 of $686,064
subordinated and junior subordinated notes of indefinite maturity and
bearing interest at a rate equal to the prime rate plus 3% for the
subordinated notes and prime rate plus 4% for the junior subordinated notes
payable to Mr. Robert T. Geras, Mr. Warren B. Cozzens, Mr. Mitchell D.
Goldsmith, Mr. Phillip J. Hanrahan, Mr. Thomas Jennings, Ms. Mary Jennings,
Mr. Christopher Kalmus, Mr. Henry Kuehn, Mr. Jeffrey Lane, Mr. Michael
Lechter, Mr. Terry Mikkelson, Mr. Michael Regenfuss, Mr. Luke E. Sims, and
Mr. Frederick P. Stratton, Jr. (the "Shareholder Notes") and related
accrued interest into 191,766 shares of Common Stock. In addition, the
Company discharged the remaining $463,352 of the Shareholder Notes and
related accrued interest to Alpha Capital Venture Partners with the
issuance of 33,861 shares of Common Stock and a cash payment of $375,000.
This sale was exempt from registration as a non-public offering of
securities under Regulation D, promulgated under Section 4(2) of the
Securities Act.
In 1995, the Company issued 111,741 shares of Common Stock in a
private placement at $1.34 per share, for aggregate consideration of
$150,000. In connection with this private placement, Robert T. Geras, a
Director of the Company, and Warren B. Cozzens, a former Director,
purchased 22,348 and 89,393 shares of Common Stock, respectively. All
Common Stock was paid for with cash. There were no underwriting discounts
of commissions in this sale. This sale was exempt from registration as a
non-public offering of securities under Regulation D, promulgated under
Section 4(2) of the Securities Act. No general solicitation or general
advertising was made in connection with this private placement, and each of
the purchasers in this private placement had the opportunity to ask
questions of officers of, and to obtain information from, the Company.
In 1995 and 1996, the Company issued an aggregate of 1,229,148 shares
of its Common Stock to 29 accredited investors in a private placement at
$1.48 per share. The Company received consideration in connection with
this private placement of $205,000 in 1995 and $1,610,000 in 1996. In
connection with such private offering, Mr. Geras, a Director of the
Company, purchased 182,848 shares at the same price offered to other
investors. Mr. Cozzens, a former director, also purchased 257,342 shares
in this private offering. These amounts reflect the total offering price.
There were no underwriting discounts or commissions in this sale. This
sale was exempt from registration as a non-public offering of securities
under Regulation D, promulgated under Section 4(2) of the Securities Act.
No general solicitation or general advertising was made in connection with
this private placement, and each of the purchasers in this private
placement had the opportunity to ask questions of officers of, and to
obtain information from, the Company.
Effective July 7, 1996, the Company's shareholders approved and
adopted the 1996 Stock Option Plan for employees of the Company (the "1996
Plan") which currently provides for the grant of options to purchase, in
the aggregate, up to 1,015,826 shares of Common Stock. The 1996 Plan
provides for the grant to employees of incentive stock options ("ISOs") and
non-qualified stock options. As of the date hereof, options to purchase
941,000 shares of Common Stock at exercise prices ranging from $1.48 to
$6.00 per share have been granted and are outstanding under the 1996 Plan.
The transaction described above was exempt from registration under Rule
701, promulgated under Section 3(b) of the Securities Act.
On June 30, 1997, Registrant entered into a Loan Agreement, as
modified by the Merge/Sirrom Revised Modification Agreement dated as of
October 30, 1997 (the "Sirrom Note Agreement") with Sirrom under which it
issued (I) a Secured Promissory Note dated June 30, 1997 in favor of Sirrom
in the principal amount of two million dollars ($2,000,000) (the Sirrom
Note"), and (ii) a Stock Purchase Warrant issued to Sirrom dated June 30,
1997, as modified by the Merge/ Sirrom Revised Modification Agreement dated
<PAGE>
as of October 30, 1997 (the "Sirrom Warrant"). In connection with and in
consideration of the Sirrom Note Agreement, Sirrom was granted the right to
acquire for nominal consideration, a base amount of 145,256 shares of the
Common Stock.
By agreement dated October 30, 1997, the Company and Sirrom agreed
that upon the expected closing of the IPO: (i) the Sirrom Note would be
paid in full; (ii) the Sirrom Warrant would be exercised as to 75%
(108,942) of the original number of shares issuable under it; (iii) Sirrom
will not offer, pledge, sell, contract to sell, grant any option for the
sale of, or otherwise dispose of, directly or indirectly any securities of
the Company for a period of 180 days following the date of the IPO without
the prior written consent of the Representative; (iv) Sirrom's right to
purchase 25% (36,314) of the original number of shares issuable under the
Sirrom Warrant would be terminated; (v) the put option in favor of Sirrom
would be canceled; (vi) a termination fee of approximately $196,000 would
be paid to Sirrom; and (vii) the Company agreed to file a registration
statement to register shares issued to Sirrom pursuant to the Sirrom
Warrant within 120 days of the closing of the initial public offering,
provided in no event would such registration statement be declared
effective until at least 180 days following the initial closing of an
initial public offering of the Common Shares.
The amount of the Sirrom Termination Fee was determined through arm's
length negotiations between the Company and Sirrom based on factors
including the Company's interest in eliminating uncertainty with respect to
its future equity-related liabilities and Sirrom's interest in receiving
cash in return for relinquishing its put option. Upon the closing of the
IPO, the Sirrom Warrant was exercised under the terms of the October 30,
1997 agreement.
The issuance of the Sirrom Note and the Sirrom Warrant were exempt
from registration under Section 4(2) of the Securities Act.
Effective May 1, 1995, Signal Stream Technologies, Inc. ("SST") was
merged with and into Signal Stream Incorporated, a Wisconsin corporation
("SSI"), a wholly-owned subsidiary of the Company, with SSI as the
surviving corporation. The Company acquired all of the outstanding shares
of SST, and the transaction was accounted for as a purchase of SST by the
Company. A total of 753,742 shares of SSI's Series A Preferred Stock were
converted into 1/40th of a share of the Common Stock (pre-Common Stock
Dividend) and 5,142,280 shares of SST Common Stock were converted into
1/120 of a share of the Common Stock (pre-Common Stock Dividend). All
shares of the Common Stock issued to SST shareholders were unregistered.
Except as otherwise indicated, the transactions described above were
exempt from registration under Section 4(2) of the Securities Act. No
general solicitation or general advertising was made in connection with any
of the transactions described above, and each of the purchasers in these
transactions had the opportunity to ask questions of officers of, and to
obtain information from, the Company.
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
The Company provides software, hardware and systems integration
products and services that enable health care organizations to network
otherwise incompatible image-producing and image-using devices. The
Company's products provide a communications bridge between incompatible
devices, permit radiologists to use either video images on electronic
workstations or film as a diagnostic medium and create a diagnostic-quality
electronic archive of imaging results. In addition, the Company's products
and services permit the information generated and used by medical imaging
devices to be included in a health care organization's information network
or an electronic patient record ("EPR").
The Company's products and services available today include: (i)
MergeWorks Connectivity Products --for retrofitting legacy stand-alone
medical image-producing and image-using devices thereby rendering such
devices capable of communicating over a DICOM network; (ii) OEM Interface
Products -- connectivity software tool kits and interface board products
that enable original equipment manufacturers ("OEMs") to manufacture new
radiology image-producing and image-using devices capable of directly
communicating with the DICOM standard; and (iii) Network Integration
Products and Services -- systems integration products and services for the
design and installation of DICOM networks, including training, design
assistance and testing services. In addition, the Company has under
development a line of Networked Image Management Products that enables
radiologists to select and manage specific diagnostic images which may be
incorporated into a diagnostic report or an EPR.
The Company introduced the first of its MergeWorks Connectivity
Products in 1989 and has continually developed and upgraded such products
to provide connectivity to additional image-producing and image-using
devices. In 1992, the Company introduced its OEM Interface Products with
the release of the MergeCOM-3 software toolkit. With the acquisition of
Signal Stream Technologies, Inc. ("SST") in 1995, the Company expanded into
board-level interface products for OEMs of medical imaging equipment. The
Company introduced its Network Integration Products and Services in 1996.
The Company expects to continue to add new products and additional
functionality to existing products.
The components of the Company's net sales by product line are as
follows.
Product Line 1995 1996 1997
---- ---- ----
(in thousands)
MergeWorks Connectivity
Products $2,725 $4,454 $7,308
OEM Interface Products 993 1,457 2,122
Network Integration Products
and Services -- 474 286
------ ------ ------
$3,718 $6,385 $9,716
====== ====== ======
The Company recognizes revenue on hardware products and software tool
kits at the time of shipment to the customer. Fees for software run-time
licensing are recognized ratably over the related contract period.
Software maintenance charges are deferred and recognized on a straight-line
basis over the contract support period, which is generally one year.
<PAGE>
Historically, the Company's products have primarily been distributed
as software and hardware components through OEMs and value added resellers
("VARs") that integrate these products into their own product offerings. As
the Company's range of product offerings has grown, so have its channels of
distribution. The Company expanded its sales and marketing staff to 17
persons at December 31, 1997 from three persons in the beginning of 1995.
The Company has increasingly concentrated on: (i) sales to end-users both
directly and through dealers on a non-exclusive basis; (ii) sales,
administrative reporting and functionality to support the growing
international demand for its products, including the opening of a branch
office in The Netherlands in 1996; and (iii) sales of new product and
service offerings such as Network Integration Products and Services. Sales
and marketing expense includes salaries and incentive compensation of
sales, sales management and service personnel, as well as the cost of
exhibiting at industry trade shows, print advertisements and product
brochures.
Net sales include standard discounts to the Company's OEM and VAR
customers. In 1995, the Company began to offer increased sales discounts to
certain distribution channels.
Cost of goods sold consists of purchased components and the
amortization of software development. For the assembly of its products, the
Company generally purchases industry standard components from multiple
vendors. The Company acquired Signal Stream Technologies in 1995 to gain
in-house computer hardware design and manufacturing expertise and to give
the Company more control over certain aspects of its cost of goods sold.
The Company capitalizes software development expense once technological
feasibility has been established in accordance with Statement of Financial
Accounting Standards No. 86, ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE
TO BE SOLD, LEASED OR OTHERWISE MARKETED. Capitalized software is amortized
over the expected life of the related product, which typically is five
years.
Product research and development expense consists primarily of the
compensation and related overhead expense of software and hardware
engineers and engineering management personnel. In fiscal years 1997, 1996,
and 1995, the Company's research and development expense was $1,616,000,
$1,391,000, and $823,000, respectively. Product innovation is considered
important to the Company's success and the Company expects to continue to
increase research and development expense in absolute dollars. However,
such expenditures are not expected to increase proportionally in relation
to the increase in net sales.
General and administrative expense includes the salaries and related
costs of administrative, finance, information services and general
management personnel, plus corporate overhead, such as facility rental,
insurance, depreciation and legal expenses. The Company believes that
general and administrative expense will decline as a percentage of net
sales in the future.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997 COMPARED TO
YEAR ENDED DECEMBER 31, 1996
NET SALES. Net sales increased by 52% to $9,716,000 in 1997 from
$6,385,000 in 1996. Net sales of MergeWorks Connectivity Products accounted
for the largest increase, rising by 64% to $7,308,000 in 1997 from
$4,454,000 in 1996, primarily due to increased distribution of products to
end-users through dealers. Sales of OEM Interface Products grew by 46% to
$2,122,000 in 1997 from $1,457,000 in 1996. Network Integration Products
and Services sales decreased by 40% to $286,000 in 1997 from $474,000 in
1996 as the Company redirected its resources to meet an increased demand
for MergeWorks Connectivity Products and OEM Interface Products during
fiscal 1997.
<PAGE>
COST OF GOODS SOLD. Cost of goods sold consists of purchased
components and the amortization of purchased and developed software. The
cost of purchased components as a percentage of net sales in 1997 increased
to approximately 25% compared to 25% in 1996, reflecting higher sales
discounts for certain of the Company's products in certain distribution
channels which were partially offset by lower material costs.
GROSS PROFIT. Gross profit increased by 56% to $6,740,000 in 1997
from $4,309,000 in 1996. As a percentage of net sales, gross profit
increased to 69% for fiscal 1997 from 68% for fiscal 1996.
SALES AND MARKETING. Sales and marketing expense increased by 73% to
$2,621,000 in 1997 from $1,519,000 in 1996. In 1997, the Company retained
additional field sales staff to market and support increasing customer
demand for image-acquisition and image-printing applications resulting in
growth of the sales and marketing department staff to 17 persons as of
December 31, 1997 from six persons as of December 31, 1996. Such personnel
are engaged in sales and marketing activities through the OEM/VAR channel
and in support of end-user distribution via dealers. The Company expects to
continue to make additions to its sales force in order to increase net
sales.
PRODUCT RESEARCH AND DEVELOPMENT. Research and development expense
increased by 16% to $1,616,000 in 1997 from $1,391,000 in 1996. The
increase in research and development expense consists primarily of
compensation to additional product engineers engaged in software design and
the development of specialized computer hardware. The Company believes that
advanced technology is a key element in the success of its business, and it
expects to continue to increase its research and development expenditures
in absolute dollars. However, research and development expense is expected
to be a declining percentage of net sales as net sales increase.
GENERAL AND ADMINISTRATIVE. General and administrative expense
increased by 28% to $1,563,000 in 1997 from $1,221,000 in 1996. The
increase was due primarily to additional overhead expense required to
generate and support higher sales. General and administrative expense
declined as a percentage of net sales to 16% in 1997 from 19% in 1996. The
Company expects general and administrative expense to increase in 1998 due
to additional fixed costs associated with operations as publicly held
company. Such fixed costs include legal, audit and investor relations
services, directors and officers insurance, and preparing, filing and
publishing periodic and other reports. However, total general and
administrative expense is expected to decline as a percentage of net sales.
TOTAL OTHER EXPENSE, NET. Total other expense, net increased to
$1,148,000 in 1997 from $97,000 in 1996. $872,000 of this expense
represents a nonrecurring noncash interest expense for amortization of a
discount on the outstanding note held by Sirrom Capital Corporation. See
"Liquidity and Capital Resources."
EXTRAORDINARY GAIN. In May 1996, the Company discharged $463,000 of
subordinated notes, and related accrued interest, with the issuance of
33,861 shares of Common Stock and a cash payment of $375,000. An
extraordinary gain of $169,000 was realized in connection with such
discharge.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
NET SALES. Net sales increased by 72% to $6,385,000 in 1996 from
$3,718,000 in 1995, primarily due to increased sales of MergeWorks
Connectivity Products. Net sales for this product line increased by 63%, or
$1,729,000, to $4,454,000 in 1996 from $2,725,000 in 1995. The increase was
due to the introduction of a new distribution channel of products to end-
users via dealers specifically for hardcopy film networks. Sales of OEM
Interface Products increased by 47% to $1,457,000 in 1996 from $993,000 in
1995 as the result of new customers for such products. Network Integration
Products and Services, introduced in fiscal 1996, generated $474,000 in
revenue.
<PAGE>
COST OF GOODS SOLD. Cost of goods sold consists of purchased
components and the amortization of purchased and developed software. The
cost of purchased components as a percentage of net sales increased to 25%
in 1996 from 20% in 1995 primarily due to higher discounts in connection
with sales in the end-user market compared to sales in the OEM/VAR market.
GROSS PROFIT. Gross profit increased by 65% to $4,309,000 in 1996
from $2,606,000 in fiscal 1995. As a percentage of net sales, gross profit
decreased to 68% in 1996 from 70% in fiscal 1995.
SALES AND MARKETING. Sales and marketing expense increased by 72% to
$1,519,000 in 1996 from $881,000 in 1995. This increase resulted from the
Company's decision to expand its sales and marketing resources. The sales
and marketing department grew to six persons at the end of 1996 from three
persons at the end of 1995, primarily as a result of implementing end-user
distribution channels in 1996.
PRODUCT RESEARCH AND DEVELOPMENT. Research and development expense
increased by 69% to $1,391,000 in 1996 from $823,000 in 1995. The Company
believes that advanced technology is a key element in the success of its
business and expects to continue to invest in research and development.
GENERAL AND ADMINISTRATIVE. General and administrative expense
increased by 27% to $1,215,000 in 1996 from $960,000 in 1995, but declined
as a percentage of net sales to 19% in 1996 from 26% in 1995. General and
administrative expense in fiscal 1996 included the addition of four
administrative personnel and related overhead as the Company expanded to
support higher sales. The Company anticipates that general and
administrative expense will continue to decline as a percentage of net
sales in future periods.
ACQUIRED IN-PROCESS TECHNOLOGY. In May 1995, Signal Stream,
Incorporated, a wholly-owned subsidiary of the Company formed to effect the
acquisition of SST, acquired all the outstanding shares of SST. The Company
recorded a one-time charge of $375,000 at the time of this transaction to
account for in-process technology which had not reached technological
feasibility.
PROFESSIONAL FEES RELATED TO PROPOSED FINANCING. The Company incurred
$364,000 in fees in 1996 in preparation for an initial public offering that
was canceled.
TOTAL OTHER EXPENSE, NET. Total other expense, net, which consists
primarily of interest expense, decreased by 30% to $96,000 in 1996 from
$138,000 in 1995. This decrease was attributable to lower interest expense
on the Company's subordinated debt, which was repaid in May 1996, offset in
part by additional borrowings from the Company's bank.
INCOME TAXES. The Company did not pay federal income taxes or
recognize an income tax benefit in 1996 or 1995. In each of 1996 and 1995,
the Company incurred losses for financial reporting purposes but did not
recognize an income tax benefit due to continued losses and uncertainty as
to future realization of a tax benefit. In addition, in 1995, the Company
did not recognize an income tax benefit, partially due to the
nondeductibility of the charge for acquired in-process technology.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operating activities generated net positive cash flow in
1997, 1996 and 1995 of $793,000, $172,000 and $413,000, respectively. The
decrease in 1996 was due to cash outflows associated with expanding sales
and marketing activities, development of new products, expanded general and
administrative personnel, the canceled initial public offering and funding
higher levels of accounts receivable, inventory and accounts payable. The
increase in 1997 was due to an increase in net sales, offset in part by
cash outflows associated with higher levels of inventory and accounts
receivable.
<PAGE>
Investing activities include net additions to capital equipment of
$499,000, $320,000 and $208,000, and additions to capitalized software of
$1,005,000, $766,000 and $724,000 in fiscal 1997, 1996 and fiscal 1995,
respectively. In 1997 and 1996, the Company also used $3,000 and $288,000
of cash, respectively, to invest in the purchase of a software license for
technology used in the CaseWorks networked image management product.
Cash provided by financing activities for 1997, 1996 and 1995 was
$856,000, $1,341,000 and $593,000, respectively.
In 1995, the Company issued 111,741 shares of Common Stock in a
private placement at $1.34 per share, for an aggregate consideration of
$150,000. All Common Stock was paid for with cash.
In 1995 and 1996, the Company issued an aggregate of 1,229,148 shares
of Common Stock in a private placement completed in fiscal 1996 at $1.48
per share; the Company received consideration in connection with this
private placement of $205,000 in 1996 and $1,610,000 in fiscal 1995.
Effective May 1996, the Company converted $222,712 of $686,064 subordinated
notes payable to shareholders (the "Shareholder Notes") and related accrued
interest into 191,766 shares of Common Stock. Also, in fiscal 1996, the
Company discharged the remaining $463,352 of the Shareholder Notes and
related accrued interest with the issuance of 33,861 shares of the Common
Stock and a cash payment of $375,000. The Company increased its net
borrowings in 1996 under its lending facilities by $503,000. In 1995, the
Company drew $250,000 from its bank line of credit and borrowed an
additional $150,000 from two shareholders.
The Company had cash and cash equivalents of $428,000 and $287,000,
and working capital deficits of $1,972,000 and $438,000 at the end of
1997 and 1996, respectively. The increase in working capital deficit was
due to a $2,000,000 note, which represented a current liability due to the
anticipated repayment in full with proceeds from the initial public
offering . This note was issued in June 1997 to Sirrom Capital
Corporation to replace the Company's working capital bank line. The Sirrom
note bore interest at 13.5%, payable monthly from August 1997 through May
2002, with the principal and any remaining interest due in June, 2002. This
note was repaid in full in February, 1998 using a portion of the net
proceeds of the initial public offering.
The Company believes that the net proceeds from the initial public
offering in 1998, together with December 31, 1997 cash and cash equivalent
balances and internally generated funds will satisfy the Company's
projected requirements for sales and distribution, research and
development, working capital and commitments under its employment
agreements with its European employees (all of which the Company believes
to be at fair market wage rates) and with Mr. Mortimore, under the terms of
which the Company is obligated to pay Mr. Mortimore an annual salary of
$160,000, for at least twelve months after the Offering. Thereafter, if
cash generated from operations is insufficient to satisfy the Company's
projected requirements, or if the Company subsequently elects to use funds
for acquisitions or other matters, the Company may be required to sell
additional equity or debt securities or obtain additional bank or other
credit facilities. There can be no assurance that the Company will be able
to sell such securities or obtain such credit facilities on acceptable
terms in the future, if at all. The sale of additional equity or debt
securities could result in additional dilution to the Company's
shareholders.
RECENT ACCOUNTING PRONOUNCEMENTS
On October 27, 1997, the American Institute of Certified Public
Accountants issued Statement of Position ("SOP") No. 97-2, Software Revenue
Recognition. This SOP provides guidance on applying generally accepted
accounting principles in recognizing revenue on software transactions.
This SOP supersedes SOP 97-1, Software Revenue Recognition. This SOP is
effective for transactions entered into in fiscal years beginning after
December 15, 1997. The Company is currently evaluating the effect of this
SOP on its 1998 financial statements.
<PAGE>
Statement of Financial Accounting Standards No. 131 (FAS 131),
"Disclosures of Information about Capital Structure" was issued in June of
1997. This Statement establishes standards for the way that public
business enterprises report information about operating segments in annual
financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. This Statement is effective for financial statements for
periods beginning after December 15, 1997. The Company has evaluated the
effect of FAS 131 on its 1998 financial statements and has determined that
it does not have reportable segments at this time.
YEAR 2000
In the year 2000, many existing computer programs that use only two
digits (rather than four) to identify a year in the date field could fail
or create erroneous results if not corrected. This computer program flaw is
found primarily in custom software and legacy systems. However, it is
expected to affect virtually all companies and organizations.
All Merge manufacturing equipment and critical facilities equipment
use commercial software applications and have been determined to be Year
2000 compliant. Year 2000 compliance is verified prior to all new
purchases.
As part of Merge's comprehensive approach to Year 2000 Compliance, we
are also verifying that our suppliers of services and products have
effective Year 2000 Compliance processes. This will help ensure that our
business systems will also operate reliably before, during, and into the
new millennium.
The following Merge Technologies products have already been assessed
to be Year 2000 compliant: MergeCOM, MergeAPS, MergeXPI, and MergeARK.
Merge will continue to test its current and future products on an ongoing
basis, applying its Year 2000 Compliance criteria and including any
modifications that are incorporated into the compliance process during its
implementation.
MergeMVP products are assessed on an ongoing basis to assess Year 2000
compliance. Since each MergeMVP can be unique to a protocol, Year 2000
compliance must also be addressed with the manufacturer of the equipment
(i.e., scanner, workstation) attached to the MergeMVP. Should a given
manufacturer be noncompliant with Year 2000 requirements, it is possible
that the Company would need to decline orders for MVPs that connect to such
equipment. The Company cannon quantify the potential value of its
inability to fulfill orders due to OEM Year 2000 noncompliance. However,
such value is expected to be insignificant.
In the event that any compliance issues are identified through our
testing, Merge will, through its support programs, provide the necessary
defect corrections, upgrades, and software releases so that its products
will comply with the date requirements of Year 2000 Compliance.
The Company cannot quantify the potential costs and uncertainties
associated with this computer program flaw at this time, but does not
anticipate that the effect of this computer program flaw on the operations
of the Company will be significant. However, the Company may be required to
spend time and monetary resources addressing any necessary computer program
changes.
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
INDEPENDENT AUDITORS' REPORT
Board of Directors
Merge Technologies Incorporated:
We have audited the accompanying consolidated balance sheets of Merge
Technologies Incorporated and subsidiary (Company) as of December 31, 1996
and 1997, and the related consolidated statements of operations,
shareholders' equity, and cash flows for each of the years in the three-
year period ending December 31, 1997. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on those consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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
the Company as of December 31, 1996 and 1997, and the results of their
operations and their cash flows for each of the years in the three-year
period ended December 31, 1997, in conformity with generally accepted
accounting principles.
Chicago, Illinois
March 9, 1998
/s/ KPMG Peat Marwick LLP
<PAGE>
<TABLE>
MERGE TECHNOLOGIES INCORPORATED AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
ASSETS
<CAPTION>
December 31,
------------------------------
1996 1997
-------------- ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . . . $ 287,098 $ 428,271
Accounts receivable, net of allowance
for doubtful accounts of $77,000 and $74,000
at December 31, 1996 and 1997, respectively. . . . . . . . . . . . . . 1,500,233 1,822,817
Inventory. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 404,493 1,178,493
Prepaid expenses and other current assets. . . . . . . . . . . . . . . . 24,252 51,418
----------- -----------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . 2,216,076 3,480,999
----------- -----------
Property and equipment:
Computer equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . 876,328 1,388,119
Office equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . 208,772 255,539
----------- -----------
1,085,100 1,643,658
Less accumulated depreciation. . . . . . . . . . . . . . . . . . . . . . 401,176 646,381
----------- -----------
Net property and equipment . . . . . . . . . . . . . . . . . . . . . . . . 683,924 997,277
License agreement, net of accumulated amortization of $ -- and
$73,557 at December 31, 1996 and 1997, respectively. . . . . . . . . . . 288,100 217,753
Purchased and developed software, net of accumulated amortization
of $1,175,185 and $2,370,344 at December 31, 1996 and 1997,
respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,143,044 2,601,685
Other intangibles, net of accumulated amortization of $9,874 and
$15,814 at December 31, 1996 and 1997, respectively. . . . . . . . . . . 49,513 43,573
Deferred financing fees, net of accumulated amortization of
$ -- and $63,370 at December 31, 1996 and 1997, respectively . . . . . . -- 285,068
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,008 13,008
----------- -----------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,393,665 $ 7,639,363
=========== ===========
<PAGE>
MERGE TECHNOLOGIES INCORPORATED AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS - CONTINUED
LIABILITIES AND SHAREHOLDERS' EQUITY
December 31,
------------------------------
1996 1997
-------------- ------------
Current Liabilities:
Note payable to bank . . . . . . . . . . . . . . . . . . . . . . . . . . $ 753,000 $ --
Note payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 2,000,000
Current portion of obligations under capital leases. . . . . . . . . . . 55,959 54,612
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,530,130 1,587,113
Customer deposits. . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,294 39,182
Put options related to redeemable common stock and stock warrants. . . . -- 1,289,887
Accrued interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,509 22,500
Accrued wages, vacation, and related payroll taxes . . . . . . . . . . . 191,221 354,637
Other accrued liabilities. . . . . . . . . . . . . . . . . . . . . . . . 101,710 104,773
----------- -----------
Total current liabilities. . . . . . . . . . . . . . . . . . . . . . . . . 2,653,823 5,452,704
----------- -----------
Obligations under capital leases, excluding current portion. . . . . . . . -- 26,516
Put options related to redeemable common stock and stock warrants. . . . . 288,730 --
----------- -----------
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,958,978 5,479,220
Shareholders' equity:
Preferred stock, $0.01 par value: Authorized 5,000,000,
no shares issued and outstanding . . . . . . . . . . . . . . . . . . . -- --
Common stock, $0.01 par value: Authorized 10,000,000,
issued and outstanding 3,896,861 and 3,908,063 shares
at December 31, 1996 and 1997, respectively. . . . . . . . . . . . . . 38,969 39,081
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . 2,854,107 2,732,631
Accumulated deficit. . . . . . . . . . . . . . . . . . . . . . . . . . . (459,602) (668,628)
Cumulative translation adjustment. . . . . . . . . . . . . . . . . . . . 1,213 57,059
----------- -----------
Total shareholders' equity . . . . . . . . . . . . . . . . . . . . . . . . 2,434,687 2,160,143
----------- -----------
Total liabilities and shareholders' equity . . . . . . . . . . . . . . . . $ 5,393,665 $ 7,639,363
=========== ===========
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
MERGE TECHNOLOGIES INCORPORATED AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, 1995, 1996 and 1997
<CAPTION>
Years Ended December 31,
-----------------------------------------------
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Net Sales. . . . . . . . . . . . . . . . . . . . . . . $ 3,718,082 $ 6,384,659 $ 9,716,112
Cost of goods sold:
Purchased components . . . . . . . . . . . . . . . . 752,630 1,626,882 2,362,248
Amortization of purchases and developed software . . 359,859 449,015 613,980
----------- ----------- -----------
Total cost of goods sold . . . . . . . . . . . . . . . 1,112,489 2,075,897 2,976,228
----------- ----------- -----------
Gross profit . . . . . . . . . . . . . . . . . . . . . 2,605,593 4,308,762 6,739,884
----------- ----------- -----------
Operating costs and expenses:
Sales and marketing. . . . . . . . . . . . . . . . . 880,919 1,519,301 2,621,152
Product research and development . . . . . . . . . . 822,690 1,391,264 1,616,486
General and administrative . . . . . . . . . . . . . 963,628 1,220,901 1,563,369
Acquired in-process technology . . . . . . . . . . . 375,000 -- --
Professional fees related to proposed financing. . . -- 363,964 --
----------- ----------- -----------
Total operating costs and expenses . . . . . . . . . . 3,042,237 4,495,430 5,801,007
----------- ----------- -----------
Operating income (loss). . . . . . . . . . . . . . . . (436,644) (186,668) 938,877
----------- ----------- -----------
Other income (expense):
Interest expense . . . . . . . . . . . . . . . . . . (141,231) (134,121) (1,088,079)
Interest income. . . . . . . . . . . . . . . . . . . 4,006 11,016 19,197
Other, net . . . . . . . . . . . . . . . . . . . . . (504) 26,580 (79,021)
----------- ----------- -----------
Total other expense. . . . . . . . . . . . . . . . . . (137,729) (96,525) (1,147,903)
----------- ----------- -----------
<PAGE>
MERGE TECHNOLOGIES INCORPORATED AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS - CONTINUED
Years Ended December 31,
-----------------------------------------------
1995 1996 1997
------------ ------------ ------------
Loss before income taxes and extraordinary item. . . . (574,373) (283,193) (209,026)
Income taxes . . . . . . . . . . . . . . . . . . . . . -- -- --
----------- ----------- -----------
Loss before extraordinary item . . . . . . . . . . . . (574,373) (283,193) (209,026)
Extraordinary gain on extinguishment of debt . . . . . -- 169,514 --
----------- ----------- -----------
Net loss . . . . . . . . . . . . . . . . . . . . . . . $ (574,373) $ (113,679) $ (209,026)
=========== =========== ===========
Basic and diluted loss before extraordinary
item per share . . . . . . . . . . . . . . . . . . . $ (0.21) $ (0.08) $ (0.05)
=========== =========== ===========
Basic and diluted net loss per share . . . . . . . . . $ (0.21) $ (0.03) $ (0.05)
=========== =========== ===========
Shares used to compute basic and
diluted net loss per share . . . . . . . . . . . . . 2,777,834 3,464,989 3,902,993
=========== =========== ===========
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
MERGE TECHNOLOGIES INCORPORATED AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years ended December 31, 1995, 1996, and 1997
<CAPTION>
Class A Class B Common
Shares Class A Shares Class B Shares Common
--------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 . . . . 1,355,795 $ 13,558 616,674 $ 6,167
--------- ---------- ---------- ---------- ---------- ----------
Sale of common stock . . . . . . . . 250,570 2,506
Issuance of stock to purchase SST. . 357,875 3,579
Conversion of common stock . . . . . (1,355,795) (13,558) (616,674) (6,167) 1,972,469 19,725
Accretion of put value . . . . . . .
Net loss . . . . . . . . . . . . . .
---------- ---------- ---------- ---------- ---------- ----------
Balance at December 31, 1995 . . . . -- -- -- -- 2,580,914 25,810
Sale of common stock . . . . . . . . 1,090,319 10,903
Fees incurred in connection
with the sale of common stock. . .
Interest on note receivable
in connection with purchase
of common stock. . . . . . . . . .
Conversion of subordinated
notes payable to common stock. . . 225,628 2,256
Offset of note payable to
shareholder with note receivable
in connection with purchase of
common stock . . . . . . . . . . .
Accretion of put value . . . . . . .
Forfeiture of put feature. . . . . .
Net loss . . . . . . . . . . . . . .
Foreign currency translation
adjustment . . . . . . . . . . . .
---------- ---------- ---------- ---------- ---------- ----------
Balance at December 31, 1996 . . . . -- -- -- -- 3,896,861 38,969
Exercise of stock options. . . . . . 11,202 112
Accretion of put value . . . . . . .
Net loss . . . . . . . . . . . . . .
Foreign currency translation
adjustment . . . . . . . . . . . .
---------- ---------- ---------- ---------- ---------- ----------
Balance at December 31, 1997 . . . . -- $ -- -- $ -- 3,908,063 $ 39,081
========== ========== ========== ========== ========== ==========
</TABLE>
<PAGE>
<TABLE>
MERGE TECHNOLOGIES INCORPORATED AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY - CONTINUED
<CAPTION>
Note
Receivable
in Connec- Retained
Additional tion with Earnings Cumulative Total
Paid-In Purchase of (Accumulated Transition Shareholders'
Capital Common Stock Deficit) Adjustment Equity
----------- ------------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1994 . . . . . . $ 331,157 $ 228,450 $ 579,332
----------- ----------- ----------- ----------- -----------
Sale of common stock . . . . . . . . . . 352,479 354,985
Issuance of stock to purchase SST. . . . 524,871 528,450
Conversion of common stock . . . . . . . --
Accretion of put value . . . . . . . . . (13,701) (13,701)
Net loss . . . . . . . . . . . . . . . . (574,373) (574,373)
----------- ----------- ----------- ----------- -----------
Balance at December 31, 1995 . . . . . . 1,194,806 -- (345,923) 874,693
Sale of common stock . . . . . . . . . . 1,599,097 (150,000 1,460,000
Fees incurred in connection
with the sale of common stock. . . . . (223,721) -- (223,721)
Interest on note receivable
in connection with purchase
of common stock. . . . . . . . . . . . 8,972 (8,792) --
Conversion of subordinated
notes payable to common stock. . . . . 330,914 -- 333,170
Offset of note payable to
shareholder with note receivable
in connection with purchase of
common stock . . . . . . . . . . . . . -- 158,972 158,972
Accretion of put value . . . . . . . . . (138,298) (138,298)
Forfeiture of put feature. . . . . . . . 82,337 82,337
Net loss . . . . . . . . . . . . . . . . -- (113,679) (113,679)
Foreign currency translation
adjustment . . . . . . . . . . . . . . -- 1,213 1,213
----------- ----------- ----------- ----------- -----------
Balance at December 31, 1996 . . . . . . 2,854,107 -- (459,602) 1,213 2,434,687
Exercise of stock options. . . . . . . . 8,138 8,250
Accretion of put value . . . . . . . . . (129,614) (129,614)
Net loss . . . . . . . . . . . . . . . . (209,026) (209,026)
Foreign currency translation
adjustment . . . . . . . . . . . . . . 55,846 55,846
----------- ----------- ----------- ----------- -----------
Balance at December 31, 1997 . . . . . . $ 2,732,631 $ -- $ (668,628) 57,059 $ 2,160,143
=========== =========== =========== =========== ===========
<FN>
See accompanying notes to consolidated financial statements
</TABLE>
<PAGE>
<TABLE>
MERGE TECHNOLOGIES INCORPORATED AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1995, 1996, and 1997
<CAPTION>
Years Ended December 31,
-----------------------------------------------
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss . . . . . . . . . . . . . . . . . . . . . . $ (574,373) $ (113,679) $ (209,026)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization. . . . . . . . . . 472,831 625,719 934,649
Amortization of discount on Sirrom Loan. . . . . -- -- 871,538
Acquired in-process technology . . . . . . . . . 375,000 -- --
Provision for doubtful accounts receivable . . . 40,000 44,000 (3,162)
Expenses related to services performed . . . . . -- 160,000 --
Extraordinary gain on extinguishment of debt . . -- (169,514) --
Change in assets and liabilities net of
effects from purchase of SST:
Accounts receivable. . . . . . . . . . . . . . (417,368) (756,289) (319,422)
Inventory. . . . . . . . . . . . . . . . . . . (140,869) (155,508) (774,000)
Accounts payable . . . . . . . . . . . . . . . 504,090 604,638 56,984
Accrued expenses . . . . . . . . . . . . . . . (1,761) 140,049 169,408
Customer deposits. . . . . . . . . . . . . . . 194,415 (189,121) 33,887
Other. . . . . . . . . . . . . . . . . . . . . (38,713) (18,779) 31,743
----------- ----------- -----------
Net cash provided by operating activities. . . . . . . 413,252 171,516 792,599
----------- ----------- -----------
Cash flows from investing activities:
Purchases of property and equipment. . . . . . . . . (208,401) (319,569) (499,065)
Development of software. . . . . . . . . . . . . . . (724,106) (765,640) (1,005,218)
Purchase of license agreement. . . . . . . . . . . . -- (288,100) (3,210)
Purchase of SST, net of cash acquired. . . . . . . . (54,981) -- --
----------- ----------- -----------
Net cash used in investing activities. . . . . . . . . (987,488) (1,373,309) (1,507,493)
----------- ----------- -----------
<PAGE>
MERGE TECHNOLOGIES INCORPORATED AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
Years Ended December 31,
-----------------------------------------------
1995 1996 1997
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from line of credit . . . . . . . . . . . . 250,000 -- --
Proceeds from loan agreement with Sirrom . . . . . . -- -- 2,000,000
Financing fees from loan agreement with Sirrom . . . -- -- (63,371)
Financing fees related to IPO. . . . . . . . . . . . -- -- (285,068)
Proceeds from revolving credit agreement . . . . . . -- 753,000 470,000
Payments on line of credit . . . . . . . . . . . . . -- (250,000) --
Repayment of revolving credit agreement. . . . . . . -- -- (1,223,000)
Repayment of subordinated notes payable to
shareholders and related interest. . . . . . . . . -- (375,000) --
Borrowings from shareholders . . . . . . . . . . . . 150,000 -- --
Issuance of common stock, net of expenses. . . . . . 204,985 1,236,279 --
Proceeds from exercise of stock options. . . . . . . -- -- 8,255
Principal payments under capital leases. . . . . . . (11,596) (23,724) (50,749)
----------- ----------- -----------
Net cash provided by financing activities. . . . . . . 593,389 1,340,555 856,067
----------- ----------- -----------
Net increase in cash and cash equivalents. . . . . . . 19,153 138,762 141,173
Cash and cash equivalents, beginning of period . . . . 129,183 148,336 287,098
----------- ----------- -----------
Cash and cash equivalents, end of period . . . . . . . $ 148,336 $ 287,098 $ 428,271
=========== =========== ===========
Supplemental Disclosures of Cash Flow Information:
Cash paid for income taxes . . . . . . . . . . . . . $ 3,000 $ -- $ --
Cash paid for interest . . . . . . . . . . . . . . . 73,000 195,000 209,000
<PAGE>
MERGE TECHNOLOGIES INCORPORATED AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
Years Ended December 31,
-----------------------------------------------
1995 1996 1997
------------ ------------ ------------
Non-cash Financing and Investing Activities:
Property and equipment acquired through
capital leases . . . . . . . . . . . . . . . . . . 60,000 17,000 59,000
Repayment of shareholder notes through
issuance of common stock . . . . . . . . . . . . . 150,000 -- --
Repayment of subordinated notes payable
and related interest through issuance of
common stock . . . . . . . . . . . . . . . . . . . -- 333,000 --
Accretion of put options related to redeemable
common stock and stock warrants. . . . . . . . . . 14,000 138,000 130,000
Forfeiture of put options related to redeemable
common stock . . . . . . . . . . . . . . . . . . . -- (82,000) --
Issuance of payable to shareholder in
consideration for services . . . . . . . . . . . . -- 160,000 --
Issuance of common stock for acquisition of SST. . . 528,000 -- --
<FN>
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) NATURE OF OPERATIONS
Merge Technologies Incorporated and its wholly-owned subsidiary,
Signal Stream, Incorporated (together, the Company), design, manufacture,
market, and support hardware and software products used in networks for the
storage, management, and distribution of medical imaging data. The
Company's products connect diverse medical equipment and systems, providing
increases in efficiency and productivity for hospitals and clinics. The
Company sells its products in the United States and internationally.
Foreign sales, accounted for approximately 50%, 37%, and 37% of the
Company's net sales for the years ended December 31, 1995, 1996, and 1997,
respectively. Sales in foreign currency represented 6.7% of the Company's
net sales for the year ended December 31, 1997. The Company's raw
materials are readily available and the Company is not dependent on a
single supplier or only a few suppliers.
In March 1996, the Company established a sales office in The
Netherlands. As of and for the year ending December 31, 1996, the sales
office generated approximately $660,000 in revenues and incurred a net loss
of approximately $210,000. As of and for the year ending December 31, 1997,
the sales office generated approximately $2,800,000 in revenues, and a net
loss of approximately $114,000.
(b) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the financial statements
of Merge Technologies Incorporated and its wholly-owned subsidiary. All
significant inter-company balances and transactions have been eliminated in
consolidation.
(c) CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flows, the Company considers
all highly liquid debt instruments with original maturities of three months
or less to be cash equivalents. Cash equivalents included a $250,000
repurchase agreement at December 31, 1996.
(d) INVENTORY
Inventory, consisting principally of raw materials and finished goods,
is stated at the lower of cost or market. Cost is determined using the
first-in, first-out method.
(e) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Equipment under capital
leases is stated at the present value of minimum lease payments.
Depreciation on property and equipment is calculated on the straight-
line method over the estimated useful lives of the assets. Useful lives of
the Company's major classes of property and equipment are five years for
computer equipment and seven years for office equipment. Equipment held
under capital leases and leasehold improvements are amortized straight line
over the shorter of the lease term or estimated useful life of the asset.
<PAGE>
(f) PURCHASED AND DEVELOPED SOFTWARE
All research and development costs incurred prior to the point at
which management believes a project has reached "technological feasibility"
are expensed. Engineering costs incurred subsequent to reaching
technological feasibility are capitalized and reported at the lower of
unamortized cost or net realizable value. 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 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.
The Company assesses the recoverability of these costs by determining
whether the amortization of the capitalized costs over the remaining life
of the projects can be recovered through undiscounted future operating cash
flows.
Acquired in-process technology for which technological feasibility has
not been achieved is expensed at date of purchase.
(g) LONG-LIVED ASSETS
The Company adopted the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 121, ACCOUNTING FOR THE IMPAIRMENT OF
LONG-LIVED ASSETS TO BE DISPOSED OF, on January 1, 1996. SFAS No. 121
requires that long-lived assets and certain identifiable intangibles be
reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of
the carrying amount of an asset to future net cash flows expected to be
generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceed the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or fair value
less costs to sell. Adoption of SFAS No. 121 had no impact on the
Company's financial position, results of operations, or liquidity.
(h) OTHER INTANGIBLES
Other intangibles represent the excess of purchase price over fair
value of net assets acquired and the customer list acquired through the
acquisition of Signal Stream Technologies, Inc. (note 2) and is amortized
on a straight-line basis over ten years, the expected period to be
benefitted.
The Company assesses the recoverability of this intangible asset by
determining whether the amortization of the balance over its remaining life
can be recovered through undiscounted future operating cash flows of the
acquired operation. The amount of impairment, if any, is measured based on
projected discounted future operating cash flows using a discount rate
reflecting the Company's average cost of funds. The assessment of the
recoverability will be impacted if estimated future operating cash flows
are not achieved.
(i) DEFERRED FINANCING FEES
Deferred financing fees are amortized over the expected term of the
related debt.
<PAGE>
(j) INCOME TAXES
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases and operating losses and tax credit carryforwards. Deferred tax
assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences
are expected to be recovered or settled. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
The Company files a consolidated Federal income tax return with its
subsidiary.
(k) STOCK OPTION PLAN
Prior to January 1, 1996, the Company accounted for its stock option
plan in accordance with the provisions of Accounting Principles Board
("APB") Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and
related interpretations. As such, compensation expense would be recorded
on the date of grant only if the current market price of the underlying
stock exceeded the exercise price. On January 1, 1996, the Company adopted
SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, which permits
entities to recognize as expense over the vesting period the fair value of
all stock-based awards on the date of grant. Alternatively, SFAS No. 123
also allows entities to continue to apply the provision of APB Opinion
No. 25 and provide pro forma net income and pro forma earnings per share
disclosures for employee stock option grants made in 1995 and future years
as if the fair-value-based method defined in SFAS No. 123 had been applied.
The Company has elected to continue to apply the provisions of APB Opinion
No. 25 and provide the pro forma disclosure provisions of SFAS No. 123.
(l) FINANCIAL INSTRUMENTS
The Company's financial instruments include cash and cash equivalents,
accounts receivable, notes payable, accounts payable, and certain accrued
expenses. The carrying amounts approximate fair value because of the short
maturity of these instruments.
(m) REVENUE RECOGNITION
Revenue from product sales is recognized upon shipment. No
significant Company obligations exist with regard to delivery or customer
acceptance following shipment. Revenues from software maintenance are
deferred and recognized straight-line over the contract support period,
which is generally one year.
(n) USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires Company management to make
estimates 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. Actual results could differ from
those estimates.
<PAGE>
(o) NET EARNINGS (LOSS) PER SHARE
The Company applies SFAS No. 128, EARNINGS PER SHARE, and Securities
and Exchange Commission Staff Accounting Bulletin No. 98 ("SAB 98") in
computing earnings per share. Basic net loss per share is computed using
the weighted average number of common shares outstanding. Diluted net loss
per share is computed using the weighted average number of common shares
outstanding and equivalent shares based on the assumed exercise of stock
options and warrants (using the treasury stock method). Prior periods'
net loss per share have been restated to conform to the requirements of
SFAS No. 128 and SAB 98.
(p) STOCK DIVIDEND
On September 25, 1997, the Company declared a 6.77217-for-one stock
split, effective as of the date of declaration of effectiveness of the
initial public offering, which occurred on January 29, 1998. The stock
split was effected as a stock dividend of 5.77217 shares per share of
Common Stock. The accompanying consolidated financial statements and notes
have been restated to reflect this change in capital structure.
(q) RECLASSIFICATIONS
Where appropriate, certain items relating to the prior years have been
reclassified to conform to the presentation in the current year.
(2) BUSINESS COMBINATION
Effective May 1, 1995, Signal Steam, Incorporated (SSI), a wholly-
owned subsidiary of the Company formed to effect the acquisition of Signal
Stream Technologies, Inc. (SST), acquired all the outstanding share of SST.
The purchase price consisted of 357,875 shares of Merge Technologies
Incorporated common stock. In addition, $77,328 in acquisition expenses
were incurred. The acquisition was accounted for as a purchase.
The consolidated statements of operations include the results of
operations of SST from the date of acquisition. The following unaudited
pro forma summary presents the consolidated results of operations for the
year ended December 31, 1995 as if the acquisition had occurred at the
beginning of the year, after giving effect to certain adjustments,
including income taxes, acquired in-process technology, and amortization of
other intangibles.
The net loss presented for the year ended December 31, 1995 includes a
$375,000 charge to operations for acquired in-process technology. Pro
forma results have been prepared for informative purposes only and do not
purport to be indicative of what would have occurred had the acquisition
been made as of the date stated or of results which may occur in the
future.
Unaudited
1995
----------
Revenue................................ $4,000,000
Net Loss............................... (770,000)
(3) LICENSE AGREEMENT
The Company entered into an agreement in 1996 with a technology
supplier under which the Company has been granted a worldwide non-exclusive
license to duplicated and distribute encoding software used by the Company
in recording identifying marks on x-ray film. The Company was also granted
a worldwide exclusive license to duplicate and distribute decoding software
embedded in hand held readers. This exclusivity will lapse on November 1,
2000. In the event that the Company ceases to distribute both licensed
products for a period of twenty-four months, any license in effect will
automatically terminate.
<PAGE>
In addition to the initial payments for the licenses of $288,100, the
Company is obligated to pay a royalty based upon the number of the products
distributed. The agreement is being amortized over the expected period of
benefit, 47 months. No products subject to royalty were sold in 1996 or in
1997. Related amortization was approximately $74,000 for the year ended
December 31, 1997.
(4) INDEBTEDNESS
(a) NOTE PAYABLE TO BANK
The Company entered into a $1,250,000 Revolving Credit Agreement
("Agreement") with a bank in June 1996. The Agreement replaced a $250,000
bank line of credit. Availability of loans under the Agreement were
subject to a borrowing base calculated on inventory and account receivable.
The loans bore interest at the bank's reference rate, as defined in the
Agreement, plus 0.5%. The Agreement was collateralized by all assets of
the Company. At December 31, 1996, the Company was in default with
respect to several of the Agreement's restrictive covenants and the note
payable to bank was due on demand. The interest rate was increased to the
default rate, which represents the bank's reference rate plus 5.5% (13.75%
at December 31, 1996).
Subsequent to December 31, 1996, the Agreement was amended to reduce
the credit limit to $753,000 in conjunction with a forbearance agreement
entered into with the bank. Under the forbearance agreement, the officer
and certain shareholders of the Company provided personal guarantees. On
March 18, 1997, the Company and the bank entered into a reinstatement
agreement under which the credit limit was increased to $1,000,000 and a
term loan of $250,000 was established. In June 1997, the principal and
interest outstanding under this note payable to bank were paid in full.
The Company incurred interest expense on bank debt of $40,000 in 1996
and $44,000 in 1997.
(b) SUBORDINATED NOTES PAYABLE TO SHAREHOLDERS
Effective May 1996, the Company converted $222,712 of $686,064
subordinated notes payable to shareholders ("Notes") and related accrued
interest into 191,766 shares of common stock. In addition, the Company
settled the remaining $463,352 of Notes and related accrued interest with
the issuance of 33,861 shares of the Company's common stock and a cash
payment of $375,000. The Company realized an extraordinary gain on the
settlement.
Interest expense incurred on subordinated notes payable to
shareholders was approximately $97,800 and $39,700 for the years ending
December 31, 1995, and 1996, respectively.
(c) NOTE PAYABLE TO SHAREHOLDER
In June 1996, the Company issued a $160,000 note to a shareholder in
consideration for services the shareholder performed in assisting the
Company with raising capital.
The note was due on January 1, 1997, and was non-interest bearing.
Effective December 31, 1996, the note payable to the shareholder was
discharged against a note due to the Company from the shareholder in
connection with the purchase of common stock.
(d) NOTE PAYABLE
In June 1997, the Company entered into a $2,000,000 Loan Agreement
with Sirrom Capital Corporation ("Sirrom"). The Loan Agreement bore
interest at a stated rate of 13.5% payable monthly from August 1997 through
May 2002, with principal and any remaining interest due in June 2002. The
Loan Agreement granted Sirrom a security interest in substantially all of
the Company's remaining assets.
<PAGE>
In connection with the Loan Agreement, the Company issued stock
purchase warrants expiring in July 2002, granting Sirrom the right to
purchase 145,256 shares of the Company's common stock at $0.001 per share.
Additional warrants would be issued as follows if the principal were
outstanding on the specified dates: June 2000 -- 58,498; June 2001 --
60,056; and June 2002 -- 61,667.
The stock purchase warrants were subject to a put option whereby
Sirrom could sell the warrants to the Company in the 30-day period prior to
the expiration date of the warrants. The put option price was equal to the
fair market value of the common stock issuable under the warrants.
The Company assigned a value of $871,538 to the warrants issued, which
is reflected as a debt discount and put warrant liability, based on the
value of the common stock on the date of the transaction. The debt
discount was fully amortized to interest expense during 1997.
Proceeds from the Loan Agreement were used to fully pay the principal
and interest outstanding on the note payable to bank (note 4 (a)), and were
also available to repurchase certain outstanding shares of the Company's
common stock, and provide additional working capital for sales, marketing,
and product development expenditures.
The note payable and related interest were paid in full in February
1998, with proceeds from the Company's initial public offering (note 12).
The Company incurred interest expense of $135,000 in connection with
the Sirrom Loan Agreement in 1997.
(5) EMPLOYEE BENEFIT PLAN
The Company maintains a contributory deferred profit-sharing plan
(401(k)) covering employees who meet minimum service requirements and have
elected to participate. Company contributions, which are at the discretion
of the Board of Directors, totaled $15,900, $30,800 and $46,100 for the
years ended December 31, 1995, 1996, and 1997, respectively.
(6) INCOME TAXES
Actual income taxes vary from the expected income taxes (computed by
applying the statutory income tax rate of 34% to loss before income taxes
and extraordinary item) as a result of the following:
Years Ended December 31,
----------------------------------
1995 1996 1997
-------- -------- --------
Expected tax expense (benefit) . . . $(165,000) $(96,000) $(71,000)
Increase (decrease) in income
taxes resulting from:
Nondeductible amortization and
acquired in-process technology . 169,000 50,000 --
Change in the beginning of the
year balance of the valuation
allowance for deferred tax
assets allocated to income
tax expense. . . . . . . . . . . 125,000 140,000 (409,000)
Research and experimentation
credit . . . . . . . . . . . . . (137,000) (137,000) (180,000)
Nondeductible financing costs. . . -- -- 318,000
Nondeductible expenses . . . . . . 5,000 42,000 14,000
Foreign tax credits. . . . . . . . -- -- (19,000)
State and local income taxes,
net of federal income tax
benefit. . . . . . . . . . . . . (3,000) (10,000) 51,000
Other. . . . . . . . . . . . . . . 6,000 11,000 296,000
--------- -------- --------
Actual tax expense . . . . . . . . . $ -- $ -- $ --
========= ======== ========
<PAGE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1997 are presented below:
December 31,
----------------------
1996 1997
---------- ----------
Deferred tax assets:
Accounts receivable, principally due to
allowance for doubtful accounts. . . . . . .$ 29,000 $ 24,000
Accrued wages. . . . . . . . . . . . . . . . . 39,000 94,000
Research and experimentation credit
carryforward . . . . . . . . . . . . . . . . 496,000 760,000
Net operating loss carryforwards . . . . . . . 741,000 268,000
Other. . . . . . . . . . . . . . . . . . . . . -- 87,000
---------- -----------
Total gross deferred tax assets. . . . . . . . . 1,305,000 1,233,000
Less valuation allowance . . . . . . . . . . . (432,000) (23,000)
---------- -----------
Net deferred tax asset . . . . . . . . . . . . 873,000 1,210,000
---------- -----------
Deferred tax liabilities:
Property and equipment, principally due
to differences in depreciation . . . . . . . (61,000) (88,000)
Software development costs . . . . . . . . . . (804,000) (978,000)
Intellectual property. . . . . . . . . . . . . -- (128,000)
Customer list. . . . . . . . . . . . . . . . . -- (16,000)
Other. . . . . . . . . . . . . . . . . . . . . (8,000) --
---------- -----------
Total gross deferred liabilities . . . . . . . .$ (873,000) $(1,210,000)
========== ===========
Net deferred taxes . . . . . . . . . . . . . . .$ -- $ --
========== ===========
The net change in the total valuation allowance for the years ended
December 31, 1995, 1996, and 1997 was an increase (decrease) of $312,000,
$79,000, and ($409,000) respectively. In assessing the realizability of
deferred tax assets, management considers whether it is more likely than
not that some portion or all of the deferred tax assets will not be
realized. The ultimate realization of deferred tax assets is dependent
upon the generation of future taxable income during the periods in which
those differences become deductible. Management considers the scheduled
reversal of deferred tax liabilities, projected future taxable income, and
tax planning strategies in making this assessment. Based upon the level of
historical taxable income, management believes it is more likely than not
the Company will realize the benefits of these deductible differences net
of the existing valuation allowances. The amount of the deferred tax asset
considered realizable, however, could be reduced in the near term if
estimates of future taxable income during the carryforward period are
reduced.
At December 31, 1997, the Company had net operating loss carryforwards
and research credits carryforwards approximating $702,000 and $596,000,
respectively. These losses and credits are available to offset future
taxable income and tax, if any, and expire in varying amounts beginning in
2008 and 2005 respectively, and continuing through 2011 and 2012,
respectively. A portion of the income tax loss carryforwards and credits
are subject to certain limitations which could impair the Company's ability
to utilize the benefits of these losses and credits in the future. In
addition, if certain substantial changes in the Company's ownership should
occur, there could be an additional annual limitation on the amount of the
carryforwards which could be utilized.
<PAGE>
(7) LEASES
The Company is obligated under various capital leases for computer
equipment that expire at various dates during the next five years. At
December 31, 1996, the gross amount of computer equipment was $95,000 and
related accumulated amortization was $27,400. At December 31, 1997, the
gross amount of computer equipment was $154,700 and related accumulated
amortization was $52,400.
The Company has a noncancelable operating lease for its main office
facility. The lease is for an eight-year term expiring in August 2004.
The Company can terminate the lease after the expiration of the fourth
year, subject to certain termination costs. Total rent expense associated
with this lease for the years ended December 31, 1995, 1996 and 1997 was
approximately $76,000, $116,000 and $160,000, respectively. Future minimum
lease payments under noncancelable operating leases (with initial or
remaining lease terms in excess of one year) and future minimum capital
lease payments as of December 31, 1997, are:
Operating Capital
---------- ----------
1998 . . . . . . . . . . . . . . . . . . . . $ 162,561 $ 60,401
1999 . . . . . . . . . . . . . . . . . . . . 162,055 13,670
2000 . . . . . . . . . . . . . . . . . . . . 159,525 7,459
2001 . . . . . . . . . . . . . . . . . . . . 159,525 7,459
2002 . . . . . . . . . . . . . . . . . . . . 159,525 1,865
Later Years, through 2004. . . . . . . . . . 265,875 --
---------- -------
Total minimum lease payments . . . . . . . . $1,069,066 $90,854
==========
Less amount representing interest . . . . 9,726
-------
Present value of net minimum
capital lease payments . . . . . . . . . . 81,128
Less current installments of obligations
under capital leases. . . . . . . . . . 54,612
-------
Obligations under capital leases,
excluding current installments . . . . . . $26,516
=======
(8) SHAREHOLDERS' EQUITY
(a) COMMON AND PREFERRED STOCK
In April 1995, the Company converted each share of issued and
outstanding Class A common stock and Class B common stock into one share of
newly created common stock, par value $0.01. Each existing option to
acquire Class A or Class B common stock was also converted into an option
to acquire one share of the newly created common stock.
In 1996, the Company sold 1,090,319 shares of common stock at
approximately $1.48 a share. The Company incurred approximately $224,000
of expenses in connection with the sales of the common stock.
In 1996, 5,000,000 shares of preferred stock, $0.01 par value, were
authorized. The Company has not issued any shares of preferred stock.
(b) STOCK REDEMPTION AGREEMENT
In May 1995, the Company entered into a Stock Redemption Agreement
("SR Agreement") with the former Class B shareholders and the former
Class B option holders. Under the terms of the SR Agreement, the Company
may redeem all (but not less than all) of the former Class B shares and the
shares of common stock that may be acquired by the exercise of a former
Class B option at $1.53 per share (the "call option"). The Company's call
option was to expire on March 1, 1997.
<PAGE>
These shares are also subject to a put option exercisable by the
former Class B shareholders, to put their shares back to the Company (for
cash) at the book value of the Company on the date exercised. The put
option cannot be exercised until June 30, 1997, and expires on June 30,
1998. The Company is recording the redemption price of the common stock
subject to the put feature by adjusting interest expense and the put option
liability.
In March 1997, the Company amended the SR Agreement to extend the
Company's call option and the holder's put option through October 1998.
The call price ranges from $1.56 to $2.37 and the put price ranges from
$0.71 to $1.52.
As of December 31, 1995 there were 616,674 shares of former Class B
stock and 60,536 former Class B options outstanding which were subject to
call and put rights. In April 1996, the number of shares and options
subject to the call and put options was reduced to 424,757 and 13,253,
respectively, as a provision of the conversion of the Notes into common
shares (see note 4). During the six months ended June 30, 1997, the 13,253
options subject to the call and put expired. In February 1998, the Company
exercised its call option with respect to the 424,757 shares for a price of
$1.90 a share.
(c) STOCK OPTION PLAN
The Company maintains a stock option plan for employees of Merge
Technologies Incorporated (Plan) which provides for the granting of a
maximum of 1,015,826 shares of common stock. Under this Plan, options
have an exercise price equal to the fair market value of the stock at the
date of grant. The majority of the options vest 25% immediately with the
remaining vesting over a three-year period. The options granted under this
plan expire six years from the date of grant.
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following assumptions
used for grants in 1996 and 1997: expected option lives of four years,
expected volatility and dividend yield of 0%, and a risk-free interest rate
of 5.63% and 6.13%. The weighted average grant-date fair value of options
calculated using the Black-Scholes model was $0.29 and $1.29 for options
granted in 1996 and 1997, respectively.
The Company applies APB Opinion No. 25 and related interpretations in
accounting for its plans. All options under the plans have been granted at
exercise prices not less than the market value at the date of the grant.
Had the Company determined compensation cost based on the fair value at the
grant date for its stock options under SFAS No. 123, the Company's net loss
would have been increased to the pro forma amounts indicated below:
<PAGE>
1995 1996 1997
---------- ---------- ----------
Net loss available to
common shareholders
As reported. . . . . . . . . $ (574,373) $ (113,679) $(209,026)
Pro forma. . . . . . . . . . (574,373) (177,000) (347,026)
Basic and diluted net loss
per share
As reported. . . . . . . . . (0.21) (0.03) (0.05)
Pro forma. . . . . . . . . . (0.21) (0.04) (0.09)
Pro forma net loss reflects only options granted in 1996 and 1997.
Therefore, the full impact of calculating compensation cost for stock
options under SFAS No. 123 is not reflected in the pro forma net loss
amounts presented above because compensation cost is reflected over the
options' vesting period of three years and compensation cost for options
granted prior to January 1, 1995 is not considered.
A summary of stock options is as follows:
Class B Common
-------------------- --------------------
Weighted Weighted
Average Average
Exercise Exercise
Number Price Number Price
-------- --------- -------- ---------
Options outstanding,
January 1, 1995. . . . 60,536 0.33
Conversion of Options. . (60,536) (0.33) 60,536 $0.33
--------
Options outstanding,
December 31, 1995. . . 60,536 0.33
Options granted . . . . 776,944 1.48
--------
Options outstanding,
December 31, 1996. . . 837,480 1.39
Options exercised. . . . (11,201) 0.74
Options granted . . . . 251,925 6.00
Options forfeited. . . . (120,104) .96
--------
Options outstanding
December 31, 1997. . . 958,100 2.67
========
Options exercisable
December 31, 1997 . . . 482,270 $2.27
========
<PAGE>
<TABLE>
The following table summarizes information about stock options outstanding at December 31, 1997:
Weighted
average Weighted Weighted
Range of remaining average average
exercise Options contractual exercise Options exercise
prices outstanding life price exercisable price
- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
$1.48 706,175 4.83 $1.48 398,295 $1.48
$6.00 251,925 5.32 6.00 83,975 6.00
-------- -------- -----
958,100 4.97 $2.67 482,270 $2.27
======== ======== =====
</TABLE>
<PAGE>
(d) WARRANTS
In June 1997, the Company entered into a $2,000,000 Loan Agreement
with Sirrom Capital Corporation (Sirrom"). In connection with the Loan
Agreement, the Company issued stock purchase warrants expiring in July
2000, granting Sirrom the right to purchase 145,256 shares of the Company's
common stock at $0.001 per share. In February, 1997, Sirrom exercised
108,942 options and the remaining 36,314 options were terminated upon
payment of a fee of $196,000 by the Company.
(e) NOTE RECEIVABLE IN CONNECTION WITH PURCHASE OF COMMON STOCK
In June 1996, a shareholder of the Company issued a $200,000 non-
interest bearing note due on or before June 1, 1999 to purchase 135,443
shares of the Company's common stock at $1.48 per share, the fair market
value of the stock on the date of the note. The present value of the note
was $150,000. The Company has recognized interest income on the note at an
imputed interest rate of 10%. Effective December 31, 1996, the note
receivable was offset with a note payable by the Company to the shareholder
(note 4(c)).
(9) SIGNIFICANT CUSTOMER
The Company had two customers that accounted for 32% and 12%,
respectively, of consolidated net sales for the year ending December 31,
1995. The Company had two customers and one distributor that accounted for
15%, 10%, and 26%, respectively, of consolidated net sales for the year
ending December 31, 1996, and one customer and one distributor that
accounted for 14% and 23%, respectively, of consolidated net sales for the
year ending December 31, 1997. Accounts receivable from the distributor
accounted for approximately 30% and 38% of outstanding consolidated
amounts at December 31, 1996 and 1997, respectively.
(10) PROFESSIONAL FEES RELATED TO PROPOSED FINANCING
The Company incurred $364,000 in fees in preparation for an initial
public offering in 1996 that was canceled.
(11) CONSULTING AGREEMENT
In June 1996, the Company entered into a three- year consulting
agreement with one of its shareholders for financing and other business
services. Pursuant to the terms of the consulting agreement, the
shareholder will be paid $3,500 per month during the term of the agreement
plus out-of-pocket expenses. In the opinion of management of the Company,
such fee is representative of the fee the Company would be required to pay
an independent third-party to receive similar financing and other business
services. The Company and the shareholder terminated this consulting
agreement effective upon closing of the initial public offering.
(12) SUBSEQUENT EVENT
On January 29, 1998, the Company completed an initial public offering
of 1,900,000 shares of common stock at an offering price of $6.00 per
share. On February 27, 1998, the underwriter exercised its overallotment
option and offered an additional 285,000 shares to the public at $6.00 per
share. As a result of the initial public offering, the Company received
net proceeds of approximately $11,800,000 and increased its total shares of
common stock outstanding by 2,185,000 shares. The net proceeds of the
offering were used, in part, to repay in full the outstanding principal and
interest on the $2,000,000 note with Sirrom Capital, to redeem 424,757
shares of stock held by Alpha Capital Venture Partners at $1.90 per share,
and to terminate an unexercised warrant held by Sirrom Capital for
$196,000.
<PAGE>
(13) RECENT ACCOUNTING PRONOUNCEMENTS
On October 27, 1997, the American Institute of Certified Public
Accountants issued Statement of Position ("SOP") No. 97-2, Software Revenue
Recognition. This SOP provides guidance on applying generally accepted
accounting principles in recognizing revenue on software transactions.
This SOP supersedes SOP 97-1, Software Revenue Recognition. This SOP is
effective for transactions entered into in fiscal years beginning after
December 15, 1997. The Company is currently evaluating the effect of this
SOP on its 1998 financial statements.
Statement of Financial Accounting Standards No. 131 (FAS 131),
"Disclosures of Information about Capital Structure" was issued in June of
1997. This Statement establishes standards for the way that public
business enterprises report information about operating segments in annual
financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. This Statement is effective for financial statements for
periods beginning after December 15, 1997. The Company has evaluated the
effect of FAS 131 on its 1998 financial statements and determined that it
does not have reportable segments at this time.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not applicable
<PAGE>
PART III
Certain information required by Part III is omitted from this Report
in that the Registrant filed its definitive proxy statement pursuant to
Rule 14a-3 (the "Proxy Statement") not later than 120 days after the end of
the fiscal year covered by this Report, and certain information included
therein is incorporated herein by reference.
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND
CONTROL PERSONS: COMPLIANCE WITH SEC. 16(A)
The information required by this item is incorporated by reference to
the information set forth under the caption "Management" in the Company's
Proxy Statement for the 1998 Annual Meeting of Stockholders.
ITEM 10. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to
the information set forth under the caption "Management - Executive
Compensation" in the Company's Proxy Statement for the 1998 Annual Meeting
of Stockholders.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to
the information set forth under the caption "Security Ownership of Certain
Beneficial Owners and Management" in the Company's Proxy Statement for the
1998 Annual Meeting of Stockholders.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to
the information set forth under the caption "Directors and Executive
Officers" in the Company's Proxy Statement for the 1998 Annual Meeting of
Stockholders.
<PAGE>
ITEM 13. EXHIBIT INDEX
EXHIBIT NO.
- -----------
3.1 Articles of Incorporation of Registrant (1)
3.2 Amended and Restated By-Laws of Registrant as of
February 3, 1998
4.1 Stock Purchase Warrant issued June 30, 1997 by Registrant
to Sirrom Capital Corporation (1)
4.2 Form of Lock-Up Agreement (1)
4.3 Common Stock Certificate (1)
4.4 Representative's Warrant
10.1 Employment Agreement dated September 1, 1997 between
Registrant and William C. Mortimore (1)
10.2 Merge/Sirrom Revised Modification Agreement dated as of
October 30, 1997 (1)
10.3 OEM Purchase Agreement between Registrant and Philips
Medical Systems Nederland B.V. dated September 24, 1994 and First Amendment
dated June 4, 1996 (1)
10.4 Distribution Agreement with Picker International, Inc.
(1)
10.5 1996 Stock Option Plan for Employees of Registrant dated
May 13, 1996 (1)
10.6 Office Lease for West Allis Center dated May 24, 1996
between Registrant and Whitnall Summit Company, LLC, Supplemental Office
Lease dated July 3, 1997 (1) and Supplemental Office Space Lease dated
January 30, 1998
10.7 Alpha Capital Venture Partners Limited Agreement dated
March 1, 1997 (1)
10.8 1998 Stock Option Plan For Directors
21 Subsidiaries of Registrant (1)
27.1 Financial Data Schedule
- --------------------
(1) Incorporated by reference to Registration Statement on Form SB-2 (No.
333-39111) effective January 29, 1998.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
INCLUDED IN SUCH REPORT.
</LEGEND>
<CIK> 0000944765
<NAME> MERGE TECHNOLOGIES INCORPORATED
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 428,271
<SECURITIES> 0
<RECEIVABLES> 1,896,817
<ALLOWANCES> 74,000
<INVENTORY> 1,178,493
<CURRENT-ASSETS> 3,480,999
<PP&E> 1,643,658
<DEPRECIATION> 646,381
<TOTAL-ASSETS> 7,639,363
<CURRENT-LIABILITIES> 5,452,704
<BONDS> 0
<COMMON> 0
0
2,771,712
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 7,639,363
<SALES> 0
<TOTAL-REVENUES> 9,716,112
<CGS> 2,362,248
<TOTAL-COSTS> 5,801,007
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,088,079
<INCOME-PRETAX> (209,026)
<INCOME-TAX> 0
<INCOME-CONTINUING> (209,026)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (209,026)
<EPS-PRIMARY> 0
<EPS-DILUTED> (0.05)
</TABLE>
EXHIBIT 3.2
- -----------
AMENDED AND RESTATED BY-LAWS OF MERGE TECHNOLOGIES INCORPORATED
(as of February 3, 1998)
ARTICLE
OFFICES
The principal office of the corporation in the State of Wisconsin
shall be located in the City of Milwaukee, County of Milwaukee. The
corporation may have such other offices, either within or without the State
of Wisconsin, as the Board of Directors may designate or as the business of
the corporation may require from time to time.
The registered office of the corporation required by the Wisconsin
Business Corporation Law to be maintained in the State of Wisconsin may be,
but need not be, identical with the principal office in the State of
Wisconsin, and the address of the registered office may be changed from
time to time by the Board of Directors.
ARTICLE
SHAREHOLDERS
Annual Meeting.
The annual meeting of the shareholders for the election of directors
and for the transaction of such other business as may properly be brought
before the meeting shall be held at such time as is specified in the notice
of the meeting on either the first Friday in March of each year or on such
other date as may be fixed by the Board of Directors of the corporation
prior to the giving of the notice of the meeting. The Board of Directors
acting by resolution may postpone or reschedule any annual meeting of
shareholders.
Special Meetings
Special meetings of the shareholders for any purpose or purposes
shall be called to be held at any time upon the request of the President, a
majority of the members of the Board of Directors or of the Executive
Committee then in office or upon the written request of the holders of not
less than ten (10%) percent of all outstanding shares of the corporation.
Business transacted at all special meetings shall be confined to the
specific purpose or purposes of the persons authorized to request such
special meeting as set forth in this Section 2 and only such purpose or
purposes will be set forth in the notice of the meeting. The Board of
Directors acting by resolution may postpone or reschedule any previously
scheduled special meeting of shareholders.
Place of Meeting.
All meetings of the shareholders shall be held at such place within
or without the state of Wisconsin as shall be fixed by the Board of
Directors from time to time.
Notice of Meeting.
Written notice stating the place, day and hour of the meeting and,
the purpose or purposes for which the meeting is called, shall be delivered
not less than ten nor more than ninety days before the date of the meeting,
either personally or by mail, by or at the direction of the President, or
the Secretary, or the officer or persons calling the meeting, to each
shareholder of record entitled to vote at such meeting. If mailed, such
notice shall be deemed to be delivered when deposited in the United States
mail, addressed to the shareholder at his address as it appears on the
stock record books of the corporation, with postage thereon prepaid.
<PAGE>
Closing of Transfer Books or Fixing of Record Date.
The Board of Directors may fix a future date as the record date for
one or more voting groups in order to determine the shareholders entitled
to notice of a shareholders meeting, to demand a special meeting, or to
vote or to take any other action. The record date may not be more than
seventy days nor less than fifteen days before the meeting or action
requiring a determination of shareholders. Except as otherwise provided by
these By-Laws, a determination of shareholders entitled to notice of or to
vote at a shareholders meeting is effective for any adjournment of the
meeting unless the Board of Directors fixes a new record date, which it
shall do if the meeting is adjourned to a date more than one hundred twenty
days after the date fixed for the original meeting. The Board of Directors
may from time to time fix in advance a date, not more than seventy days
prior to the date for the payment of any dividend, or the date for the
allotment of any rights, or the date when any change or conversion or
exchange of shares shall become effective, as a record for the
determination of the shareholders entitled to receive payment of any such
dividend, or to any such allotment of rights, or to exercise the rights in
respect of any such change, conversion, or exchange of shares, and only
such shareholders as shall be shareholders of record on the date so fixed
shall be entitled to receive payment of such dividend, or to receive such
allotment of rights, or to exercise such rights, notwithstanding any
transfer of any shares on the books of the corporation after any such
record date so fixed.
Shareholders' List For Meeting.
After fixing a record date for a meeting, the corporation shall
prepare a list of the names of all its shareholders who are entitled to
notice of a shareholders meeting. The list shall be arranged by class or
series of shares and show the address of and number of shares held by each
shareholder.
The corporation shall make the shareholders' list available for
inspection by shareholders, beginning two business days after notice of the
meeting is given for which the list was prepared and continuing to the date
of the meeting, at the corporation's principal office or at a place
identified in the meeting notice in the city where the meeting will be
held. A shareholder or his or her agent or attorney may, on written
demand, inspect the list, and during regular business hours and at his or
her expense, during the period that it is available for inspection under
this section copy such list, provided, however, that the shareholder's
demand to copy such list is made in good faith and for a proper purpose,
that the shareholder describes with reasonable particularity his or her
purpose and that the shareholders' list that he or she desires to copy is
directly connected with his or her purpose.
The corporation will make the shareholders' list available at the
meeting, and any shareholder or his or her agent or attorney may inspect
the list at any time during the meeting or any adjournment.
Quorum.
A majority of the outstanding shares of the corporation entitled to
vote at the meeting, represented in person or by proxy, shall constitute a
quorum at a meeting of shareholders. Though less than a quorum of the
outstanding shares are represented at a meeting, a majority of the shares
so represented may adjourn the meeting from time to time without further
notice. At such adjourned meeting at which a quorum shall be present or
represented, any business may be transacted which might have been
transacted at the meeting as originally notified.
<PAGE>
Proxies.
At all meetings of shareholders, a shareholder entitled to vote may
vote by proxy appointed in writing by the shareholder or by his duly
authorized attorney in fact. Such proxy shall be filed with the Secretary
of the corporation before or at the time of the meeting. No proxy shall be
valid after eleven months from the date of its execution, unless otherwise
provided in the proxy. Each proxy shall be revocable unless expressly
provided therein to be irrevocable and unless otherwise made irrevocable by
law.
Voting of Shares.
Each outstanding share shall be entitled to one vote on each matter
submitted to a vote at the meeting of shareholders, except to the extent
that the voting rights of the shares of any class are limited or denied in
the Articles of Incorporation. At each election for Directors, every
shareholder entitled to vote at such election shall have the right to vote,
in person or by proxy, the number of shares owned by him for as many
persons as there are Directors to be elected and for whose election he has
a right to vote, but without the right to cumulate votes. Except with
respect to the election of Directors, and unless required by statute or
determined by the chairman of the meeting to be advisable, the vote on any
question need not be by ballot. If a quorum is present at any meeting of
shareholders, the vote of the holders of a majority of the shares cast by
the holders of shares entitled to vote on the matter shall be sufficient
for the transaction of any business, except that directors shall be elected
by a plurality of shares cast by the holders of shares entitled to vote in
the election.
Voting Company's Shares.
Shares of the corporation belonging to it shall not be voted directly
or indirectly at any meeting and shall not be counted in determining the
total number of outstanding shares at any given time, but shares held by
this corporation in a fiduciary capacity may be voted and shall be counted
in determining the total number of outstanding shares at any given time.
Shares in Other Corporation's Name.
Shares standing in the name of another corporation may be voted
either in person or by proxy, by the president of such corporation or any
other officer appointed by such president. A proxy executed by any
principal officer of such other corporation or assistant thereto shall be
conclusive evidence of the signer's authority to act, in the absence of
express notice to this corporation, given in writing to the secretary of
this corporation, of the designation of some other person by the board of
directors or the bylaws of such other corporation.
Order of Business.
The order of business of each meeting of the shareholders of the
corporation shall be determined by the chairman of the meeting. The
chairman of the meeting shall have the right and authority to prescribe
such rules, regulations and procedures and do all acts and things as are
necessary or desirable for the conduct of the meeting, including without
limitation, the establishment of procedures for the dismissal of business
not properly presented, the maintenance of order and safety, limitations on
the time allotted to questions or comments on the affairs of the
corporation, restrictions on entry to such meetings after the time
prescribed for commencement thereof and opening and closing of the voting
polls.
<PAGE>
ARTICLE
BOARD OF DIRECTORS
General Powers.
The business and affairs of the corporation shall be managed by and
under the direction of its Board of Directors, which may exercise all such
powers of the corporation and do all such lawful acts and things as are not
by statute or by the Articles of incorporation or by these By-Laws directed
or required to be exercised and done by the shareholders.
Number, Qualification, and Term of Office.
The Board of Directors shall consist of not less than three (3) nor
more than eleven (11) individuals, at least two of whom shall at all times
be Independent Directors, except where there are three or fewer Directors
outstanding. Each Director shall hold office until the next annual meeting
of shareholders and until his successor shall have been elected and
qualified, until his death or retirement or until he or she resigns or is
removed in the manner hereinafter provided. The number of Directors may be
changed by resolution of the Board of Directors or by the stockholders at
any annual or special meeting or otherwise pursuant to action of the
stockholders. Directors need not be stockholders, and need not be
residents of the State of Wisconsin. The Directors shall be elected at the
annual meeting of the stockholders, except as provided in Section 8 of this
Article III. Such election shall be by written ballot. For purposes of
this Article III, Section 2, "Independent Directors" shall mean directors
who: (i) are not affiliated directly or indirectly (whether by ownership
of, ownership interest in, employment by, or service as an officer or
director by such person or an immediately family member) with any person or
entity which beneficially owns in excess of five percent of the Company's
common stock, on a fully-diluted basis (a "Five Percent Holder") or any
person or entity controlling, controlled by, or under common control with,
a Five Percent Holder, and (ii) perform no other ongoing or substantial
services for the Corporation except as directors.
Annual Meetings.
Annual meetings of the Board of Directors shall be held without
further notice other than this bylaw immediately after and at the same
place, as the annual meeting of shareholders, and each adjourned session
thereof. The President of the corporation may, upon not less than five
(5) days written notice to all members of the Board of Directors, provide
for a variance in the time, date or location of any such meeting.
Special Meetings.
Special meetings of the Board of Directors may be called by or at the
request of the President, Secretary or any two directors. The person or
persons authorized to call special meetings of the Board of Directors may
fix any place, either within or without the State of Wisconsin, as the
place for holding any special meeting of the Board of Directors called by
them.
Notice.
Notice of any special meeting shall be given at least 48 hours
previously thereto by written notice delivered personally or mailed to each
director at his business address, or by telegram. If mailed, such notice
shall be deemed to be delivered when deposited in the United States mail so
addressed, with postage thereon prepaid. If notice be given by telegram,
such notice shall be deemed to be delivered when the telegram is delivered
to the telegraph company. Whenever any notice whatever is required to be
given to any director of the corporation under the provisions of these
bylaws or under the provisions of the articles of incorporation or under
the provisions of any statute, a waiver thereof in writing, signed at any
time, whether before or after the time of meeting, by the director entitled
<PAGE>
to such notice, shall be deemed equivalent to the giving of such notice.
The attendance of a director at a meeting shall constitute a waiver of
notice of such meeting, except where a director attends a meeting and
objects thereat to the transaction of any business to be transacted at, nor
the purpose of, any regular or special meeting of the Board of Directors
need be specified in the notice of waiver of notice of such meeting.
Section -- Quorum.
A majority of the number of directors fixed by Section 2 of this
Article III shall constitute a quorum for the transaction of business at
any meeting of the Board of Directors, but though less than such quorum is
present at a meeting, a majority of the directors present may adjourn the
meeting from time to time without further notice.
Resignation and Removal.
Any director may resign at any time upon giving written notice to the
corporation. Any director may be removed from office by the affirmative
vote of a majority of the shares outstanding entitled to vote for the
election of such director taken at a special meeting of shareholders called
for that purpose.
Vacancies.
The Board of Directors may fill any vacancy (occurring by
resignation, removal or otherwise) in the board happening after any regular
annual election or any vacancy created by an increase in the authorized
number of directors until the next succeeding election, by the affirmative
vote of a majority of the directors then in office, although less than a
quorum.
Compensation.
The Board of Directors, by affirmative vote of a majority of the
directors then in office, and irrespective of any personal interest of any
of its members may establish reasonable compensation of all directors for
services to the corporation as directors, officers or otherwise, or may
delegate such authority to an appropriate committee.
Presumption of Assent.
A director of the corporation who is present at a meeting of the
Board of Directors or a committee thereof at which action on any corporate
matter is taken shall be presumed to have assented to the action taken
unless his dissent shall be entered in the minutes of the meeting or unless
he shall file his written dissent to such action with the person acting as
the secretary of the meeting before the adjournment thereof or shall
forward such dissent by registered mail to the Secretary of the corporation
immediately after the adjournment of the meeting. Such right to dissent
shall not apply to a director who voted in favor of such action.
Committees.
The Board of Directors by resolution adopted by the affirmative vote
of a majority of the number of directors fixed by Section 2 of this Article
III may designate an Executive Committee, a Stock Option Committee, and one
or more other committees, each committee to consist of two or more
directors elected by the Board of Directors. The Board of Directors may
elect one or more of its members as alternate members of any such committee
who may take the place of any absent member or members at any meeting of
such committee, upon request by the President or upon request by the
chairman of such meeting. Each such committee shall fix its own rules
governing the conduct of its activities and shall make such reports to the
Board of Directors of its activities as the Board of Directors may request.
<PAGE>
Any Executive Committee which to the extent provided in said
resolution, as initially adopted, and as thereafter supplemented or amended
by further resolution adopted by a like vote, shall have and may exercise,
when the Board of Directors is not in session, the powers of the Board of
Directors in the management of the business and affairs of the corporation,
except as otherwise limited by law.
ARTICLE
OFFICERS
Number.
The principal officers of the corporation shall be a President, Vice-
Presidents, a Secretary, and a Treasurer, each of whom shall be elected by
the Board of Directors. Such other officers and assistant officers as may
be deemed necessary may be elected or appointed by the Board of Directors.
Any two or more offices may be held by the same person, except the offices
of President and Secretary and the offices of President and Vice President.
Election and Term of Office.
The officers of the corporation to be elected by the Board of
Directors shall be elected annually by the Board of Directors at the first
meeting of the Board of Directors held after each annual meeting of the
shareholders. If the election of officers shall not be held at such
meeting, such election shall be held as soon thereafter as conveniently may
be. Each officer shall hold office until his successor shall have been
duly elected and shall have qualified or until his death or until he shall
resign or shall have been removed in the manner hereinafter provided.
Removal.
Any officer or agent elected or appointed by the Board of Directors
may be removed by the Board of Directors whenever in its judgment the best
interests of the corporation will be served thereby, but such removal shall
be without prejudice to the contract rights, if any, of the person so
removed. Election or appointment shall not of itself create contract
rights.
Vacancies.
A vacancy in any principal office because of death, resignation,
removal, disqualification or otherwise, shall be filled by the Board of
Directors for the unexpired portion of the term.
Section -- President.
The President shall be the principal executive officer of the
corporation and, subject to the control of the Board of Directors, shall in
general supervise and control all of the business and affairs of the
corporation. He may sign, with the Secretary or any other proper officer
of the corporation hereunto authorized by the Board of Directors,
certificates for shares of the corporation, any deeds, mortgages, bonds,
contracts, or other instruments which the Board of Directors has authorized
to be executed, except in cases where the signing and execution thereof
shall be expressly delegated by the Board of Directors or by these bylaws
to some other officer or agent of the corporation, or shall be required by
law to be otherwise signed or executed; and in general shall perform all
duties incident to the office of President and such other duties as may be
prescribed by the Board of Directors from time to time.
<PAGE>
The Vice-Presidents.
In the absence of the President or in the event of his death,
inability or refusal to act, the Vice-President (or in the event there be
more than one Vice-President, the Vice-Presidents in the order designated
at the time of their election, or in the absence of any designation, then
in the order of their election) shall perform the duties of the President,
and when so acting, shall have all the powers of and be subject to all the
restrictions upon the President. Any Vice-President may sign, with the
Secretary or an Assistant Secretary certificates for shares of the
corporation; and shall perform such other duties as from time to time may
be assigned to him by the President or by the Board of Directors.
The Secretary.
The Secretary shall: (a) keep the minutes of the shareholders' and
of the Board of Directors' meetings in one or more books provided for that
purpose; (b) see that all notices are duly given in accordance with the
provisions of these bylaws or as required by law; (c) be custodian of the
corporate records and of the seal of the corporation and see that the seal
of the corporation is affixed to all documents the execution of which on
behalf of the corporation under its seal is duly authorized; (d) keep a
register of the post office address of each shareholder which shall be
furnished to the Secretary by such shareholder; (e) sign with the
President, or a Vice-President, certificates for shares of the corporation,
the issuance of which shall have been authorized by resolution of the Board
of Directors; (f) have general charge of the stock transfer books of the
corporation; and (g) in general perform all duties incident to the office
of Secretary and such other duties as from time to time may be assigned to
him by the President or by the Board of Directors.
The Treasurer.
If required by the Board of Directors, the Treasurer shall give a
bond for the faithful discharge of his duties in such sum and with such
surety or sureties as the Board of Directors shall determine. He shall:
(a) have charge and custody of and be responsible for all funds and
securities of the corporation; receive and give receipts for moneys due and
payable to the corporation from any source whatsoever, and deposit all such
moneys in the name of the corporation in such banks, trust companies or
other depositories as shall be selected in accordance with the provisions
of Article V of these By-Laws; and (b) in general perform all of the duties
incident to the office of Treasurer and such other duties as from time to
time may be assigned to him by the President or by the Board of Directors.
Assistant Secretaries and Assistant Treasurers.
The Assistant Secretaries, when authorized by the Board of Directors,
may sign with the President or a Vice-President certificates for shares of
the corporation the issuance of which shall have been authorized by a
resolution of the Board of Directors. The Assistant Treasurers shall
respectively, if required by the Board of Directors, give bonds for the
faithful discharge of their duties in such sums and with such sureties as
the Board of Directors shall determine. The Assistant Secretaries and
Assistant Treasurers, in general, shall perform such duties as shall be
assigned to them by the Secretary or the Treasurer, respectively, or by the
President or the Board of Directors.
Salaries.
The salaries of the officers shall be fixed from time to time by the
Board of Directors and no officer shall be prevented from receiving such
salary by reason of the fact that he is also a director of the corporation.
<PAGE>
ARTICLE
CONTRACTS, LOANS, CHECKS, AND DEPOSITS
Contracts.
The Board of Directors may authorize any officer or officers, or
agents, to enter into any contract or execute and deliver any instrument in
the name of and on behalf of the corporation, and such authorization may be
general or confined to specific instances.
Loans.
No loans shall be contracted on behalf of the corporation and no
evidences of indebtedness shall be issued in its name unless authorized by
or under the authority of a resolution of the Board of Directors. Such
authorization may be general or confined to specific instances.
Checks, Drafts, etc.
All checks, drafts or other orders for the payment of money, notes or
other evidences of indebtedness issued in the name of the corporation,
shall be signed by such officer or officers, agent or agents of the
corporation and in such manner as shall from time to time be determined by
or under the authority of resolution of the Board of Directors.
Deposits.
All funds of the corporation not otherwise employed shall be
deposited from time to time to the credit of the corporation in such banks,
trust companies or other depositories as may be selected by or under the
authority of the Board of Directors.
ARTICLE
CERTIFICATES FOR SHARES AND THEIR TRANSFER
Certificates for Shares.
The corporation shall deliver certificates representing all shares to
which shareholders are entitled. Such certificates shall be numbered and
shall be entered on the books of the corporation as they are issued and
shall be signed by the President or Vice President and the Secretary or an
Assistant Secretary of the corporation, and may be sealed with the seal of
the corporation or a facsimile thereof. The signatures of the President or
Vice President, Secretary or Assistant Secretary may be facsimiles, if the
certificate is countersigned by a transfer agent or registered by a
registrar, either of which is other than the corporation itself or an
employee of the corporation. In case any officer who has signed or whose
facsimile signature has been placed upon such certificate shall have ceased
to be such officer before such certificate is issued, it may be issued by
the corporation with the same effect as if he were such officer at the date
of its issuance. There shall be set forth upon the face or back of the
certificate a statement that the corporation will furnish to any
stockholder upon request and without charge, a summary of the designations,
preferences, limitations and relative rights applicable to each class and,
if the corporation is authorized to issue any series, the variations in
rights, preferences and limitations between the shares of each such series
so far as the same have been fixed and determined and the authority of the
Board of Directors to fix and determine the relative rights and preferences
of subsequent series. Each certificate representing shares shall state
upon the face thereof that the corporation is organized under the laws of
the State of Wisconsin, the name of the person to whom issued, the number
and class and the designation of the series, if any, which such certificate
represents and the par value of each share represented by such certificate
or a statement that the shares are without par value. No certificate shall
be issued for any share until the consideration therefor has been fully
paid.
<PAGE>
Transfer Agent.
The corporation may maintain one or more transfer offices or
agencies, each under control of a Transfer Agent, where the shares of the
corporation may be transferable. The corporation may maintain one or more
registry offices or agencies, each under the control of a Registrar, where
the shares may be registered. The board of directors may make such
additional rules and regulations as it may deem expedient concerning the
issue, transfer, and registration of certificates for shares of the
corporation.
Transfer of Shares.
Transfer of shares of the corporation shall be made only on the stock
transfer books of the corporation by the holder of record thereof or by his
legal representative, who shall furnish proper evidence of authority to
transfer, or by his attorney thereunto authorized by power of attorney duly
executed and filed with the Secretary of the corporation or with any
authorized Transfer Agent, and on surrender for cancellation of the
certificate for such shares. The person in whose name shares stand on the
books of the corporation shall be deemed by the corporation to be the owner
thereof for all purposes.
Lost, Stolen or Destroyed Certificates.
The Board of Directors may direct a new certificate or certificates
to be issued in place of any certificate or certificates theretofore issued
by the corporation alleged to have been lost, stolen or destroyed upon the
making of an affidavit of that fact by the person claiming the certificate
to be lost, stolen or destroyed. When authorizing such issue of a new
certificate or certificates, the Board of Directors, in its discretion and
as a condition precedent to the issuance thereof, may require the owner of
such lost, stolen or destroyed certificate or certificates, or his legal
representative, to advertise the same in such manner as it shall require
and/or to give the corporation a bond in such sum as it may direct as
indemnity against any claim that may be made against the corporation with
respect to the certificate alleged to have been lost, stolen or destroyed.
Stock Regulations.
The Board of Directors shall have the power and authority to make all
such further rules and regulations not inconsistent with the statutes of
the State of Wisconsin as they may deem expedient concerning the issue,
transfer and registration of certificates representing share of the
corporation.
ARTICLE
FISCAL YEAR
The fiscal year of the corporation shall begin on the 1st day of
January and end on the 31st day of December in each year.
ARTICLE
DIVIDENDS
The Board of Directors may from time to time declare, and the
corporation may pay, dividends on its outstanding shares in the manner and
upon the terms and conditions provided by law and its articles of
incorporation.
ARTICLE
<PAGE>
SEAL
The Board of Directors shall provide a corporate seal which shall be
circular in form and shall have inscribed thereon the name of the
corporation and the words, "corporate Seal, Wisconsin."
ARTICLE
INDEMNIFICATION
The corporation shall indemnify each officer and director of the
corporation to the full extent provided by applicable law and, in addition,
in accordance with any other rights such persons may have under a
resolution of the shareholders of the corporation, a resolution of its
Board of Directors or under the corporation's Articles of Incorporation, as
amended and restated from time to time, or pursuant to any insurance
policy, an agreement or otherwise. Any person entitled to indemnification
or to the reimbursement or advancement of expenses hereunder may elect, to
the extent permitted by law, to have the right of indemnification (or
reimbursement or advancement of expenses) interpreted on the basis of the
applicable law in effect at the time of the occurrence of the event or
events giving rise to the action, suit or proceeding or on the basis of the
applicable law in effect as of the date these Amended and Restated By-Laws
are adopted.
ARTICLE
AMENDMENTS
Board of Directors.
The Board of Directors may from time to time, by vote of a majority
of its members, adopt, amend or repeal any and all of the By-Laws of this
corporation except such By-Laws as may have been adopted by the subscribers
or Shareholders of the corporation.
Shareholders.
The Shareholders may from time to time, by vote of a majority, adopt,
amend or repeal any and all of the By-Laws of the corporation.
EXHIBIT 4.4
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WARRANT AGREEMENT
WARRANT AGREEMENT dated as of January 29, 1998 by and among MERGE
TECHNOLOGIES INCORPORATED, a Wisconsin corporation (the "Company"), and
H.C. WAINWRIGHT & CO., INC. ("Wainwright" or the "Representative").
WHEREAS, the Company and the Representative have entered into an
Underwriting Agreement of even date herewith (the "Underwriting
Agreement"); and
WHEREAS, the Company proposes to issue to the Representative
warrants, as hereinafter described, (the "Warrants") to purchase an
aggregate of 190,000 shares, subject to adjustment as hereinafter provided
(the "Shares"), of the Company's common stock, par value $0.01 per share
(the "Common Stock").
NOW, THEREFORE, in consideration of the premises and the mutual
agreements herein set forth and for other good and valuable consideration,
the parties hereto agree as follows:
I. ISSUANCE OF WARRANTS, FORM OF WARRANT. As more fully set forth below,
the Company will issue, sell and deliver the Warrants to the Representative
or its bona fide officers or partners, as named by the Representative in
accordance with Section 5(p) of the Underwriting Agreement, for an
aggregate price of $1.00, concurrently with the closing (the "Closing")
under the Underwriting Agreement relating to the public offering, pursuant
to a registration statement on Form SB-2 (File No. 333-39111) (the
"Registration Statement"), of 1,900,000 shares of Common Stock (plus an
option to purchase up to an additional 285,000 shares of Common Stock to
cover over-allotments) (the "Offering"). The form of the Warrants shall be
substantially as set forth on EXHIBIT A, attached hereto. The Warrants
shall be executed on behalf of the Company by the manual or facsimile
signature of the present or any future Chairman of the Board, President or
Vice President of the Company, under its corporate seal, affixed or in
facsimile, attested by the manual or facsimile signature of the present or
any future Secretary or Assistant Secretary or Treasurer or Assistant
Treasurer of the Company.
II. The Warrants shall be numbered and shall be registered in a Warrant
register as they are issued. The Company shall be entitled to treat the
registered holder of any Warrant on the Warrant register (the "Warrant
Holder") as the owner in fact thereof for all purposes and shall not be
bound to recognize any equitable or other claim to or interest in such
Warrant on the part of any other person, and shall not be liable for any
registration of transfer of Warrants which are registered or are to be
registered in the name of or at the direction of a fiduciary or the nominee
of a fiduciary unless made with the actual knowledge that a fiduciary or
nominee is committing a breach of trust in requesting such registration of
transfer, or with such knowledge of such facts that its participation
therein amounts to bad faith. The Warrants shall be registered initially
in the name of "H.C. Wainwright & Co., Inc." in such denominations as the
Representative may request in writing to the Company; PROVIDED, HOWEVER,
that prior to the Closing, the Representative may designate that its
Warrants be issued in varying amounts directly to its bona fide officers or
partners and not to it directly in accordance with Section 5(p) of the
Underwriting Agreement. Such designation will only be made by the
Representative if it determines such issuances would not violate the rules
and interpretations of the Board of Governors of the National Association
of Securities Dealers, Inc. (the "NASD") relating to the review of
corporate financing arrangements, and subject to applicable federal and
state securities law.
<PAGE>
III. TRANSFER OF WARRANTS. The Warrants may not be transferred, assigned,
pledged, hypothecated, sold, made subject to a security interest, or
otherwise transferred, in part or in whole, prior to the first anniversary
of the effective date of the Registration Statement (the "Effective Date"),
except to the bona fide officers or partners of the Representative, and
subject to applicable federal and state securities law, and only on the
books of the Company upon delivery thereof duly endorsed by the Warrant
Holder or by his duly authorized attorney or representative, or accompanied
by proper evidence of succession, assignment or authority to transfer. In
all cases of transfer by an attorney, the original power of attorney, duly
approved, or an official copy thereof, duly certified, shall be deposited
with the Company. In case of transfer by executors, administrators,
guardians or other legal representative, duly authenticated evidence of
their authority shall be produced and may be required to be deposited with
the Company in its discretion. Upon any registration of transfer, the
Company shall deliver a new Warrant or new Warrants to the persons entitled
thereto. A Warrant may be exchanged at the option of the Warrant Holder
thereof for another Warrant, or other Warrants, of different denominations,
of like tenor and representing in the aggregate the right to purchase a
like number of shares of Common Stock upon surrender to the Company or its
duly authorized agent. Notwithstanding the foregoing, the Company shall
have no obligation to cause a Warrant to be transferred on its books to any
person unless the Warrant Holder thereof shall furnish to the Company
evidence of compliance with the Securities Act of 1933, as amended (the
"Act"), and applicable state securities law, in accordance with the
provisions of Section 10 of this Agreement.
IV.TERM OF WARRANTS; EXERCISE OF WARRANTS. Each Warrant entitles the
Warrant Holder thereof to purchase one Share at a purchase price of $7.80
per Share (the "Exercise Price") at any time from the first anniversary of
the Effective Date (except as otherwise set forth herein) until 5:00 p.m.,
Boston time (the "Close of Business"), on the day immediately preceding the
fifth anniversary of the Effective Date (the "Expiration Date"). The
Exercise Price and the number of Shares issuable upon exercise of each
Warrant are subject to adjustment upon the occurrence of certain events,
pursuant to the provisions of Section 8 of this Agreement. Subject to the
provisions of this Agreement, each Warrant Holder shall have the right,
which may be exercised as set forth in such Warrant, to purchase from the
Company (and the Company shall issue and sell to such Warrant Holder) the
number of fully paid and nonassessable Shares specified in such Warrant
Holder's Warrant, upon surrender to the Company, or its duly authorized
agent, of such Warrant, with an election to purchase attached thereto in
the form of EXHIBIT B to this Agreement, duly completed and signed, with
(if requested by the Company within two business days of surrender of the
Warrant with the election to purchase) signatures guaranteed by a member
firm of a national securities exchange, a commercial bank (not a savings
bank or savings and loan association) or trust company located in the
United States or a member of the NASD, and upon payment to the Company of
the Exercise Price, as adjusted in accordance with the provisions of
Section 8 of this Agreement, for the number of Shares in respect of which
such Warrant is then exercised. Notwithstanding the method of exercise set
forth in any Warrant (or anything to the contrary herein), in the event
that the Warrant Holder thereof has not exercised such Warrant prior to the
Close of Business on the Expiration Date and the current market price per
share of Common Stock at the Close of Business on the Expiration Date (as
determined substantially in accordance with Section 8(d), but using the
closing prices or quotations, as the case may be, on such Expiration Date
rather than a 30-day average) is greater than the Exercise Price, then the
Warrant Holder thereof shall be deemed to have exercised such Warrant in
full immediately prior to the Close of Business on the Expiration Date (an
"Automatic Exercise"). Payment of the Exercise Price may be made in cash or
by check payable to the order of the Company in the amount obtained by
multiplying the number of Shares for which such Warrant is then being
exercised by the Exercise Price then in effect (such amount, the "Exercise
Payment"), except that the Warrant Holder may, at its option, elect to pay
the Exercise Payment by delivering to the Company the number of shares of
<PAGE>
Common Stock determined by dividing the Exercise Payment by the current
market price (as defined in paragraph (d) of Section 8) of a share of
Common Stock on the date of exercise or by canceling a portion of such
Warrant that is equal to the number of shares determined by dividing the
Exercise Payment by the current market price (as defined in paragraph (d)
of Section 8) of a share of Common Stock as of the date of exercise. In
the event of an Automatic Exercise of any Warrant, the Warrant Holder
thereof shall be deemed to have chosen to cancel the portion of its Warrant
that is equal to the number of shares determined by dividing the Exercise
Payment by the current market price (as defined in paragraph (d) of Section
8) of a share of Common Stock as of the Close of Business on the Expiration
Date. Except as set forth in Section 8, no adjustment shall be made for
any dividends on any Shares issuable upon exercise of a Warrant. Upon each
surrender of Warrants and payment of the Exercise Payment as aforesaid, or
upon the occurrence of an Automatic Exercise, the Company shall issue and
cause to be delivered with all reasonable dispatch (but in any event within
three (3) business days) to or upon the written order of the Warrant Holder
and (subject to receipt of evidence of compliance with the Act and
applicable state securities laws in accordance with the provisions of
Section 10 of this Agreement) in such name or names as such Warrant Holder
may designate, a certificate or certificates for the number of full Shares
so purchased upon the exercise of such Warrant, together with cash, as
provided in Section 9 of this Agreement, in respect of any fractional
Shares otherwise issuable upon such surrender. Such certificate or
certificates shall be deemed to have been issued, and any person so
designated to be named therein shall be deemed to have become a holder of
record of such Shares, as of the date of the surrender of such Warrant and
payment of the Exercise Payment as aforesaid, or as of the date of the
Automatic Exercise; PROVIDED, HOWEVER, that if, at the date of surrender of
such Warrant and payment of such Exercise Payment, the transfer books for
the Common Stock or other class of stock purchasable upon the exercise of
such Warrant shall be closed, the certificates for the Shares shall be
issuable as of the date on which such books shall next be opened (whether
before, on or after the Expiration Date), and until such date the Company
shall be under no duty to deliver any certificate for such Shares; PROVIDED
FURTHER, HOWEVER, that the transfer books of record, unless otherwise
required by law, shall not be closed at any one time for a period longer
than four (4) days. The rights of purchase represented by a Warrant shall
be exercisable, at the election of the Warrant Holder thereof, either in
full or from time to time in part and, in the event that any Warrant is
exercised in respect of fewer than all of the Shares purchasable on such
exercise at any time prior to the Expiration Date, a new Warrant or new
Warrants will be issued for the remaining number of Shares specified in the
Warrant or Warrants so surrendered.
V.PAYMENT OF TAXES. The Company will pay all documentary stamp taxes, if
any, attributable to the issuance of Shares upon the exercise of a Warrant;
PROVIDED, HOWEVER, that the Company shall not be required to pay any tax or
taxes which may be payable in respect of any transfer involved in the
issuance or delivery of any certificates for Shares in a name other than
that of the Warrant Holder who exercised the Warrant in respect of which
such Shares are issued.
VI.MUTILATED OR MISSING WARRANTS. In case any Warrant shall be mutilated,
lost, stolen or destroyed, the Company shall issue and deliver in exchange
and substitution for and upon cancellation of the mutilated Warrant, or in
lieu of and substitution for the Warrant lost, stolen or destroyed, a new
Warrant of like tenor and representing an equivalent right or interest, but
only upon receipt of evidence reasonably satisfactory to the Company of
such loss, theft or destruction of such Warrant or an indemnity, also
reasonably satisfactory to the Company.
<PAGE>
VII.RESERVATION OF SHARES, ETC. There have been reserved, and the Company
shall at all times keep reserved, out of the authorized and unissued Common
Stock, an aggregate number of shares of Common Stock sufficient to provide
for the exercise of the rights of purchase represented by the outstanding
Warrants. In addition, upon any adjustment to the number and kind of
securities purchasable upon exercise of the Warrants, the Company shall
reserve, and shall at all times thereafter keep reserved, out of the
authorized and unissued Common Stock or such other kind of securities, an
aggregate number of shares of Common Stock or shares, units or otherwise of
such other kind of securities sufficient to provide for the exercise of the
rights to purchase represented by the outstanding Warrants. After the
Effective Date, the transfer agent for the Common Stock (the "Transfer
Agent"), and every subsequent Transfer Agent, if any, for Shares issuable
upon the exercise of any of the rights of purchase represented by the
Warrants, will be irrevocably authorized and directed at all times until
the Expiration Date to reserve such aggregate number of authorized and
unissued shares of Common Stock as shall be required for such purpose. The
Company will keep a copy of this Agreement on file with the Transfer Agent
and with every subsequent Transfer Agent for any Shares issuable upon the
exercise of the rights of purchase represented by the Warrants. The
Company will supply any such Transfer Agent with duly executed stock
certificates for such purpose and will itself provide or otherwise make
available any cash which may be distributable as provided in Section 9 of
this Agreement. Any Warrant surrendered in the exercise of the rights
thereby evidenced shall be canceled, and until delivery to the person
surrendering such Warrant of stock certificates representing the Shares to
be issued to such person as a result of such exercise, such canceled
Warrant shall constitute sufficient evidence of the number of Shares that
have been issued upon the exercise of such Warrant. No shares of Common
Stock shall be subject to reservation in respect of any unexercised Warrant
subsequent to the Expiration Date.
VIII.ADJUSTMENTS OF EXERCISE PRICE AND NUMBER OF SHARES. The Exercise
Price and the number and kind of securities purchasable upon exercise of
each Warrant shall be subject to adjustment from time to time upon the
happening of certain events, as follows:
A.In case the Company shall (i) declare a dividend on its Common Stock in
shares of Common Stock or make a distribution in shares of Common Stock,
(ii) subdivide its outstanding shares of Common Stock into a greater number
of shares of Common Stock, (iii) combine its outstanding shares of Common
Stock into a smaller number of shares of Common Stock, or (iv) issue by
reclassification of its shares of Common Stock other securities of the
Company, other than any such reclassification to which paragraph (j) of
this Section 8 applies, the number of Shares purchasable upon exercise of
each Warrant immediately prior thereto shall be adjusted so that the
Warrant Holder thereof shall be entitled to receive the kind and number of
shares of Common Stock or other securities of the Company which he would
have owned or have been entitled to receive after the happening of any of
the events described above had such Warrant been exercised immediately
prior to the happening of such event or any record date with respect
thereto. An adjustment made pursuant to this paragraph (a) shall become
effective immediately after the effective date of such event, retroactive
to the record date, if any, for such event.
B.In case the Company shall issue rights, options or warrants to all
holders of its Common Stock, entitling them to subscribe for or to purchase
shares of Common Stock or securities convertible into or exchangeable for
Common Stock (other than "poison pill" rights referred to in paragraph (1)
of this Section 8) at a price per share (or having a conversion price per
share) that is lower on the record date for the determination of
stockholders entitled to receive such rights, options or warrants than the
then current market price per share of Common Stock (as defined in
paragraph (d) below), the number of Shares thereafter purchasable upon the
exercise of each Warrant shall be determined by multiplying the number of
Shares theretofore purchasable upon exercise of such Warrant by a fraction,
<PAGE>
of which the numerator shall be the number of shares of Common Stock
outstanding at the close of business on the record date for the
determination of stockholders entitled to receive such rights, options or
warrants plus the number of additional shares of Common Stock offered for
subscription or purchase (or into which the convertible securities so
offered are initially convertible), and of which the denominator shall be
the number of shares of Common Stock outstanding at the close of business
on the record date for the determination of stockholders entitled to
receive such rights, options or warrants plus the number of shares which
the aggregate offering price of the total number of shares of Common Stock
so offered (or the aggregate initial conversion price of the convertible
securities so offered) would purchase at the then current market price per
share of Common Stock. Such adjustment shall be made whenever such rights,
options or warrants are issued, and shall become effective retroactively to
the record date for the determination of stockholders entitled to receive
such rights, options or warrants.
C.In case the Company shall distribute to all holders of its Common Stock
shares of stock (other than Common Stock) or evidences of its indebtedness
or assets (excluding cash dividends out of retained earnings and dividends
or distributions referred to in paragraph (a) of this Section 8) or rights,
options or warrants or convertible or exchangeable securities containing
the right to subscribe for or purchase shares of Common Stock (excluding
those referred to in paragraph (b) above and paragraph (1) below), then in
each case the number of Shares thereafter purchasable upon the exercise of
each Warrant shall be determined by multiplying the number of Shares
theretofore purchasable upon the exercise of such Warrant by a fraction, of
which the numerator shall be the current market price per share of Common
Stock (as defined in paragraph (d) below) on the record date mentioned
below in this paragraph (c), and of which the denominator shall be the
current market price per share of Common Stock on such record date, less
the then fair value (as determined by the Board of Directors of the
Company, whose determination shall be conclusive) of the portion of the
shares of stock or assets or evidences of indebtedness so distributed or of
such subscription rights, options or warrants, or of such convertible or
exchangeable securities applicable to one share of Common Stock. Such
adjustment shall be made whenever any such distribution is made, and shall
become effective on the date of distribution, retroactive to the record
date for the determination of stockholders entitled to receive such
distribution.
D.For the purpose of any computation under paragraphs (b) and (c) of this
Section 8 or under Section 4 or Section 9, the current market price per
share of Common Stock at any date shall be deemed to be the average of the
daily closing prices per share for the 30 consecutive trading days
commencing 45 trading days before the date of such computation. The
closing price for each day shall be the last reported sale price regular
way or, in case no such reported sale takes place on such day, the average
of the closing bid and asked prices regular way for such day, in either
case on the principal national securities exchange on which the shares of
Common Stock are listed or admitted to trading, or if the Common Stock is
not listed or admitted to trading on any national securities exchange, but
is traded in the over-the-counter market, the closing sale price of the
Common Stock or, in case no sale is publicly reported, the average of the
closing bid and asked quotations for the Common Stock on the Nasdaq
National Market System ("NASDAQ") or any comparable system, or if the
Common Stock is not listed on NASDAQ or a comparable system, the closing
sale price of the Common Stock or, in case no sale is publicly reported,
the average of the closing bid and asked prices as furnished by two members
of the NASD selected from time to time by the Company for that purpose.
E.No adjustment in the number of Shares purchasable upon exercise of each
Warrant shall be required unless such adjustment would require an increase
or decrease of at least one percent (I%) in the number of Shares
purchasable upon the exercise of each Warrant; PROVIDED, HOWEVER, that any
adjustments which by reason of this paragraph (e) are not required to be
made shall be carried forward and taken into account in any subsequent
adjustment. All calculations shall be made to the nearest one thousandth
of a share.
F.Whenever the number of Shares purchasable upon the exercise of each
Warrant is adjusted, as herein provided, the Exercise Price shall be
adjusted by multiplying such Exercise Price immediately prior to such
adjustment by a fraction, of which the numerator shall be the number of
Shares purchasable upon the exercise of each Warrant immediately prior to
such adjustment, and of which the denominator shall be the number of Shares
so purchasable immediately thereafter.
G.For the purpose of this Section 8, the term "shares of Common Stock"
shall mean (i) the class of stock designated as the Common Stock of the
Company at the date of this Agreement or (ii) any other class of stock
resulting from successive changes or reclassification of such shares
consisting solely of changes in par value, or from par value to no par
value, or from no par value to par value. In the event that at any time,
as a result of an adjustment made pursuant to paragraph (a) above, any
Warrant Holder shall become entitled to purchase any shares of capital
stock of the Company other than shares of Common Stock, thereafter the
number of such other shares so purchasable upon exercise of each Warrant
and the Exercise Price thereof shall be subject to adjustment from time to
time in a manner and on terms as nearly equivalent as practicable to the
provisions with respect to the Shares contained in this Section 8, and the
provisions of Sections 4, 5, 7, 9 and 12, with respect to the Shares, shall
apply on like terms to any such other shares.
H.The Company may, at its option, at any time during the term of a Warrant,
reduce, either temporarily or permanently, the then current Exercise Price
to any amount deem appropriate by the Board of Directors of the Company;
PROVIDED, HOWEVER, that any such reduction may be temporary only to the
extent that Warrant Holders receive written notice from the Company stating
the term of such temporary reduction; and FURTHER PROVIDED, that following
the expiration of such temporary reduction, the Exercise Price may not be
raised to an amount excess of the Exercise Price in effect immediately
prior to such temporary reduction.
I.Whenever the number of Shares purchasable upon the exercise of each
Warrant or the Exercise Price of such Shares is adjusted, as herein
provided, the Company shall promptly mail by first class mail, postage
prepaid, to each Warrant Holder notice of such adjustment or adjustments.
The Company may retain a firm of independent public accountants (who may be
the regular accountants employed by the Company) to make any computation
required by this Section 8 and shall cause such accountants to prepare a
certificate setting forth the number of Shares purchasable upon the
exercise of each Warrant and the Exercise Price thereof after such
adjustment, setting forth a brief statement of the facts requiring such
adjustment and setting forth the computation by which such adjustment was
made. Such certificate shall be conclusive evidence of the correctness of
such adjustment, and each Warrant Holder shall have the right to inspect
such certificate during reasonable business hours.
J.case of any consolidation of the Company with or merger of the Company
with and into another corporation or other entity or any consolidation with
or merger of any other corporation or other entity with and into the
Company (other than a merger which does not result in a reclassification,
conversion, exchange or cancellation of Shares and in which the Company is
the surviving corporation) or in case of any sale or conveyance to another
corporation or other person or entity of the property of the Company as an
entirety or substantially as an entirety, (i) notwithstanding the
provisions of Section 4 hereof, each Warrant Holder shall have the right to
exercise any Warrant then held immediately prior to such consolidation,
merger, sale or conveyance upon payment of the Exercise Price then in
effect an (ii) with respect to any Warrants which are not exercised as
provided in clause (i) above, the Company or such successor or purchasing
corporation or person or entity (or an affiliate of such successor or
purchasing corporation or person or entity), as the case may be, agrees
that each Warrant Holder shall have the right after the happening of any
such consolidation, merger, sale or conveyance (except for a consolidation,
merger, sale or conveyance in which the consideration received by the
Company's stockholders consists solely of cash) upon payment of the
Exercise Price in effect immediately prior to such action to purchase upon
exercise of each Warrant the kind and amount of shares and other securities
and property which he would have owned or have been entitled to receive
after the happening of such consolidation, merger, sale or conveyance had
such Warrant been exercised immediately prior to such action and the
securities issued upon such exercise been held since the date of such
exercise. The provisions of this paragraph (j) shall similarly apply to
successive consolidations, mergers, sales or conveyances.
K.Notwithstanding any adjustment in the Exercise Price or the number or
kind of shares purchasable upon the exercise of a Warrant pursuant to this
Agreement, a certificate for a Warrant issued prior or subsequent to such
adjustment may continue to express the same price and number and kind of
shares as are initially issuable pursuant to this Agreement.
L.Notwithstanding the foregoing, in the event that the Company shall
distribute "poison pill" rights pursuant to a "poison pill" stockholder
rights plan (the "Rights"), the Company shall, in lieu of making any
adjustment pursuant to Section 8(b) or Section 8(c) hereof, make proper
provision so that each Warrant Holder who exercises a Warrant after the
record date for such distribution and prior to the expiration or redemption
of the Rights shall be entitled to receive upon such exercise, in addition
to the Shares issuable upon such exercise, a number of Rights to be
determined as follows: (i) if such exercise occurs on or prior to the date
for the distribution to the holders of Rights of separate certificates
evidencing such Rights (the "Distribution Date"), the same number of Rights
to which a holder of a number of shares of Common Stock equal to the number
of Shares issuable upon such exercise at the time of such exercise in
accordance with the terms and provisions of and applicable to the Rights;
and (ii) if such exercise occurs after the Distribution Date, the same
number of Rights to which a holder of the number of Shares into which the
Warrant so exercised was exercisable immediately prior to the Distribution
Date would have been entitled on the Distribution Date in accordance with
the terms and provisions of and applicable to the Rights.
IX.FRACTIONAL INTERESTS. The Company shall not be required to issue
fractions of Shares on the exercise of a Warrant. If more than one Warrant
shall be presented for exercise in full at the same time by the same
Warrant Holder, the number of Shares which shall be issuable upon the
exercise thereof shall be computed on the basis of the aggregate number of
Shares purchasable on exercise of the Warrants so presented. If any
fraction of a Share would, except for the provisions of this Section 9, be
issuable on the exercise of any Warrant (or specified portions thereof),
the Company shall purchase such fraction from the Warrant Holder for an
amount in cash equal to the same fraction of the current market price per
share of Common Stock (determined as provided in paragraph (d) of Section
8) on the date of exercise.
X.RESTRICTIONS ON DISPOSITION. The issuance of the Warrants has not been
registered under the Act pursuant to the Registration Statement. The
Representative represents and warrants to the Company that it understands
that neither the Warrants nor the Shares may be transferred except pursuant
to (i) an effective registration statement under the Act or (ii) any
available rule or exemption from registration under the Act permitting such
disposition.
XI.CERTIFICATES TO BEAR LEGENDS. Each Warrant shall be subject to a stop-
transfer order and the certificate or certificates therefor shall bear the
following legend:
THE SECURITIES ISSUABLE UPON EXERCISE HEREOF HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"ACT"), OR ANY STATE SECURITIES LAWS AND NEITHER THE WARRANTS REPRESENTED
BY THIS CERTIFICATE NOR THE SECURITIES ISSUABLE UPON EXERCISE HEREOF MAY BE
OFFERED OR SOLD EXCEPT PURSUANT TO (i) AN EFFECTIVE REGISTRATION STATEMENT
UNDER THE ACT OR (ii) ANY AVAILABLE RULE OR EXEMPTION FROM REGISTRATION
UNDER SUCH ACT RELATING TO THE DISPOSITION OF SECURITIES.
The Shares or other securities issued upon exercise of a Warrant
shall be subject to a stop-transfer order and the certificate or
certificates evidencing any such Shares or securities shall bear a legend
in substantially the following form:
THE SHARES OR SECURITIES REPRESENTED BY THIS
CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "ACT"), OR ANY STATE SECURITIES LAWS AND THE SHARES OR OTHER
SECURITIES REPRESENTED BY THIS CERTIFICATE MAY NOT BE OFFERED OR SOLD
EXCEPT PURSUANT TO (i) AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT,
OR (ii) ANY AVAILABLE RULE OR EXEMPTION FROM REGISTRATION UNDER SUCH ACT
RELATING TO THE DISPOSITION OF SECURITIES.
XII.REGISTRATION RIGHTS.
A.DEMAND REGISTRATION RIGHTS. The Company covenants and agrees the
Representative and any other or subsequent Warrant Holder(s) or registered
holder(s) Shares or registered holder(s) of other securities for which the
Warrants become exercisable purposes of this Section 12, collectively, the
"Warrant Holders" and each a "Warrant Hold that, upon written request (a
"Registration Request") of the then Warrant Holder(s) of at least a
majority of the securities issued and issuable pursuant to the Warrants,
made at any time the period commencing on the first anniversary of the
Effective Date and ending at the Cl Business on the Expiration Date (which,
as set forth in Section 4 hereof is the day immediately preceding the fifth
anniversary of the Effective Date), the Company will file with all
deliberate speed and, in any event, within 45 days after receipt of such
Registration Request, at its so expense, no more than once, and at the
Warrant Holders' expense, no more than once, a registration statement or a
Regulation A offering statement (as requested by the Warrant and if
permitted under the Securities Act) registering or qualifying the Shares or
other sec for which the Warrants become exercisable for sale. Within 15
days after receiving any such notice, the Company shall give notice to the
other Warrant Holders advising that the Company is proceeding with such
registration statement or Regulation A offering statement and offering to
include therein the Shares or other securities for which the Warrants
become exercisable o Warrant Holders. The Company shall not be obligated
to any such other Warrant Holder such other Warrant Holder shall accept
such offer by notice in writing to the Company wit days after receipt of
such notice from the Company. No other securities of the Company s
entitled to participate in such registration or qualification. The Company
will use its best efforts, through its officers, directors, auditors and
counsel in all matters necessary or advisable, to file and cause to become
effective such registration statement or Regulation A offering statement
(if permitted under the Securities Act) as promptly as practicable and for
a period of two year thereafter to reflect in the registration statement or
Regulation A offering statement (if permitted under the Securities Act)
financial statements which are prepared in accordance with Section (a)(3)
of the Securities Act and any facts or events arising that, individually or
in the aggregate, represent a fundamental or material change in the
information set forth in the registration statement or Regulation A
offering statement to enable any Warrant Holder to exercise Warrants and to
sell Shares or other securities for which the Warrants become exercisable,
during such two-year period. If any registration pursuant to this
paragraph (a) underwritten offering, the Company will select an underwriter
(or managing underwriter if such offering should be syndicated) approved by
the Warrant Holders of a majority of the Warrants or Shares or other
securities for which the Warrants become exercisable to be included in such
registration; provided however, that if the Company selects an underwriter
of national stature, such approval will not be unreasonably withheld.
Notwithstanding the foregoing, the Company may postpone the filing of such
registration statement or offering statement for a reasonable period of
time after receipt of the original written Registration Request (not
exceeding 90 days) if, in the good faith opinion of the Company's Board of
Directors, effecting the registration would adversely affect a material or
other comparable transaction or would require the Company to make public
disclosure of information the public disclosure of which would have a
material adverse effect upon the Company.
B.PIGGYBACK REGISTRATION RIGHTS. The Company covenants and agrees with the
Representative and any other or subsequent Warrant Holder(s) that if, at
any time within the period commencing on the first anniversary of the
Effective Date and ending at the Close of Business on the day immediately
preceding the seventh anniversary of the Effective Date, it proposes to
register any class of security under the Act in a primary registration on
behalf of the Company or in a secondary registration on behalf of holders
of such securities and the registration form to be used may be used for
registration of the Shares or other securities for which the Warrants
become exercisable, the Company will give prompt written notice (which, in
the case of a registration pursuant to the exercise of demand registration
rights other than those provided in Section 12(a) of this Agreement, shall
be within 10 business days after the Company's receipt of notice of such
exercise and, in any event, shall be at least 45 days prior to such filing)
to each Warrant Holder (regardless of whether the Warrant Holder shall have
theretofore availed himself or herself of the right provided in Section
12(a)) at the addresses appearing on the records of the Company of its
intention to effect a registration. The Company will offer to include in
such registration such number of Shares or other securities for which the
Warrants are exercisable with respect to which the Company has received
written requests for inclusion therein within 10 days after receipt of
notice from the Company: PROVIDED that in the event that: (i) such
registration is to be underwritten; (ii) such registration is a primary
registration on behalf of the Company; and (iii) with the exception of the
Shares or other securities for which the Warrants become exercisable, such
registration is not a secondary registration on behalf of the holders of
outstanding securities of the Company, the Company shall not be required to
include the Shares or other securities for which the Warrants become
exercisable in such registration to the extent the managing underwriter(s)
determines in good faith that such inclusion would materially adversely
affect the offering being made by such registration. All registrations
requested pursuant to this Section 12(b) are referred to herein as
"Piggyback Registrations." This paragraph is not applicable to a
registration statement filed by the Company on Forms S-4 or S-8 or any
successor forms.
C.ACTION TO BE TAKEN BY THE COMPANY. In connection with the registration
of the Shares or other securities for which the Warrants become exercisable
in accordance with paragraphs (a) or (b) above, the Company agrees to:
1.bear the expense of any registration or qualification under paragraph
(a), on one occasion, or under paragraph (b), on any number of occasions,
including but not limited to legal, accounting and printing fees; PROVIDED,
HOWEVER, that in no event shall the Company be obligated to pay (A) any
fees and disbursements of more than one set of counsel for the Warrant
Holder(s) which reimbursement shall be limited to reasonable attorney's
fees in the event of a registration or qualification under paragraph (b),
or (B) any underwriters' discount or commission in respect to such Shares
or other securities for which the Warrants become exercisable, payment of
which shall, in each case, be the sole responsibility of the respective
Warrant Holder(s) thereof,
2.use its best efforts to register or qualify the Shares or other
securities for which the Warrants become exercisable for offer or sale
under state securities or blue sky laws of such jurisdictions as the
Warrant Holders shall reasonably request and do any and all other acts and
things which may be necessary or advisable to enable the Warrant Holders to
consummate the proposed sale, transfer or other disposition of such
securities in any jurisdiction;
3.furnish to each holder copies of any registration statement for the
Shares or other securities for which the Warrants become exercisable, any
prospectus included in any such registration statement and all amendments
and supplements to such documents, in each case as soon as available and in
such quantities as such Warrant Holder may from time to time reasonably
request; and
4.if registration is to be pursuant to an underwritten offering, enter into
a cross-indemnity agreement in customary form, with each underwriter, if
any, and each Warrant Holder of securities included in such registration
statement.
XIII.NOTICES TO WARRANT HOLDERS-, DISSOLUTION; EXERCISE RIGHTS.
A.Nothing contained in this Agreement or in any Warrant shall be construed
as conferring upon any Warrant Holder the right to vote or to receive
dividends or to consent or to receive notice as a stockholder in respect of
the meetings of stockholders or the election of directors of the Company or
any other matter, or any rights whatsoever as a stockholder of the Company;
PROVIDED, HOWEVER, that in the event that a meeting of stockholders shall
be called to consider and take action on a proposal for the voluntary
dissolution of the Company or a consolidation, merger or sale of all or
substantially all of its property, assets, business and goodwill as an
entirety, then, in that event, the Company shall cause a notice thereof to
be sent by first-class mail, postage prepaid, at least 20 business days
prior to the date fixed as a record date or the date of closing the
transfer books in relation to such meeting, to each Warrant Holder at such
Warrant Holder's address appearing on the Warrant register. If such notice
shall have been so given and if such a voluntary dissolution shall be
authorized at such meeting or any adjournment thereof, then (i)
notwithstanding the provisions of Section 4 hereof, each Warrant Holder
shall have the right, at the election of the Warrant Holder, (A) to
exercise any Warrant then held immediately prior to such voluntary
dissolution upon payment of the Exercise Price then in effect or (B) to
receive, as of the effective date of the dissolution, the fair value of
such Warrant as of the time immediately prior to the authorization of the
dissolution (without taking the dissolution into account) as determined by
the Board of Directors of the Company and (ii) from and after the date on
which such voluntary dissolution shall have been duly authorized by the
stockholders, the purchase rights represented by such Warrant and all other
rights with respect thereto shall cease and terminate.
B.In the event the Company intends to make any distribution on its Common
Stock (or other securities which may be purchasable in lieu thereof upon
the exercise of a Warrant), including, without limitation, any such
distribution to be made in connection with a consolidation or merger in
which the Company is the continuing corporation, or to issue subscription
rights or warrants to holders of its Common Stock, the Company shall cause
a notice of its intention to make such distribution to be sent by first-
class mail, postage prepaid, at least 10 business days prior to the date
fixed as a record date or the date of closing the transfer books in
relation to such distribution, to each registered Warrant Holder at such
Warrant Holder's address appearing on the Warrant register.
XIV.NOTICES. Any notice pursuant to this Agreement to be given or made by
any Warrant Holder to the Company shall be sufficiently given or made as of
the third business day following mailing if sent by first-class mail,
postage prepaid, or as of the day after mailing if sent by a nationally
recognized overnight courier, addressed as follows (or to such other
address as the Company may designate by notice given in accordance with
this Section 14 to the Warrant Holder(s)):
Merge Technologies Incorporated
1126 South 70th Street
Suite S107B
Milwaukee, Wisconsin 53214-3151
Attn: President
Notices or demands authorized by this Agreement to be given or made by the
Company to any Warrant Holder shall be sufficiently given or made (except
as otherwise provided in this Agreement) as of the third business day
following mailing if sent by first-class mail, postage prepaid, or as of
the day after mailing if sent by a nationally recognized overnight courier,
addressed to such Warrant Holder at the address of such Warrant Holder as
shown on the Warrant register, Common Stock register or the register for
such other security for which the Warrants become exercisable.
XV.COVENANT AS TO CERTAIN TRANSACTIONS. The Company shall not consummate
any consolidation, merger, sale or conveyance (as described in Section 80)
hereof) unless prior thereto (a) the successor or purchasing corporation
(or an affiliate of such successor or purchasing corporation), as the case
may be, shall have a sufficient aggregate number of authorized shares and
other securities which have not been issued or reserved for issuance to
permit the exercise in full of the Warrants in accordance with Section 80)
hereof and (b) the Company and such successor or purchasing corporation or
affiliate shall have executed and delivered to each Warrant Holder a
supplemental agreement confirming that the requirements of Section 80)
hereof shall be promptly performed in accordance with their terms and that
such consolidation, merger, sale or conveyance shall not result in a
default by the Company, such successor or purchasing corporation or such
affiliate under this Agreement (as the same shall have been assumed by such
successor or purchasing corporation or such affiliate) and further
providing that such successor or purchasing corporation or such affiliate
shall assume all obligations of the Company hereunder and agree to be bound
hereby. In the event of and after the happening of any such consolidation,
merger, sale or conveyance, the term "the Company," as used herein, shall
be deemed to refer to such successor or purchasing corporation or such
affiliate, as the case may be.
XVI.GOVERNING, LAW. This Agreement and each Warrant issued hereunder shall
be governed by and construed in accordance with the substantive laws of The
Commonwealth of Massachusetts without giving effect to the principles of
conflict of laws thereof.
XVII.COUNTERPARTS. The Agreement may be executed in any number of
counterparts, each of which so executed shall be deemed to be an original;
but such counterparts together shall constitute one and the same
instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed as of the day, month and year first above written.
MERGE TECHNOLOGIES INCORPORATED
By: /s/ William C. Mortimore
--------------------------
Name: William C. Mortimore
Title: President
H.C. WAINWRIGHT & CO., INC.
By: /s/ Stephen D. Barrett
------------------------------
Name: Stephen D. Barrett
Title: Chief Executive Officer
<PAGE>
EXHIBIT A
----------
(Form of Warrant Certificate)
THE SECURITIES ISSUABLE UPON EXERCISE HEREOF HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR ANY STATE
SECURITIES LAWS AND NEITHER THE WARRANTS REPRESENTED BY THIS CERTIFICATE
NOR THE SECURITIES ISSUABLE UPON EXERCISE HEREOF MAY BE OFFERED OR SOLD
EXCEPT PURSUANT TO (i) AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT,
OR (ii) ANY AVAILABLE RULE OR EXEMPTION FROM REGISTRATION UNDER SUCH ACT
RELATING TO THE DISPOSITION OF SECURITIES.
No.___________ _________ Warrants
VOID AFTER 5:00 P.M., BOSTON TIME
ON _____________, 200[ ]
MERGE TECHNOLOGIES INCORPORATED
Warrant Certificate
THIS CERTIFIES THAT, for value received, __________________, or
registered assigns, is the owner of the number of Warrants set forth above,
each of which entitles the owner thereof to purchase at any time from [
], (except as otherwise set forth in the Warrant Agreement referred to
below), until 5:00 p.m., Boston time on [ ] (the "Expiration Date"), one
fully paid and nonassessable share of the common stock, par value $.01 per
share (the "Common Stock"), of MERGE TECHNOLOGIES INCORPORATED, a Wisconsin
corporation (the "Company"), at the purchase price of $[ ] per share (the
"Exercise Price"), upon presentation and surrender of this Warrant
Certificate with the Form of Election to Purchase duly executed. The
number of Warrants evidenced by this Warrant Certificate (and the number of
shares of Common Stock which may be purchased upon exercise hereof) set
forth above, and the Exercise Price per share set forth above, are the
number and Exercise Price as of the date of original issuance of the
Warrants, based on the shares of Common Stock of the Company as constituted
at such date. As provided in the Warrant Agreement referred to below, the
Exercise Price and the number or kind of securities which may be purchased
upon the exercise of the Warrants evidenced by this Warrant Certificate
are, upon the happening of certain events, subject to modification and
adjustment.
This Warrant Certificate is subject to, and entitled to the benefits
of, all of the terms, provisions and conditions of an agreement dated as of
[ ] (the "Warrant Agreement") by and among the Company and H.C.
Wainwright & Co., Inc., which Warrant Agreement is hereby incorporated
herein by reference and made a part hereof and to which Warrant Agreement
reference is hereby made for a full description of the rights, limitations
of rights, duties and immunities hereunder of the Company and the holder of
the Warrant Certificate. Copies of the Warrant Agreement are on file at
the principal office of the Company.
This Warrant Certificate, with or without other Warrant Certificates,
upon surrender at the principal office of the Company, may be exchanged for
another Warrant Certificate or Warrant Certificates of like tenor and date
evidencing Warrants entitling the holder to purchase a like aggregate
number of shares of Common Stock as the Warrants evidenced by the Warrant
Certificate or Warrant Certificates so surrendered entitled such holder to
purchase. If this Warrant Certificate shall be exercised in part, the
holder hereof shall be entitled to receive upon surrender hereof another
Warrant Certificate or Warrant Certificates for the number of whole
Warrants not exercised.
<PAGE>
No fractional shares of Common Stock will be issued upon the exercise
of any Warrant or Warrants evidenced hereby, but in lieu thereof, a cash
payment will be made by the Company, as provided in the Warrant Agreement.
No holder of this Warrant Certificate shall be entitled to vote or
receive dividends or be deemed the holder of Common Stock or any other
securities which may at any time be issuable on the exercise hereof for any
purpose, nor shall anything contained in the Warrant Agreement or herein be
construed to confer upon the holder hereof, as such, any of the rights of a
stockholder of the Company or any right to vote for the election of
directors or upon any matter submitted to stockholders at any meeting
thereof, or to give or withhold consent to any corporate action (whether
upon any recapitalization, issue of stock, reclassification of stock,
change of par value or change of stock to no par value, consolidation,
merger, conveyance, or otherwise) or, except as provided in the Warrant
Agreement, to receive notice of meetings or to receive dividends or
subscription rights or otherwise, until the Warrant or Warrants evidenced
by this Warrant Certificate shall have been exercised and the shares of
Common Stock or other securities shall have become deliverable as provided
in the Warrant Agreement.
If this Warrant shall be surrendered for exercise within any period
during which the transfer books for the Company's Common Stock or other
securities purchasable upon the exercise of this Warrant are closed for any
purpose, the Company shall not be required to make delivery of certificates
for the shares of Common Stock or other securities purchasable upon such
exercise until the date of the reopening of said transfer books, subject to
the terms of the Warrant Agreement.
IN WITNESS WHEREOF, MERGE TECHNOLOGIES INCORPORATED has caused the
signature of its President and Secretary to be printed hereon and its
corporate seal to be printed hereon.
Dated:
MERGE TECHNOLOGIES INCORPORATED
By: _______________________________
President
Attest:
__________________________
Secretary
<PAGE>
FORM OF ASSIGNMENT
(To be executed by the registered holder if such holder desires to transfer
the Warrant Certificates.)
FOR VALUE RECEIVED, ________________________________________ hereby
sells, assigns and transfers unto
____________________________________________, this Warrant Certificate,
together with all right, title and interest therein, and does hereby
irrevocably constitute and appoint _______________________________________
to transfer the within Warrant Certificate on the books of the within-named
Company, with full power of substitution.
Dated: __________________, _____
_______________________________
Signature
Signature Guaranteed:
NOTICE
The signature on the foregoing Assignment must correspond in all
respects to the name a written upon the face of this Warrant Certificate,
without alteration, enlargement or any change whatsoever.
Accepted:
___________________________
Assignee:
<PAGE>
EXHIBIT B
---------
FORM OF
ELECTION TO PURCHASE
(To be executed if holder desires to exercise the Warrant Certificate).
TO MERGE TECHNOLOGIES INCORPORATED:
The undersigned hereby irrevocably elects to exercise _____________
Warrants represented by this Warrant Certificate to purchase the shares of
Common Stock issuable upon the exercise of such Warrants and requests that
certificates for such shares be issued in the name of:
Please insert social security or other
identifying number
____________________________
_________________________________________________________________________
(Please print name and address)
_________________________________________________________________________
If such number of Warrants shall not be all the Warrants evidenced by this
Warrant Certificate, a new Warrant Certificate for the balance remaining of
such Warrants shall be registered in the name of and delivered to:
Please insert social security or other
identifying number
____________________________
__________________________________________________________________________
(Please print name and address)
__________________________________________________________________________
Dated: _______________, ____
_______________________________
Signature
Signature Guaranteed:
<PAGE>
NOTICE
The signature on the foregoing election to purchase must correspond
in all respects to the name as written upon the face of this Warrant
Certificate, without alteration, enlargement or any change whatsoever.
EXHIBIT 10.6
____________
WEST ALLIS CENTER
OFFICE LEASE
This Lease is made as of this 30th day of January , 1998, by and
between 1126 West Allis Operating Associates, Limited Partnership
(hereinafter called "LESSOR") and MERGE TECHNOLOGIES, INC. (hereinafter
called "LESSEE").
ARTICLE I
BASIC LEASE PROVISIONS
A. ADDRESS OF LEASED PREMISES: Suite S104, 1126 South 70th Street, West
Allis, Wisconsin 53214.
B. TERM: 6 years, 7 months, 0 days, commencing February 1, 1998, and
ending August 31, 2004.
C. AREA: Usable Area 2025 square feet
Allotted Common Area 243 square feet
Total Area 2268 square feet
D. BASE MONTHLY RENT: Three Thousand, Two Hundred, Thirteen and no/100
dollars ($3,213.00).
E. SECURITY DEPOSIT: None dollars ($-00-).
F. ADDRESS FOR NOTICES AND PAYMENTS:
LESSOR: 1126 West Allis Operating Associates, Limited Partnership
West Allis Center
1126 South 70 Street
West Allis, Wisconsin 53214-3151
LESSEE: Merge Technologies, Inc.
1126 South 70th Street
Suite S107B
West Allis, WI 53214
ARTICLE II
LEASED PREMISES
2.1 LESSOR hereby leases to LESSEE and LESSEE leases from LESSOR for the
term, at the rental, and upon all of the conditions set forth herein that
certain real property situated in the City of West Allis, Milwaukee County,
Wisconsin which is located at the address specified in Item A of ARTICLE I
hereto and which is more particularly shown outlined in red on the floor
plan(s) attached hereto as Exhibit A. Said property is hereinafter
referred to as the "LEASED PREMISES."
ARTICLE III
BASE RENT
3.1 In consideration of the aforesaid leasing, LESSEE hereby agrees to
pay to LESSOR, at the address stipulated in Item F of ARTICLE I hereto, or
at such other address as LESSOR may from time to time designate by written
notice to LESSEE, the monthly rent called for in Item D of ARTICLE I
hereto. Said monthly rent (hereinafter called the "BASE MONTHLY RENT")
shall be payable without demand and in advance, on the first day of each
month during the term of this Lease. The BASE MONTHLY Rent payable
throughout each year during the term of this Lease, subsequent to the first
year of the lease term,
<PAGE>
shall be adjusted in accordance with the terms of ARTICLE IV herein.
Rent for any partial month during the term of this Lease shall be prorated
on a per diem basis.
<STRIKEOUT>ARTICLE IV<strikeout>
<STRIKEOUT>RENT ESCALATIONS<strikeout>
<STRIKEOUT>
4.1 The BASE MONTHLY RENT shall be escalated as of the first annual
anniversary date of the commencement of this Lease, and on each annual
anniversary date thereafter. The escalated rent shall be determined by
increasing the BASE MONTHLY RENT by the percentage increase, if any, in the
"Consumer Price Index." The base month for determining the increase in the
Consumer Price Index shall be the month two months prior to that in which
the term of this Lease commences. The comparison month shall be the month
two months prior to each annual anniversary date.
4.2 As used herein, the "Consumer Price Index" shall mean the "All Items"
index in the "Consumer Price Index for all Urban Consumers: U.S. City
average by expenditure category and commodity or service group (1982-84 =
100)," as published by the U.S. Department of labor, Bureau of Labor
Statistics.
4.3 Should the Consumer Price Index specified herein cease to be
published, the LESSOR shall, at its sole discretion, choose a reasonable
substitute index.
4.4 Notwithstanding anything to the contrary contained herein, in no
event shall the monthly rent payable in any lease year during the term of
this Lease be less than the amount payable during the preceding lease
year.<strikeout>
ARTICLE V
RENT TAX
5.1 LESSEE shall also pay to LESSOR monthly as additional rent without
demand any rent tax, sales tax or other tax (other than LESSOR's income
tax) which may be levied by any authorized governmental authority against
the BASE MONTHLY RENT or any additional rent payable to LESSOR under this
Lease.
ARTICLE VI
LATE CHARGES
6.1 LESSEE hereby acknowledges that the late payment of rent will cause
LESSOR to incur costs not contemplated by this Lease, the exact amount of
which will be extremely difficult to ascertain. Such costs may include
processing and accounting charges, and late charges which may be imposed on
delayed mortgage payments.
6.2 Accordingly, if any installment of rent or other payment due LESSOR
is not received by LESSOR within ten (10) days of its due date then,
without any requirement for notice to LESSEE, LESSEE shall pay to LESSOR a
late charge equal to ten percent (10%) of such overdue amount. The parties
hereto agree that said late charge is a fair reimbursement to LESSOR of the
costs it will incur as a result of said late payment.
6.3 Acceptance of a late charge by LESSOR shall not be deemed a waiver of
LESSEE's default with respect to such overdue amount, nor shall it prevent
LESSOR from exercising any of the other rights and remedies granted
hereunder.
<PAGE>
ARTICLE VII
SERVICES AND OTHER ITEMS INCLUDED IN RENT
7.1 Except as may otherwise be provided hereunder, LESSOR shall provide
the following services and pay for the following expenses which are
included in the BASE MONTHLY RENT (as such rent may, from time to time, be
escalated in accordance with the terms hereof):
A. Real property taxes, special assessments, and building
insurance costs associated with the building and underlying land areas of
which the LEASED PREMISES is a part.
B. LESSOR's liability insurance costs with respect to the property
of which the LEASED PREMISES is a part.
C. Cost incurred by LESSOR in managing, advertising, promoting,
and leasing the building of which the LEASED PREMISES is a part.
D. Legal expenses incurred by LESSOR as a result of its ownership
of the LEASED PREMISES, except as otherwise provided in this Lease.
E. Any mortgage payments or other financing costs incurred by
LESSOR.
F. The costs incurred by LESSOR in providing the following
services:
i) Daily janitorial services Monday through Friday, legal
holidays excepted, in and about the LEASED PREMISES. This shall include
all normal cleaning and upkeep services; normal daily removal of trash and
rubbish; the periodic vacuuming of carpeting, dusting of uncluttered
furniture, cleaning and waxing of uncarpeted floors, and washing of both
sides of the building's exterior windows; maintenance of towels, tissue and
other restroom supplies; daily cleaning of restroom floors and fixtures;
and such other work as is customarily performed as janitorial services in
office complexes leasing at similar per square foot annual rents in the
Milwaukee, Wisconsin, metropolitan area.
ii) Electricity for standard building lighting fixtures
and for normal incidental office use. In the event that LESSEE installs
machinery, computers, equipment or other devices requiring electrical
energy in excess of the foregoing, LESSEE shall pay to LESSOR an amount
equal to LESSOR's reasonable estimate of its increased costs occasioned
thereby, or such usage will be sub-metered, and LESSEE shall pay for actual
usage, whichever method is mutually agreeable.
iii) Heat and air conditioning when necessary for normal
comfort (in LESSOR's reasonable judgement) from 7:00 A.M. to 6:00 P.M.
weekdays, legal holidays excepted, and from 8:00 A.M. to 1:00 P.M.
Saturdays.
iv) Hot and cold running water from the regular
building outlets for lavatories, restrooms, and for drinking purposes.
v) Sewer service to the extent required for LESSEE's
use of the LEASED PREMISES for ordinary office purposes.
<PAGE>
vi) Passenger elevator service in common with other
tenants to be provided by operator-less automatic elevators. LESSOR
reserves the right to reasonably stipulate which elevators LESSEE may
utilize for passenger service. LESSOR may further stipulate which
elevators may be used for freight purposes and may restrict the hours
during which said elevators may be so used.
vii) Permits which will provide the use of non-reserved
employee parking spaces, not to exceed one permit for every 300 square feet
of "Usable Area" within the LEASED PREMISES. LESSOR shall keep and
maintain the parking lots and all driveways leading thereto in good
condition and repair, and free from any unreasonable accumulation of snow.
viii) Maintenance of the roof, building exterior,
structural system, the plumbing and electrical systems exterior to the
LEASED PREMISES, the HVAC system both interior and exterior to the LEASED
PREMISES, and the common areas of the building of which the LEASED PREMISES
are a part in a good, clean, operable and orderly condition.
ix) Guard service or security in or about the building
which contains the LEASED PREMISES, provided however that the LESSOR may,
at its sole discretion, eliminate either or both of these services at any
time without obligation and with no reduction in the rent payable by LESSEE
hereunder.
x) Conference rooms for the use, from time to time on
a first come, first served advance registration basis, by LESSEE.
Notwithstanding the foregoing, LESSOR reserves the right to charge LESSEE
for any extraordinary cleaning costs resulting from LESSEE's use of such
conference rooms, or for any damages resulting from such use. Further,
LESSOR reserves the right to restrict the LESSEE's use of such rooms,
should said use by LESSEE become excessive in the reasonable opinion of
LESSOR.
7.2 No interruption in, or temporary stoppage of, any of the aforesaid
services caused by repairs, renewals, improvements, alterations, normal
breakdowns, strikes, lockouts, labor controversy, accidents, fire,
inability to obtain fuel or supplies, or other causes beyond the reasonable
control of LESSOR shall be deemed an eviction or disturbance of LESSEE's
use and possession, or render LESSOR liable for damages, by abatement of
rent or otherwise or relieve LESSEE from any obligation set forth herein.
ARTICLE VIII
OPTIONAL SERVICES NOT INCLUDED IN RENT
8.1 The LESSOR intends, but does not guarantee, to provide certain
optional services to LESSEE. The LESSEE shall be charged only for its
actual use of these services, which use shall be at LESSEE's sole option.
These services may include the use of:
A. LESSOR's Rolm telecommunications system.
<PAGE>
ARTICLE IX
REPAIRS BY LESSEE
9.1 LESSEE shall, at its sole expense and at all times during the term of
this Lease, keep the LEASED PREMISES in good order, condition, and repair.
9.2 All electric lighting bulbs, tubes, ballasts, and starters shall be
replaced, when necessary, by LESSOR at the expense of LESSEE.
9.3 To the extent that LESSOR, its agents or employees, should do
maintenance for LESSEE which is the responsibility of LESSEE, or should pay
bills incurred by LESSEE, the charges therefore shall be due LESSOR, as
additional rent, within ten (10) days of the date on which LESSOR invoices
in writing for such charges.
ARTICLE X
MODIFICATIONS AND ALTERATIONS TO THE LEASED PREMISES
10.1 No modifications or alterations to the LEASED PREMISES shall be
allowed without the prior written consent of LESSOR. LESSOR reserves the
right to require copies of working drawings and specifications for any
modifications or alterations, which working drawings and specifications
shall be prepared in a professional manner. LESSOR may also require the
posting of a bond by LESSEE in the amount of one and one-half (1-1/2) times
the cost of the modifications or alterations, as estimated by LESSOR,
guaranteeing payment for same.
10.2 LESSEE shall keep the LEASED PREMISES and other property of LESSOR
free from liens at all times, and shall promptly discharge any liens which
are placed against LESSOR's property as a result of LESSEE's actions.
ARTICLE XI
DESTRUCTION OR DAMAGE
11.1 If the building of which the LEASED PREMISES is a part is damaged or
destroyed to the extent that the cost to repair is, in the reasonable
estimate of LESSOR, 25% or less of the then replacement cost of said
building, LESSOR shall promptly repair said building. Should said damage
exceed 25% of the then replacement cost of said building, LESSOR may elect
to either promptly repair same or, by written notice to LESSEE given within
ten (10) days of the date of such damage or destruction, terminate this
Lease. If LESSOR elects to repair said building, this Lease shall remain
in full force and effect only if, in the reasonable opinion of LESSOR, the
repairs can be made within six (6) months following the date of damage or
destruction. If this Lease remains in full force and effect, the rent on
the LEASED PREMISES shall abate to the extent that they are not usable by
LESSEE. Should this Lease be terminated by LESSOR, the rent shall abate
from the date of damage or destruction.
ARTICLE XII
CONDEMNATION
12.1 If all of the LEASED PREMISES, or such portion thereof as will make
the LEASED PREMISES unusable for the purpose herein leased, be condemned by
any legally constituted authority for public use or purpose, then the term
of this Lease shall end on the date of taking, and the rent payable
hereunder shall be prorated to said date. Any compensation payable for
said taking shall be paid to LESSOR except for any portion thereof which
may be specifically awarded to LESSEE for its relocation costs.
<PAGE>
ARTICLE XIII
PROPERTY DAMAGE INSURANCE
13.1 LESSOR will obtain fire and extended coverage insurance on the
building and LESSOR's personalty contained therein. LESSEE will obtain
insurance coverage on all of its personalty, trade fixtures, or any
leasehold improvements which it may install on the LEASED PREMISES. LESSOR
and LESSEE hereby waive all rights or subrogation by any insurance company
issuing policies carried by either LESSOR or LESSEE with respect to the
LESSOR's building, fixtures, personal property or leasehold improvements or
to LESSEE's personal property, trade fixtures or leasehold improvements.
13.2 If LESSEE does or permits anything to be done which increases the
cost of LESSOR's insurance on the building of which the LEASED PREMISES is
a part, the LESSEE shall, within ten (10) days of the posting of LESSOR's
written demand therefor, reimburse LESSOR for such increased premiums.
ARTICLE XIV
LIABILITY INSURANCE
14.1 LESSEE shall maintain a policy of public liability insurance in an
amount not less than one million dollars ($1,000,000) per occurrence
throughout the term of this Lease. A certificate indicating the existence
of such liability insurance and naming LESSOR as an additional insured
shall be furnished to LESSOR prior to the commencement date of this Lease.
It shall provide that said insurance policy shall not be canceled during
the term of this Lease without ten (10) days advance written notice to
LESSOR.
14.2 The liability insurance coverage required herein shall insure
performance by LESSEE of the indemnity provisions contained in ARTICLE XV.
The limits of said insurance shall not, however, limit the liability of
LESSEE hereunder.
ARTICLE XV
INDEMNITY
15.1 LESSEE shall indemnify and hold LESSOR harmless from and against all
claims for injuries to persons or damages to property arising out of
LESSEE's use or occupancy of the LEASED PREMISES or areas appurtenant
thereto, except to the extent to which such injuries or damages result from
the negligence of LESSOR or his agents. Said indemnification shall extend
to all costs incurred by LESSOR in defending itself against such claims,
including attorney's fees and court costs.
ARTICLE XVI
EXEMPTION OF LESSOR FROM LIABILITY
16.1 LESSEE hereby agrees that LESSOR shall not be liable for injury to
LESSEE's business or any loss of income therefrom or for damage to or the
theft of the goods, wares, merchandise or other property of LESSEE,
LESSEE's employees, invitees, customers, or any other person in or about
the LEASED PREMISES, nor shall LESSOR be liable for injury to the person of
LESSEE, LESSEE's employees, agents or contractors, whether such damage or
injury is caused by or results from fire, steam, electricity, gas, water or
rain, or from the breakage, leakage, obstruction or other defects of pipes,
sprinklers, wires, appliances, plumbing, air conditioning, lighting
fixtures, windows, or from any other cause, whether the said damage or
injury results from conditions arising upon the LEASED PREMISES or upon
other portions of the building of which the LEASED PREMISES are a
<PAGE>
part, or from other sources or places and regardless of whether the
cause of such damage or injury or the means of repairing the same is
inaccessible to LESSEE. Notwithstanding the foregoing, the LESSOR shall be
liable for injuries or damages resulting from the negligence of LESSOR or
its agents. LESSOR shall not be liable for any damages arising from any
act or neglect of any other tenant, if any, of the building in which the
LEASE PREMISES are located.
ARTICLE XVII
USE
17.1 The LEASED PREMISES shall be used and occupied only for business
office purposes and for no other purpose.
ARTICLE XVIII
COMPLIANCE WITH LAWS AND RULES
18.1 LESSOR shall comply, at its sole expense, with all applicable
statutes, ordinances, rules, codes, regulations and orders which govern the
use of the building of which the LEASED PREMISES are a part for ordinary
and usual business office purposes.
18.2 LESSEE shall promptly comply, at its sole expense, with all
applicable statutes, ordinances, rules, codes, regulations and orders which
apply to the LESSEE's use of the LEASED PREMISES, to the extent that said
use does not constitute ordinary and usual business office purposes.
18.3 LESSEE shall promptly comply with all rules and regulations of
LESSOR, the current form of which is attached to this LEASE as Exhibit B.
LESSOR shall have the right to amend or supplement the Rules and
Regulations from time to time provided the same do not discriminate against
LESSEE and apply to all tenants in general. LESSOR agrees to give LESSEE
at least ten (10) days notice of any changes to the Rules and Regulations.
ARTICLE XIX
SECURITY DEPOSIT
19.1 LESSEE shall deposit with LESSOR upon execution hereof the security
deposit stipulated in ITEM E of ARTICLE I hereto, as security for LESSEE'S
faithful performance of its obligations hereunder. If LESSEE fails to pay
rent or other charges due hereunder, or otherwise defaults with respect to
any provision of this Lease, LESSOR may use, apply or retain all or any
portion of said deposit for the payment of any rent or other charge in
default or for the payment of any other sum to which LESSOR may become
obligated by reason of LESSEE's default, or to compensate LESSOR for any
loss or damage which LESSOR may suffer thereby. IF LESSOR so uses or
applies all or any portion of said deposit, LESSEE shall within ten (10)
days after written demand therefore deposit cash with LESSOR in an amount
sufficient to restore said deposit to the full amount called for herein,
and LESSEE's failure to do so shall be a material breach of this Lease. If
LESSEE performs all of LESSEE's obligations hereunder, said deposit, or so
much thereof as has not been previously applied by LESSOR, shall be
returned, without payment of interest for its use, to LESSEE (or, at
LESSOR's option, to the last assigns, if any, of LESSEE's interest
hereunder) at the expiration of the term hereof, and after LESSEE has
vacated the LEASED PREMISES. The security deposit may be retained by
LESSOR with its general funds.
<PAGE>
ARTICLE XX
RIGHTS RESERVED BY LESSOR
20.1 LESSOR reserves the following rights exercisable without notice and
without liability to LESSEE and without effecting an eviction, constructive
or actual, or disturbance of LESSEE's use or possession, or giving rise to
any claim for setoff or abatement of rent:
A. To control the design, installation, and location of any signs
which LESSEE may wish to place on or about the LEASED PREMISES, and to
require that tenant identification signage conform to a standard sign plan
which LESSOR may establish. In no event shall LESSEE utilize any signage
which is visible to the exterior of the building of which the LEASED
PREMISES is a part.
B. To retain at all times and to use in appropriate instances keys
to all doors within and into the LEASED PREMISES. No locks shall be
changed without the prior written consent of LESSOR.
C. To make repairs, alterations, additions, or improvements,
whether structural or otherwise, in and about the LEASED PREMISES, or any
part thereof, and for such purpose to enter upon the LEASED PREMISES, and
during the continuation of any said work, to temporarily close doors,
entryways, and corridors in the LEASED PREMISES and to interrupt or
temporarily suspend services and facilities. Unless warranted by an
emergency situation, such repairs or suspensions shall not unreasonably
interfere with LESSEE's ability to conduct its normal business operations.
D. LESSOR may require that all persons who enter or leave the West
Allis Center (hereinafter called the "CENTER") identify themselves to
guards by pass, parking permit or otherwise, and LESSOR may take such other
measures as it deems reasonably necessary for the safety and security of
the CENTER. Nothing contained herein shall, however, make LESSOR
responsible in any way for the security of LESSEE, its employees, agents,
or invitees, or any property thereof. LESSOR shall be under no obligation
to maintain perimeter security or guards at the CENTER.
E. To control or prohibit the storage of explosive or inflammable
materials in or about the LEASED PREMISES. LESSEE agrees to promptly cease
and correct any practice which constitutes a fire or safety hazard in the
opinion of LESSOR, LESSOR's property insurance underwriter or its
authorized agents, or any governmental authority responsible for building
and/or fire code enforcement. LESSEE agrees to make the LEASED PREMISES
available for inspection by said parties at all times. LESSEE shall not
bring into the LEASED PREMISES or the building of which it is a part
gasoline, explosives, or other highly flammable or volatile materials.
F. To control the storage or placement of heavy objects on all
structural floors within the LEASED PREMISES. LESSEE agrees not to exceed
the load limitations of any structural floors or elevators within the
LEASED PREMISES.
G. To prohibit any advertising by LESSEE which in LESSOR's
reasonable opinion impairs the reputation or desirability of the CENTER as
an industrial and commercial center. Upon written notice from LESSOR of
such objections, LESSEE shall promptly discontinue such advertising.
LESSEE agrees that it shall not conduct any advertising or publicity
campaign which will so impair the reputation or desirability of the CENTER.
<PAGE>
H. To enforce by eviction or other means that the LEASED PREMISES
not be used for lodging or for any immoral or illegal purpose.
I. To tow away or remove, at the expense of the owner, any vehicle
or other object which is improperly parked or stored, or placed in a drive,
fire lane, or no parking zone. All vehicles shall be parked at the sole
risk of the owner, and LESSOR assumes no responsibility for any damage to
or loss of vehicles.
J. To designate, limit, restrict, control and modify any service
in or to the building of which the LEASED PREMISES is a part, and any
common areas relating to such building, provided that LESSOR shall enforce
its rights hereunder uniformly on LESSEE and all other tenants.
K. To enforce by eviction; by the termination of heat, electric,
or water service to the LEASED PREMISES; or other means, its requirement
that LESSEE not commit waste with respect to any utilities which are
furnished by LESSOR. All exterior doors and windows shall be kept closed
during the heating and air conditioning seasons, and water faucets and
fountains should be turned off when not in use.
L. To enter the LEASED PREMISES at reasonable times for the
purpose of inspecting same, showing same to prospective purchasers,
lenders, lessees, insurance inspectors, or governmental authorities.
LESSOR may, during the last 90 days of the term hereof place on or about
the LEASED PREMISES any "For Lease" signs, all without rebate of rent or
liability to LESSEE.
M. To restrict or prohibit LESSEE's ability to conduct, either
voluntarily or involuntarily, any auction upon the LEASED PREMISES. LESSEE
shall obtain LESSOR's advance written consent prior to conducting any
auction upon the LEASED PREMISES.
N. To enforce such other reasonable rules and regulations which
LESSOR or its agent may, from time to time, adopt. Written notice of such
rules and regulations may be given to LESSEE at any time.
ARTICLE XXI
DEFAULT
21.1 Any of the following events shall constitute a default and breach of
this Lease by LESSEE:
A. The vacating or abandonment of the LEASED PREMISES by LESSEE
during the term of this Lease.
B. The failure of LESSEE to make any payment of rent or any other
payment required to be made by LESSEE hereunder, as and when due, where
such failure shall continue for a period of fifteen (15) days after written
notice thereof from LESSOR to LESSEE.
C. The failure by LESSEE to observe or perform any of the
covenants, conditions or provisions of this Lease to be observed or
performed by LESSEE, other than described in Paragraph 21.1B above, where
such failure shall continue for a period of thirty (30) days after written
notice thereof from LESSOR to LESSEE; provided, however, that if the nature
of LESSEE's default cannot be cured by the payment of money and is such
that more than thirty (30) days are reasonably required for its cure, then
LESSEE shall not be deemed to be in default if LESSEE commenced such cure
within said 30-day period and thereafter diligently proceeds to complete
such cure.
<PAGE>
D. (i) The making by LESSEE of any general arrangement or
assignment for the benefit of creditors; (ii) LESSEE becomes a "debtor" as
defined in 11 U.S.C. 101 or any successor statute thereto (unless, in the
case of a petition filed against LESSEE, the same is dismissed within sixty
(60) days; (iii) the appointment of a trustee or receiver to take
possession of substantially all of LESSEE's assets located at the LEASED
PREMISES or of LESSEE's interest in this Lease, where possession is not
restored to LESSEE within thirty (30) days; or (iv) the attachment,
execution, or other judicial seizure of substantially all of LESSEE's
assets located at the LEASED PREMISES or of LESSEE's interest in this
Lease, where such seizure is not discharged within thirty (30) days.
Notwithstanding the foregoing, should any provision of the Paragraph 21.1D
be contrary to any applicable law, such provision shall be of no force or
effect.
E. The discovery of LESSOR that any financial statement given to
LESSOR by LESSEE, any assignee of LESSEE, any subtenant of LESSEE, any
successor in interest of LESSEE or any guarantor of LESSEE's obligation
hereunder, and any of them was materially false.
21.2 In the event of any such default or breach by LESSEE, LESSOR may at
any time thereafter, with or without notice or demand and without limiting
LESSOR in the exercise of any right or remedy which LESSOR may have by
reason of such default or breach:
(i) Terminate LESSEE's right to possession of the LEASED PREMISES
by any lawful means, in which case this Lease shall terminate and LESSEE
shall immediately surrender possession of the LEASED PREMISES to LESSOR.
In such event, LESSOR shall be entitled to recover from LESSEE all damages
incurred by LESSOR by reason of LESSEE's default including, but not limited
to, the cost of recovering possession of the LEASED PREMISES; expenses of
reletting, including necessary renovation and alteration of the LEASED
PREMISES, reasonable attorney's fees, and any real estate commission
actually paid; and the worth at the time of award by the court having
jurisdiction thereof of the amount by which the unpaid rent for the balance
of the term after the time of such award exceeds the amount of such rental
loss for the same period that LESSEE proves could be reasonably avoided.
(ii) Maintain LESSEE's right to possession in which case this Lease
shall continue in effect whether or not LESSEE shall have abandoned the
LEASED PREMISES. In such event, LESSOR shall be entitled to enforce all of
LESSOR's rights and remedies under this Lease, including the right to
recover the rent as it becomes due hereunder.
(iii) Pursue any other remedy now or hereafter available to LESSOR
under the laws or judicial decisions of the state wherein the LEASED
PREMISES is located. Unpaid installments of rent and other unpaid monetary
obligations of LESSEE under the terms of this Lease shall bear interest
from the date due at the maximum rate then allowable by law.
21.3 LESSOR shall not be in default unless LESSOR fails to perform
obligations required of LESSOR within a reasonable time, but in no event
later than thirty (30) days after written notice by LESSEE to LESSOR
specifying wherein LESSOR has failed to perform such obligation; provided,
however, that if the nature of LESSOR's obligation is such that more than
thirty (30) days are required for performance then LESSOR shall not be in
default if LESSOR commences performance within such thirty (30) day period
and thereafter diligently prosecutes the same to completion.
<PAGE>
ARTICLE XXII
ASSIGNMENT AND SUBLETTING
22.1 LESSEE shall not assign, sublet, transfer or mortgage this lease, nor
shall any assignment occur by operation of law, without the LESSOR's
advance written consent.
22.2 Regardless of LESSOR's consent, no subletting or assignment shall
release LESSEE from its obligation to pay the rent or perform all the
LESSEE's other obligations under this Lease. The acceptance of rent by
LESSOR from any other person shall not be deemed to be a waiver by LESSOR
of any provision hereof. Consent to one assignment or subletting shall not
be deemed consent to any subsequent assignment or subletting. In the event
of default by any assignee of LESSEE or successor of LESSEE, LESSOR may
proceed directly against LESSEE without the necessity of exhausting
remedies against said assignee.
ARTICLE XXIII
ESTOPPEL CERTIFICATE
23.1 LESSEE shall, within ten (10) days of the date of LESSOR's written
request, execute and deliver to LESSOR a statement in writing (i)
certifying that the lease is unmodified and in full force and effect (or,
if modified, stating the nature of such modification and certifying that
this Lease, as so modified, is in full force and effect) and the date to
which the rent and other charges are paid in advance, if any, and (ii)
acknowledging that there are not, to LESSEE's knowledge, any uncured
defaults on the part of LESSOR hereunder, or specifying such defaults if
any are claimed.
ARTICLE XXIV
LESSOR'S LIABILITY
24.1 The term "LESSOR" as used herein shall mean only the owner or owners
at the time in question of the fee title or of LESSEE's interest in a
ground lease of the LEASED PREMISES, and in the event of any transfer of
such title or interest, LESSOR herein named, or any subsequent LESSOR who
later transfers the LEASED PREMISES shall be relieved from and after the
date of such transfer of all liability with respect to "LESSOR's"
obligations thereafter to be performed, providing that any prepaid rent,
expenses, or security deposit in the hands of the then LESSOR, shall be
delivered to the grantee.
ARTICLE XXV
LESSOR'S RIGHT TO CONVEY
25.1 LESSOR reserves the right at all times to sell or convey all or part
of the property of which the LEASED PREMISES is a part. Such conveyance by
LESSOR shall in no way relieve LESSEE of its rights or obligations under
this Lease.
ARTICLE XXVI
SEVERABILITY
26.1 The invalidity of any provision of this Lease as determined by a
court of competent jurisdiction, shall in no way affect the validity of any
other provision hereof.
<PAGE>
ARTICLE XXVII
TIME OF ESSENCE
27.1 Time is of the essence with respect to the payment of rent hereunder,
and with respect to all other terms and provisions of this Lease.
<STRIKEOUT>ARTICLE XXVIII<strikeout>
<STRIKEOUT>RIGHT TO RELOCATE<strikeout>
<STRIKEOUT>
28.1 The LESSOR hereby retains the right to relocate LESSEE, at LESSOR's
sole expense, to another office suite within the building of which the
LEASED PREMISES is a part, provided that such substitute office suite is,
in the reasonable opinion of LESSOR, equal to or larger in area, of similar
layout, and is of reasonably comparable or better quality, than the
original LEASED PREMISES.<strikeout>
ARTICLE XXIX
INCORPORATION OF PRIOR AGREEMENTS; AMENDMENTS
29.1 This Lease contains all agreements of the parties hereto with respect
to any matter mentioned herein. No prior agreement or understanding
between LESSEE and any employee or agent of LESSOR with respect to any such
matter shall be effective.
ARTICLE XXX
NOTICE
30.1 Any notice required or permitted to be given hereunder shall be in
writing and shall be deemed given on the day immediately following the date
same is deposited in the U.S. mail, postage prepaid and registered or
certified, and addressed as provided under Item F of ARTICLE I hereto (or
to such other address as either party hereto may, from time to time,
stipulate by written notice to the other party).
ARTICLE XXXI
WAIVERS
31.1 No waiver by LESSOR of any provision of this Lease shall be deemed a
waiver of any other provision hereof or of any subsequent breach by LESSEE
of the same or any other provision. LESSOR's consent to, or approval of,
any act shall not be deemed to render unnecessary the obtaining of LESSOR's
consent to or approval of any subsequent act of LESSEE. The acceptance of
rent hereunder by LESSOR shall not be a waiver of any preceding breach by
LESSEE of any provision hereof, other than the failure of LESSEE to pay the
particular rent so accepted.
ARTICLE XXXII
POSSESSION
32.1 Any occupancy of the LEASED PREMISES by LESSEE shall subject LESSEE
to all of the terms and conditions of the Lease, regardless of whether the
term of this Lease has yet commenced.
32.2 If LESSOR shall be unable to give possession of the LEASED PREMISES
on the date of the commencement of the term because of the refusal of a
previous tenant to vacate the LEASED PREMISES, because LESSOR's remodeling
of the LEASED PREMISES has not been sufficiently completed, or for any
other reason, LESSOR shall not be subject to any claims, damages or
liabilities for the failure to give possession
<PAGE>
on said date. Under said circumstances, the rent reserved and
covenant to pay same shall not commence until the earlier of either the
date on which possession of the LEASED PREMISES is given to LESSEE, or the
date on which the LEASED PREMISES are available for occupancy by LESSEE,
provided LESSOR has given LESSEE three (3) day's advance written notice of
their availability. Failure to give possession on the date of commencement
of the term shall in no way affect the validity of this Lease or the
obligations of LESSEE hereunder, nor shall the same be construed in any way
to extend the expiration date of the term. Further, the commencement date
of the term of this Lease and LESSEE's obligation to pay rent hereunder
shall not be delayed due to LESSEE's failure to complete any remodeling
work which LESSEE may be responsible for.
32.3 By taking possession of the LEASED PREMISES, the LESSEE accepts it in
its then-existing condition provided, however, that LESSOR shall correct
any reasonable problems which LESSEE gives LESSOR notice of in writing
within seven (7) days following the date possession is taken.
ARTICLE XXXIII
SURRENDER OF PREMISES
33.1 On the last day of the term of this Lease, or on the sooner
termination thereof, LESSEE shall peaceably surrender the LEASED PREMISES
in good condition and repair, ordinary wear and tear excepted, consistent
with LESSEE's duty to make repairs as provided. On or before the last day
of the term of this Lease, or the sooner termination thereof, LESSEE shall,
at its expense, remove all of its trade fixtures, furniture, and equipment
from the LEASED PREMISES, and all property not removed shall be deemed
abandoned. LESSEE shall promptly reimburse LESSOR for any expenses
incurred by LESSOR with respect to removal or storage of abandoned property
and with respect to restoring the LEASED PREMISES to good order, condition
and repair. At the option of LESSOR, exercised by written notice to LESSEE
not later than twenty-one (21) days prior to the last day of the term of
this Lease or sooner termination thereof, any alterations, additions and
fixtures, other than LESSEE's trade fixtures and equipment, which have been
made or installed by LESSEE on the LEASED PREMISES in connection with this
Lease, shall be removed by LESSEE at its expense. If such notice is not
given by LESSOR, said alterations, additions and fixtures shall remain the
LESSOR's property, and shall be surrendered with the LEASED PREMISES as a
part thereof.
33.2 If the LEASED PREMISES are not surrendered at the end of the lease
term or sooner termination thereof, the continued occupancy by LESSEE shall
be a tenancy from month to month, subject to all the terms and provisions
of this Lease excepting (i) rights of first refusal or renewal, if any,
granted hereunder, and (ii) that the monthly rent for each month of
occupancy following the expiration or sooner termination of this Lease
shall be two hundred percent (200%) of the BASE MONTHLY RENT for the last
full month of the term of this Lease. Further, LESSEE shall indemnify
LESSOR against any loss or liability resulting from delay by LESSEE in
surrendering the LEASED PREMISES including, without limitation, claims made
by succeeding tenants founded on such delay and any attorney's fees
resulting therefrom.
ARTICLE XXXIV
CUMULATIVE REMEDIES
34.1 No remedy or election hereunder shall be deemed exclusive but shall,
wherever possible, be cumulative with all other remedies at law or in
equity.
<PAGE>
ARTICLE XXXV
BINDING EFFECT
35.1 Subject to any provisions hereof restricting assignment or subletting
by LESSEE, and subject to the provisions of ARTICLE XXIV hereof, this Lease
shall bind the parties hereto, their personal representatives, successors
and assigns.
ARTICLE XXXVI
CHOICE OF LAW
36.1 This Lease shall be governed by the laws of the state of Wisconsin.
ARTICLE XXXVII
SUBORDINATION
37.1 This Lease, at LESSOR's option, shall be subordinate to any ground
lease, mortgage, deed of trust, or any other hypothecation or security now
or hereafter placed upon the real property of which the LEASED PREMISES is
a part and to any and all advances made on the security hereof and to all
renewals, modifications, consolidations, replacements and extensions
thereof. Notwithstanding such subordination, LESSEE's right to quiet
possession of the LEASED PREMISES shall not be disturbed if LESSEE is not
in default and so long as LESSEE shall pay the rent and observe and perform
all of the provisions of this Lease, unless this Lease is otherwise
terminated pursuant to its terms. If any mortgagee, trustee or ground
lessor shall elect to have this Lease prior to the lien of its mortgage,
deed of trust or ground lease, and shall give written notice thereof to
LESSEE, this Lease shall be deemed prior to such mortgage, deed of trust,
or ground lease, whether this Lease is dated prior to subsequent to the
date of said mortgage, deed of trust or ground lease or the date of
recording thereof.
37.2 LESSEE agrees to execute any documents required to effectuate an
attornment, a subordination or to make this Lease prior to the lien of any
mortgage, deed of trust or ground lease, as the case may be. LESSEE's
failure to execute such documents within 10 days after written demand shall
constitute a material default by LESSEE hereunder, or, at LESSOR's option,
LESSOR shall execute such documents on behalf of LESSEE as LESSEE's
attorney-in-fact. LESSEE does hereby make, constitute, and irrevocably
appoint LESSOR as LESSEE's attorney-in-fact and in LESSEE's name, place and
stead, to execute such documents in accordance with this Paragraph 37.2.
ARTICLE XXXVIII
ATTORNEY'S FEES
38.1 If either party to this Lease brings an action to enforce the terms
hereof, the prevailing party in such action shall be entitled to the prompt
reimbursement of its reasonable attorney's fees from the losing party.
ARTICLE XXXIX
QUIET POSSESSION
39.1 Upon LESSEE paying the rent for the LEASED PREMISES and observing and
performing all of the covenants, conditions and provisions on LESSEE's part
to be observed and performed hereunder, LESSEE shall have quiet possession
of the LEASED PREMISES for the entire term hereof subject to all of the
provisions of this LEASE.
<PAGE>
ARTICLE XL
AUTHORITY
40.1 If LESSEE is a corporation, trust, or general or limited partnership,
each individual executing this Lease on behalf of such entity represents
and warrants that he or she is duly authorized to execute and deliver this
Lease on behalf of said entity. If LESSEE is a corporation, trust or
partnership, LESSEE shall, concurrent with its execution of this Lease,
deliver to LESSOR evidence of such authority satisfactory to LESSOR.
40.2 The individuals executing this Lease on behalf of LESSOR represent
and warrant to LESSEE that they are fully authorized and legally capable of
executing this Lease on behalf of LESSOR and that such execution is binding
upon all parties holding an ownership interest in the LEASED PREMISES.
ARTICLE XLI
ADDENDUM
41.1 Attached hereto is an addendum or addenda containing Article(s) XLII,
XLIII and XLIV which constitute (s) a part of this Lease.
IN WITNESS WHEREOF, the parties have executed this Lease as of the day and
year first above written.
1126 West Allis Operating Associates,
Limited Partnership (LESSOR) Merge Technologies, Inc. (LESSEE)
By: /s/ Rudolph C. Borchardt By: /s/ Colleen M. Doan
Title: Manager of Tenant Title: Chief Financial Officer
Leasing & Tenant Services
<PAGE>
ADDENDUM NO. 1
To Lease dated January 30, 1998, by and between 1126 West Allis Operating
Associates, Limited Partnership as LESSOR and Merge Technologies, Inc. as
Lessee.
ARTICLE XLII
BROKERAGE COMMISSION
42.1 LESSOR represents and warrants to LESSEE that it has not incurred any
obligation or liability, contingent or otherwise, for brokerage or finder's
fees or agent's commission or other like payment in connection with this
Lease or the transactions contemplated hereby and LESSOR agrees to
indemnify and hold LESSEE harmless against and in respect of any such
obligation and liability based in any way upon agreements, arrangements or
understandings made or claimed to have been made by LESSOR with any third
person. Similarly, LESSEE represents and warrants to LESSOR that it has
not incurred any obligation or liability, contingent or otherwise, for
brokerage or finder's fees or agent's commission or other like payment in
connection with this Lease or the transactions contemplated hereby and
LESSEE agrees to indemnify and hold LESSOR harmless against and in respect
of any such obligation and liability based in any way upon agreements,
arrangements or understandings made or claimed to have been made by LESSEE
with any third person.
ARTICLE XLIII
LEASE RENTAL CALCULATIONS
43.1 The following represents the method of calculation and amount of
lease rental to be applied to the term of this Lease.
Year One $38,566.00 per Year $3,213.00 per Month
Year Two $39,690.00 per Year $3,307.50 per Month
Year Three $40,824.00 per Year $3,402.00 per Month
Year Four $41,958.00 per Year $3,496.50 per Month
Year Five $43,092.00 per Year $3,591.00 per Month
Year Six $44,226.00 per Year $3,685.50 per Month
Year Seven $26,460.00 per Year $3,780.00 per Month
ARTICLE XLIV
LEASEHOLD IMPROVEMENTS
44.1 LESSOR shall provide LESSEE with the following Leasehold Improvements
at no additional costs to LESSEE beyond the monthly rent as shown in
Article I.D:
A. Steel stud and drywall work to including the following:
1) Insulated partition built through new ceiling grid at
North wall only.
2) Infill of existing south corridor door.
3) Installation of new drywall header at exposed stair
corridor
4) Patching or covering of existing walls including areas
affected by existing wall demolition.
5) All walls taped and finished.
B. Acoustical work of new 2x4 tile to match existing Merge second
floor and standard grid.
C. Floor covering to include the following:
1) New carpeting furnished and installed.
2) Merge anti-static standard.
3) Vinyl base at all new and existing walls.
<PAGE>
D. Painting to include the following and to match existing Merge
style:
1) Two coats of latex on all drywall.
2) Enamel painting on hollow metal door frames.
3) Two coats of latex paint on all exposed duct work.
4) Two coats dark green on cement pillars.
E. Remodeling of existing heating, ventilating and air
conditioning and balancing air flow
between existing and new space.
F. Electrical work to include the following:
1) Six duplex outlets plus additional outlets to be
determined at later date.
2) Single pole light switch at each entrance (three).
3) 32 2x4 parabolic lens installed in existing frames.
4) Flourescent lighting to match existing Merge
requirements.
G. Three new mini blinds at new exterior windows.
H. Sandblasting of brick wall along the exterior wall.
I. Two new steel hand rails to match existing Merge style at
existing ramp.
J. Three new exterior windows to match existing Merge style.
<PAGE>
EXHIBIT B
RULES AND REGULATIONS
1. The West Allis Center building shall be open from 7:00 A.M. to 10:00
P.M., Monday through Friday. On Saturdays, the East Lobby of the building
only, shall be open from 7:00 A.M. to 5:00 P.M. The building will be
locked during all other hours, including Sundays and holidays. Entry can
be made with building key provided to all tenants.
Lessor may at all times control entry to and departures from the
building (through a security officer or employee in charge, should lessor
so choose), and (a) persons may enter the building only with permission;
(b) persons entering or departing from the building may be questioned as to
their business in the building and the right is reserved to require the use
of an identification card and the registering of such persons as to the
hour of entry and departure, nature of visit, and other information deemed
necessary for the protection of the building and its lessees; (c) all
entries into and departures from the building will take place through such
one or more entrances as lessor shall from time to time designate.
2. Movement in or out of the building of furniture, office equipment, or
other bulky materials, or movement through the building entrances or lobby
shall be restricted to hours designated by lessor. All such movements,
shall be under supervision of lessor and in the manner agreed between
lessee and lessor by prearrangement before performance. Such
prearrangement initiated by lessee will include determination by lessor and
subject to his decision and control, of the time, method, and routing of
movement, limitations imposed by safety or other concerns which may
prohibit any article, equipment or any other item from being brought into
the building. Lessee is to assume all risk as to damage to articles moved
and injury to persons or public engaged or not engaged in such movement,
including equipment, property, and personnel or lessor it damaged or
injured as a result of acts in connection with carrying out this service
for lessee from time of entering property to completion of work; and lessor
shall not be liable for acts of any person engaged in, or any damage or
loss to any of said property or persons resulting from any act in
connection with such service performed for lessee and lessee hereby agrees
to indemnify and hold harmless lessor from and against any such damage,
injury, or loss, including attorney's fees.
3. Lessee shall be entitled to have its name displayed on the directory
of the building, but the design and type of such display, the location of
the directory, and the allocation of space on the directory shall be
determined by the lessor in its sole discretion. Any additional names
requested by lessee to be displayed on the directory must by approved by
lessor and, if approved, will be provided at the sole expense of lessee.
Lessee shall not, without lessor's prior written consent, install, affix or
use (a) any signs, lettering or advertising media of any kind, blinds,
shades, curtains, draperies or similar items on the exterior of the leased
premises or in the interior of the leased premises in such a manner as
shall be visible from outside the leased premises, or (b) any awnings,
radio or television antennae or any other object or equipment of any nature
whatsoever on the exterior of the leased premises. No symbol, mark,
design, or insignia adopted by lessor for use in connection with the
building shall be used by lessee without the prior written consent of
lessor. Lessee shall not refer to the building by any name other than that
designated by lessor from time to time and lessee may use such designated
name solely for the address of its business. All rights to and use of the
exterior walls of the leased premises and roof of the building are reserved
to lessor.
<PAGE>
4. No sign, advertisement or notice shall be inscribed, painted or
affixed on any part of the outside (including signs visible from windows)
or inside of the building premises.
5. Lessor reserves the right to exclude or eject from the building all
solicitors, canvassers and peddlers, or any person who, in the reasonable
judgment of lessor's security officer or employee in charge, is under the
influence of liquor or drugs, or any person who shall in any manner do any
illegal act or any act in violation of any of the Rules and Regulations of
the Building.
6. All deliveries and shipments to and from the West Allis Center are to
be made via the loading dock or compactor area located on the east side of
the building.
7. All common areas are to remain smoke free. Smoking by lessees
employees and visitors is allowed outside of the building at the compactor
area. No smoking allowed outside of the main entrances.
8. Food and beverage is to be consumed in the vending area first floor,
not in other common areas of the building such as lobbies or sitting areas,
etc.
9. Lessee and its employees, agents and invitees shall observe and
comply with the driving and parking signs and markers on the property
surrounding the building.
10. Lessees shall not use the name of the building for any purpose other
than that of the business address of the lessee and shall not use any
picture, cut or representation of the building, or any part thereof,
without the lessor's prior written consent.
11. In the interest of satisfactory mail delivery, all inbound mail will
include the lessee's company name, street address and suite number.
12. If lessor, by a notice in writing to lessee, shall object to any
curtain, blind, shade or screen attached to, or hung in, or used in
connection with, any window or door of the leased premises, such use of
such curtain, blind, shade or screen shall be discontinued forthwith by
lessee. No awnings shall be permitted on any part of the leased premises.
13. All entrance doors to each lessee's premises shall be locked when the
premises are not in use. Lessor's building manager and personnel shall
keep a pass key and be allowed admittance to the premises to cover any
emergency or required inspection that may arise. Lessees shall not attach
additional locks or similar devices to any interior or exterior door or
transom of the premises, change existing locks or make or permit to be made
any keys for any door thereof other than those provided by lessor. If more
than two keys for one lock are desired by a lessee, lessor will provide
them upon payment therefor by the lessee. Each lessee, upon the
termination of its tenancy, shall deliver to the lessor all keys of
offices, rooms and toilet rooms which shall have been furnished the lessee
or which the lessee shall have had made, and in the event of loss of any
keys so furnished shall pay the lessor therefor.
Lessee to provide key to janitorial services organization if they
wish to use their services.
14. Lessee assumes full responsibility for protecting its space from
theft, robbery and pilferage which includes keeping doors locked and
windows and other means of entry to the leased premises closed. Lessor
will not be responsible for lost or stolen personal property, equipment,
money, or jewelry from lessee's area or any public rooms regardless of
whether such loss occurs when such area is locked against entry or not.
<PAGE>
15. No portion of lessee's area or any other part of the building shall
at any time be used or occupied as sleeping or lodging quarters.
16. No vending machines of any description shall be installed, maintained
or operated in any part of the building without the written consent of
lessor.
17. Lessee shall not use, keep, or permit to be used or kept any foul or
noxious gas or substance in the leased premises, or permit or suffer the
leased premises to be occupied or used in a manner offensive or
objectionable to lessor or other occupants of the building by reasons of
noise, odors, and/or vibrations, or interfere in any way with other tenants
or those having business therein, nor shall any bicycles, animals or birds
(except Seeing Eye Dogs) be brought into or kept in or about the building.
Lessee shall not place or install any antennae or aerials or similar
devices outside of the leased premises.
18. If lessee desires telephone or telegraph connections or alarm
systems, lessor will direct electricians as to where and how the wires are
to be introduced. No boring or cutting for wires or otherwise shall be
made without specific directions from lessor.
19. Lessee shall give prompt notice to lessor of any accidents to or
defects in plumbing, electrical fixtures, or heating apparatus so that such
accidents or defects may be attended to promptly.
20. Lessee will refer all contractors, contractor's representatives and
installation technicians, rendering any service to lessee to lessor for
lessor's supervision approval, and control before performance of any
contractual service. This provision shall apply to all work performed in
the building including installations of telephones, telegraph equipment,
electrical devices and attachments and installations of any nature
affecting floors, walls, woodwork, trim, windows, ceilings, equipment or
any other physical portion of the building.
21. The sashes, sash doors, windows, glass lights, and any lights or
skylights that reflect or admit light into the halls or other places of the
building shall not be covered or obstructed. The toilet rooms, water and
wash closets and other water apparatus shall not be used for any purpose
other than that for which they were constructed, and no foreign substance
of any kind whatsoever shall be thrown therein, and the expense of any
breakage, stoppage or damage, resulting from the violation of this rule
shall be borne by the lessee who, or whose clerk, agents, servants, or
visitors, shall have caused it.
22. Any wallpaper or vinyl fabric materials which lessee may install on
painted walls shall be applied with a stripable adhesive. The use of
nonstripable adhesives will cause damage to the walls when materials are
removed, and repairs made necessary thereby shall be made by lessor at
lessee's expense.
23. Lessor reserves the right to make such other and reasonable rules and
regulations as in its judgment may from time to time be needed for the
safety, care and cleanliness of the building, and for the preservation of
good order therein.
EXHIBIT 10.8
- -------------
MERGE TECHNOLOGIES INCORPORATED
1998 STOCK OPTION PLAN FOR DIRECTORS (THE "PLAN")
I. GENERAL.
A. PURPOSE.
The purpose of this 1998 Stock Option Plan for Directors (the "Plan")
is to advance the interests of the stockholders of Merge Technologies
Incorporated (the "Company") by providing the members of the Company's
Board of Directors who are not also employed by the Company (the
"Directors") with an opportunity to acquire or increase their proprietary
interests in the Company by granting them options to purchase shares of the
Company's common stock (the "Shares" or "Common Stock"). By encouraging
these individuals to become owners of Shares, the Company seeks to
motivate, retain and attract those highly competent individuals upon whose
judgment, initiative, and leadership the Company's success in large measure
depends. The options granted hereunder are not "incentive stock options"
within the meaning of Section 422 of the Internal Revenue Code of 1986.
B. STRUCTURE OF THE PLAN.
The Plan shall consist of a "Director Option Grant Program,"
described in Section II. Under the Director Option Grant Program, all of
the Directors will be granted options to purchase Shares and any other
stock or security resulting from the adjustment thereof or substitution
therefor.
C. GENERAL GRANTS AND RIGHTS.
The right to acquire Shares pursuant to the Director Option Grant
Program shall be referred to as a "Director Option." Options granted under
the Director Option Grant Program shall be referred to herein as "Options."
II. DIRECTOR OPTION GRANT PROGRAM
A. ELIGIBILITY.
Each individual serving as a Director shall be eligible to
participate in the Director Option Grant Program and be granted Director
Options.
B. GRANTS.
Each of Messrs. Robert T. Geras, Robert A. Barish, M.D., Dennis
Brown, Michael D. Dunham, Douglas S. Harrington, M.D., and Kevin E. Moley,
the later of the day following the closing of the Company's initial public
offering of Common Stock (the "IPO") or their acceptance and admission as a
member of the Company's Board of Directors, shall automatically receive an
option to acquire 10,000 Shares. Subsequent grants of Options under the
Plan shall be made from time-to-time subject to the terms hereof and such
other terms and conditions as shall be set by the Board.
C. OPTION PERIOD.
The length of each Director Option shall be ten years and one day
from the day of grant. Each Director Option not exercised shall terminate
at the end of its term if not subject to earlier termination as herein
provided or as provided in the Option Agreement.
<PAGE>
D. OPTION PRICE.
The price per share at which Shares may be acquired on exercise of a
Director Option shall be one hundred percent (100%) of the Fair Market
Value on the date of grant; provided however, the price per share at which
the initial 60,000 Shares may be acquired shall be the IPO price for the
Shares sold pursuant to its initial public offering.
III. SHARES SUBJECT TO THE PLAN.
A. NUMBER OF SHARES.
The stock subject to the Options granted under this Plan shall be the
Company's Common Stock and any other stock or security resulting from the
adjustment thereof or substitution therefor as described in
Section III.G.(3). There shall be 100,000 Shares, subject to adjustment
under Section III.G.(3), reserved and available for purchase on exercise of
Options granted under the Plan. The Shares issued upon exercise of an
Option may be authorized and unissued Shares, or Shares issued and re-
acquired by the Company.
B. RELEASE OF SHARES.
If any Option granted hereunder shall be canceled, expire or
terminate for any reason without having been exercised in full, the Shares
subject to the Option shall not thereafter be available for grant under
this Plan except if and to the extent issued to an Optionee under the Plan
in replacement for outstanding Options surrendered by the Optionee.
C. RESTRICTIONS ON SHARES.
All Shares issued on exercise of an Option shall be subject to the
terms and conditions specified herein and to those other terms, conditions
and restrictions contained in the Option Agreement, as well as applicable
federal and state laws, rules and regulations including, as may be
required, approval by any government or regulatory agency. The Company may
issue or deliver certificates for Shares prior to: (i) listing the Shares
on any stock exchange on which the Common Stock may then be listed; (ii)
registering or qualifying the Shares under federal or state law; provided,
however, the Company shall not issue or deliver certificates for Shares
prior to an Optionee tendering to the Company those documents or payments
as the Board may deem necessary to satisfy any applicable withholding
obligation for the Company to obtain a deduction on its federal, state or
local tax return with respect to the exercise of an Option. The Company
may cause any Common Stock to be properly marked with a legend or other
notation reflecting the limitations on transfer provided in the Plan, the
Option Agreement or as the Board may otherwise reasonably require to comply
with law. Fractional Shares shall not be delivered, but shall be rounded
to the next lower whole number of Shares.
D. STOCKHOLDER RIGHTS.
An Optionee shall not have any rights of a stockholder as to Shares
subject to an Option until, after properly exercising the Option, the
Shares are recorded on the Company's official stockholder records as issued
or transferred to the party exercising the Option. No adjustment shall be
made for cash dividends or other rights if the record date for the cash
dividend or other right is prior to the date the Shares are recorded as
issued or transferred to the party exercising the Option, in the Company's
official stockholder records, except as provided in Article III.G.3. The
Company shall record the Shares as issued or transferred in an expeditious
manner.
<PAGE>
E. STOCK VALUATION.
Any determination of the value or closing price of Common Stock
required by the Plan shall be determined in accordance with the following
provisions, as applicable (which value or closing price shall be referred
to herein as the "Fair Market Value per Share," or for a group of Shares a
total "Fair Market Value"):
(1) if, on the relevant date, the Common Stock is traded on a
national or regional securities exchange or on the NASDAQ National Market
System, on the basis of the closing sale price on the principal securities
exchange on which the Common Stock may then be traded or, if there is no
sale on the relevant date, then on the last previous day on which a sale
was reported;
(2) if, on the relevant date, the Common Stock is not listed
on any securities exchange or traded on the NASDAQ National Market System,
but otherwise is publicly-traded and reported on NASDAQ, on the basis of
the mean between the closing bid and asked quotations in the over-the-
counter market as reported by NASDAQ; but if there are no bid and asked
quotations in the over-the-counter market as reported by NASDAQ on that
date, then the mean between the closing bid and asked quotations in the
over-the-counter market as reported by NASDAQ on the last previous day any
bid and asked prices were quoted; and
(3) if, on the relevant date, the Common Stock is not
publicly-traded as described in (i) or (ii), in good faith by the Board.
F. OPTION PROVISIONS.
(1) OPTION AGREEMENT. Each Option granted hereunder shall be
evidenced by a written option agreement ("Option Agreement"), specifying,
among other things, the Optionee, the period for which the Option
thereunder is granted, the number of Shares for which the Option is
granted, the Option price and the exercise schedule. The grant and
exercise of Options hereunder are subject to all applicable federal, state
and local laws, rules and regulations and, if required, any approvals by
any government or regulatory agency.
(2) EXERCISE OF OPTIONS. Director Options granted hereunder
shall vest and be exercisable in installments as follows: to the extent of
one third of the number of Shares commencing on each of the first, second
and third anniversaries of the date of grant, provided that the Optionee is
either serving as a Director on the applicable anniversary date, which
provision may be waived in the sole discretion of a majority of the other
then remaining members of the Board of Directors if such director is no
longer serving on the applicable anniversary. If the Optionee does not in
any given period purchase all of the Shares subject to the Option, the
Optionee's right to purchase any Shares not purchased in the period shall
continue until the expiration or sooner termination of the Option, except
to the extent provided otherwise in the Option Agreement. To exercise an
Option, an Optionee shall give written notice to the Company's Treasurer at
the Company's office at 1126 South 70th Street, Milwaukee, Wisconsin,
53214-3151 (or the office which is the successor main office or which is
otherwise designated as the office to which notice is to be given) of the
number of Shares to be acquired and make any arrangements with the
Treasurer as are acceptable to the Treasurer to satisfy the Optionee's
federal, state and local tax withholding obligations and satisfy the
Optionee's obligation under the Plan and the Option Agreement.
(3) CANCELLATION OF OPTIONS. A Director Option is
exercisable by an Optionee only so long as the director continues to hold
office and for a period of thirty days thereafter; provided, however, that
if the director ceases to hold office due to death, permanent and total
disability or expiration of the director's term of office after the
director attains his 65th birthday, all Options granted under the Plan
shall be exercisable.
<PAGE>
(4) PAYMENT OF PURCHASE PRICE ON EXERCISE. Unless otherwise
determined by the Board, the purchase price of the Shares acquired on
exercise of an Option shall be paid to the Company at the time of exercise
in cash, Shares or any other form of payment acceptable to the Board.
(5) NONASSIGNABILITY. Options are not transferable except by
will or the laws of descent and distribution, and are exercisable during an
Optionee's lifetime only by the Optionee, or the appointed guardian or
legal representative of the Optionee.
(6) LOCK UP AGREEMENT. The shares of Common Stock purchased
pursuant to an Option shall not be sold or otherwise transferred (except to
the Option holder's immediate family members by gift, will or intestacy),
whereby such permitted transferee shall continue to be subject to the
restrictions of this subchapter III F(6) for a period of 455 days
following the date of acceleration of effectiveness of a registration
statement for the initial public offering of Common Stock of the Company.
G. PROVISIONS APPLICABLE TO THE PLAN.
(1) TERMINATION OF PLAN. This Plan shall terminate on June
30, 2012, or at such earlier time as determined by the Board. No Options
shall be granted under the Plan after that date. Any Options outstanding
under the Plan at the time of its termination shall remain in effect until
they shall have been exercised, expired or otherwise canceled or terminated
as provided herein or in the Option Agreement. Termination of the Plan
shall not diminish the authority granted to the Board to administrate the
Plan.
(2) INVESTMENT REPRESENTATION. If the disposition of Common
Stock acquired on exercise of any Option is not covered by a then current
registration statement under the Securities Act of 1933, as amended (the
"Securities Act"), and is not otherwise exempt from registration, the
acquired Shares shall be restricted against transfer to the extent required
by the Securities Act or regulations thereunder. Each Option Agreement
shall contain a requirement that, on demand by the Board, the individual
exercising an Option shall state in writing, as a condition precedent to
each exercise, that the Optionee is acquiring the Common Stock for
investment only and not for resale or with a view to distribution. The
Board may set forth in an Option Agreement other terms and conditions
relating to the registration or qualification of the Common Stock under
federal or state securities laws as it desires.
(3) EFFECT OF CERTAIN CHANGES.
a. ADJUSTMENTS. If the Company declares a stock dividend,
stock split, combination or exchange of shares, recapitalization or other
change in the capital structure (including, but not limited to, a split-up,
spin-off, split-off or distribution to Company stockholders other than a
normal cash dividend), sells all or a substantial portion of its assets (if
measured on either a stand-alone or consolidated basis), undertakes a
reorganization, rights offering, share offering, partial or complete
liquidation, or any other corporate transaction or event involving the
Company and having an effect similar to any of the foregoing, then the
Board may adjust or substitute, as the case may be, the number of Shares
available for Options under the Plan, the number of Shares covered by
outstanding Options, the exercise price per Share of outstanding Options,
any target Fair Market Value per Share that the Common Stock is required to
reach for all or a portion of any Options to vest, and any other
characteristics or terms of the Options as the Board deems necessary or
appropriate to equitably reflect the effects of those changes to the Option
holders; provided, however, that any fractional Shares resulting from the
adjustment shall be eliminated by rounding to the next lower whole number
of Shares with appropriate payment for the fractional Shares as determined
by the Board. The Board may waive any limitations set forth in or imposed
pursuant to the terms and conditions of the Plan or an Option Agreement so
that all Options,
<PAGE>
from and after a date prior to the effective date of an event
specified above or a Change in Control (as defined below), shall be
exercisable in full.
b. DISSOLUTION, LIQUIDATION, CORPORATE SEPARATION OR
DIVISION. If the Board proposes to dissolve or liquidate the Company or
the Company is involved in any other corporate transaction or event and
having effects on the Options similar to any of the foregoing, the Board
may, in addition to the provisions of this SECTION III.G.(3)(A), terminate
each outstanding Option granted under the Plan as of a date fixed by the
Board; provided, however, that not less than thirty (30) days prior written
notice of the date so fixed shall be given to each Optionee (or
Beneficiary), who shall have the right, during the thirty (30) days
preceding such date, to exercise all Options, whether or not otherwise
exercisable, as to all or any part of the Shares covered thereby.
c. MERGER, CONSOLIDATION, OR SALE OF ASSETS. If the Company
is merged into or consolidated with another corporation under circumstances
where the Company is not the surviving corporation, or the Company sells or
otherwise disposes of all or a substantial portion of its assets or is
involved in any other transaction or event which has an effect on the
Shares or Options similar to the foregoing, then in addition to the
provisions of this SECTION III.G.(3), all Options outstanding under the
Plan shall become exercisable at that time and the Board may cancel all
outstanding Options as of the effective date of any transaction or event;
provided that not less than thirty (30) days prior written notice of the
date so fixed for cancellation shall be given to each Optionee (or
Beneficiary), who shall have the right, during the thirty (30) days
preceding the effective date of the transaction or event, to exercise all
Options, whether or not otherwise exercisable, as to all or any part of the
Shares covered thereby.
d. CERTAIN MERGERS AND CONSOLIDATIONS. This SECTION
III.G.(3) shall not apply to a merger or consolidation in which the Company
is the surviving corporation and Shares are not converted into or exchanged
for stock, securities of any other corporation, cash or any other thing of
value.
e. DEFINITION OF COMMON STOCK. In the event of a change in
the Company's Common Stock as presently constituted, the Shares resulting
from any change shall be deemed to be the Common Stock within the meaning
of the Plan.
f. DETERMINATION OF THE BOARD. The Board shall make all
adjustments required under this SECTION III.G.(3). All adjustments shall
be final, binding and conclusive.
g. LIMITATIONS UNDER THIS SECTION III.G.(3). The grant of
an Option pursuant to the Plan shall not in any way effect the Company's
right or power to make adjustments, reclassifications, reorganizations or
changes to its capital or business structures or to merge or to consolidate
or to dissolve, liquidate, sell or transfer all or part of its business or
assets.
(4) WITHHOLDING OBLIGATIONS.
The Optionee or Beneficiary may satisfy any withholding
obligation under the Plan or an Option Agreement by requesting the Company
to withhold and not transfer or issue Shares with a fair market value equal
to the withholding obligation, otherwise issuable or transferable to the
Optionee pursuant to the exercise of an Option. The provisions of this
SECTION III.G.(4) shall apply and be available to any Optionee who, on the
date of exercise of an Option may be subject, in the Company's opinion, to
Section 16(b) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and the rules and regulations thereunder (a "Section 16(b)
Optionee") only if, and to the extent that: (i) the Section 16(b) Optionee
<PAGE>
requests withholding of the Shares not earlier than six (6) months
subsequent to the date of the grant of the Option; or (ii) the election by
the Section 16(b) Optionee otherwise complies with the exemptive provisions
of Rule 16b-3 under the Exchange Act as determined in the sole opinion of
the Company's general counsel. If an Optionee is issued Shares without
making an election as described in this SECTION III.G.(4) and if the date
on which the amount of tax withholding is determined is deferred until at
least six months after the exercise date of the Option, the Board may
require as a condition to issuance of Shares that the Optionee tender to
the Company the proper number of Shares to satisfy the withholding
obligation on the date the tax withholding is determined. Any right or
election of an Optionee under this SECTION III.G.(4) shall be subject to
the approval of the Board. With respect to persons subject to Section 16
of the Exchange Act, transitions under this Plan are intended to comply
with all applicable conditions of Rule 16b-3 or its successors under the
Exchange Act. To the extent any provision of this Plan or any action by
the Board fails to so comply, it shall be deemed null and void, to the
extent permitted by law and deemed advisable by the Board.
(5) NOTICE TO THE COMPANY OF OPTIONEE'S ELECTION.
Any Optionee exercising an election under Section 83 of the
Code to have the receipt of Shares hereunder taxed currently, without
regard to the restrictions imposed under the Plan or an Option Agreement or
law, shall give notice to the Company of the election immediately upon
making the election.
H. INDEMNIFICATION OF THE BOARD.
In addition to such other rights of indemnification as they may have
as Board members, and to the extent permitted by law, the members of the
Board shall be indemnified and held harmless by the Company and each direct
or indirect subsidiary of the Company against the reasonable expenses,
including attorneys' fees, actually and necessarily incurred in connection
with the defense of any action, suit or proceeding, or in connection with
any appeal thereof, to which they or any of them may be a party by reason
of any action taken or failure to act under or in connection with the Plan
or any Option granted thereunder, and against all amounts paid by them in
settlement thereof (provided the settlement is approved by the Company's
legal counsel) or paid by them in satisfaction of a judgment in any action,
suit or proceeding, except in relation to matters as to which it shall be
adjudged in the action, suit or proceeding that the Board member is liable
for gross negligence or gross misconduct in the performance of its duties;
provided that within sixty (60) days after institution of any action, suit
or proceeding a Board member shall in writing offer the Company the
opportunity, at its own expense, to handle and defend the action.
I. PLAN BINDING ON SUCCESSORS.
Except as provided herein, the Plan shall be binding on the
successors and assigns of the Company.
J. INTERPRETATION AND GOVERNING LAW.
Whenever necessary or appropriate in this Plan and where the context
admits, the singular term and the related pronouns shall include the plural
and the masculine and feminine gender. The Plan shall be construed and
enforced according to the internal laws of the State of Wisconsin.
* * * * *
<PAGE>
MERGE TECHNOLOGIES INCORPORATED
1998 DIRECTOR STOCK OPTION AGREEMENT
DIRECTOR OPTION GRANT PROGRAM
THIS OPTION AGREEMENT is made as of the 4th day of February, 1998
by and between MERGE TECHNOLOGIES INCORPORATED (the "Company"), and
_____________ ("Optionee"). All definitions contained in the Merge
Technologies Incorporated 1998 Stock Option Plan for Directors ("Plan") are
hereby incorporated by reference and shall have the same meanings in this
Agreement as are contained in the Plan.
WHEREAS, Optionee serves as a director of the Company and, in his
capacity as a director, provides valuable services to the Company, and
whereas by affording an opportunity to purchase Shares (as defined below),
the Company desires to provide additional motivation to the Optionee to
achieve long-term growth in stockholder equity.
NOW, THEREFORE, in consideration of the premises, the mutual
covenants hereinafter set forth, and other good and valuable consideration,
the Company and Optionee agree as follows:
1. Grant of Option. Subject to the terms and conditions of
the Plan and this Option Agreement, the Company hereby grants to the
Optionee the option to purchase an aggregate of 10,000 shares of the
Company's Common Stock ("Shares"). The Options granted hereunder are
designated as non-qualified stock options and are not incentive stock
options as described in Section 422 of the Internal Revenue Code of 1986,
as amended (the "Code").
2. Purchase Price. The price per share at which Shares may be
acquired on exercise shall be $6.00.
3. Exercise Schedule. Subject to becoming exercisable earlier
as provided in the Plan, and subject to the provisions of Section 4 of this
Agreement, the Options granted hereunder shall vest and be exercisable in
installments as follows: to the extent of one-third of the number of
Shares commencing on each of the first, second and third anniversaries of
the date of grant, provided that the Optionee is serving as a Director on
the applicable anniversary date, which provision may be waived in the sole
discretion of a majority of the other then remaining members of the Board
of Directors if such director is no longer serving on the applicable
anniversary.
4. Period and Cancellation. The exercise period of each
Option shall terminate ten years and one day from the date of grant, unless
sooner terminated as provided in this Option Agreement or under the Plan.
The exercise period of each Option shall also terminate thirty (30) days
following termination of the Optionees term of office as a director
("Termination") except if:
(i) the Termination is due to: (a) the death or
permanent and total disability of the Optionee; or (b) the expiration of
the Optionee's term of office as a director after the Optionee attains his
65th birthday; then any unexercised Options to acquire Shares will become
immediately exercisable (without regard to meeting or complying with the
other vesting provisions of this Option Agreement or the Plan), as of the
date of death, disability or expiration of the Optionees term of office as
a director and may be exercised by the Optionee, the Optionee's legal
representative or the Optionee's Beneficiary(ies), as the case may be, at
any time within one year in the case of (a) and ninety (90) days in the
case of (b);
<PAGE>
(ii) the Termination is due to any reason other than as
described in subsection (i) above, any unexercised Options which have
vested pursuant to the terms of this Option Agreement and the Plan on or
before the Termination must be exercised by the Optionee, his or her legal
representative or his or her Beneficiary(ies) within thirty (30) days after
the date of termination; or
(iii) the Termination is in the manner described in
subsection (i) above (other than by death) and the Optionee dies prior to
the expiration of the applicable exercise period set forth therein, the
Options may be exercised by his or her legal representative or his or her
Beneficiary(ies) within the remainder of the period that would have been
applicable to the Optionee prior to the Optionee's death.
Termination of the exercise period shall result in termination and
cancellation of the Options. For purposes of this Option Agreement,
"disability" of the Optionee shall be deemed to have occurred if the
Optionee has suffered permanent and total physical or mental illness,
injury or infirmity of such a nature, degree or effect as to render the
Optionee substantially unable to perform his or her duties at the same
level as previously performed for the Company. The Board shall determine,
according to the facts then available to them, whether and when disability
has occurred and the date of disability shall be the date of any such
determination.
5. Method of Option Exercise. An Optionee shall exercise
Options by delivering written notice of intent to exercise to the Company's
Treasurer or Chief Financial Officer at the Company's principal office
located at 1126 South 70th Street Suite S107B, Milwaukee, Wisconsin 53214-
3151 (or the office which is the successor main office or which is
otherwise designated as the office to which notice is to be given as the
Board may direct). Each notice shall: (i) state the Optionee's election
to exercise the Option and the number of Shares in respect of which the
Option is being exercised; (ii) be signed by the person or persons
exercising the Option; (iii) be accompanied by proof, reasonably
satisfactory to the Company's Treasurer or Chief Financial Officer, of the
right of that person or persons to exercise the Option if the Option is
being exercised by any person or persons other than the Optionee; and (iv)
be accompanied by payment, in cash, Shares or any other form of payment
acceptable to the Board.
An Option shall not have been exercised unless all the preceding
provisions of this paragraph shall have been complied with and, for all
purposes of this Option Agreement, the date of the exercise of the Option
with respect to any particular Shares shall be the date on which the
notice, proof (if required), and payment shall all have been received by
the Treasurer or Chief Financial Officer. The certificate or certificates
for the Shares as to which the Option shall have been so exercised shall be
registered in the name of the person or persons so exercising the Option
and shall be delivered to or upon the written order of the person or
persons exercising the Option as soon as practicable after receipt by the
Treasurer or Chief Financial Officer of the notice, proof (if required) and
payment. Delivery shall be made at the principal office of the Company, or
at any other place as the Board shall have designated by notice. The
purchase price of any Shares as to which Options shall be exercised shall
be paid in full at the time of the exercise.
6. Change in Control. Notwithstanding the provisions of Section
3 of this Agreement, if while unexercised Options remain outstanding under
the Option Agreement and an Optionee's service as a director of the Company
is terminated due to a Change in Control (as defined below), all
outstanding Options shall become exercisable from and after the date of the
termination of the Optionee's employment.
<PAGE>
For the purposes of this Section 6, the term "Change in Control"
shall mean that the members of the Board of Directors of the Company as of
the date this Agreement is executed fail to constitute a majority of the
members of the Board of Directors of the Company; provided, however, that
if the Optionee has consented to the appointment or election of an
individual who becomes a new member of the Board of Directors, for the
purposes of this paragraph, that new member shall be treated as if he were
a member of the Board of Directors as of the date this Agreement is
executed.
7. No Rights as Stockholder. The Optionee shall have no
rights as a stockholder with respect to Shares covered by the Option until
the date of issuance of a stock certificate for the Shares; no adjustment
for cash dividends, or otherwise, shall be made if the record date therefor
is prior to the date of exercise of the Option.
8. Requirements of Law. The Company may issue or deliver
certificates for Shares prior to: (i) listing of the Shares on any stock
exchange on which the Shares may then be listed; (ii) registering or
qualifying the Shares under federal or state law; provided, however, the
Company shall not issue or deliver certificates for Shares prior to an
Optionee tendering to the Company those documents or payments as the Board
may deem necessary to satisfy any applicable withholding obligation for the
Company to obtain a deduction on its federal, state or local tax return
with respect to the exercise of an Option. If the disposition of Shares
acquired on exercise of any Option is not covered by a then current
registration statement under the Securities Act and is not otherwise exempt
from registration, the acquired Shares shall be restricted against transfer
to the extent required by the Securities Act or regulations thereunder.
Furthermore, on demand by the Board, the individual exercising an Option
shall state in writing, as a condition precedent to each exercise, that the
Optionee is acquiring the Shares for investment only and not for resale or
with a view to distribution. In addition, any certificates for Shares
issued pursuant to the terms of this Option Agreement or the Plan shall
bear the following or similar legend:
THE SHARES OF COMMON STOCK REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES
ACT"), OR ANY STATE SECURITIES LAWS, AND MAY NOT BE SOLD, TRANSFERRED OR
OTHERWISE DISPOSED OF BY THE HOLDER EXCEPT PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT FILED UNDER THE ACT WITH RESPECT THERETO OR IN
ACCORDANCE WITH AN OPINION OF COUNSEL IN FORM AND SUBSTANCE SATISFACTORY TO
THE ISSUER THAT AN EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE.
No Shares may be sold, transferred, or otherwise alienated or hypothecated
so long as the certificate evidencing the Shares bears this legend.
9. Cause to be Registered Under the Act. The Board may, in its
discretion, register the Shares acquired by Optionee under the Securities
Act. Further, if at any time the Company proposes to register any of its
equity securities under the Securities Act, whether or not for its own
account, and there exist Shares which cannot be sold under an existing
registration statement or Rule 144(k) (or any similar provision then
enforced), then the Company shall give written notice of the proposed
filings to the holders of the Shares at least 20 days before the
anticipated filing date. This notice shall offer the holders the
opportunity to register the Shares. The Company shall register all Shares
with respect to which the Company has received written requests for
inclusion therein within 15 business days after notice has been duly given
to the applicable holder. The holder of restricted Shares shall be
permitted to withdraw all or any part or the restricted Shares from this
registration at any time prior to the effective date of the registration.
<PAGE>
10. Non-transferability. The Option shall not be assigned,
transferred (except as herein provided), pledged, or hypothecated in any
way (whether by operation of law or otherwise), other than by will or the
laws of descent and distribution. The Option is exercisable during an
Optionee's lifetime only by the Optionee or the appointed guardian or legal
representative of the Optionee, and no Option shall be subject to
execution, attachment, or similar process. Any attempted assignment,
transfer, pledge, hypothecation, or other disposition contrary to the
provisions hereof, and the levy of any attachment or similar process upon
the Option shall be null and void and without effect. The Company shall
have the right to terminate the Option upon any assignment, transfer,
pledge, hypothecation, other disposition of the Option, or level of
attachment or similar process, by notice to that effect to the person then
entitled to exercise the Option; provided, however, that termination of the
Option hereunder shall not prejudice any rights or remedies which the
Optionee, the Company or any subsidiary of the Company may have under this
Option Agreement or otherwise.
11. Changes in Company's Capital Structure. The existence of
the Option shall not affect in any way the right or authority of the
Company or its stockholders to make or authorize any or all adjustments,
recapitalizations, reorganizations or other changes in the Company's
capital structure or its business, or any merger or consolidation of the
Company, or any issue of bonds, debentures, preferred or prior preference
stock ahead of or affecting the Common Stock or the rights thereof, or the
dissolution or liquidation of the Company, or any sale or transfer of all
or any part of its assets or business, or any other corporate act or
proceeding, whether of a similar character or otherwise.
12. Board Action Final. Any dispute or disagreement which
shall arise under, as a result of, or in any way relate to the
interpretation or construction of this Agreement or the Plan shall be
determined by the Board. Any such determination made hereunder shall be
final, binding, and conclusive for all purposes.
13. Withholding. The Optionee and Company agree that the
Company shall have no obligation to issue or transfer Shares upon the
exercise of the Option, unless and until the Optionee or Beneficiary shall
have reasonably satisfied the obligation of the Company, or with respect to
the withholding of federal, state or local taxes, or in order to reasonably
sustain a right of the Company to a tax deduction under federal, state or
local law with respect to the exercise of an Option. At the election of
the Optionee or the Beneficiary, as the case may be, the Company's
withholding obligation may be satisfied by the Optionee or Beneficiary
tendering cash, or Shares previously owned by the Optionee or directing
that a number of Shares be withheld from issuance upon the exercise of an
Option (or any combination of any of the foregoing) as the Board reasonably
determines necessary to satisfy the obligation of the Company, or in order
to sustain a right of the Company to a tax deduction under federal, state
or local law with respect to the exercise of an Option.
14. Term of Directorship. The Plan, this Option Agreement and
any Option granted under the Plan and this Option Agreement shall not
confer upon any Optionee any right to continued service as a director of
the Company, nor shall they interfere in any way with the right of the
Company, to, subject to other agreements with the Optionee, terminate an
Optionee's term of service as a director at any time.
15. Plan Controlling. This Option Agreement is executed
pursuant to the provisions of the Plan and is subject to all of the
provisions of the Plan which shall be controlling.
16. Successors and Assigns. This Option Agreement shall inure
to the benefit of and be binding upon each successor and assign of the
Company. All obligations imposed upon the Optionee or his Beneficiary and
all rights granted to the Company, hereunder or as stipulated in the Plan
shall be binding upon the Optionee's or the Beneficiary's heirs, legal
representatives, and successors.
<PAGE>
17. Choice of Laws. This Agreement shall be construed and
enforced according to the internal laws of the State of Wisconsin.
IN WITNESS WHEREOF, the Company has caused this Agreement to be
executed by its duly authorized officer, and the Optionee has hereunto set
his hand, as of the day and year first above written.
MERGE TECHNOLOGIES INCORPORATED
By:
________________________________________
Name:
________________________________________
Title:
________________________________________
________________________________________
[Name of Optionee]
