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 JUNE 30, 2003
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 incorporation or organization) (I.R.S. Employer Identification No.)
1600 West Merit Parkway, South Jordan, Utah, 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 14,363,964
- -------------------- -------------------------------
TITLE OR CLASS Number of shares Outstanding at
August 8, 2003
MERIT MEDICAL SYSTEMS, INC.
INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION PAGE
----
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 2003
and December 31, 2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Consolidated Statements of Operations for the three and six months
ended June 30, 2003 and 2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Cash Flows for the six months
ended June 30, 2003 and 2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Item 3. Quantitative and Qualitative Disclosure About Market Risk . . . . . . . . . . . . . . . . . . . . . . 13
Item 4. Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . . . . . . 14
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
CERTIFICATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
PART I - FINANCIAL INFORMATION
ITEM 1:
FINANCIAL STATEMENTS
MERIT MEDICAL SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2003 AND DECEMBER 31, 2002 (Unaudited)
------------------------------------------------------------------------------
June 30, December 31,
2003 2002
------------ ------------
ASSETS
- ------
CURRENT ASSETS:
Cash and cash equivalents $ 20,802,823 $ 9,683,578
Short-term investments 435,254 217,451
Trade receivables - net 17,564,611 15,247,892
Other receivables -- 1,209,804
Employee and related
party receivables 247,007 299,751
Inventories 17,903,362 18,699,217
Prepaid expenses and other assets 971,326 667,151
Deferred income tax assets 153,150 143,265
------------ ------------
Total current assets 58,077,533 46,168,109
------------ ------------
PROPERTY AND EQUIPMENT:
Land 2,740,394 2,034,522
Building 5,120,410 5,118,683
Manufacturing equipment 26,680,012 25,577,837
Automobiles 87,536 87,536
Furniture and fixtures 11,172,487 10,823,852
Leasehold improvements 4,514,989 4,345,620
Construction-in-progress 4,724,359 3,008,734
------------ ------------
Total 55,040,187 50,996,784
Less accumulated depreciation
and amortization (27,702,727) (25,584,648)
------------ ------------
Property and equipment - net 27,337,460 25,412,136
------------ ------------
OTHER ASSETS:
Patents, trademarks and licenses- net 1,871,694 1,927,160
Deposits 32,163 33,213
Goodwill - net 4,764,596 4,764,596
------------ ------------
Total other assets 6,668,453 6,724,969
------------ ------------
TOTAL ASSETS $ 92,083,446 $ 78,305,214
============ ============
Continued on Page 2
See Notes to Consolidated Financial Statements
1
MERIT MEDICAL SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS (Continued)
JUNE 30, 2003 AND DECEMBER 31, 2002 (Unaudited)
- --------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY June 30, December 31,
2003 2002
------------ ------------
CURRENT LIABILITIES:
Current portion of long-term debt $ 199,192 $ 400,182
Trade payables 5,335,292 4,121,577
Accrued expenses 7,530,149 6,618,407
Advances from employees 158,887 161,529
Income taxes payable 1,937,698 284,148
------------ ------------
Total current liabilities 15,161,218 11,585,843
DEFERRED INCOME TAX LIABILITIES 2,470,268 2,443,156
LONG-TERM DEBT -- 16,693
DEFERRED CREDITS 710,720 860,931
------------ ------------
Total liabilities 18,342,206 14,906,623
------------ ------------
STOCKHOLDERS' EQUITY:
Preferred stock- 5,000,000 shares authorized; no shares issued
Common stock- no par value; 50,000,000 and 20,000,000
shares authorized, respectively, 14,246,967 and 13,864,052
shares issued at June 30, 2003 and December 31, 2002,
respectively 32,584,305 30,265,963
Retained earnings 41,620,826 33,663,083
Accumulated other comprehensive loss (463,891) (530,455)
------------ ------------
Total stockholders' equity 73,741,240 63,398,591
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 92,083,446 $ 78,305,214
============ ============
See Notes to Consolidated Financial Statements
2
MERIT MEDICAL SYSTEM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2003 and 2002 (Unaudited)
- ---------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------- ----------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
NET SALES $ 34,577,305 $ 28,789,370 $ 66,318,878 $ 57,461,538
COST OF SALES 19,396,384 16,756,292 37,866,768 34,276,680
------------ ------------ ------------ ------------
GROSS PROFIT 15,180,921 12,033,078 28,452,110 23,184,858
------------ ------------ ------------ ------------
OPERATING EXPENSES:
Selling, general and administrative 7,650,977 6,984,180 14,840,524 13,689,428
Research and development 1,178,491 944,879 2,294,893 1,908,168
------------ ------------ ------------ ------------
Total operating expenses 8,829,468 7,929,059 17,135,417 15,597,596
------------ ------------ ------------ ------------
INCOME FROM OPERATIONS 6,351,453 4,104,019 11,316,693 7,587,262
OTHER (INCOME) EXPENSE:
Other (income) expense (75,691) 26,098 (143,797) 86,460
Litigation settlement -- -- (475,000) --
Gains on sale of land (182,433) -- (507,928) --
------------ ------------ ------------ ------------
Total other (income) expense (258,124) 26,098 (1,126,725) 86,460
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES 6,609,577 4,077,921 12,443,418 7,500,802
INCOME TAX EXPENSE 2,404,031 1,376,107 4,485,675 2,472,081
------------ ------------ ------------ ------------
NET INCOME $ 4,205,546 $ 2,701,814 $ 7,957,743 $ 5,028,721
============ ============ ============ ============
EARNINGS PER COMMON SHARE:
Basic $ 0.30 $ 0.20 $ 0.56 $ 0.37
============ ============ ============ ============
Diluted $ 0.28 $ 0.18 $ 0.53 $ 0.34
============ ============ ============ ============
AVERAGE COMMON SHARES:
Basic 14,176,049 13,535,651 14,128,797 13,476,275
============ ============ ============ ============
Diluted 15,028,756 14,750,259 14,982,878 14,631,076
============ ============ ============ ============
PROFORMA EARNINGS PER COMMON
SHARE (see Note 5):
EARNINGS PER COMMON SHARE:
Basic $ 0.22 $ 0.15 $ 0.42 $ 0.28
============ ============ ============ ============
Diluted $ 0.21 $ 0.14 $ 0.40 $ 0.26
============ ============ ============ ============
AVERAGE COMMON SHARES:
Basic 18,901,399 18,047,535 18,838,396 17,968,367
============ ============ ============ ============
Diluted 20,038,341 19,667,012 19,977,171 19,508,101
============ ============ ============ ============
See Notes to Consolidated Financial Statement
3
MERIT MEDICAL SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2003 AND 2002 (Unaudited)
- ---------------------------------------------------------------------------------------
June 30, June 30,
2003 2002
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 7,957,743 $ 5,028,721
------------ ------------
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 2,235,580 2,247,503
Bad debt expense
(Gains) losses on sales and abandonment of 153,909 127,182
property, equipment and land (507,756) 888
Amortization of deferred credits (81,037) (93,221)
Abandonment of certain patents and trademarks -- 177,816
Deferred income taxes 17,227 78,340
Tax benefit attributable to appreciation of common 629,851 1,490,428
stock options exercised
Changes in operating assets and liabilities:
Short-term investments (217,803) (138,670)
Trade receivables (2,470,628) (1,365,221)
Other receivables 1,209,804 --
Employee and related party receivables 52,744 161,894
Irish Development Agency grant receivable -- 108,919
Inventories 795,855 816,912
Prepaid expenses and other assets (304,175) (351,053)
Deposits 1,050 (135)
Trade payables 1,213,715 56,095
Accrued expenses 832,809 2,123,435
Advances from employees (2,642) 40,343
Income taxes payable 1,653,550 (196,336)
------------ ------------
Total adjustments 5,212,053 5,285,119
------------ ------------
Net cash provided by operating activities 13,169,796 10,313,840
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures for:
Property and equipment (4,144,640) (2,089,241)
Patents and trademarks (12,707) --
Proceeds from sale of property, equipment and land 569,424 376
------------ ------------
Net cash used in investing activities (3,587,923) (2,088,865)
------------ ------------
See Notes to Consolidated Financial Statements
4
MERIT MEDICAL SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
FOR THE SIX MONTHS ENDED JUNE 30, 2003 AND 2002 (Unaudited)
- ----------------------------------------------------------------------------------------
June 30, June 30,
2003 2002
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock $ 1,688,491 $ 901,326
Principal payments on long-term debt (217,683) (5,901,981)
------------ ------------
Net cash provided by (used in) financing activities 1,470,808 (5,000,655)
------------ ------------
EFFECT OF EXCHANGE RATES ON CASH 66,564 90,061
------------ ------------
NET INCREASE IN CASH 11,119,245 3,314,381
CASH AT BEGINNING OF PERIOD 9,683,578 341,690
------------ ------------
CASH AT END OF PERIOD $ 20,802,823 $ 3,656,071
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Cash paid during the period for:
Interest (including capitalized interest of $0 and
$17,282, respectively) $ 116,022 $ 78,614
============ ============
Income taxes $ 1,487,584 $ 1,099,649
============ ============
See Notes to Consolidated Financial Statements
5
MERIT MEDICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
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1. Basis of Presentation. The interim financial statements of Merit Medical
Systems, Inc. ("Merit," "we" or "us") for the three and six months ended June
30, 2003 and 2002 are not audited. The financial statements are prepared in
accordance with the requirements for unaudited interim periods, and
consequently, do not include all disclosures required to be in conformity with
accounting principles generally accepted in the United States of America. In the
opinion of management, the accompanying consolidated financial statements
contain all adjustments, except for the true-up of deferred tax balances,
consisting only of normal recurring accruals, necessary for a fair presentation
of our financial position as of June 30, 2003, and the results of our operations
and cash flows for the three and six months ended June 30, 2003 and 2002. The
results of operations for the three and six months ended June 30, 2003 and 2002
are not necessarily indicative of the results for a full-year period. The
information included in this Form 10-Q should be read in conjunction with
Management's Discussion and Analysis and financial statements and notes thereto
included in Merit Medical Systems, Inc. 2002 Form 10-K.
Stock-Based Compensation. We account for stock compensation arrangements under
the provisions of Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees, (APB 25) and intend to continue to do so.
Accordingly, no compensation cost has been recognized for our stock compensation
arrangements. If the compensation cost for our compensation plans had been
determined consistent with Statement of Financial Accounting Standards (SFAS)
No. 123, Accounting for Stock-Based Compensation, our net income and net income
per common and common share equivalent would have changed to the pro forma
amounts indicated below:
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- ---------------------------
2003 2002 2003 2002
----------- ------------- ----------- -------------
Net income:
As reported $ 4,205,546 $ 2,701,814 $ 7,957,743 $ 5,028,721
Pro forma 3,596,338 2,168,194 6,755,749 4,160,529
Net income per common share:
Basic:
As reported $ 0.30 $ 0.20 $ 0.56 $ 0.37
Pro forma 0.25 0.16 0.48 0.31
Diluted:
As reported $ 0.28 $ 0.18 $ 0.53 $ 0.34
Pro forma 0.24 0.15 0.45 0.28
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 2003 and 2002: dividend yield of 0%; expected
volatility of 62.60% and 63.24% for 2003 and 2002, respectively; risk-free
interest rates ranging from 3.97% to 6.71%; and expected lives ranging from 2.33
to 4.80 years.
2. Inventories. Inventories at June 30, 2003 and December 31, 2002
consisted of the following:
June 30, December 31,
2003 2002
------------ -------------
Raw materials $ 8,763,876 $ 10,223,180
Work-in-process 4,207,430 2,343,500
Finished goods 7,697,864 8,900,959
Less reserve for obsolete inventory (2,765,808) (2,768,422)
------------ ------------
Total $ 17,903,362 $ 18,699,217
============ ============
6
MERIT MEDICAL SYSTEMS, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
- --------------------------------------------------------------------------------
3. Reporting Comprehensive Income. Comprehensive income for the three and six
months ended June 30, 2003 and 2002, consisted of net income and foreign
currency translation adjustments. As of June 30, 2003 and December 31, 2002, the
cumulative effect of such adjustments reduced stockholders' equity by $463,891
and $530,455, respectively. Comprehensive income for the three and six months
ended June 30, 2003 and 2002 has been computed as follows:
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- -----------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
Net income $4,205,546 $2,701,814 $7,957,743 $5,028,721
Foreign currency translation 59,605 84,022 66,564 90,061
---------- ---------- ---------- ----------
Comprehensive income $4,265,151 $2,785,836 $8,024,307 $5,118,782
========== ========== ========== ==========
4. Recently Issued Accounting Standards. In November 2002, the Financial
Accounting Standards Board (FASB) issued Financial Accounting Standards Board
Interpretation No. ("FIN") 45, Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others, which require the guarantor to recognize as a liability the fair value
of the obligation at the inception of the guarantee. The disclosure requirements
in FIN 45 were effective for financial statements of interim or annual periods
ending after December 15, 2002. We adopted the initial recognition and
measurement provisions in FIN 45, effective January 1, 2003. As of June 30,
2003, there were no guarantees required to be disclosed or recorded in the
financial statements under FIN 45.
In January 2003, the Financial Accounting Standards Board issued FASB
Interpretation No. (FIN) 46, "Consolidation of Variable Interest Entities." FIN
46 addresses the requirements for business enterprises to consolidate related
entities, for which they do not have controlling interests through voting or
other rights, if they are determined to be the primary beneficiary as a result
of variable economic interests. The Company will adopt FIN 46 beginning the
third quarter of 2003. The adoption of FIN 46 is not expected to have a material
impact on our consolidated earnings, financial position, or cash flows since we
have no VIE.
5. Stock Splits. On April 8, 2002 we effected a five-for-four stock split. All
earnings per share and share data have been adjusted to reflect this split. In
addition, on July 31, 2003, the Company's Board of Directors approved a
four-for- three stock split of the Company's outstanding shares of common stock,
which is expected to be effective August 14, 2003, for stockholders of record as
of August 11, 2003. Average dilutive common stock shares outstanding, giving
retroactive effect to the stock split for the three and six months ended June
30, 2003 and 2002 are 20,038,341, 15,667,012, 19,977,171, and 19,508,101,
respectively. Proforma earnings per share, giving retroactive effect to the
stock split for the three and six months ended June 30, 2003 and 2002 are $0.21,
$0.14, $0.40 and $0.26, respectively.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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Disclosure Regarding Forward-Looking Statements
This Report includes "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, (the "Exchange Act"). 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. All forward-looking
statements included in this Report are made as of the date hereof and are based
on information available to us as of such date. We assume no obligation to
update any forward-looking statement. In some cases, forward-looking statements
can be identified by the use of terminology such as "may," "will," "expects,"
"plans," "anticipates," "intends" or "believes," "estimates," "potential," or
"continue," or the negative thereof or other comparable terminology. Although we
believe 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 will vary, and may vary materially from those projected or
assumed in the forward-looking statements. Future financial condition and
results of operations, as well as any forward-looking statements are subject to
inherent risks and uncertainties, including market acceptance of our products,
product introductions, potential product recalls, delays in obtaining regulatory
approvals, or the failure to maintain such approvals, cost increases,
fluctuations in and obsolescence of inventory, price and product competition,
availability of labor and materials, development of new products and technology
that could render our products obsolete, product liability claims, modification
or limitation of governmental or private insurance reimbursement procedures,
infringement of our technology or the assertion that our technology infringes
the rights of other parties, foreign currency fluctuations, challenges
associated with our growth strategy, changes in health care markets related to
health care reform initiatives and other factors referred to in our press
releases and reports filed with the Securities and Exchange Commission (the
"SEC"). All subsequent forward-looking statements attributable to Merit or
persons acting on our behalf are expressly qualified in their entirety by these
cautionary statements. Additional factors that may have a direct bearing on our
operating results are described under "Factors That May Affect Future Results"
beginning on page 10.
Overview
During the three months ended June 30, 2003, we experienced the best quarterly
performance in our history, with record revenues and earnings. We reported net
income of $4.2 million, or $.28 per share, on revenues of $34.6 million, for the
three months ended June 30, 2003. For the comparable period of 2002, we reported
net income of $2.7 million, or $.18 per share, on revenues of $28.8 million. For
the six months ended June 30, 2003, net income was $8.0 million, or $.53 per
share, on revenues of $66.3 million, compared to 2002 net income of $5.0
million, or $.34 per share, on revenues of $57.5 million.
Our management has continued its efforts to reduce inventory with an additional
reduction of $795,855 since December 31, 2002 and over $11 million during the
last three-and-a-half years. Inventory turns improved during the twelve months
preceding June 30, 2003 to 3.76 times per year from 3.11 times per year for the
twelve months preceding the same period of 2002. The improvement contributed to
lower inventory carrying costs for the three months ended June 30, 2003. Our
cash flow from operations was strong at $13.2 million for the first six months
of 2003, compared to $10.3 million for the same period of 2002. Our cash
position was $20.8 million at June 30, 2003, compared to $3.7 million at June
30, 2002.
Results of Operations
The following table sets forth certain operational data as a percentage of sales
for the three and six months ended June 30, 2003 and 2002:
Three Months Ended June 30, Six Months Ended June 30,
2003 2002 2003 2002
---------------------------- --------------------------
Sales 100.0 % 100.0% 100% 100%
Gross profit 43.9 41.8 42.9 40.3
Selling, general and administrative expenses 22.1 24.3 22.4 23.8
Research and development expenses 3.4 3.3 3.5 3.3
Income from operations 18.4 14.3 17.1 13.2
Other (income) expense (.1) .1 (1.7) .2
Net income 12.2 9.4 12.0 8.8
8
Sales. Sales for the three months ended June 30, 2003 increased by 20%, or $5.8
million, compared to the same period of 2002. All product categories of our
business contributed to our sales growth during the second quarter of 2003:
inflation device sales rose 20%, stand alone device sales grew by 26%, custom
kit sales rose 18% and catheter sales rose by 8%. For the six-month period ended
June 30, 2003 compared to the same period in 2002, stand alone device sales grew
by 20%, inflation devices sales grew by 17%; custom kit sales rose 13%; and
catheter sales increased 4%. Growth in sales for the three and six months ended
June 30, 2003, when compared to prior periods, benefited from group purchasing
contracts and OEM products sales, as well as continued focus on building
innovative products for our market segment. The increase in the exchange rate
between the Euro and U.S. Dollar increased sales by 2.1% for both the three and
six months ended June 30, 2003, when compared to prior periods for 2002.
Gross Profit. For the three months ended June 30, 2003, gross margin as a
percentage of sales was 43.9% compared to 41.8% for the same period in 2002. For
the six months ended June 30, 2003, gross margin was 42.9%, as compared to 40.3%
for the same period in 2002. Gross profit improvement for both the three and six
months ended June 30, 2003 was due primarily to an increase in efficiency and
productivity gains achieved by the operations groups in our Utah facilities.
Gross profit was also favorably impacted during the three and six months ended
June 30, 2003 from an increase in the exchange rate of the Euro against the U.S.
Dollar when compared to the same periods of 2002, resulting in an increase in
gross profit of 1.2% for both the three and six-month periods ended June 30,
2003.
Operating Expenses. Operating expenses decreased as a percentage of sales to
25.5% for the three months ended June 30, 2003, compared to 27.5% for the same
period of 2002. For the six months ended June 30, 2003, operating expenses
decreased as a percentage of sales to 25.8%, compared to 27.1% for the same
period in 2002. Selling, general and administrative expenses decreased as a
percentage of sales to 22.1% and 22.4% for three and six months ended June 30,
2003, respectively, compared to 24.3% and 23.8%, respectively, for the same
period of 2002. The decrease as a percentage of sales during the three and six
months ended June 30, 2003 was due primarily to our increased revenues. Research
and development expenses increased slightly to 3.4% of sales during the three
months ended June 30, 2003, compared to 3.3% of sales for the same period of
2002. For the six months ended June 30, 2003, research and development
expenditures were 3.5% of sales, compared to 3.3% for 2002.
Other (Income) Expense. Other income for the three months ended June 30, 2003
was $258,124, compared to other expense of $26,098 for the same period in 2002.
The generation of other income during the second quarter of 2003 was primarily
due to the sale of land adjacent to our South Jordan, Utah facility for
$182,433. Also, as a result of our strong cash position, other income for the
second quarter of 2003 was positively affected by an increase in interest income
in the amount of approximately $74,000 and a decrease in interest expense in the
amount of $15,000 when compared to the same period in 2002. For the six months
ended June 30, 2003, other income was $1.1 million, compared to other expense of
$86,460 for the same period in 2002. The generation of other income during the
first six months of 2003 was principally the result of a gain from the
settlement of a legal dispute of $475,000 and a gain on sale of land adjacent to
our South Jordan, Utah facility for $507,928. Other income for the six months
ended June 30, 2003 was also affected by an increase in interest income of
approximately $139,000 and a decrease in interest expense of approximately
$44,000, when compared to the same period in 2002.
Income Taxes. The effective tax rate for the three months ended June 30, 2003
was 36.4% compared to 33.7% for 2002. For the six months ended June 30, 2003,
the effective tax rate was 36%, compared to 33% for 2002. The increase in the
effective tax rate for the three and six months ended June 30, 2003, as compared
to the same periods of the prior year, was principally the result of an increase
in the incremental corporate tax rate of 3% on taxable income from $15 million
to $18.3 million and a dilution of our Extra Territorial Income Exclusion and
research and development tax credits on higher income before tax expense. Also,
taxable income from our Galway, Ireland operations, which is taxed at a lower
rate than U.S. operations, was lower in the three and six months ended June 30,
2003 compared to the 2002 comparable periods, which helped contribute to our
increased effective tax rate for these periods.
Income. During the three months ended June 30, 2002, we reported income from
operations of $6.4 million, an increase of 55%, from income from operations of
$4.1 million for the comparable period in 2002. Operating income for the first
six months of 2003 was $11.3 million, compared to $7.6 million for the first six
months of 2002, an increase of 49%. The increase in income from operations for
the three and six months ended June 30, 2003 was attributable primarily to
increased sales, higher gross margins, and lower selling, general and
administrative expenses as a percentage of sales. These factors also contributed
to our net income of $4.2 million for the three months ended June 30, 2003
compared to net income of $2.7 million for the same period of 2002, and net
income for the six months ended June 30, 2003 was $8.0 million compared to $5.0
million for the first half of 2002.
9
Liquidity and Capital Resources.
At June 30, 2003, our working capital was $42.9 million, which represented a
current ratio of 3.8 to 1. Our cash balance at June 30, 2003 was $20.8 million.
Historically, we have incurred significant expenses in connection with product
development and introduction of new products. Substantial capital has also been
required to finance the increase in our receivables associated with our
increased sales. During the next year-and-a-half, substantial funds will be
needed to construct additional facilities in Galway, Ireland and South Jordan,
Utah. Construction of these facilities is needed to expand our manufacturing
capacity to meet current and future demand of the Company's products. The
construction of the facilities in South Jordan, Utah will also be used to
consolidate our Murray, Utah facility and our Merit Sensor System, Inc. wafer
fab facility from Santa Clara, California to South Jordan, Utah. We currently
expect to spend approximately $18 million dollars to build these facilities. Our
principal source of funding for these and other expenses has been cash generated
from operations, sale of equity and cash secured from loans on equipment and
bank lines of credit. Management believes that Merit's present sources of
liquidity and capital are adequate for our current operations.
Critical Accounting Policies
The SEC has requested that all registrants discuss their most critical
accounting policies. We understand that a "critical accounting policy" is one
which is both important to the representation of the subject company's financial
condition and results and requires management's most difficult, subjective or
complex judgments, often as a result of the need to make estimates about the
effect of matters that are inherently uncertain. We base our estimates on past
experience and on various other assumptions that we believe are reasonable under
the circumstances, the results of which form the basis for making judgments
about carrying values of assets and liabilities that are not readily apparent
from other sources. Actual results may differ from these estimates under
different assumptions or conditions. The following are our most critical
accounting policies:
Inventory Obsolescence Reserve. We write down our inventory for estimated
obsolescence for unmarketable and/or slow-moving products that may expire prior
to being sold. If market conditions become less favorable than those projected
by our management, additional inventory write-downs may be required. Our
obsolescence reserve was $2.8 million on June 30, 2003.
Allowance for Doubtful Accounts. We maintain allowances for doubtful accounts
for estimated losses resulting from the inability of customers to make required
payments. The allowance is based upon historical experience and a review of
individual customer balances. If the financial condition of our customers were
to deteriorate, resulting in an impairment of their ability to make payments,
additional allowances may be required. Our bad debt reserve was $666,628 at June
30, 2003, which is generally consistent with our historical experience with
collection of receivables.
Factors that May Affect Future Results
Our business, operations and financial condition are subject to certain risks
and uncertainties. Should one or more of these risks or uncertainties
materialize, or should any underlying assumptions prove incorrect, actual
results will vary, and may vary materially, from those anticipated, estimated,
projected or expected. The following are among the key factors that may have a
direct bearing on our business, operations and financial condition:
Our products may be subject to recall or product liability claims.
- --------------------------------------------------------------------------------
Our products are used in connection with surgical procedures and in other
medical contexts in which it is important that those products function with
precision and accuracy. If our products do not function as designed, or are
designed improperly, we may be forced by regulatory agencies to withdraw such
products from the market. In addition, if medical personnel or their patients
suffer injury as a result of any failure of our products to function as
designed, or an inappropriate design, we may be subject to lawsuits seeking
significant compensatory and punitive damages. Any product recall or lawsuit
seeking significant monetary damages may have a material adverse effect on our
business and financial condition.
Substantially all of our products are backed by a limited warranty for returns
due to defects in quality and workmanship. We maintain a reserve for these
future returned products, but the actual costs of such returns may significantly
exceed the reserve, which could have a material adverse effect on our
operations.
Termination of relationships with our suppliers, or failure of such suppliers to
perform, could disrupt our business.
- --------------------------------------------------------------------------------
We rely on raw materials, component parts, finished products, and services
supplied by outside third parties in connection with our business. For example,
substantially all of our products are sterilized by two entities. In addition,
some of our products are manufactured or assembled by third parties. If a
supplier of significant raw materials, component parts, finished goods or
services were to terminate its relationship with Merit, or otherwise cease
supplying raw materials, component parts, finished goods or services consistent
with past practice, our ability to meet our obligations to our end customers may
be disrupted. A disruption with respect to numerous products, or with respect to
a few significant products, could have a material adverse effect on our business
and financial condition.
10
We may be unable to compete in our markets, particularly if there is a
significant change in relevant practices and technology.
- --------------------------------------------------------------------------------
The market for each of our existing and potential products is highly
competitive. We face competition from several companies, many of which are
larger, better established and have greater financial, technical and other
resources and greater market presence than does Merit. Such resources and market
presence may enable our competitors to more effectively market competing
products or to market competing products at reduced prices in order to gain
market share.
In addition, our ability to compete successfully is dependent, in part, upon our
ability to respond effectively to changes in technology and to develop and
market new products which achieve significant market acceptance. Competing
companies with substantially greater resources than Merit are actively engaged
in research and development of diagnostic and interventional methods, treatments
and procedures that could limit the market for our products and eventually make
certain of our products obsolete. A reduction in the demand for a significant
number of our products, or a few key products, could have a material adverse
effect on our business and financial condition.
A significant adverse change in, or failure to comply with, governing
regulations could adversely affect our business.
- --------------------------------------------------------------------------------
Substantially all of our products are "devices," as defined in the Federal Food,
Drug and Cosmetic Act, and the manufacture, distribution, record keeping,
labeling and advertisement of our products is subject to regulation by the Food
and Drug Administration (the "FDA") in the United States and equivalent
regulatory agencies in various foreign countries in which our products are
manufactured, distributed, labeled, offered or sold. Further, we are subject to
continual review and periodic inspections at our current facilities with respect
to the FDA Good Manufacturing Practices and similar requirements of foreign
countries. Our business and financial condition could be adversely affected if
we are found to be out of compliance with governing regulations. In addition, if
such regulations are amended to become more restrictive and costly to comply
with, the costs of compliance could adversely affect our business and financial
condition.
Limits on reimbursement imposed by governmental and other programs may adversely
affect our business.
- --------------------------------------------------------------------------------
The cost of a significant portion of medical care is funded by governmental,
social security or other insurance programs. Limits on reimbursement imposed by
such programs may adversely affect the ability of hospitals and others to
purchase Merit products. In addition, limitations on reimbursement for
procedures which utilize Merit products could adversely affect our sales.
We are subject to work stoppage, transportation and related risks.
- --------------------------------------------------------------------------------
We manufacture our products at various locations in the United States and in
Ireland and sell our products throughout the United States, Europe and other
parts of the world. We depend on third-party transportation companies to deliver
supplies necessary to manufacture Merit products from vendors to our various
facilities and to move Merit products to customers, operating divisions and
other subsidiaries located within and outside the United States. Our
manufacturing operations, and the operations of the transportation companies on
which our operations depend, may be adversely affected by natural disasters and
significant human events, such as a war, terrorist attack, riot, strike,
slowdown or similar event. Any disruption in our manufacturing or transportation
could materially adversely affect our ability to meet customer demands or
conduct our operations.
We may be unable to protect our proprietary technology or our technology may
infringe on the proprietary technology of others.
- --------------------------------------------------------------------------------
Our ability to remain competitive is dependent, in part, upon our ability to
prevent other companies from using proprietary technology incorporated into our
products. We seek to protect our technology through a combination of patents and
trade secrets, as well as license, proprietary know-how and confidentiality
agreements. We may be unable, however, to prevent others from using our
proprietary information, or continue to use such information ourselves, for
numerous reasons, including the following: o Our issued patents may not be
sufficiently broad to prevent others from copying our proprietary technologies;
o Our issued patents may be challenged by third parties and deemed
to be overbroad or unenforceable;
o Our products may infringe on the patents of others, requiring us
to alter or discontinue our manufacture or sale of such products;
o Costs associated with seeking enforcement of our patents against
infringement, or defending ourselves against allegations of
infringement, may be significant;
o Our pending patent applications may not be granted for various
reasons, including overbreadth or conflict with an existing
patent; and
o Other persons may independently develop, or have developed,
similar or superior technologies.
11
A significant portion of our revenues are derived from a few products and
procedures.
- --------------------------------------------------------------------------------
A significant portion of our revenues are attributable to sales of our inflation
devices. During the year ended December 31, 2002, sales of our inflation devices
(including inflation devices sold in custom kits) accounted for approximately
33% of our total revenues. During the three and six months ended June 30, 2003,
sales of our inflation devices (including inflation devices sold in custom kits)
accounted for approximately 32.6% and 33.2%, respectively, of our total
revenues. Any material decline in market demand for our inflation devices could
have an adverse effect on our business and financial condition.
In addition, the products that have accounted for a majority of our historical
revenues are designed for use in connection with a few related medical
procedures, including angiography, angioplasty and stent placement procedures.
If subsequent developments in medical technology or drug therapy make such
procedures obsolete, or alter the methodology of such procedures so as to
eliminate the usefulness of our products, we may experience a material decrease
in demand for our products and experience deteriorating financial performance.
Fluctuations in Euro exchange rates may negatively impact our financial results.
- --------------------------------------------------------------------------------
Fluctuations in the rate of exchange between the Euro and the U.S. Dollar could
have a negative impact on our margins and financial results. For example, for
the year ended December 31, 2000, the exchange rate between the Euro and the U.
S. Dollar dropped by approximately 13.2%, resulting in a reduction in our gross
revenues of $1,076,695 and approximately 1.2% in gross profit. For the year
ended December 31, 2001, the exchange rate between the Euro and the U. S. Dollar
resulted in a reduction of our gross revenues of $467,283 and approximately 0.4%
in gross profit. However, for the year ended December 31, 2002, the exchange
rate resulted in an increase of gross revenues of $497,644 and approximately
0.4% in gross profit. For the three and six months ended June 30, 2003, the
exchange rate resulted in an increase of gross revenues of $703,765 and $1.4
million, respectively, and approximately 1.2% in gross profit for both periods.
For the year ended December 31, 2002, approximately $10.1 million, or 8.7%, of
our sales were denominated in Euros. If the rate of exchange between the Euro
and the U.S. Dollar declines, we may not be able to increase the prices that we
charge our European customers for products whose prices are denominated in
Euros. Furthermore, we may be unable or elect not to enter into hedging
transactions which could mitigate the effect of declining exchange rates. As a
result, as the rate of exchange between Euros and the U.S. Dollars declines, our
financial results may be negatively impacted.
We may be unable to successfully manage growth, particularly if accomplished
through acquisitions.
- --------------------------------------------------------------------------------
Successful implementation of our business strategy will require that we
effectively manage any associated growth. To manage growth effectively, our
management will need to continue to implement changes in certain aspects of our
business, to enhance our information systems and operations to respond to
increased demand, to attract and retain qualified personnel and to develop,
train and manage an increasing number of management-level and other employees.
Growth could place an increasing strain on our management, financial, product
design, marketing, distribution and other resources, and we could experience
operating difficulties. Any failure to manage growth effectively could have a
material adverse effect on our results of operations and financial condition.
To the extent that we grow through acquisition, we will face the additional
challenges of integrating our current operations, culture, informational
management systems and other characteristics with that of the acquired entity.
We may incur significant expenses in connection with negotiating and
consummating one or more transactions, and we may inherit certain liabilities in
connection with the acquisition as a result of our failure to conduct adequate
due diligence or otherwise. In addition, we may not realize competitive
advantages, synergies or other benefits anticipated in connection with such
acquisition(s). If we do not adequately identify targets for, or manage issues
related to our future acquisitions, such acquisitions may have a negative
adverse effect on our business and financial results.
The market price of our common stock has been, and may continue to be, volatile.
- --------------------------------------------------------------------------------
The market price of our common stock has been, and may continue to be, highly
volatile for various reasons, including the following:
o Our announcement of new products or technical innovations, or
similar announcements by our competitors;
o Development of new procedures that use, or do not use, our
technology;
o Quarter-to-quarter fluctuations in our financial results;
o Claims involving potential infringement of patents and other
intellectual property rights;
12
o Analyst and other projections or recommendations regarding our
common stock or medical technology stocks generally;
o Any restatement of our financial statements or any investigation
into Merit by the SEC or another regulatory authority; and
o A general decline, or rise, of stock prices in the capital
markets.
We are dependent upon key personnel.
- --------------------------------------------------------------------------------
Our continued success is dependent on key management personnel, including Fred
P. Lampropoulos, our Chairman of the Board, President and Chief Executive
Officer. Mr. Lampropoulos is not subject to any agreement prohibiting his
departure, and we do not maintain key man life insurance with his life. The loss
of Mr. Lampropoulos, or of certain other key management personnel, could
materially adversely affect our business and operations. Our success also
depends, among other factors, on the successful recruitment and retention of key
operations, manufacturing, sales and other personnel.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our principal market risk relates to changes in the value of the Euro relative
to the value of the U.S. Dollar. Our consolidated financial statements are
denominated in, and our principal currency is, the U.S. Dollar. A portion of our
revenues during the three months ended June 30, 2003 ($3.3 million, representing
approximately 9.5% of aggregate revenues) came from sales that were denominated
in Euros. Certain of our expenses are also denominated in Euros, partially
offsetting any risk associated with fluctuations of the Euro/Dollar exchange
rate. As a result of our Euro-denominated revenues and expenses, in a year in
which our Euro-denominated revenues exceed our Euro-based expenses, the value of
such Euro-denominated net income increases if the value of the Euro increases
relative to the value of the U.S. Dollar, and decreases if the value of the Euro
decreases relative to the value of the U. S. Dollar. For example, in 2000, a
13.2% drop in the value of the Euro in relation to the U.S. Dollar led to
reduced revenues and gross profit of $1.1 million. By contrast, in 2002, an
increase in the value of the Euro relative to the U.S. Dollar led to increased
revenue and gross profit of approximately $500,000.
At June 30, 2003, we had a net exchange rate exposure (representing the
difference between Euro-denominated receivables and Euro-denominated payables)
of approximately $1.9 million. In order to partially offset such risk, on May
30, 2003, we entered into a 30-day Euro hedge contract. We enter into similar
hedging transactions at various times during the year in an effort to partially
offset exchange rate risks we bear throughout the year. We do not purchase or
hold derivative financial instruments for speculative or trading purposes. This
economic hedge does not qualify for hedge accounting. During the three and six
months ended June 30, 2003, we experienced a net loss of $41,635 and $61,145,
respectively, on hedging transactions we executed during the three and six
months ended June 30, 2003 in an effort to limit our exposure to fluctuations in
the Euro/Dollar exchange rate.
As of June 30, 2003, we had no variable rate debt. As long as we do not have
variable rate debt, our interest expense would not be affected by changes in
interest rates.
ITEM 4: CONTROLS AND PROCEDURES
Under the supervision and with the participation of our management, including
our principal executive officer and principal financial officer, we conducted an
evaluation of our disclosure controls and procedures, as such term is defined
under Rules 13a-14(c) and 15d-14(c) promulgated under the Exchange Act, within
90 days of the filing date of this Report. Based on this evaluation, our
principal executive officer and principal financial officer concluded that our
disclosure controls and procedures are effective in alerting them on a timely
basis to material information relating to Merit (including our consolidated
subsidiaries) required to be included in our reports filed or submitted under
the Exchange Act.
There have been no significant changes (including corrective actions with regard
to significant deficiencies or material weaknesses) in our internal controls or
in other factors that could significantly affect these controls subsequent to
the date of the evaluation referenced in the preceding paragraph.
13
PART II - OTHER INFORMATION
ITEM 4: Submission of matters to a vote of security holders
On May 22, 2003 we held our 2003 Annual Meeting of Shareholders at which our
shareholders considered and voted as follows on the items described below:
1. The shareholders considered whether to elect the following persons
as directors, each to serve until our next annual meeting of shareholders and
until his respective successor shall have been duly elected and shall qualify:
Name of Nominee Votes For Votes Withheld/Abstentions Broker Non-Votes
--------------- --------- -------------------------- ----------------
Fred P. Lampropolous 7,440,305 4,044,014 318,992
Kent W. Stanger 7,426,769 4,056,887 319,655
2. Our shareholders also considered a proposal to amend our Articles
of Incorporation for the purpose of increasing the number of authorized shares
of Common Stock from 20 million shares to 50 million shares. There were
8,927,099 votes cast in favor of the proposal, 2,423,650 votes cast in
opposition, 6,500 votes withheld and 446,062 broker non-votes.
3. Our shareholders also considered a proposal to amend the Merit
Medical Systems, Inc. 1999 Omnibus Stock Incentive Plan (the "Incentive Plan"),
to increase the number of shares available under the Incentive Plan from
2,500,000 shares of Common Stock to 4,500,000 shares of Common Stock. There were
4,090,268 votes cast in favor of the proposal, 5,012,687 votes cast in
opposition, 13,493 votes withheld and 2,686,863 broker non-votes.
4. Our shareholders also considered a proposal to ratify the
appointment by our Board of Directors of Deloitte & Touche, LLP as our auditors
for the fiscal year ending December 31, 2003. There were 11,348,308 votes cast
in favor, 320,779 votes cast against, 4,781 votes withheld, and 129,443 broker
non-votes.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits -
Exhibit No. Description
3.1 Articles of Amendment to the Articles of Incorporation
as filed with the Utah Division of Corporations and
Commercial Code on May 22, 2003
10.1 Amendment to the Merit Medical Systems, Inc. 1999
Omnibus Stock Incentive Plan, dated December 7, 2002
31.1 Certification of Principal Executive Officer
31.2 Certification of Principal Financial Officer
32.1 Certification of Principal Executive Officer
32.2 Certification of Principal Financial Officer
(b) The following Current Reports on Form 8-K were filed
during the quarter ended June 30, 2003:
Form 8-K Date of Event Description
-------- ------------- -----------
Item 7 & 9 4/23/2003 1st quarter - 2003 results
14
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: August 8, 2003 /s/: FRED P. LAMPROPOULOS
--------------------- -------------------------------------------
FRED P. LAMPROPOULOS
PRESIDENT AND CHIEF
EXECUTIVE OFFICER
Date: August 8, 2003 /s/: KENT W.
----------------------- -------------------------------------------
KENT W. STANGER
SECRETARY AND CHIEF FINANCIAL OFFICER
15
EXHIBIT 3.1
ARTICLES OF AMENDMENT
TO THE
ARTICLES OF INCORPORATION
OF
MERIT MEDICAL SYSTEMS, INC.
May 22, 2003
In accordance with Section 16-10a-1006 of the Utah Revised
Business Corporation Act (the "Act"), MERIT MEDICAL SYSTEMS, INC., a Utah
corporation (the "Corporation"), hereby declares and certifies as follows:
1. The name of the Corporation is MERIT MEDICAL SYSTEMS, INC.
2. The first full paragraph of Article IV of the Articles of
Incorporation of the Corporation, as amended to date, shall be amended and
replaced in its entirety as follows (the "Amendment"):
The total number of shares of capital stock which the
corporation shall have the authority to issue is fifty-five
million (55,000,000), of which five million (5,000,000) shall
be shares of preferred stock, no par value (hereinafter called
"Preferred Stock") and fifty million (50,000,000) shall be
shares of common stock, no par value (hereinafter called
"Common Stock").
3. The Amendment does not provide for an exchange,
reclassification, or cancellation of issued shares.
4. The Amendment was adopted as of May 22, 2003 in accordance
with the provisions of the Act.
5. The designation, number of outstanding shares, number of
votes entitled to be cast, number of shares indisputably representing at the
meeting at which the Amendment was considered, and the total number of votes
cast for, and against, the Amendment by the sole voting group entitled to vote
on the Amendment were as follows:
================================================ ======================= ======================= =========================
Designation, Number of Outstanding Shares and Number of Votes Number of Votes Cast
Number of Votes Indisputably Against the Amendment
Entitled to be Cast by Sole Voting Group Represented at the Number of Votes Cast or Abstaining From
Entitled to Vote on the Amendment Meeting For the Amendment Voting
- ------------------------------------------------ ----------------------- ----------------------- -------------------------
14,152,794 shares of Common Stock 11,803,311 8,927,099 2,430,150
================================================ ======================= ======================= =========================
The number of votes cast for the Amendment was sufficient for
approval.
IN WITNESS WHEREOF, these Articles of Amendment have been
executed by the Corporation as of the date first written above.
MERIT MEDICAL SYSTEMS, INC.,
a Utah corporation
By: /s/ Rashelle Perry
-------------------------------
Its: General Counsel
VP of Legal
Chief Legal Officer
16
MAILING ADDRESS
---------------
If, upon completion of filing of the above Articles of Amendment, the
Utah Division of Corporations and Commercial Code elects to send a copy of the
Articles of Amendment to the Corporation by mail, the address to which the copy
should be mailed is:
Merit Medical Systems, Inc.
1600 Merit Parkway
South Jordan, Utah 84095
Attn: Kent W. Stanger
17
EXHIBIT 10.1
------------
AMENDMENT TO THE MERIT MEDICAL SYSTEMS, INC.
1999 OMNIBUS STOCK INCENTIVE PLAN
This Amendment to the Merit Medical Systems, Inc. 1999 Omnibus Stock
Incentive Plan (the "Plan") is adopted as of the 7th day December, 2002, by
Merit Medical Systems, Inc. (the "Company").
RECITALS
1. In 1999, the Company adopted the Plan for the purpose of providing
options and other equity-based long term incentives to its executives, employees
and non-employee directors.
2. The Company, has reserved the right to amend the Plan at any time
and from time to time through duly adopted Board action.
3. It is necessary and desirable to amend the Plan in certain respects.
NOW, THEREFORE, the Plan is hereby amended effective as of the date
first set forth above as follows:
1. The fourth sentence of Section 7(c)(3) of the Plan is hereby amended
to read as follows:
Payment for shares of Common Stock purchased upon the exercise
of an Option shall be made on the effective date of such exercise by
one or a combination of the following means: (i) in cash, by certified
check, bank cashier's check or wire transfer; (ii) if approved by the
Committee, by delivering a properly executed exercise notice to the
Company together with a copy of irrevocable instructions to a broker to
deliver promptly to the Company the amount of sale or loan proceeds to
pay the full amount of the Purchase Price, (iii) if approved by the
Committee, by delivering shares of Common Stock owned by the
Participant for more than six months with appropriate stock powers, or
(iv) any combination of the foregoing forms approved by the Committee.
2. Clause (i) of Section 7(e)(1) of the Plan is amended to delete the
phrase "ninety (90) days after such termination," and to insert the phrase
"three (3) months after such termination (or such other period as the Company
designates in the Award Agreement), . . ."
3. Section 7(f) of the Plan is amended to read as follows:
Upon the occurrence of a Change in Control, each Option then
outstanding under the Plan shall become exercisable in full and, except
as provided below or in the otherwise applicable Award Agreement, shall
continue to be exercisable until its otherwise applicable expiration
date. Notwithstanding the foregoing, to the extent provided in any
shareholder-approved agreement or plan providing for or relating to the
Change in Control transaction ("Change in Control Agreement"), all
outstanding Options on a Change in Control shall be converted into
options of the acquiring entity, assumed by the acquiring entity,
cashed out and/or otherwise disposed of in the manner specified in the
Change in Control Agreement; provided that any such cash-out,
conversion, assumption or other disposition shall not deprive the
Option holder of the inherent intrinsic value of the Options
18
immediately prior to the Change in Control, measured solely by the
excess of the Fair Market Value of the underlying Option shares
immediately prior to the Change in Control over the Option exercise
price. In the absence of such governing provisions in a Change in a
Control Agreement, the Committee in its sole discretion and on a case
by case basis may elect to cash out and terminate any Option in
exchange for a lump sum cash payment, shares of the acquiring company
or a combination thereof having a fair market value equal to the
excess, if any, of the Fair Market Value of the underlying Option
shares immediately prior to the Change in Control over the Option
exercise price. In the case of any outstanding Option as to which the
exercise price equals or exceeds the Fair Market Value of the
underlying Option shares immediately prior to the Change in Control,
the Committee may cash out and terminate the Option effective on the
date of the Change in Control without any payment or other
consideration to the Option holder.
4. Except as provided above, the Plan is hereby continued and ratified
in all respects.
IN TESTIMONY WHEREOF, the Company has caused this Amendment to be
executed by its duly authorized officer this 7day of December, 2002.
MERIT MEDICAL SYSTEMS, INC.
By: /s/ Rashelle Perry
Its: General Counsel
VP of Legal
Chief Legal Officer
19
EXHIBIT 31
----------
Certification of Chief Executive Officer
Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
I, Fred P. Lampropoulos, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Merit
Medial Systems, Inc.;
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report,
fairly present in all material respects the financial
condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
report;
4. The registrant's other certifying officer(s) and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)) for the registrant and we have:
a) Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating
to the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly
during the period in which this report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
c) Disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during
the registrant's most recent fiscal quarter (the registrant's
fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer(s) and I have
disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant's auditors
and the audit committee of the registrant's board of directors
(or persons performing the equivalent function):
1
a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the
registrant's ability to record, process, summarize and report
financial information; and
b) Any fraud, whether or not material, that involves
management or other employees who have a significant role in
the registrant's internal control over financial reporting.
Date: August 8, 2003 /s/: FRED P. LAMPROPOULOS
- -------------------- --------------------------------------------------
Fred P. Lampropoulos, Chief Executive Officer
2
Certification of Chief Financial Officer
Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
I, Kent W. Stanger, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Merit
Medial Systems, Inc.;
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report,
fairly present in all material respects the financial
condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
report;
4. The registrant's other certifying officer(s) and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)) for the registrant and we have:
a) Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating
to the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly
during the period in which this report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
c) Disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during
the registrant's most recent fiscal quarter (the registrant's
fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer(s) and I have
disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant's auditors
and the audit committee of the registrant's board of directors
(or persons performing the equivalent function):
3
a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the
registrant's ability to record, process, summarize and report
financial information; and
b) Any fraud, whether or not material, that involves
management or other employees who have a significant role in
the registrant's internal control over financial reporting.
Date: August 8, 2003 /s/:KENT W. STANGER
- --------------------------- --------------------------------------------
Kent W. Stanger, Chief Financial Officer
4
EXHIBIT 32
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Certification of Chief Executive Officer
Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
In connection with this quarterly report on Form 10-Q of Merit Medical Systems,
Inc. I, Fred P. Lampropoulos, Chief Executive Officer of Merit Medical Systems,
Inc., certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The report fully complies with the requirements of Section 13(a)
or 15 (d) of the Securities Exchange Act of 1934; and
(2) The information contained in this report fairly presents, in all
material respects, the financial condition and results of
operations of Merit Medical Systems, Inc
Date: August 8, 2003 /s/Fred P. Lampropoulos
----------------------------------
Fred P. Lampropoulos
Chairman of the Board, President
and Chief Executive Officer
1
Certification of Chief Financial Officer
Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
In connection with this quarterly report on Form 10-Q of Merit Medical Systems,
Inc. I, Kent W. Stanger, Chief Financial Officer of Merit Medical Systems, Inc.,
certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The report fully complies with the requirements of Section 13(a)
or 15 (d) of the Securities Exchange Act of 1934; and
(2) The information contained in this report fairly presents, in all
material respects, the financial condition and results of
operations of Merit Medical Systems, Inc.
Date: August 8, 2003 /s/ Kent W. Stanger
---------------------------
Kent W. Stanger
Chief Financial Officer
2
