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FORM 10-KSB
[As last amended in Release No. 33-7505, effective January 1, 1999, 63 F.R.9632]
U.S. Securities and Exchange Commission
Washington, DC 20549
FORM 10-KSB
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31,1999
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ..................... to ........................
Commission file number ........................................................
MERGE TECHNOLOGIES INCORPORATED
(Name of small business issuer in its charter)
WISCONSIN 39-1600938
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State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1126 South 70th Street, Milwaukee 53214-3151
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number: 414-977-4000
Securities registered under Section 12(b) of the Exchange Act:
Title of each class: Common
Name of each exchange on which registered: NASDAQ Small Cap
Securities registered under Section 12(g) of the Exchange Act: (Title of class)
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 __
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B is not contained in this form, and no disclosure will
be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
State issuer's revenues for its most recent fiscal year. $13,300,220
State the aggregate market value of the voting and non-voting common
equity held by non-affiliates computed by reference to the price at which the
common equity was sold, or the average bid and asked price of such common
equity, as of a specified date within the past 60 days. (See definition of
affiliate in Rule 12b-2 of the Exchange Act.)
-- The aggregate market value for the Registrant's stock held by
non-affiliates of the Registrant based upon the closing sale price of the Common
Stock on March 28, 2000 as reported on the NASDAQ Small Cap Market System, was
approximately $17,242,451. Shares of Common Stock held by each officer and
director and by each person who owns 5% or more of the outstanding Common Stock
have been excluded in that such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily a conclusive determination
for other purposes.
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
State the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date: 5,781,389.
DOCUMENTS INCORPORATED BY REFERENCE
If the following documents are incorporated by reference, briefly
describe them and identify the part of the Form 10-KSB (e.g., Part I, Part II,
etc.) into which the document is incorporated: (1) any annual report to security
holders, (2) any proxy or information statement; and (3) any prospectus filed
pursuant to Rule 424(b) or (c) of the Securities Act of 1933 ("Securities Act").
The list documents should be clearly described for identification purposes
(e.g., annual report to security holders for fiscal year ended December 24,
1990). The information required by Part III is incorporated by reference to the
Company's Proxy statement for the 2000 Annual Meeting of Stockholders.
Transitional Small Business Disclosure Format (check one):
Yes No X
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INDEX
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PART I
Item 1. Description of Business............................................ 1
Item 2. Description of Properties..........................................13
Item 3. Legal Proceedings..................................................13
Item 4. Submission of Matters to a Vote of Security Holders................13
PART II
Item 5. Market for Common Equity and Related Stockholder Matters...........13
Item 6. Management's Discussion and Analysis of Financial Condition
and Results of Operations .........................................14
Item 7. Financial Statements...............................................18
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure...........................................34
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act..................34
Item 10. Executive Compensation.............................................34
Item 11. Security Ownership of Certain Beneficial Owners and Management.....34
Item 12. Certain Relationships and Related Transactions.....................34
Item 13. Exhibits and Reports on Form 8-K...................................34
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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 in "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, our 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, acquisition
and development of new technologies, dependence on major customers, expansion of
our 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 our results of operation,
unanticipated working capital and other cash requirements, general changes in
the industries in which we compete, and various other competitive factors that
may prevent us from competing successfully in the marketplace. Actual results
could differ materially from those projected in the forward-looking statements.
We undertake 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.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
Overview
Our business is eHealth. Founded in 1987, Merge Technologies has been
developing, marketing and supporting Internet-based eHealth connectivity and
information management solutions for over a decade. Our products enable
communication and automate transactions that occur within and between healthcare
organizations, healthcare professionals and their patients. A healthcare
organization uses our products to provide a communications bridge to
incompatible "legacy" medical devices and information systems and to create a
standards-based electronic repository for medical data. For healthcare
professionals, we offer eHealth information appliances that plug into our
connectivity and management products. Using these information appliances,
healthcare professionals can reference pertinent information and convert a
patient's medical data into concise multi-media information that may be included
in an electronic patient record, distributed within a health care organization's
information network, and communicated externally to referring physicians and
their patients via the Internet. We also provide services to assist customers in
the planning, implementation and on-going support of their eHealth connectivity
and information management solutions.
The need for such solutions in healthcare is now well understood.
Healthcare is one of the most complex industries, and transaction intensive.
There are an estimated 30 billion clinical, financial and administrative
transactions occurring annually, including orders, clinical results, claims
processing and supply chain management ("eHealth 2000", Wit Capital, January 31,
2000). Only a small fraction of these transactions are currently processed
electronically due to lack of standards, the fragmentation of healthcare and
industry inertia. The promise of eHealth is in the use of Internet open
architecture to automate these transactions, potentially saving hundreds of
billions of dollars in healthcare costs believed to be wasted annually on
excessive administrative costs, redundant tests or unnecessary care.
While most healthcare information technology providers have
historically concentrated on financial and administrative functions,
representing the easier to automate 20% of healthcare transactions, we have
focused on clinical information transactions, representing the more challenging
and substantially larger 80% of the transaction market. We have initially
specialized and succeeded in the diagnostic imaging disciplines such as
radiology, mammography, endoscopy, oncology and pathology, with the majority of
our revenues to date coming from radiology. Our products make it easy for
healthcare professionals to manage medical images in electronic form. These are
the most data intensive parts of healthcare and also have the largest installed
base of expensive legacy medical equipment. We have become the leading brand of
internetworking technologies for medical imaging connectivity using the DICOM
image communication standard. With our 1999 acquisition of Interpra Medical
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Network Ltd. ("Interpra"), we obtained proprietary "middleware" technologies
based upon Java, XML, SQL, DICOM and the HL-7 healthcare IT communication
standard. We have integrated these new technologies into our medical information
management and appliance products and will be using them to extend our reach
beyond diagnostic imaging.
We sell our solutions directly to end users and through dealers to
healthcare organizations. We also sell through strategic partners who
incorporate our technologies into their own product offerings. We have a
substantial installed base of connectivity and image management solutions,
numbering over 325 healthcare facilities in the United States and Europe,
representing a penetration of 7% of US hospitals. With our strategic partners,
including nearly all of the diagnostic imaging equipment vendors of the world,
we have products at thousands of other locations. Our products already automate
at least 20 million diagnostic imaging transactions annually.
The demand for eHealth clinical connectivity and applications solutions
is expected to expand rapidly, but there are substantial challenges in meeting
that demand due to long-standing regulatory, structural and behavioral issues
within healthcare. We believe that companies combining innovative technologies
and business models with superior domain knowledge will be the leaders in
eHealth connectivity and applications. To that end, we have developed and
deployed innovative technologies using the Internet. We are an acknowledged
world leader in the field of medical data communication standards and their use
in automating healthcare transactions. We have created innovative business
models and have organized our company to scale rapidly to meet the emerging
eHealth connectivity and applications opportunities.
INDUSTRY BACKGROUND
Overview of Healthcare Today
According to the US Healthcare Finance Administration, US healthcare
expenditures reached $1.1 trillion in 1998, representing 14% of the economy. An
estimated $500 billion of these expenditures were wasted in inefficiencies and
avoidable costs. A recent study by the US Institute of Medicine concluded that
over 98,000 people die every year due to medical errors, lack of medical
practice standards or misuse of medical devices or medications. Similarly severe
financial and operational problems exist in the other healthcare systems
throughout the world.
There are four main participants in healthcare:
- PATIENTS: the ultimate consumers of healthcare services;
- PROVIDERS: healthcare service providers such as hospitals, imaging
centers, rehabilitation centers and nursing homes, and healthcare
professionals such as doctors, nurses, technologists and referring
physicians;
- SUPPLIERS: manufacturers and distributors of drugs, healthcare supplies
and medical devices, and providers of services such as laboratories
and others; and
- PAYERS: Government agencies and programs, insurers, health plans,
employers, individuals, managed care organizations and other
enterprises that pay the bills for healthcare.
The physician is the ultimate decision-maker in healthcare. However,
the information the physician relies upon to make healthcare decisions is
usually contained in a series of paper or film records that are often
unorganized and cannot be sorted or retrieved easily or effectively. These
medical records contain patient history, encounters, medication orders,
procedures, referrals and vital statistics. All transactions, from the order of
laboratory and diagnostic imaging tests and results, medication prescriptions to
invoice generation, payment requests, payer documentation compliance and
clinical research data compilation are recorded in the patient's medical
records. Recent studies have demonstrated that these records are unavailable
when needed up to 30% of the time and that the information within them is
frequently incomplete or inaccurate.
In the US alone, there are an estimated 30 billion clinical, financial
and administrative transactions occurring annually, including orders, clinical
results, patient tracking, claim processing and supply chain management
("eHealth 2000", Wit Capital, January 31, 2000). Only a small fraction of these
transactions are currently processed electronically due to lack of standards,
the fragmentation of healthcare and industry inertia. Healthcare automation to
date has largely
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focused on financial and administrative transactions, which represent only about
20% or 6 billion of the total transactions. Due to the fragmented and localized
nature of healthcare and the myriad of legacy healthcare information systems
that do not operate on the Internet, even these transactions cannot be easily
combined to provide a complete and accessible electronic financial and
administrative record for a patient. Prior to eHealth connectivity and
applications, clinical transactions, representing about 80% or 24 billion of the
total, and the key to reduction of inefficiencies, avoidable costs and medical
errors have been largely locked in the world of paper and film.
The Internet And eHealth
The Internet's open architecture and accessibility make it an
increasingly important means of dynamic information exchange for
business-to-business and business-to-consumer interaction. Use of the Internet
in many industries has already rapidly expanded from simple information
publishing, messaging and data gathering, to business transaction automation and
confidential communications.
However, the Internet alone cannot change the regulatory, structural or
behavioral issues that make healthcare the most complicated industry in the
world. Governmental payers are attempting to hold the line on expenditures while
populations age. The impact of government regulation is uncertain. Healthcare
organizations are currently focused on administrative and facility integration.
Physician behavior is difficult to change.
The eHealth industry has emerged in response to these substantial
challenges to healthcare improvement and cost efficiencies. Using the Internet
for eHealth has the potential of dramatically reducing these inefficiencies as
it has in other industries. The use of technologies, such as Java, XML, SQL and
open medical standards such as DICOM for medical imaging and HL-7 for healthcare
IT addresses many of the issues of legacy access, implementation cost and
compatibility.
There is industry consensus that there are "four C's" of eHealth. These
segments, in order of increasing complexity and increasingly powerful
transformational and economic benefit for healthcare are Content, Commerce,
Connectivity and Computer Applications.
- CONTENT: Internet web sites that publish general-purpose healthcare
information to consumers or healthcare professionals with Internet
access. The only patient-specific information that is available on
these sites is that which the patient remotely enters themselves.
Examples of companies in this area are Dr. Koop, Medscape, Inc.,
Mayohealth, and Heatheon/WebMD.
- COMMERCE: Web sites that allow consumers or healthcare providers to
save money by purchasing medical supplies, durable medical equipment
or drugs via the Internet. Examples of companies in this area are
medibuy.com, Neoforma, and PlanetRx.
- CONNECTIVITY: A linking which allows medical information to be
exchanged, either via open or closed networks. In open networks,
companies such as DeJarnette Research Systems, Inc., Mitra Imaging
Inc. and Merge interface legacy medical devices and healthcare systems
for local or remote processing. In a closed network, multiple parties
exchange information via an Internet intermediary that is a form of
electronic data interchange, or EDI. Examples of closed network
companies include CareInsite, Inc., ENVOY Corporation, Healtheon and
NDC in the EDI arena.
- COMPUTER APPLICATIONS: Internet computer applications for healthcare
that may or may not directly compete with traditional healthcare IT
applications. The integrating power of Internet computer applications
holds the potential of creating a truly complete electronic patient
record that is needed to realize the full potential of eHealth.
Example companies include: AllScripts Inc., Confer Software, EMed
Technologies, Healthvision, Healtheon, MedicaLogic and the existing
healthcare IT players who have developed Internet strategies, such as
Eclipsys, IDX and Shared Medical Systems. We compete in this area with
our Internet clinical data repository and medical information
applications and appliances.
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The Merge Solution
Our products and services provide solutions for the Connectivity and
Computer Applications segments of eHealth. We sell these solutions for a
one-time fee, a subscription charge, or on a per-transaction fee basis.
eHEALTH CONNECTIVITY PRODUCTS
Customers benefit from our eHealth Connectivity products in a variety
of ways. Internetworking of multiple medical devices and information systems
electronically using our products rather than paper or film saves time, reduces
errors, eliminates redundancy, reduces capital equipment expenditures and
provides wider access to information. Creating Internet-enabled permanent
archives of diagnostic quality medical data and information using our products
provides the foundation for the electronic patient record that is needed to
realize the full potential of eHealth.
Connecting legacy medical devices and information systems represents
the primary barrier to creating a total eHealth solution. We have successfully
negotiated agreements under which Original Equipment Manufacturers ("OEMs") of
medical equipment have supplied the Company with the technical specifications
and software algorithms necessary for communicating with these legacy products
and we have built these into our products. These OEMs have also agreed to notify
the Company of any updates to their technical specifications and software. We
currently have signed agreements with over 20 OEMs including GE, Philips,
Marconi (formerly known as Picker), Siemens and Toshiba, representing more than
90% of the diagnostic imaging device market. We consider this access to the
proprietary communications protocols and the data formatting technologies of
these OEMs, while not exclusive, to be a substantial competitive advantage for
our business.
Our eHealth connectivity products include the following:
- - MergeBox(TM): We pioneered the concept of a "black box" for connecting
legacy medical equipment to an open standards network. Our MergeBox
products convert the output of legacy medical image-producing devices such
as Computed Tomography ("CT") scanners and Magnetic Resonance ("MR")
scanners into the industry-standard Internet communications protocol known
as DICOM (Digital Imaging Communications for Medicine). The MergeBox
products also connect various legacy diagnostic image printers and
workstations and other image-using devices to a DICOM network. The
MergeBox is built with a modular, expandable architecture, so that our
customers and we can add features. For example, our ExamWorks(TM) medical
information appliance (see "ExamWorks" below) is built on the MergeBox
architecture, so customers can upgrade the thousands of MergeBoxes in the
field into ExamWorks.
- - MergePort(TM): Our MergePort(TM) "black box" product provides a
communication gateway to legacy healthcare information systems based upon
the HL-7 healthcare IT standard, or other manufacturer-proprietary
protocols.
- - MergeCOM(TM): MergeCOM communications software is used worldwide by most
of the medical imaging device manufacturers to build DICOM into new
scanners and image-using devices.
- - MergeARK(TM): The MergeARK DICOM image archive plugs into a DICOM network.
Diagnostic quality images are stored permanently for later retrieval.
- - MergeWeb(TM): MergeWeb(TM) is our new eHealth "middleware" product based
upon Java, HTML, XML and SQL technologies. MergeWeb forms a
standards-based distributed medical information repository that "bridges"
our eHealth connectivity products to our eHealth computer applications and
information appliance products. We have already filed one United States
patent application for our MergeWeb technology and are contemplating other
patent applications. See "Intellectual Property."
We acquired proprietary Java-based rapid development technologies in
our acquisition of Interpra in 1999. We intend to leverage these technologies
and our proprietary connectivity tools to rapidly extend our eHealth
Connectivity reach beyond imaging.
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eHEALTH COMPUTER APPLICATION AND INFORMATION APPLIANCE PRODUCTS
Customers benefit from our eHealth Computer Application and Information
Appliance products in a variety of ways. Building upon the integrated data and
information infrastructure provided by our eHealth Connectivity products,
healthcare professionals and administrative staff can access pertinent patient
information, create electronic reports with fully integrated medical device data
and automate clinical workflow. We have designed these products based upon our
years of industry experience with the majority of the world's imaging equipment
vendors and working directly with hundreds of healthcare organizations.
These products include the following:
- - ExamWorks(TM): Accurate identification of a particular patient's
demographics at the point of care is paramount for error-free electronic
information management. ExamWorks is currently available either as a
stand-alone medical Internet information appliance or as an upgrade to an
existing MergeBox. ExamWorks allows the technologist operating a medical
device to interact with the hospital information system through the
MergePort or MergeWeb connectivity products to insure accuracy in the
scheduling, registration and data capture of a particular patient's
diagnostic study. Future upgrades to ExamWorks will provide advanced
information access and medical process automation features for the
technologist at the point of care.
- - CaseWorks(TM) : The CaseWorks information appliance is an easy-to-use
information appliance for generating electronic reports for inclusion in
the electronic patient record, while overcoming many of the radiologists'
objections to electronic reporting. Radiologists have historically favored
the use of film rather than computer workstations for diagnosis. CaseWorks
directly addresses this preference by allowing radiologists to either use
film or electronic images as their primary diagnostic medium while
providing an electronic selection method for images to be included in the
report. While collecting and preparing images for printing on film using
our eHealth connectivity products, each image is assigned a unique high
density unobtrusive bar code which is printed next to it on the film. The
radiologist prepares a case by selecting the images to be included in the
report and creating voice-to-text dictation using the MergePoint hand-held
device that is part of CaseWorks. The product also allows interaction with
the hospital information system through the MergePort or MergeWeb
connectivity products to provide access to information about other of the
patient's diagnostic studies, review of anticipated billing and access to
on-line medical reference material. CaseWorks is expected to be available
for sale in 2000. We have been granted two United States and two foreign
patents related to CaseWorks and have patents pending in several other
foreign countries. See "Intellectual Property."
- - AdminWorks(TM): For greatest reduction of inefficiencies, avoidable costs
and medical errors, an electronic patient record needs to contain not only
medical data and reports, but also the administrative information related
to a patient's encounter with a healthcare organization. Our AdminWorks
eHealth computer application is used by administrative staff to register
patients, order and schedule diagnostic tests, automate film tracking,
capture payer and billing information and create management reports.
AdminWorks is supported in any Internet browser by the same MergeWeb
clinical repository and application server that also manages the medical
data and reports, so the electronic records are fully integrated.
AdminWorks is expected to be available for sale in 2000.
- - PhyRWorks(TM): Connecting referring physicians electronically with the
same system used within the healthcare organization serving their patients
speeds care delivery, reduces errors and provides superior
patient-specific information for improved care. Our PhyRWorks eHealth
computer application is used by referring physicians for remote order
entry and to remotely review multi-media reports with images, text and
voice. The application is supported in any Internet browser over a secure
connection to the MergeWeb clinical repository and application server in a
healthcare facility, so it is easy to deploy and upgrade over a wide area
network. PhyRWorks is expected to be available for sale in 2000.
Each application or information appliance is tailored to the role of
the particular healthcare professional or administrative staff member. For
example, ExamWorks is designed to fit a medical technologists' workflow.
CaseWorks fits the clinical practice of reporting radiologists. For each
specialty, we provide a tool that fits their workflow. All the tools interact
with the patient's medical data via the integrating power of MergeWeb and our
other eHealth connectivity products.
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Using the proprietary Java-based rapid application development
technologies we procured in our acquisition of Interpra in 1999, we intend to
introduce additional computer applications and information appliances to extend
our eHealth reach beyond imaging.
The integrating power of these products holds the potential of creating
the complete electronic patient record that is needed to realize the full
benefits of eHealth, such as faster care delivery, reduced errors and superior
patient-specific information. When the complete electronic patient record is
truly available, patients will finally be able to have secure access to their
own medical information, as well as the ability to share this information in
confidence with all their healthcare providers.
eHEALTH PROFESSIONAL SERVICES
We offer eHealth professional services to healthcare providers and medical
device manufacturers.
- - MergeLink(TM) Our MergeLink professional consultants provide training,
advisory services, project management and medical standards validation.
Customers for these services include healthcare organizations, healthcare
professionals and medical equipment manufacturers. Our consultants use
proprietary training materials, project planning and management tools and
diagnostic testing products. Our consultants and trainers are acknowledged
leaders in the worldwide medical standards organizations.
- - Merge Integration Technology Services: Our Merge Integration Technology
Services field service organization provides site planning, installation
and on-going support services for healthcare providers and our strategic
partners. We use a combination of centrally located and geographically
dispersed professionals who achieve efficient coverage through both
on-site and remote servicing. Remote diagnostic and service capabilities
have been part of our products since the first MergeBox shipped in 1989.
STRATEGIES
We believe that healthcare organizations will not be able to convert
their current operations to a completely new eHealth integrated clinical and
administrative information system in one step, due to the long-standing
regulatory, structural and behavioral issues which must be considered. Rather,
we believe that the changes will come in steps, as healthcare organizations
convert the parts of their operations. This is where the integrating power of
standards and the Internet coupled with our modular product architecture comes
into play. Our customer can start with a small standards-based network to share
data from legacy equipment in a particular clinical department, expand to a
clinical repository, add information appliances and computer applications to
generate information and manage workflow, integrate with other departments and
ultimately extend the information reach to referring physicians and to patients.
We are already leaders in several important areas of eHealth
Connectivity. We intend to extend our leadership in Connectivity and to become a
leader in eHealth Computer Applications with the following strategies, which
build upon each other:
Attain Leadership in Worldwide Medical Standards Movements to Promote
eHealth Connectivity
In a complex industry like healthcare, worldwide communication
standards that are accepted by users and vendors are key to eHealth
connectivity. Starting in 1990, we have been one of the most active participants
in the development of the DICOM medical imaging standard. We now occupy several
positions of leadership in the worldwide DICOM movement. We have participated in
development of parts of the HL-7 healthcare IT standard. We are also leaders in
a new joint effort by the Radiological Society of North America, the Hospital
Information Management System Society and the medical device and systems
industries called "Integrating the Healthcare Enterprise," which promotes the
use of DICOM and HL-7 for integrating healthcare. Through these activities, we
gain knowledge about vendor and user needs which focuses our product and
services development. We also gain valuable contacts with potential customers
which helps our sales efforts. Finally, our leadership allows us to influence
the on-going standards development efforts in alignment with our commercial
interests.
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Sell our eHealth Connectivity Products for Retrofitting Legacy Devices and
Systems
Many devices in healthcare organizations use diagnostic images that
need to be produced, transmitted, viewed and stored. Medical specialties that
use devices of this type include radiology, radiotherapy, endoscopy, pathology,
urology, mammography and dialysis. Most of these specialties have already
adopted DICOM as the standard for communicating images. Although DICOM
capability is appearing in new medical devices, there is a substantial legacy
problem with the existing installed base of incompatible equipment. We began
selling MergeBoxes for DICOM retrofit of legacy equipment in 1989. The majority
of our revenue to date has been generated from MergeBox sales, and we are the
leaders in DICOM retrofit technologies. We recently introduced MergePort for
legacy systems based upon the HL-7 healthcare IT standard, or other
manufacturer-proprietary protocols. We expect growing MergeBox and MergePort
sales as the demand for eHealth connectivity accelerates and healthcare
organizations need to retrofit additional legacy equipment. To date we have sold
over 3,000 MergeBox products primarily for medical imaging devices. According to
a study we commissioned from the Technology Marketing Group, a diagnostic
imaging market consulting organization located in Des Plaines, Illinois, the
number of radiology departments at hospitals that can use our 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
230,000 legacy medical imaging devices, representing a potential market of over
$2 billion.
Sell our eHealth Connectivity Products to Strategic Partners for Inclusion
in New Imaging Devices and Systems
We began sales of our MergeCOM software in 1989 and have grown to be
the dominant brand of software that enables manufacturers of new medical devices
to build in DICOM capability. In 1995, we acquired Signal Stream Technologies,
Inc. and incorporated their specialized interface boards for medical
connectivity into our product line. We have continuously upgraded these
technologies for our own products and we also offer them to other manufacturers
for inclusion in their products. We recently acquired Interpra and began sales
of their "middleware" software to manufacturers of information systems who
desire a Java-based DICOM and HL-7 distributed medical information repository
for their products. We call this product "MergeWeb." We expect sales of our
software and interface boards to grow as manufacturers of medical devices and
systems upgrade and expand their current product lines to meet eHealth demand.
To date, our sales of these products have primarily been to medical imaging
device and systems manufacturers, although we are expanding our efforts beyond
these areas. According to the Technology Marketing Group study, the estimated
annual sales of new imaging devices totals approximately 11,000 units in the
United States and 33,000 units internationally. Since much of our software is
sold with on-going licensing and support fees, this strategy provides us
substantial recurring revenue. This strategy also maintains an on-going
commercial and technical relationship with most of the imaging device
manufacturers of the world, so that we can be well connected with the trends and
needs of the industry. Finally, this strategy assures us that our DICOM
technologies will be the most widely used, which helps us in field support of
our customers' products, many of which are interconnected with our products.
Expand in Europe and the Far East
Healthcare is an international business, with medical equipment
manufacturers located and selling globally. Historically, we have sold a
substantial amount of our eHealth connectivity technologies to medical equipment
manufacturers outside the United States. We established our European office in
1994 and our Japan presence in 1998. Foreign sales accounted for 36% and 39% of
net sales in 1998 and 1999, respectively.
Sell our eHealth Connectivity Products as Network Solutions for End-Users
We began selling networked systems of our eHealth connectivity products
to end-users in 1995. This is the first step in establishing a long-term
customer relationship for repeat sales of our products as an end-user moves from
a simple eHealth connectivity solution to a more complex eHealth system. The
current application of these systems has been to network diagnostic imaging
equipment with the multiple stand-alone laser film printers that are used to
generate film for diagnostic readings. We estimate the annual market for laser
film printing networks at $50 million. In the smaller sub-market for
cross-vendor networks, we are the dominant vendor. At the beginning of 1999, we
established a separate selling group known as Systems Solutions to focus on
these efforts. Currently, we have over 325 customer sites, primarily in the
United States.
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Sell Our eHealth Professional Services To Develop And Grow Long-Term
Customer Relationships
We began product support services in 1989, and today have a global
product support organization. These services assure our customers of rapid and
expert response for their mission-critical situations. The support organization
generates increasing revenue, and it is also important because it establishes a
long-term support relationship with end-user customers, which fosters repeat
Systems Solutions sales. Our MergeLink Professional Services group was
established in 1996. Its activities provide revenue, and also keep us closely
connected with other industry and end-user customer personnel. This connection
helps us gain market knowledge and grow customer relationships.
Sell Our eHealth Computer Application And Information Appliance Products As
Upgrades To End-User Systems
Our customers can plug in our newly introduced information appliances
and computer applications to an already installed connectivity network to
generate information and manage workflow, integrate with other departments, and
ultimately extend the information reach to referring physicians and to patients.
With these products, we move from the narrower markets that we have dominated
into the larger market for radiology information systems, which is estimated to
be about $1 billion. There were minimal sales of our first information appliance
ExamWorks at the end of 1999. We expect significant sales of these products to
begin in 2000.
Expand Our Systems Solutions Offerings with Technologies from Our Strategic
Partners
From time-to-time we enter into strategic partnerships with other
vendors with complementary technologies to offer more completely integrated
solutions to our end-user customers. Using strategic partnerships allows us to
focus on our connectivity and application expertise, but also meet our
customers' requirements earlier than if we attempted to develop all the
necessary technologies internally. In 1999 we developed a partnership with
Applicare Medical Imaging, a subsidiary of GE Medical Systems, to offer image
display workstations that plug in to our eHealth connectivity networks. In 1999,
we also developed a partnership with Stentor, Inc. to offer their server-based
"just-in-time" Internet image distribution technology. We will offer Stentor's
technology as a plug-into our eHealth connectivity networks, and will also
integrate this technology into our ExamWorks, CaseWorks and PhyRWorks products
to provide server-based electronic image display. We will continue to seek and
develop advantageous strategic technology partnerships.
Extend Our Reach Beyond Medical Imaging
We have initially specialized in the challenging diagnostic imaging
disciplines such as radiology, mammography, endoscopy, oncology and pathology,
with the majority of our revenues coming from radiology. Our products make it
easy for healthcare professionals to manage medical images in electronic form.
These are the most data intensive parts of healthcare and also have the largest
installed base of expensive legacy medical equipment. However, we believe that
the same strategies we are employing in diagnostic imaging apply to other parts
of healthcare. In 2001, we intend to leverage our reputation, knowledge and our
technologies to extend our reach beyond imaging toward the complete electronic
patient record. We will move to competing in markets that are estimated to be
$10 billion annually.
SALES, MARKETING AND DISTRIBUTION
We market and sell our products and services for a one-time fee, a
subscription charge, or on a per-transaction fee basis to four types of
customers.
- - End-Users: These customers purchase systems solutions directly from us,
consisting of multiple products and services.
- - Dealers: Our dealers act as retail distributors of systems solutions to
end-user customers consisting of multiple products manufactured by Merge
and other third parties, typically as part of a catalog of medical
products.
- - OEMs: Original Equipment Manufacturer customers design and manufacture
standard model medical devices such as MRI, CT and CR (computed
radiography) scanners and digital x-ray machines or healthcare information
systems. They buy technologies from us to build into their products.
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- - VARs: Our Value Added Reseller customers design and implement customized
solutions for their customers' particular needs using products purchased
from third parties such as us.
End-Users and our Dealers require substantial assistance in needs
assessment, configuration and site planning for an individual systems solution.
OEM and VAR customers require substantial technical support both in the initial
sales process and on an on-going basis. All of our customers are candidates for
professional services. Because of these substantially different customer needs,
we have organized our sales and marketing into three primary efforts - Systems
Solutions, OEM/VAR and Professional Services.
We market Systems Solutions to dealers and end-users through direct
sales efforts, advertising, trade show appearances and from repeat business
generated by our customer support efforts. To date, our System Solutions group
has primarily focused on sales of DICOM connectivity networks through dealers.
Currently, over 325 Merge DICOM connectivity networks have been installed
throughout the world. With the availability of our eHealth computer application
and information appliance products in 2000, our Systems Solutions group will
start to focus on sales more directly to end-users, since sales of these more
complex eHealth solutions requires greater domain knowledge than is typically
provided by our dealers' sales forces. At December 31, 1999, our Systems
Solutions group employed seven sales professionals experienced in selling
complex systems solutions to healthcare organizations. Net sales to end-users
accounted for 41% of total net sales in 1997, 50% for 1998 and 42% for 1999. We
believe that net sales to end-users as a percentage of total net sales will
increase in the future.
Our OEM/VAR sales and marketing effort builds upon our long-standing
relationships with the engineering personnel of our OEM/VAR partners. We
developed these relationships with our participation and leadership in the
worldwide medical standards movements and by successfully negotiating and
implementing OEM Technical Support Agreements for connecting our MergeBoxes to
their legacy equipment. We sell our connectivity technologies to OEMs and VARs
for retrofit of their legacy equipment and we have more than 180 licensing
agreements for our software technologies that OEMs use to build eHealth
connectivity directly into their products at the design stage. Because of the
limited number of medical equipment OEMs and VARs, we rely heavily on repeat
sales. At December 31, 1999 we employed six sales professionals experienced in
selling technical solutions to medical OEMs and VARs. Net sales to OEMs and VARs
accounted for 59% of total net sales in 1997, 50% in 1998, and 46% in 1999. Due
to the greater growth rates expected in End-User Sales, we expect OEM/VAR sales
to increase in absolute dollars, but decrease as a percentage of total net sales
in the future.
We market our eHealth Professional Services directly to all of our
customers. Our MergeLink Professional Services group contains acknowledged
leaders in the worldwide medical standards movements. Building on their
reputation, they market their training, advisory services, project management
and medical standards validation services directly to medical equipment
manufacturers and to end-user customers. At December 31, 1999, we employed four
professionals in the United States and Europe in our MergeLink group. Our
MergeSupport worldwide field service organization markets their site planning,
installation and on-going support services to VARs, to our dealers and to our
end-user customers. Our Merge Integration Technology Services staff conducts
service training courses for OEM and VAR personnel on a regular basis, providing
these customers with the expertise needed to install and support our products.
We respond quickly to customer requests for technical support and service
through a 24-hour, seven-day-a- week telephone hotline, on-line remote service
support and overnight exchange of defective parts or products. We provide a
limited one-year parts or factory repair warranty on our products and offer
several on-going services and support plans to suit customer needs. At December
31, 1999, we employed 11 professionals in the United States and Europe in our
Merge Integration Technology Services group. Professional Services to end-user
customers are expected to grow dramatically as we continue to focus on more
direct end user sales. Revenue for our eHealth Professional Services became a
significant part of our revenue in 1999, totaling 12% of our net sales. We
expect Professional Services revenue to increase as a percentage of total net
sales in the future.
We support our general marketing efforts by advertising, industry and
investor public relations, exhibiting at major trade shows, conducting customer
education and training programs and through our Internet site. We exhibit at the
Radiological Society of North America annual meeting, the Hospital Information
Management System Society annual meeting and at regional trade shows. Over 1,700
industry and end-user personnel have participated in our DICOM training classes.
We offer educational seminars which help prepare end-users for their eHealth
future and promote Merge solutions approximately monthly throughout the US and
Europe and already have been attended by representatives of over 500 healthcare
organizations. Our Internet site (www.merge.com) was established in 1995
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<PAGE> 12
and provides access to educational material, marketing material, technical
product information and our technical support staff.
We have an excellent international reputation and a strong base of
international business. We intend to build on this position and increase sales
in the future to customers located outside the United States. We have a sales
office in the Netherlands and, as of December 31, 1999, employed ten full-time
staff in Europe who perform sales and technical customer support roles. We also
have a Japanese subsidiary that employed one full-time person who performs sales
and customer support roles. Net sales outside the United States accounted for
36% of total net sales in 1997, 36% for 1998 and 39% for 1999. We expect net
sales outside the United States to increase as a percentage of total net sales
in the future.
We sell a majority of our products to a relatively limited number of
OEMs, VARs and dealers. Aggregate sales to our ten largest customers represented
approximately 74% of net sales in 1997, 70% in 1998 and approximately 71% in
1999. During 1998, Marconi and Konica accounted for approximately 18% each of
our net sales. During 1999, Marconi accounted for 17% of our net sales and
Konica, Philips and Fuji accounted for approximately 11% each of our net sales.
There can be no assurance that current customers will continue to place orders
with us or that we will be able to obtain orders from new customers. The loss of
any one or more of our major customers could materially adversely affect our
business and operating results.
TECHNOLOGY
We historically have developed products and services through our own
research and development, acquisitions and strategic partnerships. As of
December 31, 1999 our engineering group included approximately one-third of our
employees, with 10 employees in our Toronto development office and 25 employees
at headquarters. Product innovation is crucial in the rapidly expanding eHealth
market, so we will continue to pursue technology development internally as well
as externally.
We pioneered the "black box" legacy retrofit product market for
healthcare connectivity. Our products are field configurable by installation and
service personnel instead of relying on custom engineering for each specific
installation. This methodology enables rapid field system deployment and
leverages our talented computer engineering resources.
The technology strategy used to gain our leadership in commercial DICOM
software was the porting of our MergeCOM software to nearly 40 different
computer operating system and hardware platforms. We continue our leadership by
incorporating all parts of the DICOM standard into MergeCOM software, including
new additions to the standard as they become adopted.
Our Toronto development office specializes in the latest software
technologies including Java and XML. Our Toronto location also allows us to tap
into a larger talent pool from outside the United States, in part because
Canadian immigration laws have favored immigration of technical talent to
Canada.
We use object-oriented design principles in our products, which
facilitates rapid product development and economies from reusable technology.
Our Milwaukee office maintains ISO 9001:EN46001 certification. Our Nuenen office
maintains ISO 9004:EN46002 certification and we are preparing our Toronto office
for ISO 9001:EN46001 in 2000.
MANUFACTURING
Our manufacturing activities consist primarily of assembling and
testing hardware components and subassemblies acquired from vendors, and loading
and testing our software. Certain components are manufactured to our
specifications by outside vendors. We operate under the Good Manufacturing
Practices promulgated by the FDA and are a registered medical device
manufacturer. In addition, we have ISO 9001:EN46001 certification for our design
and development, production, installation and service processes.
We use industry standard parts and components for the assembly of our
products, generally purchased from multiple vendors. We have elected to rely on
a limited number of subcontractors for certain subassembly functions in order to
achieve more advantageous pricing through increased volume. However, we believe
that additional
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<PAGE> 13
subcontractors are available to perform these subassembly functions. We maintain
good relationships with our vendors and have not experienced any material supply
problems. Any substantial problems with suppliers, however, could have a
material adverse effect on our business, financial condition and results of
operations.
COMPETITION
The markets for our products are highly competitive. Many of our
customers purchase products from us and also from our competitors. In the
eHealth Connectivity market, we currently compete with our MergeBox primarily
with DeJarnette Research Systems, Inc. in the retrofitting of legacy medical
systems to enable DICOM standard connectivity and Mitra Imaging Inc. with our
MergePort gateway product bridging HL-7 to DICOM. The MergeCOM-3 software tool
kit primarily competes directly with AccuSoft Corporation, DeJarnette and Mitra,
and indirectly with several "freeware" implementations of DICOM which offer more
limited features and no user support.
In the application of MergeBoxes specifically for hardcopy filming
networks, we compete with film vendors, including Agfa-Gevaert, Fuji, Kodak and
Konica. However, since our products work with any of the laser film printers
available from these vendors, these companies have also purchased our products
when they have needed networked filming solutions involving their competitors'
products. Fuji and Konica also are active dealers of our products for filming
network solutions. We expect competition to increase in the future from existing
competitors and from other companies that may enter our existing or future
markets. In addition, although imaging equipment manufacturers are currently
customers of ours, we also face competition from these companies in some of our
product offerings. We could face competition from networking equipment and
telecommunications manufacturers if these companies were either to develop
eHealth connectivity capability for their products or purchase products which
provide such capability from one of our competitors.
As we begin to market our eHealth Computer Applications and Information
Appliances, we face competition from a number of companies in the imaging health
care information technology sector, including, without limitation, Dynamic
Healthcare Technologies, Inc., E-Med, and LanVision Systems, Inc. As we extend
beyond imaging-based clinical specialties, we also face competition from the
traditional healthcare IT companies such as Cerner Corporation, Eclipsys
Corporation, IDX Systems, McKessonHBOC and Shared Medical Systems, to the extent
they develop Internet eHealth strategies.
Our Internet-based eHealth products and services compete in a market
that is rapidly growing and not yet fully defined. A number of companies have
recently entered the eHealth field and more will likely enter in the future. We
believe our business plan and the business plans of these companies will overlap
in time, creating both increased competition and opportunities for strategic
partnerships, such as our partnership with Stentor, Inc.
Many of our current and potential competitors have greater resources
than we have in areas including finance, research and development, intellectual
property and marketing. Many of these competitors may also have broader product
lines and longer standing relationships with customers than we have.
We believe that our ability to compete successfully depends on a number
of factors both within and outside of our control, including: product
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 our
competitors. There can be no assurance that we will be able to compete
successfully with our existing or any new competitors.
GOVERNMENT REGULATION AND HEALTHCARE REFORM
The healthcare industry is subject to changing political, economic and
regulatory influences that may affect the procurement practices and operation of
the entire healthcare industry. Proposals to reform the United States healthcare
system have been, and will continue to be, considered by the United States
Congress. These proposals may contain proposals to increase or decrease
government involvement in healthcare or change the operating environment for our
potential customers. Healthcare organizations may react to these proposals and
the uncertainty surrounding these proposals by curtailing or deferring
investments, including those for our products and services. On the other hand,
changes in the regulatory environment have in the past increased and may
continue to increase the needs of healthcare organizations for cost-effective
information management, which may enhance the marketability of our
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applications and services. We cannot predict with any certainty what impact, if
any, these proposals or healthcare reforms might have on our business, financial
condition and results of operations.
The Health Insurance Portability and Accountability Act of 1996
mandates the use of standard transactions and identifiers, prescribed security
measures and other provisions designed to simplify the exchange of medical
information. Our products and services are designed to comply with the final
regulations. The Department of Health and Human Services is also likely to
implement regulations that would establish rules about individuals' rights to
access their own or someone else's medical information. These regulations, when
enacted, would likely define what is to be considered protected health
information and outline steps to ensure the confidentiality of this information.
The regulations will also likely require holders of medical records to implement
security measures. We intend for our products to be positioned to support our
customers' compliance with the final confidentiality and security provisions of
the regulations.
The United States Food and Drug Administration is responsible for
assuring the safety and effectiveness of medical devices under the Federal Food,
Drug and Cosmetic Act. Computer applications, software and hardware are
considered medical devices and are subject to regulation by the FDA when they
are indicated, labeled or intended to be used in the diagnosis of disease or
other conditions, or in the cure, mitigation, treatment or prevention of
disease, or are intended to affect the structure or function of the body.
Several of our current products are subject to a limited number of FDA
regulations. We have already invested the requisite resources to comply with
these regulations. Based on the nature of our products, we do not anticipate
significant additional expenditures in this area.
Sales of our products outside the United States are subject to foreign
regulatory requirements that can vary from country to country. Additional
approvals from foreign regulatory authorities may be required, and there can be
no assurance that we will be able to obtain foreign marketing approvals on a
timely basis or at all, or that we will not be required to incur significant
costs in obtaining or maintaining our foreign regulatory approvals. In Europe,
we have 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. 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 our business, financial condition and results of
operations.
There are currently few laws or regulations that specifically regulate
communications or commerce on the Internet. However, laws and regulations may be
adopted that address issues such as online content, user privacy, pricing and
characteristics and quality of applications and services. For example, although
two key provisions of the act were held unconstitutional, the Communications
Decency Act of 1996 prohibited the transmission over the Internet of some types
of information and content.
Internet user privacy has become an issue in the United States. Current
United States privacy law consists of a few disparate statutes directed at
specific industries that collect personal data, none of which specifically
covers the collection of personal information online. The United States or any
state may adopt legislation to attempt to protect this privacy. Any legislation
addressing these issues could affect the way in which we are allowed to conduct
our business, especially those aspects that involve the collection or use of
personal information, and could have a material adverse effect on our business,
financial condition and results of operations. Moreover, it may take years to
determine the extent to which existing laws governing issues such as property
ownership, libel, negligence and personal privacy are applicable to the
Internet.
International regulations concerning the Internet, privacy and
transborder data flows are considerably more developed than regulations in the
United States. We intend to develop applications and services to be used on a
worldwide basis and, consequently, will be required to comply with international
regulations concerning the Internet and e-commerce, as well as with United
States regulations.
The tax treatment of the Internet and e-commerce is currently
unsettled. A number of proposals have been made at the federal, state and local
level and by some foreign governments that could impose taxes on the sale of
goods and services and some other Internet activities. A recently passed law
places a temporary moratorium on specific types of taxation on e-commerce. We
cannot predict the effect of current attempts at taxing or regulating commerce
over the Internet. Any legislation that substantially impairs the growth of
e-commerce could have a material adverse effect on our business, financial
condition and results of operations.
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ITEM 2. DESCRIPTION OF PROPERTIES
Our principal facilities are located in Milwaukee, Wisconsin, in an
approximately 14,000 square-foot office leased through September 2004 at a rate
of approximately $220,000 per year. We also lease a sales, administrative and
service support office in Nuenen, The Netherlands and an engineering facility in
Toronto, Canada. We are currently negotiating a lease for additional office
space in our Milwaukee headquarters.
ITEM 3. LEGAL PROCEEDINGS
We are not involved in any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our Common Stock commenced trading on the Nasdaq Small Cap Market
System on January 29, 1998, under the symbol MRGE.
The following table sets forth for the periods indicated, the high and
low closing sale prices of our common stock as reported by Nasdaq.
<TABLE>
<CAPTION>
COMMON STOCK MARKET PRICES
1999 4th Quarter 3rd Quarter 2nd Quarter 1st Quarter
<S> <C> <C> <C> <C>
- ---------------------------- ----------- ----------- ----------- -----------
High........................ $2.625 $1.438 $1.688 $2.000
Low......................... $1.063 $1.000 $1.063 $0.938
1998
- ----------------------------
High........................ $2.000 $3.938 $6.500 $6.563
Low......................... $0.938 $1.375 $3.125 $6.000
</TABLE>
According to the transfer agent records, we have 143 stockholders of
record as of March 24, 2000. We estimate that there are in excess of 1,200
beneficial holders of our Common Stock.
DIVIDEND POLICY
We have not paid any cash dividends on our Common Stock since its
formation. We do not currently intend to declare or pay any cash dividends on
the Common Stock in the foreseeable future and anticipate that earnings, if any,
will be used to finance the development and expansion of its business.
We also anticipate that we 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 our earnings, financial requirements and other factors deemed
relevant by our Board of Directors, including our contractual obligations.
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
OVERVIEW
Our business is in eHealth. Founded in 1987, Merge
Technologies has been developing, marketing and supporting Internet-based
eHealth connectivity and information management solutions for over a decade. Our
products enable communication and automate transactions that occur within and
between healthcare organizations, healthcare professionals and their patients. A
healthcare organization uses our products to provide a communications bridge to
incompatible "legacy" medical devices and information systems and to create a
standards-based electronic repository for medical data. For healthcare
professionals, we offer eHealth information appliances that plug in to our
connectivity and management products. Using these information appliances,
healthcare professionals can reference pertinent information and convert a
patient's medical data into concise multi-media information that may be included
in an electronic patient record, distributed within a health care organization's
information network, and communicated externally to referring physicians and
their patients via the Internet. We also provide services to assist customers in
the planning, implementation and on-going support of their eHealth connectivity
and information management solutions.
We classify our sales by application type. OEM/VAR products are 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. Professional Services includes both our MergeLink
training, advisory services, project management and medical standards
validation, and our Merge Integration Technology Services worldwide field
organization. OEM/VAR, Systems Solutions and Professional Services sales were as
follows for 1999, 1998 and 1997.
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- ------------
(in thousands)
APPLICATION
<S> <C> <C> <C>
OEM/VAR .......................... $ 6,070 $ 4,847 $ 5,705
Systems Solutions................. 5,669 4,822 4,011
Professional Services............. 1,561 --- ---
-------- ----------- ------------
$ 13,300 $ 9,669 $ 9,716
========= =========== ============
</TABLE>
RESULTS OF OPERATIONS
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Net sales. Net sales increased by 38% to $13,300,000 in 1999 from
$9,669,000 in 1998. Net sales of OEM/VAR increased by 25% to $6,070,000 in 1999
from $4,847,000 in 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 increased by 18% to $5,669,000 in 1999 from $4,822,000 in
1998. Sales of Systems Solutions accounted for 43% of net sales in 1999 and are
expected to increase as a percentage of net sales in the future. Professional
Services include work performed by our MergeLink and MergeSupport groups. Our
MergeLink professional consultants provide training advisory services, project
management and medical standards validation. Our MergeSupport worldwide field
service organization provides site planning, installation and on-going support
services for healthcare providers and our strategic partners. We are reporting
Professional Services as a separate line item beginning in 1999 as, for the
first time, Professional Services represented greater than 10% of our net sales.
Previously, Professional Services revenues were reported to both the OEM/VAR and
Systems Solutions Categories.
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 to 24% in 1999 from 27% in
1998. Amortization of purchased and developed software increased as a percentage
of net sales to 10% in 1999 from 8% in 1998, due to commencement of amortization
of certain software development projects. Amortization of purchased
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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 in the future.
Gross profit. Gross profit increased by 41% to $8,790,000 in 1999 from
$6,250,000 in 1998. As a percentage of net sales, gross profit was at 66% in
1999 compared to 65% in 1998.
Sales and marketing. Sales and marketing expense increased by 26% to
$5,002,000 in 1999 from $3,961,000 in 1998. This increase is due primarily to
additional personnel, travel and marketing expenses related to sales growth in
1999. As a percentage of net sales, sales and marketing expense decreased to 38%
in 1999 from 41% in 1998. We expect to continue to make additions to our
sales/marketing and service staff in order to increase net sales. However, we
expect 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 15% to $2,108,000 in 1999 from $1,831,000 in 1998. The increase in
research and development expense is due primarily to the cost of additional
software engineers engaged in product development in Toronto. This workforce,
which was added at the time of the Interpra acquisition, is engaged in new
product development on information service products based on Java and XML
technologies.
General and administrative. General and administrative expense decreased by
$11,000 to $2,147,000 in 1999 from $2,158,000 in 1998. As a percentage of net
sales, general and administrative expense decreased to 16% in 1999 from 22% in
1998. General and administrative expense includes information systems,
accounting and administrative support and management personnel and their
activities in our United States, Europe, Canada and Japan offices. We expect
general and administrative expense to increase modestly in 2000 in dollar terms
and to decrease as a percentage of net sales due to anticipated increases in net
sales.
Depreciation and amortization. Depreciation and amortization expense
increased by $230,000 to $651,000 in 1999 from $420,000 in 1998. Depreciation
and amortization is assessed on our capital equipment, goodwill and other
intangible assets acquired in the mergers with Signal Stream Technologies, Inc.
and Interpra.
Acquired in-process technology and related software write-off. In the
acquisition of Interpra, we 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 we acquired 100% of its voting stock. We also
recorded a write-down of $441,000 of software capitalized by us that was
replaced by technologies acquired in the merger.
Total other income, net. Total other income, net decreased to $34,000 in
1999 from $244,000 in 1998 due primarily to an increase of $132,000 in foreign
exchange transaction expense and a decrease in net interest income of $139,000.
Foreign currency translation in 1999 reflects our potential exchange rate rise
on an intercompany obligation that is stated in US dollars.
Income taxes. We recognized an income tax expense in 1999 and in 1998,
despite incurring losses for financial reporting purposes due primarily to
foreign income taxes. We recorded an income tax expense of $173,000 in 1999,
which reflects primarily foreign income tax withholding on software royalties.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Net sales. Net sales decreased by $47,000 to $9,669,000 in 1998 from
$9,716,000 in 1997, primarily due to decreased net sales of component products
to OEMs. Net sales of OEM/VAR Products, which includes our software and
interface boards, decreased 15% to $4,847,000 in 1998 from $5,705,000 in 1997.
Systems Solutions net sales increased by 20% to $4,822,000 in 1998 from
$4,011,000 in 1997.
Cost of goods sold. Cost of goods sold consists of purchased components
and the amortization of purchased and developed software. The cost of purchased
components as a percentage of net sales in 1998 increased to approximately 27%
compared to 24% in 1997, reflecting higher sales discounts for certain products
in certain distribution channels. Amortization of purchased and developed
software increased to $816,000 or 8% of net sales in 1998 from $614,000 or 6% of
net sales in 1997 due to commencement of amortization on several new products.
Amortization of purchased and developed software is expected to increase
moderately in 1999 in dollar terms; however amortization is a fixed cost, and as
net sales increase, amortization expense is expected to decrease as a percentage
of net sales.
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Gross profit. Gross profit decreased by 7% to $6,250,000 in 1998 from
$6,740,000 in 1997. As a percentage of net sales, gross profit decreased to 65%
for 1998 from 69% for 1997.
Sales and marketing. Sales and marketing expense increased by 51% to
$3,961,000 in 1998 from $2,621,000 in 1997. In 1998, the Company retained
additional field sales and service personnel in order to support our goal of
additional market penetration. Our sales and marketing department staff
increased to 21 persons as of December 31, 1998 from 17 persons as of December
31, 1997. We also increased our service engineering staff to 13 persons as of
December 31, 1998 from eight persons as of December 31, 1997.
Product research and development. Research and development expense
increased by 13% to $1,831,000 in 1998 from $1,616,000 in 1997. The increase in
research and development expense consists primarily of compensation to
additional product engineers engaged in software design and the development of
specialized computer hardware. We believe that advanced technology is a key
element in the success of our business, and we expect to continue to increase
our research and development expenditures in dollar terms. However, in the
future as net sales increase, we expect research and development expense to
decline as a percentage of net sales.
General and administrative. General and administrative expense
increased by 65% to $2,578,000 in 1998 from $1,563,000 in 1997. The increase was
due to: (i) additional expenses associated with operating as a publicly held
company, including legal, audit and stockholder relations services, directors
and officers insurance, and preparing, filing and publishing periodic and other
reports, (ii) expenses related to expanded administrative services at the
European branch, including hiring additional personnel, (iii) establishment of
an information services group responsible for internal computer systems, and
(iv) increases in facility rental, depreciation and other overhead.
Total other income (expense). Total other income (expense) changed to
$244,000 in 1998 from ($1,148,000) in 1997. In 1998, we had interest income of
$263,000 as a result of the investment of funds raised in our initial public
offering, which occurred on January 29, 1998. In 1997, interest expense of
$1,088,000 was incurred, including $872,000 in noncash interest expense for
amortization of a discount on the outstanding note held by Sirrom Capital
Corporation.
Income taxes. We incurred income tax expense of $44,000 in 1998, due
primarily to federal alternative minimum tax and state income tax liabilities.
The Company did not pay federal income taxes or recognize an income tax benefit
in 1997 despite incurring a loss for financial reporting purposes due to
continued losses, uncertainty as to future realization of a tax benefit, and due
to the nondeductibility of certain financing charges.
LIQUIDITY AND CAPITAL RESOURCES
Operating cash flows. Operating cash flows were $192,000 in 1999 compared
to $(2,505,000) in 1998. Non-cash items were a significant component of our net
loss in 1999, including a $1,641,000 charge for acquired in-process technology
and a software write-off related to the acquisition of Interpra Medical.
Accounts receivable increased by $1,325,000 in 1999 due to the increase in our
net sales, and both accounts payable and inventory increased, due to continued
growth in the volume of our business.
16
<PAGE> 19
Investing cash flows. Cash used in investing activities was $1,827,000 in
1999. We capitalized $1,302,000 in software development of product enhancements,
primarily for products which were either completed in 1999 or expected to be
available for sale in 2000. We also purchased $525,000 in capital equipment.
Financing cash flows. Cash used in financing activities was $54,000 in 1999
for repayment of short-term notes and payments under capitalized leases.
Cash and cash equivalents were $2,044,000, $3,660,000 and $428,000, and
working capital was $4,323,000 and $6,325,000 and $(1,972,000) at the end of
1999, 1998 and 1997, respectively. We expect that our current resources along
with internally generated cash flows will be sufficient to support operations in
2000. While we are currently exploring operating financing alternatives, we do
not at this time have a bank line of credit.
YEAR 2000
We did not experience interruptions to our operations due to the change in date
from 1999 to 2000, and our products have functioned according to their defined
Y2K specifications. We anticipate that Y2K errors will not have a significant
impact on our operations in the future.
We continue to offer products and services to imaging device manufacturers to
correct errors inherent to the software on their devices. However, we anticipate
that sales of Y2K upgrades will not be significant to our business in 2000.
In 2000, hospital information technology budgets could potentially be redirected
to Y2K problems unrelated to Merge product offerings, which could delay orders
for our products. However, Y2K budget redirection, as of yet, has not had a
material adverse impact on our business.
17
<PAGE> 20
ITEM 7. FINANCIAL STATEMENTS
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, 1998 and
1999, and the related consolidated statements of operations, shareholders'
equity, cash flows and comprehensive income for each of the years in the
three-year period ended December 31, 1999. 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 audit 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, 1998 and 1999, and the results of their operations and their
cash flows for each of the years in the three-year period ended December 31,
1999, in conformity with generally accepted accounting principles.
KPMG LLP
/s/ KPMG
Chicago, Illinois
February 25, 2000
18
<PAGE> 21
MERGE TECHNOLOGIES INCORPORATED AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------
1998 1999
------------- -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents..................................................... $ 3,659,879 $ 2,044,035
Accounts receivable, net of allowance for doubtful accounts of $25,000 and
$83,600 at December 31, 1998 and 1999, respectively......................... 1,777,344 3,085,962
Inventory..................................................................... 1,951,160 1,509,060
Prepaid expenses.............................................................. 361,773 173,460
Taxes recoverable............................................................. --- 385,495
Other current assets.......................................................... 62,095 ---
------------- -------------
Total current assets............................................................ 7,812,251 7,198,012
------------- -------------
Property and equipment:.........................................................
Computer equipment............................................................ 2,072,656 2,698,889
Office equipment.............................................................. 426,153 393,673
------------- -------------
2,498,809 3,092,562
Less accumulated depreciation................................................. 1,054,554 1,588,943
------------- -------------
Net property and equipment...................................................... 1,444,255 1,503,619
License agreement, net of accumulated amortization of $150,643 and $232,584 at
December 31,1998 and 1999, respectively....................................... 157,055 75,114
Purchased and developed software, net of accumulated amortization of ...........
$3,057,339 and $3,953,422 at December 31, 1998 and 1999, respectively......... 3,463,824 3,577,674
Goodwill, net of accumulated amortization of $21,754 and $42,426 at
December 31,1998 and 1999, respectively....................................... 37,633 429,469
Other intangibles, net of accumulated amortization of $ - and $8,482 at
December 31,1998 and 1999, respectively....................................... --- 229,018
Other........................................................................... 13,008 215,963
------------- -------------
Total assets.................................................................... $ 12,928,026 $ 13,228,869
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.............................................................. $ 778,307 $ 2,101,101
Current portion of obligations under capital leases........................... 12,564 15,050
Customer deposits............................................................. 149,593 204,496
Accrued wages................................................................ 418,388 402,883
Other accrued liabilities..................................................... 128,449 151,304
------------- -------------
Total current liabilities....................................................... 1,487,301 2,874,834
------------- -------------
Notes payable................................................................... --- 141,876
Put options related to exchangeable common stock................................ --- 1,223,670
Obligations under capital leases, excluding current portion..................... 18,137 24,250
------------- --------------
Total liabilities............................................................ 1,505,438 4,264,630
------------- --------------
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, issued and
outstanding 5,778,216 shares at December 31, 1998, and 5,781,389 at December 57,782 57,814
31, 1999.....................................................................
Additional paid-in capital ................................................... 13,931,432 14,333,392
Accumulated deficit........................................................... (2,588,598) (5,487,419)
Other comprehensive income - cumulative translation adjustment................ 21,972 60,452
------------- --------------
Total shareholders' equity ................................................... 11,422,588 8,964,239
------------- --------------
Total liabilities and shareholders' equity.................................... $ 12,928,026 $ 13,228,869
============= ==============
</TABLE>
See accompanying notes to consolidated financial statements
19
<PAGE> 22
MERGE TECHNOLOGIES INCORPORATED AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
----------------------------------------
1997 1998 1999
------------ ------------ --------------
<S> <C> <C> <C>
Net sales................................................... $ 9,716,112 $ 9,669,172 $ 13,300,220
Cost of goods sold:
Purchased components...................................... 2,362,248 2,602,867 3,234,874
Amortization of purchased and
developed software....................................... 613,980 816,358 1,274,827
------------ ------------ --------------
Total cost of goods sold.................................... 2,976,228 3,419,225 4,509,701
------------ ------------ --------------
Gross profit................................................ 6,739,884 6,249,947 8,790,519
------------ ------------ --------------
Operating costs and expenses:
Sales and marketing....................................... 2,621,152 3,960,546 5,002,321
Product research and development.......................... 1,616,486 1,830,560 2,108,216
General and administrative................................ 1,245,852 2,157,632 2,146,946
Depreciation and amortization............................. 317,517 420,850 651,185
Acquired in-process R&D and related software write-off.... --- --- 1,641,063
------------ ------------ --------------
Total operating costs and expenses.......................... 5,801,007 8,369,588 11,549,731
------------ ------------ --------------
Operating income (loss)..................................... 938,877 (2,119,641) (2,759,212)
------------ ------------ --------------
Other income (expense):
Interest expense.......................................... (1,088,079) (40,718) (26,998)
Interest income........................................... 19,197 262,486 123,214
Other, net................................................ (79,021) 21,876 (62,608)
------------ ------------ --------------
Total other income (expense)................................ (1,147,903) 243,644 33,608
------------ ------------ --------------
Loss before income taxes.................................... (209,026) (1,875,997) (2,725,604)
Income taxes................................................ --- 43,973 173,217
------------ ------------ --------------
Net loss.................................................... (209,026) (1,919,970) (2,898,821)
============ ============ ==============
Loss applicable to common shareholders...................... (209,026) (1,919,970) (2,933,893)
============ ============ ==============
Basic & diluted loss per share.............................. $ (0.05) $ (0.34) $ (0.51)
============ ============ ==============
Shares used to compute basic and diluted
loss per share............................................ 3,902,993 5,608,255 5,778,225
============ ============ ==============
</TABLE>
See accompanying notes to consolidated financial statements
20
<PAGE> 23
MERGE TECHNOLOGIES INCORPORATED AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
<TABLE>
<CAPTION>
RETAINED
ADDITIONAL EARNINGS CUMULATIVE TOTAL
COMMON STOCK PAID-IN (ACCUMULATED TRANSLATION SHAREHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT ADJUSTMENT EQUITY
--------- --------- ------------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 3,896,861 $ 38,969 $ 2,854,107 $ (459,602) $ 1,213 $ 2,434,687
--------- --------- ------------- ------------ ----------- -------------
Exercise of stock options........... 11,202 112 8,138 --- --- 8,250
Accretion of put value.............. --- --- (129,614) --- --- (129,614)
Net loss............................ --- --- --- (209,026) --- (209,026)
Foreign currency translation --- --- --- --- 55,846 55,846
adjustment......................... --------- --------- ------------- ------------ ----------- -------------
Balance at December 31, 1997........ 3,908,063 $ 39,081 $ 2,732,631 $ (668,628) $ 57,059 $ 2,160,143
--------- --------- ------------- ------------ ----------- -------------
Exercise of stock options........... 1,016 10 1,490 --- --- 1,500
Sale of common stock................ 2,185,000 21,850 13,088,150 --- --- 13,110,000
Exercise of call option............. (424,757) (4,248) (802,344) --- --- (806,592)
Payment of warrant termination
fee................................ --- --- 21,788 --- --- 21,788
Exercise of stock warrant........... 108,942 1,089 (1,089) --- --- ---
IPO related fees.................... --- --- (2,181,121) --- --- (2,181,121)
Adjustment to put value............. --- --- 1,072,003 --- --- 1,072,003
Payout of fractional shares......... (48) --- (291) --- --- (291)
Payment for stock warrant........... --- --- 215 --- --- 215
Net loss............................ --- --- --- (1,919,970) --- (1,919,970)
Foreign currency translation --- --- --- --- (35,087) (35,087)
adjustment......................... --------- --------- ------------- ------------ ----------- ------------
Balance at December 31, 1998........ 5,778,216 $ 57,782 $ 13,931,432 $ (2,588,598) $ 21,972 $ 11,422,588
--------- --------- ------------- ------------ ----------- ------------
Adjustments to fractional shares.... --- --- 4,044 --- --- 4,044
Issuance of exchangeable share
rights............................. --- --- 433,020 --- --- 433,020
Exchange of share rights into
common stock....................... 3,173 32 (32) --- --- ---
Accretion of put value.............. --- --- (35,072) --- --- (35,072)
Net loss............................ --- --- --- (2,898,821) --- (2,898,821)
Foreign currency translation --- --- --- --- 38,480 38,480
adjustment......................... --------- --------- ------------- ------------ ----------- ------------
Balance at December 31, 1999........ 5,781,389 $ 57,814 $ 14,333,392 $ (5,487,419) $ 60,452 $ 8,964,239
========= ========= ============= ============ =========== ============
</TABLE>
See accompanying notes to consolidated financial statements
21
<PAGE> 24
MERGE TECHNOLOGIES INCORPORATED AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------
1997 1998 1999
------------ ------------ -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss..................................................................... $ (209,026) $ (1,919,970) $ (2,898,821)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization.............................................. 934,649 1,178,193 1,541,568
Amortization of discount on Sirrom Loan.................................... 871,538 --- ---
Amortization of discount on note acquired in merger........................ --- --- 3,700
Provision for doubtful accounts receivable................................. (3,162) 169,166 16,256
Acquired in-process technology and related software write-off.............. --- --- 1,641,063
Change in assets and liabilities net of acquisition:
Accounts receivable..................................................... (319,422) (123,693) (1,324,874)
Inventory............................................................... (774,000) (772,667) 442,100
Prepaid expenses........................................................ --- (338,347) (50,311)
Accounts payable........................................................ 56,984 (808,806) 920,304
Accrued expenses........................................................ 169,408 121,390 (6,938)
Customer deposits....................................................... 33,887 110,412 54,904
Other................................................................... 31,743 (121,082) (146,979)
------------ ------------ ------------
Net cash provided by (used in) operating activities 792,599 (2,505,404) 191,972
------------ ------------ ------------
Cash flows from investing activities:
Purchases of property and equipment......................................... (499,065) (850,262) (525,340)
Development of software..................................................... (1,005,218) (1,549,133) (1,301,830)
Purchase of license agreement............................................... (3,210) (16,388) ---
------------ ------------ ------------
Net cash used in investing activities......................................... (1,507,493) (2,415,783) (1,827,170)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from loan agreement with Sirrom..................................... 2,000,000 --- ---
Repayment of loan agreement with Sirrom...................................... --- (2,000,000) ---
Financing fees associated with loan agreement with Sirrom.................... (63,371) --- ---
Financing fees related to IPO................................................ (285,068) --- ---
Proceeds from revolving credit agreement..................................... 470,000 --- ---
Repayment of revolving credit agreement...................................... (1,223,000) --- ---
Repayment of notes acquired from Interpra.................................... --- --- (37,653)
Issuance of common stock, net of expenses.................................... --- 11,213,656 ---
Proceeds from exercise of stock options...................................... 8,255 1,715 ---
Payment for call of common stock............................................. --- (806,592) ---
Payment of warrant termination fee........................................... --- (196,096) ---
Principal payments under capital leases...................................... (50,749) (55,316) (15,909)
------------ ------------ -----------
Net cash provided by (used in) financing activities............................ 856,067 8,157,367 (53,562)
------------ ------------ -----------
Effect of exchange rate changes on cash........................................ --- (4,572) 72,916
Net increase (decrease) in cash and cash equivalents........................... 141,173 3,231,608 (1,615,844)
Cash and cash equivalents, beginning of period................................. 287,098 428,271 3,659,879
------------ ------------ -----------
Cash and cash equivalents, end of period...................................... $ 428,271 $ 3,659,879 $ 2,044,035
============ ============ ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for income taxes..................................................... $ --- $ --- $ 14,657
Cash paid for interest......................................................... 209,403 61,088 24,839
NON CASH FINANCING AND INVESTING ACTIVITIES
Property and equipment acquired through capital leases......................... 59,493 4,889 24,508
Accretion of put options related to common stock and stock warrants............ 129,614 --- 35,072
</TABLE>
See accompanying notes to consolidated financial statements
22
<PAGE> 25
MERGE TECHNOLOGIES INCORPORATED AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------
1997 1998 1999
------------- -------------- --------------
<S> <C> <C> <C>
Net loss............................................. $ (209,026) $ (1,919,970) $ (2,898,821)
Other comprehensive income (loss) - cumulative
translation adjustment............................. 55,846 (35,087) 38,480
------------- -------------- --------------
Comprehensive net loss............................... $ (153,180) $ (1,955,057) $ (2,860,341)
============= ============== ==============
</TABLE>
See accompanying notes to consolidated financial statements
23
<PAGE> 26
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Nature of Operations
Merge Technologies Incorporated and its wholly-owned subsidiaries
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 primarily in the United States, as well as internationally.
(b) Principles of Consolidation
The consolidated financial statements include the financial statements
of Merge Technologies Incorporated and its wholly-owned subsidiaries. All
significant inter-company 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.
(d) Inventory
Inventory, consisting principally of raw materials and 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: for computer
equipment five years for assets placed in service prior to December 31, 1997 and
three years for assets acquired after December 31, 1997; and seven years for
office equipment. Equipment held under capital leases and leasehold improvements
are amortized using the straight line method 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 in accordance with Statement of Financial Accounting Standards
(SFAS) No. 86, "Accounting for the Costs of Computer Software to be Sold,
Leased, or Otherwise Marketed". 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
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 each period by
determining whether the unamortized capitalized costs can be recovered through
future net operating cash flows.
(g) Fair Value of Financial Instruments and Long-Lived Assets
The Company's financial instruments include cash and cash equivalents,
accounts receivable, notes payable, accounts payable, and certain accrued
expenses. The carrying amounts approximate fair value because of the short
maturity of these instruments.
24
<PAGE> 27
On January 1, 1996, the Company adopted SFAS No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,
under which the Company has reviewed long-lived assets and certain intangible
assets and determined that their carrying values as of December 31, 1999 are
recoverable in future periods.
(h) Goodwill and 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. and is amortized on a
straight-line basis over ten years, the expected period to be benefited. Also
included, is the excess of purchase price over fair value of net assets
acquired, the customer list and assembled workforce acquired through the merger
with Interpra all of which are amortized on a straight-line basis over seven
years.
The Company assesses the recoverability of intangible assets 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) 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, 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
United States subsidiary.
(j) 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 Statement of Financial
Accounting Standard No. 123 (SFAS 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 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 required by
SFAS No. 123.
(k) Revenue Recognition
The Company recognizes revenue according to the American Institute of
Certified Public Accountants Statement of Position 97-2, "Software Revenue
Recognition". Revenues from software fees and software maintenance are deferred
and recognized ratably over the contract period, which is generally one year.
Revenue from product sales is recognized upon shipment. No significant Company
obligations exist with regard to delivery or customer acceptance following
shipment.
(l) 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.
25
<PAGE> 28
(m) Loss Per Share
Basic earnings per share is based on the weighted average number of common
shares outstanding and excludes the dilutive effect of unexercised dilutive
potential common shares. Diluted earnings per share is based on the weighted
average number of common shares outstanding and includes the dilutive effect of
unexercised potential common shares. Because the Company reported a net loss for
the years ended December 31, 1997, 1998 and 1999, per share amounts have been
presented under the basic method only.
Had the Company reported net earnings for the years ended December 31,
1997, 1998 and 1999, the weighted average number of shares outstanding would
have potentially been diluted by the following common equivalent securities (not
assuming the effects of applying the treasury stock method to outstanding stock
options):
<TABLE>
<CAPTION>
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
Stock options................... 958,100 968,806 1,344,074
Exchangeable shares............. --- --- 420,000
Warrants........................ 145,256 190,000 190,000
--------- --------- ---------
1,103,356 1,158,806 1,954,074
========= ========= =========
</TABLE>
Additionally, the net loss applicable to common stockholders for 1999 is
increased by adding the accretion of the put option of $35,072 related to the
exchangeable shares issued in the merger with Interpra.
(n) 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, which occurred January 29, 1998. The stock split was 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.
(o) Reclassifications
Where appropriate, certain items relating to the prior years have been
reclassified to conform to the presentation in the current year.
(2) ACQUISITIONS
On September 3, 1999, the Company acquired 100% of the voting stock of
Interpra Medical Imaging Network, Ltd. of Canada. In consideration for this, the
Company issued 420,000 exchangeable share rights. Each holder of Interpra shares
has the right, at any time within five years of the acquisition date, to
exchange their shares for the Company's shares. At the end of the five-year
period, any shares not exchanged will automatically be exchanged into the
Company's shares. Each holder of the exchangeable share right has also received
a put option, which may be exercised for a price of $4.50 per share during the
period from August 31, 2004 until September 30, 2004.
The acquisition of Interpra was accounted for under the purchase method of
accounting and accordingly, the assets have been recorded at their estimated
fair values at the date of acquisition. Acquired technology related to this
transaction was $140,000 and is being amortized over a period of five years.
Goodwill and other tangibles related to this transaction was $412,500, of which
$237,500 is attributable to an acquired customer base and assembled workforce,
and is being amortized over a period of seven years. The Company also recorded a
one-time charge of $1,200,000 for the in-process technology of Interpra that had
not reached technological feasibility at the date of the acquisition and
write-down of $441,000 of software capitalized by the Company that was replaced
by technologies acquired.
The pro forma unaudited results of operations had the acquisition occurred
at the beginning of 1999 is as follows:
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, December 31,
1998 1999
-----------------------------------
(in thousands, except for per
share data)
<S> <C> <C>
Net sales........................ $ 9,773 $ 13,313
Net loss......................... (2,331) (3,728)
Basic loss per share............. $ (0.38) $ (0.65)
</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 payments 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 1997, 1998 or
1999. Accumulated amortization was approximately $151,000 and $233,000 for the
years ended December 31, 1998 and 1999, respectively.
26
<PAGE> 29
(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 account 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.
During 1997, 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.
The Company incurred interest expense on the bank debt of $44,000 in
1997.
(b) Note Payable to Sirrom
In June 1997, the Company entered into a $2,000,000 Loan Agreement with
Sirrom Capital Corporation ("Sirrom"). The Loan Agreement bore interest at a
stated rate of 13.5% payable monthly from August 1997 through May 2002, with
principal and any remaining interest due in June 2002. The Loan Agreement
granted Sirrom 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 $0.001 per share. Additional
warrants would be issued as follows if the principal were outstanding on the
specified dates: June 2000 -- 58,498; June 2001 -- 60,056; and June 2002 --
61,667.
The stock purchase warrants were subject to a put option whereby Sirrom
could sell the warrants to the Company in the 30-day period prior to the
expiration date of the warrants. The put option price was equal to the fair
market value of the common stock issuable under the warrants.
The Company assigned a value of $871,538 to the warrants issued, which
is reflected as a debt discount and put warrant liability, based on the value of
the common stock on the date of the transaction. The debt discount was fully
amortized to interest expense during 1997.
Proceeds from the Loan Agreement were used to fully pay the principal
and interest outstanding on the note payable to bank (note 3 (a)), and were also
available to repurchase certain outstanding shares of the Company's common
stock, and provide additional working capital for sales, marketing, and product
development expenditures.
The note payable and related interest were paid in full in February
1998, with proceeds from the Company's initial public offering (note 7).
Interest expense in connection with the Sirrom Loan Agreement was
$135,000 and $24,000 in 1997 and 1998, respectively. In 1997, the Company also
incurred an additional $872,000 non-cash interest expense for amortization of
the discount on the Sirrom Loan.
(c) Note Payable to Investor
In September, 1999 the Company assumed a $300,000 (Cdn), five year
non-interest bearing note carried on the books of Interpra. The total note in
USD converted at December 31, 1999 rate of 1.4442 is approximately $207,000. The
note was discounted to reflect the current interest rate of 8% at the time the
note was assumed. The discount is being amortized over a five-year period. The
Company recognized interest expense related to this note in 1999 of
approximately $3,700.
27
<PAGE> 30
(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 $46,100, $73,600 and $67,400 for the years ended
December 31, 1997, 1998 and 1999, respectively.
(6) INCOME TAXES
The provision for income tax consists of the following for the years
ended December 31, 1997, 1998 and 1999.
<TABLE>
<CAPTION>
PROVISION SUMMARY:
1997 1998 1999
--------- ---------- -----------
<S> <C> <C> <C>
Current:
Federal...................... --- $ 28,000 $ ---
State........................ --- 16,000 16,000
Foreign...................... --- --- 157,000
--------- ---------- -----------
Total Current...... --- 44,000 173,000
Deferred:
Federal...................... --- --- ---
State........................ --- --- ---
--------- ---------- -----------
Total Deferred..... --- --- ---
========= ========== ===========
TOTAL --- $ 44,000 $173,000
========= ========== ===========
</TABLE>
.........Actual income taxes vary from the expected income taxes (computed by
applying the statutory 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,
-----------------------------------------
1997 1998 1999
--------- ---------- ---------
<S> <C> <C> <C>
Expected tax expense (benefit)...................................... $(71,000) $(638,000) $(927,000)
Total Increase (decrease) in income taxes resulting from............ --- ---
Nondeductible amortization and acquired in-process
technology........................................................ --- --- 419,000
Change in the beginning of the year balance of the
valuation allowance for federal deferred tax assets
allocated to income tax expense.............................. (409,000) 767,000 612,000
Research and experimentation credit............................... (180,000) (132,000) (123,000)
Nondeductible financing costs.................................... 318,000 8,000 ---
Nondeductible acquisition costs.................................. --- --- 60,000
Nondeductible expenses........................................... 14,000 5,000 109,000
Foreign tax credits............................................... (19,000) --- (157,000)
State and local income taxes, net of federal income tax
benefit...................................................... 51,000 10,000 11,000
Foreign withholding taxes......................................... --- --- 157,000
Other............................................................. 296,000 24,000 25,000
--------- ---------- ---------
Actual tax expense.................................................. $ --- $ 44,000 $ 173,000
========= ========== =========
</TABLE>
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at December 31, 1998 and
1999 are presented below:
28
<PAGE> 31
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1998 1999
------------- -------------
<S> <C> <C>
Deferred tax assets:
Accounts receivable, principally due to allowance for doubtful accounts........ $ 40,000 $ 46,000
Accrued wages.................................................................. 136,000 113,000
Research and experimentation credit carryforward............................... 934,000 1,316,000
Other credit carryforwards..................................................... 29,000 230,000
Net operating loss carryforwards............................................... 1,097,000 1,404,000
Foreign net operating loss carryforwards....................................... --- 596,000
Other.......................................................................... 59,000 45,000
------------- -------------
Total gross deferred tax assets.................................................. 2,295,000 3,750,000
Less valuation allowance....................................................... (793,000) (2,258,000)
------------- -------------
Net deferred tax asset......................................................... 1,502,000 1,492,000
------------- -------------
Deferred tax liabilities:
Property and equipment, principally due to differences in depreciation......... (68,000) (101,000)
Software development costs..................................................... (1,347,00) (1,359,000)
Intellectual property.......................................................... (73,000) (18,000)
Customer list.................................................................. (14,000) (14,000)
------------- -------------
Total gross deferred liabilities................................................. 1,502,000 1,492,000
============= =============
Net deferred taxes............................................................... $ --- $ ---
============= =============
</TABLE>
The net change in the total valuation allowance for the years ended
December 31, 1997, 1998 and 1999 was an increase (decrease) of $(409,000),
$770,000, and $1,465,000 respectively. The $1,465,000 includes $541,000 net
deferred tax assets acquired during 1999. 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 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.
At December 31, 1999, the Company had federal net operating loss
carryforwards and research credits carryforwards approximating $3,528,000 and
$917,000, respectively, and state net operating loss carryforwards and research
credit carryforwards of $3,882,000 and $400,000, respectively, and foreign
Federal and provincial net operating losses of $367,000 and $229,000
respectively. These losses and credits are available to offset future taxable
income and tax, if any. The federal amounts expire in varying amounts beginning
in 2008 and 2005 respectively, and continuing through 2019 and 2019,
respectively. The state net operating losses and research credits expire in
varying amounts beginning in 2011 and continuing through 2014. A portion of the
income tax loss carryforwards and credits are subject to certain limitations
which could impair the Company's ability to utilize the benefits of these losses
and credits in the future. In addition, if certain substantial changes in the
Company's ownership should occur, there could be an additional annual limitation
on the amount of the carryforwards which could be utilized.
(7) LEASES
The Company is obligated under various capital leases for computer
equipment that expire at various dates during the next three years. The gross
amount of computer equipment under capitalized leases and related depreciation
in the following periods was: at December 31, 1997, $154,700 and accumulated
depreciation $52,400; at December 31, 1998 equipment $72,500 and accumulated
depreciation $32,500; and at December 31, 1999 equipment $59,000 and accumulated
depreciation $21,300.
29
<PAGE> 32
The Company has a noncancelable operating lease for its main office
facility. The lease is for an 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, 1997, 1998 and 1999 was approximately $160,000,
$199,000 and $215,000, 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 payment as of December 31, 1999,
are:
<TABLE>
<CAPTION>
OPERATING CAPITAL
------------ --------
<S> <C> <C>
2000................................ $ 216,249 $19,327
2001................................ 210,810 19,327
2002................................ 210,810 7,398
2003................................ 209,987
2004 and thereafter................. 138,345
------------ --------
Total minimum lease payments........ $ 986,201 $46,052
============ =======
Less amount representing interest............................... 6,748
------
Present value of net minimum capital lease payments............... 39,304
Less current installments of obligations under capital leases.. 15,054
-------
Obligations under capital leases, excluding current installments.. $24,250
=======
</TABLE>
(7) SHAREHOLDERS' EQUITY
(a) Common and Preferred Stock
In June, 1998, the Company's shareholders voted to amend the Company's
Articles to increase the number of authorized shares of common stock of the
Company from 10,000,000 to 30,000,000.
(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 could redeem all (but
not less than all) of the former Class B shares and the shares of common stock
that could be acquired by the exercise of former Class B options at $1.53 per
share (the "call option"). The Company's call option was to expire on March 1,
1997.
These shares were 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 , which is defined as assets less the sum of
liabilities and preferred stock paid-in capital, all as defined under GAAP,
divided by the number of common shares, as of the last day of the fiscal quarter
next preceding the date that the notice of exercise of this option is sent. The
put option was to be effective June, 1997 through June, 1998.
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 ranged from $1.56 to $2.37 and the put price ranged 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. Each of the holders of former Class B stock and Class B options
also held subordinated notes. 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 subordinated Notes into
common shares. In April, 1997, the 13,253 options subject to the call and put
expired. In February 1998, the Company exercised its call option with respect to
the 424,757 shares for a price of $1.90 a share.
30
<PAGE> 33
In February 1998, put options held by Alpha Capital Venture Partners
and Sirrom Capital expired. The Company recorded the expiration of the put
options by reversing the put option liability and adjusting additional paid-in
capital in the amount of $1,072,003.
(c) Initial Public Offering
On January 29, 1998, the Company completed an initial public offering
of 1,900,000 shares of common stock at an offering price of $6.00 per share. On
February 27, 1998, the underwriter exercised its overallotment option and
offered an additional 285,000 shares to the public at $6.00 per share. As a
result of the initial public offering, the Company received net proceeds of
approximately $11,800,000 and increased its total shares of common stock
outstanding by 2,185,000 shares. The net proceeds of the offering were used to
repay in full the outstanding principal and interest on the $2,000,000 note with
Sirrom Capital, to redeem 424,757 shares of stock held by Alpha Capital Venture
Partners at $1.90 per share, and to terminate an unexercised warrant held by
Sirrom Capital for $196,000 and for general working capital.
d) Stock Option Plan
The Company maintains a stock option plan for employees of Merge
Technologies Incorporated which provides for the granting of a maximum of
2,015,826 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. There were no option grants to employees in 1998. In 1999,
493,000 options were granted under the plan.
In 1998, the Company established a stock option plan for nonemployee
directors of Merge Technologies Incorporated which provides for the granting of
a maximum of 100,000 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.
Options granted under this plan in 1998 vest as to one third of such shares on
each of the first, second and third anniversaries of the date of issuance. The
options granted under this plan expire 10 years and one day from the date of
grant. Directors have been granted 60,000 and 17,500 in 1998 and 1999,
respectively.
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 1997: expected option lives of four years, expected volatility and
dividend yield of 0%, and a risk-free interest rate of 6.13%. For grants made in
1998, the following assumptions were used: expected option lives of 10 years,
expected volatility of 45%, dividend yield of 0% and a risk-free interest rate
of 4.64%. For grants made in 1999, the following assumptions were used: expected
option lives of 6 and 10 years, expected volatility of 50%, dividend yield of
0%, and a risk free interest rate of 5.83% and 6.49%. The weighted average
grant-date fair value of options calculated using the Black-Scholes model was
$1.29 and $3.77 for options granted in 1997 and 1998, respectively. In 1999 the
weighted average grant-date fair value of options calculated using the
Black-Scholes model for five separate grants were: for six-year options $0.81,
$0.72 and $0.57, for ten-year options $0.72 and $1.53.
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:
31
<PAGE> 34
<TABLE>
<CAPTION>
1997 1998 1999
-------------- ---------------- ----------------
<S> <C> <C> <C>
Net loss applicable to common shareholders
As reported............................... $ (209,026) $ (1,919,970) $ (2,898,821)
Pro forma................................. (347,026) (2,092,741) (3,201,964)
Basic and diluted net loss per share
As reported............................... $ (0.05) $ (0.34) $ (0.51)
Pro forma................................. (0.09) (0.37) (0.55)
</TABLE>
Pro forma net loss applicable to common shareholders reflects only
options granted in 1997, 1998 and 1999. Therefore, the full impact of
calculating compensation cost for stock options under SFAS No. 123 is not
reflected in the pro forma net loss applicable to common shareholders 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. A summary of stock options is as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
WEIGHTED FAIR VALUE
AVERAGE OF
EXERCISE OPTIONS
NUMBER PRICE GRANTED
------------ ------------ ------------
<S> <C> <C> <C>
Options outstanding, December 31, 1996.................. 837,480 $ 1.39
Options granted......................................... 251,925 0.74 $ 1.29
Options exercised...................................... (11,201) 6.00
Options forfeited....................................... (120,104) 0.96
--------- -------
Options outstanding, December 31, 1997................. 958,100 $ 2.67
Options granted......................................... 60,000 6.00 3.77
Options exercised....................................... (1,016) 1.48
Options forfeited....................................... (48,278) 4.16
--------- -------
Options outstanding, December 31, 1998.................. 968,806 $ 2.80
Options granted......................................... 493,000 1.25 0.69
Options forfeited....................................... (52,480) 4.08
--------- --------
Options outstanding, December 31, 1999.................. 1,409,326 $ 2.21
--------- --------
Options exercisable, December 31, 1999.................. 985,042 $ 2.27
========= ========
</TABLE>
32
<PAGE> 35
The following table summarizes information about stock options outstanding at
December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------------ ------------------------------------
WEIGHTED
AVERAGE WEIGHTED
RANGE OF REMAINING WEIGHTED AVERAGE
EXERCISE NUMBER OF CONTRACTUAL AVERAGE EXERCISE NUMBER OF EXERCISE
PRICES SHARES LIFE PRICE SHARES PRICE
- ---------- ---------------- ------------ ----------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
$1.48 663,157 2.80 $1.48 663,158 $1.48
$6.00 253,167 4.43 6.00 178,883 6.00
$1.47 230,250 5.75 1.47 78,000 1.47
$1.03 195,000 5.98 1.03 60,000 1.03
$1.06 65,250 5.81 1.06 2,500 1.06
$2.19 2,500 9.90 2.19 2,500 2.19
---------------- ------------- ----------------- ------------- -------------
1,409,326 4.17 $2.21 985,042 $2.27
================ ============== ================ ============= =============
</TABLE>
(e) Warrants
In June 1997, the Company entered into a $2,000,000 Loan Agreement with
Sirrom Capital Corporation (Sirrom"). In connection with the Loan Agreement,
the Company issued stock purchase warrants expiring in July 2000, granting
Sirrom the right to purchase 145,256 shares of the Company's common stock at
$0.001 per share. In February, 1998, Sirrom exercised 108,942 warrants and the
remaining 36,314 warrants were terminated upon payment of $196,096 by the
Company.
In January 1998, at the completion of the initial public offering and
as part of the Underwriting Agreement with H.C. Wainwright, the Company issued
warrants of 190,000 shares, 10% of the shares offered to the public, at $7.80
per share.
(f) Exchangeable Shares
As part of the acquisition with Interpra, the Company issued 420,000
exchangeable shares for 100% of Interpra's voting stock (Note 2).
9) GEOGRAPHIC, BUSINESS AND CREDIT CONCENTRATION
Foreign sales, denominated in United States dollars, accounted for
approximately 37%, 36%, and 39% of the Company's net sales for the years ended
December 31, 1997, 1998, and 1999, respectively. Sales in foreign currency
represented 6.8% of the Company's net sales for the year ended December 31,
1999. 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 Nuenen, The
Netherlands. Revenues are attributed to countries based on the originating
office of the related orders. Revenues for The Netherlands sales office were
approximately $2,800,000, $2,700,000 and $3,800,000 in the years ended December
31, 1997, 1998 and 1999, respectively. The value of long-lived assets in service
at the Nuenen sales office was not material in 1998 and 1999.
The Company had two distributors that accounted for 18% each of
consolidated net sales for the year ended December 31, 1998. For 1999, the
Company had one distributor that accounted for 17% and two distributors and one
customer that each accounted for 11% of consolidated net sales. Accounts
receivable from two distributors accounted for 19% and 12%, respectively, of
outstanding consolidated accounts receivable at December 31, 1998. Accounts
receivable from two distributors and one customer accounted for 19%, 10%, and
19%, respectively, of outstanding consolidated accounts receivable at December
31, 1999.
33
<PAGE> 36
(10) 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 was
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 was
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 terminated this consulting agreement effective upon
closing of the initial public offering in 1998.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
Certain information required by Part III is omitted from this Report
because the Registrant will file its definitive proxy statement pursuant to
Section 240.14a-101 (the "Proxy Statement") not later than 120 days after the
end of the year covered by this Report, and certain information included therein
is incorporated herein by reference.
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The information required by this item is incorporated by reference to
the information set forth under the caption "Management" in the Company's Proxy
Statement for the 2000 Annual Meeting of Stockholders.
ITEM 10. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to
the information set forth under the caption "Management - Executive
Compensation" in the Company's Proxy Statement for the 2000 Annual Meeting of
Stockholders.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 12: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to
the information set forth under the caption "Directors and Executive Officers"
in the Company's Proxy Statement for the 2000 Annual Meeting of Stockholders.
ITEM 13. EXHIBITS AND REPORTS ON FORM-8K
34
<PAGE> 37
(a) Exhibit No.
<TABLE>
<S> <C> <C>
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
</TABLE>
- -------------------
(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.
35
<PAGE> 38
(5) Form 8-K were filed during the fourth fiscal quarter. The
company filed a report on Form 8-K on September 21, 1999, and
reports on Form 8-K/A on September 21, 1999 and November 18,
1999.
(b) Reports on Form 8-K
On November 18, 1999 we filed a Form 8-K report disclosing information
under Item 7, Financial Statements, for Interpra Medical Imaging
Network Ltd. dated August 31, 1999.
36
<PAGE> 39
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange of
1934, the Registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
REGISTRANT
MERGE TECHNOLOGIES INCORPORATED
Date: March 30, 2000 By: /s/ William C. Mortimore
WILLIAM C. MORTIMORE
President and Chief Executive Officer
Date: March 30, 2000 By: /s/ Colleen M. Doan
COLLEEN M. DOAN
Chief Financial Officer, Treasurer and Secretary
In accordance with the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the Registrant and in
the capacities and on the dates indicated.
Date: March 30, 2000 By: /s/ Robert T. Geras
ROBERT T. GERAS
Director and Chairman of Board of Directors
Date: March 30, 2000 By: /s/ Robert A. Barish
ROBERT A. BARISH, M.D.
Director
Date: March 30, 2000 By: /s/ Dennis Brown
DENNIS BROWN
Director
Date: March 30, 2000 By: /s/ Michael D. Dunham
MICHAEL D. DUNHAM
Director
Date: March 30, 2000 By: /s/ Douglas S. Harrington
DOUGLAS S. HARRINGTON, M.D.
Director
Date: March 30, 2000 By: /s/ Kevin E. Moley
KEVIN E. MOLEY
Director
Date: March 30, 2000 By: /s/ Hymie Negin
HYMIE NEGIN
Director
37
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
Exhibit 27.1
Financial Data Schedule
Period Type 12 Mos
Fiscal Year End December 31, 1999
Period Start January 1, 1999
Period End December 31, 1999
Cash 2,044,035
Securities 0
Receivables 3,169,562
Allowances 83,600
Inventory 1,509,060
Current Assets 7,198,012
PP&E 3,092,562
Depreciation 1,588,943
Total Assets 13,228,869
Current Liabilities 2,874,834
Bonds 0
Common 14,391,206
Preferred Mandatory 0
Preferred 0
Other SE (5,426,967)
Total Liability and Equity 13,228,869
Sales 0
Total Revenues 13,300,220
CGS 4,509,701
Total Costs 11,549,731
Other Expenses 0
Loss Provision 0
Interest Expense 26,998
Income Pretax (2,725,604)
Income Tax 173,217
Income Continuing (2,898,821)
Discontinued 0
Extraordinary 0
Changes 0
Net Income (2,898,821)
EPS Primary 0
EPS Diluted (0.51)
</TABLE>
