As filed with the Securities and Exchange Commission
on August 25, 1998 <STRIKEOUT>July 13, 1998</STRIKEOUT>
Registration No. 333-58973
WASHINGTON, D.C. 20549
PRE-EFFECTIVE AMENDMENT NO. 1 TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
MERGE TECHNOLOGIES INCORPORATED
----------------------------------------------------------
(Name of small business issuer as specified in its charter)
WISCONSIN 3669 39-1600938
- ------------------------ ----------------- -----------------
(State of Incorporation) (Primary Standard (I.R.S. Employer
Industrial Identification
Classification Number)
Code Number)
1126 SOUTH 70TH STREET
SUITE S107B
MILWAUKEE, WISCONSIN 53214-3151
(414) 475-4300
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
WILLIAM C. MORTIMORE
PRESIDENT
1126 SOUTH 70TH STREET
SUITE S107B
MILWAUKEE, WISCONSIN 53214-3151
(414) 475-4300
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
COPY TO:
MITCHELL D. GOLDSMITH, ESQ.
Shefsky & Froelich Ltd.
444 N. Michigan Avenue, Suite 2500
Chicago, IL 60611
(312)527-4000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From
time to time after the effectiveness of this registration statement.
<STRIKEOUT>From time to time after the effectiveness of this registration
statement but not before August 1, 1998.</STRIKEOUT>
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, as amended, check the following box: [ X ]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
<PAGE>
<STRIKEOUT>
<TABLE>
CALCULATION OF REGISTRATION FEE
<CAPTION>
TITLE OF EACH CLASS PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
OF SECURITIES TO AMOUNT TO OFFERING PRICE AGGREGATE OFFERING REGISTRATION
BE REGISTERED BE REGISTERED PER SHARE (1) PRICE FEE
- ------------------ ------------- --------------- ------------------ ------------
<S> <C> <C> <C> <C>
Common Stock 108,942 $3.50 $381,297 $112.48
<FN>
(1) Estimated solely for the purpose of determining the registration fee pursuant to Rule 457 promulgated
under the Securities Act of 1933, as amended.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS
EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF
1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO
SAID SECTION 8(a), MAY DETERMINE.
</TABLE>
</STRIKEOUT>
<PAGE>
PROSPECTUS
108,942 Shares
Merge Technologies Incorporated
Common Stock
This Prospectus relates to the resale of up to an aggregate of 108,942
shares (the "Shares") of common stock, par value $.01 per share (the
"Common Stock"), of Merge Technologies Incorporated, a Wisconsin
corporation (the "Company"), which may be offered (the "Offering") for sale
by Sirrom Capital Corporation ("Sirrom" or the "Selling Stockholder"), as
described in this Prospectus. Unless the context otherwise requires, the
terms "Merge" and the "Company" include Merge Technologies Incorporated, a
Wisconsin corporation, and its subsidiary, Signal Stream, Inc., a Wisconsin
corporation ("SSI"). The Common Stock offered hereby was acquired by
Sirrom when it exercised a warrant issued for nominal consideration as part
of a private financing transaction between the Company and Sirrom. See
"Certain Relationships and Related Transactions." The Common Stock is
included for quotation on the Nasdaq SmallCap Market under the symbol
"MRGE." On August 21, 1998 <STRIKEOUT>July 10, 1998</STRIKEOUT>,
the last reported price for the Common Stock as reported by Nasdaq was
$2.38 <STRIKEOUT>$3.50</STRIKEOUT> per share. As of August 21,
1998 <STRIKEOUT>July 10, 1998</STRIKEOUT>, the Company had a total of
5,778,216 shares of Common Stock outstanding.
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE
"RISK FACTORS" BEGINNING ON PAGE 3.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC (1) DISCOUNT (2) SIRROM (3)
Per Share . . . . . . $3.50 n/a $3.50
Total . . . . . . . . $381,297 n/a $381,297
(1) Reflects the last reported closing price of the Common Stock on
the Nasdaq SmallCap Market prior to the date of this Registration
Statement. The actual price at which Common Stock will be sold may vary.
(2) This Offering does not involve an underwriter.
(3) Reflects the last reported closing price of the Common Stock on the
Nasdaq SmallCap Market prior to the date of this Registration Statement.
The expenses of the Offering, estimated to be $15,612, including legal,
accounting and registration fees, are payable by the Company. See "Plan of
Distribution."
The date of this Prospectus is ______ __, 1998.
<PAGE>
ADDITIONAL INFORMATION
The Company is subject to the reporting and other requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and files
reports, proxy materials and other information with the Securities and
Exchange Commission (the "Commission"). The Company has filed with the
Commission a Registration Statement (of which this Prospectus is a part)
(File No. 333-58973 ) (the "Registration Statement") under the
Securities Act of 1933, as amended (the "Securities Act"), with respect to
the securities offered hereby. This Prospectus does not contain all of the
information set forth in the Registration Statement, certain portions of
which have been omitted as permitted by the rules and regulations of the
Commission. Statements contained in this Prospectus as to the content of
any contract or other document are not necessarily complete, and in each
instance reference is made to a copy of such contract or other document
filed as an exhibit to the Registration Statement or otherwise filed with
the Commission, each such statement being qualified in all respects by such
reference. For further information, reference is hereby made to the
Registration Statement and to the schedules and exhibits thereto, which can
be inspected and copied at the public reference facilities of the
Commission at its principal office at Judiciary Plaza, 450 Fifth Street,
N.W., Room 1024, Washington, D.C. 20549, and at the Commission's regional
offices at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661, and at 7 World Trade Center, Suite 1300, New York, New York
10048. Copies of each such document may be obtained at prescribed rates
from the Public Reference Section of the Commission at its principal office
at Judiciary Plaza, 450 Fifth Street, N.W., Room 1024, Washington, D.C.
20549. In addition, such material can also be obtained from the
Commission's Web site at http://www.sec.gov. The Common Stock is included
for quotation on the Nasdaq SmallCap Market and copies of reports and
other material concerning the Company can be inspected at the offices of
the National Association of Securities Dealers, Inc. at 1801 K Street,
N.W., 8th Floor, Washington, D.C. 20006.
<STRIKEOUT>
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Company incorporates by reference herein the following documents
filed pursuant to the Exchange Act under the Company's Exchange Act File
No. 0-29486: (i) the Company's Annual Report on Form 10-KSB for the fiscal
year ended December 31, 1997; (ii) the Company's quarterly report on Form
10-QSB for the quarter ended March 31, 1998; and (iii) the Company's Proxy
Statement dated May 18, 1998. All reports and other documents filed by the
Company pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act
subsequent to the date of this Prospectus also shall be deemed to be
incorporated by reference herein and to be a part hereof from the date of
filing these reports and documents. Any statement incorporated or deemed
to be incorporated herein shall be deemed to be modified or superseded for
purposes of this Prospectus to the extent that any statement contained
herein or in any other subsequently filed document which also is or is
deemed to be incorporated by reference herein modifies or supersedes this
statement. Any statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this
Prospectus. The Company will not update this Prospectus for events
occurring subsequent to the date of this Prospectus.
The Company hereby undertakes to provide without charge to each
person to whom a copy of this Prospectus has been delivered, upon written
or oral request of the person, a copy of any or all of the foregoing
documents incorporated herein by reference (other than exhibits to
documents, unless these exhibits are specifically incorporated by reference
into the document). Requests for these documents should be made to the
Investor Relations Department at the Company's principal executive offices
located at 1126 South 70th Street, Suite S107B, Milwaukee, Wisconsin
53214-3151; telephone number (414) 475-4300.
</STRIKEOUT>
<PAGE>
MergeMVP [trademark], MergeXPI [trademark], MergeAPS [trademark],
MergeARK [trademark], MergeCOM-3 [trademark], MergeLINK [trademark],
MergeWorks [trademark], CaseWorks [trademark], MergeVPI [trademark],
MergeDPI [trademark], MergeXPI [trademark], MergeReader [trademark],
MergeBOX [trademark] and ReportManager [trademark], among other marks, are
trademarks or service marks of the Company.
RISK FACTORS
PROSPECTIVE INVESTORS SHOULD CONSIDER CAREFULLY, IN ADDITION TO THE OTHER
INFORMATION CONTAINED IN THIS PROSPECTUS, THE FOLLOWING RISK FACTORS.
LACK OF CONSISTENT PROFITABILITY; HISTORY OF OPERATING LOSSES AND WORKING
CAPITAL DEFICITS; SUBSTANTIAL INTANGIBLE ASSETS
Although the Company experienced significant revenue growth from
fiscal 1995 through fiscal 1997, it incurred net losses of approximately
$209,000 in fiscal 1997, $114,000 in fiscal 1996 and approximately $574,000
in fiscal 1995. The Company incurred a net loss of approximately
$740,000 for the six months ended June 30, 1998 and a net profit of
approximately $201,000 for the six months ended June 30, 1997.
<STRIKEOUT>$57,000 for the three months ended March 31, 1998 and
approximately $45,000 for the three months ended March 31, 1997</STRIKEOUT>
There can be no assurance that revenue growth will continue or that the
Company will consistently achieve profitability in the future. As of
June 30, 1998, the Company had working capital of approximately
$8,183,000. <STRIKEOUT>As of March 31, 1998, the Company had working
capital of approximately $9,340,000.</STRIKEOUT> However, the Company
experienced working capital deficits of approximately $1,972,000 in 1997,
$438,000 in 1996 and $1,243,000 in 1995. The Company had intangible
assets of approximately $3,287,000 as of June 30, 1998. <STRIKEOUT>The
Company had intangible assets of approximately $3,057,000 as of March 31,
1998.</STRIKEOUT> See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
OPERATING RESULTS MAY FLUCTUATE
The Company's operating results are subject to quarterly and other
fluctuations due to a variety of factors. A significant portion of the
Company's business is derived from orders placed by OEMs, and the timing of
such orders could cause material fluctuations in the Company's business and
operating results. Other factors that may cause the Company's operating
results to fluctuate include changes in sales volumes through the Company's
distribution channels, changes in the mix of products sold, the timing of
new product announcements and introductions by the Company and its
competitors, market acceptance of new or enhanced versions of the Company's
products, availability and cost of products from the Company's suppliers,
competitive pricing pressures, the gain or loss of significant customers,
increased research and development expense associated with new product
introductions and economic conditions generally or in various geographic
areas. All of the above factors are difficult for the Company to forecast,
and these or other factors can materially affect the Company's operating
results for one quarter or series of quarters. In addition, the Company's
gross margins may decrease in the future as a result of increasing sales of
lower margin products and volume discounts. The Company expects to continue
to increase its operating expenses for personnel and new product
development. If the Company does not achieve increased levels of sales
commensurate with these increased levels of operating expenses, the
Company's business and operating results will be materially adversely
affected. There can be no assurance that the Company will be profitable on
a quarterly or annual basis. Fluctuations in operating results may also
result in fluctuations in the price of the Common Stock. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
<PAGE>
INCREASED CREDIT AND PAYMENT RISKS ASSOCIATED WITH END-USER SALES
The Company currently markets and sells a significant portion of its
products to OEMs. The Company has not, in the past, experienced significant
nonpayment or delays in payment on receivables from these customers.
Increased direct sales to end-users, such as hospitals, may create
delays in payment of receivables to the Company and may also increase the
risk of nonpayment of receivables. <STRIKEOUT>may create delays in
payment of receivables to the Company and may also increase the risk of
nonpayment of receivables.</STRIKEOUT> The Company may bear increased
interest expense if it experiences delays in receipt of payment on
receivables as a result of increased sales directly to end-users as a
percentage of total sales.
COMPANY MUST RESPOND TO TECHNOLOGICAL CHANGE; RISKS OF COMPANY'S
INVOLVEMENT WITH RAPIDLY DEVELOPING TECHNOLOGY
The markets for the Company's products are characterized by rapid
technological advances, product obsolescence, changes in customer
requirements and evolving regulatory requirements and industry standards.
The Company's future prospects will depend in part on its ability to
enhance its medical image networking and management products in a timely
manner and to identify, develop and achieve market acceptance of new
products that address new technologies and standards and meet customer
needs in the medical imaging network market. There can be no assurance that
the Company will be able to respond to technological advances, changes in
customer requirements or changes in regulatory requirements or industry
standards or that the Company will be able to develop and market new
products successfully. Any failure by the Company to anticipate or to
respond adequately to technological developments in its industry, changes
in customer requirements, or changes in regulatory requirements or industry
standards, or any significant delays in the development, introduction or
shipment of products, could have a material adverse effect on the Company's
business and operating results. In anticipation of new product
introductions by the Company or its competitors, customers could refrain
from purchasing the Company's existing products. New products could render
certain of the Company's existing products obsolete. Any of these events
could materially adversely affect the Company's business and operating
results. In addition, third-party payors, such as governmental programs and
private insurance plans, can indirectly affect the pricing or relative
attractiveness of the Company's products by regulating the maximum amount
of reimbursement that they will provide for the taking, storing and
interpretation of medical images. A decrease in the reimbursement amounts
for radiological procedures may decrease the amount which physicians,
clinics and hospitals are able to charge patients for such services. As a
result, the rate of adoption of new technologies may decrease as capital
investment budgets are reduced, thereby significantly reducing the demand
for the Company's products.
BROAD CONTROL BY MANAGEMENT AND DIRECTORS
The executive officers of the Company and members of the Company's
Board of Directors, own 1,827,093 <STRIKEOUT>1,832,619</STRIKEOUT>
shares (inclusive of vested options to acquire an additional
379,073 <STRIKEOUT>362,142</STRIKEOUT> shares) of the Company's
issued and outstanding Common Stock. Consequently, the executive officers
and Directors control 30% of the total voting power of the Company's Common
Stock. By virtue of such ownership, the executive officers and Directors
voting as a group may be able to influence significantly certain matters
with respect to the Company, including without limitation: (i) the election
of all of the Directors; (ii) increases in authorized capital stock; (iii)
the dissolution or merger of the Company or the sale of the Company's
assets; and (iv) discretion over the day-to-day affairs of the Company. See
"Management" and "Principal Shareholders."
<PAGE>
COMPANY DEPENDS ON MAJOR CUSTOMERS
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 68%, 74% and 74% of the
Company's net sales in 1996, 1997 and for the six months ended June 30,
1998, respectively. <STRIKEOUT>Aggregate sales to the Company's ten
largest customers represented approximately 68% , 74% and 77% of the
Company's net sales in 1996, 1997 and for the quarter ended March 31, 1998,
respectively.</STRIKEOUT> 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. For
the six months ended June 30, 1998, Picker
and Konica accounted for
approximately 17% and 26%, respectively, of the Company's net
sales. <STRIKEOUT>For the quarter ended March 31, 1998, Konica and
Picker accounted for approximately 38% and 17%, respectively, of the
Company's net sales.</STRIKEOUT> 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. None of the
Company's customers is subject to any minimum purchase requirements, and
many of the Company's VAR and OEM customers offer competitive systems
manufactured by third parties. Each of the Company's VAR and OEM customers
and dealers can cease marketing the Company's products at its respective
option, and the loss of one or more significant customers could materially
adversely affect the Company's business and operating results. See
"Business -- Sales, Marketing and Distribution."
EXPANSION OF INTERNATIONAL SALES EFFORTS; CURRENCY RISK
An important component of the Company's business plan includes
increasing its sales to customers outside the United States, which
represented 36% of the Company's net sales during fiscal 1997 and 37% of
the Company's net sales for the six months ended June 30, 1998. Sales in
foreign currency represented approximately 6.7% of the Company's net sales
during fiscal 1997 and 6.2% of the Company's net sales for the six months
ended June 30, 1998; however, the Company anticipates that this percentage
may increase in the future. <STRIKEOUT>An important component of the
Company's business plan includes increasing its sales to customers outside
the United States, which represented 36% of the Company's net sales during
fiscal 1997 and 31% of the Company's net sales for the three months ended
March 31, 1998. Sales in foreign currency represented approximately 6.7% of
the Company's net sales during fiscal 1997 and 5.0% of the Company's net
sales for the three months ended March 31, 1998; however, the Company
anticipates that this percentage may increase in the future.</STRIKEOUT>
The Company does not hedge against risks associated with receipt of foreign
currency. The Company does, however, anticipate that if sales outside the
United States increase in the future, the Company may deem it advisable to
hedge against risks associated with receipt of foreign currency. No
assurance can be given that such hedging, if undertaken, will prevent the
Company from incurring losses due to currency fluctuation.
In order to increase foreign sales, it may be necessary or desirable
for the Company to expand its sales force, or establish additional offices
outside the United States. The increased costs of hiring new personnel or
establishing offices could have a material adverse effect on the Company's
results of operations and financial condition.
<PAGE>
DEPENDENCE UPON KEY PERSONNEL
The Company's continued success will depend to a significant degree
upon the efforts and abilities of its senior management, in particular,
William C. Mortimore, its President and Chief Executive Officer, William L.
Stafford, Vice President -- Sales, David M. Noshay, Vice President --
Marketing, <STRIKEOUT>Dwight A. Simon, Vice President --
Engineering,</STRIKEOUT> Colleen M. Doan, Chief Financial Officer and
Michael J. Franco, Chief Technical Officer. Of these key personnel, only
Mr. Mortimore has an employment agreement with the Company. See "Management
- -- Employment Agreements." The loss of the services of any of these
officers could have a material adverse effect on the Company. The Company
maintains term life insurance policies covering the life of Mr. Mortimore
in the amount of $2,000,000 and covering the lives of each of Mr. Stafford,
Mr. Noshay <STRIKEOUT>, Mr. Simon</STRIKEOUT> and Ms. Doan in the amount of
$500,000, the proceeds of which would be payable to the Company.
POTENTIAL DIFFICULTY IN HIRING ADDITIONAL SALES AND ENGINEERING PERSONNEL
The Company's ability to carry out its business plan depends in part
upon its ability to hire and retain skilled sales and marketing
professionals and engineering specialists. Although the Company believes it
will be able to hire qualified personnel for such purposes, an inability to
do so could materially adversely affect the Company's ability to market,
sell and enhance its product lines. The market for qualified experienced
sales and marketing professionals and engineering specialists has
historically been, and the Company expects that it will continue to be,
intensely competitive. The inability to recruit and retain qualified
employees could materially adversely affect the Company's results of
operations and financial condition.
PROTECTION OF INTELLECTUAL PROPERTY RIGHTS
Although on April 14, 1998 the Company received U.S. patent number
5,740,248 for CaseWorks, a product currently in development, and has also
submitted foreign patent applications on CaseWorks, 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 laws,
employee and third-party confidentiality agreements and other measures to
protect intellectual property rights pertaining to its systems and
technology. There can be no assurance, however, that applicable copyright
or trade secret laws or these agreements will provide meaningful protection
of the Company's copyrights, trade secrets, know-how or other proprietary
information in the event of any unauthorized use, misappropriation or
disclosure of such 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. 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
resolve. To date, the Company has not initiated any intellectual property
infringement claims, and no such claims have been asserted against it. See
"Business -- Intellectual Property."
<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
United States Food and Drug Administration (the "FDA") and in other
countries by corresponding foreign regulatory authorities. The process of
obtaining and maintaining required regulatory clearances and approvals is
uncertain and is often lengthy and expensive. 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. Failure to comply with
applicable regulatory requirements could result, among other things, in
warning letters, seizures of the Company's products, total or partial
suspension of the Company's production operations, refusal of the
government to grant market clearance or pre-market approval, withdrawal of
approvals or criminal prosecution.
The Company is also subject to other federal, state and local laws
and regulations relating to safe working conditions and manufacturing
practices. In addition, sales of the Company's products outside the United
States are subject to various foreign regulatory requirements. The extent
of government regulation that might result from any future legislation or
administrative action cannot be predicted. Failure to comply with domestic
regulatory requirements or to obtain any necessary foreign certifications
or 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.
See "Business -- Government Regulation."
PRODUCT LIABILITY; RISK OF PRODUCT DEFECTS
The Company has licensing agreements with certain of its customers,
which typically contain provisions designed to limit the Company's exposure
to potential product liability claims. However, it is possible that the
limitation of liability provisions contained in the Company's license
agreements may not be effective under the laws of certain jurisdictions.
Furthermore, although the Company tries to include provisions limiting its
exposure to product liability in its sales agreements, the Company is not
always successful in doing so. Moreover, some of the Company's products are
sold without agreements addressing product liability claims at all.
Although the Company has not experienced any product liability claims to
date, the sale and support of products by the Company may entail the risk
of such claims, and there can be no assurance that the Company will not be
subject to such claims in the future. Although the Company has procured
product liability insurance, there can be no assurance that it will
continue to obtain such insurance on favorable terms or that such insurance
will be sufficient to fully protect the Company against a successful
product liability claim. A successful product liability claim brought
against the Company could have a material adverse effect on the Company's
business, results of operations and financial condition. Software products
such as those offered by the Company occasionally contain errors or
failures, especially when first introduced or when new versions are
released. Although the Company conducts extensive product testing, the
Company could in the future lose or delay recognition of revenues as a
result of software errors or defects, the failure of its products to meet
customer specifications or otherwise. Although to date, the Company's
business has not been materially adversely affected by any such errors,
defects or failure to meet specifications, there can be no assurance that
defects will not be found in new or existing products or releases after
commencement of commercial shipments or that such products will meet
customer specifications, resulting in loss or deferral of revenues,
diversion of resources, damage to the Company's reputation, or increased
service and warranty and other costs, any of which could have a material
adverse effect upon the Company's business, operating results and financial
condition. See "Business -- Products Under Development."
<PAGE>
SIGNIFICANT UNALLOCATED NET PROCEEDS OF INITIAL PUBLIC OFFERING; BROAD
DISCRETION OF MANAGEMENT
A significant portion of the remaining proceeds of the initial public
offering (the "IPO") of the Common Stock completed in the quarter ended
March 31, 1998 have not been allocated for specific uses by the Company.
The Company intends to use some of the remaining net proceeds of the IPO to
fund increases in accounts receivable, to increase sales and marketing and
research and development, to hire additional personnel and for other
working capital and general corporate purposes. In addition, the Company
may use a portion of the remaining net proceeds of the IPO to acquire
businesses, products or technologies complementary to its business,
although the Company has no present plans, intentions, understandings,
commitments or agreements, nor is it currently engaged in any negotiations,
with respect to any possible acquisitions. Pending such uses, the Company
has invested the remaining net proceeds from the IPO in short-term,
investment-grade, interest-bearing securities. The Company has no other
specific uses for the remaining proceeds of the IPO, and the exact use of
the proceeds will be subject to the discretion of management.
MARKETS FOR THE COMPANY'S PRODUCTS ARE HIGHLY COMPETITIVE
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 has one primary competitor in the imaging
acquisition network business, which includes the Company's MergeMVP
product. In the DICOM software package business, the Company primarily
competes directly and indirectly with a number of other entities, including
the Radiological Society of North America, which offers a version of DICOM
(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. The Company also faces
competition from picture archiving and communication systems ("PACS")
manufacturers. See "Business -- Competition."
In the application of MergeWorks Connectivity Products specifically
for hardcopy film networks, which include the MergeAPS print server and the
MergeXPI printer interface, the Company competes with multiple film
vendors. However, since the MergeAPS print server works with any of the
laser film printers available from these vendors, these companies also have
purchased products from the Company when they have needed to interface with
other competing manufacturers' 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. The Company could
also face competition from networking equipment and telecommunications
manufacturers if such companies were either to develop DICOM capability for
their products, or purchase from one of the Company's competitors products
that provide DICOM capability. 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 customers in the medical imaging field
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
existing or new competitors.
<PAGE>
POSSIBILITY OF NASDAQ QUOTATION TERMINATION OR SUSPENSION AND DECREASE IN
STOCK PRICE
Continued trading of the Common Stock on the Nasdaq SmallCap Market
is conditioned upon maintaining certain asset, capital and surplus,
earnings and stock price tests. To maintain eligibility on the Nasdaq
SmallCap Market, the Company must, among other things, maintain compliance
with one of the following three tests: (i) net tangible assets in excess of
$2,000,000; (ii) market capitalization of $35,000,000; or (iii) net income
of $500,000 in the latest fiscal year or in two of the last three fiscal
years. If the Company fails all of these tests or if the Company fails to
maintain an average bid price of at least $1.00 per Share, the Common Stock
may be suspended or terminated from inclusion on the Nasdaq SmallCap
Market. The effects of suspension or termination include the limited
release of the market prices of the Common Stock and limited news coverage
of the Company. Suspension or termination may restrict investors' interest
in the Common Stock and materially adversely affect the trading market and
prices for such securities and the Company's ability to issue additional
securities or to secure additional financing. In addition to the risk of
volatility of stock prices and possible suspension or termination, low
price stocks are subject to additional risks of additional federal and
state regulatory requirements and the potential loss of effective trading
markets. In particular, if trading of the Common Stock on the Nasdaq
SmallCap Market was to be suspended or terminated and the trading price of
the Common Stock was less than $5.00 per share, such Common Stock could be
subject to Rule 15g-9 under the Exchange Act, which, among other things,
requires that broker/dealers satisfy special sales practice requirements,
including making individualized written suitability determinations and
receiving any purchaser's written consent prior to any transaction. In such
case, the Common Stock could also be deemed "penny stock" under the
Securities Enforcement and Penny Stock Reform Act of 1990, which would
require additional disclosure in connection with trades in the Common
Stock, including the delivery of a disclosure schedule explaining the
nature and risks of the penny stock market. Such requirements could
severely limit the liquidity of the Common Stock and the ability of
purchasers in this Offering to sell their Common Stock in the secondary
market. See "Risk Factors-Recent IPO" and "-Potential Adverse Impact on
Market Price of Shares Eligible for Future Sale and Registration Rights."
RECENT IPO
Prior to the IPO there was no market for the Common Stock. Although
the Common Stock is included for quotation on the Nasdaq SmallCap Market,
there can be no assurance that an active trading market will develop for
the Common Stock, or, if developed, that it will be maintained. Certain
factors, such as subsequent sales of Common Stock into the market by
existing shareholders, including Sirrom, and market conditions generally,
could cause the market price of the Common Stock to vary substantially. In
addition, H.C. Wainwright & Co. Inc, the Underwriter of the IPO and the
Representative of the several underwriters of the IPO (the "Underwriter" or
the "Representative", as applicable) has registration rights for the Common
Stock it owns or may acquire and accordingly, will have the ability to
exercise these rights and sell these shares substantially free of
securities law restrictions. Also, certain existing shareholders have held
their shares for over one year and will be able to sell these shares
substantially free of securities law restrictions, subject to contractual
agreements not to sell these shares prior to certain dates. See "Risk
Factors-Lack of Consistent Profitability; History of Operating Losses and
Working Capital Deficits; Substantial Intangible Assets," "Certain
Relationships and Related Transactions" and "Shares Eligible for Future
Sale."
<PAGE>
ADDITIONAL FUNDING MAY BE NECESSARY
The Company believes that the remaining net proceeds from the IPO,
together with current cash and cash equivalent balances and internally
generated funds, will satisfy the Company's projected requirements for
at least <<STRIKEOUT>the</STRIKEOUT> twelve months from the
IPO <STRIKEOUT>following the date of this Prospectus</STRIKEOUT> 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 wages) and with
Mr. Mortimore, the Company's President and Chief Executive Officer.
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. This potential sale of additional equity or
debt securities could result in further dilution to the Company's
shareholders. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
NO INTENTION TO DECLARE OR PAY DIVIDENDS
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, although not known to the Company at this
time, 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. See "Dividend Policy."
POTENTIAL ADVERSE IMPACT OF PREFERRED STOCK ON RIGHTS OF COMMON STOCK
The Company's Articles of Incorporation authorize the issuance of
"blank check" preferred stock with such designations, rights and
preferences as may be determined from time to time by the Board of
Directors. Accordingly, the Company's Board of Directors will have the
authority to issue up to 5,000,000 shares of Preferred Stock and to
determine the price, rights, preferences and privileges of those shares
without any further vote or action by the shareholders. The rights of the
holders of Common Stock will be subject to, and may be materially adversely
affected by, the rights of the holders of any Preferred Stock that may be
issued in the future. The issuance of Preferred Stock, while providing
desirable flexibility in connection with possible acquisitions and other
corporate purposes, could have the effect of making it more difficult for a
third party to acquire a majority of the outstanding voting stock of the
Company. Although the Company has no present plans to issue shares of
Preferred Stock, there can be no assurance that the Company will not do so
in the future. See "Description of Securities."
ANTITAKEOVER MEASURES
The Company's Articles of Incorporation and By-Laws, along with
Wisconsin statutory law, contain provisions that could discourage potential
acquisition proposals and might delay or prevent a change in control of the
Company. Such provisions could result in the Company being less attractive
to a potential acquiror and could result in the shareholders receiving less
for their Common Stock than otherwise might be available in the event of a
takeover attempt. See "Description of Securities -- Certain Statutory and
Other Provisions."
<PAGE>
POTENTIAL ADVERSE IMPACT ON MARKET PRICE OF SHARES ELIGIBLE FOR FUTURE SALE
AND REGISTRATION RIGHTS
The Company has outstanding 5,778,216 shares of Common Stock.
Currently, 2,306,309 <STRIKEOUT>2,185,000</STRIKEOUT> shares of
Common Stock are freely tradeable without restriction or further limitation
under the Securities Act, except for any shares purchased by an "affiliate"
of the Company, which will be subject to the limitations imposed on
"affiliates" of the Company under Rule 144 promulgated under the Securities
Act ("Rule 144"). The 108,942 shares of Common Stock offered hereby are
currently "restricted securities" within the meaning of Rule 144 and may
not be resold except pursuant to a registration statement effective under
the Securities Act or pursuant to an exemption therefrom, including the
exemption provided by Rule 144. <STRIKEOUT>Sirrom has agreed with the
Company not to sell, pledge, encumber or otherwise dispose of any of the
108,942 shares of Common Stock offered hereby until August 1, 1998. After
August 1, 1998, the 108,942 shares of Common Stock offered hereby may be
sold without restriction or further limitation under the Securities
Act.</STRIKEOUT> The remaining 3,362,965 <STRIKEOUT>3,484,274
</STRIKEOUT> outstanding shares of Common Stock are "restricted
securities." Pursuant to the Company's 1996 Stock Option Plan, options to
acquire up to 924,043 shares of Common Stock are held by employees and
pursuant to the Company's 1998 Stock Option Plan for Directors, options to
acquire 60,000 shares of Common Stock are held by directors; if exercised,
the shares so issued shall be freely tradeable subject to certain
limitations imposed by Rule 701, including limitations under Rule 144,
promulgated under the Securities Act. In addition, the Representative owns
warrants that entitle the Representative to purchase an aggregate of
190,000 shares of Common Stock at an initial exercise price per share equal
to $7.80 per share (the "Representative's Warrants"). The Representative's
Warrants will be exercisable through January 28, 2002 and contain certain
demand and incidental registration rights relating to the underlying Common
Stock. The holders of the Representative's Warrants may sell shares of
Common Stock acquired by exercise of the Representative's Warrants after
one year from the date of exercise thereof without registration subject to
the limitations of Rule 144.
In general, under Rule 144, a person (or persons whose shares are
aggregated) who has satisfied a one-year holding period may, subject to
certain restrictions, sell within any three-month period a number of shares
which does not exceed the greater of: (i) 1% of the then outstanding shares
of Common Stock; or (ii) the average weekly trading volume during the four
calendar weeks preceding the date on which notice of the sale is filed with
the Commission as required by Rule 144. Rule 144 also permits the sale of
shares without any volume limitation by a person who is not an affiliate of
the Company and who has satisfied a two-year holding period. The one-year
holding period with respect to 3,362,965 <STRIKEOUT>3,484,274
</STRIKEOUT> outstanding shares of Common Stock has expired or, with
respect to shares issued upon the exercise of options granted under the
Company's 1996 Stock Option Plan, is no longer applicable.
In connection with the IPO, holders of Common Stock and outstanding
stock options holding approximately 67% of the Company's outstanding Common
Stock and outstanding options agreed not to 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 they currently hold
without the prior written consent of the Underwriter for the following
periods: (i) shareholders holding approximately 62% of the Company's
outstanding Common Stock have agreed to such restrictions with respect to
all of their current stockholdings, and shares they may obtain by
exercising options currently held by them, through October 31, 1998 (275
days following the IPO) and, with respect to 50% of their current
stockholdings, and shares they may obtain by exercising options currently
held by them through April 29, 1999 (455 days following the IPO); and (ii)
Sirrom and Alpha Capital Venture Partners, Limited ("Alpha"), who hold, in
the aggregate, approximately 4% of the Company's outstanding Common Stock,
<PAGE>
<STRIKEOUT>have</STRIKEOUT> agreed to such restrictions with respect to all
of their current stockholdings through August 1, 1998 (180 days following
the IPO). In addition, in order to register the Common Stock for sale in
certain states the Company's directors prior to the IPO, and all of the
Company's executive officers, entered into "lock-in" agreements which
prohibit the sale, pledge or encumbrance of all or a substantial majority
of their respective shares owned prior to the IPO through January 28, 2000
(two years following the IPO), subject to the right to (i) sell up to 2.5%
of the subject shares per quarter during the second year of such agreement,
and (ii) continue existing pledges of Common Stock to secure personal
borrowings in place prior to the effectiveness of the IPO in the case of
two of such individuals. Since directors of the Company who were not
directors prior to the IPO did not enter into such "lock-in" agreements,
their shares are not subject to these restrictions. In order to register
the Common Stock for sale in certain states, except for options to purchase
60,000 shares of Common Stock issued under the 1998 Stock Option Plan for
Directors granted immediately following the closing of the IPO, the Company
will not grant options or warrants in excess of 15% of the number of
outstanding shares of Common Stock to officers, directors, employees,
holders of 5% or more of the Common Stock or affiliates through January 28,
1999 (one year following the IPO).
Prior to the IPO, there was no market for the Common Stock. Further
sales of Common Stock under Rule 144 in the public market could adversely
affect the market price of the Common Stock or the ability of the Company
to raise money through a public offering of its equity securities.
FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS
This Prospectus contains certain forward-looking statements
including: (i) anticipated trends in the Company's financial condition and
results of operations, including expected changes in the Company's gross
profit, sales and marketing expense, product research and development
expense, general and administrative expense and professional expenses; (ii)
the Company's business strategy for future growth in the market, including
the Company's plans regarding anticipated hiring; and (iii) the Company's
ability to distinguish itself from its current and future competitors. When
used in the Prospectus, the words "believes," "intends," "anticipates,"
"expects," and similar expressions are intended to identify forward-looking
statements. These forward-looking statements are based largely on the
Company's current expectations and are subject to a number of risks and
uncertainties. In addition to the other risks described elsewhere in this
"Risk Factors" Section, important factors to consider in evaluating such
forward-looking statements include: (i) changes in external competitive
market factors which might impact trends in the Company's results of
operations; (ii) unanticipated working capital and other cash requirements;
(iii) general changes in the industries in which the Company competes; and
(iv) various other competitive factors that may prevent the Company from
competing successfully in the marketplace. In light of these risks and
uncertainties, many of which are described in greater detail elsewhere in
this "Risk Factors" Section, actual results could differ materially from
the forward-looking statements contained in this Prospectus.
THE COMPANY
The Company is a Wisconsin corporation and was incorporated on
November 25, 1987. The Company's principal executive offices are located at
1126 South 70th Street, Suite S107B, Milwaukee, Wisconsin 53214-3151, its
telephone number is (414) 475-4300 and its Internet address is
www.merge.com.
<PAGE>
USE OF PROCEEDS
This Prospectus relates to Shares being offered and sold for the
account of the Selling Stockholder. The Company will not receive any
proceeds from the sale of the Shares. The Company has agreed to pay all
expenses related to the registration of the Shares. See "Plan of
Distribution."
SELLING STOCKHOLDER
The Selling Stockholder beneficially owns an aggregate of 108,942
shares of Common Stock as of the date of this Prospectus, or 1.9% of the
total number of Shares outstanding. Because the Selling Stockholder may
offer all or a portion of the Shares, no estimate can be made of the number
of Shares that the Selling Stockholder will beneficially own upon
completion of the Offering. The Company previously has entered into
financing transactions with the Selling Stockholder. See "Certain
Relationships and Related Transactions."
DILUTION
This Offering, which consists solely of Shares previously issued by
the Company, is being made for the account of the Selling Stockholder and
will not result in dilution to purchasers of the Shares.
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. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
PLAN OF DISTRIBUTION
The Shares may be sold or distributed from time to time by the
Selling Stockholder, or by pledgees, donees or transferees of, or other
successors in interest to, the Selling Stockholder, directly to one or more
purchasers (including pledgees) or through brokers, dealers or underwriters
who may act solely as agents or may acquire Shares as principals, at market
prices prevailing at the time of sale, at prices related to such prevailing
market prices, at negotiated prices, or at fixed prices, which may be
changed. The distribution of the Shares may be effected by one or more of
the following methods: (i) ordinary brokers' transactions, which may
include long or short sales; (ii) transactions involving cross or block
trades or otherwise on the Nasdaq SmallCap Market; (iii) purchases by
brokers, dealers or underwriters as principals and resale by such
purchasers for their own accounts pursuant to this Prospectus; (iv) "at the
market" to or through market makers or into an existing market for the
Common Stock; (v) in other ways not involving market makers or established
trading markets, including direct sales to purchasers or sales effected
through agents; (vi) through transactions in options, swaps or other
derivatives (whether exchange-listed or otherwise), or (vii) any
combination of the foregoing, or by any other legally available means. In
<PAGE>
addition, the Selling Stockholder or its successors in interest may enter
into hedging transactions with broker-dealers who may engage in short sales
of Common Stock in the course of the hedging positions they assume with the
Selling Stockholder. The Selling Stockholder or its successors in interest
may also enter into option or other transactions with broker-dealers that
require the delivery to such broker-dealers of the Shares, which shares may
be resold thereafter pursuant to this Prospectus.
Brokers, dealers, underwriters or agents participating in the
distribution of the Shares as agent may receive compensation in the form of
discounts, concessions or commissions from the Selling Stockholder (and, if
they act as agent for the purchaser of such Shares, from such purchaser).
Such discounts, concessions or commissions as to a particular broker,
dealer, underwriter or agent might be greater or less than those customary
in the type of transaction involved.
The Selling Stockholder and any such brokers, dealers or other agents
that participate in such distribution may be deemed to be "underwriters"
within the meaning of the Securities Act, and any discounts, commissions or
concessions received by the Selling Stockholder and any such brokers,
dealers or other agents might be deemed to be underwriting discounts and
commissions under the Securities Act. Neither the Company nor the Selling
Stockholder can presently estimate the amount of any such compensation.
The Company knows of no existing arrangements between the Selling
Stockholder and any broker, dealer or other agent relating to the sale or
distribution of the Shares.
Under applicable rules and regulations under the Exchange Act, any
person engaged in a distribution of any of the Shares may not
simultaneously engage in market activities with respect to the Common Stock
for the applicable period under Regulation M prior to the commencement of
such distribution. In addition, and without limiting the foregoing, the
Selling Stockholder will be subject to applicable provisions of the
Exchange Act and the rules and regulations thereunder, including without
limitation Rules 10b-5 and Regulation M, which may limit the timing of
purchases and sales of any of the Shares by the Selling Stockholder. All
of the foregoing may affect the marketability of the Common Stock.
The Company will pay substantially all of the expenses incident to
the registration of the Shares. The Selling Stockholder may indemnify any
broker, dealer, or other agent that participates in transactions involving
sales of the Shares against certain liabilities, including liabilities
arising under the Securities Act.
In order to comply with certain states' securities laws, if
applicable, the Shares will be sold in such jurisdictions only through
registered or licensed brokers or dealers.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS
Certain statements in this report that are not historical facts
constitute forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995, Section 27A of the Securities Act
of 1933, as amended (the Securities Act) and Section 21E of the Securities
Exchange Act of 1934, as amended (the Exchange Act). Discussions
containing such forward-looking statements may be included herein in the
material set forth under "Management's Discussion and Analysis of Financial
Condition and Results of Operations" as well as within this report
generally. In addition, when used in this report, the words "believes,"
"intends," "anticipates," "expects" and similar expressions are intended to
identify forward-looking statements. These statements are subject to a
number of risks and uncertainties, including, among others, 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 and 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.
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; (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; and (iv) Networked Image Management Products --
products that enable 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
<PAGE>
board-level interface products for OEMs of medical imaging equipment. The
Company introduced its Network Integration Products and Services in 1996.
In 1998, the Company introduced its Networked Image Management Products
with the sale of beta units of MergeARK, a new medical image archival
system. 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
====== ====== ======
Three Months Six Months
Ended June 30, Ended June 30,
(Unaudited) (Unaudited)
----------------- ---------------
1997 1998 1997 1998
----- ---- ---- ----
(in thousands)
Product Line
MergeWorks Connectivity
Products. . . . . . . . . . . $1,388 $1,148 $2,687 $3,189
OEM Interface Products. . . . . 625 568 983 1,111
Network Integration Products and
Services. . . . . . . . . . . 89 104 135 166
Networked Image Management
Products. . . . . . . . . . . 0 112 0 112
------ ------ ------ -----
$2,102 $1,932 $3,805 $4,578
====== ====== ====== ======
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.
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 18
persons at June 30, 1998 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.
<PAGE>
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
THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THREE MONTHS ENDED
JUNE 30, 1997
NET SALES. Net sales decreased by 8% to $1,932,000 in the three
months ended June 30, 1998 from $2,102,000 in the three months ended
June 30, 1997. Net sales of MergeWorks Connectivity Products accounted for
the largest decrease, $240,000 or 17%, to $1,148,000 in the three months
ended June 30, 1998 from $1,388,000 in the three months ended June 30,
1997, primarily due to a decrease in distribution of products to the end-
user channel. The Company expects that net sales of Merge clinical
networks will increase over the current level in the third and fourth
quarters of 1998. Sales of OEM Interface Products decreased by 9% to
$568,000 in the three months ended June 30, 1998 from $625,000 in the three
months ended June 30, 1997, as the product mix within this category
shifted, with a decreases in net sales of MergeCOM Integrator's Tool Kit
software packages and increases in quarterly royalties for MergeCOM
licensing. The Company expects that royalty revenues from current
customers will account for a larger proportion of its software business in
the future, and that sales within this category will show modest increases.
Network Integration Products and Services net sales increased 17% to
$104,000 in the three months ended June 30, 1998 from $89,000 in the three
months ended June 30, 1997. The Company began reporting of Networked Image
Management Products line during the three months ended June 30, 1998 with
net sales of $112,000, which represented sales of beta units of MergeARK, a
new medical image archival system.
<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 the three
months ended June 30, 1998 increased to 25% compared to 19% in the three
months ended June 30, 1997, primarily due to differences in product mix
that reflect greater sales of higher margin products in the three months
ended June 30, 1997. The current level of purchased components as a
percentage of net sales more closely reflects the Company's expectations of
future cost trends. Amortization of purchased and developed software
increased as a percentage of net sales to 10% in the three months ended
June 30, 1998 from 7% in the three months ended June 30, 1997.
Amortization expense, which is computed on a straight-line basis, increased
relative to net sales as net sales in the three months ended June 30, 1998
were lower than the Company's expectations.
GROSS PROFIT. Gross profit decreased by 19% to $1,247,000 in the
three months ended June 30, 1998 from $1,548,000 in the three months ended
June 30, 1997. As a percentage of net sales, gross profit was 65% in the
three months ended June 30, 1998 compared to 74% in the three months ended
June 30, 1997.
SALES AND MARKETING. Sales and marketing expense increased by 53% to
$870,000 in the three months ended June 30, 1998 from $569,000 in the three
months ended June 30, 1997. The majority of sales and marketing expense
currently relates to compensation of sales, marketing and service
personnel. The Company increased its sales and marketing department staff
to 18 persons as of June 30, 1998 from nine persons as of June 30, 1997,
and it increased its service personnel to 12 persons as of June 30, 1998
from five persons as of June 30, 1997. The Company expects to continue to
invest in additional sales, marketing and service personnel in order to
increase net sales, and to allocate additional resources to marketing
programs to promote the Company in the end user marketplace.
PRODUCT RESEARCH AND DEVELOPMENT. Product research and development
expense increased by 39% to $519,000 in the three months ended June 30,
1998 from $374,000 in the three months ended June 30, 1997. 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 increase its research and development expenditures in dollar terms.
GENERAL AND ADMINISTRATIVE. General and administrative expense
increased by 112% to $650,000 in the three months ended June 30, 1998 from
$307,000 in the three months ended June 30, 1997. The increase was due to:
(i) expenses related to expanded administrative services at its European
branch including hiring additional personnel, (ii) establishment of an
information services group responsible for internal computer systems, and
(iii) additional expenses associated with operating as a publicly held
company. The rate of increase in general and administrative expense is
expected to moderate in the second half of 1998.
TOTAL OTHER EXPENSE, NET. Total other expense, net was $(109,000) in
the three months ended June 30, 1998 versus $52,000 in the three months
ended June 30, 1997. This change was due to (i) an increase in net
interest income of $113,000 arising from investment of funds from the
Company's initial public offering and (ii) a benefit in unrealized
transaction expense that was a result of an increase in the strength of the
Dutch guilder, the functional currency of the Company's European branch.
INCOME TAXES. The Company did not pay federal income taxes or
recognize an income tax benefit in the three months ended June 30, 1998 or
in the three months ended June 30, 1997. In the three months ended
June 30, 1998, the Company incurred a loss 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.
<PAGE>
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30,
1997
NET SALES. Net sales increased by 20% to $4,578,000 in the six
months ended June 30, 1998 from $3,805,000 in the six months ended June 30,
1997. Net sales of MergeWorks Connectivity Products increased $502,000 or
19% to $3,189,000 in the six months ended June 30, 1998 from $2,687,000 in
the six months ended June 30, 1997. This increase is due to accelerated
activity in the Company's distribution to end users through dealers during
the first quarter of 1998, which was moderated in part by delays in orders
in this channel in the second quarter of 1998. Sales of OEM Interface
Products increased by 13% to $1,111,000 in the six months ended June 30,
1998 from $983,000 in the six months ended June 30, 1997. Network
Integration Products and Services sales increased 23% to $166,000 in the
six months ended June 30,1998 from $135,000 in the six months ended
June 30, 1997. The Company began reporting of Networked Image Management
Products during the six months ended June 30, 1998 with net sales of
$112,000 for beta units of MergeARK, a new medical image archival system.
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 the six months
ended June 30, 1998 increased to approximately 28% compared to 23% in the
six months ended June 30, 1997, primarily due to differences in product mix
that reflect greater sales of lower margin products. While product mix may
vary from quarter to quarter, the Company anticipates that overall, the
cost of purchased components as a percentage of net sales will remain at or
near the current level. Amortization of purchased and developed software
was 8% of sales in both periods.
GROSS PROFIT. Gross profit increased by 12% to $2,940,000 in the six
months ended June 30, 1998 from $2,629,000 in the six months ended June 30,
1997. As a percentage of net sales, gross profit was 64% in the six months
ended June 30, 1998 and 69% in the six months ended June 30, 1997.
SALES AND MARKETING. Sales and marketing expense increased by 64% to
$1,622,000 in the six months ended June 30, 1998 from $989,000 in the six
months ended June 30, 1997. The majority of these expenses currently
relate to compensation of sales, marketing and service personnel. The
Company increased its sales and marketing department staff to 18 persons as
of June 30, 1998 from nine persons as of June 30, 1997, and it increased
its service personnel to 12 persons as of June 30, 1998 from five persons
as of June 30, 1997. The Company expects to continue to invest in
additional sales, marketing and service personnel in order to increase net
sales, and to allocate additional resources to marketing programs to
promote the Company in the end user marketplace.
PRODUCT RESEARCH AND DEVELOPMENT. Research and development expense
increased by 34% to $963,000 in the six months ended June 30, 1998 from
$719,000 in the six months ended June 30, 1997. 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 increase its research and development expenditures in dollar terms.
GENERAL AND ADMINISTRATIVE. General and administrative expense
increased by 91% to $1,187,000 in the six months ended June 30, 1998 from
$621,000 in the six months ended June 30, 1997. The increase was due to:
(i) expenses related to expanded administrative services at its European
branch including hiring additional personnel, (ii) establishment of an
information services group responsible for internal computer systems, and
(iii) additional expenses associated with operating as a publicly held
company. The rate of increase in general and administrative expense is
expected to moderate in the second half of 1998.
<PAGE>
TOTAL OTHER EXPENSE, NET. Total other expense was $(91,000) in the
six months ended June 30, 1998 versus from $99,000 in the six months ended
June 30, 1997. This change is due primarily to an increase in net interest
income of $168,000 arising from investment of funds raised in the Company's
initial public offering, which occurred on January 29, 1998.
INCOME TAXES. The Company did not pay federal income taxes or
recognize an income tax benefit in the six months ended June 30, 1998 or in
the six months ended June 30, 1997. In each of these periods, 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.
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.
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.
<PAGE>
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.
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.
<PAGE>
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
Cash provided by (used in) operating activities was $(1,137,000) in
the six months ended June 30, 1998 compared to $245,000 in the six months
ended June 30, 1997. In the six months ended June 30, 1998, the Company
incurred a net loss of $740,000 and booked depreciation and amortization
expense of $498,000. Significant changes in assets and liabilities in the
six months ended June 30, 1998 include an increase in inventory of
$664,000, reflecting components purchased in anticipation of higher sales;
a $634,000 reduction in accounts payable of which some payments were made
with proceeds of the IPO; and a decrease in accounts receivable of $463,000
due to a decrease in net sales.
Investing activities include net additions to capital equipment of
$332,000 and $174,000, and additions to capitalized software of $774,000,
and $469,000 in the six months ended June 30, 1998 and the six months ended
June 30, 1997, respectively.
Cash provided by financing activities for the six months ended
June 30, 1998 and the six months ended June 30, 1997 was $8,190,000 and
$1,162,000 respectively. Cash provided by financing activities in the six
months ended June 30, 1998 consists primarily of net proceeds of the
initial public offering, which occurred on January 29, 1998. In the six
months ended June 30, 1997, the Company received cash of $2,000,000 from a
loan agreement with Sirrom Capital and applied $655,000 of the proceed to
repayment of a revolving credit facility with Biltmore Investors Bank.
The Company had cash and cash equivalents of $6,373,000 and $428,000,
and working capital (deficits) of $8,183,000 and $(1,972,000) at June 30,
1998 and December 31, 1997, respectively. The increase in working capital
was due to the increase in cash and repayment of certain current
liabilities with proceeds of the IPO.
The Company believes that the net proceeds from the initial public
offering in 1998, together with internally generated funds will satisfy for
at least 12 months from the IPO, 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, the Company's President and Chief Executive Officer,
under the terms of which the Company is obligated to pay Mr. Mortimore an
annual salary of $160,000. 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 financing 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.
The Company has arranged a three million dollar revolving line of
credit with Bank One, Milwaukee.
<PAGE>
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.
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.
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. 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.
<PAGE>
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.
Merge MVP products are reviewed on an ongoing basis to assess Year
2000 compliance. Since each MergeMVP is 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. Most imaging
equipment installed in hospitals today uses two digits to represent a given
year, and thus they are not Year 2000 compliant. MergeMVP software on new
models has been designed to convert these two-digit dates to four-digit
dates. A portion of the existing MergeMVP product line will be upgraded to
provide Year 2000 compliance.
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.
Internal costs associated with upgrading legacy MVPs to convert two-
digit dates to four-digit dates are not expected to exceed $20,000. The
Company cannot quantify its risk for potential additional Year 2000
compliance costs at this time, but it 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.
<STRIKEOUT>
The information required by this item is incorporated by reference to
the information set forth under the caption "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in the Company's
Annual Report on Form 10-KSB for the year ended December 31, 1997 and the
Company's Quarterly Report on Form 10-QSB for the quarter ended March 31,
1998.
</STRIKEOUT>
<PAGE>
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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
PRODUCTS AND SERVICES
The Company's electronic imaging products and services available
today
(except for certain NETWORKED IMAGE MANAGEMENT PRODUCTS currently
under development) 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;
<STRIKEOUT>and</STRIKEOUT> (iii) NETWORK INTEGRATION PRODUCTS AND SERVICES
- -- for design and installation of DICOM networks, including training,
design assistance and testing services ; and (iv) <STRIKEOUT>An
additional line of</STRIKEOUT> NETWORKED IMAGE MANAGEMENT PRODUCTS for
facilitation of radiologists' selection and use of electronic
images
. <STRIKEOUT>is under development.</STRIKEOUT>
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.
<PAGE>
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.
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.
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.
<PAGE>
<<STRIKEOUT>PRODUCTS UNDER DEVELOPMENT</STRIKEOUT>
NETWORKED IMAGE MANAGEMENT PRODUCTS
The Company currently sells and 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 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.
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 third or fourth
quarter of 1998. The Company received a U.S. Patent for CaseWorks on
April 14, 1998. See " -- Intellectual Property". 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.
<PAGE>
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.
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.
<PAGE>
SELL NETWORKED IMAGE MANAGEMENT PRODUCTS TO USERS OF DICOM NETWORKS.
The Company currently sells and 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.
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.
<PAGE>
The Company markets its MergeCOM-3 software tool kit directly to OEMs
pursuant to over 90 <STRIKEOUT>70</STRIKEOUT> 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.
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, 59%
for fiscal 1997 and 53% for the six months ended June 30, 1998.
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 June 30, 1998, 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 ,
<STRIKEOUT>and</STRIKEOUT> 41% for fiscal 1997 and 47% for the six
months ended June 30, 1998 . 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 June 30, 1998
<PAGE>
employs 10 full-time staff in Europe who perform sales and technical
customer support roles.
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 68%, 74% and 74% of the
Company's net sales in 1996, 1997 and for the six months ended June 30,
1998, respectively. 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. For the six months ended June 30,
1998, Picker and Konica accounted for approximately 17% and 26%,
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
<PAGE>
face competition from networking equipment and telecommunications
manufacturers if these companies were either to develop DICOM capability
for their products or purchase products which provide DICOM capability from
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 June 30, 1998, the Company had 87 employees, including 36
employees in research and development, 9 in manufacturing, 12 in quality
control, service and support, 12 in sales, 5 in marketing and sales support
activities and 13 in general administration and finance. Ten 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.
PROPERTIES
The Company's principal facilities are located in Milwaukee,
Wisconsin, in an approximately 14,000 square-foot facility leased through
September 2004 at a rate of approximately $203,000 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. <STRIKEOUT>The Company anticipates that it
will need to acquire additional office space in fiscal 1998.</STRIKEOUT>
LEGAL PROCEEDINGS
The Company is not involved in any material legal proceedings.
<PAGE>
<STRIKEOUT>
The information required by this item is incorporated by reference to
the information set forth under the caption "Business" in the Company's
Annual Report on Form 10-KSB for the year ended December 31, 1997.
PROPERTIES
The Company's principal facilities are located in Milwaukee,
Wisconsin, in an approximately 14,000 square-foot facility leased through
September 2004 at a rate of approximately $203,000 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 1998.
<PAGE>
EMPLOYEES
As of March 31, 1998, the Company had 80 employees, including 33
employees in research and development, nine in manufacturing, 10 in quality
control, service and support, 12 in sales, five in marketing and sales
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.
LEGAL PROCEEDINGS
The Company is not involved in any material legal proceedings.
</STRIKEOUT>
<PAGE>
MANAGEMENT
DIRECTORS:
DIRECTORS AND EXECUTIVE OFFICERS
The Directors of the Company are as follows:
WILLIAM C. MORTIMORE, 52, Founder of the Company, has served as
President and Chief Executive Officer and a member of the Board of
Directors of the Company since its inception in 1987. Mr. Mortimore has
served as co-founder and a senior manager of several businesses in the
fields of information communications technology, healthcare services and
real estate, and has been responsible for securing public and private
financing for these organizations. Mr. Mortimore is an original member of
the American College of Radiology/National Association of Electrical
Manufacturers ("ACR/NEMA") committee responsible for establishing and
maintaining the DICOM medical imaging standard. Mr. Mortimore is also
Chair of the Medical Imaging Information Section, and a member of the Board
of Directors, of the Diagnostic Imaging Division of NEMA. Mr. Mortimore
received a B.S. in Electrical Engineering from Michigan State University,
an M.E.E. from the University of Minnesota, and pursued doctoral studies in
Electrical Engineering at the University of Minnesota.
ROBERT T. GERAS, 60, Chairman of the Board of Directors, has served
as Chairman of the Board of Directors of the Company since July 1997 and as
a Director since 1992 and has been a shareholder of the Company since May
1989. Mr. Geras has been a private venture investor for more than 25
years, and has participated as a director of, investor in, and/or advisor
to numerous small businesses in fields ranging from medical equipment,
computer software, banking, telecommunications, industrial distribution and
packaging. He has also assisted in corporate planning, capital formation
and management for his various investments. Mr. Geras holds a B.S.B.A.
from Northwestern University.
ROBERT A. BARISH, M.D., 45, a Director, is the Chief Executive
Officer of University CARE, the Clinical and Research Enterprise at the
University of Maryland. Dr. Barish is a Professor of the Department of
Surgery and Medicine at the University of Maryland School of Medicine. He
is a Trustee of the Endowment Fund of the University of Maryland. He is
also a Director of Doctors Health System, Inc. Dr. Barish holds an M.D.
from the New York Medical College, an M.B.A. from Loyola College and a B.A.
from the University of New Hampshire. Mr. Barish was nominated to serve as
an independent Director by H.C. Wainwright Co., Inc., pursuant to an
agreement executed in connection with the IPO. See "Certain Relationships
and Related Transactions."
DENNIS BROWN, 50, a Director, has served since 1993 as the Chief
Financial Officer and Treasurer of Sybron International Corporation, a
publicly-traded company headquartered in Milwaukee, Wisconsin. From 1990
through 1993, Mr. Brown was the President of the European Region of
Allen-Bradley Company. Prior to that, he served as the Treasurer of The
Marmon Group. Mr. Brown is a Fellow of the Chartered Institute of
Management Accountants.
MICHAEL D. DUNHAM, 53, a Director, is President of Effective
Management Systems, Inc., a publicly-traded Milwaukee-based corporation
that markets and supports manufacturing software systems from 35 locations
worldwide. Mr. Dunham co-founded Effective Management Systems, Inc. in
1978. Mr. Dunham is a director of United Wisconsin Services, Inc., a
publicly-traded health insurance concern, two private software companies
and a bank. Mr. Dunham is also a director of the Milwaukee Metropolitan
Association of Commerce and the Milwaukee Education Trust, a non-profit
organization for the enhancement of local primary and secondary education.
Mr. Dunham holds a B.S. in Electrical Engineering from the University of
Denver and a M.M.S. from the Stevens Institute of Technology.
<PAGE>
DOUGLAS S. HARRINGTON, M.D., 45, a Director, has been Chief Executive
Officer of Chromavision, Inc., a publicly-traded company, since December
1996. From 1995 through 1996, Dr. Harrington served as Chairman and
President of Strategic Business Solutions, Inc., a privately-held company
specializing in the commercialization of biotechnology, and as a Principal
in Douglas S. Harrington and Associates, a strategic consulting firm. From
1992 to 1995, Dr. Harrington served as President of the Nichols Institute,
a healthcare laboratory services provider. Prior to 1992, Dr. Harrington
held various management positions within Nichols Institute including Vice
President of Operations and Medical Director. Dr. Harrington currently
serves on the boards, advisory boards, or scientific advisory boards of ten
healthcare and medical device companies. He is a director of Pacific
Biometric, Inc., a publicly-traded healthcare technology company. He is
also an Associate Professor of Clinical and Anatomic Pathology at the
University of Nebraska Medical Center. Dr. Harrington has over 18 years
experience in the commercialization of healthcare technology and has
published over 80 peer-reviewed publications.
KEVIN E. MOLEY, 51, a Director, is a consultant to Kinetra L.L.C. and
has been the President and Chief Executive Officer of Integrated Medical
Systems, Inc. since 1995, where he has also served as a director since
1994. Mr. Moley is a director of Cephalon, Inc., a publicly-traded
biopharmaceutical company. From 1984 to 1989, Mr. Moley held positions of
increasing responsibility with the United States Department of Health and
Human Services. From 1989 through 1991, Mr. Moley served as Assistant
Secretary of the United States Department of Health and Human Services.
From 1991 through 1993, Mr. Moley served as the Deputy Secretary of the
United States Department of Health and Human Services where he was
responsible for day-to-day operations of all of the agencies of the
Department, including the FDA, Public Health Service and the Center for
Disease Control. Mr. Moley attended the School of Foreign Service at
Georgetown University.
BOARD COMMITTEES AND INSIDER PARTICIPATION IN COMPENSATION DECISIONS
The Board is required to meet at least once per year, either in
person or by telephonic conference. The Board met six times during
calendar year 1997.
The Board of Directors has four standing committees: an Audit
Committee, a Compensation Committee, a Stock Option Committee and a
Nominating Committee. The Audit, Compensation and Nominating Committees
were formed in March 1998 and, accordingly, did not meet in 1997.
The Audit Committee is comprised of William C. Mortimore, Dennis
Brown and Robert A. Barish, M.D. This committee recommends engagement of
the Company's independent accountants, approves services performed by these
accountants, and reviews and evaluates the Company's accounting system and
its system of internal accounting controls.
The Compensation Committee is comprised of Michael D. Dunham and
Kevin E. Moley. This committee reviews and administers the compensation of
the officers of the Company.
The Stock Option Committee is comprised of Messrs. Michael D. Dunham
and Kevin E. Moley. This committee reviews and administers the granting of
stock options under the Employee Plan. The Stock Option Committee met once
in 1997.
The Nominating Committee is comprised of William C. Mortimore and
Robert T. Geras. This committee nominates candidates for the Board, and
will consider nominees recommended by Shareholders.
For a discussion of Directors' compensation, as well as additional
information regarding the management of the Company, see "Management--
Executive Compensation."
<PAGE>
EXECUTIVE OFFICERS
The names of the executive officers of the Company, and their
respective ages and positions with the Company, are as follows:
NAME AGE POSITION
- ---- --- --------
William C. Mortimore. 52 President and Chief Executive
Officer, Director
William L. Stafford . 51 Vice President - Sales, Assistant
Secretary
David M. Noshay . . . 37 Vice President - Marketing
Michael J. Franco . . 51 Chief Technical Officer
Colleen M. Doan . . . 35 Chief Financial Officer, Treasurer
and Secretary
Anton van Kimmenade . 44 Director of Worldwide Service,
Branch Manager - Europe
WILLIAM C. MORTIMORE, Founder of the Company, has served as President
and Chief Executive Officer and a member of the Board of Directors of the
Company since its inception in 1987. Mr. Mortimore has served as co-
founder and a senior manager of several businesses in the fields of
information communications technology, healthcare services and real estate,
and has been responsible for securing public and private financing for
these organizations. Mr. Mortimore is an original member of the American
College of Radiology/National Association of Electrical Manufacturers
("ACR/NEMA") committee responsible for establishing and maintaining the
DICOM medical imaging standard. Mr. Mortimore is also Chair of the Medical
Imaging Information Section, and a member of the Board of Directors, of the
Diagnostic Imaging Division of NEMA. Mr. Mortimore received a B.S. in
Electrical Engineering from Michigan State University, an M.E.E. from the
University of Minnesota, and pursued doctoral studies in Electrical
Engineering at the University of Minnesota.
WILLIAM L. STAFFORD has served as Vice President, Sales of the
Company since June 1994. From February 1993 until May 1994, Mr. Stafford
served as the Company's Director of Sales. From June 1983 until February
1993, Mr. Stafford was employed by Marquette Medical Systems, Inc., a
manufacturer of patient monitoring systems. Previously, he was employed by
GE Medical Systems, a manufacturer of medical diagnostic imaging equipment,
and Baxter Laboratories, a drug manufacturer. Mr. Stafford holds a B.A. in
Economics from Yale College and an M.B.A. from Harvard.
DAVID M. NOSHAY has served as Vice President, Marketing of the
Company since August 1997. From September 1995 until July 1997, Mr. Noshay
served as the Company's Eastern Regional Sales Manager. From July 1994
until August 1995, Mr. Noshay was Sales Manager of Scitex Medical Systems,
a manufacturer of medical image printing equipment. From February 1989
until June 1994, he was Marketing Manager for Konica Medical Corporation, a
manufacturer of medical film and image printing equipment. Previously, he
was employed by Matrix Instruments, a manufacturer of medical imaging
printing equipment, and Siemens Medical Systems, a manufacturer of medical
diagnostic imaging equipment. Mr. Noshay holds a B.S. in Electrical
Engineering and an M.S. in Biomedical Engineering from Rutgers University.
MICHAEL J. FRANCO has served as Chief Technical Officer of the
Company since September 1996. From May 1995 until September 1996, Mr.
Franco served as the Company's Director of Technical Services. Mr. Franco
was the founder, and from 1993 to April 1995 was the President and Chief
Technical Officer of Signal Stream Technologies, Inc., a manufacturer of
medical imaging interfacing equipment which was merged into a subsidiary of
the Company in May 1995. Previously, he was a co-founder and served as
President and Chief Executive Officer of Adaptive Video, Inc., a
manufacturer of medical imaging interfacing equipment for teleradiology and
medical image printing. Prior to Adaptive Video, Mr. Franco was employed
by Diasonics, Inc., a manufacturer of medical diagnostic imaging devices,
and by Compression Labs, a manufacturer of video teleconferencing
equipment.
<PAGE>
COLLEEN M. DOAN has served as Chief Financial Officer of the Company
since September 1996, Treasurer since June 1994 and as Secretary since
September 1997. Ms. Doan also served as Business Manager from
September 1989 through July 1995, and Controller from August 1995 through
August 1996. Ms. Doan holds a B.A. in Business and Management from Alverno
College.
ANTON VAN KIMMENADE has served as Director of Worldwide Service since
August 1997 and Branch Manager Europe since June 1994. From 1974 to 1994,
Mr. van Kimmenade was employed by Philips, serving from 1985 to 1994 at
Philips Medical Systems in technical leadership capacities in the areas of
software development and quality assurance. Mr. van Kimmenade holds a
degree in electronics from HBO Einhoven in Einhoven, The Netherlands.
COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS
DIRECTORS' COMPENSATION
Directors who are employees of the Company do not receive any cash
compensation for their service as members of the Board of Directors,
although they are reimbursed for certain expenses incurred in connection
with attendance at Board meetings. The Board of Directors may, in its
discretion, alter this policy in the future.
Directors who are not employees of the Company receive $1,000 for
each Board meeting, and $500 for each committee meeting, which they attend
in person, and one-half of these amounts for meetings in which they
participate by telephone and which exceed two hours in length. Directors
also are reimbursed for certain expenses incurred in connection with
attendance at Board meetings. The Board of Directors may, in its
discretion, alter this policy in the future. Each Director, other than any
Director who is also an employee of the Company, on February 4, 1998,
received, pursuant to the Company's 1998 Stock Option Plan for Directors
(the "Director Plan"), options to acquire 10,000 Common Shares at an
exercise price equal to the IPO price of the Common Shares of $6.00.
The Company is currently authorized to issue up to an additional
40,000 Common Shares under the Director Plan, which the Board of Directors
approved in January 1998. Each of the six non-employee Directors of the
Company was granted an option to purchase 10,000 Common Shares as of
February 4, 1998. One-third of the Directors' options will vest on each of
the first, second and third anniversaries of the date of the grant. The
purposes of the Director Plan are to attract and retain the best available
personnel for service as Directors, to provide additional incentive to
individuals to serve as Directors, to motivate Directors to achieve
superior performance for the benefit of the Company's shareholders, and to
encourage Directors' continued service on the Board. Each option granted
under the Director Plan is evidenced by a written agreement between the
Company and the participant.
<PAGE>
<TABLE>
EXECUTIVE COMPENSATION
Set forth below is information concerning the compensation for 1997 and 1996 for the Company's President and
Chief Executive Officer, and each other executive officer of the Company whose salary and bonus exceeded $100,000:
<CAPTION>
SUMMARY COMPENSATION TABLE
LONG TERM
ANNUAL COMPENSATION COMPENSATION
------------------------------------------- AWARDS
------------
SECURITIES
OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION OPTION COMPENSATION
- --------------------------- ---- ------ ----- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
William C. Mortimore. . . . . . 1997 $136,667 $ -- -- -- $2,733(1)
President and CEO 1996 $130,001 -- -- 67,721 2,400(1)
Michael J. Franco . . . . . . . 1997 110,000 -- -- -- 2,168(1)
Chief Technical Officer 1996 102,391 -- -- 150,518(2) 546(1)
William L. Stafford . . . . . . 1997 110,000 -- -- -- 1,587(1)
Vice President - Sales 1996 -- (3) -- (3) -- (3) 67,721 -- (3)
Assistant Secretary
David M. Noshay . . . . . . . . 1997 100,500 12,184(4) 43,620(5) 50,791 2,416(1)
Vice President - Marketing 1996 -- (3) -- (3) -- (3) 16,930 -- (3)
Dwight S. Simon . . . . . . . . 1997 110,000 -- -- -- 1,626(1)
Vice President - Engineering 1996 $ -- (3) $ -- (3) $ -- (3) 67,721 -- (3)
<FN>
(1) Represents the Company's contributions to its 401(k) plan for the benefit of its employees.
(2) Includes 82,797 options granted pursuant to an employment agreement entered into in 1995 in connection with
the Company's purchase of Signal Stream Technologies, Inc.
(3) Annual Salary and bonus received by Messrs. Stafford, Noshay and Simon in 1996 was less than $100,000.
(4) In 1997 Mr. Noshay received a quarterly incentive sales bonus.
(5) Mr. Noshay received a relocation allowance of $41,620 and an automobile reimbursement of $2,000 in 1997.
</TABLE>
<PAGE>
<TABLE>
OPTION/SAR GRANTS IN 1997 FISCAL YEAR
POTENTIAL REALIZED
VALUE AT ASSUMED
NUMBER OF $ OF TOTAL ANNUAL RATES OF STOCK
SECURITIES OPTIONS PRICE APPRECIATION
UNDERLYING GRANTED TO FOR OPTION TERMS (1)
OPTIONS EMPLOYEES IN EXERCISE EXPIRATION --------------------
NAME GRANTED FISCAL YEAR PRICE DATE 5% 10%
- ---- ----------- ----------- -------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
David M. Noshay . . . . 50,791 20% $6.75(2) 07/31/2003 $116,819 $264,621
<FN>
(1) The dollar amounts under these columns are the result of calculations at the 5% and 10% rates of
appreciation set by the SEC and therefore do not necessarily predict the future appreciation, if any, of the
Common Shares.
(2) Options were granted at an exercise price equal to the estimated fair market of the Common Shares on the
date of the grant.
</TABLE>
AGGREGATED 1997 FISCAL YEAR END OPTION VALUES
<TABLE>
NUMBER OF SECURITIES VALUES OF UNEXERCISABLE
UNDERLYING UNEXERCISED OPTIONS IN-THE-MONEY-OPTIONS AT
SHARES AT FISCAL YEAR END FISCAL YEAR END
ACQUIRED ----------------------------------------------------------
ON EXERCISE EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
William C. Mortimore. . . . 0 33,860 33,861 $ 153,047 $ 153,052
Michael J. Franco . . . . . 0 116,657 33,861 527,290 153,052
William L. Stafford . . . . 0 33,860 33,861 153,047 153,052
David M. Noshay . . . . . . 0 8,465 59,256 38,262 38,262
Dwight A. Simon . . . . . . 0 33,860 33,861 $ 153,047 $153,052
</TABLE>
<PAGE>
EMPLOYMENT AGREEMENTS
The Company entered into an employment agreement dated as of September 1,
1997 with William C. Mortimore, which is in effect for an initial term of
three years, followed by one-year extensions unless terminated by either
party and provides for the Company to pay Mr. Mortimore a minimum annual
salary of $160,000. The employment agreement requires Mr. Mortimore to
devote his full time and attention to the Company. The employment
agreement also includes confidentiality provisions, restricts
Mr. Mortimore's ability to compete with the Company for a period of two
years after termination of his employment and awards Mr. Mortimore three
months' severance pay following termination of his employment under certain
conditions. Under Wisconsin law, a non-compete clause in an employment
agreement may be voided if the court determines that the non-compete clause
if unfairly restrictive.
<PAGE>
<STRIKEOUT>
DIRECTORS AND EXECUTIVE OFFICERS
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 dated May 18, 1998.
EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to
the information set forth under the caption "Management - Compensation of
Directors and Executive Officers" in the Company's Proxy Statement dated
May 18, 1998.
</STRIKEOUT>
<PAGE>
MARKET FOR COMMON STOCK
The Common Stock is included for quotation on the Nasdaq SmallCap
Market. The high bid price for the Common Stock, as reported by Nasdaq,
for the six months ended June 30, 1998 was $6.44. <STRIKEOUT>quarter
ended March 31, 1998 was $6.375.</STRIKEOUT> The low bid price for the
Common Stock, as reported by Nasdaq, for the six months ended June 30,
1998 was $3.12. <STRIKEOUT>for the quarter ended March 31, 1998 was
$6.00.</STRIKEOUT> These quotations reflect inter-dealer prices, without
retail mark-up, mark down or commission and may not represent actual
transactions. As of the date of this Prospectus, there were 5,778,216
shares of Common Stock, held of record by 102 persons, and no shares of
Preferred Stock outstanding.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On June 30, 1997, the Company borrowed $2,000,000 from Sirrom Capital
Corporation ("Sirrom"), a third-party institutional "mezzanine" lender,
pursuant to a note (the "Sirrom Note") and related security agreement. The
Sirrom Note required payments of interest only, computed at 13.5% per
annum, payable monthly in arrears through maturity (June 30, 2002).
Approximately $1,007,000 of the proceeds of the Sirrom Note were applied by
the Company in June 1997 toward the repayment of the bank indebtedness and
the balance toward working capital. No principal payments were required
prior to maturity. Prepayment in whole or part was permitted without
penalty. The Sirrom Note was secured by a first lien on all of the
Company's assets, subject to Sirrom's agreement to subordinate its lien to
a senior revolving credit facility in an amount not to exceed $2,500,000
provided that initially permitted borrowings under such facility was not to
exceed $1,500,000, subject to increase if the Company achieved certain
income targets.
As a condition to issuance of the Sirrom Note, the Company issued a
warrant, which granted Sirrom the right to acquire for nominal
consideration a base amount of 145,256 Common Shares (the "Sirrom
Warrant"). The base amount of Common Shares purchasable under the Sirrom
Warrant was determined through arms-length negotiations between Sirrom and
the Company. Under the terms of the Sirrom Warrant, in the event the loan
was outstanding in whole or in part on the third, fourth and fifth
anniversaries of the initial loan funding, additional Shares could be
purchased pursuant to the Sirrom Warrant for nominal consideration. The
Sirrom Warrant prohibited the sale of shares by the Company to third
parties at below fair market value without concomitant antidilution
protection to Sirrom, but expressly permitted the issuance of up to
1,354,434 shares pursuant to the Employee Plan.
The Sirrom Warrant granted Sirrom the right to attend (but not vote
at) Directors' meetings until such time as the Sirrom Note was paid in
full. The Sirrom Warrant granted Sirrom a put right for a period of 30 days
immediately prior to its expiration at "Fair Market Value," which was to be
determined by agreement of the parties or, in the absence of agreement, by
two independent appraisers. Sirrom was granted piggyback registration
rights in connection with certain registered offerings of the Common Shares
and rights of co-sale to participate in sales of the Common Shares by
Robert T. Geras or William C. Mortimore.
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
would not offer, pledge, sell, contract to sell, grant any option for the
sale of, or otherwise dispose of, directly or indirectly, any securities of
<PAGE>
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 (which ultimately totaled
$196,095.60) 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 IPO, 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.
On June 1, 1996 the Company entered into a three-year consulting
agreement with Robert T. Geras calling for the payment to Mr. Geras of: (i)
$160,000 on January 1, 1997 (the "$160,000 Obligation") in consideration of
financial consulting services provided by Mr. Geras to the Company through
June 30, 1996; and (ii) the sum of $3,500 per month plus reimbursement for
approved out-of-pocket expenses. Because the IPO has been completed, the
Company no longer requires the same type of financial consulting services
that Mr. Geras previously provided. Mr. Geras and the Company therefore
have terminated this consulting agreement effective as of February 3, 1998.
In 1995 and 1996, the Company issued an aggregate of 1,229,148 Common
Shares in a private placement at $1.48 per share. The Company received
consideration in connection with this private placement of $205,000 in
fiscal 1995 and $1,610,000 in fiscal 1996. In connection with this private
placement, Mr. Geras, a Director of the Company, purchased 182,848 Common
Shares at the same price offered to other investors. Warren B. Cozzens, a
former Director, also purchased 257,342 shares in this private offering.
All Common Shares were paid for with cash, except for (i) 47,405 shares
purchased by Mr. Geras with a $70,000 note bearing interest at 10% per
annum, which note was paid in full within two months; and (ii) 135,443
shares purchased by Mr. Geras with a fully-secured, three-year,
non-interest bearing $200,000 note. The Company subsequently approached Mr.
Geras with a proposal to offset the $200,000 note against the $160,000
Obligation, based on its belief that the $200,000 note had an approximately
equal net present value to the $160,000 Obligation. Mr. Geras agreed to
such set-off in full satisfaction of the purchase price obligation for the
135,443 shares.
Pursuant to a Stock Redemption Agreement between the Company and
Alpha Capital Venture Partners, Limited ("Alpha"), a third-party
institutional investor, dated May 5, 1995, and amended March 1, 1997, on
February 3, 1998 the Company exercised its call rights and used $806,592 of
the net proceeds of the IPO to redeem 424,757 Common Shares held by Alpha
at a call price of $1.90 per share.
Effective May 1996, the Company discharged $463,352 owing to Alpha
under two subordinated notes by issuing 33,861 Common Shares, and making a
cash payment of $375,000, to Alpha. The notes were in the original
principal amounts of $88,134 and $375,218, required monthly payments, had
no specified maturity date and bore interest at an annual rate equal to the
prime rate plus 3% and the prime rate plus 4%, respectively. The interest
rate, repayment schedule and other terms of these notes were substantially
identical to those in other subordinated notes issued to unaffiliated third
parties.
In connection with the IPO, the Company granted H.C. Wainwright &
Co., Inc., as Representative of the Underwriters of the IPO, the right to
nominate one Director to the Company's Board of Directors. H.C. Wainwright
& Co., Inc. nominated Robert A. Barish, M.D. as an independent director.
<PAGE>
<STRIKEOUT>
The information required by this item is incorporated by reference to
the information set forth under the caption "Certain Relationships and
Related Transactions" in the Company's Proxy Statement dated May 18, 1998.
</STRIKEOUT>
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the
beneficial ownership of the Common Shares as of August 17, 1998, by (i)
each person that is known by the Company to beneficially own or exercise
the voting or dispositive control over 5% or more of the outstanding Common
Shares; (ii) each Director; and (iii) all Directors and executive officers
of the Company as a group. Except as otherwise indicated in the footnotes
to the table, the persons named below have sole voting and investment power
with respect to the shares beneficially owned by such persons. In general,
a person is deemed to be a "beneficial owner" of a security if that person
has or shares the power to vote or direct the voting of such security, or
the power to dispose of or to direct the disposition of such security. A
person is also deemed to be a beneficial owner of any securities of which
the person has the right to acquire the beneficial ownership within 60
days. See "Certain Relationships and Related Transactions."
SHARES BENEFICIALLY
OWNED (1)
--------------------
NAME NUMBER PERCENT
- ---------------------------------------------- -------- --------
Robert T. Geras (2)(3). . . . . . . . . . . 728,589 13%
William C. Mortimore (2)(4) . . . . . . . . 602,088 10%
Robert A. Barish, M.D. (2). . . . . . . . . -- (*)
Dennis Brown (2). . . . . . . . . . . . . . 3,250 (*)
Michael D. Dunham (2) . . . . . . . . . . . -- (*)
Douglas S. Harrington, M.D. (2) . . . . . . -- (*)
Kevin E. Moley (2). . . . . . . . . . . . . 2,000 (*)
All Directors, Nominees and Executive
Officers as a group (11 persons). . . . . 1,827,093 30%
(*) Less than 1% of outstanding Common Stock.
(1) Except pursuant to applicable marital property laws or as indicated
in the footnotes to this table, to the Company's knowledge, each
shareholder identified in the table possesses sole voting and investment
power with respect to all Common Stock shown as beneficially owned by such
shareholder.
(2) The business address for each of Messrs. Geras, Mortimore, Barish,
Brown, Dunham, Harrington and Moley is Merge Technologies Incorporated,
1126 South 70th Street, Suite S107B, Milwaukee, WI 53214-3151.
(3) Reflects 203,164 shares held by trusts for the benefit of Mr. Geras'
adult children, the beneficial ownership of which Mr. Geras disclaims.
(4) Includes vested options held by Mr. Mortimore to acquire 50,790
shares.
The Company is not aware of any arrangements, the operation of which
may at a subsequent date result in a change of control of the Company.
<PAGE>
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires the Company's officers and Directors, and persons who own more
than ten percent of a registered class of the Company's equity securities,
to file initial statements of beneficial ownership (Form 3), and statements
of changes in beneficial ownership (Forms 4 or 5), of Beneficial Interest
and other equity securities of the Company with the Securities and Exchange
Commission (the "SEC") and the National Association of Securities Dealers,
Inc. (the "NASD"). The SEC requires officers, Directors and greater than
ten percent Shareholders to furnish the Company with copies of all these
forms filed with the SEC or the NASD.
To the Company's knowledge, based solely upon its review of the
copies of these forms received by it, or written representations from
certain reporting persons that no additional forms were required for those
persons, the Company believes that all filing requirements applicable to
its officers, Directors, and greater than ten percent beneficial owners
have been complied with during 1997.
<STRIKEOUT>
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 dated
May 18, 1998.
</STRIKEOUT>
DESCRIPTION OF SECURITIES
The authorized capital stock of the Company consists of 30,000,000
shares of Common Stock, par value $0.01 per share, and 5,000,000 shares of
Preferred Stock, par value $0.01 per share.
The following description of the capital stock of the Company is a
summary and is qualified in its entirety by the provisions of the Company's
Articles of Incorporation (the "Articles") and By-Laws, copies of which are
filed as exhibits to the Registration Statement of which this Prospectus
forms a part.
COMMON STOCK
Holders of Common Stock are entitled to one vote per share of Common
Stock beneficially owned on each matter submitted to a vote at a meeting of
shareholders, subject to Section 180.1150 of the WBCL (described below
under "Certain Statutory and Other Provisions"). The Common Stock does not
have cumulative voting rights, which means that the holders of a majority
of voting shares voting for the election of Directors can elect all of the
members of the Board of Directors. The Common Stock has no preemptive
rights and no redemption or conversion privileges. Subject to any
preferences of any outstanding Preferred Stock, the holders of Common Stock
are entitled to receive dividends out of assets legally available at such
times and in such amounts as the Board of Directors may, from time to time,
determine, and upon liquidation and dissolution are entitled to receive all
assets available for distribution to the shareholders. The Company's
Articles state that a majority vote of shares represented at a meeting at
which a quorum is present is sufficient for all actions that require the
vote of shareholders. However, under the WBCL, certain actions require
enhanced approval by either a supermajority of two-thirds of all
outstanding shares entitled to vote and certain actions require a majority
of all outstanding shares entitled to vote. See "Certain Statutory and
Other Provisions." All of the outstanding shares of the Common Stock are,
and the shares to be sold by Sirrom pursuant to this Offering were legally
issued, fully paid and nonassessable, except for certain statutory
liabilities which may be imposed by Section 180.0622(2)(b) of the WBCL for
unpaid employee wages.
<PAGE>
PREFERRED STOCK
Pursuant to the Articles, the Company's Board of Directors may,
without further action by the Company's shareholders, from time to time,
issue shares of the Preferred Stock in series and may, at the time of
issuance, determine the rights, preferences, and limitations of each
series. Any dividend preference of any Preferred Stock which may be issued
would reduce the amount of funds available for the payment of dividends on
Common Stock. Also, holders of the Preferred Stock would normally be
entitled to receive a preference payment in the event of any liquidation,
dissolution, or winding-up of the Company before any payment is made to the
holders of Common Stock. The issuance of preferred stock will be approved
by a majority of the Company's independent directors who do not have an
interest in the transaction and who have access, at the Company's expense,
to the Company's or independent legal counsel. Under certain circumstances,
the issuance of such Preferred Stock may discourage bids for the Common
Stock at a premium or otherwise adversely affect the market price of the
Common Stock or may render more difficult or tend to discourage a merger,
tender offer, proxy contest, the assumption of control by a holder of a
large block of the Company's securities or the removal of incumbent
management. Although the Company presently has no plans to issue any of its
shares of the Preferred Stock, the Board of Directors of the Company,
without shareholder approval, may issue the Preferred Stock with voting and
conversion rights which could adversely affect the holders of Common Stock.
LIMITATION OF DIRECTOR LIABILITY
Section 180.0828 of the WBCL provides that officers and directors of
domestic corporations may be personally liable only for intentional
breaches of fiduciary duties, criminal acts, transactions from which the
director derived an improper personal profit and wilful misconduct. These
provisions may have the effect of reducing the likelihood of derivative
litigation against directors and may discourage or deter shareholders or
management from bringing a lawsuit against directors for breach of their
duty of care, even though such an action, if successful, might otherwise
have benefitted the Company and its shareholders. The employment agreements
of certain directors and officers contain a provision similar to the
provisions of the WBCL.
INDEMNIFICATION
Under the WBCL, directors and officers of the Company are entitled to
mandatory indemnification from the Company against certain liabilities and
expenses (a) to the extent such officers or directors are successful in the
defense of a proceeding and (b) in proceedings in which the director or
officer is not successful in the defense thereof, unless (in the latter
case only) it is determined that the director or officer breached or failed
to perform his or her duties to the Company and such breach or failure
constituted: (i) a wilful failure to deal fairly with the Company or its
shareholders in connection with a matter in which the director or officer
had a material conflict of interest; (ii) a violation of the criminal law
unless the director or officer had reasonable cause to believe his or her
conduct was lawful or had no reasonable cause to believe his or her conduct
was unlawful; (iii) a transaction from which the director or officer
derived an improper personal profit; or (iv) wilful misconduct. The WBCL
allows a corporation to limit its obligation to indemnify officers and
directors by providing so in its articles of incorporation. The Company's
By-Laws provide for indemnification of directors and officers to the
fullest extent permitted by Wisconsin law.
<PAGE>
CERTAIN STATUTORY AND OTHER PROVISIONS
The provisions of the Company's By-Laws and the WBCL described in
this section may delay or make more difficult acquisitions or changes of
control of the Company not approved by the Company's Board of Directors.
Such provisions have been implemented to enable the Company, particularly
(but not exclusively) in the initial years of its existence as a
publicly-traded company, to develop its business in a manner which will
foster its long-term growth without disruption caused by the threat of a
takeover not deemed by its Board of Directors to be in the best interests
of the Company and its shareholders. Such provisions could have the effect
of discouraging third parties from making proposals involving an
acquisition or change of control of the Company, although such proposals,
if made, might be considered desirable by a majority of the Company's
shareholders. Such provisions may also have the effect of making it more
difficult for third parties to cause the replacement of the current
management of the Company without the concurrence of the Board of
Directors.
NUMBER OF DIRECTORS; REMOVAL; VACANCIES. The By-Laws currently
provide that the number of Directors shall be not less than three nor
greater than eleven. The Company currently has seven Directors. The
authorized number of Directors may be changed by amendment of the By-Laws.
The By-Laws also provide that the Company's Board of Directors shall have
the exclusive right to fill vacancies on the Board of Directors, including
vacancies created by expansion of the Board or removal of a Director, and
that any Director elected to fill a vacancy shall serve until the next
annual meeting of shareholders. The By-Laws further provide that Directors
may be removed by the shareholders only by the affirmative vote of the
holders of at least a majority of the votes then entitled to be cast in an
election of Directors. This provision, in conjunction with the provisions
of the By-Laws authorizing the Board to fill vacant Directorships, could
prevent shareholders from removing incumbent Directors and filling the
resulting vacancies with their own nominees.
AMENDMENTS TO THE ARTICLES OF INCORPORATION. The WBCL provides
authority to the Company to amend its Articles at any time to add or change
a provision that is required or permitted to be included in the Articles or
to delete a provision that is not required to be included in the Articles.
The Company's Board of Directors may propose one or more amendments to the
Company's Articles for submission to shareholders and may condition its
submission of the proposed amendment on any basis if the Board of Directors
notifies each shareholder, whether or not entitled to vote, of the
shareholders' meeting at which the proposed amendment will be voted upon.
CONSTITUENCY OR STAKEHOLDER PROVISION. Under Section 180.0827 of the
WBCL (the "Wisconsin Stakeholder Provision"), in discharging his or her
duties to the Company and in determining what he or she believes to be in
the best interests of the Company, a director or officer may, in addition
to considering the effects of any action on shareholders, consider the
effects of the action on employees, suppliers, customers, the communities
in which the Company operates and any other factors that the director or
officer considers pertinent.
WISCONSIN ANTITAKEOVER STATUTES. Sections 180.1140 to 180.1144 of
the WBCL (the "Wisconsin Business Combination Statute") regulate the broad
range of "business combinations" between a "resident domestic corporation"
(such as the Company) and an "interested stockholder." The Wisconsin
Business Combination Statute defines a "business combination" to include a
merger or share exchange, or a sale, lease, exchange, mortgage, pledge,
transfer or other disposition of assets equal to at least 5% of the market
<PAGE>
value of the stock or assets of the corporation or 10% of its earning
power, or the issuance of stock or rights to purchase stock with a market
value equal to at least 5% of the outstanding stock, the adoption of a plan
of liquidation or dissolution and certain other transactions involving an
"interested stockholder," defined as a person who beneficially owns 10% of
the voting power of the outstanding voting stock of the corporation or who
is an affiliate or associate of the corporation and beneficially owned 10%
of the voting power of the then outstanding voting stock within the last
three years. Section 180.1141 of the Wisconsin Business Combination Statute
prohibits a corporation from engaging in a business combination (other than
a business combination of a type specifically excluded from the coverage of
the statute) with an interested stockholder for a period of three years
following the date such person becomes an interested stockholder, unless
the board of directors approved the business combination or the acquisition
of the stock that resulted in a person becoming an interested stockholder
before such acquisition. Accordingly, the Wisconsin Business Combination
Statute's prohibition on business combinations cannot be avoided during the
three-year period by subsequent action of the board of directors or
shareholders. Business combinations after the three-year period following
the stock acquisition date are permitted only if (i) the board of directors
approved the acquisition of the stock by the interested stockholder prior
to the acquisition date, (ii) the business combination is approved by a
majority of the outstanding voting stock not beneficially owned by the
interested stockholder, or (iii) the consideration to be received by
shareholders meets certain requirements of the statute with respect to form
and amount.
In addition, the WBCL provides in Sections 180.1130 to 180.1133, that
business combinations involving a "significant shareholder" (as defined
below) and a "resident domestic corporation" (such as the Company) are
subject to a two-thirds supermajority vote of shareholders (the "Wisconsin
Fair Price Statute"), in addition to any approval otherwise required. A
"significant shareholder," with respect to a resident domestic corporation,
is defined as a person who beneficially owns, directly or indirectly, 10%
or more of the voting stock of the corporation, or an affiliate of the
corporation which beneficially owned, directly or indirectly, 10% or more
of the voting stock of the corporation within the last two years. The
Company is an "issuing public corporation" within the meaning of such term
under the WBCL. Under Section 180.1131 and Section 180.1132 of the WBCL,
the business combinations described above must be approved by 80% of the
voting power of the corporation's stock and at least two-thirds of the
voting power of the corporation's stock not beneficially held by the
significant shareholder who is party to the relevant transaction or any of
its affiliates or associates, in each case voting together as a single
group, unless the following fair price standards have been met: (i) the
aggregate value of the per share consideration is equal to the higher of
(a) the highest price paid for any common stock of the corporation by the
significant shareholder in the transaction in which it became a significant
shareholder of within two years before the date of the business
combination, (b) the market value of the corporation's shares on the date
of commencement of any tender offer by the significant shareholder, the
date on which the person became a significant shareholder or the date of
the first public announcement of the proposed business combination,
whichever is highest, or (c) the highest liquidation or dissolution
distribution to which holders of the shares would be entitled, and
(ii) either cash, or the form of consideration used by the significant
shareholder to acquire the largest number of shares, is offered.
<PAGE>
Section 180.1134 of the WBCL (the "Wisconsin Defensive Action
Restrictions") provides that, in addition to the vote otherwise required by
law or the articles of incorporation of an issuing public corporation, the
approval of the holders of a majority of the shares entitled to vote is
required before such corporation can take certain action while a takeover
offer is being made or after a takeover offer has been publicly announced
and before it is concluded. Under the Wisconsin Defensive Action
Restrictions, shareholder approval is required for the corporation to
(i) acquire more than 5% of the outstanding voting shares at a price above
the market price from any individual who or organization which owns more
than 3% of the outstanding voting shares and has held such shares for less
than two years, unless a similar offer is made to acquire all voting
shares, or (ii) sell or option assets of the corporation which amount to at
least 10% of the market value of the corporation, unless the corporation
has at least three independent directors (directors who are not officers or
employees) and a majority of the independent directors vote not to have
this provision apply to the corporation. The restrictions described in
clause (i) above may have the effect of deterring a shareholder from
acquiring shares of the Common Stock with the goal of seeking to have the
Company repurchase such shares at a premium over the market price.
Section 180.1150 of the WBCL provides that the voting power of shares
of public Wisconsin corporations such as the Company held by any person or
persons acting as a group in excess of 20% of the voting power in the
election of directors is limited to 10% of the full voting power of those
shares. This statutory voting restriction does not apply to shares acquired
directly from the Company or in certain specified transactions or shares
for which full voting power has been restored pursuant to a vote of
shareholders.
CERTAIN ANTITAKEOVER EFFECTS. Certain provisions of the Company's
Articles and By-Laws may have significant antitakeover effects, including
the ability of the remaining directors to fill vacancies, and the ability
of the Board of Directors to issue "blank check" preferred stock which, in
turn, allows the directors to adopt a so-called "rights plan" which would
entitle shareholders (other than a hostile bidder) to acquire stock of the
Company at a discount.
The explicit grant in the Wisconsin Stakeholder Provision of
discretion to directors to consider nonshareholder constituencies could, in
the context of an "auction" of the Company, have antitakeover effects in
situations where the interests of stakeholders of the Company, including
employees, suppliers, customers and communities in which the Company does
business, conflict with the short-term maximization of shareholder value.
The Wisconsin Fair Price Statute may discourage any attempt by a
shareholder to squeeze out other shareholders without offering an
appropriate premium purchase price. In addition, the Wisconsin Defensive
Action Restrictions may have the effect of deterring a shareholder from
acquiring the Common Stock with the goal of seeking to have the Company
repurchase the Common Stock at a premium. The WBCL statutory provisions and
the Company's Articles and By-Law provisions referenced above are intended
to encourage persons seeking to acquire control of the Company to initiate
such an acquisition through arms-length negotiations with the Company's
Board of Directors, and to ensure that sufficient time for consideration of
such a proposal, and any alternatives, is available. Such measures are also
designed to discourage investors from attempting to accumulate a
significant minority position in the Company and then use the threat of a
proxy contest as a means to pressure the Company to repurchase shares of
Common Stock at a premium over the market value. To the extent that such
measures make it more difficult for, or discourage, a proxy contest or the
assumption of control by a holder of a substantial block of the Common
Stock, they could increase the likelihood that incumbent Directors will
retain their positions, and may also have the effect of discouraging a
tender offer or other attempt to obtain control of the Company, even though
such attempt might be beneficial to the Company and its shareholders.
<PAGE>
TRANSFER AGENT AND REGISTRAR
Firstar Trust Company is the Transfer Agent and Registrar for the
Common Stock.
SHARES ELIGIBLE FOR FUTURE SALE
The Company has outstanding 5,778,216 shares of Common Stock.
Currently, 2,306,309 <STRIKEOUT>2,185,000</STRIKEOUT> shares of
Common Stock are freely tradeable without restriction or further limitation
under the Securities Act, except for any shares purchased by an "affiliate"
of the Company, which will be subject to the limitations imposed on
"affiliates" of the Company under Rule 144 promulgated under the Securities
Act ("Rule 144"). The 108,942 Shares offered hereby are currently
"restricted securities" within the meaning of Rule 144 and may not be
resold except pursuant to a registration statement effective under the
Securities Act or pursuant to an exemption therefrom, including the
exemption provided by Rule 144. The remaining 3,362,965 outstanding
shares of Common Stock, are "restricted securities." Pursuant to the
Company's 1996 Stock Option Plan, options to acquire up to 924,043 shares
of Common Stock are held by employees and pursuant to the Company's 1998
Stock Option Plan for Directors, options to acquire 60,000 shares of Common
Stock are held by directors; if exercised, <STRIKEOUT>The 108,942
Shares offered hereby will be freely tradeable upon effectiveness of this
registration statement without restriction or further limitation under the
Securities Act, but Sirrom has agreed with the Company not to sell, pledge,
encumber or otherwise dispose of any of these Shares until August 1, 1998.
The remaining 3,484,274 outstanding shares of Common Stock, are "restricted
securities." Pursuant to the Company's 1996 Stock Option Plan, options to
acquire up to 924,043 shares of Common Stock are held by employees and
pursuant to the Company's 1998 Stock Option Plan for Directors, options to
acquire 60,000 shares of Common Stock are held by directors; if
exercised,</STRIKEOUT> the shares so issued shall be freely tradeable
subject to certain limitations imposed by Rule 701, including limitations
under Rule 144, promulgated under the Securities Act. In addition, the
Representative owns the Representative's Warrants, which entitle the
Representative to purchase an aggregate of 190,000 shares of Common Stock
at an initial exercise price per share equal to $7.80 per share. The
Representative's Warrants will be exercisable through January 28, 2002 and
contain certain demand and incidental registration rights relating to the
underlying Common Stock. The holders of the Representative's Warrants may
sell shares of Common Stock acquired by exercise of the Representative's
Warrants after one year from the date of exercise thereof without
registration subject to the limitations of Rule 144.
In general, under Rule 144, a person (or persons whose shares are
aggregated) who has satisfied a one-year holding period may, subject to
certain restrictions, sell within any three-month period a number of shares
which does not exceed the greater of: (i) 1% of the then outstanding shares
of Common Stock; or (ii) the average weekly trading volume during the four
calendar weeks preceding the date on which notice of the sale is filed with
the Commission as required by Rule 144. Rule 144 also permits the sale of
shares without any volume limitation by a person who is not an affiliate of
the Company and who has satisfied a two-year holding period. The one-year
holding period with respect to 3,362,965 <STRIKEOUT>3,484,274
</STRIKEOUT> outstanding shares of Common Stock has expired or, with
respect to shares issued upon the exercise of options granted under the
Company's 1996 Stock Option Plan, is no longer applicable.
<PAGE>
Holders of Common Stock and outstanding stock options holding
approximately 67% of the Company's outstanding Common Stock and outstanding
options have agreed not to 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 they currently hold without the prior written
consent of the Underwriter for the following periods: (i) shareholders
holding approximately 62% of the Company's outstanding Common Stock have
agreed to such restrictions with respect to all of their current
stockholdings, and shares they may obtain by exercising options currently
held by them, through October 31, 1998 (275 days following the IPO) and,
with respect to 50% of their current stockholdings, and shares they may
obtain by exercising options currently held by them through April 29, 1999
(455 days following the IPO); and (ii) Sirrom and Alpha, who hold, in the
aggregate, approximately 4% of the Company's outstanding Common Stock,
agreed to such restrictions with respect to all of their current
stockholdings through August 1, 1998 (180 days following the IPO). In
addition, in order to register the Common Stock for sale in certain states,
the Company's directors prior to the IPO, and all of the Company's
officers, entered into "lock-in" agreements which prohibit the sale, pledge
or encumbrance of all or a substantial majority of their respective shares
owned prior to the IPO through January 28, 2000 (two years following the
IPO), subject to the right to (i) sell up to 2.5% of the subject shares per
quarter during the second year of such agreement, and (ii) continue
existing pledges of Common Stock to secure personal borrowings in place
prior to the effectiveness of the IPO in the case of two of such
individuals. Since directors of the Company who were not directors prior
to the IPO did not enter into such "lock-in" agreements, their shares are
not subject to these restrictions. In order to register the Common Stock
for sale in certain states, except for options to purchase 60,000 shares of
Common Stock issued under the 1998 Stock Option Plan for Directors granted
immediately following the closing of the IPO, the Company will not grant
options or warrants in excess of 15% of the number of outstanding shares of
Common Stock to officers, directors, employees, holders of 5% or more of
the Common Stock or affiliates through January 28, 1999 (one year following
the IPO).
No predictions can be made as to the effect, if any, that sales of
shares of Common Stock under Rule 144 will have on the market price of the
Common Stock; sales of Common Stock under Rule 144 in the public market
could adversely affect the market price of the Common Stock or the ability
of the Company to raise money through a public offering of its equity
securities. See "Risk Factors -- Potential Adverse Impact on Market Price
of Shares Eligible for Future Sale and Registration Rights."
LEGAL MATTERS
The validity of the Shares of Common Stock offered hereby will be
passed upon for the Company by Shefsky & Froelich Ltd., Chicago, Illinois.
As of the date of this Prospectus, a member of Shefsky & Froelich Ltd.
beneficially owns 40,246 <STRIKEOUT>40,246</STRIKEOUT> shares of
Common Stock.
EXPERTS
The consolidated balance sheets of the Company as of December 31,
1996 and 1997 and the consolidated statements of operations, shareholders'
equity, and cash flows for each of the years in the three year period
ending December 31, 1997 have been incorporated herein and in the
registration statement in reliance upon the report of KPMG Peat Marwick
LLP, independent certified public accountants, incorporated herein by
reference, and upon the authority of said firm as experts in accounting and
auditing.
<PAGE>
<STRIKEOUT>
FINANCIAL STATEMENTS
The information required by this item is incorporated by reference to
the information set forth under the caption "Financial Statements" in the
Company's Annual Report on Form 10-KSB for the year ended December 31, 1997
and the Company's Quarterly Report on Form 10-QSB for the quarter ended
March 31, 1998.
</STRIKEOUT>
<PAGE>
INDEX TO FINANCIAL STATEMENTS
MERGE TECHNOLOGIES INCORPORATED
Independent Auditors' Report. . . . . . . . . . . . . . . . F-2
Consolidated Balance Sheets as of December 31, 1996,
December 31, 1997 and June 30, 1998 (unaudited) . . . . . F-3
Consolidated Statements of Operations for the years
ended December 31, 1995, 1996 and 1997 and for
the three months ended June 30, 1997 and June 30,
1998 and the six months ended June 30, 1997 and
June 30, 1998 (unaudited) . . . . . . . . . . . . . . . . F-5
Consolidated Statements of Shareholders' Equity
for the years ended December 31, 1995, 1996 and 1997
and six months ended June 30, 1998 (unaudited). . . . . . F-7
Consolidated Statements of Cash Flows for the
years ended December 31, 1995, 1996 and 1997
and for the six months ended June 30, 1997
and June 30, 1998 (unaudited) . . . . . . . . . . . . . . F-11
Consolidated Statements of Comprehensive Income
for the three months ended June 30, 1997 and
June 30, 1998 and the six months ended
June 30, 1997 and June 30, 1998 (unaudited) . . . . . . . F-14
Notes to Consolidated Financial Statements -
years ended December 31, 1995, 1996 and 1997. . . . . . . F-15
Notes to Consolidated Financial Statements -
three months ended June 30, 1997 and 1998
and six months ended June 30, 1997 and
1998 (unaudited). . . . . . . . . . . . . . . . . . . . . F-28
<PAGE>
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, June 30,
------------------------------ 1998
1996 1997 (unaudited)
-------------- ------------ -----------
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents . . . . . . . . . . . . $ 287,098 $ 428,271 $ 6,373,246
Accounts receivable, net of allowance
for doubtful accounts of $77,000 and $74,000
at December 31, 1996 and 1997, respectively,
and $47,000 at June 30, 1998. . . . . . . . . . 1,500,233 1,822,817 1,347,068
Inventory . . . . . . . . . . . . . . . . . . . . 404,493 1,178,493 1,842,360
Prepaid expenses and other current assets . . . . 24,252 51,418 158,039
Other current assets. . . . . . . . . . . . . . . -- -- 28,488
----------- ----------- -----------
Total current assets. . . . . . . . . . . . . . . 2,216,076 3,480,999 9,749,201
----------- ----------- -----------
Property and equipment:
Computer equipment. . . . . . . . . . . . . . . . 876,328 1,388,119 1,652,483
Office equipment. . . . . . . . . . . . . . . . . 208,772 255,539 327,735
----------- ----------- -----------
1,085,100 1,643,658 1,980,218
Less accumulated depreciation . . . . . . . . . . 401,176 646,381 794,524
----------- ----------- -----------
Net property and equipment. . . . . . . . . . . . . 683,924 997,277 1,185,694
License agreement, net of accumulated amortization
of $ -- and $73,557 at December 31, 1996 and
1997, respectively, and $110,886 at June 30,
1998. . . . . . . . . . . . . . . . . . . . . . . 288,100 217,753 180,424
Purchased and developed software, net of
accumulated amortization of $1,175,185 and
$2,370,344 at December 31, 1996 and 1997,
respectively, and $2,680,222 at June 30, 1998 . . 2,143,044 2,601,685 3,066,222
Other intangibles, net of accumulated amortization
of $9,874 and $15,814 at December 31, 1996 and
1997, respectively, and $18,784 at June 30, 1998. 49,513 43,573 40,603
Deferred financing fees, net of accumulated amorti-
zation of $ -- and $63,370 at December 31, 1996
and 1997, respectively, and $ -- at June 30, 1998 -- 285,068 --
Other . . . . . . . . . . . . . . . . . . . . . . . 13,008 13,008 13,008
----------- ----------- -----------
Total assets. . . . . . . . . . . . . . . . . . . . $ 5,393,665 $ 7,639,363 $14,235,152
=========== =========== ===========
<PAGE>
MERGE TECHNOLOGIES INCORPORATED AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS - CONTINUED
LIABILITIES AND SHAREHOLDERS' EQUITY
December 31, June 30,
------------------------------ 1998
1996 1997 (unaudited)
-------------- ------------ -----------
Current Liabilities:
Note payable to bank. . . . . . . . . . . . . . . $ 753,000 $ -- --
Note payable. . . . . . . . . . . . . . . . . . . -- 2,000,000 --
Current portion of obligations under capital leases 55,959 54,612 33,705
Accounts payable. . . . . . . . . . . . . . . . . 1,530,130 1,587,113 952,634
Customer deposits . . . . . . . . . . . . . . . . 5,294 39,182 128,425
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 191,221 354,637 371,089
Other accrued liabilities . . . . . . . . . . . . 101,710 104,773 80,264
----------- ----------- -----------
Total current liabilities . . . . . . . . . . . . . 2,653,823 5,452,704 1,566,117
----------- -----------
Obligations under capital leases, excluding
current portion . . . . . . . . . . . . . . . . . -- 26,516 21,632
Put options related to redeemable common
stock and stock warrants. . . . . . . . . . . . . 288,730 -- --
----------- ----------- -----------
Total liabilities. . . . . . . . . . . . . . . . 2,958,978 5,479,220 1,587,749
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, and authorized 30,000 and 5,778,216
shares issued and outstanding at June 30, 1998. 38,969 39,081 57,782
Additional paid-in capital. . . . . . . . . . . . 2,854,107 2,732,631 13,939,556
Accumulated deficit . . . . . . . . . . . . . . . (459,602) (668,628) (1,408,641)
Accumulated other comprehensive income. . . . . . -- -- 58,706
Cumulative translation adjustment . . . . . . . . 1,213 57,059 --
----------- ----------- -----------
Total shareholders' equity. . . . . . . . . . . . . 2,434,687 2,160,143 12,647,403
----------- ----------- -----------
Total liabilities and shareholders' equity. . . . . $ 5,393,665 $ 7,639,363 14,235,152
=========== =========== ===========
<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 and
Three Months ended June 30, 1997 and June 30, 1998 and
Six Months ended June 30, 1997 and June 30, 1998 (unaudited)
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30, JUNE 30,
---------------------------------- ---------------------- ----------------------
1995 1996 1997 1997 1998 1997 1998
---------- ---------- ---------- ---------- ---------- ---------- ----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Net Sales . . . . . . . .$3,718,082 $6,384,659 $9,716,112 $2,102,095 $1,931,676 $3,805,423 $4,577,774
Cost of goods sold:
Purchased components. . 752,630 1,626,882 2,362,248 407,319 497,427 880,817 1,295,044
Amortization of pur-
chases and developed
software . . . . . . . 359,859 449,015 613,980 147,253 187,380 294,982 342,253
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total cost of goods
sold. . . . . . . . . . 1,112,489 2,075,897 2,976,228 554,572 684,807 1,175,799 1,637,297
---------- ---------- ---------- ---------- ---------- ---------- ----------
Gross profit. . . . . . . 2,605,593 4,308,762 6,739,884 1,547,523 1,246,869 2,629,624 2,940,477
---------- ---------- ---------- ---------- ---------- ---------- ----------
Operating costs
and expenses:
Sales and marketing . . 880,919 1,519,301 2,621,152 569,271 870,516 989,217 1,621,513
Product research
and development. . . . 822,690 1,391,264 1,616,486 373,646 518,753 718,967 963,242
General and adminis-
trative. . . . . . . . 963,628 1,220,901 1,563,369 306,412 649,836 620,952 1,186,710
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 1,249,329 2,039,105 2,329,136 3,771,465
---------- ---------- ---------- ---------- ---------- ---------- ----------
Operating income (loss) . (436,644) (186,668) 938,877 298,194 (792,236) 300,488 (830,988)
---------- ---------- ---------- ---------- ---------- ---------- ----------
<PAGE>
MERGE TECHNOLOGIES INCORPORATED AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS - CONTINUED
THREE MONTHS ENDED SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30, JUNE 30,
---------------------------------- ---------------------- ----------------------
1995 1996 1997 1997 1998 1997 1998
---------- ---------- ---------- ---------- ---------- ---------- ----------
(unaudited) (unaudited)
Other income (expense):
Interest expense. . . . (141,231) (134,121)(1,088,079) (31,261) (2,485) (63,351) (32,305)
Interest income . . . . 4,006 11,016 19,197 1,969 86,348 4,469 144,785
Other, net. . . . . . . (504) 26,580 (79,021) (22,321) 25,271 (40,480) (21,505)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total other expense . . . (137,729) (96,525)(1,147,903) (51,613) 109,134 (99,362) 90,975
---------- ---------- ---------- ---------- ---------- ---------- ----------
Loss before income
taxes and extra-
ordinary item . . . . . (574,373) (283,193) (209,026) 246,581 (683,102) 201,126 (740,013)
Income taxes. . . . . . . -- -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Loss before extra-
ordinary item . . . . . (574,373) (283,193) (209,026) 246,581 (683,102) 201,126 (740,013)
Extraordinary gain
on extinguishment
of debt . . . . . . . . -- 169,514 -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income (loss) . . . .$ (574,373) $ (113,679)$ (209,026) $ 246,581 $ (683,102)$ 201,126 $ (740,013)
========== ========== ========== ========== ========== ========== ==========
Basic and diluted
income (loss) before
extraordinary item
per share . . . . . . .$ (0.21) $ (0.08)$ (0.05) $ 0.06 $ (0.12)$ 0.05 $ (0.14)
========== ========== ========== ========== ========== ========== ==========
Basic and diluted
net income (loss)
per share . . . . . . .$ (0.21)$ (0.03)$ (0.05)$ 0.06 $ (0.12)$ 0.05 $ (0.14)
=========== ====================== ========== ========== ========== ==========
Shares used to
compute basic and
diluted net income
(loss) per share. . . . 2,777,834 3,464,989 3,902,993 3,942,590 5,778,216 3,943,587 5,444,076
=========== ====================== ========== ========== ========== ==========
<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 and
Six Months ended June 30, 1998 (unaudited)
<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
<PAGE>
MERGE TECHNOLOGIES INCORPORATED AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY - CONTINUED
Class A Class B Common
Shares Class A Shares Class B Shares Common
--------- ---------- ---------- ---------- ---------- ----------
Exercise of stock options . . . . 1,016 10
Sale of common stock. . . . . . . 2,185,000 21,850
Exercise of call option . . . . . (424,757) (4,248)
Exercise of stock warrant . . . . 108,942 1,089
Payment of warrant termination
fee . . . . . . . . . . . . . . (48) --
Payout of fractional shares . . .
Offset of IFO related fees. . . .
Offset of IFO related fees. . . .
Accretion of put value. . . . . .
Net loss. . . . . . . . . . . . .
Foreign currency trans-
lation adjustment . . . . . . .
---------- ---------- ---------- ---------- ---------- ----------
Balance at June 30, 1998. . . . . -- $ -- -- $ -- 5,778,216 $ 57,782
========== ========== ========== ========== ========== ==========
</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. . . . . . . . . . . . . . . (209,025) (209,025)
Foreign currency translation
adjustment. . . . . . . . . . . . . 55,845 55,845
----------- ----------- ----------- ----------- -----------
Balance at December 31, 1997. . . . . 2,732,631 -- (668,627) 57,058 2,160,143
<PAGE>
MERGE TECHNOLOGIES INCORPORATED AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY - CONTINUED
Note
Receivable
in Connec- Retained
Additional tion with Earnings Cumulative Total
Paid-In Purchase of (Accumulated Transition Shareholders'
Capital Common Stock Deficit) Adjustment Equity
----------- ------------- ------------ ----------- -------------
Exercise of stock options . . . . . . 1,490 1,500
Sale of common stock. . . . . . . . . 13,088,150 13,110,000
Exercise of call option . . . . . . . (802,344) (806,592)
Exercise of stock warrant . . . . . . (1,089) --
Payment of warrant termination
fee . . . . . . . . . . . . . . . . 21,788 21,788
Payout of fractional shares . . . . . (291) (291)
Offset of IFO related fees. . . . . . (2,106,556) (2,106,556)
Offset of IFO related fees. . . . . . (66,227) (66,227)
Accretion of put value. . . . . . . . 1,072,003 1,072,003
Net loss. . . . . . . . . . . . . . . (740,013) (740,013)
Foreign currency trans-
lation adjustment . . . . . . . . . 1,648 1,648
----------- ----------- ----------- ----------- -----------
Balance at June 30, 1998. . . . . . .$13,939,555 $ -- (1,408,640) 58,706 $12,647,403
=========== =========== =========== =========== ===========
<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 and
Six Months ended June 30, 1997 and 1998 (unaudited)
<CAPTION>
Six Months Ended
Years Ended December 31, June 30,
--------------------------------- ----------------------
1995 1996 1997 1997 1998
---------- ---------- ---------- ---------- ----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) . . . . . . . . . . . . . $ (574,373)$ (113,679) $ (209,026)$ 201,126 $ (740,013)
Adjustments to reconcile net loss
to net cash provided by
(used in) operating activities:
Depreciation and amortization . . . . . 472,831 625,719 934,649 399,572 498,321
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) (7,077) 12,832
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) 391,861 462,917
Inventory . . . . . . . . . . . . . (140,869) (155,508) (774,000) (262,480) (663,867)
Prepaid expenses. . . . . . . . . . -- -- -- (12,302) (134,613)
Accounts payable. . . . . . . . . . 504,090 604,638 56,984 (538,959) (634,479)
Accrued expenses. . . . . . . . . . (1,761) 140,049 169,408 16,826 24,270
Customer deposits . . . . . . . . . 194,415 (189,121) 33,887 65,644 89,244
Other . . . . . . . . . . . . . . . (38,713) (18,779) 31,743 (9,220) (52,050)
--------- --------- --------- ---------- ----------
Net cash provided by (used in)
operating activities. . . . . . . . . . . . 413,252 171,516 792,599 244,991 (1,137,438)
--------- --------- --------- ---------- ----------
Cash flows from investing activities:
Purchases of property and equipment . . . . (208,401) (319,569) (499,065) (173,490) (331,672)
Development of software . . . . . . . . . . (724,106) (765,640) (1,005,218) (468,770) (774,415)
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) (642,260) (1,106,087)
---------- ---------- ---------- ---------- ----------
<PAGE>
MERGE TECHNOLOGIES INCORPORATED AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
Six Months Ended
Years Ended December 31, June 30,
--------------------------------- ----------------------
1995 1996 1997 1997 1998
---------- ---------- ---------- ---------- ----------
(unaudited)
Cash flows from financing activities:
Proceeds from line of credit. . . . . . . . 250,000 -- -- -- --
Proceeds from loan agreement with Sirrom. . -- -- 2,000,000 2,000,000 --
Financing fees associated with loan
agreement with Sirrom . . . . . . . . . . -- -- (63,371) (63,371) --
Financing fees related to IPO . . . . . . . -- -- (285,068) -- --
Proceeds from revolving credit agreement. . -- 753,000 470,000 470,000 --
Payments on loan agreement with Sirrom. . . -- -- -- -- (2,000,000)
Payments on line of credit . . . . . . . . -- (250,000) -- -- --
Repayment of revolving credit agreement . . -- -- (1,223,000)(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 -- -- 11,221,996
Proceeds from exercise of stock options . . -- -- 8,255 750 1,500
Payment for call of common stock. . . . . . -- -- -- -- (806,592)
Payment of warrant termination fee. . . . . -- -- -- -- (196,096)
Principal payments under capital leases . . (11,596) (23,724) (50,749) (21,961) (30,680)
---------------------- ----------- ---------- ----------
Net cash provided by financing activities . . 593,389 1,340,555 856,067 1,162,418 8,190,128
---------------------- ----------- ---------- ----------
Effect of exchange rate changes on cash . . . -- -- -- 12,581 (1,628)
Net increase in cash and cash equivalents . . 19,153 138,762 141,173 777,730 5,944,975
Cash and cash equivalents,
beginning of period . . . . . . . . . . . . 129,183 148,336 287,098 287,098 428,271
---------- ---------- ---------- ---------- ----------
Cash and cash equivalents, end of period . . $ 148,336 $ 287,098 $ 428,271 $1,064,828 $6,373,246
========== ========== ========== ========== ==========
Supplemental Disclosures of Cash Flow
Information:
Cash paid for income taxes. . . . . . . . . $ 3,000 $ -- $ -- $ -- $ --
Cash paid for interest. . . . . . . . . . . 73,000 195,000 209,000 74,700 55,000
Non-cash Financing and Investing Activities:
Property and equipment acquired through
capital leases. . . . . . . . . . . . . . 60,000 17,000 59,000 29,600 4,900
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 -- -- --
<PAGE>
MERGE TECHNOLOGIES INCORPORATED AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
Six Months Ended
Years Ended December 31, June 30,
--------------------------------- ----------------------
1995 1996 1997 1997 1998
---------- ---------- ---------- ---------- ----------
(unaudited)
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>
<TABLE>
MERGE TECHNOLOGIES INCORPORATED AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Three Months ended June 30, 1997 and 1998 and
Six Months ended June 30, 1997 and 1998
(Unaudited)
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- --------------------------
1997 1998 1997 1998
----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Comprehensive income:
Net income (loss) . . . . . . . . . . . . . . . $ 246,581 $ (683,102) $ 201,126 $ (740,013)
Other comprehensive income (loss) - cumulative
translation adjustment . . . . . . . . . . . . 7,423 (18,105) 23,813 1,648
--------- ---------- --------- ----------
Comprehensive net income (loss) . . . . . . . . $ 254,004 $ (701,207) $ 224,939 $ (738,365)
========= =========== ========= ==========
<FN>
See accompanying notes to consolidated financial statements
</TABLE>
<PAGE>
MERGE TECHNOLOGIES INCORPORATED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
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.
<PAGE>
MERGE TECHNOLOGIES INCORPORATED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED JUNE 30, 1997 AND 1998 AND
SIX MONTHS ENDED JUNE 30, 1997 AND 1998 (UNAUDITED)
(1) BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared pursuant to the rules and regulations for reporting on Form 10-
QSB. Accordingly, certain information and notes required by generally
accepted accounting principles for complete financial statement are not
included herein. The interim statements should be read in conjunction with
the audited consolidated financial statements and notes thereto included in
the Company's Annual Report for the year ended December 31, 1997.
The accompanying unaudited consolidated financial statements of the
Company have been prepared on the same basis as the audited consolidated
financial statements and include all adjustments of a normal recurring
nature which are, in the opinion of management, necessary to present a fair
statement of the financial conditions and results. The operating results
from interim periods presented are not necessarily indicative of the
results expected for a full year.
(2) 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.
(3) INITIAL PUBLIC OFFERING
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 over allotment
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 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 an unexercised warrant held by
Sirrom Capital for $196,000, and to provide general working capital.
(4) 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. SOP 97-2 provides guidance on applying generally accepted
accounting principles in recognizing revenue on software transactions.
This SOP supersedes SOP 91-1, Software Revenue Recognition and is effective
for transactions entered into in fiscal years beginning after December 15,
1997. The Company has applied SOP 97-2 1998 in its interim financial
statements.
Statement of Financial Accounting Standards No. 130 (FAS 130),
"Reporting Comprehensive Income" was issued in June of 1997. This
statement establishes standards of reporting and display of comprehensive
income and its components in a full set of general purpose financial
statements. It is effective for financial statements for periods beginning
after December 15, 1997. The Company has adopted FAS 130 effective
January 1, 1998.
<PAGE>
108,942 Shares
Merge Technologies Incorporated
Common Stock
______________________________
PROSPECTUS
______________________________
__________, 1998
<PAGE>
No dealer, salesperson, or any other person has been authorized to give any
information or make any representations not contained in this Prospectus
and, if given or made, such information or representations must not be
relied upon as having been authorized by the Company. This Prospectus does
not constitute an offer to sell or a solicitation of an offer to buy any
securities other than those to which it relates or an offer to sell, or a
solicitation of an offer to buy any securities, by any person in any
jurisdiction where such offer or solicitation would be unlawful. Neither
the delivery of this Prospectus nor any sale made hereunder shall, under
any circumstances, create any implication that the information contained
herein is correct as of any time subsequent to the date hereof.
TABLE OF CONTENTS
Page
Additional Information. . . . . . . . . . . . . . . . . . . . . . . .2
<STRIKEOUT>
Incorporation of Certain Documents by Reference . . . . . . . . . . .2
</STRIKEOUT>
Risk Factors. . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
Forward - Looking Statements and Associated Risks . . . . . . . . . 12
The Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Selling Stockholder . . . . . . . . . . . . . . . . . . . . . . . . 12
Dilution. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Capitalization. . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Dividend Policy . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Plan of Distribution. . . . . . . . . . . . . . . . . . . . . . . . 13
Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . . . . . . . . 15
Business. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Management. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Market for Common Stock . . . . . . . . . . . . . . . . . . . . . . 42
Certain Relationships and Related Transactions. . . . . . . . . . . 42
Principal Shareholders. . . . . . . . . . . . . . . . . . . . . . . 45
Description of Securities . . . . . . . . . . . . . . . . . . . . . 46
Shares Eligible for Future Sale . . . . . . . . . . . . . . . . . . 51
Legal Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
Experts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
Financial Statements. . . . . . . . . . . . . . . . . . . . . . . .F-1
UNTIL __________, 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK OFFERED HEREBY, WHETHER
OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
<PAGE>
PART II - INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 180.0851 of the WBCL allows a Wisconsin corporation to limit
its obligation to indemnify officers and directors by providing so in the
articles of incorporation. The Company's By-Laws provide for
indemnification of directors and officers to the fullest extent permitted
by Wisconsin law.
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers or persons
controlling the Registrant pursuant to the foregoing provisions or
otherwise, the Registrant has been informed that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is therefore unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful defense
of any action, suit or proceeding is asserted by such director, officer or
controlling person in connection with the securities being registered), the
Registrant will, unless, in the opinion of counsel, the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the WBCL and will be governed by the final
adjudication of such issue.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following is a schedule of the estimated expenses to be incurred
by the Company in connection with the registration of the securities
offered hereby.
Registration Fee $ 112
Accounting Fees and Expenses $ 5,000
Legal Fees and Expenses $10,000
Miscellaneous $ 500
-------
Total $15,612
=======
ITEM 26. 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, 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 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. Each of the purchasers in the
transactions described above was given access to financial and
non-financial information about the Company and was a sophisticated
investor capable of understanding the merits and risks of his or her
investment.
<PAGE>
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
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.
In 1995 and 1996, the Company issued an aggregate of 1,229,148 shares
of its Common Stock to 45 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 2,015,826 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
924,043 shares of Common Stock have been granted and are outstanding under
the 1996 plan at exercise prices ranging from $1.48 to $6.00 per share. The
transaction described above was exempt from registration under Rule 701,
promulgated under Section 3(b) of the Securities Act.
In January 1998 the Board of Directors approved the Company's 1998
Stock Option Plan for Directors (the "Director Plan"). As of February 4,
1998, each of the six non-employee Directors of the Company was granted an
option to purchase 10,000 Common Shares at an exercise price equal to the
IPO price of $6.00 per share. The Company is currently authorized to issue
up to an additional 40,000 shares of Common Stock under the Director Plan.
One-third of the Directors' options will vest on each of the first, second
and third anniversaries of the date of the grant. The transaction
described above was exempt from registration under Rule 701, promulgated
under Section 3(b) of the Securities Act.
On June 30, 1997, the Company borrowed $2,000,000 from Sirrom Capital
Corporation ("Sirrom"), a third-party institutional "mezzanine" lender,
pursuant to a note (the "Sirrom Note") and related security agreement. The
Sirrom Note required payments of interest only, computed at 13.5% per
annum, payable monthly in arrears through maturity (June 30, 2002).
Approximately $1,007,000 of the proceeds of the Sirrom Note were applied by
the Company in June 1997 toward the repayment of the bank indebtedness and
the balance toward working capital. No principal payments were required
prior to maturity. Prepayment in whole or part was permitted without
penalty. The Sirrom Note was secured by a first lien on all of the
Company's assets, subject to Sirrom's agreement to subordinate its lien to
a senior revolving credit facility in an amount not to exceed $2,500,000
provided that initially permitted borrowings under such facility was not to
exceed $1,500,000, subject to increase if the Company achieved certain
income targets.
<PAGE>
As a condition to issuance of the Sirrom Note, the Company issued a
warrant, which granted Sirrom the right to acquire for nominal
consideration a base amount of 145,256 Common Shares (the "Sirrom
Warrant"). The base amount of Common Shares purchasable under the Sirrom
Warrant was determined through arms-length negotiations between Sirrom and
the Company. Under the terms of the Sirrom Warrant, in the event the loan
was outstanding in whole or in part on the third, fourth and fifth
anniversaries of the initial loan funding, additional Shares could be
purchased pursuant to the Sirrom Warrant for nominal consideration. The
Sirrom Warrant prohibited the sale of shares by the Company to third
parties at below fair market value without concomitant antidilution
protection to Sirrom, but expressly permitted the issuance of up to
1,354,434 shares pursuant to the 1996 Plan.
The Sirrom Warrant granted Sirrom the right to attend (but not vote
at) Directors' meetings until such time as the Sirrom Note was paid in
full. The Sirrom Warrant granted Sirrom a put right for a period of 30 days
immediately prior to its expiration at "Fair Market Value," which was to be
determined by agreement of the parties or, in the absence of agreement, by
two independent appraisers. Sirrom was granted piggyback registration
rights in connection with certain registered offerings of the Common Shares
and rights of co-sale to participate in sales of the Common Shares by
Robert T. Geras or William C. Mortimore.
By agreement dated October 30, 1997 as amended May 29, 1998 ,
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 would 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 (which ultimately totaled $196,095.60) 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 (extended to 165 days by amendment dated May 29, 1998) of the Closing
of the IPO, 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.
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 27. EXHIBITS
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 (2)
4.1 Form of Lock-Up Agreement (1)
4.2 Common Stock Certificate (1)
4.3 Representative's Warrant (2)
5.1 Opinion of Shefsky & Froelich Ltd. regarding legality
<STRIKEOUT>(3)</STRIKEOUT>
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), and Amendment dated May 29, 1998 (3)
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
<STRIKEOUT>(2)</STRIKEOUT> Lease dated January 30, 1998 (2)
10.7 Alpha Capital Venture Partners Limited Agreement dated March 1, 1997
(1)
10.8 1998 Stock Option Plan For Directors (2)
13.1 Annual Report on Form 10-KSB for the fiscal year ended December 31,
1997 (2)
13.2 Quarterly Report on Form 10-QSB for the quarter ended March 31, 1998
(2)
21 Subsidiaries of Registrant (1)
23.1 Consent of Shefsky & Froelich Ltd. (see Exhibit 5.1)
23.2 Consent of KPMG Peat Marwick LLP (3)
24 Power of Attorney (3)
27.1 Financial Data Schedule (December 31, 1997) (2)
27.2 Financial Data Schedule (June 30, 1998) (4)
<PAGE>
- -----------
(1) Incorporated by reference to Registration Statement on Form SB-2 (no.
333-39111) effective January 29, 1998.
(2) Incorporated by reference to Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1997.
(3) Incorporated by reference to Registration Statement on Form SB-2 (No.
333-58973) filed July 13, 1998.
(4) Incorporated by reference to Quarterly Report on Form 10-QSB for the
quarterly period ended June 30, 1998.
<PAGE>
ITEM 28. UNDERTAKINGS
A. SUPPLEMENTARY AND PERIODIC INFORMATION, DOCUMENTS AND REPORTS.
Subject to the terms and conditions of Section 15(d) of the
Securities Exchange Act of 1934, as amended, the Registrant hereby
undertakes to continue to file with the Securities and Exchange Commission
such supplementary and periodic information, documents and reports as may
be prescribed by any rule or regulation of the Commission heretofore or
hereafter duly adopted pursuant to authority in that Section.
B. INDEMNIFICATION.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 (the "Act") may be permitted to directors, officers
or persons controlling the Registrant pursuant to the foregoing provisions
or otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is therefore unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful defense
of any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless, in the opinion of counsel, the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
C. UNDERTAKINGS PURSUANT TO RULE 415.
The Registrant will (1) file, during any period in which offers or
sales of securities are made under this Registration Statement, a post-
effective amendment to this Registration Statement to: (i) include any
prospectus required by Section 10(a)(3) of the Act; (ii) reflect in the
prospectus any facts or events which, individually or together, represent a
fundamental change in the information in this Registration Statement; and
(iii) include any additional or changed material information on the plan of
distribution; (2) for purposes of determining liability under the Act,
treat each post-effective amendment as a new registration statement of the
securities offered, and the offering of the securities at that time to be
the initial bona fide offering; and (3) file a post-effective amendment to
remove from registration any of the securities that remain unsold at the
end of the offering.
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act, the
Registrant certifies that it has reasonable grounds to believe that it
meets all of the requirements of filing on Form SB-2 and authorized this
Registration Statement to be signed on its behalf by the undersigned, in
the City of Milwaukee, State of Wisconsin, on August 25, 1998
<STRIKEOUT>July 13, 1998.</STRIKEOUT>.
MERGE TECHNOLOGIES INCORPORATED
(Registrant)
By: /s/ William C. Mortimore
------------------------------
William C. Mortimore
President, Chief Executive Officer
and Director
In accordance with the requirements of the Securities Act, this
Registration Statement was signed by the following persons in the
capacities indicated this 25th day of August, 1998. <STRIKEOUT>13th
day of July, 1998.</STRIKEOUT>
Name Position Date
- ---- -------- ----
/s/ William C. Mortimore President,
- --------------------------- Chief Executive Officer, August 25, 1998
William C. Mortimore and Director
(Principal Executive <STRIKEOUT>
Officer) July 13, 1998
</STRIKEOUT>
/s/ Colleen M. Doan Chief Financial Officer,
- --------------------------- Secretary and Treasurer August 25, 1998
Colleen M. Doan (Principal Accounting
Officer and Principal <STRIKEOUT>
Financial Officer) July 13, 1998
</STRIKEOUT>
The entire Board of Directors:
William C. Mortimore
Robert T. Geras
Robert A. Barish, M.D.
Dennis Brown
Michael D. Dunham
Douglas S. Harrington, M.D.
Kevin E. Moley
By /s/ William C. Mortimore
--------------------------- August 25, 1998
William C. Mortimore,
as Attorney-in-fact <STRIKEOUT>
July 13, 1998
</STRIKEOUT>
<PAGE>
EXHIBIT 5.1
- -----------
August 25, 1998
<STRIKEOUT>July 13, 1998</STRIKEOUT>
Merge Technologies Incorporated
1126 South 70th Street
Suite 5107B
Milwaukee, WI 53214
Re: Registration Statement on Form SB-2
Ladies and Gentlemen:
We have examined the Registration Statement on Form SB-2 to be filed
by you with the Securities and Exchange Commission on or about July 13,
1998 (the "Registration Statement") and the form of Prospectus included
therein (the "Prospectus"), in connection with the registration under the
Securities Act of 1933, as amended, of 108,942 shares of your common stock,
$.01 par value, (the "Shares") to be sold by the Selling Stockholder. As
your legal counsel, we have examined (a) the Registration Statement; (b)
the Articles of Incorporation and By-laws of the Company; (c) resolutions
of the Company's Board of Directors relating to the authorization of the
issuance and registration of the Shares covered by the Registration
Statement; and (d) such other proceedings, documents and records as we have
deemed necessary to enable us to render this opinion.
It is our opinion that the Shares are, and following sale by the
Selling Stockholder pursuant to the Registration Statement will remain,
legally and validly issued, fully paid and nonassessable, except with
respect to debts owing to employees of the Company for services performed,
but not exceeding six months' service in any one case, as provided in
Section 180.0622(2)(b) of the Wisconsin Business Corporation Law.
We consent to the use of this opinion as an exhibit to the
Registration Statement and further consent to the use of our name wherever
appearing in the Registration Statement, including any Prospectus
constituting a part hereof, and any amendments thereto.
Very truly yours,
/s/ Shefsky & Froelich Ltd.
SHEFSKY & FROELICH LTD.
<PAGE>
<STRIKEOUT>
EXHIBIT 10.2
- ------------
AMENDMENT TO SIRROM/MERGE AGREEMENT
-----------------------------------
FIRST AMENDMENT dated this 29th day of May, 1998 amending that
certain agreement dated as of October 30, 1997 ("Agreement"), by and
between Sirrom Funding Corporation ("Lender") and Merge Technologies
Incorporated, a Wisconsin corporation ("Merge"). Capitalized terms used
herein and not otherwise defined shall have the same meaning as set forth
in the Agreement.
RECITALS
--------
A. Lender loaned $2,000,000 to Merge and in connection with such
loan obtained a warrant to purchase up to 145,256 shares of Merge's Common
Stock for nominal consideration.
B. The Agreement provides among other things for the reduction in
the number of shares purchasable per the warrant to 108,942 shares ("Lender
Shares"), payment of a termination fee and for Merge to submit a
registration statement for the registration of the Lender Shares, and use
its best efforts to cause such registration statement to be declared
effective, no earlier than 180 days following the initial closing of the
initial public offering of the IPO of Merge's common stock.
C. The Closing Date of the IPO was February 3, 1998 and Merge has
met its obligations to date under the Agreement. The parties are desirous
of extending the dates for the registration of the Lender Shares as set
forth below.
NOW THEREFORE, in consideration of the premises herein, payment of
$1.00 from Merge to Lender, receipt of which is acknowledged, and other
good and valuable consideration, the parties agree that the first sentence
of Section 2d of the Agreement is amended and restated as follows:
The Borrower shall file a registration statement under Form SB-2 no
later than 165 days following the Closing Date, to register the Lender
Shares and shall use its best efforts to cause such registration statement
to be declared effective as quickly as possible, but in no event prior to
180 days following the Closing Date, and Lender further agrees to not sell,
pledge, encumber or otherwise dispose of any of its Lender Shares or its
interest in the Warrant or in any rights in said securities for a period of
180 days following the Closing Date.
IN WITNESS WHEREOF, the undersigned have executed this First
Amendment as of the date first set forth above.
SIRROM FUNDING CORPORATION MERGE TECHNOLOGIES INCORPORATED
By: /S/ John Dyslin
Its: Vice President /S/ William C. Mortimore, President
SIRROM CAPITAL CORPORATION
By: /S/ John Dyslin, Vice President
</STRIKEOUT>
<PAGE>
EXHIBIT 23.2
- ------------
CONSENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
Merge Technologies Incorporated:
We consent to the use of our report included <STRIKEOUT>incor-
porated</STRIKEOUT> herein <STRIKEOUT>by reference</STRIKEOUT> and to the
reference to our firm under the heading "Experts" in the Prospectus.
KPMG PEAT MARWICK LLP
Chicago, Illinois
August 25, 1998
<STRIKEOUT>
July 13, 1998
</STRIKEOUT>
<PAGE>
<STRIKEOUT>
EXHIBIT 24
- ----------
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints
William C. Mortimore his true and lawful attorney-in-fact and agent, with
full power of substitution and resubstitution, for him and in his name,
place and stead, in any and all capacities, to sign any or all amendments
to the Registration Statement on Form SB-2 (including post-effective
amendments), and to file the same, with all exhibits thereto, and all
documents in connection therewith, with the Commission, granting unto said
attorney-in-fact and agent, full power and authority to do and perform each
and every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorney-in-fact and
agent or his substitute or substitutes, may lawfully do or cause to be done
by virtue hereof.
Name Position Date
- ---- -------- ----
/s/ Colleen M. Doan Chief Financial July 13, 1998
- ------------------------------- Officer, Secretary
Colleen M. Doan and Treasurer
/s/ Robert T. Geras Director July 13, 1998
- -------------------------------
Robert T. Geras
/s/ ROBERT A. BARISH, M.D. Director July 13, 1998
- -------------------------------
Robert A. Barish, M.D.
/s/ DENNIS BROWN Director July 13, 1998
- -------------------------------
Dennis Brown
/s/ MICHAEL D. DUNHAM Director July 13, 1998
- -------------------------------
Michael D. Dunham
/s/ DOUGLAS S. HARRINGTON, M.D. Director July 13, 1998
- -------------------------------
Douglas S. Harrington, M.D.
/s/ KEVIN E. MOLEY Director July 13, 1998
- -------------------------------
Kevin E. Moley
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