<PAGE> 1
Form 10-QSB
U.S. Securities and Exchange Commission
Washington, D.C. 20549
[X} QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
[ ] TRANSITION REPORT PURSUANT TO 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 0-29486
Merge Technologies Incorporated
(Exact name of small business issuer as specified in its charter.)
Wisconsin 39-1600938
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
1126 South 70th Street, Milwaukee, WI 53214-3151
(Address of principal executive offices)
414-977-4000
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes X No _
As of August 13, 1999, the issuer had 5,778,216 shares of Common Stock
outstanding
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INDEX
PAGE
PART I FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements....................................1
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................5
PART II OTHER INFORMATION
Item 4. Submission of matters to a Vote of Security Holders.................10
Item 6. Exhibits and Reports on Form 8-K....................................11
Signatures..........................................................12
Exhibit Index.......................................................13
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PART I
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
MERGE TECHNOLOGIES INCORPORATED AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
JUNE 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Current assets:
Cash and cash equivalents ....................................................... $ 3,329,648
Accounts receivable, net of allowance for doubtful accounts of $93,000 .......... 2,004,896
Inventory ....................................................................... 1,560,791
Prepaid expenses ................................................................ 368,489
Other current assets ............................................................ 92,609
------------
7,356,433
------------
Property and equipment:
Computer equipment .............................................................. 2,304,065
Office equipment ................................................................ 461,167
------------
2,765,232
Less accumulated depreciation ................................................... 1,360,831
------------
Net property and equipment ......................................................... 1,404,401
License agreement, net of accumulated amortization of $191,613 ..................... 116,085
Purchased and developed software, net of accumulated amortization of $3,537,225 .... 3,685,960
Other intangibles, net of accumulated amortization of $24,724 ...................... 34,663
Other .............................................................................. 114,682
------------
Total assets ....................................................................... $ 12,712,224
============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................................................ $ 840,214
Current portion of obligations under capital leases ............................. 7,174
Customer deposits ............................................................... 229,595
Accrued wages ................................................................... 417,227
Other accrued liabilities ....................................................... 84,451
------------
Total current liabilities .......................................................... 1,578,661
------------
Obligations under capital leases, excluding current portion ........................ 14,459
------------
Total liabilities ............................................................... 1,593,120
Shareholders' equity
Preferred stock, $0.01 par value: authorized 5,000,000, no shares issued ....... --
Common stock, $0.01 par value: authorized 30,000,000, 5,778,216 shares issued and
outstanding ..................................................................... 57,782
Additional paid-in capital ...................................................... 13,935,476
Accumulated deficit ............................................................. (2,976,524)
Accumulated other comprehensive income-cumulative translation adjustment ........ 102,370
------------
Total shareholders' equity ........................................................ 11,119,104
------------
Total liabilities and shareholders' equity ........................................ $ 12,712,224
============
</TABLE>
See accompanying notes to consolidated financial statements.
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MERGE TECHNOLOGIES INCORPORATED AND SUBSIDIARY
CONSOLIDATED STATMENTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1998 AND 1999 AND
SIX MONTHS ENDED JUNE 30, 1998 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------- ----------------------------
1998 1999 1998 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales ................................ $ 1,931,676 $ 2,815,938 $ 4,544,774 $ 6,235,353
Cost of goods sold:
Purchased components .................. 497,427 654,792 1,295,044 1,505,820
Amortization of purchased and developed
software .............................. 187,380 317,995 342,253 625,609
----------- ----------- ----------- -----------
Total cost of goods sold ................. 684,807 972,787 1,637,297 2,131,429
----------- ----------- ----------- -----------
Gross profit ............................. 1,246,869 1,843,151 2,940,477 4,103,924
----------- ----------- ----------- -----------
Operating costs and expenses:
Sales and marketing ................... 870,516 1,172,859 1,621,513 2,289,039
Product research and development ...... 518,753 474,647 963,242 856,041
General and administrative ............ 649,836 682,970 1,186,710 1,280,019
----------- ----------- ----------- -----------
Total operating costs and expenses ....... 2,039,105 2,330,477 3,771,465 4,425,099
----------- ----------- ----------- -----------
Operating income (loss) .................. (792,236) (487,326) (830,988) (321,175)
----------- ----------- ----------- -----------
Other income (expenses):
Interest expense ...................... (2,485) (3,291) (32,305) (3,294)
Interest income ....................... 86,348 33,912 (144,785) 67,685
Other, net ............................ 25,271 (47,223) (21,505) (127,342)
----------- ----------- ----------- -----------
Total other expense ...................... 109,134 (16,602) 90,975 (62,951)
----------- ----------- ----------- -----------
Loss before income taxes ................. (683,102) (503,928) (740,013) (387,926)
Income taxes ............................. -- -- -- 3,800
Net loss ................................. $ (683,102) $ (503,928) $ (740,013) $ (387,926)
=========== =========== =========== ===========
Basic and diluted net loss per share ..... $ (0.12) $ (0.09) $ (0.14) $ (0.07)
=========== =========== =========== ===========
Shares used to compute basic and diluted
net loss per share ..................... 5,778,216 5,778,216 5,444,076 5,778,216
=========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
2
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MERGE TECHNOLOGIES INCORPORATED AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1998 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
------------------------------
1998 1999
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss .................................................................... $ (740,013) $ (387,926)
Adjustments to reconcile net loss to net cash provided by (used in) operating
activities
Depreciation and amortization .............................................. 498,321 830,104
Provision for doubtful accounts receivable ................................. 12,832 (29,442)
Change in assets and liabilities:
Accounts receivable ...................................................... 462,917 (198,109)
Inventory ................................................................ (663,867) 390,368
Prepaid expenses ......................................................... (134,613) (108,390)
Accounts payable ......................................................... (634,479) 61,907
Accrued expenses ......................................................... 24,270 (30,155)
Customer deposits......................................................... 89,244 80,003
Other..................................................................... (52,050) 3,752
------------ ------------
Net cash provided by (used in) operating activities............................. (1,137,438) 612,112
------------ ------------
Cash flows from investing activities:
Purchases of property and equipment.......................................... (331,672) (266,424)
Development of software...................................................... (774,415) (702,022)
------------ ------------
Net cash used in investing activities........................................... (1,106,087) (968,446)
------------ ------------
Cash flows from financing activities:
Payments on loan agreement with Sirrom ...................................... (2,000,000) --
Issuance of common stock, net of expenses ................................... 11,221,996 --
Proceeds from exercise of stock options ..................................... 1,500 --
Payment for call of common stock ............................................ (806,592) --
Payment of warrant termination fee .......................................... (196,096) --
Principal payments under capital leases ..................................... (30,680) (9,069)
------------ ------------
Net cash provided by (used in) financing activities ............................ 8,190,128 (9,069)
------------ ------------
Effect of exchange rate changes on cash ........................................ (1,628) 35,172
Net increase(decrease) in cash and cash equivalents ............................ 5,944,975 (330,231)
Cash and cash equivalents, beginning of period ................................. 428,271 3,659,879
------------ ------------
Cash and cash equivalents, end of period .................................. $ 6,373,246 $ 3,329,648
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for income taxes ..................................................... $ -- $ 14,346
Cash paid for interest ......................................................... $ 55,001 $ 4,477
NON CASH FINANCING AND INVESTING ACTIVITIES:
Property and equipment acquired through capital leases ......................... $ 4,889 $ --
</TABLE>
See accompanying notes to consolidated financial statements
3
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MERGE TECHNOLOGIES INCORPORATED AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
THREE MONTHS ENDED JUNE 30, 1998 AND 1999 AND
SIX MONTHS ENDED JUNE 30, 1998 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------- ---------------------------
1998 1999 1998 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net loss ............................................ $ (683,102) $ (503,928) $ (740,013) $ (387,926)
Other comprehensive income (loss)
-cumulative translation adjustment................ (18,105) 19,022 1,648 80,397
----------- ----------- ----------- -----------
Comprehensive net loss .............................. $ (701,207) $ (484,906) $ (738,365) $ (307,529)
=========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
4
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MERGE TECHNOLOGIES INCORPORATED AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared pursuant to the rules and regulations for reporting on Form 10-QSB.
Accordingly, certain information and footnotes required by generally accepted
accounting principles for complete financial statement are not included herein.
The interim statements should be read in conjunction with the financial
statements and notes thereto included in the Company's latest Annual Report on
Form 10-KSB.
The accompanying unaudited consolidated financial statements of the Company
reflect all adjustments of a normal recurring nature which are, in the opinion
of management, necessary to present a fair statement of the financial position.
(2) Revenue Recognition
Revenue from product sales is recognized upon shipment. No significant
Company obligations exist with regard to delivery or customer acceptance
following shipment. Revenues from Software maintenance are deferred and
recognized straight-line over the contract support period, which is generally
one year.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Special Note on Forward-Looking Statements
Certain statements in this report that are not historical facts constitute
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as
amended (the Securities Act) and Section 21E of the Securities Exchange Act of
1934, as amended (the Exchange Act). Discussions containing such forward-looking
statements may be included herein in the material set forth under "Management's
Discussion and Analysis of Financial Condition and Results of Operations" as
well as within this report generally. In addition, when used in this report, the
words believes, intends, anticipates, expects and similar expressions are
intended to identify forward-looking statements. These statements are subject to
a number of risks and uncertainties, including, among others, the Company's lack
of consistent profitability, history of operating losses, fluctuations in
operating results, credit and payment risks associated with end-user sales,
involvement with rapidly developing technology in highly competitive markets,
dependence on major customers, expansion of its international sales effort,
broad discretion of management and dependence on key personnel, risks associated
with product liability and product defects, costs of complying with government
regulation, changes in external competitive market factors which might impact
trends in the Company's results of operation, unanticipated working capital and
other cash requirements, general changes in the industries in which the Company
competes, and various other competitive factors that may prevent the Company
from competing successfully in the marketplace. Actual results could differ
materially from those projected in the forward-looking statements. The Company
undertakes no obligation to publicly release the result of any revisions to
these forward-looking statements that may be made to reflect any future events
or circumstances.
OVERVIEW
Merge Technologies Incorporated is an international provider of clinical
information systems integration solutions for healthcare organizations. Current
offerings include software, hardware, and integration component products that
facilitate networking and information management of image-producing and
image-using devices in diagnostic radiology. A hospital or an imaging center can
use Merge Technologies' components to create a communications bridge between
incompatible devices, permit radiologists to use video images on electronic
workstations or film as a diagnostic medium and create a diagnostic-quality
electronic archive of imaging
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results. In addition, the Company's products can convert the data generated by
medical imaging devices into concise electronic reports with relevant images
that may be distributed in a health care organization's information network or
included in an electronic patient record ("EPR").
The Company classifies its sales by application type. Component
Technologies are products sold primarily through original equipment
manufacturer's ("OEMs") and value added resellers ("VARs"), which integrate
Merge's products into their own product offerings in order to increase the
functionality of their equipment or systems. Systems Solutions are complete
networked imaging applications using a combination of Merge components. Systems
Solutions are sold to end-users either directly or through distributors under
the Merge brand name. Component Technologies and Systems Solutions sales were as
follows for the three months and six months ended June 30, 1999 and 1998,
respectively.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------ ------------------------------
1999 1998 1999 1998
------------- ------------- ------------- -------------
(UNAUDITED AND IN (UNAUDITED AND IN
APPLICATION THOUSANDS) THOUSANDS)
-----------
<S> <C> <C> <C> <C>
Component Technologies............... $ 1,674 $ 1,273 $ 3,349 $ 2,431
Systems Solutions.................... 1,142 659 2,886 2,147
------------- ------------- ------------- -------------
$ 2,816 $ 1,932 $ 6,235 $ 4,578
============= ============= ============= =============
</TABLE>
RESULTS OF OPERATIONS
Three Months Ended June 30, 1999 Compared to Three Months Ended June 30, 1998
Net sales. Net sales increased by 46% to $2,816,000 in the three months
ended June 30, 1999 from $1,932,000 in the three months ended June 30, 1998. Net
sales of Systems Solutions accounted for the largest increase, rising by 73% to
$1,142,000 in the three months ended June 30, 1999 from $659,000 in the three
months ended June 30, 1998. Net sales of Component Technologies increased by 32%
to $1,674,000 in the three months ended June 30, 1999 from $1,273,000 in the
three months ended June 30, 1998. Systems Solutions sales accounted for 41% of
net sales in the three months ended June 30, 1999 and are expected to increase
as a percentage of net sales in the future.
Cost of goods sold. Cost of goods sold consists of purchased components and
amortization of purchased and developed software. The cost of purchased
components decreased as a percentage of net sales in the three months ended June
30, 1999 to approximately 23% compared to 26% in the three months ended June 30,
1998, due primarily to reduced costs of procured parts. Amortization of
purchased and developed software increased 70% to $318,000 in the three months
ended June 30, 1999 from $187,000 in the three months ended June 30, 1998, due
to commencement of amortization of certain software development projects as the
related products were released. Amortization of purchased and developed software
is expected to increase in dollar terms, but as a percentage of net sales,
amortization of purchased and developed software is expected to remain at or
near the current level for the rest of 1999.
Gross profit. Gross profit increased by 48% to $1,843,000 in the three
months ended June 30, 1999 from $1,247,000 in the three months ended June 30,
1998. As a percentage of net sales, gross profit was at 65% for both the three
months ended June 30, 1999 and 1998.
Sales and marketing. Sales and marketing expense increased by 35% to
$1,173,000 in the three months ended June 30, 1999 from $871,000 in the three
months ended June 30, 1998. The Company increased its sales/marketing staff to
21 persons as of June 30, 1999 from 18 persons as of June 30, 1998, and
increased service personnel to 13 persons as of June 30, 1999 from 12 persons as
of June 30, 1998. As a percentage of net sales, sales and marketing expense
decreased to 42% in the three months ended June 30, 1999 from 45% in the three
months ended June 30,
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1998. The Company expects to continue to make additions of sales/marketing and
service personnel in order to increase net sales. However, the Company expects
that over time sales and marketing expense will continue to decrease as a
percentage of net sales.
Product research and development. Research and development expense
decreased by 9% to $475,000 in the three months ended June 30, 1999 from
$519,000 in the three months ended June 30, 1998. The decrease in research and
development expense reflects the Company's decision to delay investments in
certain product development activities until net sales began to increase. The
Company expects to increase its research and development expenditures in the
third quarter of 1999.
General and administrative. General and administrative expense increased by
$33,000, or 5% to $683,000 in the three months ended June 30, 1999 from $650,000
in the three months ended June 30, 1998. Depreciation expense on capital
equipment increased $65,000 in the three months ended June 30, 1999 while total
other general administrative expense decreased $32,000. There were 13 general
and administrative employees as of both June 30, 1999 and June 30, 1998. As a
percentage of net sales, general and administrative expense decreased to 24% in
the months ended June 30, 1999 from 34% in the three months ended June 30, 1998.
Total other expense, net. Total other expense, net increased to $17,000 in
the three months ended June 30, 1999 from $(109,000) in the three months ended
June 30, 1998 due primarily to an increase of $84,000 in foreign currency
translation expense and a decrease in net interest income of $53,000. Foreign
currency translation in the three months ended June 30, 1999 reflects the
decrease in value of the Dutch guilder relative to the U.S. dollar.
Income taxes. The Company did not recognize an income tax benefit for the
three months ended June 30, 1999 or the three months ended June 30, 1998,
despite incurring losses for financial reporting purposes due to uncertainty as
to future realization of tax benefit.
Six Months Ended June 30, 1999 Compared to Six Months Ended June 30, 1998
Net sales. Net sales increased by 36% to $6,235,000 in the six months ended
June 30, 1999 from $4,578,000 in the six months ended June 30, 1998. Net sales
of Component Technologies accounted for the largest increase, rising by 38% to
$3,349,000 in the six months ended June 30, 1999 from $2,431,000 in the six
months ended June 30, 1998. Net sales of Systems Solutions increased by 34% to
$2,886,000 in the six months ended June 30, 1999 from $2,147,000 in the six
months ended June 30, 1998.
Cost of goods sold. Cost of goods sold consists of purchased components and
amortization of purchased and developed software. The cost of purchased
components decreased as a percentage of net sales in the six months ended June
30, 1999 to approximately 24% compared to 28% in the six months ended June 30,
1998, reflecting lower discounts to customers in certain markets and reduced
costs of procured parts. Amortization of purchased and developed software
increased 83% to $627,000 in the six months ended June 30, 1999 from $342,000 in
the six months ended June 30, 1998, due to commencement of amortization of
certain software development projects as the related products were released.
Amortization of purchased and developed software is expected to increase in
dollar terms, but as a percentage of net sales, amortization of purchased and
developed software is expected to remain at or near the current level for the
rest of 1999.
Gross profit. Gross profit increased by 40% to $4,103,000 in the six months
ended June 30, 1999 from $2,940,000 in the six months ended June 30, 1998. As a
percentage of net sales, gross profit increased to 66% at the six months ended
June 30, 1999 from 64% at the six months ended June 30, 1998.
Sales and marketing. Sales and marketing expense increased by 41% to
$2,289,000 in the six months ended June 30, 1999 from $1,622,000 in the six
months ended June 30, 1998. The Company increased its sales/marketing staff to
21 persons as of June 30, 1999 from 18 persons as of June 30, 1998, and
increased service personnel to 13 persons as of June 30, 1999 from 12 persons as
of June 30, 1998. As a percentage of net sales, sales and marketing expense
increased to 37% in the six months ended June 30, 1999 from 35% in the six
months ended June 30, 1998. The
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Company expects to continue to make additions of sales/marketing and service
personnel in order to increase net sales. However, the Company expects that over
time sales and marketing expense will decrease as a percentage of net sales.
Product research and development. Research and development expense
decreased by 11% to $856,000 in the six months ended June 30, 1999 from $963,000
in the six months ended June 30, 1998. The decrease in research and development
expense reflects the Company's decision to delay investments in certain product
development activities until net sales began to increase. The Company expects to
increase its research and development expenditures in the third quarter of 1999.
General and administrative. General and administrative expense increased by
$93,000, or 8% to $1,280,000 in the six months ended June 30, 1999 from
$1,187,000 in the six months ended June 30, 1998. Depreciation expense on
capital equipment increased $159,000 in the six months ended June 30, 1999 while
total other general administrative expense decreased $65,000. There were 13
general and administrative employees as of both June 30, 1999 and June 30, 1998.
As a percentage of net sales, general and administrative expense decreased to
21% in the months ended June 30, 1999 from 26% in the six months ended June 30,
1998.
Total other expense, net. Total other expense, net increased to $63,000 in
the six months ended June 30, 1999 from $(91,000) in the six months ended June
30, 1998 due primarily to an increase of $120,000 in foreign currency
translation expense and a decrease in net interest income of $48,000. Foreign
currency translation in the six months ended June 30, 1999 reflects the decrease
in value of the Dutch guilder relative to the U.S. dollar.
Income taxes. The Company recorded an income tax expense of $4,000 in the
six months ended June 30, 1999 to reflect an estimated state tax liability. The
Company did not recognize an income tax benefit in the six months ended June 30,
1998, despite incurring a loss for financial reporting purposes, due to
uncertainty as to future realization of tax benefit.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by (used in) operating activities was $612,000 in the six
months ended June 30, 1999 compared to $(1,137,000) in the six months ended June
30, 1998. In the six months ended June 30, 1999, the Company had a net loss of
$(388,000) and incurred depreciation and amortization expense of $830,000.
Significant changes in assets and liabilities included an increase in accounts
receivable of $198,000 due to sales growth and a decrease in inventory of
$390,000, which reflects management's efforts to reduce inventory levels to be
more in line with the current rate of sales.
Investing activities include net additions to capital equipment of $266,000
and $332,000, and additions to capitalized software of $702,000 and $774,000 in
the six months ended June 30, 1999 and the six months ended June 30, 1998,
respectively.
Cash provided by (used in) financing activities for the six months ended
June 30, 1999 and the six months ended June 30, 1998 was $(9,000) and
$8,190,000, respectively. Cash provided by financing activities in 1998 consists
primarily of proceeds from the issuance of common stock in the initial public
offering, the subsequent over-allotment exercise less expenses and payments for
redemption of common stock, the warrant termination fee and the payment for the
remaining principal on the Sirrom note.
The Company had cash and cash equivalents of $3,330,000 and working capital
of $5,778,000 at June 30, 1999.
In July, 1999 the Company entered into a letter of intent to acquire
Interpra Medical Imaging Network Ltd. of Toronto, subject to negotiation of
definitive agreements, satisfactory completion of due diligence review, and
customary closing conditions. At closing, the Interpra shareholders are expected
to receive 420,000 shares of Merge common stock along with an equal amount of
put options exercisable in five years at $4.50 per share.
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The Company intends to integrate Interpra's Java-based clinical workflow
and information management products into its line of image management and
networking solutions for healthcare organizations. As a result of the
transaction, Merge will assume operating expenses for the technical and
engineering staff in Toronto.
Internally generated cash flows are expected to be sufficient to support
operations and the potential acquisition of Interpra in 1999. The Company is
currently negotiating with a bank to arrange for a line of credit, however, it
is anticipated that if the loan is not finalized, no material adverse effect
will be realized by the Company in 1999. Thereafter, if cash generated from
operations is insufficient to satisfy the Company's projected requirements, or
if the Company elects to use funds for additional acquisitions or other matters,
the Company may be required to sell additional equity or debt securities or
obtain bank financing or other credit facilities.
YEAR 2000
In the year 2000, many existing computer programs that use only two digits,
rather than four, to identify a year in the date field could fail or create
erroneous results if not corrected. All Merge products have received a Year 2000
compliance evaluation. Merge will continue to test its current and future
products on an ongoing basis, applying its Year 2000 compliance criteria. The
Company will include into its procedure any modifications that are incorporated
into the compliance process during its implementation.
All Merge manufacturing equipment and critical facilities equipment have
been determined to be Year 2000 compliant. Key service providers have furnished
to the Company with Year 2000 compliance statements which indicate that they
either have Year 2000 compliant internal systems or that their systems are
expected to be Year 2000 compliant during 1999. The Company has also commenced a
program to verify that its materials suppliers have effective Year 2000
compliance processes. The vendor evaluations under this program are expected to
be completed during the third quarter of 1999.
The following product have been determined to meet the Company's Year 2000
compliance criteria: MergeCOM-3(TM), MergeARK(TM), and MergeDPM(TM),
MergeVPI(TM), MergeDPI(TM) and MergeAPS(TM). A software upgrade for Year 2000
compliance is available through the Merge service department for versions of
MergeVPI, MergeDPI and MergeAPS shipped prior to March, 1999.
The MergeMVP(TM) product line connects to legacy image equipment, and the
data output of a MergeMVP is largely dependent upon the data received from the
source equipment. As a result, when connected to a device such as a CT or MR
imaging device that is not Year 2000 compliant, the data output from an MVP may
not be Year 2000 compliant due to development issues that the Company cannot
control. Nevertheless, the majority of MergeMVP products in current production
meet the Company's Year 2000 compliance criteria. The Company offers upgrades at
no charge on MVPs shipped beginning in 1998 in which Merge software is not
compliant. The Company also will offer for sale to imaging device manufacturers
engineering services to correct Year 2000 problems inherent to their software
through programs installed on MergeMVPs. In the fourth quarter of 1998, the
first of such upgrades was sold to a customer. The Company anticipates
additional sales of Year 2000 upgrades but it expects that such sales will not
be significant in 1999.
The Company believes based on its successful completion of Year 2000
upgrades for its MergeMVP, MergeVPI, MergeDPI, and MergeAPS products that the
possibility of experiencing significant technical delays in further Year 2000
product upgrades is remote. However, if the Company does experience an
unanticipated delay, it may elect to refrain from offering for sale certain
products. Should Year 2000 development projects be canceled due to such
technical delays, product development engineers would be assigned to other
projects that the Company believes would generate comparable revenues. The
Company evaluates progress on Year 2000 development at regular intervals in
order to ensure that development costs do not exceed the original estimate.
Costs associated with Year 2000 upgrades in 1998 were approximately $20,000 and
they are expected not to exceed $80,000 in 1999. A Year 2000 upgrade is
considered to be no more complicated than any other upgrade for a Merge product,
so no significant change in the rate of calls for customer support is expected.
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The Company cannot quantify its risk for potential additional Year 2000
compliance costs at this time, but it anticipates that the effect of this
computer program flaw on the operations of the Company will not be
significant. However, the Company may be required to spend time and monetary
resources addressing any necessary computer program changes.
In the Company's assessment, the most reasonably likely worst case scenario
caused by Year 2000 issues relates to potential redirection of hospital
information technology budgets for solving Year 2000 problems unrelated to Merge
product offerings. Should expenses for an institution's Year 2000 remediation
exceed its budget allocation, funds that would have been invested in networking
and image management products (such as those sold by Merge) may be reallocated
to Year 2000 fixes. The Company may, in that circumstance, encounter delays in
anticipated orders. Should order delays occur, the Company would market its
products to other customers with funds available in their capital equipment
budgets. Management currently believes that order delays due to external Year
2000 problems will not have a material impact on the Company's future financial
performance. The Company is continuing to develop a contingency plan for
maintaining revenues in the event of order delays caused by Year 2000 issues.
PART II OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company conducted its Annual Meeting of Shareholders on May 25, 1999.
Matters voted on and the results of such votes are listed below.
<TABLE>
<CAPTION>
VOTES BROKER
VOTES FOR AGAINST OR ABSTAINED NON-VOTES RESULT
WITHHELD
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Elect Robert A. Barish, M.D. to serve as Director
until the next annual meeting of Shareholders 4,413,109 11,985 --- --- Elected
Elect Dennis Brown to serve as Director until the
next annual meeting of Shareholders 4,418,109 6,985 --- --- Elected
Elect Michael D. Dunham to serve as Director
until the next annual meeting of Shareholders 4,413,109 11,985 --- --- Elected
Elect Robert T. Geras to serve as Director until the
next annual meeting of Shareholders 4,418,109 6,985 --- --- Elected
Elect Douglas S. Harrington, M.D. to serve as Director
until the next annual meeting of Shareholders 4,413,109 11,985 --- --- Elected
Elect Kevin E. Moley to serve as Director until the
next annual meeting of Shareholders 4,418,109 6,985 --- --- Elected
Elect William C. Mortimore to serve as Director
until the next annual meeting of Shareholders 4,418,109 6,985 --- --- Elected
</TABLE>
10
<PAGE> 13
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
See Exhibit Index
(b) No Reports on Form 8-K were filed during the first fiscal quarter.
11
<PAGE> 14
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
Registrant caused this Report to be signed on its behalf by the undersigned,
thereunto duly authorized.
MERGE TECHNOLOGIES INCORPORATED
By: /s/ William C. Mortimore Date: August 13, 1999
---------------------------------------------
William C. Mortimore
President and Chief Executive Officer
By: /s/ Colleen M. Doan Date: August 13, 1999
---------------------------------------------
Colleen M. Doan
Chief Financial Officer, Treasurer and Secretary
(Principal Financial Officer and Principal
Accounting Officer)
12
<PAGE> 15
EXHIBIT INDEX
3.1 Articles of Incorporation of Registrant (1) and Articles of Amendment
as of June 16, 1998 (4)
3.2 Amended and Restated By-Laws of Registrant as of February 3, 1998 (2)
4.1 Stock Purchase Warrant issued June 30, 1997 by Registrant to Sirrom
Capital Corporation (1)
4.2 Form of Lock-Up Agreement (1)
4.3 Common Stock Certificate (1)
4.4 Representative's Warrant (2)
10.1 Employment Agreement dated September 1, 1997 between Registrant and
William C. Mortimore (1)
10.2 Merge/Sirrom Revised Modification Agreement dated as of October 30,
1997 (1) and Amendment to Sirrom/Merge Agreement dated as of May 29,
1998 (3)
10.3 OEM Purchase Agreement between Registrant and Philips Medical Systems
Nederland B.V. dated September 24, 1994 and First Amendment dated June
4, 1996 (1)
10.4 Distribution Agreement with Picker International, Inc. (1)
10.5 1996 Stock Option Plan for Employees of Registrant dated May 13,
1996 (1)
10.6 Office Lease for West Allis Center dated May 24, 1996 between
Registrant and Whitnall Summit Company, LLC, Supplemental Office Lease
dated July 3, 1997 (1) and Supplemental Office Space Lease dated
January 30, 1998 (2)
10.7 Alpha Capital Venture Partners Limited Agreement dated March 1,
1997 (1)
10.8 1998 Stock Option Plan For Directors (2)
21 Subsidiaries of Registrant (1)
27.1 Financial Data Schedule
- ----------
(1) Incorporated by reference to Registration Statement on Form SB-2 (No.
333-39111) effective January 29, 1998.
(2) Incorporated by reference to Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1997.
(3) Incorporated by reference to Registration Statement on Form SB-2 (No.
333-58973) effective July 13, 1998.
(4) Incorporated by reference to Quarterly Report on Form 10-QSB for the
three months ended March 31, 1999.
13
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 3,329,648
<SECURITIES> 0
<RECEIVABLES> 2,098,022
<ALLOWANCES> 93,126
<INVENTORY> 1,560,791
<CURRENT-ASSETS> 7,356,433
<PP&E> 2,765,232
<DEPRECIATION> 1,360,831
<TOTAL-ASSETS> 12,712,224
<CURRENT-LIABILITIES> 1,578,661
<BONDS> 0
0
0
<COMMON> 13,993,258
<OTHER-SE> 2,976,524
<TOTAL-LIABILITY-AND-EQUITY> 12,712,224
<SALES> 0
<TOTAL-REVENUES> 2,815,938
<CGS> 972,787
<TOTAL-COSTS> 2,330,477
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (3,294)
<INCOME-PRETAX> (503,928)
<INCOME-TAX> 3,800
<INCOME-CONTINUING> (503,928)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (503,928)
<EPS-BASIC> 0
<EPS-DILUTED> (0.09)
</TABLE>
