<PAGE> 1
As filed with the Securities and Exchange Commission on January 26, 1998
Registration No. 333-39111
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WASHINGTON, D.C. 20549
---------------
PRE EFFECTIVE
AMENDMENT
NO. 2 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 Industrial (I.R.S. Employer
Classification Code Number) Identification 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)
--------------------
COPIES TO:
MITCHELL D. GOLDSMITH, ESQ. ELIZABETH R. HUGHES, ESQ.
Shefsky & Froelich Ltd. Venable, Baetjer and Howard, LLP
444 N. Michigan Avenue, Suite 2500 1800 Mercantile Bank & Trust Building
Chicago, IL 60611 Two Hopkins Plaza
(312)527-4000 Baltimore, Maryland 21201-2978
(410) 244-7400
---------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
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: [ ]
---------------
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.
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INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED JANUARY 26, 1998
PROSPECTUS
1,900,000 SHARES
[MERGE LOGO]
MERGE TECHNOLOGIES INCORPORATED
COMMON STOCK
The 1,900,000 shares of common stock, par value $0.01 per share (the
"Common Stock"), offered hereby are being issued and sold by Merge Technologies
Incorporated (the "Company"). Prior to the offering contemplated hereby (the
"Offering"), there has been no public market for the Common Stock. It is
anticipated that the initial public offering price will be between $7.00 and
$8.00 per Share. See "Underwriting" for a discussion of the factors considered
in determining the initial public offering price. The Company has applied to
have the Common Stock included for quotation on the Nasdaq SmallCap Market under
the symbol "MRGE."
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK AND
SUBSTANTIAL IMMEDIATE DILUTION. SEE "RISK FACTORS" BEGINNING ON PAGE 7.
---------------------
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.
<TABLE>
<S> <C> <C> <C>
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PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
- -------------------------------------------------------------------------------------------------------------
Per Share......................
- -------------------------------------------------------------------------------------------------------------
Total(3).......................
=============================================================================================================
</TABLE>
(1) Excludes a non-accountable expense allowance equal to three percent (3.0%)
of the total proceeds from the sale of the Common Stock payable to H.C.
Wainwright & Co., Inc., the representative of the Underwriters (the
"Representative"), and the value of warrants to be issued to the
Representative to purchase 190,000 shares of Common Stock at an exercise
price of 130% of the Price to Public (the "Representative's Warrants"). The
Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended (the "Securities Act"). See "Underwriting."
(2) Before deducting expenses of the Offering payable by the Company estimated
to be $ , ($ , if the Underwriters' over-allotment option is
exercised in full) including the Representative's non-accountable expense
allowance. See "Underwriting."
(3) The Company has granted the Underwriters a 30-day option to purchase up to
285,000 additional shares of Common Stock, on the same terms as set forth
above, solely to cover over-allotments, if any. If the Underwriters exercise
such option in full, the total Price to Public, Underwriting Discount and
Proceeds to Company will be $ , $ , and $ ,
respectively. See "Underwriting."
---------------------
The shares of Common Stock are being offered severally by the Underwriters
named herein, subject to prior sale, when, as and if issued to and accepted by
them, subject to the approval of certain legal matters by counsel for the
Underwriters and to certain other conditions. The Underwriters reserve the right
to withdraw, cancel or modify such offer and to reject orders in whole or in
part. It is expected that delivery of the shares of Common Stock will be made in
Boston, Massachusetts on or about , 1998.
H.C. WAINWRIGHT & CO., INC.
The date of this Prospectus is , 1998.
<PAGE> 3
INSIDE FRONT COVER PAGE
The inside front cover diagram contains a large oval with a Merge logo in
the center. "Medical Image Management Network" is written above the oval.
Pictures of various medical image-producing and image-using devices are
displayed around the circumference of the oval. Radial lines connect each
medical device to the Company's logo in the center. A downward arrow points from
the center of the oval to a caption just below that reads "Shared information
with outside networks." Graphics labeled "Hospitals" and "Clinics" flank this
caption.
Below the oval are four pictures of the Company's product groups. The
products displayed include MergeWorks Connectivity Products, OEM Interface
Products, Network Integration Products and Services and Networked Image
Management Products. A caption above the pictures reads "Merge Product Profile."
[Inside Cover Printed Here]
MergeMVP(TM), MergeXPI(TM), MergeAPS(TM), MergeARK(TM), MergeCOM-3(TM),
MergeLINK(TM), MergeWorks(TM), CaseWorks(TM), MergeVPI(TM), MergeDPI(TM),
MergeXPI(TM), MergeReader(TM), MergeBOX(TM) and ReportManager(TM), among other
marks, are trademarks or service marks of the Company.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK OFFERED
HEREBY, INCLUDING THE ENTRY OF STABILIZING BIDS, SYNDICATE COVERING TRANSACTIONS
OR THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial data appearing elsewhere in this Prospectus. Potential
purchasers of the Common Stock should read carefully this Prospectus in its
entirety and should consider carefully the factors identified under "Risk
Factors." Except as otherwise indicated, the information contained herein: (i)
reflects a 6.77217-for-one stock split of Common Stock effected as of the date
of declaration of effectiveness of the Offering (the "Stock Dividend"); (ii)
assumes the redemption and retirement of 424,757 shares of Common Stock held by
Alpha Capital Venture Partners, Limited ("Alpha"), a third-party institutional
investor, See "Certain Transactions"; (iii) assumes repayment of a Secured
Promissory Note dated June 30, 1997, in favor of Sirrom Capital Corporation, a
third-party lender, ("Sirrom") in the principal amount of $2,000,000 (the
"Sirrom Note"); (iv) assumes the issuance of 108,942 shares of Common Stock
issuable pursuant to a warrant originally issued to Sirrom to acquire for
nominal consideration 145,256 shares of Common Stock and subsequently modified
as of October 6, 1997 (the "Sirrom Warrant"), See "Certain Transactions"; (v)
assumes payment of a fee of approximately $245,000 to Sirrom in connection with
the Sirrom Warrant (the "Sirrom Termination Fee"); and (vi) assumes the
Underwriters' over-allotment option is not exercised. Unless the context
otherwise requires, the terms "Merge" and the "Company" include Merge
Technologies Incorporated, a Wisconsin corporation, and its subsidiary, Signal
Stream, Incorporated, a Wisconsin corporation ("SSI").
THE COMPANY
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 improvement of the exchange and storage of information by the various
participants in the health care delivery system is essential to the efficient
delivery of health care services. Such exchange and storage generally is
conducted through the manual transfer and storage of patient information in hard
copy format. If accomplished electronically, information exchange generally is
limited to text that can be transferred only among the internal departments of a
single institution. In recent years, however, the health care industry has
recognized that technology now permits the development of the EPR as a
repository of individual electronic patient information that can be exchanged
internally among the departments of a single organization, or externally among
all of the health care providers that serve an individual patient. The practice
of medical diagnostics and recommendation of treatment from remote locations by
use of telecommunications is commonly referred to as "telemedicine."
Until recently, despite advances in electronic information storage and
exchange technology in other sectors of health care organizations and
institutions, the exchange of imaging information produced by radiology
departments and diagnostic imaging centers has been limited to hard copy format,
i.e., images printed directly on film that are stored and transferred in
individual patient jackets, as opposed to images that are stored and transferred
electronically and available for display on a computer screen. Because the
medical image-producing and image-using devices manufactured by different
original equipment manufacturers ("OEMs") have historically utilized
incompatible proprietary communications protocols and data formats, the output
of an image-producing device manufactured by one OEM frequently cannot be used
by an
3
<PAGE> 5
image-using device produced by another OEM. As a result, such "legacy" devices
have not been compatible with the network technologies that permit the
electronic exchange and storage of information. This medical image-producing and
image-using device connectivity problem has usually required the direct
connection of image-producing devices to dedicated image-using devices. Such
direct connections have required radiology departments and diagnostic imaging
centers to purchase multiple pieces of similar equipment thereby increasing
their capital expenditures. Further, electronic storage of medical imaging
information in multiple communications protocols and data formats is not
practical.
The Company's products address the incompatibility of the proprietary
communications protocols and data formats used by medical image-producing and
image-using devices by converting the output from a customer's existing base of
image-producing devices into a standard communications protocol and data format
- -- Digital Imaging Communications in Medicine ("DICOM" or the "DICOM standard").
Once in the DICOM standard, such data can be stored electronically, made
generally available on a network or converted into the particular proprietary
language required by any image-using device on the network. The Company's
products enable radiology departments, diagnostic imaging centers and the users
of their images and diagnostic reports to 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 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 be readily incorporated into a patient's EPR.
The Company began to address these issues of format incompatibility when it
commenced selling its products and services in 1989. Today, the Company's
products and services available 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 OEMs to manufacture new radiology
image-producing and image-using devices capable of directly communicating with
the DICOM standard; and (iii) Network Integration Products and Services -- for
the design and installation of DICOM networks, including training, design
assistance and testing services. In addition, the Company has under development
a line of Networked Image Management Products that enables radiologists to
select and manage specific diagnostic images which may be incorporated into a
diagnostic report or an EPR.
The Company's primary objective is to become a leading provider of
connectivity and data management solutions that facilitate the networking of
incompatible, proprietary devices in medical imaging and other diagnostic
systems. The key elements of the Company's strategy include: (i) sell MergeWorks
Connectivity Products for retrofitting legacy radiology image-producing and
image-using devices; (ii) sell OEM Interface Products for new radiology
image-producing and image-using devices; (iii) sell Network Integration Products
and Services; (iv) sell Networked Image Management Products to users of DICOM
networks; and (v) expand the Company's product and service offerings to other
image-intensive specialties and departments in the health care field.
The Company markets its products to OEMs, value-added resellers ("VARs"),
dealers and directly to end-users. The Company's customers include Siemens A.G.
("Siemens"), Philips Medical Systems Nederland B.V. ("Philips"), Toshiba Corp.
("Toshiba") and the GE Medical Systems Division of the General Electric Company
("GE"). The Company also markets its products to end-users through its direct
sales staff and through Picker International, Inc. ("Picker"), Konica Medical
Corporation ("Konica") and other nonexclusive third party dealers.
The Company is a Wisconsin corporation and was incorporated on November 25,
1987. The Company's 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.
4
<PAGE> 6
THE OFFERING
Common Stock being offered by the
Company................................... 1,900,000 shares
Common Stock outstanding prior to the
Offering.................................. 3,592,248 shares
Common Stock to be outstanding after the
Offering(1)............................... 5,492,248 shares
Use of Proceeds........................... For: (i) repayment of the Sirrom
Note; (ii) redemption and
retirement of 424,757 shares of
Common Stock held by Alpha;
(iii) the hiring of new
personnel; (iv) payment of the
Sirrom Termination Fee; and (v)
working capital and other
general corporate purposes. See
"Use of Proceeds."
Proposed Nasdaq SmallCap Market Symbol.... MRGE
- ---------------
(1) Does not include: (i) 1,015,826 shares of Common Stock reserved for issuance
upon the exercise of options which may be granted pursuant to the Company's
1996 Stock Option Plan, of which options to purchase 959,115 shares have
been granted and are outstanding; (ii) 100,000 shares of Common Stock to be
reserved for issuance under the Company's 1998 Stock Option Plan for
Directors, of which options to purchase 60,000 shares are expected to be
granted and outstanding within 30 days following the closing of the
Offering; and (iii) exercise of the Representative's Warrants to purchase up
to 190,000 shares of Common Stock at a price per share equal to 130% of the
initial offering price of the Common Stock. See "Use of Proceeds," and
"Underwriting."
SUMMARY CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
FISCAL YEARS ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
-------------------------------------------------------------- -----------------------
1992 1993 1994 1995 1996 1996 1997
---------- ---------- ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Net sales.................. $ 1,416 $ 1,743 $ 2,420 $ 3,718 $ 6,385 $ 4,252 $ 6,800
Cost of goods sold......... 501 560 653 1,112 2,076 1,330 2,016
Operating costs and
expenses(1)(2)........... 628 760 1,213 3,042 4,495 2,820 3,828
Operating income (loss).... 287 423 554 (436) (187) 102 955
Income (loss) before
extraordinary item....... 144 120 466 (574) (283) 14 357
Net income (loss)(3)....... 144 120 466 (574) (114) 183 357
Net income (loss) before
extraordinary item per
common and common
equivalent share(4)...... $ 0.07 $ 0.05 $ 0.18 $ (0.21) $ (0.07) $ 0.00 $ 0.08
Net income (loss) per
common and common
equivalent share(4)...... $ 0.07 $ 0.05 $ 0.18 $ (0.21) $ (0.03) $ 0.05 $ 0.08
Weighted average number of
common and common
equivalent shares
outstanding(4)........... 2,153,125 2,407,103 2,521,253 2,777,834 3,969,391 3,907,745 4,712,994
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
-----------------------------
ACTUAL AS ADJUSTED(6)
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(UNAUDITED)
<S> <C> <C>
Balance Sheet Data:
Cash and cash equivalents................................. $ 655 $10,020
Working capital........................................... 1,957 11,344
Total assets.............................................. 6,710 16,043
Long-term debt, less current portion...................... 1,368 31
Put options related to redeemable common stock and stock
warrants(5)............................................. 1,469 --
Total shareholders' equity................................ 2,751 14,912
</TABLE>
(footnotes on following page)
5
<PAGE> 7
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(1) Effective May 1, 1995, the Company acquired all the outstanding shares of
Signal Stream Technologies, Inc. The acquisition was accounted for as a
purchase. The fair value of certain acquired in-process technology in the
amount of $375,000 that had not reached technological feasibility was
charged to operations in May 1995.
(2) The Company recognized $364,000 in fees in December 1996 in preparation for
an initial public offering that was canceled.
(3) In May 1996, the Company discharged $463,000 of subordinated notes payable
to Alpha and related accrued interest with the issuance of 33,861 shares of
the Common Stock and a cash payment of $375,000. The Company realized an
extraordinary gain of $169,000.
(4) Net income (loss) per share data has been computed using the weighted
average number of shares of common and common equivalent shares from stock
options (when dilutive using the treasury stock method). Pursuant to the
Securities and Exchange Commission Staff Accounting Bulletin No. 83, common
stock, warrants and options issued during the twelve month period
immediately preceding the Company's proposed initial public offering have
been included in the calculation as if they were outstanding for all periods
presented (even if antidilutive, using the treasury stock method and the
anticipated offering price).
(5) In connection with the Sirrom Note, the Company issued the Sirrom Warrant,
granting Sirrom the right to purchase 145,256 shares of the Common Stock at
$0.01 per share. The Sirrom Warrant is subject to a put option equal to the
fair market value of the Common Stock issuable under the Sirrom Warrant. The
value of this put option at September 30, 1997 totals $1,089,422. In
addition, 424,757 shares of Common Stock are subject to a put option
exercisable by Alpha. The value of the Alpha put option at September 30,
1997 totals $379,462. The Alpha and Sirrom put options will be terminated
simultaneously with the closing of the Offering.
(6) Gives effect to: (i) the sale by the Company of 1,900,000 shares of Common
Stock in this Offering at an assumed public offering price of $7.50 per
share and the application of the net proceeds therefrom; (ii) redemption and
retirement of 424,757 shares of Common Stock held by Alpha which the Company
will redeem simultaneously with the closing of this Offering; (iii)
repayment of the Sirrom Note and related accrued interest simultaneously
with the closing of this Offering; (iv) charge to operations of the Sirrom
Note discount of approximately $663,000 and deferred finance charges of
approximately $32,000; (v) issuance of 108,942 shares of Common Stock upon
exercise of the Sirrom Warrant; and (vi) payment of the Sirrom Termination
Fee.
6
<PAGE> 8
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 DEFICIENCIES; SUBSTANTIAL INTANGIBLE ASSETS AND NEGATIVE NET TANGIBLE
BOOK VALUE
Although the Company experienced significant revenue growth from fiscal
1994 through fiscal 1996, it incurred net losses of approximately $114,000 in
fiscal 1996 and approximately $574,000 in fiscal 1995, respectively, and earned
net income of approximately $466,000 in fiscal 1994. The Company earned net
income of approximately $357,000 for the nine months ended September 30, 1997
and approximately $183,000 for the nine months ended September 30, 1996.
However, there can be no assurance that revenue growth will continue or that the
Company will consistently achieve profitability in the future. As of September
30, 1997, the Company had working capital of approximately $1,957,000. However,
the Company experienced working capital deficiencies of approximately $(438,000)
in 1996 and $(1,243,000) in 1995. As of September 30, 1997, on a pro forma basis
giving effect to the Offering and related transactions, the Company had net
tangible book value of approximately $11,984,000. However, without giving effect
to the Offering and the related transactions, the Company had net tangible book
value of approximately $(54,000). The Company had intangible assets of
approximately $2,805,000 as of September 30, 1997. 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."
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. 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. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
7
<PAGE> 9
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,
adoption of new technologies may slow as capital investment budgets are reduced,
thereby significantly reducing the demand for the Company's products.
BROAD CONTROL BY MANAGEMENT AND DIRECTORS
After the sale of the Common Stock offered hereby, the executive officers
of the Company and members of the Company's Board of Directors, will own
1,525,106 shares (exclusive of vested options to acquire an additional 260,566
shares) of the Company's issued and outstanding Common Stock. Consequently, the
executive officers and Directors will control 28% (26% if the Underwriters'
over-allotment option is exercised in full) 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."
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 75% and 68% of the Company's net sales in
1995 and 1996, respectively, and approximately 76% of the Company's net sales
for the nine months ended September 30, 1997. During 1996, Picker, Philips and
Siemens accounted for approximately 26%, 15% and 10%, respectively, of the
Company's net sales. For the nine months ended September 30, 1997, Picker,
Philips and Konica accounted for approximately 18%, 14% and 11%, 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. 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, including Picker, 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."
8
<PAGE> 10
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 35% of the
Company's net sales for the nine months ended September 30, 1997. Sales in
foreign currency represented approximately 7.8% of the Company's net sales for
the nine months ended September 30, 1997; however, the Company anticipates that
this percentage may increase in the future. In order to increase overseas 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.
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.
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, Dwight A.
Simon, Vice President -- Engineering, 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 will maintain 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, Mr.
Simon, Ms. Doan and Mr. Franco 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 professionals and engineering and
marketing support staff. 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 the Company has submitted domestic and foreign patent applications
on CaseWorks, a product currently in development, 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."
9
<PAGE> 11
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 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. 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 expects to procure product liability insurance, there can be no
assurance that it will procure 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 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."
SIGNIFICANT UNALLOCATED NET PROCEEDS; BROAD DISCRETION OF MANAGEMENT
The Company intends to use the net proceeds of this Offering to repay the
Sirrom Note, redeem 424,757 shares of Common Stock held by Alpha, fund accounts
receivable, increase sales and marketing and research and development, hire
additional personnel and pay the Sirrom Termination Fee. Sirrom and Alpha,
third-party institutional investors, will benefit from the Offering through the
Company's repayment of the Sirrom Note and the redemption of Common Stock held
by Alpha. See "Use of Proceeds." The Company intends to use the balance of the
net proceeds of this Offering, approximately 12% of the total Offering proceeds,
for
10
<PAGE> 12
working capital and other general corporate purposes. In addition, the Company
may use a portion of the net proceeds of this Offering to acquire businesses,
products or technologies complementary to its business. Although the Company has
from time to time engaged in discussions with respect to possible acquisitions,
it has no present plans, intentions, understandings, commitments or agreements,
nor is it currently engaged in any negotiations, with respect to any such
transaction. Pending such uses, the Company intends to invest the net proceeds
from this Offering in short-term, investment-grade, interest-bearing securities.
The Company has no other specific uses for the proceeds of this Offering, and
the exact use of the proceeds will be subject to the discretion of management.
See "Use of Proceeds."
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.
POSSIBILITY OF NASDAQ QUOTATION TERMINATION OR SUSPENSION AND DECREASE IN STOCK
PRICE
The trading of the Common Stock on the Nasdaq SmallCap Market is
conditioned upon meeting 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) have 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
11
<PAGE> 13
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 "Absence of
Public Market; Negotiated Offering Price" and "Potential Adverse Impact on
Market Price of Shares Eligible for Future Sale and Registration Rights."
SUBSTANTIAL AND IMMEDIATE DILUTION; SIGNIFICANT BENEFIT TO CURRENT SHAREHOLDERS
Purchasers of the Common Stock offered hereby will incur immediate dilution
of net tangible book value of approximately $5.32 per share, or 71% of the
anticipated offering price of the Common Stock. Shareholders of the Company who
purchased their shares prior to the public offering acquired their shares at a
cost substantially below the price offered hereby and, accordingly purchasers of
shares of the Company pursuant to this Offering will bear a disproportionate
risk of investment in the Common Stock. See "Dilution."
ABSENCE OF PUBLIC MARKET; NEGOTIATED OFFERING PRICE
Prior to this Offering there has been no market for the Common Stock.
Although the Company has applied to include the Common Stock 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. The price of the Common Stock offered hereby was determined through
negotiation between the Company and the Representative and may not be indicative
of the market price for the Common Stock after the Offering. The factors
considered in determining the offering price were the preliminary demand for the
Common Stock, prevailing market and economic conditions, the Company's revenue
and earnings, estimates of its business potential and prospects, the present
state of its business operations, an assessment of its management, the
consideration of these factors in relation to the market valuation of comparable
companies in related businesses and the current condition of the markets in
which it operates. The offering price does not relate directly to the Company's
book value, cash flow, price-to-earnings ratio, price-to-sales ratio, debt-to-
equity ratio, or other such ratios. Certain factors, such as subsequent sales of
Common Stock into the market by existing shareholders and market conditions
generally, could cause the market price of the Common Stock to vary
substantially. Certain existing shareholders and the Representative have
registration rights for the Common Stock they own or may acquire and/or have
held their shares for over one year and accordingly, will have the ability to
exercise such rights and sell such shares substantially free of securities law
restrictions. See "Lack of Consistent Profitability; History of Operating Losses
and Working Capital Deficiencies; Substantial Intangible Assets and Negative Net
Tangible Book Value," "Substantial and Immediate Dilution; Significant Benefit
to Current Shareholders," "Certain Transactions," "Shares Eligible for Future
Sale" and "Underwriting."
ADDITIONAL FUNDING MAY BE NECESSARY
The Company believes that the estimated net proceeds from this Offering,
together with current 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 agreement with Mr. Mortimore for at least twelve months after the
Offering. Thereafter, if cash generated from operations is insufficient to
satisfy the Company's projected requirements, or if the Company subsequently
elects to use funds for acquisitions or other matters, the Company may be
required to sell additional equity or debt securities or obtain additional bank
or other credit facilities. There can be no assurance that the Company will be
able to sell such securities or obtain such credit facilities on acceptable
terms in the future, if at all. 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."
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<PAGE> 14
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."
POTENTIAL ADVERSE IMPACT ON MARKET PRICE OF SHARES ELIGIBLE FOR FUTURE SALE AND
REGISTRATION RIGHTS
Upon completion of this Offering, the Company will have outstanding
5,492,248 shares of Common Stock. After this Offering, the 1,900,000 shares of
Common Stock sold in this Offering and any shares issued in the event that the
Underwriters' over-allotment option to purchase up to 285,000 shares is
exercised, will be 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 remaining 3,592,248 outstanding shares of Common Stock, are "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. Pursuant to
the Company's 1996 Stock Option Plan, options to acquire up to 959,115 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
anticipated to be held by directors; if exercised, the shares so issued shall be
freely tradeable subject to certain limitations imposed by Rule 701 promulgated
under the Securities Act. In addition, on the closing of the Offering, the
Company will sell to the Representative, individually and not as representative
of the Underwriters, for nominal consideration, the Representative's Warrants
entitling the Representative to purchase an aggregate of 190,000 shares of
Common Stock at an initial exercise price per share equal to 130% of the initial
public offering price hereunder. The Representative's Warrants will be
exercisable for a period of four years commencing one year after the effective
date of this Offering and will contain certain demand and incidental
registration rights relating to the underlying Common Stock. The holders of the
Representative's
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<PAGE> 15
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
3,581,047 outstanding shares of Common Stock has expired. The one-year holding
period with respect to 6,122 shares of Common Stock will expire on May 28, 1998,
and with respect to 5,079 shares, will expire on August 28, 1998.
Shareholders holding approximately 99% 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 94% 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, for a
period of 275 days following the date of this Prospectus and, with respect to
50% of their current stockholdings, and shares they may obtain by exercising
options currently held by them, for a period of 455 days following the date of
this Prospectus; and (ii) Sirrom and Alpha, who hold in the aggregate
approximately 5% of the Company's outstanding Common Stock, have agreed to such
restrictions with respect to all of their current stockholdings for a period of
180 days following the date of this Prospectus. See "Underwriting." In addition,
in order to register the Common Stock for sale in certain states, the thirteen
individuals listed in "Management" have entered into "lock-in" agreements which
prohibit the sale, pledge or encumbrance of all or a substantial majority of
their respective shares for a period of two years following the effective date
of the Offering, 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 Offering in the case of two of such individuals.
Moreover, in order to register the Common Stock for sale in certain states,
except for options to purchase 60,000 shares of Common Stock issuable under the
1998 Stock Option Plan for Directors expected to be granted and outstanding
within 30 days following the closing of the Offering, 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 for a one-year period following the Offering.
Prior to this Offering, there has been 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.
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<PAGE> 16
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.
USE OF PROCEEDS
The net proceeds to the Company from the sale of 1,900,000 shares of Common
Stock offered hereby at an assumed initial public offering price per share of
$7.50, after deducting underwriting discounts, commissions and other expenses of
this Offering, are estimated to be approximately $12,271,000. Such proceeds are
anticipated to be used as follows:
<TABLE>
<CAPTION>
APPROXIMATE PERCENTAGE OF
AMOUNTS NET PROCEEDS
----------- -------------
<S> <C> <C>
Sales and Marketing......................................... $ 3,000,000 24.4%
Research and Development.................................... 1,000,000 8.2%
Redemption of 424,757 shares of Common Stock held by
Alpha(1).................................................. 793,000 6.5%
Payment of the Sirrom Termination Fee(1).................... 245,000 2.0%
Repayment of the Sirrom Note(1)............................. 2,000,000 16.3%
Accounts receivable and inventory financing................. 2,000,000 16.3%
Establish and maintain domestic and international sales
offices................................................... 1,000,000 8.2%
Personnel expense........................................... 700,000 5.7%
Working Capital and General Corporate Purposes.............. 1,533,000 12.4%
----------- -----
Net Proceeds................................................ $12,271,000 100%
=========== =====
</TABLE>
- -------------------------
(1) See "Certain Transactions."
The Sirrom Note was issued on June 30, 1997. The Sirrom Note requires
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 toward the repayment of the bank
indebtedness and the balance toward working capital. 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 for relinquishment of its put option.
The net proceeds, if any, received in connection with the exercise of the
Underwriters' over-allotment option will be applied to working capital.
Net proceeds reserved for working capital and general corporate purposes
may be used by the Company for financing receivables and inventory, personnel
expense, additional sales and marketing expense and additional research and
development expense. A portion of the net proceeds received by the Company may
be used for the acquisition of complementary businesses, products or
technologies. Although the Company has from time to time engaged in discussions
with respect to possible acquisitions, it has no present understandings,
commitments or agreements, nor is it currently engaged in any negotiations, with
respect to any acquisition. None of the net proceeds of the Offering are
specifically designated for payments to officers or Directors.
Pending use of the net proceeds from this Offering, the Company intends to
invest the net proceeds received by it in bank certificates of deposit,
interest-bearing savings accounts, prime commercial paper, United States
Government obligations, money market funds or similar short-term investments.
Any income derived from these short-term investments is expected to be used for
working capital.
The amounts set forth above are estimates developed by management for the
allocation of the net proceeds to be received by the Company from this Offering
based upon the current state of the Company's existing and proposed business and
prevailing economic conditions. These estimates are subject to reallocation by
the Board of Directors among the applications listed above or to new
applications and are further subject to future events, including changes in
general economic conditions, the Company's business plan, and the financial
markets in general. Since a significant portion of the net proceeds will be
applied to general corporate purposes, as working capital, the Company will have
broad discretion as to the application of such net proceeds. See "Risk
Factors -- Significant Unallocated Net Proceeds; Broad Discretion of
Management."
15
<PAGE> 17
DILUTION
At September 30, 1997, the Company's net tangible book value was
approximately $(54,000) or $(0.01) per share of Common Stock. "Net tangible book
value per share of Common Stock" represents the amount of total tangible assets
less total liabilities divided by the number of shares of Common Stock
outstanding. After giving effect to the sale of the Common Stock offered hereby
by the Company at an assumed public offering price of $7.50 per share and the
application of the net proceeds received by the Company therefrom, the repayment
of the Sirrom Note and related accrued interest, the charge to operations of the
Sirrom Note discount of approximately $663,000 and deferred finance charges of
approximately $32,000, the issuance of 108,942 shares of Common Stock upon
exercise of the Sirrom Warrant, the redemption and retirement of 424,757 shares
of Common Stock held by Alpha and payment of the Sirrom Termination Fee, the pro
forma net tangible book value of the Common Stock at September 30, 1997, would
have been approximately $11,984,000, or $2.18 per share, representing an
immediate increase in pro forma net tangible book value of $2.19 per share to
existing shareholders and an immediate dilution of $5.32, or 71% per share to
new investors. The difference between the public offering price per share and
the pro forma net tangible book value per share of Common Stock after the
Offering constitutes dilution to investors in this Offering. The following table
illustrates the immediate per share dilution to new investors:
<TABLE>
<S> <C> <C>
Assumed public offering price per share of Common Stock(1)......... $7.50
Net tangible book value per share of Common Stock before
the Offering........................................... (0.01)
Increase per share attributable to new investors(2)....... 2.19
Pro forma net tangible book value per share of Common Stock after
the Offering..................................................... 2.18
-----
Dilution per share to new investors(3)............................. $5.32
=====
Percentage dilution per share to new investors..................... 71%
</TABLE>
- ---------------
(1) Before deduction of underwriting discounts and commissions and offering
expenses payable by the Company.
(2) After deduction of underwriting discounts and commissions and offering
expenses payable by the Company.
(3) In addition, if the Underwriters' over-allotment option is exercised in
full, the pro forma net tangible book value per share of Common Stock after
the Offering would be approximately $2.44, representing an immediate
increase in pro forma net tangible book value of $2.45 per share to existing
shareholders and an immediate dilution of $5.06 per share to new investors.
The following table summarizes, on a pro forma basis as of September 30,
1997, the differences between the number of shares purchased from the Company,
the total consideration paid to the Company and the average price per share paid
by the existing shareholders and by new investors (based upon an assumed initial
public offering price of $7.50 per share):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
-------------------- ---------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing shareholders........ 3,592,248 65% $ 1,623,430 10% $0.45
New investors................ 1,900,000 35% 14,250,000 90% 7.50
--------- --- ----------- --- -----
Total.............. 5,492,248 100% $15,873,430 100% $2.89
========= === =========== === =====
</TABLE>
The foregoing table does not give effect to the possible issuance of: (i)
1,015,826 shares of Common Stock reserved for issuance upon the exercise of
options which may be granted pursuant to the Company's 1996 Stock Option Plan,
options to purchase 959,115 of which have been granted and are outstanding; (ii)
285,000 shares issuable upon exercise of the Underwriters' over-allotment
option; (iii) 100,000 shares of Common Stock to be reserved for issuance under
the Company's 1998 Stock Option Plan for Directors, of which options to purchase
60,000 shares are expected to be granted and outstanding within 30 days
following the closing of the Offering; and (iv) 190,000 shares issuable upon
exercise of the Representative's Warrants. The foregoing table gives effect to
(i) redemption of 424,757 shares of Common Stock held by Alpha, which the
Company will redeem simultaneously with the close of this Offering; and (ii)
issuance of 108,942 shares of Common Stock upon exercise of the Sirrom Warrant.
See "Use of Proceeds" and "Underwriting."
16
<PAGE> 18
CAPITALIZATION
The following table sets forth the unaudited consolidated capitalization of
the Company at September 30, 1997: (i) on an actual basis; and (ii) on an
adjusted basis to reflect: (a) the consummation of the sale by the Company of
1,900,000 shares of Common Stock offered hereby at an assumed public offering
price of $7.50 per share; (b) the application of the net proceeds therefrom,
including the redemption of 424,757 shares of Common Stock held by Alpha and
repayment of the Sirrom Note and related accrued interest; (c) the charge to
operations of the Sirrom Note discount of approximately $663,000 and deferred
finance charges of approximately $32,000; (d) the issuance of 108,942 shares of
Common Stock upon exercise of the Sirrom Warrant; and (e) the payment of the
Sirrom Termination Fee. This information should be read in conjunction with the
Company's Consolidated Financial Statements and the notes thereto, appearing
elsewhere in this Prospectus. See "Use of Proceeds," and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
----------------------------
(IN THOUSANDS, EXCEPT SHARE
DATA)
ACTUAL AS ADJUSTED
----------- -----------
(UNAUDITED)
<S> <C> <C>
Long-term debt:
Capitalized leases....................................... $ 31 $ 31
Sirrom Note payable, net of discount..................... 1,337 --
Put options related to redeemable common stock and stock
warrants.............................................. 1,469 --
------ -------
2,837 31
------ -------
Shareholders' equity:
Preferred Stock, $.01 par value, 5,000,000 shares
authorized, no shares issued and outstanding............. -- --
Common Stock, $.01 par value, 10,000,000 shares authorized,
3,908,063 issued and outstanding, actual; 5,492,248
issued and outstanding, as adjusted(1)................... 39 55
Additional paid-in capital................................. 2,772 15,430
Accumulated deficit........................................ (103) (770)
Cumulative translation adjustment.......................... 43 43
------ -------
Total shareholders' equity................................. 2,751 14,758
------ -------
Total capitalization....................................... $5,588 $14,789
====== =======
</TABLE>
- ---------------
(1) Does not include: (i) 1,015,826 shares of Common Stock reserved for issuance
upon the exercise of options which may be granted pursuant to the Company's
1996 Stock Option Plan, of which options to purchase 959,115 have been
granted and are outstanding; (ii) 285,000 shares issuable on conversion of
the Underwriters' overallotment option; (iii) 100,000 shares of Common Stock
to be reserved for issuance under the Company's 1998 Stock Option Plan for
Directors, of which options to purchase 60,000 shares are expected to be
granted and outstanding within 30 days following the closing of the
Offering; and (iv) 190,000 shares reserved for issuance upon the exercise of
the Representative's Warrants. See "Underwriting."
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."
17
<PAGE> 19
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The selected financial data set forth below with respect to the Company's
consolidated statements of operation for the three fiscal years ended December
31, 1994, 1995 and 1996 and consolidated balance sheets as of December 31, 1995
and 1996 are derived from audited financial statements of the Company included
elsewhere in this Prospectus. The Company's consolidated statements of
operations data for the years ended December 31, 1992 and 1993 and the
consolidated balance sheet data as of December 31, 1992, 1993 and 1994 are
derived from audited financial statements of the Company not included in this
Prospectus. The consolidated statements of operations data for the nine months
ended September 30, 1996 and September 30, 1997 and the consolidated balance
sheet data as of September 30, 1997 are derived from unaudited financial
statements included elsewhere in this Prospectus. The unaudited financial
statements include all adjustments, consisting only of normal recurring
adjustments, that the Company considers necessary for a fair presentation of the
financial position and results of operations for these periods. Operating
results for the nine months ended September 30, 1997 are not necessarily
indicative of the results that may be expected for the entire fiscal year ended
December 31, 1997. The data set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the financial statements and notes thereto included elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
FISCAL YEARS ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------------------------------ ------------------------
1992 1993 1994 1995 1996 1996 1997
---------- ---------- ---------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net sales....................... $ 1,416 $ 1,743 $ 2,420 $ 3,718 $ 6,385 $ 4,252 $ 6,800
---------- ---------- ---------- ---------- ---------- ---------- ----------
Cost of goods sold:
Purchased components.......... 305 314 388 752 1,627 1,013 1,574
Amortization of purchased and
developed software.......... 196 246 265 360 449 317 442
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total cost of goods sold........ 501 560 653 1,112 2,076 1,330 2,016
---------- ---------- ---------- ---------- ---------- ---------- ----------
Gross profit.................... 915 1,183 1,767 2,606 4,309 2,922 4,784
---------- ---------- ---------- ---------- ---------- ---------- ----------
Operating costs and expenses:
Sales and marketing........... 199 194 378 881 1,519 991 1,605
Product research and
development................. 91 138 365 823 1,391 946 1,133
General and administrative.... 338 428 470 960 1,215 879 1,086
Acquired in-process
technology(1)............... -- -- -- 375 -- -- --
Professional fees related to
proposed financing(2)....... -- -- -- -- 364 -- --
Amortization of other
intangibles................. -- -- -- 3 6 4 4
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total operating costs and
expenses...................... 628 760 1,213 3,042 4,495 2,820 3,828
---------- ---------- ---------- ---------- ---------- ---------- ----------
Operating income (loss)......... 287 423 554 (436) (187) 102 955
Other income (expense)
Interest expense.............. (156) (311) (88) (141) (134) (98) (566)
Interest income............... 62 17 5 4 11 7 11
Other (expense), net.......... (49) (9) (5) (1) 27 3 (43)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total other expense, net........ (143) (303) (88) (138) (96) (88) (598)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income (loss) before income
taxes......................... 144 120 466 (574) (283) 14 357
Income tax expense.............. -- -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Income (loss) before
extraordinary item............ 144 120 466 (574) (283) 14 357
Extraordinary gain on
extinguishment of debt(3)..... -- -- -- -- 169 169 --
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income (loss)............... $ 144 $ 120 $ 466 $ (574) $ (114) $ 183 $ 357
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net income (loss) before
extraordinary item per common
and common equivalent
share(4)...................... $ 0.07 $ 0.05 $ 0.18 $ (0.21) $ (0.07) $ (0.00) $ 0.08
Net income (loss) per common and
common equivalent share(4).... $ 0.07 $ 0.05 $ 0.18 $ (0.21) $ (0.03) $ 0.05 $ 0.08
Weighted average number of
common and common equivalent
shares outstanding(4)......... 2,153,125 2,407,103 2,521,253 2,777,834 3,969,391 3,907,745 4,712,994
</TABLE>
18
<PAGE> 20
<TABLE>
<CAPTION>
DECEMBER 31
----------------------------------------------- SEPTEMBER 30,
1992 1993 1994 1995 1996 1997
------ ------ ------ ------- ------ -------------
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents............................. $ 102 $ 118 $ 129 $ 148 $ 287 $ 655
Working capital....................................... 60 82 388 (1,243) (438) 1,957
Total assets.......................................... 1,375 1,706 1,749 3,604 5,394 6,710
Long-term debt, less current portion.................. 745 686 686 50 16 1,368
Put options related to redeemable common stock and
stock warrants(5)................................... 131 69 219 233 289 1,469
Total shareholders' equity............................ (99) 164 579 875 2,435 2,751
</TABLE>
- ---------------
(1) Effective May 1, 1995, the Company acquired all the outstanding shares of
Signal Stream Technologies, Inc. The acquisition was accounted for as a
purchase. The fair value of certain acquired in-process technology in the
amount of $375,000 that had not reached technological feasibility was
charged to operations in May 1995.
(2) The Company recognized $364,000 in fees in December 1996 in preparation for
an initial public offering that was canceled.
(3) In May 1996, the Company discharged $463,000 of subordinated notes payable
to Alpha and related accrued interest with the issuance of 33,861 shares of
the Common Stock and a cash payment of $375,000. The Company realized an
extraordinary gain of $169,000.
(4) Net income (loss) per share data has been computed using the weighted
average number of shares of common and common equivalent shares from stock
options (when dilutive using the treasury stock method). Pursuant to the
Securities and Exchange Commission Staff Accounting Bulletin No. 83, common
stock, warrants and options issued during the twelve month period
immediately preceding the Company's proposed initial public offering have
been included in the calculation as if they were outstanding for all periods
presented (even if antidilutive, using the treasury stock method and the
anticipated offering price).
(5) In connection with the Sirrom Note, the Company issued the Sirrom Warrant,
granting Sirrom the right to purchase 145,256 shares of the Common Stock at
$0.01 per share. The Sirrom Warrant is subject to a put option equal to the
fair market value of the Common Stock issuable under the Sirrom Warrant. The
value of this put option at September 30, 1997 totals $1,089,000. In
addition, 424,757 shares of Common Stock are subject to a put option
exercisable by Alpha. The value of the Alpha put option at September 30,
1997 totals $380,000. It is contemplated that the Alpha and Sirrom put
options will be terminated simultaneously with the closing of the Offering.
19
<PAGE> 21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company provides software, hardware and systems integration products
and services that enable health care organizations to network otherwise
incompatible image-producing and image-using devices. The Company's products
provide a communications bridge between incompatible devices, permit
radiologists to use either video images on electronic workstations or film as a
diagnostic medium and create a diagnostic-quality electronic archive of imaging
results. In addition, the Company's products and services permit the information
generated and used by medical imaging devices to be included in a health care
organization's information network or an electronic patient record ("EPR").
The Company's products and services available today include: (i) MergeWorks
Connectivity Products -- for retrofitting legacy stand-alone medical
image-producing and image-using devices thereby rendering such devices capable
of communicating over a DICOM network; (ii) OEM Interface Products --
connectivity software tool kits and interface board products that enable
original equipment manufacturers ("OEMs") to manufacture new radiology
image-producing and image-using devices capable of directly communicating with
the DICOM standard; and (iii) Network Integration Products and Services --
systems integration products and services for the design and installation of
DICOM networks, including training, design assistance and testing services. In
addition, the Company has under development a line of Networked Image
Management Products that enables radiologists to select and manage specific
diagnostic images which may be incorporated into a diagnostic report or an EPR.
The Company introduced the first of its MergeWorks Connectivity Products in
1989 and has continually developed and upgraded such products to provide
connectivity to additional image-producing and image-using devices. In 1992, the
Company introduced its OEM Interface Products with the release of the MergeCOM-3
software toolkit. With the acquisition of Signal Stream Technologies, Inc.
("SST") in 1995, the Company expanded into board-level interface products for
OEMs of medical imaging equipment. The Company introduced its Network
Integration Products and Services in 1996. The Company expects to continue to
add new products and additional functionality to existing products.
The components of the Company's net sales by product line are as follows.
<TABLE>
<CAPTION>
NINE MONTHS
FISCAL YEARS ENDED
ENDED DECEMBER 31, SEPTEMBER 30,
------------------------ ---------------
PRODUCT LINE 1994 1995 1996 1996 1997
------------ ------ ------ ------ ------ ------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
MergeWorks Connectivity Products.......... $2,099 $2,725 $4,454 $2,845 $5,019
OEM Interface Products.................... 321 993 1,457 1,110 1,567
Network Integration Products and
Services................................ -- -- 474 297 214
------ ------ ------ ------ ------
$2,420 $3,718 $6,385 $4,252 $6,800
====== ====== ====== ====== ======
</TABLE>
The Company recognizes revenue on both hardware and software products at
the time of shipment to the customer. Revenue from software maintenance, which
is part of the OEM Interface Products line, is deferred and recognized on a
straight-line basis over the contract support period, which is generally one
year.
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 SST 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
20
<PAGE> 22
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.
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 eleven persons at September
30, 1997 from one person in the beginning of 1994. 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.
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 1996, 1995 and 1994, the
Company's research and development expense was $1,391,000, $823,000 and
$365,000, 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.
21
<PAGE> 23
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, selected
statements of operations data as a percentage of net sales:
<TABLE>
<CAPTION>
NINE MONTHS
FISCAL YEARS ENDED
ENDED DECEMBER 31, SEPTEMBER 30,
----------------------- --------------
1994 1995 1996 1996 1997
----- ----- ----- ----- -----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales.......................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold:
Purchased components............................. 16.0 20.3 25.5 23.8 23.1
Amortization of purchased and developed
software...................................... 11.0 9.7 7.0 7.5 6.5
----- ----- ----- ----- -----
Gross profit....................................... 73.0 70.0 67.5 68.7 70.4
Operating costs and expenses:
Sales and marketing.............................. 15.6 23.7 23.8 23.3 23.6
Product research and development................. 15.0 22.1 21.8 22.2 16.7
General and administrative....................... 19.4 25.8 19.0 20.7 16.0
Acquired in-process technology................... -- 10.1 -- -- --
Professional fees related to proposed
financing..................................... -- -- 5.7 -- --
Amortization of other intangibles................ -- 0.1 0.1 0.1 0.1
----- ----- ----- ----- -----
Total operating expenses......................... 50.0 81.8 70.4 66.3 56.4
Operating income (loss)............................ 23.0 (11.8) (2.9) 2.4 14.0
Other expense, net................................. (3.5) (3.7) (1.5) (2.1) (8.8)
----- ----- ----- ----- -----
Income (loss) before income taxes and extraordinary
item............................................. 19.3 (15.5) (4.4) 0.3 5.2
Income tax expense................................. -- -- -- -- --
----- ----- ----- ----- -----
Income (loss) before extraordinary item............ 19.3 (15.5) (4.4) 0.3 5.2
Extraordinary gain on extinguishment of debt....... -- -- 2.6 4.0 --
----- ----- ----- ----- -----
Net income (loss).................................. 19.3% (15.5)% (1.8)% 4.3% 5.2%
===== ===== ===== ===== =====
</TABLE>
- ---------------
(1) See "Summary Consolidated Financial Data" and "Selected Consolidated
Financial Data."
Nine Months Ended September 30, 1997 Compared to Nine Months Ended September
30, 1996
Net sales. Net sales increased by 60% to $6,800,000 for the nine months
ended September 30, 1997 from $4,252,000 for the nine months ended September 30,
1996. Net sales of MergeWorks Connectivity Products accounted for the largest
increase, rising by 76% to $5,019,000 for the nine months ended September 30,
1997 from $2,845,000 for the nine months ended September 30, 1996, primarily due
to increased distribution of products to end-users through dealers. Sales of OEM
Interface Products grew by 41% to $1,567,000 for the nine months ended September
30, 1997 from $1,110,000 for the nine months ended September 30, 1996. Network
Integration Products and Services sales decreased by 28% to $214,000 for the
nine months ended September 30, 1997 from $297,000 for the nine months ended
September 30, 1996 as the Company redirected its resources to meet an increased
demand for MergeWorks Connectivity Products and OEM Interface Products during
the nine months ended September 30, 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 for the nine months ended September 30,
1997 remained level at approximately 23%, reflecting lower material costs which
were offset by higher sales discounts in certain distribution channels.
Gross profit. Gross profit increased by 64% to $4,784,000 for the nine
months ended September 30, 1997 from $2,922,000 for the nine months ended
September 30, 1996. As a percentage of net sales, gross profit
22
<PAGE> 24
increased to 70% for the nine months ended September 30, 1997 from 69% for the
nine months ended September 30, 1996.
Sales and marketing. Sales and marketing expense increased by 62% to
$1,605,000 for the nine months ended September 30, 1997 from $991,000 for the
nine months ended September 30, 1996. In the nine months ended September 30,
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 eleven
persons as of September 30, 1997 from four persons as of September 30, 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 20% to $1,133,000 for the nine months ended September 30, 1997 from
$946,000 for the nine months ended September 30, 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
24% to $1,086,000 for the nine months ended September 30, 1997 from $879,000 for
the nine months ended September 30, 1996. The increase was due primarily to
additional overhead expense required to support higher sales. General and
administrative expense declined as a percentage of net sales to 16% in the nine
months ended September 30, 1997 from 21% in the nine months ended September 30,
1996.
Total other expense, net. Total other expense, net increased by 580% to
$598,000 for the nine months ended September 30, 1997 from $88,000 for the nine
months ended September 30, 1996. A non-cash charge of $426,000 was recognized in
the nine months ended September 30, 1997 for the amortization of the debt
discount related to the outstanding Sirrom Note. An additional non-cash charge
for amortization of the debt discount will be recorded in the amount of $663,000
during the fourth quarter of 1997. See "Business -- Certain Transactions."
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.
Fiscal Year Ended December 31, 1996 Compared to Fiscal Year Ended December 31,
1995
Net sales. Net sales increased by 72% to $6,385,000 in fiscal 1996 from
$3,718,000 in fiscal 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 fiscal 1996 from $2,725,000 in fiscal 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 fiscal 1996 from $993,000
in fiscal 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 26% in fiscal 1996 from 20%
in fiscal 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 fiscal 1996
from $2,606,000 in fiscal 1995. As a percentage of net sales, gross profit
decreased to 68% in fiscal 1996 from 70% in fiscal 1995.
Sales and marketing. Sales and marketing expense increased by 72% to
$1,519,000 in fiscal 1996 from $881,000 in fiscal 1995. This increase resulted
from the Company's decision to expand its sales and marketing
23
<PAGE> 25
resources. The sales and marketing department grew to six persons at the end of
fiscal 1996 from three persons at the end of fiscal 1995, primarily as a result
of implementing end-user distribution channels in fiscal 1996.
Product research and development. Research and development expense
increased by 69% to $1,391,000 in fiscal 1996 from $823,000 in fiscal 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 fiscal 1996 from $960,000 in fiscal 1995, but declined as a
percentage of net sales to 19% in fiscal 1996 from 26% in fiscal 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 fiscal 1996 in preparation for an initial public offering
that was canceled.
Total other expense, net. Total other expense, net, which consists
primarily of interest expense, decreased by 30% to $96,000 in fiscal 1996 from
$138,000 in fiscal 1995. This decrease was attributable to additional borrowings
from the Company's bank, offset in part by lower interest expense on its
subordinated debt, which was repaid in May 1996.
Income taxes. The Company did not pay federal income taxes or recognize an
income tax benefit in fiscal 1996 or fiscal 1995. In each of fiscal 1996 and
fiscal 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 fiscal 1995, the
Company's inability to recognize an income tax benefit was partially due to the
nondeductibility of the charge for acquired in-process technology.
Fiscal Year Ended December 31, 1995 Compared to Fiscal Year Ended December 31,
1994
Net sales. Net sales increased by 54% to $3,718,000 in fiscal 1995 from
$2,420,000 in fiscal 1994. Net sales of MergeWorks Connectivity Products
increased by 30%, or $626,000, to $2,725,000 in fiscal 1995 from $2,099,000 in
fiscal 1994 due to the introduction of products specifically for hardcopy film
networks. Net sales of OEM Interface Products increased by 210% to $993,000 in
fiscal 1995 from $321,000 in fiscal 1994 primarily due to new software license
agreements entered into with OEMs and the introduction of hardware interface
products acquired in the merger with SST.
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 20% in fiscal 1995 from 16%
in fiscal 1994 primarily due to the redesign of certain components to meet
heightened government regulatory requirements.
Gross profit. Gross profit increased by 47% to $2,606,000 for fiscal 1995
from $1,767,000 in fiscal 1994. As a percentage of net sales, gross profit
decreased to 70% in fiscal 1995 from 73% in fiscal 1994.
Sales and marketing. Sales and marketing expense increased by 133% to
$881,000 in fiscal 1995 from $378,000 in fiscal 1994. This increase was
primarily attributable to the Company's retention of additional sales and
marketing personnel. The Company's field sales staff grew to three persons
selling to the Company's OEM/VAR customers at the end of fiscal 1995 from one
full time sales representative at the beginning of fiscal 1994.
Product research and development. Research and development expense
increased by 126%, or $458,000, to $823,000 in fiscal 1995 from $365,000 in
fiscal 1994. In fiscal 1995, the Company implemented a strategy to
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<PAGE> 26
engage in research and development of emerging product lines in addition to its
practice of developing products only after receiving customer orders.
General and administrative. General and administrative expense increased by
104% to $960,000 in fiscal 1995 from $470,000 in fiscal 1994. This increase was
due to 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 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.
Total other expense, net. Total other expense, net, which consists
primarily of interest expense, increased by 57% to $138,000 in fiscal 1995 from
$88,000 in fiscal 1994. This increase was attributable to additional bank
borrowings.
Income taxes. The Company did not pay federal income taxes or recognize an
income tax benefit in fiscal 1995, despite incurring a loss for financial
reporting purposes, due to continued losses and uncertainty as to future
realization of a tax benefit and due to the nondeductibility of the charge for
acquired in-process technology.
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<PAGE> 27
Quarterly results of operations
The following tables set forth unaudited financial data for each of the
eight consecutive fiscal quarters ended September 30, 1997, including such data
expressed as a percentage of the Company's revenue. The unaudited financial
statements include all adjustments, consisting only of normal recurring
adjustments that the Company considers necessary for a fair presentation of the
financial position and results of operations for these periods. The data set
forth below should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Consolidated
Financial Statements and Notes therein included elsewhere in this Prospectus.
The operating results of any quarter are not necessarily indicative of the
results of any future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------------------------------------------------
DEC. 31 MAR. 31 JUNE 30 SEPT. 30 DEC. 31 MAR. 31 JUNE 30 SEPT. 30
1995 1996 1996 1996 1996 1997 1997 1997
------- ------- ------- -------- ------- ------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales.................... $1,112 $1,269 $1,270 $1,714 $2,132 $1,703 $2,102 $2,995
Cost of goods sold:
Purchased components....... 214 300 292 421 614 473 408 693
Amortization of purchased
and developed
software................ 140 98 104 115 132 148 147 147
------ ------ ------ ------ ------ ------ ------ ------
Total cost of goods sold..... 354 398 396 536 746 621 555 840
------ ------ ------ ------ ------ ------ ------ ------
Gross profit................. 758 871 874 1,178 1,386 1,082 1,547 2,155
------ ------ ------ ------ ------ ------ ------ ------
Operating costs and expenses:
Sales and marketing........ 331 275 362 353 529 420 569 616
Product research and
development............. 278 290 328 329 444 345 374 414
General and
administrative.......... 251 292 276 311 336 313 305 468
Professional fees related
to proposed financing... -- -- -- -- 364 -- -- --
Amortization of other
intangibles............. 1 2 1 1 2 2 1 1
------ ------ ------ ------ ------ ------ ------ ------
Total operating costs and
expenses................... 861 859 967 994 1,675 1,080 1,249 1,499
------ ------ ------ ------ ------ ------ ------ ------
Operating income (loss)...... (103) 12 (93) 184 (289) 2 298 656
------ ------ ------ ------ ------ ------ ------ ------
Other income (expense)
Interest expense........... (50) (41) (40) (17) (36) (32) (31) (503)
Interest income............ 1 1 4 2 4 3 2 6
Other, net................. 12 14 (1) (9) 23 (18) (22) (3)
------ ------ ------ ------ ------ ------ ------ ------
Total other expense.......... (37) (26) (37) (24) (9) (47) (51) (500)
------ ------ ------ ------ ------ ------ ------ ------
Income (loss) before income
taxes and extraordinary
item....................... (140) (14) (130) 160 (298) (45) 247 156
------ ------ ------ ------ ------ ------ ------ ------
Income tax expense........... -- -- -- -- -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------
Income (loss) before
extraordinary item......... (140) (14) (130) 160 (298) (45) 247 156
Extraordinary gain on
extinguishment of debt..... -- -- 169 -- -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------
Net income (loss)............ $ (140) $ (14) $ 39 $ 160 $ (298) $ (45) $ 247 $ 156
====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
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<PAGE> 28
<TABLE>
<CAPTION>
AS A PERCENTAGE OF TOTAL REVENUE
THREE MONTHS ENDED
-------------------------------------------------------------------------------
DEC. 31 MAR. 31 JUNE 30 SEPT. 30 DEC. 31 MAR. 31 JUNE 30 SEPT. 30
1995 1996 1996 1996 1996 1997 1997 1997
------- ------- ------- -------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales.................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold:
Purchased components....... 19.2 23.7 23.0 24.6 28.8 27.8 19.4 23.1
Amortization of purchased
and developed
software................ 12.6 7.7 8.2 6.7 6.2 8.7 7.0 4.9
----- ----- ----- ----- ----- ----- ----- -----
Total cost of goods sold..... 31.8 31.4 31.2 31.3 35.0 36.5 26.4 28.0
----- ----- ----- ----- ----- ----- ----- -----
Gross profit................. 68.2 68.6 68.8 68.7 65.0 63.5 73.6 72.0
----- ----- ----- ----- ----- ----- ----- -----
Operating costs and expenses:
Sales and marketing........ 29.7 21.8 28.5 20.6 24.8 24.6 27.0 20.6
Product research and
development............. 25.0 22.8 25.8 19.2 20.9 20.3 17.8 13.8
General and
administrative.......... 22.6 23.0 21.8 18.1 15.7 18.4 14.5 15.6
Professional fees related
to proposed financing... -- -- -- -- 17.0 -- -- --
Amortization of other
intangibles............. 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1
----- ----- ----- ----- ----- ----- ----- -----
Total operating cost and
expenses................... 77.4 67.7 76.2 58.0 78.5 63.4 59.4 50.1
----- ----- ----- ----- ----- ----- ----- -----
Operating income............. (9.2) 0.9 (7.4) 10.7 (13.5) 0.1 14.2 21.9
----- ----- ----- ----- ----- ----- ----- -----
Other income (expense):
Interest expense........... (4.5) (3.2) (3.1) (1.0) (1.7) (1.8) (1.5) (16.8)
Interest income............ 0.1 1.3 0.3 0.1 0.2 0.2 0.1 0.2
Other, net................. 1.1 (0.1) (.1) (0.5) 1.1 (1.1) (1.0) (0.1)
----- ----- ----- ----- ----- ----- ----- -----
Total other expense.......... (3.3) (2.0) (2.9) (1.4) (0.4) (2.7) (2.4) (16.7)
----- ----- ----- ----- ----- ----- ----- -----
Income (loss) before income
taxes and extraordinary
item....................... (12.5) (1.1) (10.3) 9.3 (13.9) (2.6) 11.8 5.2
----- ----- ----- ----- ----- ----- ----- -----
Income tax expense........... -- -- -- -- -- -- -- --
----- ----- ----- ----- ----- ----- ----- -----
Income (loss) before
extraordinary item......... (12.5) (1.1) (10.3) 9.3 (13.9) (2.6) 11.8 5.2
----- ----- ----- ----- ----- ----- ----- -----
Extraordinary gain on
extinguishment of debt..... -- -- 13.4 -- -- -- -- --
----- ----- ----- ----- ----- ----- ----- -----
Net income (loss)............ (12.5)% (1.1)% 3.1% 9.3% (13.9)% (2.6)% 11.8% 5.2%
===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
The Company's results of operations have been subject to quarterly
fluctuations due to a variety of factors, including nonrecurring and
extraordinary gains and losses and the Company's limited capital resources. The
uncertainties generated by the Company's limited capital resources and
nonrecurring extraordinary gains and losses have made the estimation of revenue
and the results of operations on a quarterly basis difficult. As a result, the
Company believes that period-to-period comparison of its results of operations
is not necessarily meaningful and should not be relied upon as an indication of
future performance.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operating activities generated cash for fiscal 1996, fiscal
1995 and fiscal 1994 of $172,000, $413,000 and $693,000, respectively. The
decrease 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.
Investing activities include net additions to capital equipment of
$320,000, $208,000 and $193,000, and additions to capitalized software of
$766,000, $724,000 and $386,000 in fiscal 1996, fiscal 1995 and fiscal 1994,
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<PAGE> 29
respectively. In fiscal 1996, the Company also used $288,000 of cash to invest
in the purchase of a software license for technology used in the CaseWorks
networked image management tool.
Cash provided by financing activities for fiscal 1996 and fiscal 1995 was
$1,341,000 and $593,000, respectively, and in fiscal 1994, cash used in
financing activities was $102,000.
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. See "Certain Transactions."
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 fiscal 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. See "Certain Transactions." The Company increased its borrowings in
fiscal 1996 under its lending facilities by $503,000. In fiscal 1995, the
Company drew $250,000 from its bank line of credit and borrowed an additional
$150,000 from two shareholders. In fiscal 1994, the Company made cash principal
payments of $102,000 on the senior notes.
The Company had cash and cash equivalents of $287,000, $148,000 and
$129,000, and working capital (deficits) of ($438,000), ($1,243,000) and
$388,000 at the end of fiscal 1996, fiscal 1995 and fiscal 1994, respectively.
In June 1997, the Company replaced its working capital bank line with the
Sirrom Note. The Sirrom Note bears interest at 13.5%, payable monthly from
August 1997 through May 2002. The principal and any remaining interest is due in
June 2002. The Company will repay the Sirrom Note using a portion of the net
proceeds of the Offering.
As of September 30, 1997, the Company had cash and cash equivalents of
approximately $655,000, and working capital of approximately $1,957,000.
The Company believes that the estimated net proceeds from this Offering,
together with current cash and cash equivalent balances and internally generated
funds will satisfy the Company's projected requirements for sales and
distribution, research and development, working capital and commitments under
its employment agreements with its European employees (all of which the Company
believes to be at fair market wage rates) and with Mr. Mortimore, under the
terms of which the Company is obligated to pay Mr. Mortimore an annual salary of
$160,000, for at least twelve months after the Offering. Thereafter, if cash
generated from operations is insufficient to satisfy the Company's projected
requirements, or if the Company subsequently elects to use funds for
acquisitions or other matters, the Company may be required to sell additional
equity or debt securities or obtain additional bank or other credit facilities.
There can be no assurance that the Company will be able to sell such securities
or obtain such credit facilities on acceptable terms in the future, if at all.
The sale of additional equity or debt securities could result in additional
dilution to the Company's shareholders.
RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has recently issued Statement No.
128, Earnings Per Share. This statement will affect the disclosure requirements
related to the Company's December 31, 1997 financial statements. Currently, the
Company is evaluating the effect of this new statement on the Company's
financial reporting requirements.
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 91-1,
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 fiscal 1998 financial statements.
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<PAGE> 30
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
various 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.
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
29
<PAGE> 31
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 U.S. 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.
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 usually must 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
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<PAGE> 32
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 to be a substantial
competitive advantage for its business.
NETWORK COMMUNICATIONS PROTOCOLS FOR MEDICAL IMAGING APPLICATIONS
In order to solve the connectivity problem and eventually to replace the
proprietary communications protocols and data formats discussed above, a joint
committee of the American College of Radiology ("ACR") and the National
Electrical Manufacturers' Association ("NEMA") was formed in 1984 to create an
open standard method of describing and communicating medical images over a
network. The joint committee includes representatives of many of the major
companies in the medical imaging industry including Siemens, Philips, GE,
Picker, Kodak, Agfa, Imation, Polaroid Corporation and the Company. Version 3.0
of the DICOM standard was released in 1992 and has become the first medical data
communications standard to be adopted worldwide. Recently ACR and NEMA agreed to
create the DICOM Standards Committee to continue the ongoing work of developing
the DICOM standard. The contents of the DICOM standard are determined by the
consensus of the membership of the DICOM Standards Committee, which includes
representatives of bio-medical professional organizations, manufacturers, trade
associations, other standards development organizations, and governmental
agencies worldwide. The activities of the Committee are administered by NEMA,
and the Committee owns the DICOM standard. The development and use of DICOM has
made possible the efficient collection and management of clinical data that is
produced and used by medical imaging devices.
William C. Mortimore, the Company's President, has been a member of the
ACR/NEMA joint committee since its establishment in 1984. In addition, several
other Company employees, as well as employees of certain of the Company's
competitors, occupy leadership positions on this committee. The Company has
found that its leadership in the setting of standards for medical communications
protocols has provided important technological and strategic insights that have
facilitated the successful development and deployment of its products and
services.
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<PAGE> 33
PRODUCTS AND SERVICES
The Company's electronic imaging products and services available today
include: (i) MergeWorks Connectivity Products for retrofitting legacy radiology
image-producing and image-using devices; (ii) OEM Interface Products, including
connectivity software tool kits and interface boards for new OEM image-producing
and image-using devices; and (iii) Network Integration Products and
Services -- for design and installation of DICOM networks, including training,
design assistance and testing services. An additional line of Networked Image
Management Products for facilitation of radiologists' selection and use of
electronic images is under development.
MERGECOM NETWORK
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,
comprising 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
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<PAGE> 34
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.
Image Printing -- MergeAPS -- The MergeAPS print server permits DICOM
formatted data to be converted into the proprietary language of a wide
variety of medical laser film printers. The MergeAPS print server plays a
key role in transforming stand-alone medical laser film printers to print
networks thereby eliminating the need for individual printers for each
image-producing device. As component parts, MergeAPS print servers can be
used to network a group of existing printers to achieve systems
compatibility without requiring the purchase of new printers. In addition,
the MergeAPS print server contains a limited storage capacity permitting
images to be retained for a short period of time for later printing.
Image Storage -- MergeARK -- The MergeARK digital image archive is a
stand-alone device that is connected to a DICOM compatible network. The
MergeARK archive can acquire images and related clinical information from
any number of image sources including imaging devices, displays and
workstations, laser print servers and other limited storage file servers.
The MergeARK archive can store images permanently, in diagnostic quality on
CDs, for later retrieval over the network, for such applications as film
reprints, supporting the EPR and telemedicine, the practice of medical
diagnostics and recommendation of treatment from remote locations by the
use of telecommunications. Without the DICOM standardization provided by
the Company's products, each incompatible device would require its own
dedicated archive. The MergeARK digital image archive is fully scalable and
a user can upgrade the size of its archive incrementally through the
installation of additional modular CD arrays.
OEM Interface Products
The Company sells software tool kits and interface board products that
enable OEMs to manufacture new radiology image-producing and image-using devices
capable of directly communicating with the DICOM standard. The Company's OEM
Interface Products include:
OEM Connectivity -- MergeCOM-3 Software -- The MergeCOM-3 software
tool kit permits OEMs to design image-producing and image-using devices
capable of communicating in the DICOM format thereby rendering such
equipment network ready and avoiding the need for the MergeMVP converter,
the MergeXPI printer interface or the MergeAPS print server. The Company
licenses the MergeCOM-3 software tool kit to over 70 OEMs of
image-producing devices. The MergeCOM-3 software tool kit is available for
over 30 different computer platforms, representing nearly all of the
technologies currently employed in medical image production and use.
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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. The Company has certain products under development
in this category. See "Products Under Development."
PRODUCTS UNDER DEVELOPMENT
Networked Image Management Products
The Company is developing DICOM Networked Image Management Products that
enable radiologists to select specific diagnostic images. Once selected, such
images may be incorporated into a patient report or the EPR.
Image Management -- CaseWorks -- The CaseWorks radiology work-flow
management tool builds on the Company's MergeWorks product line to manage
the large volume of image data generated in radiology departments and other
diagnostic imaging centers and to facilitate the integration of such data
into the EPR. Because of their clinical expertise and diagnostic
experience, radiologists are best positioned to determine specific images
that are pertinent for inclusion in the patient file from among the large
number of images generated for a patient. Historically, radiologists have
favored the use of film rather than computer workstations for diagnosis.
The CaseWorks management tool directly addresses this preference by
allowing radiologists to continue to use film as a primary diagnostic
medium while facilitating the electronic selection of images for inclusion
in the EPR. During the process of collecting and preparing images for
printing on film for diagnosis, each image is assigned a unique, machine-
readable identifier which is printed next to each image. A radiologist can
prepare a case by selecting the images to be included in the EPR using the
MergeReader hand-held unit. Thereafter, the selected images can be
retrieved, along with the text report, from the MergeARK archive for
consideration by various participants in the health care system. An
anticipated future option for the CaseWorks management tool is the support
of dictation within the MergeReader hand-held unit. The Company expects the
CaseWorks management tool to be available for sale in the second quarter of
1998. In 1996, in anticipation of the introduction of the CaseWorks
management tool, the Company entered into an agreement with a technology
supplier under which the Company was granted a worldwide exclusive license
to duplicate and distribute decoding software embedded in hand-held
readers. The Company was also granted a worldwide non-exclusive license to
duplicate and distribute encoding software used by the Company in recording
identifying marks on x-ray film. Exclusivity under this agreement will
lapse on November 1, 2000. In the event that the Company ceases to
distribute both licensed products for a period of twenty-four months, any
license in effect will automatically terminate.
Image Management -- ReportManager -- The ReportManager integration
tool builds upon the image collection and management capability of the
CaseWorks management tool and facilitates the automated assembly and
distribution of radiology reports containing text and pertinent diagnostic
image data. Such reports can be published in a variety of media including
facsimile, telemedicine and hypertext markup language (HTML), a format for
intranet and internet applications. The Company expects the ReportManager
integration tool to be available for sale by the end of 1998.
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Other Products
The Company is continuing to develop new products and improve existing
products. For example, the Company is currently developing products that provide
a direct connection between DICOM imaging networks and hospital information
systems, facilitating a more complete EPR. These interface products will also
permit transmittal of patient demographic information to the MergeMVP converter
and the MergeXPI print interface where images are initially acquired, thus
reducing data entry errors and labor costs.
STRATEGY
The Company's goal is to become a leading provider of connectivity and data
management solutions that facilitate the networking of incompatible, proprietary
devices in medical imaging systems. The Company intends to achieve this
objective through the implementation of the following strategy:
Sell MergeWorks Connectivity Products for retrofitting legacy radiology
image-producing and image-using
devices.
The majority of the Company's current revenue is generated through the sale
of devices that enable existing radiology image-producing and image-using
equipment to connect to a DICOM network. The Company expects sales of such
devices to grow as (i) radiology departments and other diagnostic imaging
centers that have no DICOM capability or that are partially DICOM-compliant
retrofit additional existing machines with the Company's products, and (ii)
radiology departments and other diagnostic imaging centers install new DICOM
networks that require the retrofitting of all or some of their existing
equipment base with the Company's products. According to a study commissioned by
the Company and conducted by Technology Marketing Group, a diagnostic imaging
market consulting organization located in Des Plaines, Illinois, the number of
radiology departments at hospitals that can use the Company's products totals
approximately 5,500 in the United States and 17,000 internationally. Within
these facilities, there is an estimated total installed base of approximately
250,000 image-producing and image-using devices.
Sell OEM Interface Products for new radiology image-producing and image-using
devices.
The Company currently sells software tool kits that enable manufacturers of
new radiology image-producing and image-using devices to connect their machines
directly to a DICOM network. The Company expects sales of such software tool
kits and interface boards to grow as manufacturers of radiology image-producing
and image-using devices upgrade and expand their current product lines.
According to the Technology Marketing Group study, the estimated annual sales of
new radiology image-producing and image-using machines totals approximately
11,000 units in the United States and 33,000 units internationally.
Sell Network Integration Products and Services.
The Company offers its customers Network Integration Products and Services
that range from the installation of DICOM connectivity devices for
image-producing and image-using equipment to the design and installation of
entire DICOM networks and the conversion of all existing radiology machines to
the DICOM communications protocol.
Sell Networked Image Management Products to users of DICOM networks.
The Company is developing Networked Image Management Products that enable
radiologists to select and mark for retrieval specific selections of medical
imaging data. These products are anticipated to reduce the amount of data
required to be shared over a network and facilitate the development of the EPR.
The Company expects to market these products to radiology departments and other
diagnostic imaging centers that are already connected to a DICOM network.
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Expand the Company's product and service offerings to other image-intensive
departments in medical institutions.
Many devices in medical institutions produce or use images that need to be
viewed, transmitted and stored. Departments that use devices of this type
include endoscopy, pathology, radiotherapy, urology, mammography and dialysis.
The Company believes that machines used by radiology and such other departments
will ultimately be connected to the hospital's information network and that
images produced by these machines will eventually be stored in an EPR. The
Company intends to develop connectivity products for such devices by applying
its expertise in standardized communications protocols to bridge the gap between
DICOM and HL-7, the developing standard for hospital information technology
networks, and by leveraging its strong relationships with the manufacturers of
medical image-producing and image-using devices. Certain employees of the
Company have been: (i) members of the ACR/NEMA DICOM standard setting joint
committee since its formation in 1984; (ii) active members of the HL-7 standard
setting committee for hospital administrative information networks since 1994;
and (iii) core members of the Andover Working Group since 1997. Employees of
certain competitors maintain membership in the HL-7 committee, but no employees
of the Company's competitors are core members of the Andover Working Group. The
Andover Working Group, sponsored by Hewlett-Packard, was formed in 1995 to
develop specific implementations of medical data communication standards. The
primary work of the Andover Working Group has been conducted by approximately
twenty-five core members. The core members that represent diagnostic imaging are
Philips and the Company. The initial accomplishment of the Andover Working Group
has been agreement on an implementation of a subset of HL-7, the developing
standard for hospital information technology networks.
SALES, MARKETING AND DISTRIBUTION
The Company markets its products and services to three types of customers:
(i) OEMs that typically design and manufacture standard model devices such as
MRIs, CTs, CRs, digital x-ray machines and other products that are not
customized by the OEM for the individual customer; (ii) VARs that design and
implement customized solutions, typically utilizing products manufactured by
third parties, for their customers' particular needs; and (iii) dealers that act
as retail distributors to end-users of products manufactured by third parties.
The medical imaging device market is dominated by a limited number of high
volume vendors with multiple divisions. As a result, depending on the specific
product being sold and how it will be utilized, different divisions of a single
customer, each with separate relationships with the Company, may fall into more
than one of the types of customers listed above.
The Company markets its MergeWorks Connectivity Products, and intends to
market its Networked Image Management Products, to VARs, dealers and end-users.
The MergeWorks Connectivity Products enable VARs to connect the image-producing
and image-using devices manufactured by different OEMs into the customized
solutions that they market to their customers. Dealers market the MergeWorks
Connectivity Products directly to end-users typically as part of a catalog of
medical imaging related products.
The Company markets its MergeCOM-3 software tool kit directly to OEMs
pursuant to over 70 licensing agreements with such OEMs. Utilizing the
MergeCOM-3 software tool kit and the Company's interface boards, OEMs are able
to build DICOM capability directly into their products at the design stage. To a
more limited extent, the Company licenses the MergeCOM-3 software tool kit to
end-users that have in-house systems integration capability.
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
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and VARs. Sales to OEMs and VARs accounted for 95% of the Company's net sales in
fiscal 1995, 70% in fiscal 1996 and 61% for the nine months ended September 30,
1997.
The Company's end-user sales initiative is predominantly focused on sales
through dealers. The Company has cultivated relationships with dealers that
permit Company personnel to participate in presentations to potential customers.
Pursuant to such relationships, once an end-user sale is made, the Company sells
its products to the dealer for resale to the end-user. The Company markets to
dealers and end-users through direct sales efforts, advertising and repeat
business generated by its customer support efforts. The Company employs six
sales professionals that market to dealers and end-users. Sales to end-users
accounted for 5% of the Company's net sales in fiscal 1995, 30% in fiscal 1996
and 39% for the nine months ended September 30, 1997. The Company believes that
sales to end-users as a percentage of total net sales will increase in the
future.
The Company supports its general marketing efforts by exhibiting its
products directly to customers in major trade shows; through its Internet
address; through direct customer support; and through its product warranty. With
respect to trade shows, the Company exhibits its products at the Radiological
Society of North America annual meeting, the European Congress of Radiology and
the Association of American Hospital Radiology Administrators annual meeting.
Because the medical imaging industry is dominated by a few large participants,
such trade shows, which employees of most such participants attend, are viewed
by the Company as an integral part of its marketing strategy. The Company's
Internet address (www.merge.com) was established in 1995, currently averages
approximately 40,000 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 September 30, 1997 employs seven
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 75% of the Company's net sales in fiscal
1995, 68% in fiscal 1996 and approximately 76% in the nine months ended
September 30, 1997. During fiscal 1996, Picker, Philips and Siemens accounted
for approximately 26%, 15% and 10%, respectively, of the Company's net sales.
For the nine months ended September 30, 1997, Picker, Philips and Konica
accounted for approximately 18%, 14% and 11%, 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
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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 works with any of the laser film printers available from these
vendors, these companies have also purchased the Company's products when they
have needed networked filming solutions involving their competitors' products.
The Company expects competition to increase in the future from existing
competitors and from other companies that may enter the Company's existing or
future markets. In addition, although many PACS manufacturers are currently
customers of the Company, the Company faces competition from PACS manufacturers.
The Company could face competition from networking equipment and
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
Although the Company has filed foreign and domestic 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 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
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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.
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 will become effective 90 days
thereafter. The Amendment is designed, in part, to
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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.
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.
PROPERTIES
The Company's principal facilities are located in Milwaukee, Wisconsin, in
an approximately 12,000 square-foot facility leased through September 2004 at a
rate of approximately $156,000 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.
EMPLOYEES
As of September 30, 1997, the Company had 64 employees, including 28
employees in research and development, six in manufacturing, six in quality
control, service and support, 11 in sales, three in sales and marketing support
activities and 10 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.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The names of the Directors, executive officers and Nominees to the Board of
Directors of the Company, and their respective ages and positions with the
Company, are listed below. The Company anticipates that the Nominees will be
elected to the Board of Directors prior to completion of the Offering. Mr. Pivan
has advised the Company that he intends to resign as a Director after the
Offering is completed.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
William C. Mortimore.............. 52 President and Chief Executive Officer, Director
William L. Stafford............... 50 Vice President -- Sales, Assistant Secretary
David M. Noshay................... 37 Vice President -- Marketing
Dwight A. Simon................... 52 Vice President -- Engineering
Colleen M. Doan................... 35 Chief Financial Officer, Treasurer and Secretary
Michael J. Franco................. 50 Chief Technical Officer
Robert T. Geras................... 60 Director and Chairman of the Board of Directors
David B. Pivan.................... 76 Director
Robert A. Barish, M.D. ........... 44 Nominee for Director
Dennis Brown...................... 50 Nominee for Director
Michael D. Dunham................. 52 Nominee for Director
Douglas S. Harrington, M.D. ...... 44 Nominee for Director
Kevin E. Moley.................... 51 Nominee for Director
</TABLE>
William C. Mortimore is a founder of the Company and 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 Informatics 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 University.
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.
Dwight A. Simon has served as Vice President, Engineering of the Company
since October 1992. From August 1990 until September 1992, Mr. Simon served as
Manager of Engineering Services of the Company. Mr. Simon has over 30 years of
experience in the information technology industry, with over 22 years of senior
management experience with companies in manufacturing automation, communications
and medical software
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applications. Mr. Simon has served as chair of several working groups and
subcommittees of the DICOM committee responsible for the creation of the DICOM
standard.
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.
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 electronic equipment for
interfacing devices, 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 Laboratories Incorporated,
a manufacturer of video teleconferencing equipment.
Robert T. Geras has served as Chair of the Board of Directors of the
Company since July 1997, 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
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.
David B. Pivan has served as a Director of the Company since 1992. He has
been a private investor for more than 25 years. He has participated as an early
investor and director of several small companies which subsequently become
public corporations. Previously, Mr. Pivan was the owner of Pivan Engineering,
an electronic manufacturers' representative firm. Mr. Pivan holds a B.S. in
Electrical Engineering from Illinois Institute of Technology.
Robert A. Barish, M.D., a Nominee for 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.
Dennis Brown, a Nominee for Director, has been the Chief Financial Officer
and Treasurer of Sybron International Corporation since 1993. From 1990 through
1993, Mr. Brown was the President of the European Region of Allen-Bradley
International, Ltd. 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, a Nominee for Director, is President of Effective
Management Systems, Inc., a 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, a health insurance concern, two private software
companies and a privately-held 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.
Douglas S. Harrington, M.D., a Nominee for Director, has been Chief
Executive Officer of Chromavision, Inc. 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
42
<PAGE> 44
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
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, a Nominee for Director, 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. 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
In the past, the Board of Directors has operated without committees, other
than the Stock Option Committee. Immediately after the Offering, the Company
plans to establish the following committees: (i) a Compensation Committee,
consisting of at least two Directors, a majority of which shall be independent
Directors, to make recommendations concerning salaries, incentive compensation
and stock option grants for officers, employees and Directors of the Company;
(ii) an Audit Committee, consisting of at least two Directors, a majority of
which shall be independent, to review the results and scope of the Company's
audits and other services provided by the Company's independent auditors and to
approve the selection of the auditors; and (iii) a Nominating Committee,
consisting of at least two Directors, to nominate additional Directors.
EXECUTIVE COMPENSATION
Set forth below is information concerning the compensation for fiscal 1997
and fiscal 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:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
ANNUAL COMPENSATION AWARDS
------------------- ----------------------
SECURITIES
NAME AND PRINCIPAL OTHER ANNUAL UNDERLYING ALL OTHER
POSITION YEAR SALARY BONUS COMPENSATION OPTIONS COMPENSATION
------------------ ---- -------- --------- ------------ ---------------------- ------------
<S> <C> <C> <C> <C> <C> <C>
William C. Mortimore,......... 1997 $136,667 0 0 0 $2,733(1)
President and CEO 1996 130,101 0 0 67,721 2,602(1)
Michael J. Franco,............ 1997 110,000 0 0 0 2,168(1)
Chief Technical Officer 1996 102,391 0 0 150,518(2) 2,048(1)
William L. Stafford,.......... 1997 110,000 0 0 0 1,587(1)
Vice President-Sales, 1996 (3) (3) (3) 67,721 (3)
Assistant Secretary
David M. Noshay,.............. 1997 100,300 $12,184(4) $53,804(5) 50,791 2,416(1)
Vice President-Marketing 1996 (3) (3) (3) 16,930 (3)
Dwight A. Simon,.............. 1997 110,000 0 0 0 1,626(1)
Vice President-Engineering 1996 $ (3) (3) (3) 67,721 $ (3)
</TABLE>
- ---------------
(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 SST.
43
<PAGE> 45
(3) Annual salary and bonus received by Messrs. Stafford, Noshay and Simon in
fiscal 1996 was less than $100,000.
(4) Mr. Noshay receives a quarterly incentive sales bonus.
(5) Mr. Noshay received a relocation allowance of $41,620 and an automobile
reimbursement of $2,200 in fiscal 1997.
OPTION GRANTS IN 1997 FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZED
VALUE AT ASSUMED
NUMBER OF % OF TOTAL ANNUAL RATES OF STOCK
SECURITIES OPTIONS PRICE APPRECIATION FOR
UNDERLYING GRANTED TO OPTION TERM(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 25% $6.75(2) 07/31/2003 $116,819 $264,621
</TABLE>
- ---------------
(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 Stock.
(2) Options were granted at an exercise price equal to the estimated fair market
value of the Common Stock on the date of the grant.
AGGREGATED 1997 FISCAL YEAR END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
SHARES FISCAL YEAR END FISCAL YEAR END
ACQUIRED ---------------------------- ---------------------------
NAME ON EXERCISE EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
William C. Mortimore................. 0 33,860 33,861 $203,837 $203,843
Michael J. Franco.................... 0 116,657 33,861 702,275 203,843
William L. Stafford.................. 0 33,860 33,861 203,837 203,843
David M. Noshay...................... 0 0 67,721 0 140,011
Dwight A. Simon...................... 0 33,860 33,861 $203,837 $203,843
</TABLE>
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. Mr. Mortimore's employment agreement is
governed by the laws of the state of Wisconsin. Under Wisconsin law, a
non-compete clause in an employment agreement may be voided if the court
determines that the non-compete clause is unfairly restrictive.
DIRECTORS' COMPENSATION
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. 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, is entitled to receive options
to acquire 10,000 shares of the Common Stock at an exercise price equal to the
Offering price. The Company has agreed to grant each of the Nominees to the
Board of Directors and Mr. Geras the options described above, which will be
issued pursuant to the Company's 1998 Stock Option Plan for Directors (the
"Directors Plan") within 30 days following the closing of the Offering.
44
<PAGE> 46
The Company is currently authorized to issue up to 100,000 shares of Common
Stock under the Directors Plan, which the Board of Directors approved in
January, 1998. Each of the six non-employee directors of the Company will be
granted an option to purchase 10,000 shares of Common Stock as of the date
immediately following the Closing of the Offering. A copy of the Directors Plan
has been filed as an exhibit to the Registration Statement of which this
Prospectus is a part. The purposes of the Directors Plan are to attract and
retain the best available personnel for service as directors, to provide
additional incentive to individuals to serve as director, and encourage their
continued service on the Board. Each option granted under the Directors Plan
will be evidenced by a written agreement between the Company and the
participant. The price to be paid for each share of Common Stock upon the
exercise of an option granted under the Directors Plan is 100% of the fair
market value of the Common Stock on the date of the grant (which will be the
price per share offered pursuant to this Prospectus for the initial options to
purchase 60,000 shares to be granted under the Directors Plan). For so long as
the Common Stock is traded on the Nasdaq SmallCap Market, the fair market value
of a share of Common Stock will be the mean between the bid and asked price (as
reported by Nasdaq) for such stock on the trading day prior to the date of
grant. Options granted under the Directors Plan may be exercised no later than
ten years after the date of grant, and shall vest as to one third of the shares
as of each of the first three anniversaries of the Closing of this Offering with
respect to the options presently scheduled to be granted.
45
<PAGE> 47
CERTAIN TRANSACTIONS
On June 30, 1997, the Company borrowed $2,000,000 from Sirrom, a
third-party institutional "mezzanine" lender, pursuant to a note (the "Sirrom
Note") and related security agreement. The Sirrom Note requires 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 toward the repayment of the bank indebtedness and the balance
toward working capital. No principal payments are required prior to maturity.
Prepayment in whole or part is permitted without penalty. The Sirrom Note is
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 may not exceed $1,500,000, subject to increase in such
permitted borrowings to (i) $2,000,000 in the event the Company achieves
earnings before deductions for interest, taxes, depreciation and amortization
("EBITDA") of $2,000,000 for fiscal 1997; and (ii) $2,500,000 in the event the
Company achieves EBITDA of $2,000,000 for fiscal 1997 and EBITDA of $1,250,000
for any six month period thereafter. The Sirrom Note and related loan
transactions were approved at a duly convened meeting by three of the four
members of the Company's Board of Directors. However, this transaction was not
approved by a majority of the Company's independent directors because one of the
two independent directors was not present at the meeting.
As a condition to issuance of the Sirrom Note, the Company issued the
Sirrom Warrant, which granted Sirrom the right to acquire for nominal
consideration a base amount of 145,256 shares of Common Stock. The base amount
of Common Stock 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 is outstanding in whole or in part on the
following dates, the base amount would be increased to the following: June 30,
2000 -- 203,754; June 30, 2001 -- 205,312; June 30, 2002 -- 206,923. The Sirrom
Warrant prohibits the sale of shares by the Company to third parties at below
fair market value without concomitant antidilution protection to Sirrom, but
expressly permits the issuance of up to 1,354,434 shares pursuant to the 1996
Employees' Stock Option Plan ("1996 Plan") at fair market value on the date of
the option grant provided that the Company does not grant options to purchase
more than 338,609 shares of Common Stock in any year.
The Sirrom Warrant grants Sirrom the right to attend (but not vote at)
Directors' meetings until such time as the Sirrom Note is paid in full. The
Sirrom Warrant grants Sirrom a put right for a period of 30 days immediately
prior to its expiration at "Fair Market Value," which is to be determined by
agreement of the parties or, in the absence of agreement, by two independent
appraisers. In valuing the Common Stock if the Company is publicly-traded, the
appraisers are to take into value the anticipated impact on the market if such
shares were all offered for sale. Sirrom has been granted piggyback registration
rights in connection with certain registered offerings of the Common Stock and
rights of co-sale to participate in sales of the Common Stock by Robert T. Geras
or William C. Mortimore.
By agreement dated October 30, 1997, the Company and Sirrom agreed that
upon the successful closing of an initial public offering of the Common Stock:
(i) the Sirrom Note would be paid in full; (ii) the Sirrom Warrant would be
exercised as to 75% (108,942) of the original number of shares issuable under
it; (iii) Sirrom will not offer, pledge, sell, contract to sell, grant any
option for the sale of, or otherwise dispose of, directly or indirectly, any
securities of the Company for a period of 180 days following the date of this
Prospectus 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) the Sirrom Termination Fee 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 this Offering, provided in no event would such registration
statement be declared effective until at least 180 days following the initial
closing of an initial public offering of the Common Stock. 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.
46
<PAGE> 48
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. The terms of the three year consulting agreement are as
favorable to the Company as those generally available from unaffiliated third
parties. The consulting agreement was ratified by the two disinterested
independent directors then serving on the Company's Board of Directors. The
Company does not anticipate that, after the Offering is completed, it will
require the same type of financial consulting services that Mr. Geras previously
provided. Mr. Geras and the Company therefore have agreed to terminate this
consulting agreement effective upon the completion of the Offering.
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. In
connection with this private placement, Mr. 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.
In 1995 and 1996, the Company issued an aggregate of 1,229,148 shares of
Common Stock 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 shares of Common Stock
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
Stock was 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, a
third-party institutional investor, dated May 5, 1995, and amended March 1,
1997, the Company has the right to redeem up to 424,757 shares of Common Stock
held by Alpha through October, 1998. The call price ranges from $1.56 to $2.37
per share. The Company will use $780,249 of the net proceeds of this Offering to
redeem all such shares. These shares are also subject to put options through
October 1998 at prices ranging from $0.71 to $1.52 per share.
Effective May 1996, the Company discharged $463,352 owing to Alpha under
two subordinated notes by issuing 33,861 shares of Common Stock, and making a
cash payment of $375,000, to Alpha.
The notes were in the original principal amounts of $88,136 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.
The Company also invested in a merger with Signal Stream Technologies
("SST"), a supplier of interface products to the diagnostic imaging industry, in
May 1995, in which Signal Stream, Incorporated ("SSI"), a wholly-owned
subsidiary of the Company formed to effect the acquisition of SST, acquired all
the outstanding shares of SST. The purchase price consisted of 357,875 shares of
Common Stock. In addition, $77,328 in acquisition expenses were incurred. The
acquisition was accounted for as a purchase. The purchase price, net of cash
acquired, was $55,000. All of the outstanding shares of SST were acquired by
SSI.
All material affiliated transactions and loans will be made or entered into
on terms that are no less favorable to the Company than those that can be
obtained from unaffiliated third parties. All material transactions and loans,
and any forgiveness of loans, must be approved by a majority of the Company's
independent directors who do not have an interest in the transactions and who
had access, at the Company's expense, to the Company's or independent legal
counsel. With the exception of the Sirrom Note and related
47
<PAGE> 49
loan transactions, each of the transactions described above was approved by all
of the Company's independent directors.
Company's agreement with the Representative. The Company has granted H.C.
Wainwright & Co., Inc. the right to nominate one Director to the Company's Board
of Directors. H.C. Wainwright & Co., Inc. has nominated Robert A. Barish, M.D.
as an independent director. As a result, the Representative may have the ability
to influence the affairs of the Company. See "Underwriting."
48
<PAGE> 50
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock as of December 17, 1997 and as adjusted to reflect
the sale of the shares of Common Stock offered hereby, 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 shares of Common Stock;
(ii) each Director and Nominee; and (iii) all Directors, Nominees 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
Transactions."
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO OWNED AFTER
OFFERING(1) OFFERING(1)
-------------------- ----------------------
NAME NUMBER PERCENT NUMBER PERCENT
---- --------- ------- ----------- -------
<S> <C> <C> <C> <C>
Robert T. Geras(3)......................................... 728,591 17% 728,591 12%
c/o Merge Technologies Incorporated
1126 South 70th Street, Suite S107B
Milwaukee, WI 53214-3151
William C. Mortimore(4).................................... 545,160 13% 545,160 9%
c/o Merge Technologies Incorporated
1126 South 70th Street, Suite S107B
Milwaukee, WI 53214-3151
Alpha Capital Venture Partners, Limited(2)................. 546,067 13% 121,309 2%
122 South Michigan Avenue, Suite 1700
Chicago, IL 60642
Michael J. Franco(5)....................................... 225,737 5% 225,737 4%
c/o Merge Technologies Incorporated
1126 South 70th Street, Suite S107B
Milwaukee, WI 53214-3151
David B. Pivan............................................. 57,624 1% 57,624 (*)
1765 South Lane
Northbrook, IL 60062
Robert A. Barish, M.D. .................................... -- (*) -- (*)
c/o Merge Technologies Incorporated
1126 South 70th Street, Suite S107B
Milwaukee, WI 53214-3151
Dennis Brown............................................... -- (*) -- (*)
c/o Merge Technologies Incorporated
1126 South 70th Street, Suite S107B
Milwaukee, WI 53214-3151
Michael D. Dunham.......................................... -- (*) -- (*)
c/o Merge Technologies Incorporated
1126 South 70th Street, Suite S107B
Milwaukee, WI 53214-3151
Douglas S. Harrington, M.D. ............................... -- (*) -- (*)
c/o Merge Technologies Incorporated
1126 South 70th Street, Suite S107B
Milwaukee, WI 53214-3151
Kevin E. Moley............................................. -- (*) -- (*)
c/o Merge Technologies Incorporated
1126 South 70th Street, Suite S107B
Milwaukee, WI 53214-3151
All Directors, Nominees and Executive Officers as a Group
(13 persons)............................................. 1,785,672 41% 1,785,672 30%
</TABLE>
- ---------------
(*) 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) A portion of the net proceeds received by the Company in this Offering will
be used to redeem 424,757 shares of Common Stock currently held by Alpha.
See "Use of Proceeds" and "Certain Transactions."
(3) Reflects 203,165 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 33,861 shares.
(5) Includes vested options held by Mr. Franco to acquire 116,657 shares.
49
<PAGE> 51
DESCRIPTION OF SECURITIES
The authorized capital stock of the Company consists of 10,000,000 shares
of Common Stock, par value $0.01 per share, and 5,000,000 shares of Preferred
Stock, par value $0.01 per share. As of the date of this Prospectus, there were
3,908,063 shares of Common Stock, beneficially held by 81 persons, and no shares
of Preferred Stock outstanding.
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 the Company as part of the Offering when legally issued and
paid for will be, 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.
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
50
<PAGE> 52
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.
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 five. The authorized number of Directors may be
changed by amendment of the By-Laws. The Company expects that the By-Laws will
be amended before the Nominees are elected to the Board of Directors to provide
that the number of Directors shall be not less than three nor greater than
eleven. 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.
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<PAGE> 53
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 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. It is anticipated that after completion
of the Offering, the Company will be an "issuing public corporation." Under 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.
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
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<PAGE> 54
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.
TRANSFER AGENT AND REGISTRAR
Firstar Trust Company will be the Transfer Agent and Registrar for the
Common Stock.
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<PAGE> 55
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, the Company will have outstanding
5,492,248 shares of Common Stock assuming that the Underwriters do not exercise
their over-allotment option. After this Offering, the 1,900,000 shares of Common
Stock sold in this Offering and any shares issued in the event that the
Underwriters' over-allotment option to purchase up to 285,000 shares is
exercised, will be freely tradeable without restriction or further registration
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 remaining 3,592,248 outstanding shares of Common Stock, are "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.
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
3,581,047 outstanding shares of Common Stock has expired. The one-year holding
period with respect to 6,122 shares of Common Stock will expire on May 28, 1998
and with respect to 5,079 shares will expire on August 28, 1998.
Shareholders holding approximately 99% 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 94% 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, for a
period of 275 days following the date of this Prospectus and, with respect to
50% of their current stockholdings, and shares they may obtain by exercising
options currently held by them, for a period of 455 days following the date of
this Prospectus; and (ii) Sirrom and Alpha, who hold in the aggregate
approximately 5% of the Company's outstanding Common Stock, have agreed to such
restrictions with respect to all of their current stockholdings for a period of
180 days following the date of this Prospectus. See "Underwriting." In addition,
in order to register the Common Stock for sale in certain states, the thirteen
individuals listed in "Management" have entered into "lock-in" agreements which
prohibit the sale, pledge or encumbrance of all or a substantial majority of
their respective shares for a period of two years following the effective date
of the offering, 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 Offering in the case of two of such individuals.
Moreover, in order to register the Common Stock for sale in certain states,
except for options to purchase 60,000 shares of Common Stock issuable under the
1998 Stock Option Plan for Directors expected to be granted and outstanding
within 30 days following the closing of the Offering, 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 for a one-year period following the Offering.
On the closing of the Offering, the Company will sell to the
Representative, individually and not as representative of the Underwriters, for
nominal consideration, the Representative's Warrants entitling the
Representative to purchase an aggregate of 190,000 shares of Common Stock at an
initial exercise price per share equal to 130% of the initial public offering
price hereunder. The Representative's Warrants will be exercisable for a period
of four years commencing one year after the effective date of this Offering and
will 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 one
year from the date of exercise thereof without registration subject to the
limitations of Rule 144. See "Underwriting."
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<PAGE> 56
Prior to this Offering, there has been no market for the Common Stock. 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."
UNDERWRITING
Subject to the terms and conditions contained in an underwriting agreement
(the "Underwriting Agreement"), the Company has agreed to sell to each of the
Underwriters named below (the "Underwriters"), for whom H.C. Wainwright & Co.,
Inc. is acting as Representative, and each of the Underwriters has severally
agreed to purchase from the Company, the respective number of shares of Common
Stock set forth opposite its name below at the initial public offering price
less the underwriting discount set forth on the cover page of this Prospectus.
The Underwriting Agreement provides that, subject to the terms and conditions
set forth therein, the Underwriters are obligated to purchase all of the shares
of Common Stock being sold pursuant to the Underwriting Agreement if any of the
shares of Common Stock are purchased. Under certain circumstances, under the
Underwriting Agreement, the commitments of non-defaulting Underwriters may be
increased.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
----------- ---------
<S> <C>
H.C. Wainwright & Co., Inc. ................................
Total............................................. 1,900,000
</TABLE>
The Representative has advised the Company that the Underwriters propose
initially to offer the Common Stock to the public at the public offering price
set forth on the cover page of this Prospectus, and to certain dealers at such
price less a concession not in excess of $ per share. The Underwriters may
allow, and such dealers may reallow, a discount not in excess of $ per share of
Common Stock on sales to certain other dealers. The public offering price,
concession and discount will not be changed until after the Offering has been
completed.
The Company has granted the Underwriters an option to purchase up to an
additional 285,000 shares of Common Stock at the initial public offering price
set forth on the cover page of this Prospectus, less the underwriting discount.
Such option, which will expire 30 days after the date of this Prospectus, may be
exercised solely to cover over-allotments, if any, made in connection with the
sale of Common Stock offered hereby. To the extent that this option is
exercised, each of the Underwriters will have a firm commitment, subject to
certain conditions, to purchase approximately the same percentage thereof which
the number of shares of Common Stock to be purchased initially by that
Underwriter bears to the total number of shares of Common Stock to be purchased
initially by the Underwriters. If purchased, the Underwriters will offer such
additional shares on the same terms as those on which the 1,900,000 shares of
Common Stock are being offered hereby.
The Company has agreed to pay the Representative a non-accountable expense
allowance of three percent (3%) of the gross proceeds of the Offering, which
will include proceeds from the over-allotment option, if exercised. The
Representative's expenses in excess of the non-accountable expense allowance,
including its legal expenses, will be borne by the Representative.
At the request of the Company, the Underwriters have reserved up to 5% of
the shares of Common Stock offered hereby for sale to certain Directors,
officers, employees and certain other persons having business relationships with
the Company, who have expressed an interest in purchasing shares of Common Stock
in this Offering. The price for such reserved shares will be the public offering
price. The number of shares available to the general public will be reduced to
the extent such persons purchase the reserved shares. Any reserved shares that
are not so purchased by such persons at the initial closing of this Offering
will be sold by
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<PAGE> 57
the Underwriters to the general public on the same terms as the other shares of
Common Stock offered hereby.
On the closing of the Offering, the Company will sell to the
Representative, individually and not as representative of the Underwriters, for
nominal consideration, the Representative's Warrants entitling the
Representative to purchase an aggregate of 190,000 shares of Common Stock at an
initial exercise price per share equal to 130% of the initial public offering
price hereunder. The Representative's Warrants will be exercisable for a period
of four years commencing with the first anniversary of the effective date of
this Offering and will contain certain demand and incidental registration rights
relating to the underlying Common Stock, requiring the Company to file, at any
time from the first anniversary of the effective date of this Offering upon
written request by the Representative, a registration statement with the
Securities and Exchange Commission for the shares of Common Stock represented by
the Representative's Warrants, and granting "piggyback" registration rights to
the Representative's Warrants for a period beginning on the first anniversary of
the effective date of this Offering and ending on the day immediately preceding
the fifth anniversary of the effective date of this Offering. The
Representative's Warrants cannot be transferred, assigned or hypothecated, in
whole or in part, for a period of twelve months from the effective date of the
Offering, except to any officer or partner of the Representative. The
Representative's Warrants will contain anti-dilution provisions providing for
appropriate adjustment of the exercise price and the number of shares issuable
upon exercise thereof upon the occurrence of certain events.
For the life of the Representative's Warrants, their holders have, at
nominal cost, the opportunity to profit from a rise in the market price for the
Common Stock without assuming the risk of ownership, with a resulting dilution
in the interest of other security holders. As long as the Representative's
Warrants remain unexercised, the terms under which the Company could obtain
additional capital may be adversely affected. Moreover, the holders of the
Representative's Warrants might be expected to exercise them at a time when the
Company would, in all likelihood, be able to obtain any needed capital by a new
offering of its securities on terms more favorable than those provided by the
Representative's Warrants. Additionally, if the Representative should exercise
its registration rights to effect a distribution of the underlying shares of
Common Stock, the Representative, prior to and during such distribution, would
be unable to make a market in the Common Stock. If the Representative must cease
making a market, the market and market price for the Common Stock may be
adversely affected and holders of the Common Stock may be unable to sell the
Common Stock.
The Company has granted H.C. Wainwright & Co., Inc. 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.
The Company has, subject to certain exceptions with respect to employee and
Director stock options, agreed not to, directly or indirectly, sell, offer to
sell, grant any option to purchase, or otherwise dispose of, any Common Stock,
or any security convertible or exchangeable into, or exercisable for, such
Common Stock or file any registration statement with respect to any of the
foregoing, for a period of 455 days after the effective date of this Offering,
without the prior written consent of the Underwriters.
Shareholders holding approximately 99% 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 94% 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, for a
period of 275 days following the date of this Prospectus and, with respect to
50% of their current stockholdings, and shares they may obtain by exercising
options currently held by them, for a period of 455 days following the date of
this Prospectus; and (ii) Sirrom and Alpha, who hold in the aggregate
approximately 5% of the Company's outstanding Common Stock, have agreed to such
restrictions with respect to all of their current stockholdings for a period of
180 days following the date of this Prospectus. In addition, in order to
register the Common Stock for sale in certain states, the thirteen individuals
listed in "Management" have entered into "lock-in" agreements which prohibit the
sale, pledge or encumbrance of all or a substantial majority of their
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respective shares for a period of two years following the effective date of the
offering, 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 Offering in the case of two of such individuals. Moreover,
in order to register the Common Stock for sale in certain states, except for
options to purchase 60,000 shares of Common Stock issuable under the 1998 Stock
Option Plan for Directors expected to be granted and outstanding within 30 days
following the closing of the Offering, 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 for a one-year period following the Offering.
The Representative has advised the Company that the Underwriters do not
intend to confirm sales of Common Stock offered hereby to any accounts over
which they exercise discretionary authority.
Prior to the Offering, there has been no public market for the Common
Stock. The initial public offering price of the Common Stock was determined by
negotiations among the Company and the Underwriters. Among the factors
considered in such negotiations, in addition to prevailing market conditions,
were certain financial information of the Company, an assessment of the
Company's management, estimates of the business potential and earnings prospects
of the Company, the present state of the Company's development and operations,
the present state of the Company's industry in general and other factors deemed
relevant. The initial public offering price set forth on the cover page of this
Prospectus should not, however, be considered an indication of the actual value
of the Common Stock. Such price is subject to change as a result of market
conditions and other factors. There can be no assurance that an active trading
market will develop for the Common Stock or that the Common Stock will trade in
the public market subsequent to the Offering at or above the initial public
offering price.
In connection with the Offering, the Underwriters and certain selling group
members may engage in stabilizing, syndicate short covering transactions or
other transactions that stabilize, maintain or otherwise affect the market price
of the Common Stock. Stabilizing transactions may consist of initiating bids or
effecting purchases on the Nasdaq SmallCap Market for the purpose of preventing
or retarding a decline in the market price of the Common Stock. Bids or
purchases effected by the Underwriters or selling group members for such
purposes may be instituted at prices no higher than the initial public offering
price or the most recent independent bid, whichever is less. Such transactions
may stabilize the market price of the Common Stock at a level above that which
might otherwise prevail and, if commenced, may be discontinued at any time.
The Company has applied to include its Common Stock for quotation on the
Nasdaq SmallCap Market under the symbol MRGE.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including certain liabilities under the Securities Act, or
contribute to payments the Underwriters may be required to make in respect
thereof.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Foley & Lardner, Milwaukee, Wisconsin. Certain legal
matters will be passed upon for the Company by Shefsky & Froelich Ltd., Chicago,
Illinois. Certain legal matters will be passed upon for the Underwriters by
Venable, Baetjer and Howard, LLP, Baltimore, Maryland. As of the date of this
Prospectus, a member of Shefsky & Froelich Ltd. beneficially owns 40,247 shares
of Common Stock and three members of Foley & Lardner beneficially own an
aggregate of 53,365 shares of Common Stock.
EXPERTS
The consolidated balance sheets of the Company as of December 31, 1996 and
1995, and the consolidated statements of operations, shareholders' equity and
cash flows for each of the years in the three
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years ended December 31, 1996, have been included herein and in the Registration
Statement in reliance upon the report of KPMG Peat Marwick LLP, independent
certified public accountants, appearing elsewhere herein, and upon the authority
of said firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission"), a Registration Statement (of which this Prospectus is a part)
(File No. 333-39111) (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.
---------------------
Following this Offering, the Company will be subject to the reporting and
other requirements of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and intends to furnish to its shareholders annual reports
containing audited financial statements and quarterly reports for the first
three quarters of each fiscal year containing unaudited financial statements.
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<PAGE> 60
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
MERGE TECHNOLOGIES INCORPORATED
Independent Auditors' Report................................ F-2
Consolidated Balance Sheets as of December 31, 1995 and 1996
and September 30, 1997 (unaudited)........................ F-3
Consolidated Statements of Operations for the years ended
December 31, 1994, 1995 and 1996 and the nine months ended
September 30, 1996 and 1997 (unaudited)................... F-4
Consolidated Statements of Shareholders' Equity for the
years ended December 31, 1994, 1995 and 1996 and the nine
months ended September 30, 1996 and 1997 (unaudited)...... F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1994, 1995 and 1996 and the nine months ended
September 30, 1996 and 1997 (unaudited)................... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE> 61
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, 1995 and
1996, 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, 1996. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with 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, 1995 and 1996, and the results of their operations and their
cash flows for each of the years in the three-year period ended December 31,
1996, in conformity with generally accepted accounting principles.
Chicago, Illinois
March 21, 1997, except as to notes 4 (a) and 4 (d), and note 1 (q),
which are as of June 30, 1997 and September 26, 1997, respectively
/s/ KPMG Peat Marwick, LLP
F-2
<PAGE> 62
MERGE TECHNOLOGIES INCORPORATED AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ SEPTEMBER 30,
1995 1996 1997
---------- ---------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 148,336 $ 287,098 $ 655,404
Accounts receivable, net of allowance for doubtful
accounts of $40,000 and $77,000 at December 31, 1995 and
1996, respectively, and $71,000 at September 30, 1997... 787,944 1,500,233 1,518,855
Inventory................................................. 248,985 404,493 749,456
Prepaid expenses and other current assets................. 18,296 24,252 155,521
---------- ---------- ----------
Total current assets........................................ 1,203,561 2,216,076 3,079,236
---------- ---------- ----------
Property and equipment:
Computer equipment........................................ 661,299 876,328 1,138,837
Office equipment.......................................... 87,730 208,772 238,196
---------- ---------- ----------
749,029 1,085,100 1,377,033
Less accumulated depreciation............................. 234,063 401,176 564,234
---------- ---------- ----------
Net property and equipment.................................. 514,966 683,924 812,799
License agreement, net of accumulated amortization of $-- at
December 31, 1995 and 1996 and $55,167 at September 30,
1997...................................................... -- 288,100 232,933
Purchased and developed software, net of accumulated
amortization of $724,128 and $1,175,185 at December 31,
1995 and 1996, respectively, and $1,566,795 at September
30, 1997.................................................. 1,830,095 2,143,044 2,495,386
Other intangibles, net of accumulated amortization of $3,959
and $9,874 at December 31, 1995 and 1996, respectively,
and $14,329 at September 30, 1997......................... 55,428 49,513 45,058
Deferred financing fees, net of accumulated amortization of
$-- at December 31, 1995 and 1996 and $31,685 at September
30, 1997.................................................. -- -- 31,686
Other....................................................... -- 13,008 13,008
---------- ---------- ----------
$3,604,050 $5,393,665 $6,710,106
========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Note payable to bank...................................... $ 250,000 $ 753,000 $ --
Subordinated notes payable to shareholders................ 686,064 -- --
Current portion of obligations under capital leases....... 29,884 55,959 34,908
Accounts payable.......................................... 925,492 1,530,130 675,196
Customer deposits......................................... 194,415 5,294 64,652
Accrued wages, vacation and related payroll taxes......... 184,916 191,221 209,474
Accrued interest.......................................... 152,045 16,509 22,500
Other accrued liabilities................................. 23,711 101,710 115,250
---------- ---------- ----------
Total current liabilities................................... 2,446,527 2,653,823 1,121,980
---------- ---------- ----------
Note payable, net of discount............................... -- -- 1,337,001
Obligations under capital leases, excluding current
portion................................................... 49,722 16,425 31,378
Put options related to redeemable common stock and stock
warrants.................................................. 233,108 288,730 1,468,884
---------- ---------- ----------
Total liabilities........................................... 2,729,357 2,958,978 3,959,243
---------- ---------- ----------
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 2,580,914 and 3,896,861 shares at
December 31 1995 and 1996, respectively, and 3,908,063
shares at September 30, 1997............................ 25,810 38,969 39,081
Additional paid-in capital................................ 1,194,806 2,854,107 2,771,853
Accumulated deficit....................................... (345,923) (459,602) (102,604)
Cumulative translation adjustment......................... -- 1,213 42,533
---------- ---------- ----------
Total shareholders' equity.................................. 874,693 2,434,687 2,750,863
---------- ---------- ----------
$3,604,050 $5,393,665 $6,710,106
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 63
MERGE TECHNOLOGIES INCORPORATED AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996, AND
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 (UNAUDITED)
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
------------------------------------ -----------------------
1994 1995 1996 1996 1997
---------- ---------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales............................ $2,420,090 $3,718,082 $6,384,659 $4,252,212 $6,799,626
Cost of goods sold:
Purchased components............... 387,715 752,630 1,626,882 1,013,353 1,573,817
Amortization of purchased and
developed software.............. 264,724 359,859 449,015 317,153 442,162
---------- ---------- ---------- ---------- ----------
Total cost of goods sold............. 652,439 1,112,489 2,075,897 1,330,506 2,015,979
---------- ---------- ---------- ---------- ----------
Gross profit......................... 1,767,651 2,605,593 4,308,762 2,921,706 4,783,647
---------- ---------- ---------- ---------- ----------
Operating costs and expenses:
Sales and marketing................ 377,817 880,919 1,519,301 990,633 1,604,864
Product research and development... 365,155 822,690 1,391,264 946,045 1,133,223
General and administrative......... 470,227 959,669 1,214,986 879,468 1,085,769
Acquired in-process technology..... -- 375,000 -- -- --
Professional fees related to
proposed financing.............. -- -- 363,964 -- --
Amortization of other
intangibles..................... -- 3,959 5,915 4,455 4,455
---------- ---------- ---------- ---------- ----------
Total operating costs and expenses... 1,213,199 3,042,237 4,495,430 2,820,601 3,828,311
---------- ---------- ---------- ---------- ----------
Operating income (loss).............. 554,452 (436,644) (186,668) 101,105 955,336
---------- ---------- ---------- ---------- ----------
Other income (expense):
Interest expense................... (88,314) (141,231) (134,121) (98,247) (565,646)
Interest income.................... 5,277 4,006 11,016 7,025 10,952
Other, net......................... (5,310) (504) 26,580 3,273 (43,644)
---------- ---------- ---------- ---------- ----------
Total other expense.................. (88,347) (137,729) (96,525) (87,949) (598,338)
---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes and
extraordinary item................. 466,105 (574,373) (283,193) 13,156 356,998
Income tax expense................... -- -- -- -- --
---------- ---------- ---------- ---------- ----------
Income (loss) before extraordinary
item............................... 466,105 (574,373) (283,193) 13,156 356,998
Extraordinary gain on extinguishment
of debt............................ -- -- 169,514 169,514 --
---------- ---------- ---------- ---------- ----------
Net income (loss).................... $ 466,105 $ (574,373) $ (113,679) $ 182,670 $ 356,998
========== ========== ========== ========== ==========
Net income (loss) before
extraordinary item per common and
common equivalent share............ $ 0.18 $ (0.21) $ (0.07) $ 0.00 $ 0.08
========== ========== ========== ========== ==========
Net income (loss) per common and
common equivalent share............ $ 0.18 $ (0.21) $ (0.03) $ 0.05 $ 0.08
========== ========== ========== ========== ==========
Weighted average number of common and
common equivalent shares
outstanding........................ 2,521,253 2,777,834 3,969,391 3,907,745 4,712,994
========== ========== ========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 64
MERGE TECHNOLOGIES INCORPORATED AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996, AND
NINE MONTHS ENDED SEPTEMBER 30, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
NOTE
COMMON STOCK RECEIVABLE IN
---------------------------------------------------------------- ADDITIONAL CONNECTION WITH
CLASS A CLASS B COMMON PAID-IN PURCHASE OF
SHARES CLASS A SHARES CLASS B SHARES COMMON CAPITAL COMMON STOCK
---------- -------- -------- ------- --------- ------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1993........................ 677,224 $ 6,772 616,674 $6,167 -- $ -- 388,462 --
---------- -------- -------- ------ --------- ------- --------- --------
Issuance of common stock...... 671,799 6,718 -- -- -- -- 92,482 --
Exercise of stock options..... 6,772 68 -- -- -- -- (68) --
Accretion of put value........ -- -- -- -- -- -- (149,719) --
Net income.................... -- -- -- -- -- -- -- --
---------- -------- -------- ------ --------- ------- --------- --------
Balance at December 31,
1994........................ 1,355,795 13,558 616,674 6,167 -- -- 331,157 --
---------- -------- -------- ------ --------- ------- --------- --------
Sale of common stock.......... -- -- -- -- 250,570 2,506 352,479 --
Issuance of stock to purchase
SST......................... -- -- -- -- 357,875 3,579 524,871 --
Conversion of common stock.... (1,355,795) (13,558) (616,674) (6,167) 1,972,469 19,725 -- --
Accretion of put value........ -- -- -- -- -- -- (13,701) --
Net loss...................... -- -- -- -- -- -- -- --
---------- -------- -------- ------ --------- ------- --------- --------
Balance at December 31,
1995........................ -- -- -- -- 2,580,914 25,810 1,194,806 --
---------- -------- -------- ------ --------- ------- --------- --------
Sale of common stock.......... -- -- -- -- 1,090,319 10,903 1,599,097 (150,000)
Fees incurred in connection
with the sale of common
stock....................... -- -- -- -- -- -- (223,721) --
Interest on note receivable in
connection with purchase of
common stock................ -- -- -- -- -- -- 8,972 (8,972)
Conversion of subordinated
notes payable to common
stock....................... -- -- -- -- 225,628 2,256 330,914 --
Offset of note payable to
shareholder with note
receivable in connection
with purchase of common
stock....................... -- -- -- -- -- -- -- 158,972
Accretion of put value........ -- -- -- -- -- -- (138,298) --
Forfeiture of put feature..... -- -- -- -- -- -- 82,337 --
Net loss...................... -- -- -- -- -- -- -- --
Foreign currency translation
adjustment.................. -- -- -- -- -- -- -- --
---------- -------- -------- ------ --------- ------- --------- --------
Balance at December 31,
1996........................ -- -- -- -- 3,896,861 38,969 2,854,107 --
---------- -------- -------- ------ --------- ------- --------- --------
Exercise of stock options..... -- -- -- -- 11,202 112 8,138 --
Accretion of put value........ -- -- -- -- -- -- (90,392) --
Net income.................... -- -- -- -- -- -- -- --
Foreign currency translation
adjustment.................. -- -- -- -- -- -- -- --
---------- -------- -------- ------ --------- ------- --------- --------
Balance at September 30, 1997
(Unaudited)................. -- $ -- -- $ -- 3,908,063 $39,081 2,771,853 --
========== ======== ======== ====== ========= ======= ========= ========
<CAPTION>
RETAINED
EARNINGS CUMULATIVE TOTAL
(ACCUMULATED TRANSLATION SHAREHOLDERS'
DEFICIT) ADJUSTMENT EQUITY
------------ ----------- -------------
<S> <C> <C> <C>
Balance at December 31,
1993........................ (237,655) -- 163,746
-------- ------ ---------
Issuance of common stock...... -- -- 99,200
Exercise of stock options..... -- -- --
Accretion of put value........ -- -- (149,719)
Net income.................... 466,105 -- 466,105
-------- ------ ---------
Balance at December 31,
1994........................ 228,450 -- 579,332
-------- ------ ---------
Sale of common stock.......... -- -- 354,985
Issuance of stock to purchase
SST......................... -- -- 528,450
Conversion of common stock.... -- -- --
Accretion of put value........ -- -- (13,701)
Net loss...................... (574,373) -- (574,373)
-------- ------ ---------
Balance at December 31,
1995........................ (345,923) -- 874,693
-------- ------ ---------
Sale of common stock.......... -- -- 1,460,000
Fees incurred in connection
with the sale of common
stock....................... -- -- (223,721)
Interest on note receivable in
connection with purchase of
common stock................ -- -- --
Conversion of subordinated
notes payable to common
stock....................... -- -- 333,170
Offset of note payable to
shareholder with note
receivable in connection
with purchase of common
stock....................... -- -- 158,972
Accretion of put value........ -- -- (138,298)
Forfeiture of put feature..... -- -- 82,337
Net loss...................... (113,679) -- (113,679)
Foreign currency translation
adjustment.................. -- 1,213 1,213
-------- ------ ---------
Balance at December 31,
1996........................ (459,602) 1,213 2,434,687
-------- ------ ---------
<CAPTION>
RETAINED
EARNINGS CUMULATIVE TOTAL
(ACCUMULATED TRANSLATION SHAREHOLDERS'
DEFICIT) ADJUSTMENT EQUITY
------------ ----------- -------------
<S> <C> <C> <C>
Exercise of stock options..... -- -- 8,250
Accretion of put value........ -- -- (90,392)
Net income.................... 356,998 -- 356,998
Foreign currency translation
adjustment.................. -- 41,320 41,320
-------- ------ ---------
Balance at September 30, 1997
(Unaudited)................. (102,604) 42,533 2,750,863
======== ====== =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 65
MERGE TECHNOLOGIES INCORPORATED AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996, AND
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 (UNAUDITED)
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
----------------------------------- -----------------------
1994 1995 1996 1996 1997
--------- --------- ----------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)......................................... $ 466,105 $(574,373) $ (113,679) $ 182,670 $ 356,998
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization........................... 319,911 472,831 625,719 445,375 645,975
Amortization of discount on Sirrom Loan................. -- -- -- -- 426,423
Acquired in-process technology.......................... -- 375,000 -- -- --
Provision for doubtful accounts receivable.............. -- 40,000 44,000 37,048 (5,597)
Expenses related to services performed.................. -- -- 160,000 160,000 --
Extraordinary gain on extinguishment of debt............ -- -- (169,514) (169,514) --
Change in assets and liabilities, net of effects from
purchase of SST:
Accounts receivable................................... 225,899 (417,368) (756,289) (505,958) (13,025)
Inventory............................................. 3,455 (140,869) (155,508) (113,938) (344,963)
Accounts payable...................................... 26,043 504,090 604,638 (174,027) (854,934)
Accrued expenses...................................... (319,420) (1,761) 140,049 (109,056) 24,244
Customer deposits..................................... -- 194,415 (189,121) (53,716) 59,358
Other................................................. (28,857) (38,713) (18,779) (49,331) (76,069)
--------- --------- ----------- ---------- ----------
Net cash provided by (used in) operating activities......... 693,136 413,252 171,516 (350,447) 218,410
--------- --------- ----------- ---------- ----------
Cash flows from investing activities:
Purchases of property and equipment....................... (193,063) (208,401) (319,569) (288,374) (262,335)
Development of software................................... (386,160) (724,106) (765,640) (584,792) (743,952)
Purchase of license agreement............................. -- -- (288,100) (215,000) --
Purchase of SST, net of cash acquired..................... -- (54,981) -- -- --
--------- --------- ----------- ---------- ----------
Net cash used in investing activities....................... (579,223) (987,488) (1,373,309) (1,088,166) (1,006,287)
--------- --------- ----------- ---------- ----------
Cash flows from financing activities:
Proceeds on line of credit................................ 25,000 250,000 -- -- --
Proceeds from loan agreement with Sirrom.................. -- -- -- -- 2,000,000
Financing fees associated with loan agreement with
Sirrom.................................................. -- -- -- -- (63,371)
Proceeds from revolving credit agreement.................. -- -- 753,000 753,000 470,000
Payments on line of credit................................ (25,000) -- (250,000) (250,000) --
Repayment of revolving credit agreement................... -- -- -- -- (1,223,000)
Repayments on senior notes payable........................ (102,299) -- -- -- --
Repayment of subordinated notes payable to shareholders
and related interest.................................... -- -- (375,000) (375,000) --
Borrowings from shareholders.............................. -- 150,000 -- -- --
Issuance of common stock, net of expenses................. -- 204,985 1,236,279 1,199,368 --
Proceeds from exercise of stock options................... -- -- -- -- 8,250
Principal payments under capital leases................... -- (11,596) (23,724) (24,681) (35,696)
--------- --------- ----------- ---------- ----------
Net cash provided by (used in) financing activities......... (102,299) 593,389 1,340,555 1,302,687 1,156,183
--------- --------- ----------- ---------- ----------
Net increase in cash and cash equivalents................... 11,614 19,153 138,762 (135,926) 368,306
Cash and cash equivalents, beginning of period.............. 117,569 129,183 148,336 148,336 287,098
--------- --------- ----------- ---------- ----------
Cash and cash equivalents, end of period.................... $ 129,183 $ 148,336 $ 287,098 $ 12,410 $ 655,404
========= ========= =========== ========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash received (paid) for income taxes....................... $ (15,000) $ (3,000) $ -- $ -- $ --
Cash paid for interest...................................... 104,000 73,000 195,000 -- 132,000
NON CASH FINANCING AND INVESTING ACTIVITIES:
Property and equipment acquired through capital lease....... -- 60,000 17,000 17,000 30,000
Repayment of shareholder notes through issuance of common
stock..................................................... -- 150,000 -- -- --
Repayment of senior note payable through issuance of common
stock upon exercise of option............................. (99,200) -- -- -- --
Repayment of subordinated notes payable and related interest
through issuance of common stock.......................... -- -- 333,000 -- --
Accretion of put options related to redeemable common stock
and stock warrants........................................ 150,000 14,000 138,000 69,000 90,000
Forfeiture of put options related to redeemable common
stock..................................................... -- -- (82,000) -- --
Issuance of payable to shareholder in consideration for
services.................................................. -- -- 160,000 160,000 --
Issuance of common stock for acquisition of SST............. -- 528,000 -- -- --
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 66
MERGE TECHNOLOGIES INCORPORATED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996, AND
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 (UNAUDITED)
(1) 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, denominated in U.S.
dollars, accounted for approximately 57%, 50% and 37% of the Company's net sales
for the years ended December 31, 1994, 1995 and 1996, respectively. 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, incurred a net loss of approximately
$210,000, and had a net liability position of approximately $210,000.
(b) Principles of Consolidation
The consolidated financial statements include the financial statements of
Merge Technologies Incorporated and its wholly-owned subsidiary. All significant
intercompany 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 include a $250,000 repurchase agreement
at December 31, 1996.
(d) Inventory
Inventory, consisting principally of 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.
(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
F-7
<PAGE> 67
MERGE TECHNOLOGIES INCORPORATED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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
and for 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 benefited. 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.
(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.
F-8
<PAGE> 68
MERGE TECHNOLOGIES INCORPORATED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(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, note payable to bank, 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.
(o) Interim Financial Information
The interim financial statements included herein are unaudited; however,
they include all adjustments of a normal recurring nature, which, in the opinion
of Company management, are necessary to present fairly the financial position of
the Company at September 30, 1997, and the results of operations and cash flows
for the nine months ended September 30, 1996 and 1997. Accounting measurements
at interim dates inherently involve greater reliance on estimates than at year
end. The results of operations for the interim periods presented are not
necessarily indicative of the results to be expected for the entire year.
(p) Net Earnings (Loss) Per Share
Net earnings (loss) per share data has been computed using the weighted
average number of shares of common stock and common equivalent shares from stock
options (when dilutive using the treasury stock method). Pursuant to Securities
and Exchange Commission Staff Accounting Bulletin No. 83, common stock warrants
and options issued during the twelve month period immediately preceding the
Company's proposed initial public offering have been included in the calculation
as if they were outstanding for all periods presented (even if antidilutive
using the treasury stock method and the anticipated initial public offering
price).
F-9
<PAGE> 69
MERGE TECHNOLOGIES INCORPORATED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(q) 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. The stock split will be effected as a stock dividend of 5.77217 shares
per share of Common Stock. The accompanying consolidated financial statements
and notes reflect this change in capital structure.
(2) BUSINESS COMBINATION
Effective May 1, 1995, Signal Stream, Incorporated (SSI), a wholly-owned
subsidiary of the Company formed to effect the acquisition of Signal Stream
Technologies, Inc. (SST), acquired all the outstanding shares 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 years ended December 31,
1994 and 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.
<TABLE>
<CAPTION>
UNAUDITED UNAUDITED
1994 1995
---------- ----------
<S> <C> <C>
Revenue..................................................... $2,750,000 $4,000,000
Net loss.................................................... (624,000) (770,000)
</TABLE>
(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
duplicate 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.
In addition to the initial payment 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.
(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 accounts 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).
F-10
<PAGE> 70
MERGE TECHNOLOGIES INCORPORATED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Subsequent to year-end, 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 officers 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 (note 4 (d)).
(b) Subordinated Notes Payable to Shareholders
In September 1995, the Company borrowed $150,000 from two shareholders. The
borrowings and related accrued interest were subsequently converted during 1995
to common stock.
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 the 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 $88,300, $97,800 and $39,700 for the years ending December 31,
1994, 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 (note 8(d)).
(d) Note Payable
In June 1997, the Company entered into a $2,000,000 Loan Agreement with
Sirrom Capital Corporation (Sirrom). The Loan Agreement bears interest at a
stated rate of 13.5%, payable monthly from August 1997 through May 2002.
Principal and any remaining interest is due in June 2002. The Loan Agreement
grants a security interest in substantially all of the Company's assets.
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 $0.01 per share. Additional warrants
will be issued as follows if the principal is outstanding on the specified
dates: June 2000 -- 58,498; June 2001 -- 60,056; and June 2002 -- 61,667. The
stock purchase warrants are subject to a put option whereby Sirrom may sell the
warrants to the Company in the 30-day period prior to the expiration date of the
warrants. The put option price is equal to the fair market value of the common
stock issuable under the warrants.
The Company assigned a value of $1,089,422 to the warrants issued, which is
reflected as a debt discount and put warrant liability, based on the value of
common stock on the date of the transaction. The debt discount is being
amortized to interest expense over the expected term of the loan, which is six
months. The Company will reflect future changes in the fair value of the put
option or the warrants as either an increase or decrease in interest expense and
the associated put warrant liability.
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 are also
available to repurchase certain outstanding shares of the
F-11
<PAGE> 71
MERGE TECHNOLOGIES INCORPORATED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company's common stock, and provide additional working capital for sales,
marketing, and product development expenditures.
(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 $6,900, $15,900 and $30,800 for the years ended December 31,
1994, 1995 and 1996, respectively.
(6) INCOME TAXES
Actual income taxes vary from the expected income taxes (computed by
applying the statutory Federal income tax rate of 34% to loss before income
taxes and extraordinary item) as a result of the following:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-----------------------------------
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Expected tax expense (benefit)...................... $ 160,000 $(165,000) $ (96,000)
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................ (126,000) 125,000 140,000
Research and experimentation credit............... (81,000) (137,000) (137,000)
Nondeductible expenses............................ 27,000 5,000 42,000
State and local income taxes, net of federal
income tax benefit............................. 19,000 (3,000) (10,000)
Other............................................. 1,000 6,000 11,000
--------- --------- ---------
Actual tax expense.................................. $ -- $ -- $ --
========= ========= =========
</TABLE>
F-12
<PAGE> 72
MERGE TECHNOLOGIES INCORPORATED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
1996 are presented below:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1995 1996
---------- ----------
<S> <C> <C>
Deferred tax assets:
Accounts receivable, principally due to allowance for
doubtful accounts..................................... $ 15,000 $ 29,000
Accrued wages............................................ 18,000 39,000
Research and experimentation credit carryforward......... 359,000 496,000
Net operating loss carryforwards......................... 691,000 741,000
---------- ----------
Total gross deferred tax assets............................ 1,083,000 1,305,000
Less valuation allowance................................. (353,000) (432,000)
---------- ----------
Net deferred tax asset..................................... 730,000 873,000
---------- ----------
Deferred tax liabilities:
Property and equipment, principally due to differences in
depreciation.......................................... (44,000) (61,000)
Software development costs............................... (686,000) (804,000)
Other.................................................... -- (8,000)
---------- ----------
Total gross deferred liabilities........................... (730,000) (873,000)
---------- ----------
Net deferred taxes......................................... $ -- $ --
========== ==========
</TABLE>
The net change in the total valuation allowance for the years ended
December 31, 1994, 1995 and 1996 was an increase (decrease) of $(126,000),
$312,000 and $79,000, 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 temporary 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. Subsequently recognized tax benefits
relating to the valuation allowance for deferred tax assets as of December 31,
1996 will be allocated as follows:
<TABLE>
<S> <C>
Income tax benefit that would be reported in the statement
of operations............................................. $347,000
Goodwill and other noncurrent intangible assets............. 85,000
--------
Total............................................. $432,000
========
</TABLE>
At December 31, 1996, the Company has net operating loss carryforwards
totaling approximately $1,975,000 for federal and state income tax purposes
which begin to expire in 2010.
(7) LEASES
The Company is obligated under various capital leases for computer
equipment that expire at various dates during the next three years. At December
31, 1996, the gross amount of computer equipment under capital leases was
$116,069 and related accumulated amortization was $37,553.
F-13
<PAGE> 73
MERGE TECHNOLOGIES INCORPORATED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company has a noncancelable operating lease for its main office
facility. The lease is for an initial 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, 1994, 1995 and 1996 was approximately
$57,000, $76,000 and $116,000, 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, 1996, are:
<TABLE>
<CAPTION>
OPERATING CAPITAL
---------- --------
<S> <C> <C>
1997........................................................ $ 159,100 $ 69,188
1998........................................................ 159,100 17,034
1999........................................................ 158,600 6,037
2000........................................................ 156,000 --
2001........................................................ 156,000 --
Later years, through 2004................................... 416,200 --
---------- --------
Total minimum lease payments................................ 1,205,000 92,259
Less amount representing interest......................... 19,875
--------
Present value of net minimum capital lease payments......... 72,384
Less current installments of obligations under capital
leases................................................. 55,959
--------
Obligations under capital leases, excluding current
installments.............................................. $ 16,425
========
</TABLE>
(8) SHAREHOLDERS' EQUITY
(a) Common and Preferred 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 sale of the common 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, 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.
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.
F-14
<PAGE> 74
MERGE TECHNOLOGIES INCORPORATED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
(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: expected option lives of four years, expected volatility and
dividend yield of 0%, and a risk-free interest rate of 5.63%. The weighted
average grant-date fair value of options granted in 1996 calculated using the
Black-Scholes model was $0.29. The weighted average remaining contractual life
for options granted in 1996 and outstanding at December 31, 1996 was 5.8 years.
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:
<TABLE>
<CAPTION>
1995 1996
--------- ---------
<S> <C> <C>
Net loss available to common shareholders
As reported............................................... $(574,373) $(113,679)
Pro forma................................................. (574,373) (177,000)
Loss per common and common equivalent share
As reported............................................... (0.21) (0.03)
Pro forma................................................. (0.21) (0.04)
</TABLE>
Pro forma net loss reflects only options granted in 1995 and 1996.
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.
F-15
<PAGE> 75
MERGE TECHNOLOGIES INCORPORATED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of stock options is as follows:
<TABLE>
<CAPTION>
CLASS A CLASS B COMMON
-------------------- ------------------- -------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
NUMBER PRICE NUMBER PRICE NUMBER PRICE
-------- -------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding,
January 1, 1994............. 671,792 $0.15 60,536 $0.33 -- $ --
Options exercised............. (671,792) 0.15 -- -- -- --
Options outstanding, December
31, 1994.................... -- -- 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 exercisable, December
31, 1996.................... -- -- -- $ -- 275,472 $1.27
</TABLE>
(d) 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 CUSTOMERS
The Company had two customers that accounted for 35% and 13%, respectively,
of net sales for the year ending December 31, 1994.
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 two customers and one distributor that accounted for 14%, 11% and 18%,
respectively of consolidated net sales for the nine months ended September 30,
1997. Accounts receivable at December 31, 1996, from one distributor accounted
for approximately 30% of outstanding consolidated amounts (24% at September 30,
1997).
(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 have
agreed to terminate this consulting agreement effective upon the closing of the
Offering.
F-16
<PAGE> 76
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE> 77
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE> 78
BACK COVER PAGE
The back cover page depicts a radiologist in a clinic using the CaseWorks
product. The clinic is being viewed over the left shoulder of the radiologist
who is looking at a flat panel CaseWorks screen and a film light box. Additional
magnified images of CaseWorks features are set off the lower right hand side of
the diagram. The bottom-left corner of the diagram contains descriptive
CaseWorks text.
[Back Cover Printed Here]
<PAGE> 79
======================================================
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, OR THE UNDERWRITERS. 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
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 7
The Company........................... 15
Use of Proceeds....................... 15
Dilution.............................. 16
Capitalization........................ 17
Dividend Policy....................... 17
Selected Consolidated Financial
Data................................ 18
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 20
Business.............................. 29
Management............................ 41
Certain Transactions.................. 45
Principal Shareholders................ 48
Description of Securities............. 49
Shares Eligible for Future Sale....... 53
Underwriting.......................... 54
Legal Matters......................... 56
Experts............................... 56
Additional Information................ 56
Index to Financial Statements......... F-1
</TABLE>
---------------------
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.
======================================================
======================================================
1,900,000 SHARES
[MERGE LOGO]
MERGE TECHNOLOGIES
INCORPORATED
COMMON STOCK
-----------------
PROSPECTUS
-----------------
H.C. WAINWRIGHT & CO., INC.
, 1998
======================================================
<PAGE> 80
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.
II-1
<PAGE> 81
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 issuance and sale of the securities being
registered hereby, other than underwriting discounts and commissions.
<TABLE>
<S> <C>
Registration Fee $5,297
NASD Filing Fee $2,248
Blue Sky Fees and Expenses $35,000
Accounting Fees and Expenses $250,000
Legal Fees and Expenses $120,000
Printing Expenses $75,000
Transfer Agent and Registrar Fees $1,000
Underwriter's Non accountable Expense $427,500
NASDAQ Quotation Fee $10,000
Director and Officer Liability Insurance Premiums $30,000
Miscellaneous $25,000
----------
Total $981,045
==========
</TABLE>
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 to the Company's
knowledge a sophisticated investor capable of understanding the merits and
risks of his or her investment.
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
1,015,826 shares of Common Stock. The 1996 Plan provides for the grant to
employees of incentive stock options ("ISOs") and non-qualified stock options.
As of the date hereof, the Company has granted options under the 1996 Plan to
purchase 939,815 shares of Common Stock at exercise prices ranging from $1.48 to
$6.75 per share. The transaction described above was exempt from registration
under Rule 701, promulgated under Section 3(b) of the Securities Act.
II-2
<PAGE> 82
On June 30, 1997, Registrant entered into a Loan Agreement, as modified
by the Merge/Sirrom Revised Modification Agreement dated as of October 30, 1997
(the "Sirrom Note Agreement") with Sirrom under which it issued (i) a
Secured Promissory Note dated June 30, 1997 in favor of Sirrom in the principal
amount of two million dollars ($2,000,000) (the "Sirrom Note"), and (ii) a
Stock Purchase Warrant issued to Sirrom dated June 30, 1997, as modified by the
Merge/Sirrom Revised Modification Agreement dated as of October 30, 1997 (the
"Sirrom Warrant"). In connection with and in consideration of the Sirrom Note
Agreement, Sirrom was granted the right to acquire for nominal consideration, a
base amount of 145,256 shares of the Common Stock. Under the terms of the
Sirrom Warrant, in the event the loan is outstanding in whole or in part on the
following dates, the base amount would be increased to the following:
<TABLE>
<S> <C>
June 30, 2000 203,754
June 30, 2001 205,312
June 30, 2002 206,923
</TABLE>
The issuance of the Sirrom Note and the Sirrom Warrant were exempt from
registration under Section 4(2) of the Securities Act.
Effective May 1, 1995, Signal Stream Technologies, Inc. ("SST") was merged
with and into Signal Stream Incorporated, a Wisconsin corporation ("SSI"), a
wholly-owned subsidiary of the Company, with SSI as the surviving corporation.
The Company acquired all of the outstanding shares of SST, and the transaction
was accounted for as a purchase of SST by the Company. A total of 753,742 shares
of SSI's Series A Preferred Stock were converted into 1/40th of a share of the
Common Stock (pre-Common Stock Dividend) and 5,142,280 shares of SST Common
Stock were converted into 1/120 of a share of the Common Stock (pre-Common Stock
Dividend). All shares of the Common Stock issued to SST shareholders were
unregistered.
Except as otherwise indicated, the transactions described above were exempt
from registration under Section 4(2) of the Securities Act. No general
solicitation or general advertising was made in connection with any of the
transactions described above, and each of the purchasers in these transactions
had the opportunity to ask questions of officers of, and to obtain information
from, the Company.
ITEM 27. EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. PAGE NO.
- ----------- --------
<S> <C>
1 Form of Amended Underwriting Agreement.
3.1 Articles of Incorporation of Registrant. (1)
3.2 By-Laws of Registrant. (1)
4.1 Stock Purchase Warrant issued June 30, 1997 by Registrant to
Sirrom Capital Corporation. (1)
4.2 Form of Lock-Up Agreement (1).
</TABLE>
II-3
<PAGE> 83
"(1)"
<TABLE>
<S> <C>
4.3 Form of Common Stock Certificate. (1)
4.4 Form of Representative's Warrants
5.1 Opinion of Foley & Lardner regarding legality. (2)
10.1 Employment Agreement dated September 1, 1997 between
Registrant and William C. Mortimore. (1)
10.2 Loan Agreement dated June 30, 1997 between Registrant and
Sirrom Capital Corporation. (1)
10.3 Security Agreement dated June 30, 1997 between Registrant and
Sirrom Capital Corporation. (1)
10.4 Secured Promissory Note dated June 30, 1997 between Registrant
and Sirrom Capital Corporation. (1)
10.5 Merge/Sirrom Revised Modification Agreement dated as of
October 30, 1997. (2)
10.6 Intentionally omitted.
10.7 Intentionally omitted.
10.8 Intentionally omitted.
10.9 1996 Stock Option Plan for Employees of Registrant dated May
13, 1996. (1)
10.10 Office Lease for West Allis Center dated May 24, 1996 between
Registrant and Whitnall Summit Company, LLC, together with
Supplement Office Space Lease dated July 3, 1997.(1)
10.11 Alpha Capital Venture Partners Limited Agreement dated March
1, 1997.(1)
10.12 Consulting Agreement of Robert T. Geras dated June 1, 1996,
as terminated effective as of the closing of the Offering.
10.13 Form of 1998 Stock Option Plan For Directors.
11 Statement regarding computation of per share earnings.
21 Subsidiaries of Registrant.(1)
23.1 Consent of Foley & Lardner (see Exhibit 5.1).
23.2 Consent of KPMG Peat Marwick LLP
24 Power of Attorney.(1)
27.1 Financial Data Schedule.
27.2 Financial Data Schedule.(2)
27.3 Financial Data Schedule.(2)
27.4 Financial Data Schedule.(2)
27.5 Financial Data Schedule.(2)
</TABLE>
- -----------------
(1) Incorporated by reference to Registration Statement No. 333-39111 filed
October 30, 1997.
(2) Incorporated by reference to Pre-Effective Amendment No. 1 to Registration
Statement No. 333-39111.
II-4
<PAGE> 84
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 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. Provisions for Certificates.
The undersigned Registrant hereby undertakes to provide to the
Underwriters at the closing, certificates in such denominations and registered
in such names as required by the Underwriters to permit prompt delivery to each
purchaser.
C. Indemnification.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 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 Act and will be governed by the final adjudication of
such issue.
D. Undertakings Pursuant to Rule 430A.
For the purposes of determining any liability under the Securities Act
of 1933, as amended, the information omitted from the Prospectus filed as a part
of this Registration Statement in reliance on Rule 430A and contained in a form
of prospectus filed pursuant to rule 424(b)(1) or (4) or 497(h) under the
Securities Act shall be deemed to be a part of this Registration Statement as of
the time it was declared effective.
For the purpose of determining any liability under the Securities Act
of 1933, as amended, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering of those securities.
II-5
<PAGE> 85
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
Pre-Effective Amendment No. 2 to Registration Statement to be signed on its
behalf by the undersigned, in the City of Milwaukee, State of Wisconsin, on
January 26, 1998.
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 Pre -
Effective Amendment No. 2 to the Registration Statement was signed by the
following persons in the capacities indicated this 26th day of January, 1998.
<TABLE>
<CAPTION>
NAME POSITION DATE
- ---- -------- ----
<S> <C> <C>
/s/ William C. Mortimore President and Director January 26, 1998
- ------------------------ (Pricipal Executive Officer) -----------------
William C. Mortimore
/s/ Colleen M. Doan Chief Financial Officer, Secretary January 26, 1998
- ----------------------- and Treasurer (Principal Accounting -----------------
Colleen M. Doan Officer and Principal Financial Officer)
The entire Board of Directors:
William C. Mortimore
Robert T. Geras
David B. Pivan
By /s/ William C. Mortimore January 26, 1998
------------------------ -----------------
William C. Mortimore
as Attorney-in-fact
</TABLE>
II-6
<PAGE> 86
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. PAGE NO.
- ----------- --------
<S> <C>
1 Form of Amended Underwriting Agreement. (1)
3.1 Articles of Incorporation of Registrant. (1)
3.2 By-Laws of Registrant. (1)
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 Form of Common Stock Certificate. (1)
4.4 Form of Representative's Warrants
5.1 Opinion of Foley & Lardner regarding legality. (2)
10.1 Employment Agreement dated September 1, 1997 between
Registrant and William C. Mortimore. (1)
10.2 Loan Agreement dated June 30, 1997 between Registrant and
Sirrom Capital Corporation. (1)
10.3 Security Agreement dated June 30, 1997 between Registrant and
Sirrom Capital Corporation. (1)
10.4 Secured Promissory Note dated June 30, 1997 between Registrant
and Sirrom Capital Corporation. (1)
10.5 Merge/Sirrom Revised Modification Agreement dated as of
October 30, 1997. (2)
10.6 Intentionally omitted
10.7 Intentionally omitted
10.8 Intentionally omitted
10.9 1996 Stock Option Plan for Employees of Registrant dated May
13, 1996. (1)
10.10 Office Lease for West Allis Center dated May 24, 1996 between
Registrant and Whitnall Summit Company, LLC, together with
Supplement Office Space Lease dated July 3, 1997.(1)
10.11 Alpha Capital Venture Partners Limited Agreement dated March
1, 1997.(1)
10.12 Consulting Agreement of Robert T. Geras dated June 1, 1996,
as terminated effective as of the closing of the Offering.
10.13 Form of 1998 Stock Option Plan For Directors.
11 Statement regarding computation of per share earnings.
21 Subsidiaries of Registrant.(1)
23.1 Consent of Foley & Lardner (see Exhibit 5.1).
23.2 Consent of KPMG Peat Marwick LLP
24 Power of Attorney.(1)
27.1 Financial Data Schedule.
27.2 Financial Data Schedule.(2)
27.3 Financial Data Schedule.(2)
27.4 Financial Data Schedule.(2)
27.5 Financial Data Schedule.(2)
</TABLE>
- -----------------
(1) Incorporated by reference to Registration Statement No. 333-39111 filed
October 30, 1997.
(2) Incorporated by reference to Pre-Effective Amendment No. 1 to Registration
Statement No. 333-39111.
<PAGE> 1
1,900,000 Shares(1)
MERGE TECHNOLOGIES, INCORPORATED
Common Stock
UNDERWRITING AGREEMENT
[ ], 1998
H.C. Wainwright & Co., Inc.
As Representative of the several Underwriters
c/o H.C. Wainwright & Co., Inc.
One Boston Place
Boston, Massachusetts 02108
Ladies and Gentlemen:
Merge Technologies Incorporated, a Wisconsin corporation (the "Company"),
proposes to issue and sell 1,900,000 shares (the "Firm Shares") of its
authorized but unissued Common Stock. The Company also proposes to grant to the
Underwriters (as defined below) an option to purchase up to 285,000 additional
shares of Common Stock (the "Optional Shares" and, with the Firm Shares,
collectively, the "Shares"). The Common Stock is more fully described in the
Registration Statement and the Prospectus hereinafter mentioned.
The Company hereby confirms the agreements made with respect to the
purchase of the Shares by the several underwriters, for whom you are acting,
named in Schedule I hereto (collectively, the "Underwriters," which term shall
also include any underwriter purchasing Shares pursuant to Section 2(b)
hereof). You represent and warrant that you have been authorized by each of
the other Underwriters to enter into this Underwriting Agreement (the
"Agreement") on its behalf and to act for it in the manner herein provided.
SECTION 1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
hereby represents and warrants to the several Underwriters as of the date
hereof and as of each Closing Date (as defined below) that:
(a) The Company has filed with the Securities and Exchange Commission
(the "Commission") a registration statement on Form SB-2 (No. 333-39111),
including
__________________________
(1) Plus an option to purchase from the Company up to 285,000 additional shares
to cover over-allotments.
<PAGE> 2
the related preliminary prospectus, for the registration under the Securities
Act of 1933, as amended (the "Securities Act") of the Shares. Copies of such
registration statement and of each amendment thereto, if any, including the
related preliminary prospectus (meeting the requirements of Rule 430A of the
rules and regulations of the Commission) heretofore filed by the Company with
the Commission have been delivered to you.
The term Registration Statement as used in this Agreement shall mean such
registration statement, including all exhibits and financial statements, all
information omitted therefrom in reliance upon Rule 430A and contained in the
Prospectus referred to below, in the form in which it became effective, and any
registration statement filed pursuant to Rule 462(b) of the rules and
regulations of the Commission with respect to the Shares (a "Rule 462(b)
registration statement"), and, in the event of any amendment thereto after the
effective date of such registration statement (the "Effective Date"), shall
also mean (from and after the effectiveness of such amendment) such
registration statement as so amended (including any Rule 462(b) registration
statement). The term Prospectus as used in this Agreement shall mean the
prospectus relating to the Shares first filed with the Commission pursuant to
Rule 424(b) and Rule 430A (or if no such filing is required, as included in the
Registration Statement) and, in the event of any supplement or amendment to
such prospectus after the Effective Date, shall also mean (from and after the
filing with the Commission of such supplement or the effectiveness of such
amendment) such prospectus as so supplemented or amended. The term Preliminary
Prospectus as used in this Agreement shall mean each preliminary prospectus
included in such registration statement prior to the time it becomes effective.
(b) The Registration Statement has been declared effective under the
Securities Act, and no post-effective amendment to the Registration Statement
has been filed as of the date of this Agreement. The Company has caused to be
delivered to you copies of each Preliminary Prospectus and has consented to the
use of such copies for the purposes permitted by the Securities Act.
(c) Each of the Company and its subsidiaries has been duly incorporated
and each is validly existing as a corporation in good standing under the laws
of the jurisdiction of its incorporation, has full corporate power and
authority to own or lease its properties and conduct its business as described
in the Registration Statement and the Prospectus and as being conducted, and is
duly qualified as a foreign corporation and in good standing in all
jurisdictions in which the character of the property owned or leased or the
nature of the business transacted by it makes qualification necessary (except
where the failure to be so qualified would not have a material adverse effect
on the business, properties, condition (financial or otherwise) or results of
operations of the Company and its subsidiaries, taken as a whole).
(d) The Company does not own or control, directly or indirectly, any
corporation, association or other entity other than the subsidiaries listed in
Exhibit 21.1 to the Registration Statement. Except as otherwise described in
the Prospectus, the Company owns all of the outstanding capital stock of its
subsidiaries free and clear of all
-2-
<PAGE> 3
claims, liens, charges and encumbrances. The Company and each of its
subsidiaries are in possession of, and operating in compliance with, all
material authorizations, licenses, permits, consents, certificates and orders
material to the conduct of their respective businesses as described in the
Prospectus, all of which are valid and in full force and effect.
(e) Since the respective dates as of which information is given in the
Registration Statement and the Prospectus, there has not been any material
adverse change in the business, properties, condition (financial or otherwise)
or results of operations of the Company and its subsidiaries, taken as a whole,
whether or not arising from transactions in the ordinary course of business,
other than as set forth in the Registration Statement and the Prospectus, and
since such dates, except in the ordinary course of business, neither the
Company nor any of its subsidiaries has entered into any material transaction
not referred to in the Registration Statement and the Prospectus.
(f) The Registration Statement and the Prospectus comply and on the
Closing Date (as hereinafter defined) and any later date on which Optional
Shares are to be purchased, the Prospectus will comply, in all material
respects, with the provisions of the Securities Act and the rules and
regulations of the Commission thereunder; on the Effective Date, the
Registration Statement did not contain any untrue statement of a material fact
and did not omit to state any material fact required to be stated therein or
necessary in order to make the statements therein not misleading; and, on the
Effective Date the Prospectus did not and, on the Closing Date and any later
date on which Optional Shares are to be purchased, will not contain any untrue
statement of a material fact or omit to state any material fact necessary in
order to make the statements therein, in the light of the circumstances under
which they were made, not misleading; provided, however, that none of the
representations and warranties in this paragraph shall apply to statements in,
or omissions from, the Registration Statement or the Prospectus made in
reliance upon and in conformity with information herein or otherwise furnished
in writing to the Company by or on behalf of the Underwriters specifically for
use in the Registration Statement or the Prospectus.
(g) The Company has authorized and outstanding capital stock as set
forth under the heading "Capitalization" in the Prospectus. The issued and
outstanding shares of Common Stock have been duly authorized and validly
issued, are fully paid and nonassessable, have been issued in compliance with
all federal and state securities laws, and were not issued in violation of or
subject to any preemptive rights or other rights to subscribe for or purchase
securities. All issued and outstanding shares of capital stock of each
subsidiary of the Company have been duly authorized and validly issued and are
fully paid and nonassessable. Except as disclosed in or contemplated by the
Prospectus and the financial statements of the Company and the related notes
thereto included in the Prospectus, neither the Company nor any subsidiary has
any outstanding options to purchase, or any preemptive rights or other rights
to subscribe for or to purchase, any securities or obligations convertible
into, or any contracts or commitments to issue or sell, shares of its capital
stock or any such options, rights, convertible securities or obligations.
-3-
<PAGE> 4
The description of the Company's stock option, stock bonus and other
stock plans or arrangements, and the options or other rights granted and
exercised thereunder, set forth in the Prospectus accurately and fairly
presents the information required by the Securities Act and the rules and
regulations promulgated thereunder ("Rules and Regulations") to be shown with
respect to such plans, arrangements, options and rights.
(h) The Shares will be, when issued and sold to the Underwriters as
provided herein, validly issued, fully paid and nonassessable and conform to
the description thereof in the Prospectus. No further approval or authority of
the stockholders or the Board of Directors of the Company will be required for
the issuance and sale of the Shares to be sold by the Company as contemplated
herein.
(i) The Warrants (as defined in Section 5(p) below) will conform to the
description thereof in the Prospectus and, when sold to and paid for by the
Representative in accordance with the Warrant Agreement (as defined in Section
5(p) below), will be duly authorized and validly issued and will be valid and
binding obligations of the Company entitled to all the benefits of the Warrant
Agreement. The Warrant Shares (as defined in Section 5(p) below) will be duly
authorized and reserved for issuance upon exercise of the Warrants and, when
issued upon such exercise in accordance with the terms of the Warrants and the
Warrant Agreement, will be duly and validly issued, fully paid and
nonassessable, free of preemptive rights and will conform to the description
thereof in the Prospectus.
(j) Prior to the Closing Date, (i) the Shares to be issued and sold by the
Company and (ii) the Warrant Shares, will be authorized for quotation on the
Nasdaq SmallCap Market upon official notice of issuance.
(k) The Shares to be sold by the Company will be sold free and clear of
any pledge, lien, security interest, encumbrance, claim or equitable interest,
and will conform to the description thereof contained in the Prospectus.
Except as described in the Prospectus, no preemptive right, co-sale right,
registration right, right of first refusal or other similar right to subscribe
for or purchase securities of the Company exists with respect to the issuance
and sale of the Shares by the Company pursuant to this Agreement. No
stockholder of the Company has any right which has not been waived, or complied
with, to require the Company to register the sale of any shares owned by such
stockholder under the Securities Act in the public offering contemplated by
this Agreement.
(l) The Company has all requisite corporate power and authority to
enter into this Agreement and Warrant Agreement and perform the transactions
contemplated hereby and thereby. This Agreement and the Warrant Agreement have
been duly authorized, executed and delivered by the Company and constitute
valid and binding obligations of the Company enforceable in accordance with
their terms, except as enforceability may be limited by general equitable
principles, bankruptcy, insolvency, reorganization, moratorium laws affecting
creditors' rights generally and except as to
-4-
<PAGE> 5
those provisions relating to rights to indemnity or contribution for
liabilities arising under federal and state securities laws. The making and
performance of this Agreement and the Warrant Agreement by the Company and the
consummation of the transactions contemplated hereby and thereby (i) will not
violate any provisions of the Certificate of Incorporation, Bylaws or other
organizational documents of the Company or any of its subsidiaries, and (ii)
will not conflict with, result in a material breach or violation of, or
constitute, either by itself or upon notice or the passage of time or both, a
material default under (A) any agreement, mortgage, deed of trust, lease,
franchise, license, indenture, permit or other instrument to which the Company
or any of its subsidiaries is a party or by which the Company or any of its
subsidiaries or any of their respective properties may be bound or affected, or
(B) any statute or any authorization, judgment, decree, order, rule or
regulation of any court or any regulatory body, administrative agency or other
governmental body applicable to the Company and its subsidiaries, taken as a
whole, or to which any of their respective properties are subject. No consent,
approval, authorization or other order of any court regulatory body,
administrative agency or other governmental body that has not already been
obtained is required for the execution and delivery of this Agreement and the
Warrant Agreement or the consummation of the transactions contemplated by this
Agreement and the Warrant Agreement, except for the clearance of such offering
with the National Association of Securities Dealers, Inc. (the "NASD") and the
approval of the quotation of the Shares on the Nasdaq SmallCap Market.
(m) The consolidated financial statements and schedules of the Company and
the related notes thereto included in the Registration Statement and the
Prospectus present fairly on a consolidated basis the financial position of the
Company and its subsidiaries as of the respective dates of such financial
statements and schedules, and the results of operations and cash flows of the
Company and its subsidiaries for the respective periods covered thereby. Such
statements, schedules and related notes have been prepared in accordance with
generally accepted accounting principles applied on a consistent basis
throughout the periods specified, as certified by the independent accountants
named in subsection 10(f). No other financial statements or schedules are
required to be included in the Registration Statement. The financial data set
forth in the Prospectus under the captions "Capitalization" and "Selected
Consolidated Financial Data" fairly present the information set forth therein
on the basis stated in the Registration Statement.
(n) The Company maintains a system of internal accounting controls
sufficient to provide reasonable assurances that (i) transactions are executed
in accordance with management's general or specific authorizations, (ii)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and to
maintain accountability for assets, (iii) access to assets is permitted only in
accordance with management's general or specific authorization, and (iv) the
recorded accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to any
differences. The representations and warranties given by the Company and its
officers to
-5-
<PAGE> 6
its independent public accountants for the purpose of supporting the letters
referred to in Sections 9(f) and (g) are true and correct.
(o) Neither the Company nor any of its subsidiaries is (i) in violation or
default of any provision of its Certificate of Incorporation, Bylaws or other
organizational documents, or (ii) in material breach of, or default with
respect to, any provision of any agreement, judgment, decree, order, mortgage,
deed of trust, lease, franchise, license, indenture, permit or other instrument
to which it is a party or by which it or any of its properties are bound; and
there does not exist any state of facts which, with notice or lapse of time or
both, would constitute such a breach or default on the part of the Company and
its subsidiaries, taken as a whole.
(p) There are no contracts or other documents required to be described in
the Registration Statement or to be filed as exhibits to the Registration
Statement by the Securities Act or by the Rules and Regulations which have not
been described or filed as an exhibit to the Registration Statement as
required. The contracts so described in the Prospectus are in full force and
effect on the date hereof.
(q) Except as disclosed in the Prospectus, there are no legal or
governmental actions, suits, investigations or other proceedings (formal or
informal) pending or, to the best knowledge of the Company, threatened to which
the Company or any of its subsidiaries is or is threatened to be made a party
or a subject or of which property owned or leased by the Company or any of its
subsidiaries is or has been threatened to be made the subject, which actions,
suits, investigations or other proceedings could, individually or in the
aggregate, prevent or materially adversely affect the transactions contemplated
by this Agreement or the Warrant Agreement or result in a material adverse
change in the business, properties, condition (financial or otherwise), or
results of operations of the Company and its subsidiaries, taken as a whole;
there are no outstanding claims, asserted or otherwise, against the Company,
any of its subsidiaries, or any of their respective officers or directors, for
violations of any federal or state securities laws, or any other applicable
laws, relating to any purchase, sale, or redemption of, or other transaction
with respect to, the Common Stock or shares of capital stock of any of the
Company's subsidiaries; and no labor disturbance by the employees of the
Company or any of its subsidiaries exists or is imminent which could materially
adversely affect the business, properties, condition (financial or otherwise),
or results of operations of the Company or its subsidiaries, taken as a whole.
Neither the Company nor any of its subsidiaries is a party or subject to the
provisions of any material injunction, judgment, decree or order of any court,
regulatory body, administrative agency or other governmental body. Except as
disclosed in the Prospectus, there are no material legal or governmental
actions, suits, investigations or proceedings pending or, to the Company's best
knowledge, threatened against any executive officers or directors of the
Company.
(r) The Company or the applicable subsidiary has good title to all the
properties and assets reflected as owned in the financial statements
hereinabove described (or elsewhere in the Prospectus), subject to no lien,
mortgage, pledge, charge or
-6-
<PAGE> 7
encumbrance of any kind except (i) those, if any, reflected in such financial
statements (or elsewhere in the Prospectus), or (ii) those which are not
material in amount to the Company and its subsidiaries, taken as a whole, and
do not adversely affect the use made and proposed to be made of such property
by the Company or its subsidiaries. The Company or the applicable subsidiary
holds its leased properties under valid and binding leases. Except as
described in the Prospectus, the Company owns or leases all such properties as
are necessary to its operations as now conducted or as proposed to be conducted.
(s) Since the respective dates as of which information is given in the
Registration Statement and Prospectus, and except as described in or
specifically contemplated by the Prospectus: (i) the Company and its
subsidiaries have not (A) incurred any material liabilities or obligations,
indirect, direct or contingent, or (B) entered into any oral or written
agreement or other transaction, which in the case of (A) or (B) is not in the
ordinary course of business; (ii) the Company and its subsidiaries have not
sustained any material loss or interference with their respective businesses or
properties from fire, flood, windstorm, accident or other calamity, whether or
not covered by insurance; (iii) the Company and its subsidiaries have not paid
or declared any dividends or other distributions with respect to their
respective capital stock and the Company and its subsidiaries are not in
default in the payment of principal or interest on any outstanding debt
obligations; (iv) there has not been any change in the capital stock of the
Company or its subsidiaries (other than upon the sale of the Shares hereunder
or upon the exercise of any options or warrants disclosed in the Prospectus);
(v) there has not been any material increase in the short- or long-term debt of
the Company and its subsidiaries; and (vi) there has not been any material
adverse change or any development involving or which may reasonably be expected
to involve a prospective material adverse change, in the business, condition
(financial or otherwise), properties, or results of operations of the Company
and its subsidiaries, taken as a whole.
(t) The Company and its subsidiaries are conducting business in compliance
with all applicable laws, rules and regulations of the jurisdictions in which
they are conducting business, except where the failure to be so in compliance
would not have a material adverse effect on the business, properties, condition
(financial or otherwise) or results of operations of the Company and its
subsidiaries, taken as a whole.
(u) The Company and its subsidiaries have filed all necessary federal,
state and foreign income and franchise tax returns, and all such tax returns
are complete and correct in all material respects, and the Company and its
subsidiaries have not failed to pay any taxes which were payable pursuant to
said returns or any assessments with respect thereto. The Company has no
knowledge of any tax deficiency which has been or is likely to be threatened or
asserted against the Company or its subsidiaries.
(v) The Company has not distributed, and will not distribute prior to
the later to occur of (i) completion of the distribution of the Shares, or (ii)
the expiration of any time period within which a dealer is required under the
Securities Act to deliver a
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<PAGE> 8
prospectus relating to the Shares, any offering material in connection
with the offering and sale of the Shares other than the Prospectus, the
Registration Statement and any other materials permitted by the Securities Act
and consented to by the Underwriters.
(w) Each of the Company and its subsidiaries maintains insurance of the
types and in the amounts generally deemed adequate for their business,
including, but not limited to, directors' and officers' insurance, insurance
covering real and personal property owned or leased by the Company and its
subsidiaries against theft, damage, destruction, acts of vandalism and all
other risks customarily insured against, all of which insurance is in full
force and effect. The Company has not been refused any insurance coverage
sought or applied for, and the Company has no reason to believe that it will
not be able to renew its existing insurance coverage as and when such coverage
expires or to obtain similar coverage from similar insurers as may be necessary
to continue its business at a cost that would not materially adversely affect
the business, properties, condition (financial or otherwise) or results of
operations of the Company or its subsidiaries, taken as a whole.
(x) Neither the Company nor any of its subsidiaries nor, to the best of
the Company's knowledge, any of their employees or agents has at any time
during the last five years (i) made any unlawful contribution to any candidate
for foreign office, or failed to disclose fully any contribution in violation
of law, or (ii) made any payment to any foreign, federal or state governmental
officer or official or other person charged with similar public or quasi-public
duties, other than payments required or permitted by the laws of the United
States or any jurisdiction thereof.
(y) The Company has not taken and will not take, directly or indirectly,
any action designed to or that might be reasonably expected to cause or result
in stabilization or manipulation of the price of the Common Stock to facilitate
the sale or resale of the Shares.
(z) The Company has caused the holders of no less than ninety-five
percent (95%) of the outstanding shares of Common Stock (including shares
issuable upon the exercise or conversion of any option, warrant or other
security that vests or is exercisable prior to the 455th day following the date
the Registration Statement became effective) to furnish to the Underwriters an
agreement in form and substance satisfactory to H.C. Wainwright & Co., Inc.
stating that without the prior written consent of H. C. Wainwright & Co., Inc.,
such person or entity will not: (i) until the 275th day following the date the
Registration Statement became effective, directly or indirectly, offer, sell,
pledge, contract to sell, grant any option to purchase or otherwise dispose of
any shares of Common Stock beneficially owned or otherwise held by such person
or entity (including, without limitation, shares of Common Stock which may be
deemed to be beneficially owned by such person or entity in accordance with the
rules and regulations of the Securities and Exchange Commission and shares of
Common Stock which may be issued upon exercise of a stock option or warrant),
or any securities convertible into, derivative of or exercisable or
exchangeable for such Common Stock, as of the date the Registration
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<PAGE> 9
Statement became effective; and (ii) until the 455th day following the
date the Registration Statement became effective, directly or indirectly,
offer, sell, pledge, contract to sell, grant any option to purchase or
otherwise dispose of more than one-half of the aggregate number of shares of
Common Stock beneficially owned or otherwise held by such person or entity
(including, without limitation, shares of Common Stock which may be deemed to
be beneficially owned by such person or entity in accordance with the rules and
regulations of the Securities and Exchange Commission and shares of Common
Stock which may be issued upon exercise of a stock option or warrant), or any
securities convertible into, derivative of or exercisable or exchangeable for
such Common Stock, as of the date the Registration Statement became effective;
provided, however, that if such party is an individual, he or she may transfer
any or all of the Common Stock held by such party either during his or her
lifetime or on death, by gift, will or intestacy, to his or her immediate
family or to a trust the beneficiaries of which are exclusively such party
and/or a member or members of his or her immediate family (any of such
transferees are hereinafter referred to as a "Permitted Transferee"); provided
further, that in any such case the Permitted Transferee executes a lock-up
agreement in substantially the same form covering the remainder of the lock-up
period.
(aa) Neither the Company nor any of its affiliates does business with the
government of Cuba or with any person or affiliate located in Cuba.
(bb) Except as specifically disclosed in the Prospectus: the Company and
its subsidiaries have sufficient trademarks, trade names, patent rights,
copyrights, trade secret protections, licenses, approvals and governmental
authorizations to conduct their businesses as now conducted; the expiration or
absence of any trademarks, trade names, patent rights, copyrights, trade secret
protections, licenses, approvals or governmental authorizations would not have
a material adverse effect on the business, properties, condition (financial or
otherwise) or results of operations of the Company or its subsidiaries; the
Company has no knowledge of any infringement or of facts that suggest any
infringement by the Company or its subsidiaries of any trademark, trade name,
patent, copyright, license, trade secret or other similar rights of others; and
no claims have been made or are threatened against the Company or its
subsidiaries regarding infringement by the Company of any trademark, trade
name, patent, copyright, license, trade secret or other similar rights of
others.
(cc) Except as disclosed in the Prospectus, (i) the Company and its
subsidiaries are in compliance in all material respects with all material
rules, laws and regulations relating to the use, treatment, storage and
disposal of toxic substances and protection of health or the environment
("Environmental Laws") which are applicable to their business, (ii) neither the
Company nor any of its subsidiaries has received any notice from any
governmental authority or third party of an asserted claim under Environmental
Laws, (iii) no facts currently exist that will require the Company or any of
its subsidiaries to make future material capital expenditures to comply with
Environmental Laws, and (iv) to the knowledge of the Company, no property which
is or has been owned, leased or occupied by the Company or any of its
subsidiaries has been designated as a Superfund
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<PAGE> 10
site pursuant to the Comprehensive Environmental Response, Compensation
and Liability Act of 1980, as amended (42 U.S.C. Section 9601, et seq.), or
otherwise designated as a contaminated site under applicable state or local
law.
(dd) The Company is not an "investment company" within the meaning of the
Investment Company Act of 1940, as amended.
(ee) Except as disclosed in the Prospectus, neither the Company nor any of
its subsidiaries is in violation or in default in the performance of any
obligation under any permits or authorizations granted by the U.S. Food and
Drug Administration, or any comparable state, local or foreign governmental
agency, to the Company. The Company is in compliance in all material respects
with the Food Drug and Cosmetic Act ("FDCA"), all applicable regulations
thereunder, including, without limitation, all applicable requirements under
the FDCA pertaining to the export of medical devices, and any comparable state,
local or foreign laws or regulations.
SECTION 2. PURCHASE OF THE SHARES BY THE UNDERWRITERS.
(a) On the basis of the representations and warranties and subject to the
terms and conditions herein set forth, the Company agrees to issue and sell the
Firm Shares to the several Underwriters, and each of the Underwriters
agrees to purchase from the Company the respective aggregate number of Firm
Shares set forth opposite its name in Schedule I. The price at which such Firm
Shares shall be sold by the Company and purchased by the several Underwriters
shall be $[ ] per share. The obligation of each Underwriter to the Company
shall be to purchase from the Company that number of Firm Shares which
represents the same proportion of the total number of Firm Shares to be sold by
the Company pursuant to this Agreement as the number of Firm Shares set forth
opposite the name of such Underwriter in Schedule I hereto represents of the
total number of Firm Shares to be purchased by all Underwriters pursuant to
this Agreement, as adjusted by you in such manner as you deem advisable to
avoid fractional shares. In making this Agreement, each Underwriter is
contracting severally and not jointly; except as provided in paragraphs (b) and
(c) of this Section 2, the agreement of each Underwriter is to purchase only
the respective number of the Firm Shares specified in Schedule I.
(b) If for any reason one or more of the Underwriters shall fail or
refuse (otherwise than for a reason sufficient to justify the termination of
this Agreement under the provisions of Section 8 or 9 hereof) to purchase and
pay for the number of Shares agreed to be purchased by such Underwriter or
Underwriters, the Company shall immediately give notice thereof to you, and the
non-defaulting Underwriters shall have the right within 24 hours after the
receipt by you of such notice to purchase, or procure one or more other
Underwriters to purchase, in such proportions as may be agreed upon between you
and such purchasing Underwriter or Underwriters and upon the terms herein set
forth, all or any part of Shares which such defaulting Underwriter or
Underwriters agreed to purchase. If the non-defaulting Underwriters fail so to
make such arrangements
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<PAGE> 11
with respect to all such shares and portion, the number of Shares which
each non-defaulting Underwriter is otherwise obligated to purchase under this
Agreement shall be automatically increased on a pro rata basis to absorb the
remaining shares and portion which the defaulting Underwriter or Underwriters
agreed to purchase; provided, however, that the non-defaulting Underwriters
shall not be obligated to purchase the portion which the defaulting Underwriter
or Underwriters agreed to purchase if the aggregate number of such Shares
exceeds 10% of the total number of Shares which all Underwriters agreed to
purchase hereunder. If the total number of Shares which the defaulting
Underwriter or Underwriters agreed to purchase shall not be purchased or
absorbed in accordance with the two preceding sentences, the Company shall have
the right, within 24 hours next succeeding the 24-hour period above referred
to, to make arrangements with other underwriters or purchasers satisfactory to
you for purchase of such Shares and portion on the terms herein set forth. In
any such case, either you or the Company shall have the right to postpone the
Closing Date determined as provided in Section 4 hereof for not more than seven
business days after the date originally fixed as the Closing Date pursuant to
Section 4 in order that any necessary changes in the Registration Statement,
the Prospectus or any other documents or arrangements may be made. The term
"Underwriter" as used in this Agreement shall include any party substituted
under this Section 2(b) as if such party had originally been a party to this
Agreement and had been allocated the number of Shares actually purchased by it
as a result of its original commitment (if applicable) to purchase Shares and
its purchase of Shares pursuant to this Section 2(b). If neither the
non-defaulting Underwriters nor the Company shall make arrangements within the
24-hour periods stated above for the purchase of all of the Shares which the
defaulting Underwriter or Underwriters agreed to purchase hereunder, this
Agreement shall be terminated without further act or deed and without any
liability on the part of the Company to any non-defaulting Underwriter and
without any liability on the part of any non-defaulting Underwriter to the
Company. Nothing in this paragraph (b), and no action taken hereunder, shall
relieve any defaulting Underwriter from liability in respect of any default of
such Underwriter under this Agreement.
(c) On the basis of the representations, warranties and covenants herein
contained, and subject to the terms and conditions herein set forth, the
Company hereby grants an option to the several Underwriters to purchase,
severally and not jointly up to 285,000 Optional Shares from the Company at the
same price per share as the Underwriters shall pay for the Firm Shares. Said
option may be exercised only to cover over-allotments in the sale of the Firm
Shares by the Underwriters and may be exercised in whole or in part at any time
on or before the thirtieth day after the date of this Agreement upon written or
telegraphic notice by you to the Company setting forth the aggregate number of
Optional Shares as to which the several Underwriters are exercising the option.
Delivery of certificates for the Optional Shares, and payment therefor, shall
be made as provided in Section 4 hereof. The number of Optional Shares to be
purchased by each Underwriter shall be the same percentage of the total number
of Optional Shares to be purchased by the several Underwriters as such
Underwriter is purchasing of the Firm Shares, as adjusted by you in such manner
as you deem advisable to avoid fractional shares.
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<PAGE> 12
(d) If the Firm Shares are purchased and sold on the Closing Date (as
defined in Section 4(a)), then the Company shall pay to the Representative on
the Closing Date an amount equal to 3% of the aggregate price to the public of
all the Firm Shares sold in the offering, which amount shall represent a
non-accountable allowance for the expenses incurred by the Representative in
connection with its duties and activities under this Agreement. If any
Optional Shares are purchased and sold on the Closing Date, then the Company
shall pay to the Representative on the Closing Date an amount equal to 3% of
the aggregate price to the public of all the Optional Shares sold in the
offering, which amount shall represent an additional non-accountable allowance
for the expenses incurred by the Representative as aforesaid. If any Optional
Shares are purchased and sold on the Option Closing Date (as defined in Section
4(b)), then the Company shall pay to the Representative on the Option Closing
Date an amount equal to 3% of the aggregate price to the public of all the
Optional Shares sold in the offering, which amount shall represent an
additional non-accountable allowance for the expenses incurred by the
Representative as aforesaid. The non-accountable expense allowance pertaining
to the Firm Shares and the non-accountable expense allowance pertaining to the
Optional Shares, if any, are collectively referred to herein as the
"Non-Accountable Expense Allowance."
SECTION 3. OFFERING BY UNDERWRITERS.
(a) The terms of the initial public offering by the Underwriters of the
Shares to be purchased by them shall be as set forth in the Prospectus. The
Underwriters may from time to time change the public offering price after the
closing of the initial public offering and increase or decrease the concessions
and discounts to dealers as they may determine.
(b) The information (insofar as such information relates to the
Underwriters) set forth in the last paragraph on the front cover page and under
"Underwriting" in the Registration Statement, any Preliminary Prospectus and
the Prospectus relating to the Shares constitutes the only information
furnished by the Underwriters to the Company for inclusion in the Registration
Statement, any Preliminary Prospectus, and the Prospectus, and you on behalf of
the respective Underwriters represent and warrant to the Company that the
statements made therein are correct.
SECTION 4. DELIVERY OF AND PAYMENT FOR THE SHARES AND WARRANTS.
(a) Delivery of certificates for the Firm Shares, the Optional Shares
(if the option granted by Section 2(c) hereof shall have been exercised
not later than 10:00 a.m., Boston time, on the date two business days preceding
the Closing Date), and the Warrants (as defined in Section 5(p) below) Shares,
and payment therefor, shall be made at the offices of H.C. Wainwright & Co.,
Inc., One Boston Place, Boston, Massachusetts 02108, or such other location as
the Representative shall determine, at 10:00 a.m., Boston time, on the fourth
business day after the date of this Agreement, or at such time on such other
day, not later than seven full business days after such fourth business day, as
shall be agreed upon in writing by the
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<PAGE> 13
Company and you. The date and hour of such delivery and payment (which
may be postponed as provided in Section 2(b) hereof) are herein called the
"Closing Date."
(b) If the option granted by Section 2(c) hereof shall be exercised after
10:00 a.m., Boston time, on the date two business days preceding the Closing
Date, delivery of certificates for the shares of Optional Shares, and payment
therefor, shall be made at the offices of H.C. Wainwright & Co., Inc., One
Boston Place, Boston, Massachusetts 02108, or such other location as the
Representative shall determine, at 10:00 a.m., Boston time, on the third
business day after the exercise of such option. The date and hour of such
delivery and payment are herein called the "Option Closing Date."
(c) Payment for the Firm Shares, the Optional Shares and the Warrants
purchased from the Company shall be made to the Company or its order by (i) one
or more certified or official bank check or checks in same day funds (and the
Company agrees not to deposit any such check in the bank on which drawn until
the day following the date of its delivery to the Company) or (ii) federal
funds same day wire transfer to an account designated by the Company. Such
payment shall be made upon delivery of certificates for the Shares and the
Warrants to you for your account and the respective accounts of the several
Underwriters (including without limitation by "full-fast" electronic transfer
by the Depository Trust Company) against receipt therefor signed by you and the
payment of the Non-Accountable Expense Allowance to you. Payment for the
Non-Accountable Expense Allowance shall be made to the Representative or to
their order by (i) one or more certified or official bank check or checks in
same day funds, (ii) federal funds same day wire transfer to an account
designated by the Representative or (iii) at the option of the Representative,
may be deducted from the amount transferred to the Company pursuant to this
Section 4(c). Certificates for the Shares and the Warrants to be delivered to
you shall be registered in such name or names and shall be in such
denominations as you may request at least one business day before the Closing
Date, in the case of Firm Shares and the Warrants, and at least one business
day prior to the purchase thereof, in the case of the Optional Shares.
Certificates for the Firm Shares and Optional Shares will be made available to
the Underwriters for inspection, checking and packaging at such office or such
other place as the Representative may designate not later than 9:30 a.m. Boston
time on the business day prior to the Closing Date or, in the case of the
Optional Shares, by 9:30 a.m., Boston time, on the business day preceding the
date of purchase.
It is understood that you, individually and not on behalf of the
Underwriters, may (but shall not be obligated to) make payment to the Company
for shares to be purchased by any Underwriter whose check shall not have been
received by you on the Closing Date or any later date on which Optional Shares
are purchased for the account of such Underwriter. Any such payment by you
shall not relieve such Underwriter from any of its obligations hereunder.
SECTION 5. COVENANTS OF THE COMPANY. The Company covenants and agrees as
follows:
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<PAGE> 14
(a) The Company will (i) prepare and timely file with the Commission under
Rule 424(b) a Prospectus containing information previously omitted at the time
of effectiveness of the Registration Statement in reliance on Rule 430A and
(ii) the Company will not file any amendment to the Registration Statement or
supplement to the Prospectus of which you shall not previously have been
advised and furnished with a copy or to which you shall have reasonably
objected in writing or which is not in compliance with the Securities Act or
the rules and regulations of the Commission.
(b) The Company will promptly notify each Underwriter in the event of (i)
the request by the Commission for amendment of the Registration Statement or
for supplement to the Prospectus or for any additional information, (ii) the
issuance by the Commission of any stop order suspending the effectiveness of
the Registration Statement, (iii) the institution or notice of intended
institution of any action or proceeding for that purpose, (iv) the receipt by
the Company of any notification with respect to the suspension of the
qualification of the Shares for sale in any jurisdiction, or (v) the receipt by
the Company of notice of the initiation or threatening of any proceeding for
such purpose. The Company will make every reasonable effort to prevent the
issuance of such a stop order and, if such an order shall at any time be
issued, to obtain the withdrawal thereof at the earliest possible moment.
(c) The Company will (i) on or before the Closing Date, deliver to you a
signed copy of the Registration Statement as originally filed and of each
amendment thereto filed prior to the time the Registration Statement becomes
effective and, promptly upon the filing thereof, a signed copy of each
post-effective amendment, if any, to the Registration Statement (together with,
in each case, all exhibits thereto unless previously furnished to you) and will
also deliver to you, for distribution to the Underwriters, a sufficient number
of additional conformed copies of each of the foregoing (but without exhibits)
so that one copy of each may be distributed to each Underwriter, (ii) as
promptly as possible deliver to you and send to the several Underwriters, at
such office or offices as you may designate, as many copies of the Prospectus
as you may reasonably request, and (iii) thereafter from time to time during
the period in which a prospectus is required by law to be delivered by an
Underwriter or dealer, likewise send to the Underwriters as many additional
copies of the Prospectus and as many copies of any supplement to the Prospectus
and of any amended prospectus, filed by the Company with the Commission, as you
may reasonably request for the purposes contemplated by the Securities Act.
(d) If at any time during the period in which a prospectus is required
by law to be delivered by an Underwriter or dealer any event relating to or
affecting the Company, or of which the Company shall be advised in writing by
you, shall occur as a result of which it is necessary, in the opinion of
counsel for the Company or of counsel for the Underwriters, to supplement or
amend the Prospectus in order to make the Prospectus not misleading in the
light of the circumstances existing at the time it is delivered to a purchaser
of the Shares, the Company will forthwith prepare and file with the
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<PAGE> 15
Commission a supplement to the Prospectus or an amended prospectus so
that the Prospectus as so supplemented or amended will not contain any untrue
statement of a material fact or omit to state any material fact necessary in
order to make the statements therein, in the light of the circumstances
existing at the time such Prospectus is delivered to such purchaser, not
misleading. If, after the initial public offering of the Shares by the
Underwriters and during such period, the Underwriters shall propose to vary the
terms of offering thereof by reason of changes in general market conditions or
otherwise, you will advise the Company in writing of the proposed variation,
and, if in the opinion either of counsel for the Company or of counsel for the
Underwriters such proposed variation requires that the Prospectus be
supplemented or amended, the Company will forthwith prepare and file with the
Commission a supplement to the Prospectus or an amended prospectus setting
forth such variation. The Company authorizes the Underwriters and all dealers
to whom any of the Shares may be sold by the several Underwriters to use the
Prospectus, as from time to time amended or supplemented, in connection with
the sale of the Shares in accordance with the applicable provisions of the
Securities Act and the rules and regulations thereunder for such period.
(e) Prior to the filing thereof with the Commission, the Company will
submit to you, for your information, a copy of any post-effective amendment to
the Registration Statement and any supplement to the Prospectus or any amended
prospectus proposed to be filed.
(f) The Company will cooperate when and as requested by you, in the
qualification of the Shares for offer and sale under the securities or blue sky
laws of such jurisdictions as you may designate and, during the period in which
a prospectus is required by law to be delivered by an Underwriter or dealer, in
keeping such qualifications in good standing under said securities or blue sky
laws; provided, however, that the Company shall not be obligated to file any
general consent to service of process or to qualify as a foreign corporation in
any jurisdiction in which it is not so qualified. The Company will, from time
to time, prepare and file such statements, reports, and other documents as are
or may be required to continue such qualifications in effect for so long a
period as you may reasonably request for distribution of the Shares.
(g) During a period of five years commencing with the date hereof, the
Company will furnish to you, and to each Underwriter who may so request in
writing, copies of all periodic and special reports furnished to stockholders
of the Company and of all information, documents and reports filed with the
Commission (including the Report on Form SR required by Rule 463 of the
Commission under the Securities Act).
(h) Not later than the 45th day following the end of the fiscal
quarter first occurring after the first anniversary of the Effective Date, the
Company will make generally available to its security holders an earnings
statement which need not be certified by independent certified public
accountants unless required by the Securities Act or the rules and regulations
thereunder, but which shall satisfy the provisions of Section
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11(a) of the Securities Act and Rule 158 thereunder, covering a period
of at least twelve months beginning with the day immediately succeeding the
Effective Date.
(i) The Company agrees to pay all costs and expenses incident to the
performance of its obligations under this Agreement, including but not limited
to all costs and expenses incident to (i) the preparation, printing, delivering
and filing with the Commission and the NASD of the Registration Statement, any
Preliminary Prospectus and the Prospectus, (ii) the preparation, printing and
delivering to the Underwriters and, if applicable, the persons designated by
them of copies of any Preliminary Prospectus and of the several documents
required by paragraph (c) of this Section 5 to be so furnished, (iii) the
printing of this Agreement and related documents delivered to the Underwriters,
(iv) the preparation, printing and filing of all supplements and amendments to
the Prospectus referred to in paragraph (d) of this Section 5, (v) the
furnishing to you and the Underwriters of the reports and information referred
to in paragraph (g) of this Section 5, (vi) the fees, costs, expenses and taxes
(if any) relating to the delivery of stock to the Underwriters, (vii) costs of
preparing, printing and delivering share certificates, (viii) fees and expenses
of the transfer agent and registrar and (viii) fees and expenses associated
with listing the Shares on any exchange or other market.
(j) The Company agrees to reimburse you for the account of the several
Underwriters, for blue sky fees and related disbursements (including reasonable
counsel fees and reasonable disbursements and cost of printing memoranda for
the Underwriters) paid by or for the account of the Underwriters or their
counsel in qualifying the shares under state securities or blue sky laws and in
the review of the offering by the NASD.
(k) The Company acknowledges that the provisions of paragraphs (i) and (j)
of this Section 5 are intended to relieve the Underwriters from the payment of
the expenses and costs which the Company hereby agrees to pay and shall not
affect any agreement which the Company may make, or may have made, for the
sharing of any such expenses and costs.
(l) The Company hereby agrees that, without the prior written consent
of H.C. Wainwright & Co., Inc., the Company will not, prior to the 455th day
following the date the Registration Statement becomes effective, directly or
indirectly, sell, offer to sell, pledge, contract to sell, grant any option to
purchase or otherwise dispose of any shares of Common Stock owned beneficially
or otherwise (including, without limitation, shares of Common Stock which may
be deemed to be beneficially owned in accordance with the rules and regulations
of the Securities and Exchange Commission and shares of Common Stock which may
be issued upon exercise of a stock option or warrant) or any securities
convertible into, derivative of or exercisable or exchangeable for such Common
Stock, or file any registration statement or offering circular with respect to
any of the foregoing except for (i) the issuance of shares of Common Stock upon
the exercise of options to purchase Common Stock which are outstanding on the
date hereof and (ii) the granting of options pursuant to the Company's existing
stock option plan as in effect on the date of this agreement without amendment
or other modification; provided however, that any
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<PAGE> 17
shares issuable in respect of the options described in clause (i) or
(ii) shall not be sold, offered for sale or otherwise transferred until the
455th day following the date the Registration Statement becomes effective.
(m) If at any time during the 25-day period after the Registration
Statement becomes effective any rumor, publication or event relating to or
affecting the Company shall occur as a result of which in your opinion the
market price for the shares has been or is likely to be materially affected
(regardless of whether such rumor, publication or event necessitates a
supplement to or amendment of the Prospectus), the Company will, after written
notice from you advising the Company to the effect set forth above, forthwith
prepare, consult with you concerning the substance of, and disseminate a press
release or other public statement, reasonably satisfactory to you, responding
to or commenting on such rumor, publication or event.
(n) The Company is familiar with the Investment Company Act of 1940, as
amended, and has in the past conducted its affairs, and will in the future
conduct its affairs, in such a manner to ensure that the Company was not and
will not be an "investment company" or a company "controlled" by an "investment
company" within the meaning of the Investment Company Act of 1940, as amended,
and the rules and regulations thereunder.
(o) The Company agrees to maintain directors' and officers' insurance in
an amount not less than $2,000,000 for a period of two years from the date of
this Agreement.
(p) At the Closing Date, the Company will issue and sell to the
Representative or, at its direction, to its bona fide officers or partners, as
described below, for a total purchase price of $1.00, warrants (the "Warrants")
entitling the holders thereof to purchase an aggregate of 190,000 shares
of Common Stock (subject to adjustment) (the "Warrant Shares") for a period of
four (4) years, such period to commence one year after the effective date of
the Registration Statement (except as otherwise set forth in the Warrant
Agreement referred to below). Said Warrants shall contain terms and provisions
set forth in the Warrant Agreement of even date among the Company and the
Representative (the "Warrant Agreement"). As provided in the Warrant
Agreement, the Representative may designate that some or all of the Warrants be
issued in varying amounts directly to its bona fide officers or partners and
not to the Representative. Such designation will be made by the Representative
only if it determines that such issuances would not violate the rules and
interpretations of the Board of Governors of the NASD relating to the review of
corporate financing arrangements and subject to applicable federal and state
securities laws. As further provided, no transfer, assignment or hypothecation
of the Warrants shall be made by the Representative for a period of 12
months from the issuance of the Warrants, except to its bona fide officers or
partners and subject to applicable federal and state securities laws.
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(q) H.C. Wainwright & Co., Inc. shall have the right to nominate one
member of the Company's Board of Directors which individual shall be a member
of the Compensation and Audit Committees.
SECTION 6. INDEMNIFICATION AND CONTRIBUTION.
(a) The Company agrees to indemnify and hold harmless each Underwriter
and each person (including each partner or officer thereof) who controls any
Underwriter within the meaning of Section 15 of the Securities Act from and
against any and all losses, claims, damages or liabilities, joint or several,
to which such indemnified parties or any of them may become subject under the
Securities Act, the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), or the common law or otherwise, and the Company agrees to reimburse each
such Underwriter and controlling person for any legal or other expenses
(including, except as otherwise hereinafter provided, reasonable fees and
disbursements of counsel) incurred by the respective indemnified parties in
connection with defending against any such losses, claims, damages or
liabilities or in connection with any investigation or inquiry of, or other
proceeding which may be brought against, the respective indemnified parties, in
each case arising out of or based upon (i) any untrue statement or alleged
untrue statement of a material fact contained in the Registration Statement
(including the Prospectus as part thereof and any Rule 462(b) registration
statement) or any post-effective amendment thereto (including any Rule 462(b)
registration statement), or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, or (ii) any untrue statement or alleged untrue
statement of a material fact contained in any Preliminary Prospectus or the
Prospectus (as amended or as supplemented if the Company shall have filed with
the Commission any amendment thereof or supplement thereto) or the omission or
alleged omission to state therein a material fact necessary in order to make
the statements therein, in the light of the circumstances under which they were
made, not misleading; provided, however, that (1) the indemnity agreement of
the Company contained in this paragraph (a) shall not apply to any such losses,
claims, damages, liabilities or expenses if such statement or omission was made
in reliance upon and in conformity with information furnished as herein stated
in writing to the Company by or on behalf of any Underwriter specifically for
use in any Preliminary Prospectus or the Registration Statement or the
Prospectus or any such amendment thereof or supplement thereto, and (2) the
indemnity agreement contained in this paragraph (a) with respect to any
Preliminary Prospectus shall not inure to the benefit of any Underwriter from
whom the person asserting any such losses, claims, damages, liabilities or
expenses purchased the Shares which is the subject thereof (or to the benefit
of any person controlling such Underwriter) if at or prior to the written
confirmation of the sale of such Shares a copy of the Prospectus (or the
Prospectus as amended or supplemented) was not sent or delivered to such person
and the untrue statement or omission of a material fact contained in such
Preliminary Prospectus was corrected in the Prospectus (or the Prospectus as
amended or supplemented) unless the failure is the result of noncompliance by
the Company with subparagraphs (ii) and (iii) of paragraph (c) of Section 5
hereof. The indemnity agreement of the Company contained in this paragraph
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(a) and the representations and warranties of the Company contained in
Section 1 hereof shall remain operative and in full force and effect regardless
of any investigation made by or on behalf of any indemnified party and shall
survive the delivery of and payment for the Shares.
(b) Each Underwriter severally agrees to indemnify and hold harmless the
Company, each of its officers who signs the Registration Statement on his own
behalf or pursuant to a power of attorney, each of its directors, each other
Underwriter and each person (including each partner or officer thereof) who
controls the Company or any such other Underwriter within the meaning of
Section 15 of the Securities Act from and against any and all losses, claims,
damages or liabilities, joint or several, to which such indemnified parties or
any of them may become subject under the Securities Act, the Exchange Act, or
the common law or otherwise and to reimburse each of them for any legal or
other expenses (including, except as otherwise hereinafter provided, reasonable
fees and disbursements of counsel) incurred by the respective indemnified
parties in connection with defending against any such losses, claims, damages
or liabilities or in connection with any investigation or inquiry of, or other
proceeding which may be brought against, the respective indemnified parties, in
each case arising out of or based upon (i) any untrue statement or alleged
untrue statement of a material fact contained in the Registration Statement
(including the Prospectus as part thereof and any Rule 462(b) registration
statement) or any post-effective amendment thereto (including any Rule 462(b)
registration statement) or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading or (ii) any untrue statement or alleged untrue statement
of a material fact contained in the Prospectus (as amended or as supplemented
if the Company shall have filed with the Commission any amendment thereof or
supplement thereto) or the omission or alleged omission to state therein a
material fact necessary in order to make the statements therein, in the light
of the circumstances under which they were made, not misleading, if such
statement or omission was made in reliance upon and in conformity with
information furnished as herein stated in writing to the Company by or on
behalf of such indemnifying Underwriter specifically for use in the
Registration Statement or the Prospectus or any such amendment thereof or
supplement thereto. The indemnity agreement of each Underwriter contained in
this paragraph (b) shall remain operative and in full force and effect
regardless of any investigation made by or on behalf of any indemnified party
and shall survive the delivery of and payment for the Shares.
(c) Each party indemnified under the provisions of paragraphs (a) and
(b) of this Section 6 agrees that, upon the service of a summons or other
initial legal process upon it in any action or suit instituted against it or
upon its receipt of written notification of the commencement of any
investigation or inquiry of, or proceeding against, it in respect of which
indemnity may be sought on account of any indemnity agreement contained in such
paragraphs, it will promptly give written notice (the "Notice") of such service
or notification to the party or parties from whom indemnification may be sought
hereunder. No indemnification provided for in such paragraphs shall be
available to any party who shall fail so to give the Notice if the party to
whom such Notice was not given
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was unaware of the action, suit, investigation, inquiry or proceeding
to which the Notice would have related and was prejudiced by the failure to
give the Notice, but the omission so to notify such indemnifying party or
parties of any such service or notification shall not relieve such indemnifying
party or parties from any liability which it or they may have to the
indemnified party for contribution or otherwise than on account of such
indemnity agreement. Any indemnifying party shall be entitled at its own
expense to participate in the defense of any action, suit or proceeding
against, or investigation or inquiry of, an indemnified party. Any
indemnifying party shall be entitled, if it so elects within a reasonable time
after receipt of the Notice by giving written notice (the "Notice of Defense")
to the indemnified party, to assume (alone or in conjunction with any other
indemnifying party or parties) the entire defense of such action, suit,
investigation, inquiry or proceeding, in which event such defense shall be
conducted, at the expense of the indemnifying party or parties, by counsel
chosen by such indemnifying party or parties and reasonably satisfactory to the
indemnified party or parties; provided, however, that (i) if the indemnified
party or parties reasonably determine that there may be a conflict between the
positions of the indemnifying party or parties and of the indemnified party or
parties in conducting the defense of such action, suit, investigation, inquiry
or proceeding or that there may be legal defenses available to such indemnified
party or parties different from or in addition to those available to the
indemnifying party or parties, then counsel for the indemnified party or
parties shall be entitled to conduct the defense to the extent reasonably
determined by such counsel to be necessary to protect the interests of the
indemnified party or parties; and (ii) in any event, the indemnified party or
parties shall be entitled to have counsel chosen by such indemnified party or
parties participate in, but not conduct, the defense. If, within a reasonable
time after receipt of the Notice, an indemnifying party gives a Notice of
Defense and the counsel chosen by the indemnifying party or parties is
reasonably satisfactory to the indemnified party or parties, the indemnifying
party or parties will not be liable under paragraphs (a) through (c) of this
Section 6 for any legal or other expenses subsequently incurred by the
indemnified party or parties in connection with the defense of the action,
suit, investigation, inquiry or proceeding, except that (A) the indemnifying
party or parties shall bear the legal expenses of one counsel for the
indemnified party or parties and other expenses incurred in connection with the
conduct of the defense as referred to in clause (i) of the proviso to the
preceding sentence and (B) the indemnifying party or parties shall bear other
expenses as it or they have authorized to be incurred by the indemnified party
or parties. If, within a reasonable time after receipt of the Notice, no
Notice of Defense has been given, the indemnifying party or parties shall be
responsible for any legal or other expenses incurred by the indemnified party
or parties in connection with the defense of the action, suit, investigation,
inquiry or proceeding.
(d) If the indemnification provided for in this Section 6 is
unavailable or insufficient to hold harmless an indemnified party under
paragraph (a) or (b) of this Section 6, then each indemnifying party, in lieu
of indemnifying such indemnified party, shall contribute to the amount paid or
payable by such indemnified party as a result of the losses, claims, damages or
liabilities referred to in paragraph (a) or (b) of this Section 6(i) in such
proportion as is appropriate to reflect the relative benefits received by each
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<PAGE> 21
indemnifying party from the offering of the Shares or (ii) if the allocation
provided by clause (i) above is not permitted by applicable law, in such
proportion as is appropriate to reflect not only the relative benefits referred
to in clause (i) above but also the relative fault of each indemnifying party
in connection with the statements or omissions that resulted in such losses,
claims, damages or liabilities, or actions in respect thereof, as well as any
other relevant equitable considerations. The relative benefits received by the
Company on the one hand and the Underwriters on the other shall be deemed to be
in the same respective proportions as the total net proceeds from the offering
of the shares received by the Company and the total underwriting discount
received by the Underwriters, as set forth in the table on the cover page of
the Prospectus, bear to the aggregate public offering price of the shares.
Relative fault shall be determined by reference to, among other things, whether
the untrue or alleged untrue statement of a material fact or the omission or
alleged omission to state a material fact relates to information supplied by
each indemnifying party and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such untrue statement or
omission.
The parties agree that it would not be just and equitable if contributions
pursuant to this paragraph (d) were to be determined by pro rata allocation
(even if the Underwriters were treated as one entity for such purpose) or by
any other method of allocation which does not take into account the equitable
considerations referred to in the first sentence of this paragraph (d). The
amount paid by an indemnified party as a result of the losses, claims, damages
or liabilities, or actions in respect thereof, referred to in the first
sentence of this paragraph (d) shall be deemed to include any legal or other
expenses reasonably incurred by such indemnified party in connection with
investigation, preparing to defend or defending against any action or claim
which is the subject of this paragraph (d). Notwithstanding the provisions of
this paragraph (d), no Underwriter shall be required to contribute any amount
in excess of the underwriting discount applicable to the Shares purchased by
such Underwriter. No person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. The Underwriters' obligations in this paragraph (d) to
contribute are several in proportion to their respective underwriting
obligations and not joint.
Each party entitled to contribution agrees that upon the service of a
summons or other initial legal process upon it in any action instituted against
it in respect of which contribution may be sought, it will promptly give
written notice of such service to the party or parties from whom contribution
may be sought, but the omission so to notify such party or parties of any such
service shall not relieve the party from whom contribution may be sought from
any obligation it may have hereunder or otherwise (except as specifically
provided in paragraph (c) of this Section 6).
(e) The Company will not, without the prior written consent of each
Underwriter, settle or compromise or consent to the entry of any judgment in
any pending or threatened claim, action, suit or proceeding in respect of which
indemnification may be
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<PAGE> 22
sought hereunder (whether or not such Underwriter or any person who controls
such Underwriter within the meaning of Section 15 of the Securities Act or
Section 20 of the Exchange Act is a party to such claim, action, suit or
proceeding) unless such settlement, compromise or consent includes an
unconditional release of such Underwriter and each such controlling person from
all liability arising out of such claim, action, suit or proceeding.
SECTION 7. REIMBURSEMENT OF CERTAIN EXPENSES. In addition to their other
obligations under Section 6 of this Agreement, the Company hereby agrees to
reimburse on a monthly basis the Underwriters for all reasonable legal and
other expenses incurred in connection with investigating or defending any
claim, action, investigation, inquiry or other proceeding arising out of or
based upon any statement or omission, or any alleged statement or omission,
described in paragraph (a) of Section 6 of this Agreement, notwithstanding the
absence of a judicial determination as to the propriety and enforceability of
the obligations under this Section 7 and the possibility that such payments
might later be held to be improper, provided, however, that (i) to the extent
any such payment is ultimately held to be improper, the persons receiving such
payments shall promptly refund them; (ii) such persons shall provide to the
Company, upon request, reasonable assurances of their ability to effect any
refund, when and if due; and (iii) such reimbursements will be limited to
out-of-pocket costs and will not cover the overhead costs of the Underwriters.
SECTION 8. TERMINATION. This Agreement may be terminated by you at any
time prior to the Closing Date by giving written notice to the Company in
accordance with Section 9, or if after the date of this Agreement trading in
the Common Stock shall have been suspended, or if there shall have occurred (i)
the engagement in hostilities or an escalation of major hostilities by the
United States or the declaration of war or a national emergency by the United
States on or after the date hereof, (ii) any outbreak of hostilities or other
national or international calamity or crisis or change in economic or political
conditions if the effect of such outbreak, calamity, crisis or change in
economic or political conditions in the financial markets of the United States
or the Company's industry sector would, in the Underwriters' reasonable
judgment, make the offering or delivery of the shares impracticable, (iii)
suspension of trading in securities generally or a material adverse decline in
value of securities generally on the New York Stock Exchange, the American
Stock Exchange, or The Nasdaq Stock Market, or limitations on prices (other
than limitations on hours or numbers of days of trading) for securities on
either such exchange or system, (iv) the enactment, publication, decree or
other promulgation of any federal or state statute, regulation, rule or order
of, or commencement of any proceeding or investigation by, any court,
legislative body, agency or other governmental authority which in the
Underwriters' reasonable opinion materially and adversely affects or will
materially or adversely affect the business or operations of the Company, (v)
declaration of a banking moratorium by either federal or New York
State authorities, (vi) the taking of any action by any federal, state or local
government or agency in respect of its monetary or fiscal affairs which in the
Underwriters' reasonable opinion has a material adverse effect on the
securities markets in the United States, (vii) a
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<PAGE> 23
material adverse change in the Company's business , financial condition,
results of operations, or prospects or (viii) the discovery by the Underwriters
of material facts or circumstances that render the offering of the Shares
impracticable. If this Agreement shall be terminated pursuant to this Section
8, there shall be no liability of the Company to the Underwriters and no
liability of the Underwriters to the Company; provided, however, that in the
event of any such termination, the Company agrees to indemnify and hold
harmless the Underwriters from all costs or expenses incident to the
performance of the obligations of the Company under this Agreement, including
all costs and expenses referred to in paragraphs (i) and (j) of Section 5
hereof and to reimburse the Representative for its out-of-pocket expenses
incurred in connection with the performance of its obligations hereunder,
including fees and disbursements of counsel to the Underwriters.
SECTION 9. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The obligations of
the several Underwriters to purchase and pay for the Shares shall be subject to
the performance by the Company of all its obligations to be performed hereunder
at or prior to the Closing Date or any later date on which Optional Shares are
to be purchased, as the case may be, and to the following further conditions:
(a) The Registration Statement shall have become effective; and no stop
order suspending the effectiveness thereof shall have been issued and no
proceedings therefor shall be pending or threatened by the Commission.
(b) The legality and sufficiency of the sale of the Shares hereunder and
the validity and form of the certificates representing the Shares, all
corporate proceedings and other legal matters incident to the foregoing, and
the form of the Registration Statement and of the Prospectus (except as to the
financial statements contained therein), shall have been approved at or prior
to the Closing Date by Venable, Baetjer and Howard, LLP, counsel for the
Underwriters.
(c) You shall have received from Shefsky & Froelich Ltd., counsel for the
Company, or other counsel acceptable to the Underwriters, an opinion, addressed
to the Underwriters and dated the Closing Date, covering the matters set forth
in Annex A hereto, and if Optional Shares are purchased at any date after the
Closing Date, additional opinions from such counsel, addressed to the
Underwriters and dated such later date, confirming that the statements
expressed as of the Closing Date in such opinion remain valid as of such later
date.
(d) You shall be satisfied that (i) as of the Effective Date, the
statements made in the Registration Statement and the Prospectus were true and
correct, and neither the Registration Statement nor the Prospectus omitted to
state any material fact required to be stated therein or necessary in order to
make the statements therein, respectively, not misleading; (ii) since the
Effective Date, no event has occurred which should have been set forth in a
supplement or amendment to the Prospectus which has not been set forth in such
a supplement or amendment; (iii) since the respective dates as of which
information
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<PAGE> 24
is given in the Registration Statement in the form in which it originally
became effective and the Prospectus contained therein, there has not been any
material adverse change or any development involving a prospective material
adverse change in or affecting the business, properties, financial condition or
results of operations of the Company and its subsidiaries, taken as a whole,
whether or not arising from transactions in the ordinary course of business,
and, since such dates, except in the ordinary course of business, neither the
Company nor any of its subsidiaries has entered into any material transaction
not referred to in the Registration Statement in the form in which it
originally became effective and the Prospectus contained therein; (iv) the
Commission has not issued any order preventing or suspending the use of the
Prospectus or any Preliminary Prospectus filed as a part of the Registration
Statement or any amendment thereto; no stop order suspending the effectiveness
of the Registration Statement has been issued; and to the best knowledge of the
respective signers, no proceedings for that purpose have been instituted or are
pending or contemplated under the Securities Act; (v) neither the Company nor
any of its subsidiaries has any material contingent obligations which are not
disclosed in the Registration Statement and the Prospectus; (vi) there are not
any pending or known threatened legal proceedings to which the Company or any
of its subsidiaries is a party or of which property of the Company or any of
its subsidiaries is the subject which are material and which are not disclosed
in the Registration Statement and the Prospectus; (vii) there are not any
franchises, contracts, leases or other documents which are required to be filed
as exhibits to the Registration Statement which have not been filed as
required; and (viii) the representations and warranties of the Company herein
are true and correct in all material respects as of the Closing Date or any
later date on which Optional Shares are to be purchased, as the case may be.
(e) You shall have received on the Closing Date and on any later date on
which Optional Shares are purchased a certificate, dated the Closing Date or
such later date, as the case may be, and signed by the President and the Chief
Financial Officer of the Company, stating that the respective signers of said
certificate have carefully examined the Registration Statement in the form in
which it originally became effective and the Prospectus contained therein and
any supplements or amendments thereto, and that the statements included in
clauses (i) through (viii) of paragraph (d) of this Section 9 are true and
correct.
(f) You shall have received from KPMG Peat Marwick LLP, a letter or
letters, addressed to the Underwriters and dated the Closing Date and any
later date on which Optional Shares are purchased, confirming that they are
independent public accountants with respect to the Company within the meaning
of the Securities Act and the applicable published rules and regulations
thereunder and based upon the procedures described in their letter delivered to
you concurrently with the execution of this Agreement (the "Original Letter"),
but carried out to a date not more than three business days prior to the
Closing Date or such later date on which Optional Shares are purchased (i)
confirming, to the extent true, that the statements and conclusions set forth
in the Original Letter are accurate as of the Closing Date or such later date,
as the case may be, and (ii) setting forth any revisions and additions to the
statements and conclusions set
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<PAGE> 25
forth in the Original Letter which are necessary to reflect any changes in the
facts described in the Original Letter since the date of the Original Letter or
to reflect the availability of more recent financial statements, data or
information. The letters shall not disclose any change, or any development
involving a prospective change, in or affecting the business or properties of
the Company or any of its subsidiaries which, in your sole judgment, makes it
impractical or inadvisable to proceed with the public offering of the Shares or
the purchase of the Optional Shares as contemplated by the Prospectus.
(g) You shall have received from KPMG Peat Marwick LLP, a letter stating
that their review of the Company's system of internal accounting controls, to
the extent they deemed necessary in establishing the scope of their examination
of the Company's financial statements as at December 31, 1996, did not disclose
any weakness in internal controls that they considered to be material
weaknesses.
(h) You shall have been furnished evidence in usual written or telegraphic
form from the appropriate authorities of the several jurisdictions, or other
evidence satisfactory to you, of the qualification referred to in paragraph (f)
of Section 5 hereof.
(i) Prior to the Closing Date, the Shares and the Warrant Shares shall
have been duly authorized for quotation by the Nasdaq SmallCap Market upon
official notice of issuance.
(j) The Warrant Agreement and the Warrants shall have been executed and
delivered to the Representative on behalf of the Company.
(k) On or prior to the Closing Date, you shall have received agreements
from the holders of no less than ninety-five percent (95%) of the outstanding
shares of Common Stock (including shares issuable upon the exercise or
conversion of any option, warrant or other security that vests or is
exercisable prior to the 455th day following the date the Registration
Statement became effective), in form reasonably satisfactory to H.C. Wainwright
& Co., Inc., stating that without the prior written consent of H. C. Wainwright
& Co., Inc., such person or entity will not: (i) until the 275th day following
the date the Registration Statement became effective, directly or indirectly,
offer, sell, pledge, contract to sell, grant any option to purchase or
otherwise dispose of any shares of Common Stock beneficially owned or otherwise
held by such person or entity (including, without limitation, shares of Common
Stock which may be deemed to be beneficially owned by such person or entity in
accordance with the rules and regulations of the Securities and Exchange
Commission and shares of Common Stock which may be issued upon exercise of a
stock option or warrant), or any securities convertible into, derivative of or
exercisable or exchangeable for such Common Stock, as of the date the
Registration Statement became effective; and (ii) until the 455th day following
the date the Registration Statement became effective, directly or indirectly,
offer, sell, pledge, contract to sell, grant any option to purchase or
otherwise dispose of more than one-half of the aggregate number of shares of
Common Stock beneficially owned or otherwise held by such person or entity
(including, without limitation, shares of Common Stock
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<PAGE> 26
which may be deemed to be beneficially owned by such person or entity in
accordance with the rules and regulations of the Securities and Exchange
Commission and shares of Common Stock which may be issued upon exercise of a
stock option or warrant), or any securities convertible into, derivative of or
exercisable or exchangeable for such Common Stock, as of the date the
Registration Statement became effective provided, however, that if such party
is an individual, he or she may transfer any or all of the Common Stock held by
such party either during his or her lifetime or on death, by gift, will or
intestacy, to a Permitted Transferee; provided further, that in any such case
the Permitted Transferee executes a lock-up agreement in substantially the same
form covering the remainder of the lock-up period.
All the agreements, opinions, certificates and letters mentioned above or
elsewhere in this Agreement shall be deemed to be in compliance with the
provisions hereof only if Venable, Baetjer and Howard, LLP, counsel for the
Underwriters, shall agree that they comply in form and scope, which agreement
shall not be unreasonably withheld.
In case any of the conditions specified in this Section 9 shall not be
fulfilled, this Agreement may be terminated by you by giving notice to the
Company. Any such termination shall be without liability of the Company to the
Underwriters and without liability of the Underwriters to the Company;
provided, however, that (i) in the event of such termination, the Company
agrees to indemnify and hold harmless the Underwriters from all costs or
expenses incident to the performance of the obligations of the Company under
this Agreement, including all costs and expenses referred to in paragraphs (i)
and (j) of Section 5 hereof, and (ii) if this Agreement is terminated by you
because of any refusal, inability or failure on the part of the Company to
perform any agreement herein, to fulfill any of the conditions herein, or to
comply with any provision hereof other than by reason of a default by any of
the Underwriters, the Company will reimburse the Underwriters severally upon
demand for all out-of-pocket expenses (including reasonable fees and
disbursements of counsel) that shall have been incurred by them in connection
with the transactions contemplated hereby.
SECTION 10. CONDITIONS OF THE OBLIGATION OF THE COMPANY. The obligation
of the Company to deliver the Shares shall be subject to the conditions that
(a) the Registration Statement shall have become effective and (b) no stop
order suspending the effectiveness thereof shall be in effect and no
proceedings therefor shall be pending or threatened by the Commission.
In case either of the conditions specified in this Section 10 shall not be
fulfilled, this Agreement may be terminated by the Company by giving notice to
you. Any such termination shall be without liability of the Company to the
Underwriters and without liability of the Underwriters to the Company;
provided, however, that in the event of any such termination the Company agrees
to indemnify and hold harmless the Underwriters from all costs or expenses
incident to the performance of the obligations of the Company
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<PAGE> 27
under this Agreement, including all costs and expenses referred to in
paragraphs (i) and (j) of Section 5 hereof.
SECTION 11. PERSONS ENTITLED TO BENEFIT OF AGREEMENT. This Agreement
shall inure to the benefit of the Company and the several Underwriters and,
with respect to the provisions of Section 6 hereof, the several parties (in
addition to the Company and the several Underwriters) indemnified under the
provisions of said Section 6, and their respective personal representatives,
successors and assigns. Nothing in this Agreement is intended or shall be
construed to give to any other person, firm or corporation any legal or
equitable remedy or claim under or in respect of this Agreement or any
provision herein contained. The term "successors and assigns" as herein used
shall not include any purchaser, as such purchaser, of any of the shares from
any of the several Underwriters.
SECTION 12. NOTICES. Except as otherwise provided herein, all
communications hereunder shall be in writing or by telegraph and, if to the
Underwriters, shall be mailed, telexed, telegraphed, transmitted by facsimile
transmission or delivered to H.C. Wainwright & Co., Inc., One Boston Place,
Boston, Massachusetts 02108, Attention: Stephen Barrett if to the Company,
shall be mailed, telexed, telegraphed, transmitted by facsimile transmission or
delivered to it at its office, 1126 South 70th Street, Suite S107B, Milwaukee,
Wisconsin 53214-3151, Attention: William C. Mortimore. All notices given by
telex, telegraph or facsimile transmission shall be promptly confirmed by
letter.
SECTION 13. MISCELLANEOUS. The reimbursement, indemnification and
contribution agreements contained in this Agreement and the representations,
warranties and covenants in this Agreement shall remain in full force and
effect regardless of (a) any termination of this Agreement, (b) any
investigation made by or on behalf of any Underwriter or controlling person
thereof, or by or on behalf of the Company or its directors or officers, and
(c) delivery and payment for the Shares under this Agreement; provided,
however, that if this Agreement is terminated prior to the Closing Date, the
provisions of paragraph (2) of Section 1 and paragraphs (l), (m) and (n) of
Section 5 hereof shall be of no further force or effect.
SECTION 14. PARTIAL UNENFORCEABILITY. The invalidity or unenforceability
of any Section, paragraph or provision of this Agreement shall not affect the
validity or enforceability of any other Section, paragraph or provision hereof.
If any Section, paragraph or provision of this Agreement is for any reason
determined to be invalid or unenforceable, there shall be deemed to be made
such minor changes (and only such minor changes) as are necessary to make it
valid and enforceable.
SECTION 15. APPLICABLE LAW. This Agreement shall be governed by and
construed in accordance with the internal laws (and not the laws pertaining to
conflicts of laws) of The Commonwealth of Massachusetts.
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SECTION 16. GENERAL. This Agreement and the Warrant Agreement constitute
the entire agreement of the parties to this Agreement and the Warrant Agreement
and supersede all prior written or oral and all contemporaneous oral
agreements, understandings and negotiations with respect to the subject matter
hereof and thereof. This Agreement may be executed in several counterparts,
each one of which shall be an original, and all of which together shall
constitute one and the same document.
In this Agreement, the masculine, feminine and neuter genders and the
singular and the plural include one another. The section headings in this
Agreement are for the convenience of the parties only and will not affect the
construction or interpretation of this Agreement. This Agreement may be
amended or modified, and the observance of any term of this Agreement may be
waived, only by a writing signed by the Company and you.
[Remainder of page intentionally left blank.]
-28-
<PAGE> 29
If the foregoing is in accordance with your understanding of our
agreement, kindly sign and return to us the enclosed copies hereof, whereupon
it will become a binding agreement among the Company and the several
Underwriters, including you, all in accordance with its terms.
Very truly yours,
MERGE TECHNOLOGIES INCORPORATED
By:
--------------------------
Title:
The foregoing Underwriting Agreement
is hereby confirmed and accepted
by us in Boston, Massachusetts as of
the date first above written.
H.C. WAINWRIGHT & CO., INC.
- ----------------------------------------------
Acting for ourselves and as the Representative
of the several Underwriters named in the
attached Schedule A
BY: H.C. WAINWRIGHT & CO., INC.
By:
------------------------------------
Name:
Principal
-29-
<PAGE> 30
SCHEDULE I
UNDERWRITERS
NUMBER OF FIRM
UNDERWRITERS SHARES TO BE PURCHASED
- --------------------------------------------------------------------------------
H.C. Wainwright & Co., Inc................................................ [ ]
Total............................................................... [ ]
I-1
<PAGE> 31
ANNEX A
MATTERS TO BE COVERED IN THE OPINION OF SHEFSKY & FROELICH LTD.
COUNSEL FOR THE COMPANY
In connection with the preparation of this opinion, we have examined,
and have relied as to matters of fact upon, originals or copies, certified or
otherwise identified to our satisfaction, of such corporate records,
agreements, documents and other instruments and such certificates or comparable
documents of public officials, and have made such other and further
investigations as we have deemed relevant and necessary as a basis of the
opinions hereinafter set forth. We have relied upon, without independent
investigation, the representations and warranties of the Company contained in
the___________ and upon statements and representations of officers and other
representatives of the Company. In such examination, we have assumed the
genuineness of all signatures, the legal capacity of natural persons, the
authenticity of all documents submitted to us as originals, the conformity to
original documents of all documents submitted to us as certified or photostatic
copies and the authenticity of the originals of such latter documents. In
addition, we have, with your permission, assumed that each of the____________
has been duly authorized, executed and delivered on behalf of the parties
thereto (other than the Company). We have also assumed that all of the parties
to the_____________ will perform their respective obligations thereunder in
accordance with their respective terms and conditions.
In connection with the opinions expressed herein as being made "to our
knowledge," our examination has been limited to (i) a review of documents in
our firm's files as to which we have represented the Company, (ii)
conversations with certain of the executive officers of the Company, and (iii)
reasonable inquiry by this firm into applicable laws. We have made no
independent investigation as to the accuracy or completeness of any
representations, warranties, data or other information, written or oral, made
or furnished by the Company to us or to you.
(i) Each of the Company and its subsidiaries has been duly incorporated
and is validly existing as a corporation in good standing under the laws of the
jurisdiction of its incorporation, is duly qualified as a foreign corporation
and in good standing in each state of the United States of America in which the
nature of its business or its ownership or leasing of property requires such
qualification (except where the failure to be so qualified would not have a
material adverse effect on the business, properties, financial condition or
results of operations of the Company and its subsidiaries, taken as a whole)
and has full corporate power and authority to own or lease its properties and
conduct its business as described in the Registration Statement; all the issued
and outstanding capital stock of each of the subsidiaries of the Company has
been duly authorized and validly issued and is fully paid and nonassessable,
and is owned by the Company free and clear of all liens, encumbrances and
security interests, and to the best of such counsel's knowledge, other than as
described in the Prospectus, no options, warrants or other rights
A-1
<PAGE> 32
to purchase, agreements or other obligations to issue or other rights to
convert any obligations into shares of capital stock or ownership interests in
such subsidiaries are outstanding;
(ii) the authorized capital stock of the Company consists of 5,000,000
shares of Preferred Stock, $0.01 par value, none of which are outstanding, and
10,000,000 shares of Common Stock, $0.01 par value, of which there are [ ]
outstanding shares; all of the outstanding shares of such capital
stock (including the Firm Shares and the Optional Shares issued, if any) have
been duly authorized and validly issued and are fully paid and nonassessable;
any Optional Shares purchased after the Closing Date have been duly authorized
and, when issued and delivered to, and paid for by, the Underwriters as
provided in the Underwriting Agreement will be validly issued and fully paid
and nonassessable; and no preemptive rights of, or rights of refusal in favor
of, stockholders exist with respect to the Shares, or the issue and sale
thereof, pursuant to the Certificate of Incorporation or Bylaws of the Company
or any other instrument and, to the knowledge of such counsel, there are no
contractual preemptive rights that have not been waived, rights of first
refusal or rights of co-sale which exist with respect to the issue and sale of
the Shares by the Company;
(iii) the Registration Statement has become effective under the Securities
Act and, to such counsel's knowledge, no stop order suspending the
effectiveness of the Registration Statement or suspending or preventing the use
of the Prospectus is in effect and no proceedings for that purpose have been
instituted or are pending or contemplated by the Commission;
(iv) the Registration Statement and the Prospectus (except as to the
financial statements and schedules and other financial data contained therein,
as to which such counsel need express no opinion) comply as to form in all
material respects with the requirements of the Securities Act, and with the
rules and regulations of the Commission thereunder;
(v) such counsel have no reason to believe that the Registration
Statement (except as to the financial statements and schedules and other
financial and statistical data contained therein, as to which such counsel need
not express any opinion or belief) at the Effective Date contained any untrue
statement of a material fact or omitted to state a material fact required to be
stated therein or necessary to make the statements therein not misleading, or
that the Prospectus (except as to the financial statements and schedules and
other financial and statistical data contained therein, as to which such
counsel need not express any opinion or belief) as of its date or at the
Closing Date (or any later date on which Optional Shares are purchased),
contained or contains any untrue statement of a material fact or omitted or
omits to state a material fact necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading;
A-2
<PAGE> 33
(vi) the information set forth in the Registration Statement in answer to
Items 9 (Legal Proceedings), 10 (Interests of Named Experts and Counsel)
(insofar as it relates to such counsel), 12 (Description of Securities) and 19
(Certain Relationships and Related Transactions) of Form SB-2 and under the
captions "Business--Government Regulation" and "Risk Factors--Government
Regulation" and all summaries of contracts and other documents in the
Prospectus are, to such counsel's knowledge, accurately and adequately set
forth therein in all material respects or, with respect to Items 9, 10, 12, and
19 above, if no information is provided, no response is required with respect
to such Items, and the description of the Company's stock option plan and the
options granted and which may be granted thereunder in the Prospectus
accurately and fairly presents the information required to be shown with
respect to said plan and options to the extent required by the Securities Act
and the rules and regulations of the Commission thereunder;
(vii) such counsel do not know of any franchises, contracts, leases,
documents or legal proceedings, pending or threatened, which in the opinion of
such counsel are of a character required to be described in the Registration
Statement or the Prospectus or to be filed as exhibits to the Registration
Statement, which are not described and filed as required;
(viii) all issuances and repurchases or redemptions by the Company and any
of its subsidiaries of any of their respective securities have been effected in
compliance with all federal and state securities laws;
(ix) the Underwriting Agreement and the Warrant Agreement have been duly
authorized, executed and delivered by the Company;
(x) the Company has the requisite corporate power and authority to enter
into the Underwriting Agreement and the Warrant Agreement and to sell and
deliver the Shares and the Warrants to be sold by it to the several
Underwriters;
(xi) the issue and sale by the Company of the Shares and the Warrants sold
by the Company as contemplated by the Underwriting Agreement and the Warrant
Agreement will not conflict with, or result in a breach of, or constitute a
default under the Certificate of Incorporation or Bylaws of the Company or any
of its subsidiaries or any agreement or instrument known to such counsel to
which the Company or any of its subsidiaries is a party or by which any of its
properties may be bound or any applicable law or regulation, or so far as is
known to such counsel, any order, writ, injunction or decree, of any
jurisdiction, court or governmental instrumentality;
(xii) all holders of securities of the Company having rights to the
registration of shares of Common Stock, or other securities, because of the
filing of the Registration Statement by the Company have waived such rights or
such rights have expired by reason of lapse of time following notification of
the Company's intent to file the Registration Statement;
A-3
<PAGE> 34
(xiii) good title to the Shares under the Underwriting Agreement, free and
clear of all liens, encumbrances, equities, security interests and claims, has
been transferred to the Underwriters who have severally purchased such Shares
under the Underwriting Agreement, assuming for the purpose of this opinion that
the Underwriters purchased the same in good faith without notice of any adverse
claims;
(xiv) good title to the Warrants under the Warrant Agreement, free and
clear of all liens, encumbrances, equities, security interests and claims, has
been transferred to the Representative who has purchased such Warrants under
the Warrant Agreement, assuming for the purpose of this opinion that the
Representative purchased the same in good faith without notice of any adverse
claims;
(xv) no consent, approval, authorization or order of any court or
governmental agency or body is required for the consummation of the
transactions contemplated in the Underwriting Agreement, except such as have
been obtained under the Securities Act and such as may be required under state
securities or blue sky laws in connection with the purchase and distribution of
the Shares by the Underwriters and the clearance of the offering with the NASD
and the Nasdaq SmallCap Market;
(xvi) the Shares issued and sold by the Company and the Warrant Shares
will be duly authorized for quotation by the Nasdaq SmallCap Market upon
official notice of issuance;
(xvii) the Warrants conform to the description thereof in the Prospectus
(it being understood that with respect to the fair presentation of such
description and whether it is an accurate summary such counsel's opinion is
limited to that set forth in clause (vi) above) and have been duly authorized
and validly issued and are valid and binding obligations of the Company
entitled to all the benefits of the Warrant Agreement and are enforceable
against the Company (except (1) as such enforcement may be limited by
bankruptcy, insolvency, reorganization, receivership, moratorium, fraudulent
conveyance, or other similar laws now or hereinafter in effect relating to or
affecting creditors', debtors' and shareholders' rights generally and by
general principles of equity, (2) that the remedies of specific performance and
injunctive and other forms of relief are subject to general equitable
principles, whether such enforcement is sought at law or in equity, and such
enforcement may be subject to the discretion of the court before which any
proceedings therefor may be brought and (3) as rights to indemnity and
contribution may be limited by state or federal laws or by policies underlying
such laws). The Warrant Shares have been duly authorized and reserved for
issuance upon exercise of the Warrants and, when issued upon such exercise in
accordance with the terms of Warrants and the Warrant Agreement, will be duly
and validly issued, fully paid and nonassessable, free of preemptive rights and
will conform to the description thereof in the Prospectus;
(xviii) Except as specifically disclosed in the Prospectus: the Company
and its subsidiaries have sufficient trademarks, trade names, patent rights,
copyrights, trade secret protections, licenses, approvals and governmental
authorizations to conduct their
A-4
<PAGE> 35
businesses as now conducted; such counsel has no knowledge of any infringement
or of facts that suggest any infringement by the Company or its subsidiaries of
any trademark, trade name, patent, copyright, license, trade secret or other
similar rights of others; and such counsel has no knowledge of any claims that
have been made or are threatened regarding infringement by the Company or its
subsidiaries of any trademark, trade name, patent, copyright, license, trade
secret or other similar rights of others.
(xix) Except as disclosed in the Prospectus, there are no legal or
governmental actions, suits, investigations or other proceedings (formal or
informal) pending or, to our knowledge, threatened to which the Company or any
of its subsidiaries is or is threatened to be made a party or a subject or of
which property owned or leased by the Company or any of its subsidiaries is or
has been threatened to be made the subject, which actions, suits,
investigations or other proceedings could, individually or in the aggregate,
prevent or materially adversely affect the transactions contemplated by the
Underwriting Agreement or the Warrant Agreement or result in a material adverse
change in the business, properties, condition (financial or otherwise), or
results of operations of the Company and its subsidiaries, taken as a whole;
there are no outstanding claims, asserted or otherwise, against the Company,
any of its subsidiaries, or to our knowledge, any of their respective officers
or directors, for violations of any federal or state securities laws, or any
other applicable laws, relating to any purchase, sale, or redemption of, or
other transaction with respect to, the Common Stock or shares of capital stock
of any of the Company's subsidiaries; and to our knowledge, no labor
disturbance by the employees of the Company or any of its subsidiaries exists
or is imminent which could materially adversely affect the business,
properties, condition (financial or otherwise), or results of operations of the
Company or its subsidiaries, taken as a whole. Neither the Company nor any of
its subsidiaries is a party or subject to the provisions of any material
injunction, judgment, decree or order of any court, regulatory body,
administrative agency or other governmental body. To our knowledge, except as
disclosed in the Prospectus, there are no material legal or governmental
actions, suits, investigations or proceedings pending or threatened against any
executive officers or directors of the Company.
(xx) Except as disclosed in the Prospectus, neither the Company nor any of
its subsidiaries is in violation or in default in the performance of any
obligation under any permits or authorizations granted by the U.S. Food and
Drug Administration, or any comparable state, local or foreign governmental
agency, to the Company. The Company is in compliance in all material respects
with the Food Drug and Cosmetic Act ("FDCA"), all applicable regulations
thereunder, including, without limitation, all applicable requirements under
the FDCA pertaining to the export of medical devices, and any comparable state,
local or foreign laws or regulations.
We express no opinion as to the laws of any state or other jurisdiction
other than as to the substantive laws of the State of Wisconsin, the General
Corporation Law of the State of Wisconsin and the federal law of the United
States, and foreign laws with respect
A-5
<PAGE> 36
to the manufacture and sale of medical devices without giving effect to
principles relating to conflicts of law.
This opinion is rendered to you in connection with the above-described
transactions and is for your exclusive benefit. This opinion may not be relied
upon by you for any other purpose, or relied upon or furnished to any other
person, firm or corporation without our prior written consent.
-------------------------
Counsel rendering the foregoing opinion may rely as to questions of law
not involving the laws of the United States upon opinions of local counsel
satisfactory in form and scope to counsel for the Underwriters. Copies of any
opinions so relied upon shall be delivered to the Representative and to counsel
for the Underwriters and the foregoing opinion shall also state that counsel
knows of no reason the Underwriters are not entitled to rely upon the opinions
of such local counsel.
A-6
<PAGE> 37
EXHIBIT 1
MERGE TECHNOLOGIES INCORPORATED
Officers' Certificate Pursuant to Section 9(e)
of the Underwriting Agreement
Pursuant to Section 9(e) of the Underwriting Agreement, dated [ ], 1998
(the "Underwriting Agreement"), by and between Merge Technologies Incorporated
(the "Company") and H.C. Wainwright & Co., Inc. (the "Underwriter"), and
pursuant to the resolutions adopted by the Board of Directors of the Company
(the "Board of Directors") as of [ ], 1997 (the "Resolutions"), the undersigned
do hereby certify the following:
1. As of the Effective Date, the statements made in the Registration
Statement and the Prospectus were true and correct, and neither the
Registration Statement nor the Prospectus omitted to state any material fact
required to be stated therein or necessary in order to make the statements
therein, respectively, not misleading;
2. Since the Effective Date, no event has occurred which should have been
set forth in a supplement or amendment to the Prospectus which has not been set
forth in such a supplement or amendment;
3. Since the respective dates as of which information is given in the
Registration Statement in the form in which it originally became effective and
the Prospectus contained therein, there has not been any material adverse
change or any development involving a prospective material adverse change in or
affecting the business, properties, financial condition or results of
operations of the Company and its subsidiaries, taken as a whole, whether or
not arising from transactions in the ordinary course of business, and, since
such dates, except in the ordinary course of business, neither the Company nor
any of its subsidiaries has entered into any material transaction not referred
to in the Registration Statement in the form in which it originally became
effective and the Prospectus contained therein;
4. The Commission has not issued any order preventing or suspending the
use of the Prospectus or any Preliminary Prospectus filed as a part of the
Registration Statement or any amendment thereto; no stop order suspending the
effectiveness of the Registration Statement has been issued; and to the best
knowledge of the respective signers, no proceedings for that purpose have been
instituted or are pending or contemplated under the Securities Act;
5. Neither the Company nor any of its subsidiaries has any material
contingent obligations which are not disclosed in the Registration Statement
and the Prospectus;
<PAGE> 38
6. There are not any pending or known threatened legal proceedings
to which the Company or any of its subsidiaries is a party or of which property
of the Company or any of its subsidiaries is the subject which are material and
which are not disclosed in the Registration Statement and the Prospectus;
7. There are not any franchises, contracts, leases or other documents
which are required to be filed as exhibits to the Registration Statement which
have not been filed as required;
8. The representations and warranties of the Company in the Underwriting
Agreement are true and correct in all material respects.
References to the Registration Statement and the Prospectus in this
Certificate are to such documents as amended and supplemented at the date of
this Certificate. All terms that are not defined in this Certificate, but
which are defined in the Underwriting Agreement, shall have the meanings
assigned to them in the Underwriting Agreement.
IN WITNESS WHEREOF, the undersigned have executed this Certificate as the
[ ] day of [ ] 1998.
__________________________________
Name: William C. Mortimore
Title: President
__________________________________
Name: Colleen M. Doan
Title: Chief Financial Officer
2
<PAGE> 39
EXHIBIT 2
MERGE TECHNOLOGIES INCORPORATED
Secretary's Certificate
The undersigned, Colleen M. Doan, does hereby certify that:
1. She is the duly elected, qualified and acting Secretary of Merge
Technologies Incorporated, a Wisconsin corporation (the "Company"), is familiar
with the facts herein certified and is duly authorized to certify the same, and
to make the statements as certified by her herein in connection with the
issuance, delivery and sale of 1,900,000 shares of common stock of the Company,
$0.01 par value per share (the "Common Stock");
2. Attached hereto as Annex A is a true, correct and complete copy
of the Articles of Incorporation of the Company, as amended to the date hereof
(the "Articles"). There have been no amendments to the Articles since the
filing of an amendment thereto on [ ], no meeting of directors or shareholders
has been called for such purpose and the Articles remain in full force and
effect on the date hereof. Since [ ], 1998, the date upon which the Secretary
of the Department of Financial Institutions of the State of Wisconsin issued
the certificate as to the due incorporation, good standing and the
qualification to do business in the state of Wisconsin of the Company, a
listing of all charter documents of the Company and the payment of all fees and
filing of annual reports, by the Company, a copy of which is attached hereto as
Annex B, no act, omission or event has occurred which would make such
certificate untrue, incorrect or incomplete on the date hereof. There are no
proceedings pending or contemplated for the liquidation or dissolution of the
Company or threatening its existence as a corporation, nor has a meeting of
shareholders or directors been called for such purpose;
3. Attached hereto as Annex C are true and correct copies of the
resolutions duly adopted by the board of directors of the Company and any
committee of the board of directors (the "Board of Directors") in connection
with the organization of the Company;
4. Attached hereto as Annex D is a true, correct and complete copy
of the By-Laws of the Company (the "By-Laws") in effect on the date hereof.
There have been no amendments to the By-Laws since [ ] and no meeting of
directors or shareholders has been called for such purpose;
5. Attached hereto as Annex E are true and complete copies of the
resolutions duly adopted by the Board of Directors as of [ ], which:
authorize the issuance and sale of the Common Stock in the proposed initial
public offering; approve the form of stock certificate for the Common Stock in
the form attached hereto as Annex F; approve and authorize the execution of the
underwriting agreement, dated [ ], 1998, executed by the Company and H.C.
Wainwright & Co., Inc. ("HCW"), as representative
<PAGE> 40
of the several underwriters (the "Underwriting Agreement"); approve and
authorize the execution of the warrant agreement proposed to be executed by the
Company and HCW in the form attached hereto as Annex G, (the "Warrant
Agreement"); authorize the issuance of the warrants pursuant to the Warrant
Agreement (the "Warrants"); reserve shares of Common Stock for issuance
pursuant to the Warrant Agreement and the Warrants; and related matters, and
such resolutions are in full force and effect as of the date hereof, such
resolutions have not been amended, modified or rescinded and no other
resolutions governing the same or related subject matters that are currently in
effect have been adopted by the Board of Directors;
6. The Board of Directors has duly authorized the execution and
delivery of the Underwriting Agreement, the Warrant Agreement and the Warrants.
7. Attached hereto as Annex H are true and complete copies of all
written communications (including all available transcripts of oral
communications) with the Securities and Exchange Commission relating to the
Registration Statement and the Prospectus;
8. All persons who, as officers or directors of the Company,
executed on behalf of the Company the Registration Statement, the Underwriting
Agreement, and any other document delivered by the Company in connection with
the offering and sale of the Common Stock, were duly elected or appointed to
the offices they purported to hold at the time of such execution, delivery and
issuance, and the signatures of such persons appearing on such documents are
their genuine signatures.
2
<PAGE> 41
9. The persons named below have been duly elected or appointed,
have been qualified and are, were, and at all times since the filing of the
Registration Statement have been, officers of the Company holding the
respective office or offices set opposite their names below and the signatures
set opposite their names below are their genuine signatures:
Name Office Signature
---- ------ ---------
William C. Mortimore President and Chief
Executive Officer ----------------------
Robert T. Geras Chairman of the
Board of Directors ----------------------
Colleen M. Doan Chief Financial
Officer, Treasurer
and Secretary ----------------------
William L. Stafford Vice President and
Assistant Secretary ----------------------
Dwight A. Simon Vice President ----------------------
David M. Noshay Vice President ----------------------
All terms that are not defined in this Certificate but which are
defined in the Underwriting Agreement shall have the meanings assigned to them
in the Underwriting Agreement.
IN WITNESS WHEREOF, the undersigned has signed this Certificate as of
the [ ] day of [ ] 1998.
--------------------------------------
Colleen M. Doan
3
<PAGE> 42
I, William C. Mortimore, President of the Company, hereby certify, as of
the [ ] day of [ ] 1998, that Colleen M. Doan is the Secretary of the Company
and has held such office since [ ], 199[ ] and that the signature set forth
opposite her name is her genuine signature.
--------------------------------------
William C. Mortimore
4
<PAGE> 43
EXHIBIT 3
SIGNAL STREAM, INCORPORATED
Secretary's Certificate
The undersigned, [ ], does hereby certify that:
1. [S]he is the duly elected, qualified and acting Secretary of Signal
Stream, Incorporated, a Wisconsin corporation (the "Company"), is familiar with
the facts herein certified and is duly authorized to certify the same, and to
make the statements as certified by her herein in connection with the issuance,
delivery and sale of 1,900,000 shares of common stock of the Company's parent
Merge Technologies Incorporated, $0.01 par value per share;
2. Attached hereto as Annex A is a true, correct and complete copy of the
Articles of Incorporation of the Company, as amended to the date hereof (the
"Articles"). There have been no amendments to the Articles since the filing of
an amendment thereto on [ ], no meeting of directors or shareholders has been
called for such purpose and the Articles remain in full force and effect on the
date hereof. Since [ ], 1998, the date upon which the Secretary of
the Department of Financial Institutions of the state of Wisconsin issued the
certificate as to the due incorporation, good standing and the qualification to
do business in the state of Wisconsin of the Company, a listing of all charter
documents of the Company and the payment of all fees and filing of annual
reports, by the Company, a copy of which is attached hereto as Annex B, no act,
omission or event has occurred which would make such certificate untrue,
incorrect or incomplete on the date hereof. There are no proceedings pending
or contemplated for the liquidation or dissolution of the Company or
threatening its existence as a corporation, nor has a meeting of shareholders
or directors been called for such purpose;
3. Attached hereto as Annex C are true and correct copies of the
resolutions duly adopted by the Board of Directors of the Company in connection
with the organization of the Company;
4. Attached hereto as Annex D is a true, correct and complete copy of the
By-Laws of the Company (the "By-Laws") in effect on the date hereof. There
have been no amendments to the By-Laws since [ ] and no meeting of directors
or shareholders has been called for such purpose;
<PAGE> 44
5. The persons named below have been duly elected or appointed, have been
qualified and are, were, and at all times since the filing of the Registration
Statement have been, officers of the Company holding the respective office or
offices set opposite their names below and the signatures set opposite their
names below are their genuine signatures:
<TABLE>
<CAPTION>
Name Office Signature
- ---- ------ ---------
<S> <C> <C>
[ ] President and Chief Executive Officer
----------------------
[ ] Chief Financial Officer, Treasurer and Secretary
----------------------
</TABLE>
All terms that are not defined in this Certificate but which are defined
in the Underwriting Agreement shall have the meanings assigned to them in the
Underwriting Agreement.
IN WITNESS WHEREOF, the undersigned has signed this Certificate as of the
[ ] day of [ ] 1998.
------------------------------
[ ]
I, [ ], President of the Company, hereby certify, as of the [ ] day of [
] 1998, that [ ] is the Secretary of the Company and has held such office
since [ ], and that the signature set forth opposite [her/his] name is
[her/his] genuine signature.
------------------------------
[ ]
2
<PAGE> 45
EXHIBIT 4
MERGE TECHNOLOGIES INCORPORATED
Company Certificate
Merge Technologies Incorporated, a Wisconsin corporation (the
"Company"), hereby certifies pursuant to the Underwriting Agreement, dated [ ],
1998 (the "Underwriting Agreement"), by and between Merge Technologies
Incorporated (the "Company") and H.C. Wainwright & Co., Inc., as representative
of the several underwriters, that the representations and warranties of the
Company in the Underwriting Agreement are true and correct in all material
respects as of the date hereof.
IN WITNESS WHEREOF, the Company has caused this Certificate to be
executed by its President and Chief Executive Officer and its corporate seal to
be affixed and attested as of the [ ] day of [ ] 1998.
MERGE TECHNOLOGIES INCORPORATED
By:
------------------------------------
William C. Mortimore
President and Chief Executive Officer
ATTEST:
(SEAL)
- -------------------------------
Colleen M. Doan
Secretary
<PAGE> 46
EXHIBIT 5
Certificate of Transfer Agent and Registrar
Firstar Trust Company (the "Agent"), hereby certifies that:
1. The Agent has been duly appointed and authorized to act as Transfer
Agent and Registrar for the common stock, $0.01 par value per share (the
"Common Stock") of Merge Technologies Incorporated, a Wisconsin corporation
(the "Company").
2. The Agent, as Transfer Agent and Registrar, has duly issued,
countersigned and registered certificates for an aggregate of 1,900,000 shares
of Common Stock of the Company upon instructions from the Company. Such
certificates so issued were duly registered in the names and denominations
requested by H.C. Wainwright & Co., Inc., as representative of the several
underwriters (the "Representative") pursuant to the Underwriting Agreement,
dated [ ], 1998 executed by the Company and the
Representative.
3. The persons who registered and countersigned the certificates referred
to in paragraph 2 hereof on behalf of the Agent in its capacity as Transfer
Agent and Registrar were duly appointed, qualified and authorized to sign at
the time of such signing and the signatures of each such person appearing on
such certificates were genuine.
4. The Company is authorized to issue [ ] shares of Common Stock
and the total number of such shares issued and outstanding at the close of
business on [ ], 1998 was [ ].
5. There are no stop orders or other instructions restricting the issuance
of the shares of Common Stock on file with the Company or the Agent.
6. The Agent is duly registered as transfer agent in accordance with Rule
17A(c)2-1 under the Securities Exchange Act of 1934, as amended.
IN WITNESS WHEREOF, Firstar Trust Company has caused this Certificate to
be executed and its seal duly affixed this [ ] day of [ ],
1998.
FIRSTAR TRUST COMPANY
By:____________________________
Name:
Title:
ATTEST:
___________________________ (SEAL)
Name:
Title:
<PAGE> 47
EXHIBIT 6
MERGE TECHNOLOGIES INCORPORATED
CROSS RECEIPT
[ ], 1998
Merge Technologies Incorporated, a Wisconsin corporation (the "Company")
hereby acknowledges receipt on the above date from H.C. Wainwright & Co., Inc.,
as representative of the several underwriters (the "Representative"), of a wire
transfer of immediately available funds in the amount of $[ ]
representing payment in full for 1,900,000 shares of the common stock, $0.01
par value per share, of the Company (the "Common Stock") at a price of $[
] per share in accordance with the terms of the Underwriting Agreement by and
between the Company and the Representative dated [ ], 1998.
MERGE TECHNOLOGIES INCORPORATED
By:________________________________
Name:
Title:
The Representative hereby acknowledges receipt on the above date of
1,900,000 shares of the Common Stock of the Company pursuant to the
instructions previously delivered.
H.C. WAINWRIGHT & CO., INC.
By:________________________________
Name:
Title:
<PAGE> 48
EXHIBIT 7
[ ], 1998
Merge Technologies Incorporated
1126 South 70th Street
Suite S107B
Milwaukee, WI 53214-3151
Re: 1,900,000 Shares of Common Stock
of Merge Technologies Incorporated
Prospectus dated [ ], 1998
Ladies and Gentlemen:
This letter is delivered to you in connection with the above-mentioned
prospectus dated [ ], 1998 (the "Prospectus") of Merge
Technologies Incorporated (the "Company") relating to the offer and sale of
1,900,000 shares of common stock, par value $0.01 per share of the Company.
As Representative of the several underwriters, we have furnished to you
the following information for use in the prospectus:
(a) The first two sentences of the last paragraph of text on the cover
page of the Prospectus concerning the terms of offering by the Underwriter;
(b) The legend appearing below the graphic information on page 2 (inside
cover page) of the Prospectus concerning stabilization and other matters by
certain persons participating in the offering; and
(c) The second, fifth, [eleventh] and [thirteenth] paragraphs under the
caption "Underwriting" on pages [53, 54 and 55] of the Prospectus, also
concerning the terms of offering by the Underwriter.
Very truly yours,
H.C. WAINWRIGHT & CO., INC.
as Representative of the Several Underwriters
By:______________________________________________
Authorized Representative
<PAGE> 49
The undersigned hereby acknowledges receipt of the foregoing letter.
MERGE TECHNOLOGIES INCORPORATED
By:______________________________________________
William C. Mortimore
President
<PAGE> 1
WARRANT AGREEMENT
WARRANT AGREEMENT dated as of [ ], 1998 by and among MERGE TECHNOLOGIES
INCORPORATED, a Wisconsin corporation (the "Company"), and H.C. WAINWRIGHT &
CO., INC. ("Wainwright" or the "Representative").
WHEREAS, the Company and the Representative have entered into an
Underwriting Agreement of even date herewith (the "Underwriting Agreement");
and
WHEREAS, the Company proposes to issue to the Representative warrants, as
hereinafter described, (the "Warrants") to purchase an aggregate of 190,000
shares, subject to adjustment as hereinafter provided (the "Shares"), of the
Company's common stock, par value $0.0l per share (the "Common Stock").
NOW, THEREFORE, in consideration of the premises and the mutual agreements
herein set forth and for other good and valuable consideration, the parties
hereto agree as follows:
1. Issuance of Warrants; Form of Warrant. As more fully set forth below,
the Company will issue, sell and deliver the Warrants to the Representative or
its bona fide officers or partners, as named by the Representative in
accordance with Section 5(p) of the Underwriting Agreement, for an aggregate
price of $1.00, concurrently with the closing (the "Closing") under the
Underwriting Agreement relating to the public offering, pursuant to a
registration statement on Form SB-2 (File No. 333-39111) (the "Registration
Statement"), of 1,900,000 shares of Common Stock (plus an option to purchase up
to an additional 285,000 shares of Common Stock to cover over-allotments) (the
"Offering"). The form of the Warrants shall be substantially as set forth on
Exhibit A, attached hereto. The Warrants shall be executed on behalf of the
Company by the manual or facsimile signature of the present or any future
Chairman of the Board, President or Vice President of the Company, under its
corporate seal, affixed or in facsimile, attested by the manual or facsimile
signature of the present or any future Secretary or Assistant Secretary or
Treasurer or Assistant Treasurer of the Company.
2. The Warrants shall be numbered and shall be registered in a Warrant
register as they are issued. The Company shall be entitled to treat the
registered holder of any Warrant on the Warrant register (the "Warrant Holder")
as the owner in fact thereof for all purposes and shall not be bound to
recognize any equitable or other claim to or interest in such Warrant on the
part of any other person, and shall not be liable for any registration of
transfer of Warrants which are registered or are to be registered in the name
of or at the direction of a fiduciary or the nominee of a fiduciary unless made
with the actual knowledge that a fiduciary or nominee is committing a breach of
trust in requesting such registration of transfer, or with such knowledge of
such facts that its participation therein amounts to bad faith. The Warrants
shall be registered initially in the name of "H.C. Wainwright & Co., Inc." in
such denominations as the Representative may request in writing to the Company;
provided, however, that prior to the Closing, the Representative may designate
that its Warrants be issued in varying amounts directly to its bona fide
officers or partners and not to it directly in accordance with Section 5(p) of
the Underwriting
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<PAGE> 2
Agreement. Such designation will only be made by the Representative if it
determines such issuances would not violate the rules and interpretations
of the Board of Governors of the National Association of Securities Dealers,
Inc. (the "NASD") relating to the review of corporate financing arrangements,
and subject to applicable federal and state securities law.
3. Transfer of Warrants. The Warrants may not be transferred, assigned,
pledged, hypothecated, sold, made subject to a security interest, or otherwise
transferred, in part or in whole, prior to the first anniversary of the
effective date of the Registration Statement (the "Effective Date"), except to
the bona fide officers or partners of the Representative, and subject to
applicable federal and state securities law, and only on the books of the
Company upon delivery thereof duly endorsed by the Warrant Holder or by his
duly authorized attorney or representative, or accompanied by proper evidence
of succession, assignment or authority to transfer. In all cases of transfer
by an attorney, the original power of attorney, duly approved, or an official
copy thereof, duly certified, shall be deposited with the Company. In case of
transfer by executors, administrators, guardians or other legal representative,
duly authenticated evidence of their authority shall be produced and may be
required to be deposited with the Company in its discretion. Upon any
registration of transfer, the Company shall deliver a new Warrant or new
Warrants to the persons entitled thereto. A Warrant may be exchanged at the
option of the Warrant Holder thereof for another Warrant, or other Warrants, of
different denominations, of like tenor and representing in the aggregate the
right to purchase a like number of shares of Common Stock upon surrender to the
Company or its duly authorized agent. Notwithstanding the foregoing, the
Company shall have no obligation to cause a Warrant to be transferred on its
books to any person unless the Warrant Holder thereof shall furnish to the
Company evidence of compliance with the Securities Act of 1933, as amended (the
"Act"), and applicable state securities law, in accordance with the provisions
of Section 10 of this Agreement.
4. Term of Warrants; Exercise of Warrants. Each Warrant entitles the
Warrant Holder thereof to purchase one Share at a purchase price of $[ ] per
Share (the "Exercise Price") at any time from the first anniversary of the
Effective Date (except as otherwise set forth herein) until 5:00 p.m., Boston
time (the "Close of Business"), on the day immediately preceding the fifth
anniversary of the Effective Date (the "Expiration Date"). The Exercise Price
and the number of Shares issuable upon exercise of each Warrant are subject to
adjustment upon the occurrence of certain events, pursuant to the provisions of
Section 8 of this Agreement. Subject to the provisions of this Agreement, each
Warrant Holder shall have the right, which may be exercised as set forth in
such Warrant, to purchase from the Company (and the Company shall issue and
sell to such Warrant Holder) the number of fully paid and nonassessable Shares
specified in such Warrant Holder's Warrant, upon surrender to the Company, or
its duly authorized agent, of such Warrant, with an election to purchase
attached thereto in the form of Exhibit B to this Agreement, duly completed and
signed, with (if requested by the Company within two business days of surrender
of the Warrant with the election to purchase) signatures guaranteed by a member
firm of a national securities exchange, a commercial bank (not a savings bank
or savings and loan association) or trust company located in the United States
or a member of the NASD, and upon payment to the Company of the Exercise Price,
as adjusted in accordance with the provisions of Section 8 of this Agreement,
for the number of Shares in respect of which such Warrant is then exercised.
Notwithstanding the method of exercise set forth in any Warrant
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<PAGE> 3
(or anything to the contrary herein), in the event that the Warrant Holder
thereof has not exercised such Warrant prior to the Close of Business on the
Expiration Date and the current market price per share of Common Stock at the
Close of Business on the Expiration Date (as determined substantially in
accordance with Section 8(d), but using the closing prices or quotations, as
the case may be, on such Expiration Date rather than a 30-day average) is
greater than the Exercise Price, then the Warrant Holder thereof shall be
deemed to have exercised such Warrant in full immediately prior to the Close of
Business on the Expiration Date (an "Automatic Exercise"). Payment of the
Exercise Price may be made in cash or by check payable to the order of the
Company in the amount obtained by multiplying the number of Shares for which
such Warrant is then being exercised by the Exercise Price then in effect (such
amount, the "Exercise Payment"), except that the Warrant Holder may, at its
option, elect to pay the Exercise Payment by delivering to the Company the
number of shares of Common Stock determined by dividing the Exercise Payment by
the current market price (as defined in paragraph (d) of Section 8) of a share
of Common Stock on the date of exercise or by canceling a portion of such
Warrant that is equal to the number of shares determined by dividing the
Exercise Payment by the current market price (as defined in paragraph (d) of
Section 8) of a share of Common Stock as of the date of exercise. In the event
of an Automatic Exercise of any Warrant, the Warrant Holder thereof shall be
deemed to have chosen to cancel the portion of its Warrant that is equal to the
number of shares determined by dividing the Exercise Payment by the current
market price (as defined in paragraph (d) of Section 8) of a share of Common
Stock as of the Close of Business on the Expiration Date. Except as set forth
in Section 8, no adjustment shall be made for any dividends on any Shares
issuable upon exercise of a Warrant. Upon each surrender of Warrants and
payment of the Exercise Payment as aforesaid, or upon the occurrence of an
Automatic Exercise, the Company shall issue and cause to be delivered with all
reasonable dispatch (but in any event within three (3) business days) to or
upon the written order of the Warrant Holder and (subject to receipt of
evidence of compliance with the Act and applicable state securities laws in
accordance with the provisions of Section 10 of this Agreement) in such name or
names as such Warrant Holder may designate, a certificate or certificates for
the number of full Shares so purchased upon the exercise of such Warrant,
together with cash, as provided in Section 9 of this Agreement, in respect of
any fractional Shares otherwise issuable upon such surrender. Such certificate
or certificates shall be deemed to have been issued, and any person so
designated to be named therein shall be deemed to have become a holder of
record of such Shares, as of the date of the surrender of such Warrant and
payment of the Exercise Payment as aforesaid, or as of the date of the
Automatic Exercise; provided, however, that if, at the date of surrender of
such Warrant and payment of such Exercise Payment, the transfer books for the
Common Stock or other class of stock purchasable upon the exercise of such
Warrant shall be closed, the certificates for the Shares shall be issuable as
of the date on which such books shall next be opened (whether before, on or
after the Expiration Date), and until such date the Company shall be under no
duty to deliver any certificate for such Shares; provided further, however,
that the transfer books of record, unless otherwise required by law, shall not
be closed at any one time for a period longer than four (4) days. The rights
of purchase represented by a Warrant shall be exercisable, at the election of
the Warrant Holder thereof, either in full or from time to time in part and, in
the event that any Warrant is exercised in respect of fewer than all of the
Shares purchasable on such exercise at any time prior to the Expiration Date, a
new Warrant or new Warrants will be issued for the remaining number of Shares
specified in the Warrant or Warrants
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<PAGE> 4
so surrendered.
5. Payment of Taxes. The Company will pay all documentary stamp taxes, if
any, attributable to the issuance of Shares upon the exercise of a Warrant;
provided, however, that the Company shall not be required to pay any tax or
taxes which may be payable in respect of any transfer involved in the issuance
or delivery of any certificates for Shares in a name other than that of the
Warrant Holder who exercised the Warrant in respect of which such Shares are
issued.
6. Mutilated or Missing Warrants. In case any Warrant shall be mutilated,
lost, stolen or destroyed, the Company shall issue and deliver in exchange and
substitution for and upon cancellation of the mutilated Warrant, or in lieu of
and substitution for the Warrant lost, stolen or destroyed, a new Warrant of
like tenor and representing an equivalent right or interest, but only upon
receipt of evidence reasonably satisfactory to the Company of such loss, theft
or destruction of such Warrant or an indemnity, also reasonably satisfactory to
the Company.
7. Reservation of Shares, etc. There have been reserved, and the Company
shall at all times keep reserved, out of the authorized and unissued Common
Stock, an aggregate number of shares of Common Stock sufficient to provide for
the exercise of the rights of purchase represented by the outstanding Warrants.
In addition, upon any adjustment to the number and kind of securities
purchasable upon exercise of the Warrants, the Company shall reserve, and shall
at all times thereafter keep reserved, out of the authorized and unissued
Common Stock or such other kind of securities, an aggregate number of shares of
Common Stock or shares, units or otherwise of such other kind of securities
sufficient to provide for the exercise of the rights to purchase represented by
the outstanding Warrants. After the Effective Date, the transfer agent for
the Common Stock (the "Transfer Agent"), and every subsequent Transfer Agent,
if any, for Shares issuable upon the exercise of any of the rights of purchase
represented by the Warrants, will be irrevocably authorized and directed at all
times until the Expiration Date to reserve such aggregate number of authorized
and unissued shares of Common Stock as shall be required for such purpose. The
Company will keep a copy of this Agreement on file with the Transfer Agent and
with every subsequent Transfer Agent for any Shares issuable upon the exercise
of the rights of purchase represented by the Warrants. The Company will supply
any such Transfer Agent with duly executed stock certificates for such purpose
and will itself provide or otherwise make available any cash which may be
distributable as provided in Section 9 of this Agreement. Any Warrant
surrendered in the exercise of the rights thereby evidenced shall be canceled,
and until delivery to the person surrendering such Warrant of stock
certificates representing the Shares to be issued to such person as a result of
such exercise, such canceled Warrant shall constitute sufficient evidence of
the number of Shares that have been issued upon the exercise of such Warrant.
No shares of Common Stock shall be subject to reservation in respect of any
unexercised Warrant subsequent to the Expiration Date.
8. Adjustments of Exercise Price and Number of Shares. The Exercise Price
and the number and kind of securities purchasable upon exercise of each Warrant
shall be subject to adjustment from time to time upon the happening of certain
events, as follows:
(a) In case the Company shall (i) declare a dividend on its Common Stock
in
4
<PAGE> 5
shares of Common Stock or make a distribution in shares of Common Stock,
(ii) subdivide its outstanding shares of Common Stock into a greater number of
shares of Common Stock, (iii) combine its outstanding shares of Common Stock
into a smaller number of shares of Common Stock, or (iv) issue by
reclassification of its shares of Common Stock other securities of the Company,
other than any such reclassification to which paragraph (j) of this Section 8
applies, the number of Shares purchasable upon exercise of each Warrant
immediately prior thereto shall be adjusted so that the Warrant Holder thereof
shall be entitled to receive the kind and number of shares of Common Stock or
other securities of the Company which he would have owned or have been entitled
to receive after the happening of any of the events described above had such
Warrant been exercised immediately prior to the happening of such event or any
record date with respect thereto. An adjustment made pursuant to this
paragraph (a) shall become effective immediately after the effective date of
such event, retroactive to the record date, if any, for such event.
(b) In case the Company shall issue rights, options or warrants to all
holders of its Common Stock, entitling them to subscribe for or to purchase
shares of Common Stock or securities convertible into or exchangeable for
Common Stock (other than "poison pill" rights referred to in paragraph (l) of
this Section 8) at a price per share (or having a conversion price per share)
that is lower on the record date for the determination of stockholders entitled
to receive such rights, options or warrants than the then current market price
per share of Common Stock (as defined in paragraph (d) below), the number of
Shares thereafter purchasable upon the exercise of each Warrant shall be
determined by multiplying the number of Shares theretofore purchasable upon
exercise of such Warrant by a fraction, of which the numerator shall be the
number of shares of Common Stock outstanding at the close of business on the
record date for the determination of stockholders entitled to receive such
rights, options or warrants plus the number of additional shares of Common
Stock offered for subscription or purchase (or into which the convertible
securities so offered are initially convertible), and of which the denominator
shall be the number of shares of Common Stock outstanding at the close of
business on the record date for the determination of stockholders entitled to
receive such rights, options or warrants plus the number of shares which the
aggregate offering price of the total number of shares of Common Stock so
offered (or the aggregate initial conversion price of the convertible
securities so offered) would purchase at the then current market price per
share of Common Stock. Such adjustment shall be made whenever such rights,
options or warrants are issued, and shall become effective retroactively to the
record date for the determination of stockholders entitled to receive such
rights, options or warrants.
(c) In case the Company shall distribute to all holders of its Common
Stock shares of stock (other than Common Stock) or evidences of its
indebtedness or assets (excluding cash dividends out of retained earnings and
dividends or distributions referred to in paragraph (a) of this Section 8) or
rights, options or warrants or convertible or exchangeable securities
containing the right to subscribe for or purchase shares of Common Stock
(excluding those referred to in paragraph (b) above and paragraph (l) below),
then in each case the number of Shares thereafter purchasable upon the exercise
of each Warrant shall be determined by multiplying the number of Shares
theretofore purchasable upon the exercise of such Warrant by a fraction, of
which the numerator shall be the current market price per share of Common Stock
(as
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<PAGE> 6
defined in paragraph (d) below) on the record date mentioned below in this
paragraph (c), and of which the denominator shall be the current market price
per share of Common Stock on such record date, less the then fair value (as
determined by the Board of Directors of the Company, whose determination shall
be conclusive) of the portion of the shares of stock or assets or evidences of
indebtedness so distributed or of such subscription rights, options or
warrants, or of such convertible or exchangeable securities applicable to one
share of Common Stock. Such adjustment shall be made whenever any such
distribution is made, and shall become effective on the date of distribution,
retroactive to the record date for the determination of stockholders entitled
to receive such distribution.
(d) For the purpose of any computation under paragraphs (b) and (c) of
this Section 8 or under Section 4 or Section 9, the current market price per
share of Common Stock at any date shall be deemed to be the average of the
daily closing prices per share for the 30 consecutive trading days commencing
45 trading days before the date of such computation.
The closing price for each day shall be the last reported sale price regular
way or, in case no such reported sale takes place on such day, the average of
the closing bid and asked prices regular way for such day, in either case on
the principal national securities exchange on which the shares of Common Stock
are listed or admitted to trading, or if the Common Stock is not listed or
admitted to trading on any national securities exchange, but is traded in the
over-the-counter market, the closing sale price of the Common Stock or, in case
no sale is publicly reported, the average of the closing bid and asked
quotations for the Common Stock on the Nasdaq National Market System ("NASDAQ")
or any comparable system, or if the Common Stock is not listed on NASDAQ or a
comparable system, the closing sale price of the Common Stock or, in case no
sale is publicly reported, the average of the closing bid and asked prices as
furnished by two members of the NASD selected from time to time by the Company
for that purpose.
(e) No adjustment in the number of Shares purchasable upon exercise of
each Warrant shall be required unless such adjustment would require an increase
or decrease of at least one percent (1%) in the number of Shares purchasable
upon the exercise of each Warrant; provided, however, that any adjustments
which by reason of this paragraph (e) are not required to be made shall be
carried forward and taken into account in any subsequent adjustment.
All calculations shall be made to the nearest one thousandth of a share.
(f) Whenever the number of Shares purchasable upon the exercise of each
Warrant is adjusted, as herein provided, the Exercise Price shall be adjusted
by multiplying such Exercise Price immediately prior to such adjustment by a
fraction, of which the numerator shall be the number of Shares purchasable upon
the exercise of each Warrant immediately prior to such adjustment, and of which
the denominator shall be the number of Shares so purchasable immediately
thereafter.
(g) For the purpose of this Section 8, the term "shares of Common Stock"
shall mean (i) the class of stock designated as the Common Stock of the Company
at the date of this Agreement or (ii) any other class of stock resulting from
successive changes or reclassification of such shares consisting solely of
changes in par value, or from par value to no par value, or from no par value
to par value. In the event that at any time, as a result of an
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<PAGE> 7
adjustment made pursuant to paragraph (a) above, any Warrant Holder shall
become entitled to purchase any shares of capital stock of the Company other
than shares of Common Stock, thereafter the number of such other shares so
purchasable upon exercise of each Warrant and the Exercise Price thereof shall
be subject to adjustment from time to time in a manner and on terms as nearly
equivalent as practicable to the provisions with respect to the Shares
contained in this Section 8, and the provisions of Sections 4, 5, 7, 9 and 12,
with respect to the Shares, shall apply on like terms to any such other shares.
(h) The Company may, at its option, at any time during the term of a
Warrant, reduce, either temporarily or permanently, the then current Exercise
Price to any amount deemed appropriate by the Board of Directors of the
Company; provided, however, that any such reduction may be temporary only to
the extent that Warrant Holders receive written notice from the Company stating
the term of such temporary reduction; and further provided, that following the
expiration of such temporary reduction, the Exercise Price may not be raised to
an amount in excess of the Exercise Price in effect immediately prior to such
temporary reduction.
(i) Whenever the number of Shares purchasable upon the exercise of each
Warrant or the Exercise Price of such Shares is adjusted, as herein provided,
the Company shall promptly mail by first class mail, postage prepaid, to each
Warrant Holder notice of such adjustment or adjustments. The Company may
retain a firm of independent public accountants (who may be the regular
accountants employed by the Company) to make any computation required by this
Section 8 and shall cause such accountants to prepare a certificate setting
forth the number of Shares purchasable upon the exercise of each Warrant and
the Exercise Price thereof after such adjustment, setting forth a brief
statement of the facts requiring such adjustment and setting forth the
computation by which such adjustment was made. Such certificate shall be
conclusive evidence of the correctness of such adjustment, and each Warrant
Holder shall have the right to inspect such certificate during reasonable
business hours.
(j) In case of any consolidation of the Company with or merger of the
Company with and into another corporation or other entity or any consolidation
with or merger of any other corporation or other entity with and into the
Company (other than a merger which does not result in a reclassification,
conversion, exchange or cancellation of Shares and in which the Company is the
surviving corporation) or in case of any sale or conveyance to another
corporation or other person or entity of the property of the Company as an
entirety or substantially as an entirety, (i) notwithstanding the provisions of
Section 4 hereof, each Warrant Holder shall have the right to exercise any
Warrant then held immediately prior to such consolidation, merger, sale or
conveyance upon payment of the Exercise Price then in effect and (ii) with
respect to any Warrants which are not exercised as provided in clause (i)
above, the Company or such successor or purchasing corporation or person or
entity (or an affiliate of such successor or purchasing corporation or person
or entity), as the case may be, agrees that each Warrant Holder shall have the
right after the happening of any such consolidation, merger, sale or conveyance
(except for a consolidation, merger, sale or conveyance in which the
consideration received by the Company's stockholders consists solely of cash)
upon payment of the Exercise Price in effect immediately prior to such action
to purchase upon exercise of each Warrant the kind and amount of shares and
other securities and property which he would have owned or have
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<PAGE> 8
been entitled to receive after the happening of such consolidation, merger,
sale or conveyance had such Warrant been exercised immediately prior to such
action and the securities issued upon such exercise been held since the date of
such exercise. The provisions of this paragraph (j) shall similarly apply to
successive consolidations, mergers, sales or conveyances.
(k) Notwithstanding any adjustment in the Exercise Price or the number or
kind of shares purchasable upon the exercise of a Warrant pursuant to this
Agreement, a certificate for a Warrant issued prior or subsequent to such
adjustment may continue to express the same price and number and kind of shares
as are initially issuable pursuant to this Agreement.
(l) Notwithstanding the foregoing, in the event that the Company shall
distribute "poison pill" rights pursuant to a "poison pill" stockholder rights
plan (the "Rights"), the Company shall, in lieu of making any adjustment
pursuant to Section 8(b) or Section 8(c) hereof, make proper provision so that
each Warrant Holder who exercises a Warrant after the record date for such
distribution and prior to the expiration or redemption of the Rights shall be
entitled to receive upon such exercise, in addition to the Shares issuable upon
such exercise, a number of Rights to be determined as follows: (i) if such
exercise occurs on or prior to the date for the distribution to the holders of
Rights of separate certificates evidencing such Rights (the "Distribution
Date"), the same number of Rights to which a holder of a number of shares of
Common Stock equal to the number of Shares issuable upon such exercise at the
time of such exercise in accordance with the terms and provisions of and
applicable to the Rights; and (ii) if such exercise occurs after the
Distribution Date, the same number of Rights to which a holder of the number of
Shares into which the Warrant so exercised was exercisable immediately prior to
the Distribution Date would have been entitled on the Distribution Date in
accordance with the terms and provisions of and applicable to the Rights.
9. Fractional Interests. The Company shall not be required to issue
fractions of Shares on the exercise of a Warrant. If more than one Warrant
shall be presented for exercise in full at the same time by the same Warrant
Holder, the number of Shares which shall be issuable upon the exercise thereof
shall be computed on the basis of the aggregate number of Shares purchasable on
exercise of the Warrants so presented. If any fraction of a Share would,
except for the provisions of this Section 9, be issuable on the exercise of any
Warrant (or specified portions thereof), the Company shall purchase such
fraction from the Warrant Holder for an amount in cash equal to the same
fraction of the current market price per share of Common Stock (determined as
provided in paragraph (d) of Section 8) on the date of exercise.
10. Restrictions on Disposition. The issuance of the Warrants has not
been registered under the Act pursuant to the Registration Statement. The
Representative represents and warrants to the Company that it understands that
neither the Warrants nor the Shares may be transferred except pursuant to (i)
an effective registration statement under the Act or (ii) any available rule or
exemption from registration under the Act permitting such disposition.
11. Certificates to Bear Legends. Each Warrant shall be subject to a
stop-transfer order and the certificate or certificates therefor shall bear the
following legend:
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<PAGE> 9
THE SECURITIES ISSUABLE UPON EXERCISE HEREOF HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "ACT"), OR ANY STATE SECURITIES LAWS AND
NEITHER THE WARRANTS REPRESENTED BY THIS CERTIFICATE
NOR THE SECURITIES ISSUABLE UPON EXERCISE HEREOF MAY
BE OFFERED OR SOLD EXCEPT PURSUANT TO (i) AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE ACT OR (ii) ANY
AVAILABLE RULE OR EXEMPTION FROM REGISTRATION UNDER
SUCH ACT RELATING TO THE DISPOSITION OF SECURITIES.
The Shares or other securities issued upon exercise of a Warrant shall be
subject to a stop-transfer order and the certificate or certificates evidencing
any such Shares or securities shall bear a legend in substantially the
following form:
THE SHARES OR SECURITIES REPRESENTED BY THIS
CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR ANY
STATE SECURITIES LAWS AND THE SHARES OR OTHER
SECURITIES REPRESENTED BY THIS CERTIFICATE MAY NOT BE
OFFERED OR SOLD EXCEPT PURSUANT TO (i) AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE ACT, OR (ii) ANY
AVAILABLE RULE OR EXEMPTION FROM REGISTRATION UNDER
SUCH ACT RELATING TO THE DISPOSITION OF SECURITIES.
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<PAGE> 10
12. Registration Rights.
(a) Demand Registration Rights. The Company covenants and agrees with the
Representative and any other or subsequent Warrant Holder(s) or registered
holder(s) of Shares or registered holder(s) of other securities for which the
Warrants become exercisable (for purposes of this Section 12, collectively, the
"Warrant Holders" and each a "Warrant Holder") that, upon written request (a
"Registration Request") of the then Warrant Holder(s) of at least a majority of
the securities issued and issuable pursuant to the Warrants, made at any time
within the period commencing on the first anniversary of the Effective Date and
ending at the Close of Business on the Expiration Date (which, as set forth in
Section 4 hereof is the day immediately preceding the fifth anniversary of the
Effective Date), the Company will file with all deliberate speed and, in any
event, within 45 days after receipt of such Registration Request, at its sole
expense, no more than once, and at the Warrant Holders' expense, no more than
once, a registration statement or a Regulation A offering statement (as
requested by the Warrant Holders and if permitted under the Securities Act)
registering or qualifying the Shares or other securities for which the Warrants
become exercisable for sale. Within 15 days after receiving any such notice,
the Company shall give notice to the other Warrant Holders advising that the
Company is proceeding with such registration statement or Regulation A offering
statement and offering to include therein the Shares or other securities for
which the Warrants become exercisable of such Warrant Holders. The Company
shall not be obligated to any such other Warrant Holder unless such other
Warrant Holder shall accept such offer by notice in writing to the Company
within 10 days after receipt of such notice from the Company. No other
securities of the Company shall be entitled to participate in such registration
or qualification. The Company will use its best efforts, through its officers,
directors, auditors and counsel in all matters necessary or advisable, to file
and cause to become effective such registration statement or Regulation A
offering statement (if permitted under the Securities Act) as promptly as
practicable and for a period of two years thereafter to reflect in the
registration statement or Regulation A offering statement (if permitted under
the Securities Act) financial statements which are prepared in accordance with
Section 10(a)(3) of the Securities Act and any facts or events arising that,
individually or in the aggregate, represent a fundamental or material change in
the information set forth in the registration statement or Regulation A
offering statement to enable any Warrant Holder to exercise Warrants and to
sell Shares or other securities for which the Warrants become exercisable,
during such two-year period. If any registration pursuant to this paragraph
(a) is an underwritten offering, the Company will select an underwriter (or
managing underwriter if such offering should be syndicated) approved by the
Warrant Holders of a majority of the Warrants or Shares or other securities for
which the Warrants become exercisable to be included in such registration;
provided however, that if the Company selects an underwriter of national
stature, such approval will not be unreasonably withheld. Notwithstanding the
foregoing, the Company may postpone the filing of such registration statement
or offering statement for a reasonable period of time after receipt of the
original written Registration Request (not exceeding 90 days) if, in the good
faith opinion of the Company's Board of Directors, effecting the registration
would adversely affect a material or other comparable transaction or would
require the Company to make public disclosure of information the public
disclosure of which would have a material adverse effect upon the Company.
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<PAGE> 11
(b) Piggyback Registration Rights. The Company covenants and agrees with
the Representative and any other or subsequent Warrant Holder(s) that if, at
any time within the period commencing on the first anniversary of the Effective
Date and ending at the Close of Business on the day immediately preceding the
seventh anniversary of the Effective Date, it proposes to register any class of
security under the Act in a primary registration on behalf of the Company or in
a secondary registration on behalf of holders of such securities and the
registration form to be used may be used for registration of the Shares or
other securities for which the Warrants become exercisable, the Company will
give prompt written notice (which, in the case of a registration pursuant to
the exercise of demand registration rights other than those provided in Section
12(a) of this Agreement, shall be within 10 business days after the Company's
receipt of notice of such exercise and, in any event, shall be at least 45 days
prior to such filing) to each Warrant Holder (regardless of whether the Warrant
Holder shall have theretofore availed himself or herself of the right provided
in Section 12(a)) at the addresses appearing on the records of the Company of
its intention to effect a registration. The Company will offer to include in
such registration such number of Shares or other securities for which the
Warrants are exercisable with respect to which the Company has received written
requests for inclusion therein within 10 days after receipt of notice from the
Company: provided that in the event that: (i) such registration is to be
underwritten; (ii) such registration is a primary registration on behalf of the
Company; and (iii) with the exception of the Shares or other securities for
which the Warrants become exercisable, such registration is not a secondary
registration on behalf of the holders of outstanding securities of the Company,
the Company shall not be required to include the Shares or other securities for
which the Warrants become exercisable in such registration to the extent the
managing underwriter(s) determines in good faith that such inclusion would
materially adversely affect the offering being made by such registration. All
registrations requested pursuant to this Section 12(b) are referred to herein
as "Piggyback Registrations." This paragraph is not applicable to a
registration statement filed by the Company on Forms S-4 or S-8 or any
successor forms.
(c) Action to be Taken by the Company. In connection with the
registration of the Shares or other securities for which the Warrants become
exercisable in accordance with paragraphs (a) or (b) above, the Company agrees
to:
(i) bear the expense of any registration or qualification under
paragraph (a), on one occasion, or under paragraph (b), on any number of
occasions, including but not limited to legal, accounting and printing
fees; provided, however, that in no event shall the Company be obligated
to pay (A) any fees and disbursements of more than one set of counsel for
the Warrant Holder(s) which reimburesment shall be limited to reasonable
attorney's fees in the event of a registration or qualification under
paragraph (b), or (B) any underwriters' discount or commission in respect
to such Shares or other securities for which the Warrants become
exercisable, payment of which shall, in each case, be the sole
responsibility of the respective Warrant Holder(s) thereof;
(ii) use its best efforts to register or qualify the Shares or other
securities for which the Warrants become exercisable for offer or sale
under state securities or blue sky laws of such jurisdictions as the
Warrant Holders shall reasonably
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<PAGE> 12
request and do any and all other acts and things which may be necessary
or advisable to enable the Warrant Holders to consummate the proposed
sale, transfer or other disposition of such securities in any
jurisdiction;
(iii) furnish to each holder copies of any registration statement
for the Shares or other securities for which the Warrants become
exercisable, any prospectus included in any such registration statement
and all amendments and supplements to such documents, in each case as
soon as available and in such quantities as such Warrant Holder may from
time to time reasonably request; and
(iv) if registration is to be pursuant to an underwritten offering,
enter into a cross-indemnity agreement in customary form, with each
underwriter, if any, and each Warrant Holder of securities included in
such registration statement.
13. Notices to Warrant Holders; Dissolution; Exercise Rights.
(a) Nothing contained in this Agreement or in any Warrant shall be
construed as conferring upon any Warrant Holder the right to vote or to receive
dividends or to consent or to receive notice as a stockholder in respect of the
meetings of stockholders or the election of directors of the Company or any
other matter, or any rights whatsoever as a stockholder of the Company;
provided, however, that in the event that a meeting of stockholders shall be
called to consider and take action on a proposal for the voluntary dissolution
of the Company or a consolidation, merger or sale of all or substantially all
of its property, assets, business and goodwill as an entirety, then, in that
event, the Company shall cause a notice thereof to be sent by first-class mail,
postage prepaid, at least 20 business days prior to the date fixed as a record
date or the date of closing the transfer books in relation to such meeting, to
each Warrant Holder at such Warrant Holder's address appearing on the Warrant
register. If such notice shall have been so given and if such a voluntary
dissolution shall be authorized at such meeting or any adjournment thereof,
then (i) notwithstanding the provisions of Section 4 hereof, each Warrant
Holder shall have the right, at the election of the Warrant Holder, (A) to
exercise any Warrant then held immediately prior to such voluntary dissolution
upon payment of the Exercise Price then in effect or (B) to receive, as of the
effective date of the dissolution, the fair value of such Warrant as of the
time immediately prior to the authorization of the dissolution (without taking
the dissolution into account) as determined by the Board of Directors of the
Company and (ii) from and after the date on which such voluntary dissolution
shall have been duly authorized by the stockholders, the purchase rights
represented by such Warrant and all other rights with respect thereto shall
cease and terminate.
(b) In the event the Company intends to make any distribution on its
Common Stock (or other securities which may be purchasable in lieu thereof upon
the exercise of a Warrant), including, without limitation, any such
distribution to be made in connection with a consolidation or merger in which
the Company is the continuing corporation, or to issue subscription rights or
warrants to holders of its Common Stock, the Company shall cause a notice of
its intention to make such distribution to be sent by first-class mail, postage
prepaid, at least 10 business days prior to the date fixed as a record date or
the date of closing the transfer
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<PAGE> 13
books in relation to such distribution, to each registered Warrant Holder at
such Warrant Holder's address appearing on the Warrant register.
14. Notices. Any notice pursuant to this Agreement to be given or made by
any Warrant Holder to the Company shall be sufficiently given or made as of the
third business day following mailing if sent by first-class mail, postage
prepaid, or as of the day after mailing if sent by a nationally recognized
overnight courier, addressed as follows (or to such other address as the
Company may designate by notice given in accordance with this Section 14 to the
Warrant Holder(s)):
Merge Technologies Incorporated
1126 South 70th Street
Suite S107B
Milwaukee, Wisconsin 53214-3151
Attn.: President
Notices or demands authorized by this Agreement to be given or made by the
Company to any Warrant Holder shall be sufficiently given or made (except as
otherwise provided in this Agreement) as of the third business day following
mailing if sent by first-class mail, postage prepaid, or as of the day after
mailing if sent by a nationally recognized overnight courier, addressed to such
Warrant Holder at the address of such Warrant Holder as shown on the Warrant
register, Common Stock register or the register for such other security for
which the Warrants become exercisable.
15. Covenant as to Certain Transactions. The Company shall not consummate
any consolidation, merger, sale or conveyance (as described in Section 8(j)
hereof) unless prior thereto (a) the successor or purchasing corporation (or an
affiliate of such successor or purchasing corporation), as the case may be,
shall have a sufficient aggregate number of authorized shares and other
securities which have not been issued or reserved for issuance to permit the
exercise in full of the Warrants in accordance with Section 8(j) hereof and (b)
the Company and such successor or purchasing corporation or affiliate shall
have executed and delivered to each Warrant Holder a supplemental agreement
confirming that the requirements of Section 8(j) hereof shall be promptly
performed in accordance with their terms and that such consolidation, merger,
sale or conveyance shall not result in a default by the Company, such successor
or purchasing corporation or such affiliate under this Agreement (as the same
shall have been assumed by such successor or purchasing corporation or such
affiliate) and further providing that such successor or purchasing corporation
or such affiliate shall assume all obligations of the Company hereunder and
agree to be bound hereby. In the event of and after the happening of any such
consolidation, merger, sale or conveyance, the term "the Company," as used
herein, shall be deemed to refer to such successor or purchasing corporation or
such affiliate, as the case may be.
16. Governing Law. This Agreement and each Warrant issued hereunder shall
be governed by and construed in accordance with the substantive laws of the
State of Massachusetts without giving effect to the principles of conflict of
laws thereof.
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<PAGE> 14
17. Counterparts. The Agreement may be executed in any number of
counterparts, each of which so executed shall be deemed to be an original; but
such counterparts together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the day, month and year first above written.
MERGE TECHNOLOGIES INCORPORATED
By:
______________________________
Name:
Title:
H.C. WAINWRIGHT & CO., INC.
By:
______________________________
Name:
Title:
14
<PAGE> 15
EXHIBIT A
(Form of Warrant Certificate)
THE SECURITIES ISSUABLE UPON EXERCISE HEREOF HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR ANY STATE
SECURITIES LAWS AND NEITHER THE WARRANTS REPRESENTED BY THIS CERTIFICATE NOR
THE SECURITIES ISSUABLE UPON EXERCISE HEREOF MAY BE OFFERED OR SOLD EXCEPT
PURSUANT TO (i) AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT, OR (ii) ANY
AVAILABLE RULE OR EXEMPTION FROM REGISTRATION UNDER SUCH ACT RELATING TO THE
DISPOSITION OF SECURITIES.
No. __________________ _____________ Warrants
VOID AFTER 5:00 P.M., BOSTON TIME
ON _____________, 200[ ]
MERGE TECHNOLOGIES INCORPORATED
Warrant Certificate
THIS CERTIFIES THAT, for value received, _________________, or registered
assigns, is the owner of the number of Warrants set forth above, each of which
entitles the owner thereof to purchase at any time from[ ], (except as
otherwise set forth in the Warrant Agreement referred to below), until 5:00
p.m., Boston time on [ ] (the "Expiration Date"), one fully paid and
nonassessable share of the common stock, par value $.0l per share (the "Common
Stock"), of MERGE TECHNOLOGIES INCORPORATED, a Wisconsin corporation (the
"Company"), at the purchase price of $[ ] per share (the "Exercise Price"),
upon presentation and surrender of this Warrant Certificate with the Form of
Election to Purchase duly executed. The number of Warrants evidenced by this
Warrant Certificate (and the number of shares of Common Stock which may be
purchased upon exercise hereof) set forth above, and the Exercise Price per
share set forth above, are the number and Exercise Price as of the date of
original issuance of the Warrants, based on the shares of Common Stock of the
Company as constituted at such date. As provided in the Warrant Agreement
referred to below, the Exercise Price and the number or kind of securities
which may be purchased upon the exercise of the Warrants evidenced by this
Warrant Certificate are, upon the happening of certain events, subject to
modification and adjustment.
This Warrant Certificate is subject to, and entitled to the benefits of,
all of the terms, provisions and conditions of an agreement dated as of [ ]
(the "Warrant Agreement") by and
15
<PAGE> 16
among the Company and H.C. Wainwright & Co., Inc., which Warrant Agreement is
hereby incorporated herein by reference and made a part hereof and to which
Warrant Agreement reference is hereby made for a full description of the
rights, limitations of rights, duties and immunities hereunder of the Company
and the holder of the Warrant Certificate. Copies of the Warrant Agreement are
on file at the principal office of the Company.
This Warrant Certificate, with or without other Warrant Certificates, upon
surrender at the principal office of the Company, may be exchanged for another
Warrant Certificate or Warrant Certificates of like tenor and date evidencing
Warrants entitling the holder to purchase a like aggregate number of shares of
Common Stock as the Warrants evidenced by the Warrant Certificate or Warrant
Certificates so surrendered entitled such holder to purchase. If this Warrant
Certificate shall be exercised in part, the holder hereof shall be entitled to
receive upon surrender hereof another Warrant Certificate or Warrant
Certificates for the number of whole Warrants not exercised.
No fractional shares of Common Stock will be issued upon the exercise of
any Warrant or Warrants evidenced hereby, but in lieu thereof, a cash payment
will be made by the Company, as provided in the Warrant Agreement.
No holder of this Warrant Certificate shall be entitled to vote or receive
dividends or be deemed the holder of Common Stock or any other securities which
may at any time be issuable on the exercise hereof for any purpose, nor shall
anything contained in the Warrant Agreement or herein be construed to confer
upon the holder hereof, as such, any of the rights of a stockholder of the
Company or any right to vote for the election of directors or upon any matter
submitted to stockholders at any meeting thereof, or to give or withhold
consent to any corporate action (whether upon any recapitalization, issue of
stock, reclassification of stock, change of par value or change of stock to no
par value, consolidation, merger, conveyance, or otherwise) or, except as
provided in the Warrant Agreement, to receive notice of meetings or to receive
dividends or subscription rights or otherwise, until the Warrant or Warrants
evidenced by this Warrant Certificate shall have been exercised and the shares
of Common Stock or other securities shall have become deliverable as provided
in the Warrant Agreement.
If this Warrant shall be surrendered for exercise within any period during
which the transfer books for the Company's Common Stock or other securities
purchasable upon the exercise of this Warrant are closed for any purpose, the
Company shall not be required to make delivery of certificates for the shares
of Common Stock or other securities purchasable upon such exercise until the
date of the reopening of said transfer books, subject to the terms of the
Warrant Agreement.
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<PAGE> 17
IN WITNESS WHEREOF, MERGE TECHNOLOGIES INCORPORATED has caused the
signature of its President and Secretary to be printed hereon and its corporate
seal to be printed hereon.
Dated:
MERGE TECHNOLOGIES INCORPORATED
By: ____________________________
President
Attest:
_____________________________
Secretary
17
<PAGE> 18
FORM OF ASSIGNMENT
(To be executed by the registered holder if such holder desires to transfer the
Warrant Certificates.)
FOR VALUE RECEIVED, ____________________________________________ hereby
sells, assigns and transfers unto _________________________________________,
this Warrant Certificate, together with all right, title and interest therein,
and does hereby irrevocably constitute and appoint
_______________________________________________ to transfer the within Warrant
Certificate on the books of the within-named Company, with full power of
substitution.
Dated: ____________________, ___
________________________________________
Signature
Signature Guaranteed:
NOTICE
The signature on the foregoing Assignment must correspond in all respects
to the name as written upon the face of this Warrant Certificate, without
alteration, enlargement or any change whatsoever.
Accepted:
__________________________
Assignee:
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<PAGE> 19
EXHIBIT B
FORM OF
ELECTION TO PURCHASE
(To be executed if holder desires to exercise the Warrant Certificate).
TO MERGE TECHNOLOGIES INCORPORATED:
The undersigned hereby irrevocably elects to exercise __________ Warrants
represented by this Warrant Certificate to purchase the shares of Common Stock
issuable upon the exercise of such Warrants and requests that certificates for
such shares be issued in the name of:
Please insert social security or other
identifying number
__________________________________
________________________________________________________________________________
(Please print name and address)
________________________________________________________________________________
If such number of Warrants shall not be all the Warrants evidenced by this
Warrant Certificate, a new Warrant Certificate for the balance remaining of
such Warrants shall be registered in the name of and delivered to:
Please insert social security or other
identifying number
______________________________________
________________________________________________________________________________
(Please print name and address)
________________________________________________________________________________
Dated:
______________________,____
__________________________________
Signature
Signature Guaranteed:
19
<PAGE> 20
NOTICE
The signature on the foregoing election to purchase must correspond in all
respects to the name as written upon the face of this Warrant Certificate,
without alteration, enlargement or any change whatsoever.
20
<PAGE> 1
Exhibit 10.12
CONSULTING AGREEMENT
This Consulting Agreement (the "AGREEMENT") is made and entered into as
of June 1, 1996 by and between Robert T. Geras ("CONSULTANT") and Merge
Technologies Incorporated, a Wisconsin corporation (the "COMPANY").
R E C I T A L S:
A. Consultant has provided extensive consulting and advisory
service to the Company over the past six years.
B. The Company desires to continue to avail itself from time to
time of Consultant's extensive experience in business and financing matters by
continuing to engage Consultant in the capacity of a consultant to the Company
on the terms set forth herein.
NOW, THEREFORE, in consideration of the foregoing and the agreements,
covenants and conditions contained herein, Consultant and the Company hereby
agree as follows:
ARTICLE I
CONSULTING SERVICES
SECTION 1.1 Position; Term; Responsibilities. The Company shall
retain Consultant to perform the services described in Section 1.2 for a term
commencing on the date hereof and ending on the three-year anniversary of the
date hereof or such earlier date upon which this Agreement may be terminated
(the "CONSULTING PERIOD"). The Company shall have the right to terminate this
Agreement following sixty (60) days written notice by the Company for
Consultant's refusal to perform, or his substantial neglect of, the duties
assigned to Consultant hereunder, but such termination shall not relieve the
Company of the obligation to pay the amounts due to the Consultant under
Section 2.1(a).
SECTION 1.2 Performance of Consulting Services. During the
Consulting Period, Consultant shall perform and faithfully discharge such
consulting services to the Company as the Company may assign to him, on an
as-needed basis, when mutually convenient.
SECTION 1.3 Consultant's Relationship to the Company. Consultant's
relationship hereunder to the Company is one of independent contractor and
nothing contained in this Agreement shall be construed to imply that he is an
agent or employee of the Company for any purpose, including, without
limitation, withholding for purposes of Social Security or income taxes, or
entitlement to any insurance, retirement or other employee benefits offered by
the Company. Consultant shall have no right, power or authority to create any
obligation, expressed or implied, or to make any representation on behalf of
the Company, except as may be expressly authorized in writing from time to time
by the Company and then only to the extent of such authorization.
<PAGE> 2
ARTICLE II
COMPENSATION
SECTION 2.1 Compensation.
(a) The Company, in consideration for Consultant's consulting and
advisory services performed prior to the date of this Agreement, shall pay to
Consultant or his designee the amount of $160,000 on January 1, 1997. Company
and Consultant agree that the amount of $160,000 is a reasonable amount for the
services performed by Consultant prior to the date of this Agreement.
(b) The Company, in consideration for Consultant's consulting
services performed pursuant to Article I, shall pay to Consultant or his
designee the amount of $3,500 per month, provided that Consultant has continued
to provide the services required in Article I. Company and Consultant agree
that the amount of $3,500 per month is a reasonable amount for the services to
be performed by Consultant pursuant to Article I.
SECTION 2.2 Expenses. The Company shall reimburse Consultant for
all of his out-of-pocket expenses incurred by him related to his services
hereunder that were authorized or subsequently approved by the Company;
provided, that Consultant shall have submitted an expense report in form
satisfactory to the Company with such receipts or other substantiation as
required by the Company.
ARTICLE III
MISCELLANEOUS
SECTION 3.1 Conflicts. Consultant hereby warrants and represents
that he is not under any legal or contractual obligation that would conflict in
any manner with the obligations and duties he is undertaking herein, and that
the execution of this Agreement will not breach any agreement to which he is now
a party.
SECTION 3.2 Notices. All notices or other communications required
or permitted hereunder shall be in writing and shall be deemed given, delivered
and received (a) when delivered, if delivered personally, (b) four days after
mailing, when sent by registered or certified mail, return receipt requested
and postage prepaid, and (c) one business day after delivery to a private
courier service, when delivered to a private courier service providing
documented overnight service, in each case addressed as follows:
2
<PAGE> 3
If to Consultant:
Robert T. Geras
2125 Valley Road
Northbrook, Illinois 60062
If to Company:
Merge Technologies Incorporated
1126 South 70th Street
Suite S107B
Milwaukee, Wisconsin 53214-3151
Attention: William C. Mortimore, President
with a copy to:
Shefsky Froelich & Devine Ltd.
444 North Michigan Avenue, Suite 2500
Chicago, Illinois 60611
Attention: Mitchell D. Goldsmith
or to such other address as the recipient party may indicate by a notice
delivered to the sending party (such change of address notice to be deemed
given, delivered and received only upon actual receipt thereof by the recipient
of such notice).
SECTION 3.3 Assignment and Succession. Consultant hereby acknowledges
that the services to be rendered by him hereunder are unique and personal.
Accordingly, Consultant may not assign any of his rights or delegate any of his
duties or obligations under this Agreement. The rights and obligations of the
Consultant and Company under this Agreement shall inure to the benefit of and
be binding upon its successors and permitted assigns.
SECTION 3.4 Applicable Law. This agreement shall at all times be
governed by and construed, interpreted and enforced in accordance with the laws
of the State of Wisconsin without regard to the law of conflicts thereof.
SECTION 3.5 Entire Agreement: Amendments. This Agreement contains the
entire understanding of the parties hereto with regard to the subject matter
contained herein, and supersedes all prior or contemporaneous agreements,
understandings or intents between the partis hereto or any related parties,
whether oral or written. This Agreement may be amended, modified or
supplemented only by a writing signed by both parties hereto.
SECTION 3.6 Waivers. Any term of this Agreement may be waived by the
party or parties entitled to the benefits thereof but only by a writing executed
by such party. No
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<PAGE> 4
waiver or any breach of this Agreement shall be held to constitute a waiver of
any other or subsequent breach.
SECTION 3.7 Interpretation. Article titles and headings to
Sections herein are inserted for convenience of reference only and are not
intended to be part of or to affect the meaning or interpretation of this
Agreement. The language used in this Agreement will be deemed to be the
language chosen by the parties hereto to express their mutual intent, and no
rule of strict construction will be applied against any party.
SECTION 3.8 Counterparts. This Agreement may be executed in one or
more counterparts, each of which shall be considered an original instrument,
but all of which shall be considered one and the same agreement, and shall
become binding when one or more counterparts have been signed and delivered by
each of the partners hereto.
SECTION 4.0 Partial Invalidity. Wherever possible, each provision
hereof shall be interpreted in such manner as to be effective and valid under
applicable law, but in case any one or more of the provisions contained herein
shall, for any reason, be held to be invalid, illegal or unenforceable in any
respect, such provision shall be ineffective to the extent, but only to the
extent, of such invalidity, illegality or unenforceability without invalidating
the remainder of such invalid, illegal or unenforceable provision or provisions
or any other provisions hereof, unless such a construction would be
unreasonable.
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of
the day and year first above written.
/s/ Robert T. Geras
---------------------------------
ROBERT T. GERAS
MERGE TECHNOLOGIES INCORPORATED
By: /s/ William C. Mortimore
------------------------------
Name: William C. Mortimore
Title: President
<PAGE> 5
Merge Technologies Incorporated
1126 South 70th Street
Suite S107B
Milwaukee, Wisconsin 53214-3151
Re: Termination of Consulting Agreement with Merge Technologies
Incorporated (the "Company")
Ladies and Gentlemen:
This letter is to advise you that I hereby agree to terminate the
Consulting Agreement entered into between the Company and me and dated as of
June 1, 1996, effective upon the closing of the public offering of 1,900,000
shares of the Company's Common Stock in an offering underwritten by H.C.
Wainwright & Co., Inc.
I also agree to execute any additional documents that may be needed to
effect the termination of the Consulting Agreement.
Please acknowledge the termination of the Consulting Agreement on the
conditions described above by signing this letter where indicated below.
Very truly yours,
/s/ Robert T. Geras
Robert T. Geras
Acknowledged, Agreed to, and Accepted:
MERGE TECHNOLOGIES INCORPORATED
By: /s/ William C. Mortimore
-------------------------
Name: William C. Mortimore
Title: President and Chief Executive Officer
<PAGE> 1
Exhibit 10.13
MERGE TECHNOLOGIES INCORPORATED
1998 STOCK OPTION PLAN FOR DIRECTORS (THE "PLAN")
I. GENERAL.
A. PURPOSE.
The purpose of this 1998 Stock Option Plan for Directors (the "Plan")
is to advance the interests of the stockholders of Merge Technologies
Incorporated (the "Company") by providing the members of the Company's Board of
Directors who are not also employed by the Company (the "Directors") with an
opportunity to acquire or increase their proprietary interests in the Company
by granting them options to purchase shares of the Company's common stock (the
"Shares" or "Common Stock"). By encouraging these individuals to become owners
of Shares, the Company seeks to motivate, retain and attract those highly
competent individuals upon whose judgment, initiative, and leadership the
Company's success in large measure depends. The options granted hereunder are
not "incentive stock options" within the meaning of Section 422 of the Internal
Revenue Code of 1986.
B. STRUCTURE OF THE PLAN.
The Plan shall consist of a "Director Option Grant Program,"
described in Section II. Under the Director Option Grant Program, all of the
Directors will be granted options to purchase Shares and any other stock or
security resulting from the adjustment thereof or substitution therefor.
C. GENERAL GRANTS AND RIGHTS.
The right to acquire Shares pursuant to the Director Option Grant
Program shall be referred to as a "Director Option." Options granted under the
Director Option Grant Program shall be referred to herein as "Options."
II. DIRECTOR OPTION GRANT PROGRAM
A. ELIGIBILITY.
Each individual serving as a Director shall be eligible to
participate in the Director Option Grant Program and be granted Director
Options.
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<PAGE> 2
B. GRANTS.
Each of Messrs. Robert T. Geras, Robert A. Barish, M.D., Dennis
Brown, Michael D. Dunham, Douglas S. Harrington, M.D., and Kevin E. Moley, the
later of the day following the closing of the Company's initial public offering
of Common Stock (the "IPO") or their acceptance and admission as a member of
the Company's Board of Directors, shall automatically receive an option to
acquire 10,000 Shares. Subsequent grants of Options under the Plan shall be
made from time-to-time subject to the terms hereof and such other terms and
conditions as shall be set by the Board.
C. OPTION PERIOD.
The length of each Director Option shall be ten years and one day
from the day of grant. Each Director Option not exercised shall terminate at
the end of its term if not subject to earlier termination as herein provided or
as provided in the Option Agreement.
D. OPTION PRICE.
The price per share at which Shares may be acquired on exercise of a
Director Option shall be one hundred percent (100%) of the Fair Market Value on
the date of grant; provided however, the price per share at which the initial
60,000 Shares may be acquired shall be the IPO price for the Shares sold
pursuant to its initial public offering.
III. SHARES SUBJECT TO THE PLAN.
A. NUMBER OF SHARES.
The stock subject to the Options granted under this Plan shall be the
Company's Common Stock and any other stock or security resulting from the
adjustment thereof or substitution therefor as described in Section III.G.(3).
There shall be 100,000 Shares, subject to adjustment under Section III.G.(3),
reserved and available for purchase on exercise of Options granted under the
Plan. The Shares issued upon exercise of an Option may be authorized and
unissued Shares, or Shares issued and re-acquired by the Company.
B. RELEASE OF SHARES.
If any Option granted hereunder shall be canceled, expire or
terminate for any reason without having been exercised in full, the Shares
subject to the Option shall not thereafter be available for grant under this
Plan except if and to the extent issued to an Optionee under the Plan in
replacement for outstanding Options surrendered by the Optionee.
2
<PAGE> 3
C. RESTRICTIONS ON SHARES.
All Shares issued on exercise of an Option shall be subject to the
terms and conditions specified herein and to those other terms, conditions and
restrictions contained in the Option Agreement, as well as applicable federal
and state laws, rules and regulations including, as may be required, approval
by any government or regulatory agency. The Company may issue or deliver
certificates for Shares prior to: (i) listing the Shares on any stock exchange
on which the Common Stock may then be listed; (ii) registering or qualifying
the Shares under federal or state law; provided, however, the Company shall not
issue or deliver certificates for Shares prior to an Optionee tendering to the
Company those documents or payments as the Board may deem necessary to satisfy
any applicable withholding obligation for the Company to obtain a deduction on
its federal, state or local tax return with respect to the exercise of an
Option. The Company may cause any Common Stock to be properly marked with a
legend or other notation reflecting the limitations on transfer provided in the
Plan, the Option Agreement or as the Board may otherwise reasonably require to
comply with law. Fractional Shares shall not be delivered, but shall be
rounded to the next lower whole number of Shares.
D. STOCKHOLDER RIGHTS.
An Optionee shall not have any rights of a stockholder as to Shares
subject to an Option until, after properly exercising the Option, the Shares
are recorded on the Company's official stockholder records as issued or
transferred to the party exercising the Option. No adjustment shall be made
for cash dividends or other rights if the record date for the cash dividend or
other right is prior to the date the Shares are recorded as issued or
transferred to the party exercising the Option, in the Company's official
stockholder records, except as provided in Article III.G.3. The Company shall
record the Shares as issued or transferred in an expeditious manner.
E. STOCK VALUATION.
Any determination of the value or closing price of Common Stock
required by the Plan shall be determined in accordance with the following
provisions, as applicable (which value or closing price shall be referred to
herein as the "Fair Market Value per Share," or for a group of Shares a total
"Fair Market Value"):
(1) if, on the relevant date, the Common Stock is traded on
a national or regional securities exchange or on the NASDAQ National
Market System, on the basis of the closing sale price on the principal
securities exchange on which the Common Stock may then be traded or,
if there is no sale on the relevant date, then on the last previous
day on which a sale was reported;
(2) if, on the relevant date, the Common Stock is not
listed on any securities exchange or traded on the NASDAQ National
Market System, but
3
<PAGE> 4
otherwise is publicly-traded and reported on NASDAQ, on the
basis of the mean between the closing bid and asked quotations in the
over-the-counter market as reported by NASDAQ; but if there are no bid
and asked quotations in the over-the-counter market as reported by
NASDAQ on that date, then the mean between the closing bid and asked
quotations in the over-the-counter market as reported by NASDAQ on the
last previous day any bid and asked prices were quoted; and
(3) if, on the relevant date, the Common Stock is not
publicly-traded as described in (i) or (ii), in good faith by the
Board.
F. OPTION PROVISIONS.
(1) OPTION AGREEMENT. Each Option granted hereunder shall
be evidenced by a written option agreement ("Option Agreement"), specifying,
among other things, the Optionee, the period for which the Option thereunder is
granted, the number of Shares for which the Option is granted, the Option price
and the exercise schedule. The grant and exercise of Options hereunder are
subject to all applicable federal, state and local laws, rules and regulations
and, if required, any approvals by any government or regulatory agency.
(2) EXERCISE OF OPTIONS. Director Options granted hereunder shall
vest and be exercisable in installments as follows: to the extent of one third
of the number of Shares commencing on each of the first, second and third
anniversaries of the date of grant, provided that the Optionee is either
serving as a Director on the applicable anniversary date, which provision may
be waived in the sole discretion of a majority of the other then remaining
members of the Board of Directors if such director is no longer serving on the
applicable anniversary. If the Optionee does not in any given period purchase
all of the Shares subject to the Option, the Optionee's right to purchase any
Shares not purchased in the period shall continue until the expiration or
sooner termination of the Option, except to the extent provided otherwise in
the Option Agreement. To exercise an Option, an Optionee shall give written
notice to the Company's Treasurer at the Company's office at 1126 South 70th
Street, Milwaukee, Wisconsin, 53214-3151 (or the office which is the successor
main office or which is otherwise designated as the office to which notice is
to be given) of the number of Shares to be acquired and make any arrangements
with the Treasurer as are acceptable to the Treasurer to satisfy the Optionee's
federal, state and local tax withholding obligations and satisfy the Optionee's
obligation under the Plan and the Option Agreement.
(3) CANCELLATION OF OPTIONS. A Director Option is exercisable by
an Optionee only so long as the director continues to hold office and for a
period of thirty days thereafter; provided, however, that if the director
ceases to hold office due to death, permanent and total disability or
expiration of the director's term of office after the director attains his 65th
birthday, all Options granted under the Plan shall be exercisable.
4
<PAGE> 5
(4) PAYMENT OF PURCHASE PRICE ON EXERCISE. Unless otherwise
determined by the Board, the purchase price of the Shares acquired on exercise
of an Option shall be paid to the Company at the time of exercise in cash,
Shares or any other form of payment acceptable to the Board.
(5) NONASSIGNABILITY. Options are not transferable except by will
or the laws of descent and distribution, and are exercisable during an
Optionee's lifetime only by the Optionee, or the appointed guardian or legal
representative of the Optionee.
(6) LOCK UP AGREEMENT. The shares of Common Stock purchased
pursuant to an Option shall not be sold or otherwise transferred (except to the
Option holder's immediate family members by gift, will or intestacy, whereby
such permitted transferee shall continue to be subject to the restrictions of
this subchapter III F(6) for a period of 455 days following the date of
acceleration of effectiveness of a registration statement for the initial public
offering of Common Stock of the Company.
G. PROVISIONS APPLICABLE TO THE PLAN.
(1) TERMINATION OF PLAN. This Plan shall terminate on June 30,
2012, or at such earlier time as determined by the Board. No Options shall be
granted under the Plan after that date. Any Options outstanding under the Plan
at the time of its termination shall remain in effect until they shall have
been exercised, expired or otherwise canceled or terminated as provided herein
or in the Option Agreement. Termination of the Plan shall not diminish the
authority granted to the Board to administrate the Plan.
(2) INVESTMENT REPRESENTATION. If the disposition of Common Stock
acquired on exercise of any Option is not covered by a then current
registration statement under the Securities Act of 1933, as amended (the
"Securities Act"), and is not otherwise exempt from registration, the acquired
Shares shall be restricted against transfer to the extent required by the
Securities Act or regulations thereunder. Each Option Agreement shall contain
a requirement that, on demand by the Board, the individual exercising an Option
shall state in writing, as a condition precedent to each exercise, that the
Optionee is acquiring the Common Stock for investment only and not for resale
or with a view to distribution. The Board may set forth in an Option Agreement
other terms and conditions relating to the registration or qualification of the
Common Stock under federal or state securities laws as it desires.
(3) EFFECT OF CERTAIN CHANGES.
a. Adjustments. If the Company declares a stock dividend, stock
split, combination or exchange of shares, recapitalization or other
change in the capital structure (including, but not limited to, a split-up,
spin-off, split-off or distribution to Company stockholders other than a
normal cash dividend), sells all or a substantial portion of its assets (if
measured on either a stand-alone or consolidated basis), undertakes a
reorganization, rights offering, share offering, partial or complete
liquidation, or any other corporate transaction or event involving the
Company and having an effect similar to any of the foregoing, then the
Board may adjust or substitute, as the case may be, the number of Shares
available for Options under the Plan, the number of Shares covered by
outstanding Options, the exercise price per Share of outstanding Options,
any target
5
<PAGE> 6
Fair Market Value per Share that the Common Stock is required to reach for all
or a portion of any Options to vest, and any other characteristics or terms of
the Options as the Board deems necessary or appropriate to equitably reflect
the effects of those changes to the Option holders; provided, however, that any
fractional Shares resulting from the adjustment shall be eliminated by rounding
to the next lower whole number of Shares with appropriate payment for the
fractional Shares as determined by the Board. The Board may waive any
limitations set forth in or imposed pursuant to the terms and conditions of the
Plan or an Option Agreement so that all Options, from and after a date prior to
the effective date of an event specified above or a Change in Control (as
defined below), shall be exercisable in full.
b. Dissolution, Liquidation, Corporate Separation or Division.
If the Board proposes to dissolve or liquidate the Company or the Company is
involved in any other corporate transaction or event and having effects on the
Options similar to any of the foregoing, the Board may, in addition to the
provisions of this Section III.G.(3)(a), terminate each outstanding Option
granted under the Plan as of a date fixed by the Board; provided, however, that
not less than thirty (30) days prior written notice of the date so fixed shall
be given to each Optionee (or Beneficiary), who shall have the right, during
the thirty (30) days preceding such date, to exercise all Options, whether or
not otherwise exercisable, as to all or any part of the Shares covered thereby.
c. Merger, Consolidation, or Sale of Assets. If the Company is
merged into or consolidated with another corporation under circumstances where
the Company is not the surviving corporation, or the Company sells or otherwise
disposes of all or a substantial portion of its assets or is involved in any
other transaction or event which has an effect on the Shares or Options similar
to the foregoing, then in addition to the provisions of this Section III.G.(3),
all Options outstanding under the Plan shall become exercisable at that time
and the Board may cancel all outstanding Options as of the effective date of
any transaction or event; provided that not less than thirty (30) days prior
written notice of the date so fixed for cancellation shall be given to each
Optionee (or Beneficiary), who shall have the right, during the thirty (30)
days preceding the effective date of the transaction or event, to exercise all
Options, whether or not otherwise exercisable, as to all or any part of the
Shares covered thereby.
d. Certain Mergers and Consolidations. This Section III.G.(3)
shall not apply to a merger or consolidation in which the Company is the
surviving corporation and Shares are not converted into or exchanged for stock,
securities of any other corporation, cash or any other thing of value.
6
<PAGE> 7
e. Definition of Common Stock. In the event of a change in the
Company's Common Stock as presently constituted, the Shares resulting from any
change shall be deemed to be the Common Stock within the meaning of the Plan.
f. Determination of the Board. The Board shall make all
adjustments required under this Section III.G.(3). All adjustments shall be
final, binding and conclusive.
g. Limitations under this Section III.G.(3). The grant of an
Option pursuant to the Plan shall not in any way effect the Company's right or
power to make adjustments, reclassifications, reorganizations or changes to its
capital or business structures or to merge or to consolidate or to dissolve,
liquidate, sell or transfer all or part of its business or assets.
(4) WITHHOLDING OBLIGATIONS.
The Optionee or Beneficiary may satisfy any withholding obligation
under the Plan or an Option Agreement by requesting the Company to withhold and
not transfer or issue Shares with a fair market value equal to the withholding
obligation, otherwise issuable or transferable to the Optionee pursuant to the
exercise of an Option. The provisions of this Section III.G.(4) shall apply
and be available to any Optionee who, on the date of exercise of an Option may
be subject, in the Company's opinion, to Section 16(b) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and the rules and
regulations thereunder (a "Section 16(b) Optionee") only if, and to the extent
that: (i) the Section 16(b) Optionee requests withholding of the Shares not
earlier than six (6) months subsequent to the date of the grant of the Option;
or (ii) the election by the Section 16(b) Optionee otherwise complies with the
exemptive provisions of Rule 16b-3 under the Exchange Act as determined in the
sole opinion of the Company's general counsel. If an Optionee is issued Shares
without making an election as described in this Section III.G.(4) and if the
date on which the amount of tax withholding is determined is deferred until at
least six months after the exercise date of the Option, the Board may require
as a condition to issuance of Shares that the Optionee tender to the Company
the proper number of Shares to satisfy the withholding obligation on the date
the tax withholding is determined. Any right or election of an Optionee under
this Section III.G.(4) shall be subject to the approval of the Board. With
respect to persons subject to Section 16 of the Exchange Act, transitions under
this Plan are intended to comply with all applicable conditions of Rule 16b-3
or its successors under the Exchange Act. To the extent any provision of this
Plan or any action by the Board fails to so comply, it shall be deemed null and
void, to the extent permitted by law and deemed advisable by the Board.
(5) NOTICE TO THE COMPANY OF OPTIONEE'S ELECTION.
7
<PAGE> 8
Any Optionee exercising an election under Section 83 of the Code to
have the receipt of Shares hereunder taxed currently, without regard to the
restrictions imposed under the Plan or an Option Agreement or law, shall give
notice to the Company of the election immediately upon making the election.
H. INDEMNIFICATION OF THE BOARD.
In addition to such other rights of indemnification as they may have as
Board members, and to the extent permitted by law, the members of the Board
shall be indemnified and held harmless by the Company and each direct or
indirect subsidiary of the Company against the reasonable expenses, including
attorneys' fees, actually and necessarily incurred in connection with the
defense of any action, suit or proceeding, or in connection with any appeal
thereof, to which they or any of them may be a party by reason of any action
taken or failure to act under or in connection with the Plan or any Option
granted thereunder, and against all amounts paid by them in settlement thereof
(provided the settlement is approved by the Company's legal counsel) or paid by
them in satisfaction of a judgment in any action, suit or proceeding, except in
relation to matters as to which it shall be adjudged in the action, suit or
proceeding that the Board member is liable for gross negligence or gross
misconduct in the performance of its duties; provided that within sixty (60)
days after institution of any action, suit or proceeding a Board member shall
in writing offer the Company the opportunity, at its own expense, to handle and
defend the action.
I. PLAN BINDING ON SUCCESSORS.
Except as provided herein, the Plan shall be binding on the successors
and assigns of the Company.
J. INTERPRETATION AND GOVERNING LAW.
Whenever necessary or appropriate in this Plan and where the context
admits, the singular term and the related pronouns shall include the plural and
the masculine and feminine gender. The Plan shall be construed and enforced
according to the internal laws of the State of Wisconsin.
* * * * *
I hereby certify that the foregoing Plan was duly adopted by the board
of Directors of MERGE TECHNOLOGIES INCORPORATED on January 16, 1998.
- --------------------
Secretary
8
<PAGE> 1
EXHIBIT 11
Merge Technologies Incorporated
Statement Regarding Computation of Net Income (Loss) per share of Common Stock
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1994 1995 1996
------------ -------------- --------------
<S> <C> <C> <C>
Net income (loss) before extraordinary item $ 466,105 $ (574,373) $ (283,193)
Net income (loss) $ 466,105 $ (574,373) $ (113,679)
Weighted average Common
Shares outstanding 1,453,758 2,273,432 3,464,989
Common Stock equivalents 563,093 - -
Additional shares pursuant
to SAB 83 computation 504,402 504,402 504,402
------------- ------------- -------------
Shares used in computing
net income (loss)
per share of Common Stock 2,521,253 2,777,834 3,969,391
============= ============= =============
Net income (loss) before extraordinary item per
share of Common Stock $ 0.18 $ (0.21) $ (0.07)
============= ============= =============
Net income (loss) per
share of Common Stock $ 0.18 $ (0.21) $ (0.03)
============= ============= =============
</TABLE>
<TABLE>
<CAPTION> NINE MONTHS ENDED SEPTEMBER 30,
1996 1997
------------- -----------
<S> <C> <C>
Net income (loss) before extraordinary item $ 13,156 $ 356,998
Net income (loss) $ 182,670 $ 356,998
Weighted average Common
Shares outstanding 3,319,449 3,896,862
Common Stock equivalents 83,894 311,730
Additional shares pursuant
to SAB 83 computation 504,402 504,402
------------- -----------
Shares used in computing
net income (loss)
per share of Common Stock 3,907,745 4,712,994
============= ===========
Net income (loss) before extraordinary item per
share of Common Stock $ 0.00 $ 0.08
============= ===========
Net income (loss) per
share of Common Stock $ 0.05 $ 0.08
============= ===========
</TABLE>
<PAGE> 1
EXHIBIT 23.2
Consent of KPMG Peat Marwick LLP
The Board of Directors
Merge Technologies, Inc.:
We consent to the use of our report included herein and to the reference to our
firm under the heading "Experts" in the prospectus.
/s/ KPMG Peat Marwick LLP
Chicago, Illinois
January 20, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> DEC-31-1994
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 0
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 0
<SALES> 0
<TOTAL-REVENUES> 2,420,090
<CGS> 387,715
<TOTAL-COSTS> 1,213,199
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 88,314
<INCOME-PRETAX> 466,105
<INCOME-TAX> 0
<INCOME-CONTINUING> 466,105
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 466,105
<EPS-PRIMARY> 0
<EPS-DILUTED> 0.18
</TABLE>
