<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 September 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
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(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
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(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 November 15, 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 6. Exhibits and Reports on Form 8-K .......................... 11
Signatures ................................................ 12
Exhibit Index ............................................. 13
i
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PART I
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
MERGE TECHNOLOGIES INCORPORATED AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Current assets:
Cash and cash equivalents ............................................... $ 2,470,433
Accounts receivable, net of allowance for doubtful accounts of $106,103 . 2,574,688
Inventory ............................................................... 1,585,548
Prepaid expenses ........................................................ 294,755
Taxes receivable ........................................................ 371,488
Other current assets .................................................... 92,744
-----------
Total current assets ....................................................... 7,389,656
-----------
Property and equipment:
Computer equipment ...................................................... 2,563,223
Office equipment ........................................................ 396,498
-----------
2,959,721
Less accumulated depreciation ........................................... 1,524,892
-----------
Net property and equipment ................................................. 1,434,829
License agreement, net of accumulated amortization of $212,099 ............. 95,599
Purchased and developed software, net of accumulated amortization of
$3,785,171 ................................................................. 3,433,302
Goodwill, net of accumulated amortization of $26,209 ....................... 432,312
Other intangibles .......................................................... 237,500
Other fixed assets ......................................................... 239,656
===========
Total assets ............................................................... $13,262,854
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ........................................................ $ 1,238,774
Notes payable, short term ............................................... 37,653
Current portion of obligations under capital leases ..................... 13,697
Customer deposits ....................................................... 460,756
Accrued wages ........................................................... 407,405
Other accrued liabilities ............................................... 115,874
-----------
Total current liabilities .................................................. 2,274,159
Notes payable .............................................................. 136,803
Put options related to redeemable common stock ............................. 1,188,600
Obligations under capital leases, excluding current portion ................ 29,072
-----------
Total liabilities ....................................................... 3,628,634
Shareholders' equity
Preferred stock, $0.01 par value: authorized 5,000,000, one share issued ---
Common stock, $0.01 par value: authorized 30,000,000, issued and
outstanding 5,778,216 shares at September 30, 1999 ...................... 57,782
Additional paid-in capital .............................................. 14,368,496
Accumulated deficit ..................................................... (4,889,019
Other comprehensive income - cumulative translation adjustment .......... 96,961
-----------
Total shareholders' equity ................................................ 9,634,220
===========
Total liabilities and shareholders' equity ................................ $13,262,854
===========
</TABLE>
See accompanying notes to consolidated financial statements.
1
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MERGE TECHNOLOGIES INCORPORATED AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1999 AND
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------ -----------------------------
1998 1999 1998 1999
------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales ..................................... $ 2,852,541 $ 3,052,182 $ 7,430,315 $ 9,287,535
Cost of goods sold:
Purchased components ....................... 670,253 694,835 1,965,297 2,200,655
Amortization of purchased and developed
software ................................... 211,964 317,657 554,217 943,266
------------ -------------- ------------- ------------
Total cost of goods sold ...................... 882,217 1,012,492 2,519,514 3,143,921
------------ -------------- ------------- ------------
Gross profit .................................. 1,970,324 2,039,690 4,910,801 6,143,614
------------ -------------- ------------- ------------
Operating costs and expenses:
Sales and marketing ........................ 1,082,060 1,095,828 2,703,572 3,384,868
Product research and development ........... 477,575 581,304 1,440,817 1,437,344
General and administrative ................. 675,986 680,454 1,862,697 1,960,473
Acquired in-process technology and
related software write-off (See Note 3)... --- 1,641,063 --- 1,641,063
------------ -------------- ------------- ------------
Total operating costs and expenses ............ 2,235,621 3,998,649 6,007,086 8,423,748
------------ -------------- ------------- ------------
Operating (income) loss ....................... (265,297) (1,958,959) (1,096,285) (2,280,134)
------------ -------------- ------------- ------------
Other income (expenses):
Interest expense ........................... (3,905) (1,776) (36,210) (5,070)
Interest income ............................ 72,484 32,974 217,269 100,659
Other, net ................................. 45,931 15,623 24,426 (111,719)
------------ -------------- ------------- ------------
Total other expenses .......................... 114,510 46,821 205,485 (16,130)
------------ -------------- ------------- ------------
Income tax expense ............................ 11,973 357 11,973 4,157
------------ -------------- ------------- ------------
Net loss ...................................... $ (162,760) $ (1,912,495) $ (902,773) $ (2,300,421)
============ ============== ============= ============
Basic and diluted net loss per share .......... $ (0.03) $ (0.32) $ (0.16) $ (0.40)
============ ============== ============= ============
Shares used to compute basic and diluted
net loss per share ......................... 5,778,216 5,901,477 5,557,019 5,819,754
============ ============== ============= ============
</TABLE>
See accompanying notes to consolidated financial statements.
2
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MERGE TECHNOLOGIES INCORPORATED AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
1998 1999
---------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss .................................................................... $ (902,773) $(2,300,421)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities
Depreciation and amortization .............................................. 798,902 1,264,082
Provision for doubtful accounts receivable ................................. 57,784 14,302
Acquired in-process technology and related software write-off .............. --- 1,641,063
Change in assets and liabilities, net of acquisition:
Accounts receivable ...................................................... (432,210) (811,646)
Inventory ................................................................ (878,228) 365,612
Prepaid expenses ......................................................... (192,530) (195,434)
Accounts payable ......................................................... (790,043) 71,351
Accrued expenses ......................................................... 60,141 (48,557)
Customer deposits ........................................................ 95,231 311,163
Other .................................................................... (77,262) (122,804)
------------ ------------
Net cash provided by (used in) operating activities ............................ (2,260,988) 188,711
------------ ------------
Cash flows from investing activities:
Purchases of property and equipment ......................................... (637,009) (392,499)
Development of software ..................................................... (1,132,452) (989,208)
------------ ------------
Net cash used in investing activities .......................................... (1,769,461) (1,381,707)
------------ ------------
Cash flows from financing activities:
Payments on loan agreement with Sirrom ...................................... (2,000,000) ---
Issuance of common stock, net of expenses ................................... 11,215,408 ---
Proceeds from exercise of stock options ..................................... 1,715 ---
Payment for call of common stock ............................................ (806,592) ---
Payment of warrant termination fee .......................................... (196,096) ---
Principal payments under capital leases ..................................... (45,237) (12,440)
------------ ------------
Net cash provided by (used in) financing activities ............................ 8,169,198 (12,440)
------------ ------------
Effect of exchange rate changes on cash ........................................ (22,256) 15,990
Net increase (decrease) in cash and cash equivalents ........................... 4,116,493 (1,189,446)
Cash and cash equivalents, beginning of period ................................. 428,271 3,659,879
------------ ------------
Cash and cash equivalents, end of period ....................................... $ 4,544,764 $ 2,470,433
============= ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for income taxes ................................................ $ --- $ 14,346
Cash paid for interest .................................................... $ 58,000 $ 8,740
NON CASH FINANCING AND INVESTING ACTIVITIES:
Property and equipment acquired through capital leases .................... $ 4,889 $ 24,508
Details of acquisition:
Liabilities assumed................................................... $ 422,085
Value of common stock and put options related to
acquisition of Interpra .............................................. $ 1,621,620
</TABLE>
See accompanying notes to consolidated financial statements.
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MERGE TECHNOLOGIES INCORPORATED AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1999 AND
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1999
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- ---------------------------
1998 1999 1998 1999
------------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net loss ............................................ $ (162,760) $(1,912,495) $ (902,773) $(2,300,421)
Other comprehensive income (loss) -
cumulative translation adjustment ................ (22,555) (5,409) (20,908) 74,988
============= =========== =========== ===========
Comprehensive net loss .............................. $ (185,315) $(1,917,904) $ (923,681) $(2,225,433)
============= =========== =========== ===========
</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.
(3) Business Combination
On September 3, 1999, Merge Technologies Holdings Co., a wholly-owned
subsidiary of the Company formed to effect the acquisition of Interpra Medical
Imaging Network Ltd. (Interpra), acquired all the outstanding voting shares of
Interpra. The purchase price consisted of 420,000 common equivalent shares and
420,000 put options exercisable in five years at $4.50 per share. In addition
$176,000 in acquisition expenses were incurred. The acquisition was accounted
for as a purchase.
The consolidated statements of operations include the results of
operations of Interpra from the date of acquisition. The following unaudited
pro forma summary presents the consolidated results of operations for the three
and nine months ended September 30, 1999 and 1998 assuming the Interpra
acquisition occurred as of January 1 of each year. These amounts are based upon
certain assumptions and estimates and do not necessarily represent results that
would have occurred if the acquisition had taken place on the basis assumed
above, nor are they indicative of the results of future combined operations.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- ----------------------
(IN THOUSANDS EXCEPT FOR PER SHARE DATA)
--------------------------------------------
1998 1999 1998 1999
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net sales..................... $2,856 $ 3,097 $ 7,444 $ 9,968
Net income.................... (273) (2,069) (1,343) (2,928)
Basic earnings per share...... (0.05) (0.35) (0.24) (0.50)
</TABLE>
(4) Acquired in-process technology and related software write-off
In the acquisition of Interpra Medical Imaging Network, Ltd., the Company
recorded a one-time charge of $1,200,000 for the in-process technology of
Interpra that had not reached technological feasibility as of September 3, 1999,
the date Merge acquired 100% of its voting stock, and for the write-down of
$400,000 of software capitalized by Merge that was replaced by technologies
acquired in the merger.
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.
5
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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 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").
On September 3, 1999 the Company acquired Interpra Medical Imaging Network,
Ltd. ("Interpra") of Toronto. As a result of this transaction, the Company is
integrating into its product offerings the acquired technologies for
internet-based report creation, including voice-to-text and java-based
information integration and management tools for not only radiology, but the
rest of clinical healthcare as well.
The Company classifies its sales by application type. OEM/VAR Component
Technologies are products sold primarily through original equipment
manufacturers and value added resellers, 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. OEM/VAR Component Technologies and Systems Solutions sales were as follows
for the three months and nine months ended September 30, 1999 and 1998,
respectively.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------ -------------------------------
1999 1998 1999 1998
------------- ------------- -------------- -------------
(UNAUDITED AND IN (UNAUDITED AND IN
APPLICATION THOUSANDS) THOUSANDS)
<S> <C> <C> <C> <C>
OEM/VAR Component Technologies......... $ 1,885 $ 1,505 $ 5,234 $ 3,935
Systems Solutions...................... 1,167 1,348 4,054 3,495
------------- ------------- -------------- -------------
$ 3,052 $ 2,853 $ 9,288 $ 7,430
============= ============= ============== =============
</TABLE>
RESULTS OF OPERATIONS
Three Months Ended September 30, 1999 Compared to Three Months Ended September
30, 1998
Net sales. Net sales increased by 7% to $3,052,000 in the three months
ended September 30, 1999 from $2,853,000 in the three months ended September 30,
1998. Net sales of OEM/VAR Component Technologies increased 25% to $1,885,000 in
the three months ended September 30, 1999 from $1,505,000 in the three months
ended September 30, 1998. The increase in this area reflects higher sales in
each of the software, connectivity box and interface boards product lines. Net
sales of Systems Solutions decreased by 13% to $1,167,000 in the three months
ended September 30, 1999 from $1,348,000 in the three months ended September 30,
1998. Net sales of Systems Solutions accounted for 38% of net sales in the three
months ended September 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 as a percentage of net sales was 23% in the three months ended
September 30, 1999 and in the three months ended September 30, 1998.
Amortization of purchased and developed software increased 50% to $318,000 in
the three months ended September 30, 1999 from $212,000 in the three months
ended September 30, 1998, due to commencement of amortization of certain
software development
6
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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 during the next several quarters.
Gross profit. Gross profit increased by 4% to $2,040,000 in the three
months ended September 30, 1999 from $1,970,000 in the three months ended
September 30, 1998. As a percentage of net sales, gross profit was at 67% for
the three months ended September 30, 1999 compared to 69% for the three months
ended September 30, 1998.
Sales and marketing. Sales and marketing expense increased by $14,000 to
$1,096,000 in the three months ended September 30, 1999 from $1,082,000 in the
three months ended September 30, 1998. As a percentage of net sales, sales and
marketing expense decreased to 36% in the three months ended September 30, 1999
from 38% in the three months ended September 30, 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
increased by 22% to $581,000 in the three months ended September 30, 1999 from
$478,000 in the three months ended September 30, 1998. The increase in research
and development expense is due primarily to the cost of seven additional
software engineers engaged in product development in Toronto. This workforce was
acquired in the merger with Interpra.
General and administrative. General and administrative expense increased by
$4,000 to $680,000 in the three months ended September 30, 1999 from $676,000 in
the three months ended September 30, 1998. As a percentage of net sales, general
and administrative expense decreased to 22% in the three months ended September
30, 1999 from 24% in the three months ended September 30, 1998.
Acquired in-process technology and related software write-off. In the
acquisition of Interpra, the Company recorded a one-time charge of $1,200,000
for the in-process technology of Interpra that had not reached technological
feasibility as of September 3, 1999, the date Merge acquired 100% of its voting
stock and for the write-down of $441,000 of software capitalized by Merge that
was replaced by technologies acquired in the merger.
Total other expense, net. Total other expense, net decreased to $47,000 in
the three months ended September 30, 1999 from $115,000 in the three months
ended September 30, 1998 due primarily to a decrease of $30,000 in foreign
currency translation benefit and a decrease in net interest income of $40,000.
Foreign currency translation in the three months ended September 30, 1999
reflects the changes in value of the Dutch guilder and the Canadian dollar
relative to the U.S. dollar.
Income taxes. The Company did not recognize an income tax benefit for the
three months ended September 30, 1999 or the three months ended September 30,
1998, despite incurring losses for financial reporting purposes due to
uncertainty as to future realization of tax benefit. The Company recorded an
income tax expense of $400 in the three months ended September 30, 1999 and
$12,000 in the three months ended September 30, 1998 to reflect an alternative
minimum tax liability.
Nine Months Ended September 30, 1999 Compared to Nine Months Ended September 30,
1998
Net sales. Net sales increased by 25% to $9,288,000 in the nine months
ended September 30, 1999 from $7,430,000 in the nine months ended September 30,
1998. Net sales of Component Technologies accounted for the largest increase,
rising by 33% to $5,234,000 in the nine months ended September 30, 1999 from
$3,935,000 in the nine months ended September 30, 1998. Net sales of Systems
Solutions increased by 16% to $4,054,000 in the nine months ended September 30,
1999 from $3,495,000 in the nine months ended September 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 nine months ended
September 30, 1999 to approximately 24% compared to 26% in the nine months ended
September 30, 1998,
7
<PAGE> 10
reflecting lower discounts to customers in certain markets and reduced costs of
procured parts. Amortization of purchased and developed software increased 70%
to $943,000 in the nine months ended September 30, 1999 from $554,000 in the
nine months ended September 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 during the
next several quarters.
Gross profit. Gross profit increased by 25% to $6,144,000 in the nine
months ended September 30, 1999 from $4,911,000 in the nine months ended
September 30, 1998. As a percentage of net sales, gross profit was 66% for both
the nine months ended September 30, 1999 and the nine months ended September 30,
1998.
Sales and marketing. Sales and marketing expense increased by 25% to
$3,385,000 in the nine months ended September 30, 1999 from $2,704,000 in the
nine months ended September 30, 1998. As a percentage of net sales, sales and
marketing expense was 36% in both the nine months ended September 30, 1999 and
the nine months ended September 30, 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 decrease as a percentage of net sales.
Product research and development. Research and development expense
decreased $4,000 to $1,437,000 in the nine months ended September 30, 1999 from
$1,441,000 in the nine months ended September 30, 1998. The decrease reflects
the Company's decision to delay investments in certain product development
activities until net sales increase. As a percentage of net sales, product
research and development expense was 15% in the nine months ended September 30,
1999 compared to 19% in the nine months ended September 30, 1998. The Company
expects research and development expenditures to increase due to the acquisition
of Interpra. However, as net sales increase, product research and development
expense as a percentage of net sales is expected to remain at or near the
current level.
General and administrative. General and administrative expense increased by
$98,000, or 5% to $1,960,000 in the nine months ended September 30, 1999 from
$1,863,000 in the nine months ended September 30, 1998. Depreciation expense on
capital equipment increased $166,000 in the nine months ended September 30, 1999
while total other general administrative expense decreased $68,000. As a
percentage of net sales, general and administrative expense decreased to 21% in
the months ended September 30, 1999 from 25% in the nine months ended September
30, 1998.
Acquired in-process technology and related software write-off. In the
acquisition of Interpra, the Company recorded a one-time charge of $1,200,000
for the in-process technology of Interpra that had not reached technological
feasibility as of September 3, 1999, the date Merge acquired 100% of its voting
stock and the write-down of $441,000 of software capitalized by Merge that was
replaced by technologies acquired in the merger.
Total other expense, net. Total other expense, net increased to $16,000 in
the nine months ended September 30, 1999 from a benefit of $205,000 in the nine
months ended September 30, 1998 due primarily to an increase of $136,000 in
foreign currency translation expense and a decrease in net interest income of
$117,000. Foreign currency translation in the nine months ended September 30,
1999 reflects the changes in value of the Dutch guilder and the Canadian dollar
relative to the U.S. dollar.
Income taxes. The Company recorded an income tax expense of $4,000 in the
nine months ended September 30, 1999 to reflect an estimated state tax
liability. The Company did not recognize an income tax benefit in the nine
months ended September 30, 1999 or the nine months ended September 30, 1998,
despite incurring losses 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 $189,000 in the nine
months ended September 30, 1999 compared to $(2,261,000) in the nine months
ended September 30, 1998. In the nine months ended September 30, 1999, the
8
<PAGE> 11
Company had a net loss of $2,300,000, of which $1,264,000 was for non-cash
depreciation and amortization and $1,641,000 related to a non-cash charge for
acquired in-process technology and a software write-off. Significant changes in
assets and liabilities in the nine months ended September 30, 1999 included an
increase in accounts receivable of $812,000 due to sales growth and a decrease
in inventory of $366,000, which reflects management's efforts to reduce
inventory levels to be more in line with the current rate of sales. Inventory
levels are not expected to decrease further in the fourth quarter due to the
Company's Y2K assurance plan, which designates 30-day safety stock levels to be
in place at December 31, 1999.
Investing activities include net additions to capital equipment of $392,000
and $637,000, and net additions to capitalized software of $989,000 and
$1,132,000 in the nine months ended September 30, 1999 and the nine months ended
September 30, 1998, respectively.
Cash provided by (used in) financing activities for the nine months ended
September 30, 1999 and the nine months ended September 30, 1998 was $(12,000)
and $8,169,000, respectively. Financing activities in 1999 were for payments
under capital leases. 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, and the warrant termination fee and the payment for
the remaining principal on the Sirrom note.
The Company had cash and cash equivalents of $2,470,000 and working capital
of $5,116,000 at September 30, 1999.
Internally generated cash flows are expected to be sufficient to support
operations during the next 12 months. 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 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. Based on the responses received, the Company has assessed the risk of
business disruption due to material availability from suppliers to be remote.
In order to further ensure that the Company is able to provide products
and services to its customers in January, 2000, it has established a Y2K
contingency plan. The plan designates a 30-day safety stock at December 31,
1999, identifies transportation carriers for service beginning at 12:01 a.m. on
January 1, 2000 and assigns Company representatives to be on call 24 hours per
day through January 31, 2000, specifically to provide Year 2000 assistance to
customers.
9
<PAGE> 12
The following products have been determined to meet the Company's Year
2000 compliance criteria: MergeCOM-3(TM), MergeARK(TM), 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 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 has sold additional
Year 2000 upgrades in the three months ended September 30, 1999 and anticipates
additional related sales in the fourth quarter of 1999, but it expects that such
sales will not be significant.
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 $150,000 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.
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 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
See Exhibit Index
(b) Form 8-K
10
<PAGE> 13
On September 21, 1999, the Company filed a Form 8-K to report the
acquisition of Interpra Medical Imaging Network, Ltd. Amendment No. 1 to
the Form 8-K was also filed on September 21, 1999 to incorporate as
exhibits the Company's press release announcing the acquisition and a copy
of the Purchase Agreement.
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: November 15, 1999
----------------------------
William C. Mortimore
President and Chief Executive Officer
By: /s/ Colleen M. Doan Date: November 15, 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
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