Form 10-QSB
U.S. Securities and Exchange Commission
Washington, D.C. 20549
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
TRANSITION REPORT PURSUANT TO 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 0-29486
MERGE TECHNOLOGIES INCORPORATED
(Exact name of small business issuer as specified in its charter.)
Wisconsin 39-1600938
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1126 South 70th Street, Milwaukee, WI 53214-3151
(Address of principal executive offices)
414-475-4300
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 12 months (or
for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past
90 days. Yes _ X__ No ____
As of August 12, 1998, the issuer had 5,778,216 shares of Common
Stock outstanding.
<PAGE>
INDEX
Page
PART I Financial Information
Item 1. Consolidated Financial Statements. . . . . . . . . . 1
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . 7
PART II Other Information
Item 2. Changes in Securities. . . . . . . . . . . . . . . . 12
Item 4. Submission of Matters to a Vote of Security Holders. 13
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . 15
Signatures . . . . . . . . . . . . . . . . . . . . . 16
Exhibit Index. . . . . . . . . . . . . . . . . . . . 17
i
<PAGE>
PART I FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
MERGE TECHNOLOGIES INCORPORATED AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
June 30, 1998 (Unaudited)
ASSETS
Current assets:
Cash and cash equivalents. . . . . . . . . . . . . . . $ 6,373,246
Accounts receivable, net of allowance for doubtful
accounts of $47,000 . . . . . . . . . . . . . . . . . 1,347,068
Inventory. . . . . . . . . . . . . . . . . . . . . . . 1,842,360
Prepaid expenses . . . . . . . . . . . . . . . . . . . 158,039
Other current assets . . . . . . . . . . . . . . . . . 28,488
-----------
Total current assets . . . . . . . . . . . . . . . . . . 9,749,201
-----------
Property and equipment:
Computer equipment . . . . . . . . . . . . . . . . . . . 1,652,483
Office equipment . . . . . . . . . . . . . . . . . . . . 327,735
-----------
1,980,218
Less accumulated depreciation. . . . . . . . . . . . . 794,524
-----------
Net property and equipment . . . . . . . . . . . . . . . 1,185,694
License agreement, net of accumulated amortization of
$110,886. . . . . . . . . . . . . . . . . . . . . . . . 180,424
Purchased and developed software, net of accumulated
amortization of $2,680,222 . . . . . . . . . . . . . . 3,066,222
Other intangibles, net of accumulated amortization of
$18,784 . . . . . . . . . . . . . . . . . . . . . . . . 40,603
Other. . . . . . . . . . . . . . . . . . . . . . . . . . 13,008
-----------
Total assets . . . . . . . . . . . . . . . . . . . . . . $14,235,152
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . $ 952,634
Current portion of obligations under capital leases. . 33,705
Customer deposits. . . . . . . . . . . . . . . . . . . 128,425
Note payable . . . . . . . . . . . . . . . . . . . . . --
Interest payable . . . . . . . . . . . . . . . . . . . --
Accrued wages. . . . . . . . . . . . . . . . . . . . . 371,089
Other accrued liabilities. . . . . . . . . . . . . . . 80,264
Total current liabilities. . . . . . . . . . . . . . . . 1,566,117
Obligations under capital leases, excluding current
portion . . . . . . . . . . . . . . . . . . . . . . . . 21,632
Total liabilities . . . . . . . . . . . . . . . . . . 1,587,749
Shareholders' equity
Preferred stock, $0.01 par value: authorized
5,000,000, no shares issued. . . . . . . . . . . . . --
Common stock, $0.01 par value: authorized 30,000,000,
5,778,216 shares issued and outstanding. . . . . . . 57,782
Additional paid-in capital. . . . . . . . . . . . . . 13,939,556
Accumulated deficit . . . . . . . . . . . . . . . . . (1,408,641)
Accumulated other comprehensive income. . . . . . . . 58,706
-----------
Total shareholders' equity. . . . . . . . . . . . . . . 12,647,403
-----------
Total liabilities and shareholders' equity. . . . . . . $14,235,152
===========
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE> MERGE TECHNOLOGIES INCORPORATED AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months ended June 30, 1997 and 1998 and
Six Months ended June 30, 1997 and June 30, 1998
(Unaudited)
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- --------------------------
1997 1998 1997 1998
----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Net sales. . . . . . . . . . . . . . . . . . . . . $ 2,102,095 $1,931,676 $3,805,423 $4,577,774
Cost of goods sold:
Purchased components . . . . . . . . . . . . . . 407,319 497,427 880,817 1,295,044
Amortization of purchased and developed
software. . . . . . . . . . . . . . . . . . . . 147,253 187,380 294,982 342,253
----------- --------- --------- ---------
Total cost of goods sold . . . . . . . . . . . . . 554,572 684,807 1,175,799 1,637,297
----------- --------- --------- ---------
Gross profit . . . . . . . . . . . . . . . . . . . 1,547,523 1,246,869 2,629,624 2,940,477
----------- --------- --------- ---------
Operating costs and expenses:
Sales and marketing. . . . . . . . . . . . . . . 569,271 870,516 989,217 1,621,513
Product research and development . . . . . . . . 373,646 518,753 718,967 963,242
General and administrative . . . . . . . . . . . 306,412 649,836 620,952 1,186,710
----------- --------- --------- ---------
Total operating costs and expenses . . . . . . . . 1,249,329 2,039,105 2,329,136 3,771,465
----------- --------- --------- ---------
Operating income (loss). . . . . . . . . . . . . . 298,194 (792,236) 300,488 (830,988)
----------- --------- --------- ---------
Other income (expenses):
Interest expense . . . . . . . . . . . . . . . . (31,261) (2,485) (63,351) (32,305)
Interest income. . . . . . . . . . . . . . . . . 1,969 86,348 4,469 144,785
Other, net . . . . . . . . . . . . . . . . . . . (22,321) 25,271 (40,480) (21,505)
----------- --------- --------- ---------
Total other expenses . . . . . . . . . . . . . . . (51,613) 109,134 (99,362) 90,975
----------- --------- --------- ---------
Net income (loss). . . . . . . . . . . . . . . . . $ 246,581 $(683,102) $ 201,126 $(740,013)
=========== ========= ========= =========
Basic and diluted net income (loss) per share. . . $ 0.06 $ (0.12) $ 0.05 $ (0.14)
=========== ========= ========= =========
Shares used to compute basic and diluted net
income (loss) per share . . . . . . . . . . . . . 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 CASH FLOWS
Six Months ended June 30, 1997 and 1998 (Unaudited)
<CAPTION>
Six Months Ended
June 30,
------------------------------
1997 1998
------------ -----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 201,126 (740,013)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization. . . . . . . . . . . . . . . . . . . . . . . . . 399,572 498,321
Provision for doubtful accounts receivable . . . . . . . . . . . . . . . . . . (7,077) 12,832
Change in assets and liabilities:
Accounts receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 391,861 462,917
Inventory. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (262,480) (663,867)
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (12,302) (134,613)
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (538,959) (634,479)
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,826 24,270
Customer deposits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65,644 89,244
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (9,220) (52,050)
--------- -----------
Net cash provided by (used in) operating activities. . . . . . . . . . . . . . . 244,991 (1,137,438)
--------- -----------
Cash flows from investing activities:
Purchases of property and equipment. . . . . . . . . . . . . . . . . . . . . . (173,490) (331,672)
Development of software. . . . . . . . . . . . . . . . . . . . . . . . . . . . (468,770) (774,415)
--------- -----------
Net cash used in investing activities. . . . . . . . . . . . . . . . . . . . . . (642,260) (1,106,087)
--------- -----------
Cash flows from financing activities:
Proceeds from loan agreement with Sirrom . . . . . . . . . . . . . . . . . . . 2,000,000 --
Financing fees associated with loan agreement with Sirrom. . . . . . . . . . . (63,371) --
Proceeds from revolving credit agreement . . . . . . . . . . . . . . . . . . . 470,000 --
Payments on loan agreement with Sirrom . . . . . . . . . . . . . . . . . . . . -- (2,000,000)
Repayment of revolving credit agreement. . . . . . . . . . . . . . . . . . . . (1,223,000) --
Issuance of common stock, net of expenses. . . . . . . . . . . . . . . . . . . -- 11,221,996
Proceeds from exercise of stock options. . . . . . . . . . . . . . . . . . . . 750 1,500
Payment for call of common stock . . . . . . . . . . . . . . . . . . . . . . . -- (806,592)
Payment of warrant termination fee . . . . . . . . . . . . . . . . . . . . . . -- (196,096)
Principal payments under capital leases. . . . . . . . . . . . . . . . . . . . (21,961) (30,680)
--------- -----------
Net cash provided by financing activities. . . . . . . . . . . . . . . . . . . . 1,162,418 8,190,128
--------- -----------
<PAGE>
MERGE TECHNOLOGIES INCORPORATED AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
Six Months ended June 30, 1997 and 1998 (Unaudited)
Six Months Ended
June 30,
------------------------------
1997 1998
------------ -----------
Effect of exchange rate changes on cash. . . . . . . . . . . . . . . . . . . . . 12,581 (1,628)
Net increase in cash and cash equivalents. . . . . . . . . . . . . . . . . . . . 777,730 5,944,975
Cash and cash equivalents, beginning of period . . . . . . . . . . . . . . . . . 287,098 428,271
--------- -----------
Cash and cash equivalents, end of period . . . . . . . . . . . . . . . . . . . . 1,064,828 6,373,246
========= ===========
Supplemental Disclosures of cash flow Information:
Cash paid for interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 74,700 $ 55,000
Non Cash Financing and Investing Activities:
Property and equipment acquired through capital leases . . . . . . . . . . . . . $ 29,600 $ 4,900
<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
(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>
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 among 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 (unaudited and in thousands):
Three Months Six Months
Ended June 30, Ended June 30,
----------------- ---------------
1997 1998 1997 1998
----- ---- ---- ----
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
====== ====== ====== ======
<PAGE>
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.
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
<PAGE>
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.
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.
<PAGE>
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.
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.
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.
<PAGE>
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.
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.
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.
<PAGE>
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.
PART II OTHER INFORMATION
ITEM 2. 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. The net proceeds of the
offering of 1,900,000 shares of common stock were used to repay in full the
outstanding principal and interest on the $2,000,000 note with Sirrom
Capital, to redeem 424,757 shares of stock held by Alpha Capital Venture
Partners at $1.90 per share, to terminate unexercised warrant 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.
On June 16, 1998, the Company's shareholders voted to amend the
Company's Articles to increase the number of authorized shares of common
stock of the Company, par value $0.01 per share, from 10,000,000 to
30,000,000.
<PAGE>
<TABLE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company conducted its Annual Meeting of Shareholders on June 16, 1998. Matters voted on and the results
of such votes are listed below.
<CAPTION>
Votes
Against or Broker
Votes For Withheld Abstained Non-Votes Results
------------ ----------- --------- --------- -------
<S> <C> <C> <C> <C> <C>
Elect Robert A. Barish, M.D. to
serve as Director until the next
annual meeting of Shareholders 3,824,189 3,750 -- -- Elected
Elect Dennis Brown to serve as
Director until the next annual
meeting of Shareholders 3,824,189 3,750 -- -- Elected
Elect Michael D. Dunham to serve as
Director until the next annual
meeting of Shareholders 3,824,189 3,750 -- -- Elected
Elect Robert T. Geras to serve as
Director until the next annual
meeting of Shareholders 3,824,189 3,750 -- -- Elected
Elect Douglas S. Harrington, M.D. to
serve as Director until the next
annual meeting of Shareholders 3,824,189 3,750 -- -- Elected
Elect Kevin E. Moley to serve as
Director until the next annual meeting
of Shareholders 3,824,189 3,750 -- -- Elected
Elect William E. Mortimore to serve
as Director until the next annual
meeting of Shareholders 3,824,189 3,750 -- -- Elected
Concur in the selection of KPMG Peat
Marwick LLP as the Company's
independent certified public
accountants for the fiscal year ending
December 31, 1998 3,754,582 72,307 1,050 -- Passed
<PAGE>
Votes
Against or Broker
Votes For Withheld Abstained Non-Votes Results
------------ ----------- --------- --------- -------
Amend the Company's Restated Articles
of Incorporation by adding a
provision expressly electing not to
be governed by Sections 180.1131
through 180.1133 of the Wisconsin
Business Corporation Law 2,511,304 58,398 93,773 1,164,464 Defeated(1)
Amend the Company's Restated
Articles of Incorporation by
adding a provision expressly
electing not to be governed by
Section 180.1150 of the
Wisconsin Business Corporation
Law 2,425,075 143,627 94,773 1,164,464 Defeated(2)
Amend the Company's Articles of
Incorporation by increasing the
number of authorized shares of
Common Stock from 10,000,000 to
30,000,000 3,753,445 53,076 21,418 1,164,464 Passed
Amend the Company's Stock Option
Plan for Employees to increase
the number of shares of Common
Stock authorized for issuance
under the Plan from 1,015,826
to 2,015,826 2,338,880 307,937 16,658 1,164,464 Passed
<FN>
(1) Required the affirmative vote of 80% of the Company's outstanding shares and the affirmative vote of two-
thirds of the Company's Common Shares held by persons who are not significant shareholders of the Company.
(2) Required the affirmative vote of a majority of the outstanding Common Shares.
</TABLE>
<PAGE>
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 second fiscal quarter.
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of
1934, the Registrant caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MERGE TECHNOLOGIES INCORPORATED
By: /s/ William C. Mortimore Date: August 14, 1998
William C. Mortimore
President and Chief Executive Officer
By: /s/ Colleen M. Doan Date: August 14, 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 Form of Lock-Up Agreement (1)
4.2 Common Stock Certificate (1)
4.3 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) 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 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.
(3) Incorporated by reference to Registration Statement on Form SB-2 (No.
333-58973) filed July 14, 1998.
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 1998 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS INCLUDED IN SUCH
REPORT.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 6,373,246
<SECURITIES> 0
<RECEIVABLES> 1,394,068
<ALLOWANCES> 47,000
<INVENTORY> 1,842,360
<CURRENT-ASSETS> 9,749,201
<PP&E> 1,980,218
<DEPRECIATION> 794,524
<TOTAL-ASSETS> 14,235,152
<CURRENT-LIABILITIES> 1,566,117
<BONDS> 0
<COMMON> 13,997,338
0
0
<OTHER-SE> 1,349,935
<TOTAL-LIABILITY-AND-EQUITY> 14,235,152
<SALES> 0
<TOTAL-REVENUES> 4,577,774
<CGS> 1,637,297
<TOTAL-COSTS> 3,771,465
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 32,305
<INCOME-PRETAX> (740,013)
<INCOME-TAX> 0
<INCOME-CONTINUING> (740,013)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (740,013)
<EPS-PRIMARY> 0
<EPS-DILUTED> (0.14)
</TABLE>
