SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- --- ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998.
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- --- ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____ TO _____.
Commission File Number 0-18592
MERIT MEDICAL SYSTEMS, INC.
- --------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Utah 87-0447695
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Identification No.)
incorporation or organization)
1600 West Merit Park Way, South Jordan UT, 84095
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices)
(801) 253-1600
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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
--- ---
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of the latest practicable date.
Common Stock 7,413,748
------------ ---------
TITLE OR CLASS Number of Shares Outstanding at
May 13, 1998
<PAGE>
MERIT MEDICAL SYSTEMS, INC.
---------------------------
INDEX TO FORM 10-Q
------------------
PART I. FINANCIAL INFORMATION PAGE
----
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 1998
and December 31, 1997...........................................1
Consolidated Statements of Operations for the three months
ended March 31, 1998 and 1997...................................3
Consolidated Statements of Cash Flows for the three months
ended March 31, 1998 and 1997...................................4
Notes to Consolidated Financial Statements......................6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................7
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K...............................9
SIGNATURES..................................................................9
<PAGE>
PART I - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
ITEM 1: Financial Statements
MERIT MEDICAL SYSTEMS, INC.
- ---------------------------
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1998 AND DECEMBER 31, 1997
- ---------------------------------------------------------------------------------------------
March 31, December 31,
ASSETS 1998 1997
- ------ ----------- -----------
(Unaudited)
CURRENT ASSETS:
<S> <C> <C>
Cash $ 594,765 $ 976,692
Trade receivables - net 9,455,838 9,599,443
Employee and related
party receivables 304,171 288,812
Irish Development Agency grant receivable 438,658 747,888
Inventories 15,387,892 14,535,440
Prepaid expenses other assets 729,781 538,259
Deferred income tax assets 731,989 782,435
Total current assets 27,643,094 27,468,969
----------- -----------
PROPERTY AND EQUIPMENT:
Land 1,099,915 1,101,544
Building 904,255 932,448
Manufacturing equipment 11,232,315 10,909,529
Automobiles 111,493 112,633
Furniture and fixtures 4,878,875 4,817,738
Leasehold improvements 4,454,204 4,483,071
Construction-in-progress 3,173,812 2,747,414
---------- -----------
Total 25,854,869 25,104,377
Less accumulated depreciation
and amortization (10,244,541) (9,648,746)
----------- -----------
Property and equipment - net 15,610,328 15,455,631
----------- -----------
OTHER ASSETS:
Intangible assets - net 2,007,496 2,024,050
Deposits 54,175 46,612
Cost in excess of the fair value of assets of acquired-net 162,066 167,273
Prepaid royalty 85,714 107,143
----------- -----------
Total other assets 2,309,451 2,345,078
----------- -----------
TOTAL $ 45,562,873 $ 45,269,678
=========== ===========
</TABLE>
Continued on Page 2
See Notes to Consolidated Financial Statements
1
<PAGE>
MERIT MEDICAL SYSTEMS, INC.
- ---------------------------
<TABLE>
CONSOLIDATED BALANCE SHEETS (Continued)
MARCH 31, 1998 AND DECEMBER 31, 1997
- ------------------------------------
<CAPTION>
LIABILITIES AND STOCKHOLDERS' March 31, December 31,
- ----------------------------- 1998 1997
EQUITY ------------ -----------
- ------ (Unaudited)
CURRENT LIABILITIES:
<S> <C> <C>
Line of credit $ 5,233,711 $ 4,624,727
Current portion of long-term debt 1,854,262 1,802,932
Trade payables 2,852,362 3,438,349
Accrued expenses 2,338,660 2,414,050
Advances from employees 67,554 81,245
Income taxes payable 467,023 369,695
------------ -----------
Total current liabilities 12,813,572 12,730,998
DEFERRED INCOME TAX LIABILITIES 895,983 883,002
LONG-TERM DEBT 3,847,309 3,913,686
DEFERRED CREDITS 1,439,927 1,543,151
------------ -----------
Total Liabilities 18,996,791 19,070,837
------------ -----------
MINORITY INTEREST IN SUBSIDIARY 421,265 396,692
------------ -----------
STOCKHOLDERS' EQUITY:
Preferred stock- 5,000,000 shares authorized as of
March 31, 1998 and December 31, 1997, respectively,
no shares issued
Common stock- no par value; 20,000,000 and 10,000,000
shares authorized, respectively; 7,413,509 and 7,395,091
shares issued at March 31, 1998 and December 31, 1997,
respectively 17,282,330 17,178,971
Foreign currency translation adjustment (678,937) (490,591)
Retained earnings 9,541,424 9,113,769
------------ -----------
Total stockholders' equity 26,144,817 25,802,149
------------ -----------
TOTAL $ 45,562,873 $ 45,269,678
============ ============
</TABLE>
See Notes to Consolidated Financial Statements
2
<PAGE>
MERIT MEDICAL SYSTEMS, INC.
- ---------------------------
<TABLE>
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997 (Unaudited)
- ------------------------------------------------------------------------------------------------------
<CAPTION>
March 31, March 31,
1998 1997
---------- ----------
<S> <C> <C>
SALES $16,466,015 $13,833,143
COST OF SALES 10,302,854 8,451,853
---------- ----------
GROSS PROFIT 6,163,161 5,381,290
---------- ----------
OPERATING EXPENSES:
Selling, general and administrative 4,166,965 3,839,438
Research and development 888,193 910,053
---------- ----------
TOTAL 5,055,158 4,749,491
---------- ----------
INCOME FROM OPERATIONS 1,108,003 631,799
OTHER EXPENSE - NET 196,660 179,533
---------- ----------
INCOME BEFORE INCOME TAX EXPENSE 911,343 452,266
INCOME TAX EXPENSE 459,115 249,086
MINORITY INTEREST IN INCOME OF SUBSIDIARY (24,573) (11,113)
---------- ----------
NET INCOME $ 427,655 $ 192,067
========== ==========
EARNINGS PER COMMON SHARE -
Basic and diluted $ .06 $ .03
========== ==========
AVERAGE COMMON SHARES -
Basic and diluted 7,437,485 7,307,292
========== ==========
</TABLE>
See Notes to Consolidated Financial Statements
3
<PAGE>
MERIT MEDICAL SYSTEMS, INC.
- ---------------------------
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997 (Unaudited)
- ------------------------------------------------------------------------
<CAPTION>
March 31, March 31,
1998 1997
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net income $427,655 $192,067
---------- ----------
Adjustments to reconcile net income to net
cash provided by (used in) in operating activities:
Depreciation and amortization 674,366 508,143
Bad debt expense 75,312 28,780
(Gains) on sales and abandonment of
property and equipment (330) (3,394)
Amortization of deferred credits (8,423)
Deferred income taxes 63,427 42,463
Minority interest in income of subsidiary 24,573 11,113
Changes in operating assets and liabilities
net of effects from purchase of UMI:
Trade receivables 68,293 (592,872)
Employee and related party receivables (15,359) 40,339
Irish Development Agency grant receivable 231,796 5,247
Inventories (852,452) 21,890
Prepaid expenses and other assets (191,522) (324,659)
Deposits (7,563) (11,329)
Trade payables (585,987) (327,353)
Accrued expenses (75,390) (320,972)
Advances from employees (13,691) (31,178)
Income taxes payable 97,328 189,177
---------- ----------
Total adjustments (515,622) (764,605)
---------- ----------
Net cash used in operating activities (87,967) (572,538)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures for:
Property and equipment (316,538) (487,513)
Cash payments in connection with assets purchased from UMI (49,265)
Intangible assets (35,381) 66,556
Proceeds from sale of property and equipment 330 16,482
---------- ----------
Net cash used in investing activities ( 351,589) (453,740)
---------- ----------
</TABLE>
Continued on page 5
See Notes to Consolidated Financial Statements
4
<PAGE>
MERIT MEDICAL SYSTEMS, INC.
- ---------------------------
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997 (Unaudited)
- -----------------------------------------------------------------
<CAPTION>
March 31, March 31,
1998 1997
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
<S> <C> <C>
Borrowings under line of credit 608,984
Proceeds from issuance of common stock 103,359 852,368
Principal payments on:
Long-term debt (449,001) (290,954)
Line of credit (34,623)
Deferred credits (17,367) (17,367)
---------- ----------
Net cash provided by financing activities 245,975 509,424
---------- ----------
EFFECT OF EXCHANGE RATES ON CASH (188,346) (155,600)
---------- ----------
NET (DECREASE) IN CASH (381,927) (672,454)
CASH AT BEGINNING OF PERIOD 976,692 1,262,950
---------- ----------
CASH AT END OF PERIOD $ 594,765 $ 590,496
========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Cash paid during the period for interest (including
capitalized interest of $32,512 and $29,428, respectively) $ 160,731 $ 205,042
========== ==========
Income taxes $ 298,360 $ 17,446
========== ==========
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
During the three month periods ended March 31, 1998 and 1997, the Company
entered into notes payable totaling $433,954 and $278,216, respectively, for
manufacturing equipment and furniture and fixtures.
During the quarter ended March 31, 1997, the Company acquired substantially all
of the operating assets of Universal Medical Instrument Corporation for 152,424
shares of Merit restricted common stock. In connection with this acquisition,
the Company recorded the following as of the acquisition date:
Assets Acquired $ 863,198
Cost in excess of fair market value 182,288
----------
Total purchase price $ 1,045,486
==========
See Notes to Consolidated Financial Statements
5
<PAGE>
MERIT MEDICAL SYSTEMS, INC.
- ---------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. Basis of Presentation. In the opinion of management, the accompanying
consolidated financial statements contain all adjustments, consisting only of
normal recurring accruals, necessary for a fair presentation of financial
position of the Company as of March 31, 1998 and December 31, 1997, and the
results of its operations and cash flows for the three months ended March 31,
1998 and 1997. The results of operations for the three months ended March 31,
1998 and 1997 are not necessarily indicative of the results for a full year
period.
2. Inventories. Inventories at March 31, 1998 and December 31, 1997 consisted
of the following:
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
---------- -----------
<S> <C> <C>
Raw materials $ 4,869,733 $ 4,635,593
Work-in-process 5,116,884 4,305,202
Finished goods 6,132,810 6,261,203
Less reserve for obsolete inventory (731,535) (666,558)
---------- -----------
Total $15,387,892 $14,535,440
=========== ===========
</TABLE>
3. Income Taxes. The Company has not fully allocated income tax expense between
current and deferred for the quarters ended March 31, 1998 and 1997. The
effective tax rate for the quarters ended March 31, 1998 and 1997 is higher than
the federal statutory tax rate largely due to losses incurred by the Company's
Irish subsidiary for which a tax benefit was recorded at a rate of 10% vs a 35%
federal statutory tax rate.
4. Reporting Comprehensive Income - In June 1997, the Financial Accounting
Standards Board (FASB) issued SFAS No.130, "Reporting Comprehensive Income."
SFAS No. 130 establishes standards for reporting and display of comprehensive
income and its components (revenues, expenses, gains and losses) in a full set
of general-purpose financial statements. This statement requires that an
enterprise (a) classify items of other comprehensive income by their nature in a
financial statement and (b) display the accumulated balance of other
comprehensive income separately from retained earnings and additional
paid-in-capital in the equity section of a statement of financial position.
Effective January 1, 1998, the Company adopted the provisions of SFAS No. 130.
Accordingly, the Company determined that the only transaction considered to be
an additional component of comprehensive income is the cumulative effect of
foreign currency translation adjustments. As of March 31, 1998 and December 31,
1997, the cumulative effect of such transactions reduced stockholders' equity by
approximately $678,937 and $490,591, respectively. The net impact to operations
for the three months ended March 31, 1998 and 1997 would reduce comprehensive
income by approximately $188,346 and $155,600, respectively.
6
<PAGE>
MERIT MEDICAL SYSTEMS, INC.
- ---------------------------
ITEM 2:
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Operations. The Company's sales increased for the three months ended March 31,
1998 compared to the same period in 1997. The following table sets forth certain
operational data as a percentage of sales for the three months ended March 31,
1998 and 1997:
Three Months Ended
March 31,
---------
1998 1997
---- ----
Sales 100.0 % 100.0%
Gross Profit 37.4 38.9
Selling, general and administrative 25.3 27.8
Research and development 5.4 6.6
Income From Operations 6.7 4.6
Other Expense 1.2 1.3
Net Income 2.6 1.4
Sales for the first quarter of 1998 increased by 19%, or $2,632,872, compared to
the same period for 1997. This increase was attributable to growth in sales of
inflation devices (up 12%), custom kits (up 23%), and new angiographic needles.
The Company has also begun to see increased sales of many of its stand alone
products (up 20%), in part due to increased OEM sales to other medical products
companies. International sales for the first quarter of 1997 and 1998
represented 23% of total Company sales. For the first quarter of 1998 the
international direct sales force accounted for sales of $2,233,438, an increase
of 40% over comparable rates in the first quarter of 1997, which represented 59%
of total international sales. The balance of international sales were made
through independent distributors.
Gross Profit. Gross profit as a percentage of sales decreased in the first
quarter of 1998 to 37.4% as compared to 38.9% in the first quarter of 1997.
Factors contributing to the decrease were increased sales of lower-margin custom
kits, price competition affecting several products, especially in European
markets, and a strong U.S. dollar affecting the currency translation of the
Company's European sales.
7
<PAGE>
MERIT MEDICAL SYSTEMS, INC.
- ---------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
- --------------------------------------------------------------------------------
Operating Expenses. Operating expenses decreased as a percentage of sales to
30.7% of sales in the first quarter of 1998 compared to 34.4% in the first
quarter of 1997. Selling general and administrative costs as a percentage of
sales declined to 25.3% compared to 27.8% for the first quarter of 1997. The
improvement in the current period was due primarily to economies of scale
associated with increasing sales volumes and a continuing Company wide focus on
achieving greater individual productivity and cost containment. Research and
development expenses declined by $21,860 and were 5.4% of sales in the 1st
quarter of 1998 compared to 6.6% of sales for the 1st quarter of 1997. This
decline in expense was due to the completion of the development of the PTCA
guidewire in Ireland at the end of 1997.
Income. During the quarter ended March 31, 1998, the Company reported income
from operations of $1,108,003 an increase of 75.4% from income from operations
of $631,799 for the comparable period in 1997. Higher earnings for the most
recent quarter were attributed to higher sales, reduced selling, general and
administrative and research and development expenses as a percentage of sales. A
lower effective tax rate of 50%, down from 55% for the same quarter last year,
also contributed to a net income increase to $427,655 up 123% from $192,067,
when comparing net income for lst quarter of 1998 to lst quarter 1997.
Liquidity and Capital Resources. At March 31, 1998, the Company's working
capital was $14,829,522 which represented a current ratio of 2.2 to 1. During
1997, the Company increased an available secured bank line of credit to
$10,500,000. The line of credit bears interest at the bank's prime rate and
contains various conditions and restrictions. At March 31, 1998, the outstanding
balance under the line of credit was $5,233,711. Historically, the Company has
incurred significant expenses in connection with product development and
introduction of new products. Substantial capital has also been required to
finance growth in inventories and receivables. The Company's principal source of
funding for these and other expenses has been the sale of equity and cash
generated from operations, secured loans on equipment and bank lines of credit.
The Company believes that its present sources of liquidity and capital are
adequate for its current operations.
Year 2000. In 1996 the Company began the conversion of the principal computer
software systems to a new integrated system to support future growth and improve
productivity. Management believes that an additional benefit of the conversion
will be in compliance with Year 2000 requirements without material additional
expenditures or a material adverse effect on the Company's financial position,
results of operations or liquidity. The Company also has third-party customers,
financial institutions, vendors and others with which it conducts business.
While the Company believes that these third-party vendors and customers will
successfully address Year 2000 issues in a timely manner, it is possible that a
series of failures by third parties could have a material adverse effect on the
Company's results of operations in future years.
Statements contained in this release which are not purely historical are
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. These encompass Merit's beliefs, expectations,
hopes or intentions regarding the future. All forward-looking statements
included in this release are made as of the date hereof and are based on
information available to Merit as of such date. Merit assumes no obligation to
update any forward-looking statement. It is important to note that actual
outcomes and Merit's actual results could differ materially from those in such
forward-looking statements. Factors that could cause actual results to differ
materially include risks and uncertainties related to future market growth such
as product acceptance, product recalls, competition and the overall regulatory
environment.
8
<PAGE>
MERIT MEDICAL SYSTEMS, INC.
- ---------------------------
PART II - OTHER INFORMATION
ITEM 6: Exhibits and Reports on Form 8-K
(a) Exhibits - none required to be filed
(b) Reports on Form 8-K - none
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MERIT MEDICAL SYSTEMS, INC.
- ---------------------------
REGISTRANT
Date: May 13, 1998
------------ ---------------------------------
FRED P. LAMPROPOULOS
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Date: May 13, 1998
------------ ---------------------------------
KENT W. STANGER
SECRETARY AND CHIEF FINANCIAL OFFICER
9
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<S> <C>
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<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
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<ALLOWANCES> (247306)
<INVENTORY> 15387892
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<DEPRECIATION> (10244541)
<TOTAL-ASSETS> 45562873
<CURRENT-LIABILITIES> 12813572
<BONDS> 3847309
0
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<COMMON> 17282330
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<SALES> 16466015
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</TABLE>
