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, 2000.
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 Parkway, 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 7,748,021
- ---------------- ------------------------------
TITLE OR CLASS Number of Shares Outstanding at
May 15, 2000
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MERIT MEDICAL SYSTEMS, INC.
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INDEX TO FORM 10-Q
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PART I. FINANCIAL INFORMATION PAGE
----
Item 1. Financial Statements
<S> <C>
Consolidated Balance Sheets as of March 31, 2000
and December 31, 1999..........................................................1
Consolidated Statements of Operations for the three months
ended March 31, 2000 and 1999..................................................3
Consolidated Statements of Cash Flows for the three months
ended March 31, 2000 and 1999..................................................4
Notes to Consolidated Financial Statements.....................................6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................................8
Item 3. Qualitative and Quantitative Disclosures About Market Risk.....................9
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.............................................10
SIGNATURES................................................................................11
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<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1: Financial Statements
MERIT MEDICAL SYSTEMS, INC.
- ---------------------------
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2000 AND DECEMBER 31, 1999
- ------------------------------------
March 31 December 31,
ASSETS 2000 1999
- ----------- ------------- ------------
(Unaudited)
CURRENT ASSETS:
Cash $ 751,370 $ 668,711
Trade receivables - net 13,194,587 12,550,132
Employee and related
party receivables 537,178 502,803
Irish Development
Agency grant receivable 80,154 93,059
Inventories 28,401,576 27,521,087
Prepaid expenses other assets 856,443 564,213
Deferred income tax assets 1,029,147 1,052,745
Income tax refund receivable 217,182 210,112
------------ ------------
Total current assets 45,067,637 43,162,862
------------ ------------
PROPERTY AND EQUIPMENT:
Land 1,365,985 1,365,985
Building 1,500,000 1,500,000
Manufacturing equipment 18,553,734 17,617,798
Automobiles 131,186 133,316
Furniture and fixtures 9,136,204 8,883,297
Leasehold improvements 5,216,125 5,114,964
Construction-in-progress 2,035,675 1,669,725
------------ ------------
Total 37,938,909 36,285,085
Less accumulated depreciation
and amortization (15,247,747) (14,277,666)
------------ ------------
Property and equipment - net 22,691,162 22,007,419
------------ ------------
OTHER ASSETS:
Intangible assets - net 2,408,867 2,319,581
Deposits 111,289 51,319
Cost in excess of the fair
value of assets of acquired-net 4,755,446 4,819,288
------------ ------------
Total other assets 7,275,602 7,190,188
------------ ------------
TOTAL $ 75,034,401 $ 72,360,469
============ ============
Continued on Page 2
See Notes to Consolidated Financial Statements
1
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MERIT MEDICAL SYSTEMS, INC.
- ---------------------------
CONSOLIDATED BALANCE SHEETS (Continued)
MARCH 31, 2000 AND DECEMBER 31, 1999
- ------------------------------------
March 31 December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 2000 1999
- ------------------------------------ ------------ ------------
(Unaudited)
CURRENT LIABILITIES:
Current portion of long-term debt $ 1,395,627 $ 1,001,917
Trade payables 3,986,777 4,749,432
Accrued expenses 4,178,773 3,092,280
Advances from employees 137,937 116,094
Income taxes payable 269,441
------------ ------------
Total current liabilities 9,699,114 9,229,164
DEFERRED INCOME TAX LIABILITIES 1,727,931 1,722,094
LONG-TERM DEBT 29,297,491 27,817,308
DEFERRED CREDITS 864,781 901,767
------------ ------------
Total Liabilities 41,589,317 39,670,333
------------ ------------
STOCKHOLDERS' EQUITY:
Preferred stock- 5,000,000 shares
authorized as of March 31, 2000
and December 31, 1999, respectively,
no shares issued
Common stock- no par value; 20,000,000
and 10,000,000 shares authorized,
respectively; 7,729,802 and 7,591,236
shares issued at March 31, 2000 and
December 31, 1999, respectively 19,379,180 18,428,572
Accumulated other comprehensive loss (565,132) (528,954)
Retained earnings 14,631,036 14,790,518
------------ ------------
Total stockholders' equity 33,445,084 32,690,136
------------ ------------
TOTAL $ 75,034,401 $ 72,360,469
============ ============
See Notes to Consolidated Financial Statements
2
<PAGE>
MERIT MEDICAL SYSTEMS, INC.
- ---------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 (Unaudited)
- ----------------------------------------------------------------------
March 31, March 31,
2000 1999
------------ ------------
SALES $ 22,080,435 $ 17,701,723
COST OF SALES 14,446,385 11,009,621
------------ ------------
GROSS PROFIT 7,634,050 6,692,102
------------ ------------
OPERATING EXPENSES:
Selling, general and administrative 6,338,539 4,819,663
Research and development 1,005,936 801,703
------------ ------------
TOTAL 7,344,475 5,621,366
------------ ------------
INCOME FROM OPERATIONS 289,575 1,070,736
OTHER EXPENSE - NET 517,404 230,546
------------ ------------
INCOME (LOSS) BEFORE INCOME TAX EXPENSE (227,829) 840,190
INCOME TAX EXPENSE (BENEFIT) (68,347) 255,731
MINORITY INTEREST IN INCOME OF SUBSIDIARY 0 (19,336)
------------ ------------
NET INCOME (LOSS) $ (159,482) $ 565,123
============ ============
EARNINGS (LOSS) PER COMMON SHARE -
Basic and diluted $ (.02) $ .08
============ ============
AVERAGE COMMON SHARES -
Basic 7,622,918 7,511,095
============ ============
Diluted 7,893,646 7,512,809
============ ============
See Notes to Consolidated Financial Statements
3
<PAGE>
MERIT MEDICAL SYSTEMS, INC.
- ---------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 (Unaudited)
- --------------------------------------------------------------
March 31, March 31,
2000 1999
----------- -----------
OPERATING ACTIVITIES:
Net income (loss) $ (159,482) $ 565,123
----------- -----------
Adjustments to reconcile net
income to net cash
provided by (used in) in
operating activities:
Depreciation and amortization 1,081,220 744,812
Bad debt expense 390,780 8,018
(Gains) on sales and abandonment of
property and equipment (1,679)
Amortization of deferred credits (32,832) (45,845)
Deferred income taxes 29,435 66,168
Minority interest in income of subsidiary 19,336
Changes in operating assets and liabilities:
Trade receivables (1,035,235) (677,132)
Employee and related party receivables (34,375) (91,918)
Irish Development Agency grant receivable 8,751 (43,967)
Inventories (880,489) (604,785)
Prepaid expenses and other assets (292,230) (345,909)
Deposits (59,970) 7,837
Trade payables (762,655) 467,472
Accrued expenses 1,086,493 602,344
Advances from employees 21,843 (465)
Income taxes payable (276,511) 101,296
----------- -----------
Total adjustments (757,454) 207,262
----------- -----------
Net cash provided by (used in)
operating activities (916,936) 772,385
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures for:
Property and equipment (1,152,049) (947,731)
Intangible assets (127,701) (25,159)
Proceeds from sale of
property and equipment 985
----------- -----------
Net cash used in investing activities (1,278,765) (972,890)
----------- -----------
Continued on page 5
See Notes to Consolidated Financial Statements
4
<PAGE>
MERIT MEDICAL SYSTEMS, INC.
- ---------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
FOR THE THREE MONTHS ENDED MARCH 31, 2000 AND 1999 (Unaudited)
- -----------------------------------------------------------------
March 31, March 31,
2000 1999
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under line of credit 1,700,576 618,639
Proceeds from issuance of common stock 950,608 95,409
Principal payments on:
Long-term debt (336,646) (483,967)
----------- -----------
Net cash provided by
financing activities 2,314,538 230,081
----------- -----------
EFFECT OF EXCHANGE RATES ON CASH (36,178) (406,181)
----------- -----------
NET INCREASE (DECREASE) IN CASH 82,659 (376,605)
CASH AT BEGINNING OF PERIOD 668,711 851,910
----------- -----------
CASH AT END OF PERIOD $ 751,370 $ 475,305
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Cash paid during the period for:
Interest (including capitalized
interest of $27,037
and $28,614, respectively $ 110,186 $ 181,366
=========== ===========
Income taxes $ 202,327 $ 88,267
=========== ===========
SUPPLEMENTAL DISCLOSURE OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
During the three month periods ended March 31, 2000 and 1999, the Company
entered into notes payable totaling $509,963 and $50,015, respectively, for
manufacturing equipment and furniture and fixtures.
See Notes to Consolidated Financial Statements
5
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MERIT MEDICAL SYSTEMS, INC.
- ---------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaduited)
- ------------------------------------------------------
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, 2000 and December 31, 1999, and the
results of its operations and cash flows for the three months ended March 31,
2000 and 1999. The results of operations for the three months ended March 31,
2000 and 1999 are not necessarily indicative of the results for a full year
period.
2. Inventories. Inventories at March 31, 2000 and December 31, 1999 consisted of
the following:
March 31, December 31,
2000 1999
------------ -----------
Raw materials $8,068,926 $8,554,635
Work-in-process 3,679,223 3,270,163
Finished goods 17,939,962 16,816,578
Less reserve for obsolete inventory (1,286,535) (1,120,289)
------------ -----------
Total $28,401,576 $27,521,087
============ ===========
3. Income Taxes. The Company has not fully allocated income tax expense between
current and deferred for the quarters ended March 31, 2000 and 1999. The
effective tax rate for the three months ended March 31, 2000 and 1999 is below
the 35% federal statutory tax rate, as the result of the Company's profitable
operations in Ireland which are taxed at a tax rate that is lower than the
Company's U.S. overall effective tax rate.
4. Reporting Comprehensive Income - In June 1997, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standards (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, 2000 and December 31,
1999, the cumulative effect of such transactions reduced stockholders' equity by
approximately $565,132 and $528,954, respectively. Comprehensive income for the
three months ended March 31, 2000 and 1999 is computed as follows:
Three Months Ended
March 31,
-----------------------------
2000 1999
------------ ------------
Net income (loss) $ (159,482) $ 565,123
Foreign currency translation ( 36,178) (406,181)
------------ ------------
Comprehensive income (loss) $ (195,660) $ 158,942
============ ============
6
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MERIT MEDICAL SYSTEMS, INC.
- ---------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
- ------------------------------------------------------
5. Acquisitions. On July 27, 1999, the Company acquired the 28% minority
interest in its subsidiary, Sentir. The acquisition has been accounted for using
the purchase method of accounting; as such, 100 percent of Sentir's results of
operations have been included in the accompanying consolidated financial
statements from the date of acquisition. Previous to the acquisition date, the
minority interest's share of operations was excluded from net income on the
consolidation statements of operations. The cost of this acquisition exceeded
the estimated fair value of the acquired net assets by $2,825,640.
On August 20, 1999, the Company acquired substantially all of the assets and
assumed certain liabilities of the Angleton Division of Mallinckrodt, Inc.
(Angleton) for a purchase price of $8,132,194. Angleton is a manufacturer and
marketer of medical catheters, introducers, guide wires, and needles. The
acquisition has been accounted for using the purchase method of accounting; as
such, Angleton's results of operations have been included in the accompanying
consolidated financial statements from the date of acquisition. The cost of this
acquisition exceeded the estimated fair value of the acquired net assets by
$1,949,380.
6. Line of Credit. On March 14, 2000 the Company increased it's available line
of credit to $35 million.
7
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MERIT MEDICAL SYSTEMS, INC
- --------------------------
ITEM 2:
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- -----------------------------------------------------------
Overview
In the quarter ended March 31, 2000, the Company experienced a significant
growth in revenues due in large part to the successful addition of the Angleton
Catheter division. Despite the increase in sales the Company reported the first
quarter loss since 1988. The loss was attributable primarily to two developments
discussed below.
During the first half of 1999, shortly after the implementation of the Company's
new comprehensive Oracle software system, the planning, scheduling and
purchasing group, as well as many other areas of the Company, experienced
difficulty in learning to effectively operate the system. One of the first
concerns was an increase in back orders to our customers, and Merit, being a
customer- driven company, responded by building more inventory than the rate of
sales. By doing so we were successful in working out of back orders in most
catalog numbers. The Company also believed there should be higher safety stock
levels of inventory in the expectation of higher quantities ordered by hospitals
in anticipation of possible Y2K problems.
The combination of these increased production demands created a build-up of
capacity in labor and overhead. Also, in the third quarter of 1999 the Company
made an important acquisition of the Angleton Catheter division of Mallinckrodt
Medical and with it came the purchase of eight million dollars worth of assets
including 2.5 million in inventory and a catheter facility with excess capacity.
A decision was made to continue to utilize this excess capacity and build
inventory in the Angleton facility to accommodate sales increases that were
anticipated as a result of the efforts of Merit's worldwide sales force. As the
end of 1999 approached, however, we recognized that inventory levels were in
excess of the sales rate and we needed to reduce productivity levels to match
cash flow expectations. The reduced production volumes created lower gross
margins, and therefore lower bottom line results.
The Company has implemented a plan to address these problems. First, we have
reduced substantially the amount of discretionary spending such as travel,
advertising and trade shows. Second, we have reduced, through attrition and
other means, the number of employees and will continue to do so as the
circumstances warrant. We have also pulled back a number of management salaries.
Expenses related to consultants and other programs have been reduced or
discontinued. The most important issue will be to balance our overhead and
production costs. Ongoing and new cost-reduction programs have been and will
continue to be implemented
In mid-April the Company also received notice that a large custom packer of
procedure trays for interventional cardiology and radiology (Clinipad
Corporation), had been forced by the FDA into a significant recall for the
majority of their products. As result of this recall, Clinipad ceased its
operations and informed its vendors that there would be no assets left after the
secured lender satisfied its priority position. Therefore, the receivable the
Company had with Clinipad is expected to be uncollectible. This type of
subsequent event was determined to be applicable to the first quarter of 2000
and therefore an adjustment of $340,000 to write off the entire outstanding
balance of the Clinipad receivable was made in the first quarter.
Operations. The Company's sales increased for the three months ended March 31,
2000 compared to the same period in 1999; however, the Company experienced a net
loss of $159,482 for the three months ended March 31, 2000, compared to the net
income of 565,123 for the same period of 1999. The following table sets forth
certain operational data as a percentage of sales for the three months ended
March 31, 2000 and 1999:
Three Months Ended
March 31,
--------
2000 1999
-------- --------
Sales 100.0 % 100.0%
Gross Profit 34.6 37.8
Selling, general and administrative 28.7 27.2
Research and development 4.6 4.5
Income From Operations 1.3 6.0
Other Expense 2.3 1.4
Net Income (Loss) (.7) 3.2
8
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MERIT MEDICAL SYSTEMS, INC
- --------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
- -----------------------------------------------------------
Sales for the first quarter of 2000 increased by 25%, or $4,378,712, compared to
the same period for 1999. This increase is in large part due to the acquisition
of the new catheter and wire products. The Company also experienced increased
sales of many of its stand- alone products (up 39%), as well as increased OEM
sales to other medical products companies. To a lesser degree, this increase was
attributable to growth in sales of inflation devices (up 7%) and custom kits (up
2%).
Gross Profit. Gross profit as a percentage of sales decreased in the first
quarter of 2000 to 34.6% as compared to 37.8% in the first quarter of 1999.
Factors contributing to the decrease were primarily higher costs per unit of
product produced in December and the first quarter of 2000, due to higher
overhead costs to be applied over smaller production volumes. The Company
believes these higher production costs will affect gross margins during the
second quarter of 2000 to an even greater extent and will carry on into at least
the third quarter as well.
Operating Expenses. Operating expenses increased as a percentage of sales to
33.3% of sales in the first quarter of 2000 compared to 31.8% in the first
quarter of 1999. Selling, general and administrative costs as a percentage of
sales increased to 28.7%, compared to 27.2% for the first quarter of 1999. The
increase as a percentage of sales in the current period was due primarily to a
sudden and very unusual financial adjustment caused by the surprising closure of
a major customer of the Company (Clinipad Corp) on the last day of the quarter.
Upon hearing rumors of the closure, the Company moved to recover any inventory
to meet hospital demand as well as minimize the financial loss. In mid-April,
the Company determined that a total loss of the remaining approximately $340,000
was likely and made the appropriate adjustment required for financial accounting
purposes. If not for this unusual adjustment, there would have been a slight
decrease as a percentage of sales in selling, general and administrative
expense, in spite of an increase of seven new sales people, compared to the
first quarter of 1999. Research and development expenses rose by $204,233 and
were 4.6% of sales in the first quarter of 2000 compared to 4.5% of sales for
the first quarter of 1999. This increase in expense was due primarily to the
addition of new R&D resources associated with the acquisition of the Angleton,
Texas catheter division.
Income. During the quarter ended March 31, 2000, the Company reported income
from operations of $289,575, a decrease of 73% from income from operations of
$1,070,936 for the comparable period in 1999. Lower operating income for the
most recent quarter was attributable primarily to lower gross margins as a
percentage of sales. Net income was further negatively impacted by higher
interest costs of $517,404 for the first quarter of 2000, compared to $230,546
for the first quarter of 1999. This combined for a net loss of $159,482 for the
quarter ended March 31, 2000 compared to $565,123 of net income for the same
quarter of 1999.
Liquidity and Capital Resources. At March 31, 2000, the Company's working
capital was $35,368,523, which represented a current ratio of 4.6 to 1. During
August 1999, the Company increased an available secured bank line of credit to
$28 million. In March, 2000 this line of credit was increased to $35 million. In
1999, the Company also negotiated a reduction in the interest rate and fees for
its line of credit. At March 31, 2000, the outstanding balance under the line of
credit was $27,608,172. The increase in the line of credit was due to the two
cash acquisitions the Company completed in the last half of 1999, as well as the
increased inventory and equipment the Company purchased in the past year.
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.
Forward Looking Statements. Statements contained in this document 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 document 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, delays in product introductions, product acceptance, product
recalls, delays in obtaining regulatory approvals, cost increases, price and
product competition, availability of labor and materials related to health care
reform initiatives, product obsolescence relating to changes in product
technology or other factors relating to the success of the Company's business.
9
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MERIT MEDICAL SYSTEMS, INC
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ITEM 3:
QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
The Company principally hedges the following EURO currencies: Belgian Francs,
French Francs, German Marks, Dutch Gilders, and Irish Pounds. The Company enters
into forward foreign exchange contracts to protect the Company from the risk
that the eventual net dollar cash flows resulting from transactions with foreign
customers and suppliers may be adversely affected by changes in currency
exchange rates. Such contracts are not significant.
PART II - OTHER INFORMATION
ITEM 6: Exhibits and Reports on Form 8-K
(a) Exhibits Exhibit No. Description
---------- -------------
10.1 Agreement to Loan Agreement with Zions
First National Bank dated March 14, 2000
27 Financial Data Schedule
(b) Reports on Form 8-K - none
10
<PAGE>
MERIT MEDICAL SYSTEMS, INC
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 12, 2000
---------------
/s/FRED P. LAMPROPOULOS
-----------------------
FRED P. LAMPROPOULOS
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Date: May 12, 2000
---------------
/s/KENT W. STANGER
------------------
KENT W. STANGER
SECRETARY AND CHIEF FINANCIAL OFFICER
REPLACEMENT PROMISSORY NOTE
Revolving Line of Credit
Variable Rate
March 14, 2000
Borrowers: Merit Medical Systems, Inc., Merit Holdings, Inc., and Sentir
Semiconductor, Inc.
Lender: Zions First National Bank
Amount: $35,000,000.00
Maturity: July 31, 2006
For value received, Borrowers promise to pay to the order of Lender at
its Commercial Banking Department in Salt Lake City, Utah, the sum of
thirty-five million dollars ($35,000,000.00) or such other principal balance as
may be outstanding hereunder in lawful money of the United States with interest
thereon calculated and payable as provided herein.
This Replacement Promissory Note shall be a revolving line of credit
under which Borrowers may repeatedly draw and repay funds, so long as no default
has occurred hereunder or under the Amended and Restated Loan Agreement dated
August 11, 1999, between Lender and Borrowers (as amended or otherwise modified
from time to time, the "Loan Agreement") and so long as the aggregate,
outstanding principal balance at any time does not exceed the Reducing Available
Borrowing Base (as defined in the Loan Agreement). Disbursements under this
Replacement Promissory Note shall be made in accordance with the Loan Agreement.
In connection with each request for an advance under this Replacement
Promissory Note, the applicable Borrower shall specify whether the advance shall
bear interest based on the Prime Rate (as defined below) or the LIBOR Rate (as
defined below) and, if the LIBOR Rate is selected, the applicable Interest
Period (as defined below). The specification made by such Borrower may not be
changed without consent of Lender. If no specification is made by such Borrower,
the advance shall bear interest based on the Prime Rate.
Interest on advances based on the Prime Rate shall be calculated as
follows:
1. Interest shall be at a variable rate computed on the basis of
a three hundred sixty (360) day year as follows: the Prime
Rate of Lender from time to time in effect plus the Prime Rate
Performance Percent (as defined below) per annum, adjusted as
of the date of any change in the Prime Rate.
2. The Prime Rate Performance Percent shall be determined as
follows:
1
<PAGE>
(a) If the Performance Pricing Ratio (as defined in
the Loan Agreement) is equal to or greater than three to one
(3.0:1), the Prime Rate Performance Percent will be zero (0).
(b) If the Performance Pricing Ratio is equal to or
greater than two to one (2.0:1) but less than three to one
(3.0:1), the Prime Rate Performance Percent will be minus
fifteen-hundredths (-.15).
(c) If the Performance Pricing Ratio is less than two
to one (2.0:1), the Prime Rate Performance Percent will be
minus thirty-five hundredths (-.35).
The Prime Rate Performance Percent shall be
determined based upon the most recent quarterly or annual
financial statements of Borrowers provided pursuant to the
Loan Agreement and shall be adjusted as of the first day of
the month following the month in which Borrowers are required
to deliver such reports to Lender pursuant to the Loan
Agreement.
3. Prime Rate means an index which is determined daily by the
published commercial loan variable rate index held by any two
of the following banks: Chase Manhattan Bank, Wells Fargo Bank
N. A., and Bank of America N. T. & S. A. In the event no two
of the above banks have the same published rate, the bank
having the median rate will establish Lender's Prime Rate. If,
for any reason beyond the control of Lender, any of the
aforementioned banks becomes unacceptable as a reference for
the purpose of determining the Prime Rate used herein, Lender
may, five days after posting notice in Lender's bank offices,
substitute another comparable bank for the one determined
unacceptable. As used in this paragraph, "comparable bank"
shall mean one of the ten largest commercial banks
headquartered in the United States of America. This definition
of Prime Rate is to be strictly interpreted and is not
intended to serve any purpose other than providing an index to
determine the variable interest rate used herein. It is not
the lowest rate at which Lender may make loans to any of its
customers, either now or in the future.
Interest on advances based on the LIBOR Rate shall be calculated as
follows:
1. Interest shall be at a rate computed on the basis of a three
hundred sixty (360) day year equal to the LIBOR Rate of Lender
for the applicable Interest Period plus the LIBOR Rate
Performance Percent (as defined below).
2. The LIBOR Rate Performance Percent shall be determined as
follows:
(a) If the Performance Pricing Ratio (as defined in
the Loan Agreement) is equal to or greater than three to one
(3.0:1), the LIBOR Rate Performance Percent will be one and
sixty-five hundredths (1.65).
2
<PAGE>
(b) If the Performance Pricing Ratio is equal to or
greater than two to one (2.0:1) but less than three to one
(3.0:1), the LIBOR Rate Performance Percent will be one and
five-tenths (1.50).
(c) If the Performance Pricing Ratio is less than two
to one (2.0:1), the LIBOR Rate Performance Percent will be one
and four-tenths (1.40).
The LIBOR Rate Performance Percent shall be
determined based upon the most recent quarterly or annual
financial statements of Borrowers provided pursuant to the
Loan Agreement and shall remain in effect for the applicable
Interest Period.
3. The LIBOR Rate applicable to any Interest Period means the
rate per annum quoted by Lender as its LIBOR Rate. The LIBOR
Rate shall be related to quotes for the London Interbank
Offered Rate from the British Bankers Association Interest
Settlement Rates, Lasser Marshall Inc., or other comparable
services for the applicable Interest Period. This definition
of LIBOR Rate is to be strictly interpreted and is not
intended to serve any purpose other than providing an index to
determine the interest rate used herein. The LIBOR Rate of
Lender may not necessarily be the same as the quoted London
Interbank Offered Rate quoted by any particular institution or
service applicable to any Interest Period.
4. Banking Business Day means any day other than a Saturday,
Sunday or other day on which commercial banks in the State of
Utah are authorized or required to close and a day on which
dealings in dollar deposits are also carried on in the London
Interbank market and banks are open for business in London.
5. Dollars and the sign "$" mean lawful money of the United
States.
6. Interest Period means, with respect to any LIBOR Rate advance,
the period commencing on the date such advance is made and
ending, as the applicable Borrower may select, on the
numerically corresponding day in the first, second, third,
sixth, twelfth, twenty-fourth, thirty-sixth, forty-eighth, or
sixtieth calendar month thereafter, except that each such
Interest Period that commences on the last Banking Business
Day of a calendar month (or on any day for which there is no
numerically corresponding day in the appropriate subsequent
calendar month) shall end on the last Banking Business Day of
the appropriate subsequent calendar month; provided that all
of the foregoing provisions relating to Interest Periods are
subject to the following:
(a) No Interest Period may extend beyond the
termination of the Loan Agreement;
(b) No Interest Period may extend beyond the
aforesaid Maturity Date or such later date to which it is
extended; and
3
<PAGE>
(c) If an Interest Period would end on a day
that is not a Banking Business Day, such Interest Period shall
be extended to the next Banking Business Day unless such
Banking Business Day would fall in the next calendar month, in
which event such Interest Period shall end on the immediately
preceding Banking Business Day.
7. Notwithstanding any other provision in this Replacement
Promissory Note, if the adoption of any applicable law, rule,
or regulation, or any change therein, or any change in the
interpretation or administration thereof by any governmental
authority, central bank, or comparable agency charged with the
interpretation or administration thereof, or compliance by
Lender with any request or directive (whether or not having
the force of law) of any such authority, central bank, or
comparable agency shall make it unlawful or impossible for
Lender to maintain or fund advances based on the LIBOR Rate,
then upon notice to Borrowers by Lender the outstanding
principal amount of the advances based on the LIBOR Rate,
together with interest accrued thereon, shall, at the election
of Lender, be (1) immediately converted to an advance based on
Prime Rate; (2) repaid immediately upon demand of Lender if
such change or compliance with such request, in the judgment
of Lender, requires immediate repayment; or (3) repaid at the
expiration of the last Interest Period to expire before the
effective date of any such change or request.
8. Notwithstanding anything to the contrary herein, if Lender
determines (which determination shall be conclusive) that:
(a) Quotations of interest rates for the relevant
deposits referred to in the definition of LIBOR Rate are not
being provided in the relevant amounts or for the relative
maturities for purposes of determining the LIBOR Rate; or
(b) The LIBOR Rate does not accurately cover the
cost to Lender of making or maintaining advances based on the
LIBOR Rate, then Lender may give notice thereof to Borrowers,
whereupon until Lender notifies Borrowers that the
circumstances giving rise to such suspension no longer exist,
(1) the obligation of Lender to make advances based on the
LIBOR Rate shall be suspended; and (2) Borrowers shall repay
in full the then outstanding principal amount of each advance
based on LIBOR Rate together with accrued interest thereon, on
the last day of the then current Interest Period applicable to
such advance, or, at Borrowers' option, convert the advances
based on LIBOR Rate to advances based on Prime Rate on the
last day of the then current Interest Period applicable to
such advance.
4
<PAGE>
On or before the last day of the applicable Interest Period for which
an advance has been made, the applicable Borrower shall specify whether the
outstanding balance owing on the advance shall bear interest after the
applicable Interest Period based on the Prime Rate or the LIBOR Rate and, if the
LIBOR Rate is selected, the applicable Interest Period. The specification made
by such Borrower may not be changed without consent of Lender. If no
specification is made by such Borrower, the advance shall bear interest based on
the Prime Rate.
Principal and interest on advances based on the Prime Rate shall be
payable as follows: Interest accrued is to be paid monthly commencing September
1, 1999 and on the same day of each month thereafter. All principal and unpaid
interest shall be paid in full on July 31, 2005.
Principal and interest on advances based on the LIBOR Rate shall be
payable as follows: Interest accrued is to be paid monthly commencing September
1, 1999 and on the same day of each month thereafter and on the last day of the
Interest Period. All principal and unpaid interest shall be paid in full upon
the earlier of maturity of the applicable Interest Period or July 31, 2005.
As to all advances, whether based on the Prime Rate or the LIBOR Rate:
1. Interest shall accrue from the date of disbursement of the
principal amount or portion thereof until paid, both before
and after judgment, in accordance with the terms set forth
herein.
2. All payments shall be applied first to accrued interest and
the remainder, if any, to principal. Lender may apply payments
to Prime Rate based or LIBOR Rate based advances in any order
determined by Lender in its sole discretion.
3. Notwithstanding anything to the contrary herein, all principal
and unpaid interest shall be paid in full on July 31, 2005.
4. Upon default in payment of any principal or interest when due,
whether due at stated maturity, by acceleration, or otherwise,
all outstanding principal shall bear interest at a default
rate from the date when due until paid, both before and after
judgment, which default rate shall be three percent (3.0%) per
annum above the Prime Rate.
If, at any time prior to the maturity of this Replacement Promissory
Note, this Replacement Promissory Note shall have a zero balance owing, this
Replacement Promissory Note shall not be deemed satisfied or terminated but
shall remain in full force and effect for future draws unless terminated upon
other grounds.
Borrowers may prepay all or any portion of all Prime Rate based
advances at any time without penalty. Any prepayment of a LIBOR Rate based
advance shall be subject to a prepayment fee if the Original LIBOR Rate is
greater than the Current LIBOR Rate on the prepayment date. The prepayment fee
shall be an amount equal to the prepaid principal amount multiplied by the
product of the Original LIBOR Rate less the Current LIBOR Rate multiplied by the
number of years and fractional portion of a year remaining until maturity of the
Interest Period. Current LIBOR Rate means the LIBOR Rate in effect on the date
the prepayment is made for the Interest Period from that prepayment date to the
date of maturity of the Interest Period. Original LIBOR Rate means the LIBOR
Rate in effect on the date the LIBOR Rate based advance which is being prepaid
was made for the Interest Period selected by the applicable Borrower for that
advance. Any prepayment received by Lender after 2:00 p.m. mountain standard or
daylight time (whichever is in effect on the date the prepayment is received)
shall be deemed received on the following Banking Business Day.
5
<PAGE>
This Replacement Promissory Note is made in accordance with the Loan
Agreement and is secured by the collateral identified in and contemplated by the
Loan Agreement.
If default occurs in the payment of any principal or interest when due,
or if any Event of Default (as defined in the Loan Agreement) occurs under the
Loan Agreement, time being the essence hereof, then the entire unpaid balance,
with interest as aforesaid, shall, at the election of the holder hereof and
without notice of such election, become immediately due and payable in full.
If this Replacement Promissory Note becomes in default or payment is
accelerated, Borrowers agree to pay to the holder hereof all collection costs,
including reasonable attorney fees and legal expenses, in addition to all other
sums due hereunder.
This Replacement Promissory Note is issued in replacement of the
promissory note dated August 11, 1999 issued by the Borrowers to Lender in the
original principal amount of $28,000,000.00.
All obligations of Borrowers under this Replacement Promissory Note
shall be joint and several.
Borrowers and all endorsers, sureties and guarantors hereof hereby
jointly and severally waive presentment for payment, demand, protest, notice of
protest, notice of protest and of non- payment and of dishonor, and consent to
extensions of time, renewal, waivers or modifications without notice and further
consent to the release of any collateral or any part thereof with or without
substitution.
Borrowers:
Merit Medical Systems, Inc.
By:
Title:
Merit Holdings, Inc.
By:
Title:
Sentir Semiconductor, Inc.
By:
Title:
6
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<PERIOD-START> JAN-01-2000
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