Form 10-QSB
U.S. Securities and Exchange Commission
Washington, DC 20549
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ............... to ...............
Commission file number 0-29486
MERGE TECHNOLOGIES INCORPORATED
--------------------------------------------
Name of small business issuer in its charter
Wisconsin 39-1600938
- ------------------------------- -------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1126 South 70th Street, Milwaukee, Wisconsin 53214-3151
- -------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: 414-475-4300
Securities registered under Section 12(b) of the Exchange Act:
Common NASDAQ Small Cap
------------------- ---------------------
Title of Each Class Name of each exchange
on which registered
Securities registered under Section 12(g) of the Exchange Act:
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes [ X ] No [ ]
As of May 15, 1998, the issuer had 5,778,216 shares of Common Stock
outstanding.
<PAGE>
INDEX
Page
----
PART I
Item 1. Consolidated Financial Statements. . . . . . . . . 1
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations. . 8
PART II
Item 3. Changes in Securities. . . . . . . . . . . . . . . 11
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . 11
Signatures . . . . . . . . . . . . . . . . . . . . 12
Exhibit Index. . . . . . . . . . . . . . . . . . . 13
i
<PAGE>
<TABLE> PART I
Item 1. Consolidated Financial Statements
MERGE TECHNOLOGIES INCORPORATED AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
ASSETS
<CAPTION>
December 31, March 31,
1997 1998
------------- ------------
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . . . $ 428,271 7,462,596
Accounts receivable, net of allowance for
doubtful accounts of $74,000 at
December 31, 1997 and $40,000 at March 31, 1998. . . . . . . . . . . . 1,822,817 2,267,489
Inventory. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,178,493 1,038,746
Prepaid expenses and other current assets. . . . . . . . . . . . . . . . 23,426 207,947
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . 27,992 21,883
----------- -----------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . 3,480,999 10,998,661
----------- -----------
Property and equipment:
Computer equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,388,119 1,469,072
Office equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . 255,539 273,586
----------- -----------
1,643,658 1,742,658
Less accumulated depreciation. . . . . . . . . . . . . . . . . . . . . . 646,381 711,697
----------- -----------
Net property and equipment . . . . . . . . . . . . . . . . . . . . . . . . 997,277 1,030,961
License agreement, net of accumulated amortization of $73,557 at
December 31, 1997 and $92,206 at March 31, 1998. . . . . . . . . . . . . 217,753 199,103
Purchased and developed software, net of accumulated amortization
of $2,370,344 at December 31, 1997, and $2,508,850 at March 31, 1998 . . 2,601,685 2,815,808
Other intangibles, net of accumulated amortization of $15,814 at
December 31, 1997 and $17,299 at March 31, 1998. . . . . . . . . . . . . 43,573 42,088
Deferred financing fees, net of accumulated amortization of
$63,370 at December 31, 1997 . . . . . . . . . . . . . . . . . . . . . . 285,068 --
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,008 13,008
----------- -----------
$ 7,639,363 15,099,629
=========== ===========
See accompanying notes to consolidated financial statements
<PAGE>
MERGE TECHNOLOGIES INCORPORATED AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS (CONTINUED)
LIABILITIES AND SHAREHOLDERS' EQUITY
<CAPTION>
December 31, March 31,
1997 1998
------------ ------------
(unaudited)
<S> <C> <C>
Current Liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,587,113 1,133,746
Current portion of obligations under capital leases. . . . . . . . . . . 54,612 43,551
Customer deposits. . . . . . . . . . . . . . . . . . . . . . . . . . . . 39,182 72,064
Note payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,000,000 --
Put options related to redeemable common stock and stock warrants. . . . 1,289,887 --
Interest payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,500 --
Accrued wages. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 354,637 320,401
Other accrued liabilities. . . . . . . . . . . . . . . . . . . . . . . . 104,773 88,993
----------- -----------
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . 5,452,704 1,658,755
----------- -----------
Obligations under capital leases, excluding current portion. . . . . . . . 26,516 26,038
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . 5,479,220 1,684,793
Shareholders' Equity:
Preferred Stock, $0.01 par value: Authorized 5,000,000,
no shares issued . . . . . . . . . . . . . . . . . . . . . . . . . . . -- --
Common Stock, $0.01 par value; Authorized 10,000,000, issued and
outstanding 3,908,063 shares at December 31, 1997 and
$5,778,215 at March 31, 1998 . . . . . . . . . . . . . . . . . . . . . 39,081 57,782
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . 2,732,631 14,005,782
Accumulated deficit. . . . . . . . . . . . . . . . . . . . . . . . . . . (668,628) (725,539)
Other comprehensive income - cumulative translation adjustment . . . . . 57,059 76,811
----------- -----------
Total shareholders' equity . . . . . . . . . . . . . . . . . . . . . . . 2,160,143 13,414,836
----------- -----------
$ 7,639,363 15,099,629
=========== ===========
<FN>
See accompanying notes to consolidated financial statements
</TABLE>
<PAGE>
<TABLE>
MERGE TECHNOLOGIES INCORPORATED AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<CAPTION>
Three Months Ended
March 31,
---------------------------
1997 1998
----------- -----------
<S> <C> <C>
Net Sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,703,328 2,646,098
Cost of goods sold:
Purchased components . . . . . . . . . . . . . . . . . . . . . . . . . . 473,498 797,617
Amortization of purchased and developed software . . . . . . . . . . . . 147,729 154,873
----------- -----------
Total cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . 621,227 952,490
----------- -----------
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,082,101 1,693,608
----------- -----------
Operating costs and expenses:
Sales and marketing. . . . . . . . . . . . . . . . . . . . . . . . . . . 419,946 750,997
Product research and development . . . . . . . . . . . . . . . . . . . . 345,321 444,489
General and administrative . . . . . . . . . . . . . . . . . . . . . . . 314,540 536,874
----------- -----------
Total operating costs and expenses . . . . . . . . . . . . . . . . . . . . 1,079,807 1,732,360
----------- -----------
Operating income (loss). . . . . . . . . . . . . . . . . . . . . . . . . . 2,294 (38,752)
----------- -----------
Other income (expense):
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . (32,090) (29,820)
Interest income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,500 58,437
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (18,159) (46,776)
----------- -----------
Total other expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . (47,749) (18,159)
----------- -----------
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (45,455) $ (56,911)
=========== ===========
Basic and diluted net loss per share . . . . . . . . . . . . . . . . . . . $ (0.01) (0.01)
=========== ===========
Shares used to compute basic and diluted net loss per share. . . . . . . . 3,896,862 5,106,197
=========== ===========
<FN>
See accompanying notes to consolidated financial statements
</TABLE>
<PAGE>
<TABLE>
MERGE TECHNOLOGIES INCORPORATED AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
Three Months Ended
March 31,
---------------------------
1997 1998
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (45,454) (56,911)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization. . . . . . . . . . . . . . . . . . . . 199,842 223,213
Provision for doubtful accounts receivable . . . . . . . . . . . . . (5,000) (7,500)
Change in assets and liabilities:
Accounts receivable. . . . . . . . . . . . . . . . . . . . . . . . 149,964 (437,172)
Inventory. . . . . . . . . . . . . . . . . . . . . . . . . . . . . (137,460) 139,747
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . (194,728) (453,367)
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . (11,319) (54,225)
Customer deposits. . . . . . . . . . . . . . . . . . . . . . . . . 46,828 32,883
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . (2,763) (184,521)
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (9,415) (2,952)
----------- -----------
Net cash used in operating activities. . . . . . . . . . . . . . . . . . . (9,325) (794,901)
----------- -----------
Cash flows from investing activities:
Purchases of property and equipment. . . . . . . . . . . . . . . . . . . (106,637) (94,110)
Development of software. . . . . . . . . . . . . . . . . . . . . . . . . (205,091) (351,886)
----------- -----------
Net cash used in investing activities. . . . . . . . . . . . . . . . . . . (311,728) (445,996)
----------- -----------
Cash flows from financing activities:
Proceeds from revolving credit agreement . . . . . . . . . . . . . . . . 100,000 --
Payments on loan agreement with Sirrom . . . . . . . . . . . . . . . . . -- (2,000,000)
Repayment of revolving credit agreement. . . . . . . . . . . . . . . . . (198,000) --
Issuance of common stock, net of expenses. . . . . . . . . . . . . . . . -- 11,288,221
Repurchase of common stock . . . . . . . . . . . . . . . . . . . . . . . -- (806,592)
Termination of unexercised warrants. . . . . . . . . . . . . . . . . . . -- (196,096)
Proceeds from exercise of stock options. . . . . . . . . . . . . . . . . 750 1,500
Principal payments under capital leases. . . . . . . . . . . . . . . . . (11,338) (16,428)
----------- -----------
Net cash provided by (used in) financing activities. . . . . . . . . . . . (108,588) 8,270,605
----------- -----------
<PAGE>
MERGE TECHNOLOGIES INCORPORATED AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(Unaudited)
<CAPTION>
Three Months Ended
March 31,
---------------------------
1997 1998
----------- -----------
<S> <C> <C>
Effect of exchange rate changes on cash. . . . . . . . . . . . . . . . . . 2,164 4,617
----------- -----------
Net increase in cash and cash equivalents. . . . . . . . . . . . . . . . . (408,827) 7,034,325
Cash and cash equivalents, beginning of period . . . . . . . . . . . . . . 287,098 428,271
----------- -----------
Cash and cash equivalents, end of period . . . . . . . . . . . . . . . . . $ (121,729) 7,462,595
============ ===========
Supplemental Disclosures of Cash Flow Information:
Cash paid for interest . . . . . . . . . . . . . . . . . . . . . . . . . 31,300 50,500
Non-cash Financing and Investing Activities:
Property and equipment acquired through capital leases . . . . . . . . . -- 4,900
<FN>
See accompanying notes to consolidated financial statements
</TABLE>
<PAGE>
MERGE TECHNOLOGIES INCORPORATED AND SUBSIDIARY
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(Unaudited)
Three Months Ended
March 31,
--------------------
1997 1998
------ ------
Net Loss . . . . . . . . . . . . . . . . . . . . $(45,455) (56,911)
Other comprehensive income - cumulative
translation adjustment . . . . . . . . . . . . 16,390 19,753
-------- -------
Comprehensive net loss $(29,065) (37,158)
======== =======
See accompanying notes to consolidated financial statements
<PAGE>
MERGE TECHNOLOGIES INCORPORATED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared
pursuant to the rules and regulations for reporting on Form 10-QSB.
Accordingly, certain information and footnotes required by generally
accepted accounting principles for complete financial statement are not
included herein. The interim statements should be read in conjunction with
the financial statements and notes thereto included in the Company's latest
Annual Report on Form 10-KSB.
The accompanying unaudited consolidated financial statements of the
Company reflect all adjustments of a normal recurring nature which are, in
the opinion of management, necessary to present a fair statement of the
financial position.
(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 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. Expenses incurred in
relation to the offering in the three months ended March 31, 1998 were
approximately $510,000 in the three months ended March 31, 1998. The net
proceeds of the offering were also 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 warrants 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 97-1, 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 in presentation of its 1998
consolidated financial statements. SOP 97-2 has not had a material impact
on the Company.
Statement of Financial Accounting Standards No. 130 (FAS 130),
"Reporting Comprehensive Income" was issued in June of 1997. This
Statement establishes standards for 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>
MERGE TECHNOLOGIES INCORPORATED AND SUBSIDIARY
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Special Note on Forward-Looking Statements
Certain statements in this report that are not historical facts
constitute forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995, Section 27A of the Securities Act
of 1933, as amended (the Securities Act) and Section 21E of the Securities
Exchange Act of 1934, as amended (the Exchange Act). Discussions
containing such forward-looking statements may be included herein in the
material set forth under "Management's Discussion and Analysis of Financial
Condition and Results of Operations" as well as within this report
generally. In addition, when used in this report, the words believes,
intends, anticipates, expects and similar expressions are intended to
identify forward-looking statements. These statements are subject to a
number of risks and uncertainties, including, among others, 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 components of the Company's net sales by product line are as follows:
Three Months Ended
March 31,
Product Line 1997 1998
------------ -----------------------
(Unaudited)
MergeWorks Connectivity Products $1,299,000 $2,041,000
OEM Interface Products 358,000 543,000
Network Integration Products and Services 46,000 62,000
---------- ----------
$1,703,000 $2,646,000
========== ==========
<PAGE>
Results of Operations
Three Months Ended March 31, 1998 Compared to Three Months
Ended March 31, 1997
NET SALES. Net sales increased by 55% to $2,646,000 in the three
months ended March 31, 1998 from $1,703,000 in the three months ended March
31, 1997. Net sales of MergeWorks Connectivity Products accounted for the
largest increase, rising by 57% to the $2,041,000 in the three months ended
March 31, 1998 from $1,299,000 in three months ended March 31, 1997,
primarily due to increased distribution of products to end-users through
dealers. Sales of OEM Interface Products grew by 52% to $543,000 in the
three months ended March 31, 1998 from $358,000 in the three months ended
March 31, 1997. Network Integration Products and Services sales increased
35% to $62,000 in the three months ended March 31, 1998 from $46,000 in the
three months ended March 31, 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 the three
months ended March 31, 1998 increased to approximately 30% compared to 28%
in the three months ended March 31, 1997, reflecting higher sales discounts
for certain of the Company's products in certain distribution channels.
GROSS PROFIT. Gross profit increased by 57% to $1,694,000 in the three
months ended March 31, 1998 from $1,082,000 in the three months ended March
31, 1997. As a percentage of net sales, gross profit was 64% in each of
these periods.
SALES AND MARKETING. Sales and marketing expense increased by 79% to
$751,000 in the three months ended March 31, 1998 from $420,000 in the
three months ended March 31, 1997. The Company increased its sales and
marketing department staff to 17 persons as of March 31, 1998 from nine
persons as of March 31, 1997. 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 29% to $444,000 in the three months ended March 31, 1998 from
$345,000 in the three months ended March 31, 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 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 71% to $537,000 in the three months ended March 31, 1998 from
$315,000 in the three months ended March 31, 1997. The increase was due
primarily to additional expenses associated with operations as a publicly
held company. Such expenses include legal, audit and investor relations
services, directors and officers insurance, and preparing, filing and
publishing periodic and other reports. As a percentage of net sales,
general and administrative expense decreased to 19% in the three months
ended March 31, 1998 from 20% in the three months ended March 31, 1997.
<PAGE>
TOTAL OTHER EXPENSE, NET. Total other expense, net decreased to
$18,000 in the three months ended March 31, 1998 from $48,000 in the three
months ended March 31, 1997 due to an increase in interest income of
$55,000 arising from investment of funds from the Company's initial public
offering, which occurred on January 29, 1998, offset in part by an increase
in foreign currency translation expense.
INCOME TAXES. The Company did not pay federal income taxes or
recognize an income tax benefit in the three months ended March 31, 1998 or
in the three months ended March 31, 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.
Liquidity and Capital Resources
Cash used in operating activities was $795,000 in the three months
ended March 31, 1998 compared to $9,000 in the three months ended March 31,
1997. During the three months ended March 31, 1998, the Company used cash
for an increase in accounts receivable of $437,000, an increase in prepaid
expenses of $185,000 reflecting payments for corporate insurance and
prepaid software licenses, and to reduce accounts payable to $453,000 using
cash proceeds from the initial public offering.
Investing activities include net additions to capital equipment of
$94,000 and $107,000, and additions to capitalized software of $352,000,
and $205,000 in the three months ended March 31, 1998 and the three months
ended March 31, 1997, respectively.
Cash provided by (used in) financing activities for the three months
ended March 31, 1998 and the three months ended March 31, 1997 was
$8,271,000 and $(109,000) respectively. The Company received net proceeds
of approximately $11,800,000 in the issuance of common stock in the initial
public offering and subsequent overallotment exercise and incurred
approximately $510,000 in related expenses in three months ended March 31,
1998. In the three months ended March 31, 1997, the Company used a net
amount of $98,000 in repayment of a revolving credit facility.
The Company had cash and cash equivalents of $7,463,000 and $428,000,
and working capital (deficits) of $9,340,000 and $(1,972,000) at March 31,
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 December 31, 1997 cash and cash equivalent
balances and internally generated funds will satisfy the Company's
projected requirements for sales and distribution, research and
development, working capital and commitments under its employment
agreements with its European employees (all of which the Company believes
to be at fair market wage rates) and with Mr. Mortimore, the Company's
President and Chief Executive Officer. Thereafter, if cash generated from
operations is insufficient to satisfy the Company's projected requirements,
of if the Company subsequently elects to use funds for acquisitions or
other matters, the Company may be required to sell additional equity or
debt securities or obtain additional bank or other credit facilities.
There can be no assurance that the Company will be able to sell such
securities or obtain such credit facilities on acceptable terms in the
future, if at all. The sale of additional equity or debt securities could
result in additional dilution to the Company's shareholders.
Year 2000
In the year 2000, many existing computer programs that use only two
digits (rather than four) to identify a year in the date field could fail
or create erroneous results if not corrected. This computer program flaw
is found primarily in custom software and legacy systems. However, it is
expected to affect virtually all companies and organizations.
<PAGE>
All Merge manufacturing equipment and critical facilities equipment
use commercial software applications and have been determined to be Year
2000 compliant. Year 2000 compliance is verified prior to all new
purchases.
As part of Merge's comprehensive approach to Year 2000 Compliance, we
are also verifying that our suppliers of services and products have
effective Year 2000 Compliance processes. This will help ensure that our
business systems will also operate reliably before, during, and into the
new millennium.
The following Merge Technologies products have already been assessed
to be Year 2000 compliant: MergeCOM, MergeAPS, MergeXPI, and MergeARK.
Merge will continue to test its current and future products on an ongoing
basis, applying its Year 2000 Compliance criteria and including any
modifications that are incorporated into the compliance process during its
implementation.
Merge MVP products are assessed on an ongoing basis to assess Year
2000 compliance. Since each MergeMVP can be unique to a protocol, Year
2000 compliance must also be addressed with the manufacturer of the
equipment (i.e., scanner, workstation) attached to the Merge MVP. Most
imaging equipment installed in hospitals today use two digits to represent
a given year, and thus they are not Year 2000 compliant. MergeMVP software
has been designed to convert these two-digit dates to four-digit dates for
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.
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.
PART II
Item 3. Changes in Securities
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. Expenses incurred in
relation to the offering in the three months ended March 31, 1998 were
approximately $510,000. The net proceeds of the offering were also used to
repay in full the outstanding principal and interest on the $2,000,000 note
with Sirrom Capital, to redeem 424,757 shares of stock held by Alpha
Capital Venture Partners at $1.90 per share, to terminate unexercised
warrants held by Sirrom Capital for $196,000, and for general working
capital. The net proceeds received by the Company in connection with the
exercise of the underwriters overallotment option were applied to general
working capital.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
See Exhibit Index
(b) No Reports on Form 8-K were filed during the first fiscal quarter.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this Report to be signed on its behalf by
the undersigned, thereunto duly authorized.
MERGE TECHNOLOGIES INCORPORATED
By: /s/ William C. Mortimore Date: May 15, 1998
William C. Mortimore,
President and Chief Executive Officer
By: /s/ Colleen M. Doan Date: May 15, 1998
Colleen M. Doan,
Chief Financial Officer, Treasurer
and Secretary
(Principal Financial Officer
and Principal Accounting Officer)
<PAGE>
EXHIBIT INDEX
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 Stock Purchase Warrant issued June 30, 1997 by Registrant
to Sirrom Capital Corporation (1)
4.2 Form of Lock-Up Agreement (1)
4.3 Common Stock Certificate (1)
4.4 Representative's Warrant (2)
10.1 Employment Agreement dated September 1, 1997 between
Registrant and William C. Mortimore (1)
10.2 Merge/Sirrom Revised Modification Agreement dated as of
October 30, 1997 (1)
10.3 OEM Purchase Agreement between Registrant and Philips
Medical Systems Nederland B.V. dated September 24, 1994 and First Amendment
dated June 4, 1996 (1)
10.4 Distribution Agreement with Picker International, Inc.
(1)
10.5 1996 Stock Option Plan for Employees of Registrant dated
May 13, 1996 (1)
10.6 Office Lease for West Allis Center dated May 24, 1996
between Registrant and Whitnall Summit Company, LLC, Supplemental Office
Lease dated July 3, 1997 (1) and Supplemental Office Space Lease dated
January 30, 1998 (2)
10.7 Alpha Capital Venture Partners Limited Agreement dated
March 1, 1997 (1)
10.8 1998 Stock Option Plan For Directors (2)
21 Subsidiaries of Registrant (1)
27.1 Financial Data Schedule
- --------------------
(1) Incorporated by reference to Registration Statement on Form SB-2 (No.
333-39111) effective January 29, 1998.
(2) Incorporated by reference to Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1997.
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