<PAGE> 1
Form 10-QSB
U.S. Securities and Exchange Commission
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
[ ] TRANSITION REPORT PURSUANT TO 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 0-29486
Merge Technologies Incorporated
-------------------------------
(Exact name of small business issuer as specified in its charter.)
Wisconsin 39-1600938
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
1126 South 70th Street, Milwaukee, WI 53214-3151
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(Address of principal executive offices)
414-977-4000
------------
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes X No
- -
As of November 10, 2000 the issuer had 5,805,170 shares of
Common Stock outstanding
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INDEX
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
PART I FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements.......................................................1
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...............................................................5
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.......................................................12
Signatures.............................................................................13
Exhibit Index..........................................................................14
</TABLE>
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PART I
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
MERGE TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1999 2000
(UNAUDITED)
-------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................................ $ 2,044,035 $ 498,248
Accounts receivable, net of allowance for doubtful accounts of $83,600
and $20,200 at December 31, 1999 and September 30, 2000, respectively.... 3,085,962 1,206,070
Inventory................................................................ 1,509,060 2,159,334
Prepaid expenses......................................................... 173,460 220,613
Taxes recoverable........................................................ 385,495 326,807
Other current assets .................................................... --- 13,441
-------------- -------------
Total current assets ....................................................... 7,198,012 4,424,513
-------------- -------------
Property and equipment:
Computer equipment....................................................... 2,698,889 3,099,654
Office equipment......................................................... 393,673 408,418
-------------- -------------
3,092,562 3,508,072
Less accumulated depreciation............................................ 1,588,943 2,255,673
-------------- -------------
Net property and equipment.................................................. 1,503,619 1,252,399
Purchased and developed software, net of accumulated amortization of 3,135,620
$3,953,422 and $4,092,264 at December 31, 1999 and September 30, 2000,
respectively............................................................... 3,577,674 3,135,620
Goodwill, net of accumulated amortization of $42,426 and $93,397 at December
31, 1999 and September 30, 2000, respectively.............................. 429,469 394,724
Other intangibles, net of accumulated amortization of $241,066 and $327,969
at December 31, 1999 and September 30, 2000, respectively.................. 304,132 217,229
Other....................................................................... 215,963 167,951
-------------- -------------
Total assets................................................................ $ 13,228,869 $ 9,592,436
============== =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable......................................................... $ 2,101,101 $ 1,760,031
Note payable to bank..................................................... --- 900,000
Current portion of obligations under capital leases...................... 15,050 24,822
Customer deposits........................................................ 204,496 270,504
Accrued wages............................................................ 402,883 459,841
Other accrued liabilities................................................ 151,304 73,096
-------------- -------------
Total current liabilities................................................... 2,874,834 3,488,294
Notes payable............................................................... 141,876 144,870
Put options related to redeemable common stock.............................. 1,223,670 1,328,880
Obligations under capital leases, excluding current portion................. 24,250 38,084
-------------- -------------
Total liabilities........................................................ 4,264,630 5,000,128
Shareholders' equity
Preferred stock, $0.01 par value: authorized 5,000,000, one share
issued................................................................. --- ---
Common stock, $0.01 par value: authorized 30,000,000, issued and
outstanding 5,805,170 shares at September 30, 2000..................... 57,814 58,052
Additional paid-in capital............................................... 14,333,392 14,280,025
Accumulated deficit...................................................... (5,487,418) (9,639,475)
Accumulated other comprehensive income-cumulative translation adjustment. 60,451 (106,294)
-------------- -------------
Total shareholders' equity................................................. 8,964,239 4,592,308
-------------- -------------
Total liabilities and shareholders' equity................................. $ 13,228,869 $ 9,592,436
============== =============
</TABLE>
See accompanying notes to consolidated financial statements.
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MERGE TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- ----------------------------
1999 2000 1999 2000
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales..................................... $ 3,052,182 $ 2,303,286 $ 9,287,535 $ 9,068,781
Cost of goods sold:
Purchased components....................... 694,835 572,336 2,200,655 2,489,291
Amortization of purchased and developed
software................................... 317,657 337,060 943,266 1,033,398
------------- -------------- ------------- --------------
Total cost of goods sold ..................... 1,012,492 909,396 3,143,921 3,522,689
------------- -------------- ------------- --------------
Gross profit.................................. 2,039,690 1,393,890 6,143,614 5,546,093
------------- -------------- ------------- --------------
Operating costs and expenses:
Sales and marketing........................ 1,095,828 1,399,063 3,384,868 4,079,138
Product research and development........... 581,304 572,535 1,437,344 1,629,651
General and administrative................. 514,859 714,630 1,479,765 2,143,312
Depreciation and amortization.............. 165,595 228,139 480,708 676,000
Acquired in-process technology and
software write-off...................... 1,641,063 1,129,871 1,641,063 1,129,871
------------- -------------- ------------- --------------
Total operating costs and expenses............. 3,998,649 4,044,238 8,423,748 9,657,972
------------- -------------- ------------- --------------
Operating loss................................. (1,958,959) (2,650,348) (2,280,134) (4,111,879)
------------- -------------- ------------- --------------
Total other income (expense):
Interest expense........................... (1,776) (31,982) (5,070) (45,725)
Interest income............................ 32,974 7,594 100,659 22,244
Other, net................................. 15,623 52,136 (111,719) 20,731
------------- -------------- ------------- --------------
Total other income (expense)................... 46,821 27,748 (16,130) (2,750)
------------- -------------- ------------- --------------
Loss before income taxes....................... (1,912,138) (2,622,600) (2,296,264) (4,114,629)
Income taxes expense........................... 357 15,516 4,157 37,427
Net loss....................................... $ (1,912,495) $(2,638,116) $(2,300,421) $(4,152,056)
============= ============== ============= ==============
Accretion of put options....................... --- 35,070 --- 105,210
Loss available to common shareholders.......... $(1,912,495) $(2,673,186) $(2,300,421) $(4,257,266)
============= ============== ============= ==============
Basic and diluted net loss per share........... $ (0.32) $ (0.43) $ (0.40) $ (0.69)
============= ============== ============= ==============
Shares used to compute basic and diluted
net loss per share........................... 5,901,477 6,209,973 5,819,754 6,202,325
</TABLE>
See accompanying notes to consolidated financial statements
2
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MERGE TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
1999 2000
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<S> <C> <C>
Cash flows from operating activities:
Net loss........................................................................... $(2,300,421) $(4,152,056)
Adjustments to reconcile net loss to net cash provided by (used in) operating
activities
Depreciation and amortization..................................................... 1,264,082 1,057,617
Provision for doubtful accounts receivable........................................ 14,302 (55,226)
Acquired in-process technology and related software write-off..................... 1,641,063 1,129,871
Change in assets and liabilities, net of acquisition:
Accounts receivable............................................................. (811,646) 1,935,118
Inventory....................................................................... 365,612 (650,274)
Prepaid expenses................................................................ (195,434) 303,337
Accounts payable................................................................ 71,351 (357,295)
Accrued expenses................................................................ (48,557) (8,653)
Customer deposits............................................................... 311,163 66,008
Other........................................................................... (122,804) (178,362)
----------- -----------
Net cash provided by (used in) operating activities................................... 188,711 (909,915)
----------- -----------
Cash flows from investing activities:
Purchases of property and equipment................................................ (392,499) (295,824)
Development of software............................................................ (989,208) (1,323,733)
----------- -----------
Net cash used in investing activities................................................. (1,381,707) (1,619,557)
----------- -----------
Cash flows from financing activities:
Proceeds from revolving credit agreement........................................... --- 900,000
Proceeds from employee stock purchase plan......................................... --- 15,230
Proceeds from exercise of stock options............................................ --- 826
Principal payments under capital leases............................................ (12,440) (15,789)
----------- -----------
Net cash provided by (used in) financing activities................................... (12,440) 900,267
----------- -----------
Effect of exchange rate changes on cash............................................... 15,990 83,418
Net decrease in cash and cash equivalents............................................. (1,189,446) (1,545,787)
Cash and cash equivalents, beginning of period........................................ 3,659,879 2,044,035
----------- -----------
Cash and cash equivalents, end of period.............................................. $ 2,470,433 $ 498,248
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for income taxes............................................................ $ 14,346 $ 16,150
Cash paid for interest................................................................ $ 8,740 $ 22,590
NON-CASH FINANCING AND INVESTING ACTIVITIES:
Property and equipment acquired through capital leases................................ $ 24,508 $ 39,396
Accretion of put options related to exchangeable share rights......................... --- $ 105,210
Details of Acquisition:
Liabilities assumed.......................................................... $ 422,085 ---
Value of common stock and put options related to acquisition of Interpra..... $ 1,621,620 ---
</TABLE>
See accompanying notes to consolidated financial statements
3
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MERGE TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------ ----------------------------
1999 2000 1999 2000
--------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net loss............................................. $ (1,912,495) $(2,638,116) $(2,300,421) $(4,152,056)
Other comprehensive income (loss) -
cumulative translation adjustment................. (5,409) (82,175) 74,988 (166,745)
--------------- ------------- ------------- -------------
Comprehensive net loss............................... $ (1,917,904) $(2,720,291) $(2,225,433) $(4,318,801)
=============== ============= ============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
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MERGE TECHNOLOGIES INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared pursuant to the rules and regulations for reporting on Form 10-QSB.
Accordingly, certain information and footnotes required by generally accepted
accounting principles for complete financial statements are not included herein.
The interim statements should be read in conjunction with the financial
statements and notes thereto included in the Company's latest Annual Report on
Form 10-KSB.
The accompanying unaudited consolidated financial statements of the
Company reflect all adjustments of a normal recurring nature which are, in the
opinion of management, necessary to present a fair statement of the financial
position.
(2) Revenue Recognition
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 contract periods, which are generally one year.
Revenues from product sales are recognized upon shipment. No significant Company
obligations exist with regard to delivery or customer acceptance following
shipment.
(3) 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.
(4) Acquired in-process technology and software write-off
In September 1999 the Company recorded a charge of $1.2 million for
the in-process technology of Interpra Medical Imaging Network, Ltd. that had not
reached technological feasibility as of September 3, 1999, the date which Merge
acquired 100% of its voting stock and the write down of $440,000 in software
capitalized by Merge that was replaced by technologies acquired in the merger.
In September 2000 the Company recorded a charge of $975,000 for technologies
replaced by the newly developed Merge WorkFlow platform, which will have
expanded applications in Merge products due to the success of the first WorkFlow
product which was released during the third quarter of 2000. Additionally the
Company wrote down a $155,000 prepaid software license for which future product
delivery from its vendor is at risk.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SPECIAL NOTE ON FORWARD-LOOKING STATEMENTS
Certain statements in this report that are not historical facts
constitute forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of
1933, as amended (the "Securities Act") and Section 21E of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). Discussions containing
such forward-looking statements may be included herein in the material set forth
under Management's Discussion and Analysis of Financial Condition and Results of
Operations, as well as within this report generally. In addition, when used in
this report, the words believes,
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intends, anticipates, expects and similar expressions are intended to identify
forward-looking statements. These statements are subject to a number of risks
and uncertainties, including, among others, the Company's lack of consistent
profitability, history of operating losses, fluctuations in operating results,
credit and payment risks associated with end-user sales, involvement with
rapidly developing technology in highly competitive markets, significant
investment in new product development, dependence on major customers, expansion
of its international sales effort, broad discretion of management and dependence
on key personnel, risks associated with product liability and product defects,
costs of complying with government regulation, changes in external competitive
market factors which might impact trends in the Company's results of operation,
unanticipated working capital and other cash requirements, general changes in
the industries in which the Company competes, and various other competitive
factors that may prevent the Company from competing successfully in the
marketplace. Actual results could differ materially from those projected in the
forward-looking statements. The Company undertakes no obligation to publicly
release the result of any revisions to these forward-looking statements that may
be made to reflect any future events or circumstances.
OVERVIEW
Our business is eHealth. Founded in 1987, Merge Technologies has been
developing, marketing and supporting clinical connectivity and information
management solutions for more than a decade. We are a global leader in the drive
towards an integrated healthcare enterprise, with 44% of our business in the
first nine months of 2000 conducted with our international customers.
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.
Healthcare professionals using our products 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, their patients, insurers and others 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 include both our MergeLink
training, advisory services, project management and medical standards validation
and our Merge Integration Technology Services worldwide field service
organization. OEM/VAR, Systems Solutions and Professional Services sales were as
follows for the three-month and nine-month periods ended September 30, 2000 and
September 30, 1999.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -----------------
2000 1999 2000 1999
-------- ------- ------- -------
APPLICATION (UNAUDITED AND IN THOUSANDS)
<S> <C> <C> <C> <C>
OEM/VAR.............................. $ 1,490 $ 1,412 $4,503 $ 4,444
Systems Solutions.................... 550 1,136 3,565 3,853
Professional Services................ 263 504 1,001 991
-------- ------- ------ -------
$ 2,303 $ 3,052 $9,069 $ 9,288
======== ======= ====== =======
</TABLE>
During the quarter, Richard A. Linden was hired to serve as President
and CEO. William C. Mortimore, who previously served in that capacity, is now
Chairman and Chief Strategy Officer.
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Results year-to-date fell short of management expectations. To address
the sales shortfall, we have taken action to implement new sales processes which
we believe will increase both the effectiveness and accountability of our sales
force. Additionally, in response to our financial performance in the third
quarter we have taken specific actions in four areas of our business to
stabilize the Company and get it back on track for positive financial results.
Specifically, we initiated a number of revenue enhancing and expense management
actions designed to achieve positive cash flow in early 2001. We have begun
discussions with potential strategic partners to accelerate the development of
our Merge WorkFlow products. We have retained the services of a financial
advisor to help communicate our strategy and new way of doing business to
investors and customers. And, finally, we have initiated discussions with our
bank to secure access to additional working capital to complete these
initiatives. These four specific actions are expected to have a positive impact
on our financial performance beginning in the fourth quarter and will be
reflected in full during the first quarter of 2001.
RESULTS OF OPERATIONS
Three Months Ended September 30, 2000 Compared to Three Months Ended September
30, 1999
Net sales. Net sales decreased by 25% to $2,303,000 in the three months
ended September 30, 2000 from $3,052,000 in the three months ended September 30,
1999. Net sales of Systems Solutions represented the largest shortfall,
decreasing $586,000 to $550,000 in the three months ended September 30, 2000
from $1,136,000 in the comparable period last year. During the quarter, we
redirected substantial Systems Solutions sales and marketing resources to work
primarily on sales of Merge systems directly to hospitals. The sales cycle for
direct business was longer than anticipated, and the direct sales initiative did
not result in material orders from hospitals during the third quarter. The
majority of Systems Solutions sales during the third quarter of 2000 were from
business in our distributor channel. Both direct sales and sales through
distributors were less than management expectations.
Cost of goods sold. Cost of goods sold consists of purchased components
and amortization of purchased and developed software. The cost of purchased
components as a percentage of net sales was 25% in the three months ended
September 30, 2000 compared to 23% in the three months ended September 30, 1999.
During the quarter, we modified our discounting policies and focused on growing
sales of more profitable product lines, and, as a result, reduced the cost of
purchased components as a percentage of net sales from the second quarter rate
of 32%.
Amortization of purchased and developed software increased to $337,000
of net sales in the three months ended September 30, 2000 from $318,000 in the
three months ended September 30, 1999, due to commencement of amortization of
certain software development projects. Amortization of purchased and developed
software, which is computed on a straight-line basis, will increase in dollar
terms over time and decrease as a percentage of net sales as net sales increase.
Gross profit. Gross profit was $1,394,000, or 61% of net sales, in the
three months ended September 30, 2000 compared to $2,040,000, or 67% of net
sales, in the three months ended September 30,1999. Gross profit margins
improved during the quarter from 58% in the second quarter of this year due to
modified discounting policies and focus on sales of more profitable product
lines. We expect gross profit margins to increase somewhat during the next year.
Sales and marketing. Sales and marketing expense increased $303,000 to
$1,399,000 in the three months ended September 30, 2000 from $1,100,000 in the
three months ended September 30, 1999. This increase is due primarily to
additional sales, marketing, program management and service personnel associated
with our launch of a direct sales strategy. Sales and marketing expense will
increase during the fourth quarter of this year due to our participation in the
annual meeting of the Radiological Society of North America trade show. We have
delayed the hiring of additional field sales personnel until efficiency measures
in our sales team improve.
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Product research and development. Product research and development
expense decreased $9,000 to $573,000 in the three months ended September 30,
2000 from $581,000 in the three months ended September 30, 1999. Product
innovation is a key component of our strategy. However, we will make some
targeted reductions to our engineering staff in the fourth quarter in order to
decrease cash outflows.
General and administrative. General and administrative expense
increased $200,000 to $715,000 in the three months ended September 30, 2000 from
$515,000 in the three months ended September 30, 1999. The increase relates
primarily to administration costs for operating our subsidiaries in Toronto and
Tokyo, both of which were established in the second half of 1999, and from
additional information technology infrastructure to support our business and
prepare for the anticipated expansion of sales. General and administrative
expense decreased from $785,000 in the second quarter of 2000. We expect general
and administrative expense to continue to decrease as the full impact of expense
management efforts are realized.
Depreciation and amortization. Depreciation and amortization expense
increased by $63,000 to $228,000 in the three months ended September 30, 2000
from $166,000 in the three months ended September 30, 1999, primarily due to
amortization expense related to the acquisition of Interpra in September 1999.
Acquired in-process technology and software write-off. In September
2000, we recorded a charge of $975,000 for technologies replaced by the
newly-developed Merge WorkFlow platform, which will have expanded applications
in Merge products due to the successful completion this quarter of MergePort
v2.0, the first WorkFlow product. We also wrote down a $155,000 prepaid software
license for which future product delivery from our vendor is at risk.
In September 1999, we recorded a charge of $1.2 million for the
in-process technology of Interpra Medical Imaging Network, Ltd. that had not
reached technological feasibility as of September 3, 1999, the date which Merge
acquired 100% of its voting stock, and a charge of $440,000 for the write down
of software capitalized by Merge that was replaced by technologies acquired in
the merger.
Other income (expense). In the quarter ended September 30, 2000, net
interest expense was $24,000 and foreign currency transaction expense was a
credit of $52,000. Foreign currency transaction reflects the unrealized foreign
exchange risk resulting from changes in the value of the Dutch Guilder and
Canadian dollar relative to the U.S. dollar on intercompany transactions that
are not of a long-term investment nature. In the quarter ended September 30,
1999, we had net interest income of $31,000 due to maintaining cash balances on
deposit at our bank. Cash at September 30, 1999 was $2.5 million.
Income taxes. We recognized an income tax expense in the three months
ended September 30, 2000 and in the three months ended September 30, 1999,
despite incurring losses for financial reporting purposes, due primarily to
Japanese income tax withholding on software royalties.
Nine Months Ended September 30, 2000 Compared to Nine Months Ended September 30,
1999
Net sales. Net sales decreased by 2% to $9,069,000 in the nine months
ended September 30, 2000 from $9,288,000 in the nine months ended September 30,
1999. Net sales of Systems Solutions represented the largest shortfall,
decreasing by $288,000 or 7% to $3,565,000 in the nine months ended September
30, 2000 from $3,853,000 in the nine months ended September 30, 1999. The
decrease in Systems Solutions business is due to sales shortfalls in the third
quarter of 2000 which were the result of longer than anticipated sales cycles.
Cost of goods sold. Cost of goods sold consists of purchased components
and amortization of purchased and developed software. The cost of purchased
components as a percentage of net sales was 27% in the nine months ended
September 30, 2000 compared to 24% in the nine months ended September 30, 1999.
The increase in the cost of purchased components as a percentage of net sales is
due primarily to a change in the product mix sold. As a result of recently
modifying our discounting policies and focusing on growing sales of more
profitable product lines, the cost of purchased components as a percentage of
net sales decreased to 25% in the current quarter.
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<PAGE> 11
Amortization of purchased and developed software was $1,033,000 in the
nine months ended September 30, 2000 compared to $943,000 in the comparable
period of 1999, due to commencement of amortization of certain software
development projects. As a percentage of net sales, amortization of purchased
and developed software was 11% in each of the first nine months of 2000 compared
to 10% in the first nine months of 1999. Amortization of purchased and developed
software, which is computed on a straight-line basis, will increase in dollar
terms over time and decrease as a percentage of net sales as net sales increase.
Gross profit. Gross profit was $5,546,000 or 61% in the nine months
ended September 30, 2000 compared to $6,145,000 or 66% in the nine months ended
September 30, 1999. The decrease in gross profit as a percentage of net sales is
due primarily to the change in product mix and increased discounts to certain
customers. We have modified our discounting policies and focused our sales
efforts on more profitable products in order to increase gross margins to
historic levels.
Sales and marketing. Sales and marketing expense increased $694,000 to
$4,079,000 in the nine months ended September 30, 2000 from $3,385,000 in the
nine months ended September 30, 1999. This increase is due primarily to
additional sales, marketing, program management and service personnel associated
with our launch of a direct sales strategy.
Product research and development. Product research and development
expense increased $192,000 to $1,630,000 in the nine months ended September 30,
2000 from $1,437,000 in the nine months ended September 30, 1999. The increase
in research and development expense is due to increased personnel costs and, in
particular, 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 MergeWorkflow
products, the first of which was successfully completed in the third quarter of
2000. Product innovation is a key component of our strategy. However, we will
make some targeted reductions to our engineering staff in the fourth quarter in
order to decrease cash outflows.
General and administrative. General and administrative expense
increased $663,000 to $2,143,000 in the nine months ended September 30, 2000
from $1,480,000 in the nine months ended September 30, 1999. The increase in
general and administrative expense relates primarily to administration costs for
operating our subsidiaries in Toronto and Tokyo, both of which were established
in the second half of 1999, and from additional information technology
infrastructure to support our business. We expect general and administrative
expense to continue to decrease as the full impact of expense management efforts
are realized.
Depreciation and amortization. Depreciation and amortization expense
increased by $195,000 to $676,000 in the nine months ended September 30, 2000
from $481,000 in the nine months ended September 30, 1999 primarily due to
amortization expense related to the acquisition of Interpra in September 1999.
Acquired in-process technology and software write-off. In September
2000, we recorded a charge of $975,000 for technologies replaced by the
newly-developed Merge WorkFlow platform, which will have expanded applications
in Merge products due to the successful completion this quarter of MergePort
v2.0, the first WorkFlow product. We also wrote down a $155,000 prepaid software
license for which future product delivery from our vendor is at risk.
In September 1999, we recorded a charge of $1.2 million for the
in-process technology of Interpra Medical Imaging Network, Ltd. that had not
reached technological feasibility as of September 3, 1999, the date which Merge
acquired 100% of its voting stock, and a charge of $440,000 for the write down
of software capitalized by Merge that was replaced by technologies acquired in
the merger.
Other income (expense). Total other income (expense) was $(3,000) in
the nine months ended September 30, 2000 compared to $(16,000) in the nine
months ended September 30, 1999. Net interest expense was $23,000 in the nine
months ended September 30, 2000 compared to net interest income of $96,000 in
the nine months ended September 30, 1999 due to a decrease in cash balances and
borrowings under our bank line of credit. In the nine months ended September 30,
1999, we incurred a charge of $136,000 for foreign
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currency transaction expense to reflect the unrealized foreign exchange risk
due to changes in the value of the Dutch guilder and Canadian dollar relative to
the U.S. dollar on intercompany transactions that are not of a long-term
investment nature.
Income taxes. We recognized an income tax expense in the nine months
ended September 30, 2000 and in the nine months ended September 30, 1999,
despite incurring losses for financial reporting purposes, due primarily to
Japanese income tax withholding on software royalties.
LIQUIDITY AND CAPITAL RESOURCES
Operating cash flows. Operating cash flows were $(910,000) for the nine
months ended September 30, 2000. Our gross margin contribution was less than
fixed operating expense due to lower than anticipated net sales. The lower level
of sales also caused accounts receivable to decrease to $1.2 million from $2.5
million at June 30, 2000 and inventory to increase to $2.2 million from $1.4
million at June 30, 2000 as production outpaced shipments. Accounts payable grew
during the quarter to $1.8 million from $1.6 million at the end of the second
quarter.
Investing cash flows. Investing cash flows were $(1,619,000) for the
nine months ended September 30, 2000. Cash outflows for property and equipment
were $296,000 versus $392,000 in the comparable period last year, a result of
management initiatives to lower capital equipment spending. We also invested
$1,324,000 in capitalized software development, an increase of $335,000 over
1999, due to additional product development engineering in our Toronto office,
which was established in the Interpra acquisition in September 1999.
Financing cash flows. Financing cash flows were $900,000 for the nine
months ended September 30, 2000, representing borrowings on our working capital
line of credit, which was established in May 2000 with Merchants and
Manufacturers BanCorp of Milwaukee. The arrangement provides for up to $3
million in funding based on 70% of qualified domestic accounts receivable under
60 days, 60% of foreign accounts receivable under 60 days in countries with
Fitch-IBCA Long-Form risk ratings of AA or better and 25% of inventory. At
September 30, 2000 we had a $1.2 million borrowing capacity.
At September 30, 2000, cash and cash equivalents were $498,000. We
believe that existing cash and future cash flows from operations will be
sufficient to execute our current business. However, any projections of future
cash inflows and outflows are subject to substantial uncertainty. Beyond
December 31, 2000, we may need to raise additional capital to meet our long-term
liquidity needs. If we determine that we need to raise additional capital, we
may seek to sell additional equity or raise debt from third party sources. The
sale of additional equity or convertible debt securities could result in
dilution to our stockholders. In addition, any debt financing, if available,
could involve restrictive covenants, which could adversely affect our
operations. There can be no assurance that any of these financing alternatives,
including raising additional capital, will be available in amounts or on terms
acceptable to us, if at all. If we are unable to raise any needed additional
capital, we could be required to significantly alter our operating plan, which
could have a material adverse effect on the Company's business, financial
condition and results of operations.
RECENTLY ISSUED ACCOUNTING STANDARDS
During 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities (as amended by SFAS No. 137, Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133 and SFAS No. 138, Accounting for Certain Derivative
Instruments and Hedging Activities), which is effective for all fiscal years
beginning after June 15, 2000. SFAS No. 133 establishes a comprehensive standard
for the recognition and measurement of derivative instruments and hedging
activities. We expect the adoption of the new standard will not have a material
effect on our consolidated financial position, liquidity, or results of
operations.
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In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) 101, Revenue Recognition in Financial Statements, as
amended, which summarizes the staff's views in applying generally accepted
accounting principles to revenue recognition in financial statements. SAB 101 is
effective no later than the fourth quarter for fiscal years beginning after
December 15, 1999. The impact of this SAB was not significant to our results of
operations or financial position.
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PART II
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
See Exhibit Index
(b) No Reports on Form 8-K were filed during the third fiscal quarter.
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SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, the
Registrant caused this Report to be signed on its behalf by the undersigned,
thereunto duly authorized.
MERGE TECHNOLOGIES INCORPORATED
By: /s/ Richard A. Linden Date: November 13, 2000
------------------------------------------------
Richard A. Linden
President and Chief Executive Officer
By: /s/ Colleen M. Doan Date: November 13, 2000
-------------------------------------------------
Colleen M. Doan
Chief Financial Officer, Treasurer and Secretary
(Principal Financial Officer and Principal Accounting Officer)
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EXHIBIT INDEX
3.1 Articles of Incorporation of Registrant (2), Articles of Amendment as
of June 16, 1998 (3), and Articles of Amendment as of September 1,
1999 (6)
3.2 Amended and Restated By-Laws of Registrant as of February 3, 1998 (1)
10.2 Employment Agreement entered into as of September 1, 2000 between
Registrant and Richard A. Linden
10.3 Employment Agreement entered into as of September 1, 2000 between
Registrant and William C. Mortimore
10.5 1996 Stock Option Plan for Employees of Registrant dated May 13, 1996
(2)
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), Supplemental Office Space Lease dated
January 30, 1999 (2) and Supplemental Office Space Lease for 1126
Operating Associates Limited Partnership dated April 11, 2000 (4)
10.8 1999 Stock Option Plan For Directors (1)
10.9 Merge Technologies Incorporated 2000 Employee Stock Purchase Plan (5)
27.1 Financial Data Schedule
- - - - - - - - - - - - - - - -
(1) Incorporated by reference to Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1997.
(2) Incorporated by reference to Registration Statement on Form SB-2 (No.
333-39111) effective January 29, 1998.
(3) Incorporated by reference to Quarterly Report on Form 10-QSB for the
three months ended March 31, 1999.
(4) Incorporated by reference to Quarterly Report on Form 10-QSB for the
three months ended March 31, 2000.
(5) Incorporated by reference to Form 14A dated May 9, 2000.
(6) Incorporated by reference to Quarterly Report on Form 10-QSB for the
three months ended June 30, 2000.
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