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, 1999.
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.
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(Exact name of Registrant as specified in its charter)
Utah 87-0447695
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(State or other jurisdiction of (I.R.S. Identification No.)
incorporation or organization)
1600 West Merit Parkway, South Jordan UT, 84095
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(Address of Principal Executive Offices)
(801) 253-1600
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(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 7,529,352
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TITLE OR CLASS Number of Shares Outstanding at
May 13, 1999
<PAGE>
MERIT MEDICAL SYSTEMS, INC.
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INDEX TO FORM 10-Q
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<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
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<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 1999
and December 31, 1998..........................................................1
Consolidated Statements of Operations for the three months
ended March 31, 1999 and 1998..................................................3
Consolidated Statements of Cash Flows for the three months
ended March 31, 1999 and 1998..................................................4
Notes to Consolidated Financial Statements.....................................6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................................7
Item 3. Market Risk Disclosure........................................................9
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K..............................................9
SIGNATURES................................................................................10
</TABLE>
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1: Financial Statements
MERIT MEDICAL SYSTEMS, INC.
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<TABLE>
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1999 AND DECEMBER 31, 1998
- ------------------------------------------------------------
<CAPTION>
March 31, December 31,
ASSETS 1999 1998
- ------ ------------- -------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash $ 475,305 $ 851,910
Trade receivables - net 11,105,599 10,436,485
Employee and related
party receivables 564,912 472,994
Irish Development Agency grant receivable 329,776 198,445
Inventories 18,390,528 17,785,743
Prepaid expenses other assets 982,033 636,124
Deferred income tax assets 676,284 739,595
------------- -------------
Total current assets 32,524,437 31,121,296
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PROPERTY AND EQUIPMENT:
Land 1,065,985 1,065,985
Manufacturing equipment 14,018,970 13,669,599
Automobiles 85,359 89,469
Furniture and fixtures 7,989,623 7,963,835
Leasehold improvements 4,949,228 5,035,288
Construction-in-progress 1,895,426 1,182,669
------------- -------------
Total 30,004,591 29,006,845
Less accumulated depreciation
and amortization (12,706,807) (12,043,130)
------------- -------------
Property and equipment - net 17,297,784 16,963,715
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OTHER ASSETS:
Intangible assets - net 2,302,706 2,333,456
Deposits 66,381 74,218
Cost in excess of the fair value of assets of acquired-net 146,875 150,673
Prepaid royalty 21,428
------------- -------------
Total other assets 2,515,962 2,579,775
------------- -------------
TOTAL $ 52,338,183 $ 50,664,786
============= =============
</TABLE>
Continued on Page 2
See Notes to Consolidated Financial Statements
1
<PAGE>
MERIT MEDICAL SYSTEMS, INC.
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<TABLE>
CONSOLIDATED BALANCE SHEETS (Continued)
MARCH 31, 1999 AND DECEMBER 31, 1998
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<CAPTION>
March 31, December 31
LIABILITIES AND STOCKHOLDERS' EQUITY 1999 1998
- ------------------------------------ ------------- -------------
(Unaudited)
<S> <C> <C>
CURRENT LIABILITIES:
Line of credit $ 8,253,246 $ 7,634,607
Current portion of long-term debt 1,699,571 1,808,970
Trade payables 4,040,805 3,573,333
Accrued expenses 2,658,193 2,055,849
Advances from employees 73,625 74,090
Income taxes payable 296,018 194,722
------------- --------------
Total current liabilities 17,021,458 15,341,571
DEFERRED INCOME TAX LIABILITIES 1,278,508 1,275,651
LONG-TERM DEBT 3,064,282 3,388,835
DEFERRED CREDITS 1,065,380 1,023,861
------------- -------------
Total Liabilities 22,429,628 21,029,918
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MINORITY INTEREST IN SUBSIDIARY 567,836 548,500
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STOCKHOLDERS' EQUITY:
Preferred stock- 5,000,000 shares authorized as of
March 31, 1999 and December 31, 1998, respectively,
no shares issued
Common stock- no par value; 20,000,000 and 10,000,000
shares authorized, respectively; 7,528,668 and 7,508,914
shares issued at March 31, 1999 and December 31, 1998,
respectively 17,888,503 17,793,094
Accumulated other comprehensive loss (677,835) (271,654)
Retained earnings 12,130,051 11,564,928
------------- -------------
Total stockholders' equity 29,340,719 29,086,368
------------- -------------
TOTAL $ 52,338,183 $ 50,664,786
============= =============
</TABLE>
See Notes to Consolidated Financial Statements
2
<PAGE>
MERIT MEDICAL SYSTEMS, INC.
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CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998 (Unaudited)
- -----------------------------------------------------------------
March 31, March 31,
1999 1998
------------- -------------
SALES $ 17,701,723 $ 16,466,015
COST OF SALES 11,009,621 10,302,854
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GROSS PROFIT 6,692,102 6,163,161
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OPERATING EXPENSES:
Selling, general and administrative 4,819,663 4,166,965
Research and development 801,703 888,193
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TOTAL 5,621,366 5,055,158
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INCOME FROM OPERATIONS 1,070,736 1,108,003
OTHER EXPENSE - NET 230,546 196,660
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INCOME BEFORE INCOME TAX EXPENSE 840,190 911,343
INCOME TAX EXPENSE 255,731 459,115
MINORITY INTEREST IN INCOME OF SUBSIDIARY (19,336) (24,573)
------------- -------------
NET INCOME $ 565,123 $ 427,655
============= =============
EARNINGS PER COMMON SHARE -
Basic and diluted $ .08 $ .06
============= =============
AVERAGE COMMON SHARES -
Basic 7,511,095 7,398,596
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Diluted 7,512,809 7,437,485
============= =============
See Notes to Consolidated Financial Statements
3
<PAGE>
MERIT MEDICAL SYSTEMS, INC.
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<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998 (Unaudited)
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<CAPTION>
March 31, March 31,
1999 1998
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<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 565,123 $ 427,655
------------- -------------
Adjustments to reconcile net income to net
cash provided by (used in) in operating activities:
Depreciation and amortization 744,812 674,366
Bad debt expense 8,018 75,312
(Gains) on sales and abandonment of
property and equipment (330)
Amortization of deferred credits (45,845) (8,423)
Deferred income taxes 66,168 63,427
Minority interest in income of subsidiary 19,336 24,573
Changes in operating assets and liabilities:
Trade receivables (677,132) 68,293
Employee and related party receivables (91,918) (15,359)
Irish Development Agency grant receivable (43,967) 231,796
Inventories (604,785) (852,452)
Prepaid expenses and other assets (345,909) (191,522)
Deposits 7,837 (7,563)
Trade payables 467,472 (585,987)
Accrued expenses 602,344 (75,390)
Advances from employees (465) (13,691)
Income taxes payable 101,296 97,328
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Total adjustments 207,262 (515,622)
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Net cash provided by ( used in) operating activities 772,385 (87,967)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures for:
Property and equipment (947,731) (316,538)
Intangible assets (25,159) (35,381)
Proceeds from sale of property and equipment 330
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Net cash used in investing activities (972,890) (351,589)
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</TABLE>
Continued on page 5
See Notes to Consolidated Financial Statements
4
<PAGE>
MERIT MEDICAL SYSTEMS, INC.
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<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998 (Unaudited)
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<CAPTION>
March 31, March 31,
1999 1998
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<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under line of credit 618,639 608,984
Proceeds from issuance of common stock 95,409 103,359
Principal payments on:
Long-term debt (483,967) (449,001)
Deferred credits (17,367)
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Net cash provided by financing activities 230,081 245,975
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EFFECT OF EXCHANGE RATES ON CASH (406,181) (188,346)
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NET DECREASE IN CASH (376,605) (381,927)
CASH AT BEGINNING OF PERIOD 851,910 976,692
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CASH AT END OF PERIOD $ 475,305 $ 594,765
============= =============
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Cash paid during the period for interest (including
capitalized interest of $28,614 and $32,512, respectively) $ 181,366 $ 160,731
============= =============
Income taxes $ 88,267 $ 298,360
============= =============
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
During the three month periods ended March 31, 1999 and 1998, the Company
entered into notes payable totaling $50,015 and $433,954, respectively, for
manufacturing equipment and furniture and fixtures.
See Notes to Consolidated Financial Statements
5
<PAGE>
MERIT MEDICAL SYSTEMS, INC.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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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, 1999 and December 31, 1998, and the
results of its operations and cash flows for the three months ended March 31,
1999 and 1998. The results of operations for the three months ended March 31,
1999 and 1998 are not necessarily indicative of the results for a full year
period.
2. Inventories. Inventories at March 31, 1999 and December 31, 1998 consisted
of the following:
March 31, December 31,
1999 1998
----------- -------------
Raw materials $9,011,035 $7,458,133
Work-in-process 2,541,671 1,954,696
Finished goods 7,679,589 8,981,007
Less reserve for obsolete inventory (841,767) (608,093)
----------- -------------
Total $18,390,528 $17,785,743
=========== =============
3. Income Taxes. The Company has not fully allocated income tax expense between
current and deferred for the quarters ended March 31, 1999 and 1998. The
effective tax rate for the quarter ended March 31, 1998 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. The effective tax rate improved during the quarter
ended March 31, 1999, as the Company's operations in Ireland became profitable
and their lower tax rate improved the Company's overall effective 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, 1999 and December 31,
1998, the cumulative effect of such transactions reduced stockholders' equity by
$677,835 and $271,654, respectively. Comprehensive income for the three months
ended March 31, 1999 and 1998 is computed as follows:
Three Months Ended
March 31,
---------
1999 1998
---------- ----------
Net income $565,123 $427,655
Foreign currency translation (406,181) (188,346)
Comprehensive income $158,942 $239,309
========== ==========
6
<PAGE>
MERIT MEDICAL SYSTEMS, INC.
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ITEM 2:
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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Operations. The Company's sales and earnings increased for the three months
ended March 31, 1999 compared to the same period in 1998. The following table
sets forth certain operational data as a percentage of sales for the three
months ended March 31, 1999 and 1998:
Three Months Ended
March 31,
---------
1999 1998
---- ----
Sales 100.0 % 100.0%
Gross Profit 37.8 37.4
Selling, general and administrative 27.2 25.3
Research and development 4.5 5.4
Income From Operations 6.0 6.7
Other Expense 1.4 1.2
Net Income 3.2 2.6
Sales for the first quarter of 1999 increased by 8%, or $1,235,708, compared to
the same period for 1998. This increase was attributable to growth in sales of
stand-alone products (up 16%), and custom kits (up 2%). The largest sales growth
for stand-alone products came from inflation devices (up 17%). The introduction
in April of 1998 of a new line of Fountain Infusion Catheters also contributed
to growth in stand-alone products. International sales for the first quarter
represented 24% of total Company sales, compared to 23% for 1997.
Gross Profit. Gross profit as a percentage of sales increased in the first
quarter of 1999 to 37.8%, as compared to 37.4% in the first quarter of 1998.
Factors contributing to the improvement were increased sales of higher-margin,
stand alone products such as the new Fountain Infusion Catheter and the
inflation devices.
Operating Expenses. Operating expenses increased as a percentage of sales to
31.8%, of sales in the first quarter of 1999, compared to 30.7% in the first
quarter of 1998. Selling, general and administrative costs as a percentage of
sales increased to 27.2%, compared to 25.3% for the first quarter of 1998. The
increase in the current period was due to increases in MIS personnel associated
with implementing the Company's Oracle integrated business information system
and Y2K compliance, as well as strengthening its OEM sales and new business
development departments. Research and development expenses declined by $86,490
and were 4.5% of sales in the first quarter of 1999 compared to 5.4% of sales
for the first quarter of 1998.
Income. During the quarter ended March 31, 1999, the Company reported income
from operations of $1,070,736, a decrease of 3.4% from income from operations of
$1,108,003 for the comparable period in 1998. In spite of this decline in income
from operations, net income rose to $565,123 up from $427,655, an increase of
32%, when comparing net income for first quarter of 1999 to first quarter 1998.
This increase was primarily due to a lower effective tax rate of 30%, down from
50% for the same quarter last year. The turn from a loss in the first quarter of
1998 to profitability in the first quarter of 1999 for the Company's Irish
operation contributed greatly to this reduced income tax rate.
7
<PAGE>
MERIT MEDICAL SYSTEMS, INC.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
- ----------------------------------------------------------------------------
Liquidity and Capital Resources. At March 31, 1999, the Company's working
capital was $15,502,979, which represented a current ratio of 1.9 to 1. During
1998, the Company increased an available secured bank line of credit to
$10,500,000. In 1998 the Company negotiated a reduction in the interest rate and
fees for its line of credit. At March 31, 1999, the outstanding balance under
the line of credit was $8,253,246. 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 sources 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. The Company has completed a review of its business information
systems with regard to Year 2000 compliance and is either replacing or
correcting those computer systems that have been found to have date-related
deficiencies. A new Oracle integrated business information system for the order
administration, financial and manufacturing processes was implemented and
completed in November 1998.
Through March 31, 1999 the Company had incurred approximately $3.5 million
in costs to improve the Company's information technology systems and for Year
2000 readiness efforts. Of this amount, a substantial portion represents the
costs of implementing and transitioning to new computer hardware and software
for the Company's Oracle enterprise-wide business systems. Substantially all of
these costs have been capitalized. The Company anticipates incurring an
additional $500,000 in connection with the Year 2000 readiness efforts. The
Company expects to have all Year 2000 readiness efforts completed by September
30, 1999.
The Company believes its non-IT systems and products being shipped today
have been assessed and found to be Year 2000 compliant. The Company relies on
third-party providers for materials and services such as telecommunications,
utilities, financial services and other key services. Interruption of those
materials or services due to Year 2000 issues could affect the Company's
operations. The Company has completed the process of contacting its major
suppliers and has determined that all major suppliers are in the process of
ensuring Year 2000 compliance. However, since the Company is dependent on key
third parties, there can be no guarantee that the Company's efforts will prevent
a material adverse impact on its financial position, results of operations or
liquidity in future periods in the event that a significant number of suppliers
and /or customers experience business disruptions as a result of their lack of
Year 2000 readiness.
The Company is in the process of implementing the Oracle system in its
Irish facility with a planned completion date for the end of the third quarter
of 1999. Both the Company's cost estimates and completion time frames could be
influenced by the Company's ability to successfully identify all Year 2000
issues, the nature and amount of corrective action required, the availability
and cost of trained personnel in this area and the Year 2000 success that key
third parties and customers attain. While these and other unforeseen factors
could have a material adverse impact on the Company's financial position,
results of operations or liquidity in future periods, management believes that
it has implemented an effective Year 2000 compliance program that will minimize
the possible negative consequences to the Company.
The foregoing discussion of the Company's Year 2000 readiness includes
forward looking statements, including estimates of the time frames and costs for
addressing the known Year 2000 issues confronting the Company, and is based upon
management's current estimates, which were derived using numerous assumptions.
There can be no assurance that these estimates will be achieved, and actual
events and results could differ materially from those anticipated. Specific
factors that might cause such material differences include, but are not limited
to, the availability of personnel with required remediation skills, the ability
of the Company to identify and correct or replace all relevant computer code and
the success of the third parties with whom the Company does business in
addressing their Year 2000 issues
8
<PAGE>
MERIT MEDICAL SYSTEMS, INC.
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DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report may include "Forward-Looking Statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E
of the Securities Exchange Act of 1934, as amended. All statements other than
statements of historical fact are "Forward-Looking Statements" for purposes of
these provisions, including any projections of earnings, revenues or other
financial items, any statements of the plans and objectives of management for
future operations, any statements concerning proposed new products or services,
any statements regarding future economic conditions or performance, and any
statements of assumptions underlying any of the foregoing. In some cases;
Forward-Looking Statements can be identified by the use of terminology such as
"may," "will," "expects," "plans," "anticipates," "estimates," "potential," or
"continue," or the negative thereof or other comparable terminology. Although
the Company believes that the expectations reflected in the Forward-Looking
Statements contained herein are reasonable, there can be no assurance that such
expectations or any of the Forward-Looking Statements will prove to be correct,
and actual results could differ materially from those projected or assumed in
the Forward-Looking Statements are subject to inherent risks and uncertainties,
including market acceptance of the company's products, potential product
recalls, delays in obtaining regulatory approvals, cost increases, price and
product competition, availability of labor and material, foreign currency
fluctuations, changes in health care markets related to health care reform
initiatives and other factors referred to in the Company's press releases and
reports filed with the Securities and Exchange Commission. All subsequent
Forward-Looking Statements attributable to the Company or persons acting on its
behalf are expressly qualified in their entirety by these cautionary statements.
ITEM 3:
MARKET RISK DISCLOSURES
The Company does not engage in significant derivative financial
instruments. The Company does experience risk associated with foreign currency
fluctuations, and interest rate risk associated with its variable rate debt;
however, such risks have not been material to the Company and, accordingly, the
Company has not deemed it necessary to enter into agreements to hedge such
risks. The Company may enter into such agreements in the event that such risks
become material in the future.
9
<PAGE>
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, 1999 /s/FRED P. LAMPROPOULOS
------------- --------------------------------------
FRED P. LAMPROPOULOS
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Date: May 13, 1999 /s/KENT W. STANGER
------------- --------------------------------------
KENT W. STANGER
SECRETARY AND CHIEF FINANCIAL OFFICER
10
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM MERIT
MEDICAL SYSTEMS, INC.'S CONSOLIDATED BALANCE SHEET AND INCOME STATEMENT FOR THE
THREE MONTH PERIOD ENDING MARCH 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 475305
<SECURITIES> 0
<RECEIVABLES> 11311330
<ALLOWANCES> (205731)
<INVENTORY> 18390528
<CURRENT-ASSETS> 32524437
<PP&E> 30004591
<DEPRECIATION> (12706807)
<TOTAL-ASSETS> 52338183
<CURRENT-LIABILITIES> 17021458
<BONDS> 3064282
0
0
<COMMON> 17888503
<OTHER-SE> 11452216
<TOTAL-LIABILITY-AND-EQUITY> 52338183
<SALES> 17701723
<TOTAL-REVENUES> 17701723
<CGS> 11009621
<TOTAL-COSTS> 11009621
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 8018
<INTEREST-EXPENSE> 228528
<INCOME-PRETAX> 840190
<INCOME-TAX> 255731
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 565123
<EPS-PRIMARY> .08
<EPS-DILUTED> .08
</TABLE>
