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, 1997.
OR
__ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____ TO _____.
Commission File Number 0-18592
MERIT MEDICAL SYSTEMS, INC.
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(Exact name of Registrant as specified in its charter)
Utah 87-0447695
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(State or other jurisdiction of (I.R.S. Identification No.)
incorporation or organization)
1600 West Merit Park Way, South Jordan UT, 84095
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(Address of Principal Executive Offices)
(801) 253-1600
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(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes x No
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of the latest practicable date.
Common Stock 7,240,081
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TITLE OR CLASS Number of Shares Outstanding at
May 14, 1997
MERIT MEDICAL SYSTEMS, INC.
INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 1997
and December 31, 1996...........................................1
Consolidated Statements of Operations for the three months
ended March 31, 1997 and 1996...................................3
Consolidated Statements of Cash Flows for the three months
ended March 31, 1997 and 1996...................................4
Notes to Consolidated Financial Statements......................6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................7
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K................................9
SIGNATURES..................................................................9
PART I - FINANCIAL INFORMATION
ITEM 1: Financial Statements
MERIT MEDICAL SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1997 AND DECEMBER 31, 1996
March 31, December 31,
ASSETS 1997 1996
- ------ --------------- -------------
(Unaudited)
CURRENT ASSETS:
Cash $ 590,496 $ 1,262,950
Trade receivables - net 7,943,171 7,379,079
Employee and related
party receivables 287,086 327,425
Irish Development Agency grant receivable 589,568 416,891
Inventories 14,504,314 13,852,360
Prepaid expenses other assets 843,482 518,823
Deferred income tax assets 702,463 729,060
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Total current assets 25,460,580 24,486,588
----------- -----------
PROPERTY AND EQUIPMENT:
Land 1,105,298 1,107,351
Building 991,979 1,043,804
Manufacturing equipment 9,278,619 8,656,145
Automobiles 124,138 144,535
Furniture and fixtures 4,009,144 3,816,402
Leasehold improvements 4,509,965 2,673,897
Construction-in-progress 3,608,826 5,193,993
---------- ----------
Total 23,627,969 22,636,127
Less accumulated depreciation
and amortization (7,996,400) (7,605,728)
------------ -----------
Property and equipment - net 15,631,569 15,030,399
------------ -----------
OTHER ASSETS:
Intangible assets - net 1,697,087 1,839,532
Deposits 180,506 169,177
Goodwill 616,067
Prepaid royalty 171,428 192,857
----------- ----------
Total other assets 2,665,088 2,201,566
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TOTAL $ 43,757,237 $ 41,718,553
============ ============
Continued on Page 2
See Notes to Consolidated Financial Statements
1
MERIT MEDICAL SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS (Continued)
MARCH 31, 1997 AND DECEMBER 31, 1996
LIABILITIES AND STOCKHOLDERS' March 31, December 31,
EQUITY 1997 1996
- ------ -------------- --------------
(Unaudited)
CURRENT LIABILITIES:
Line of credit $ 4,499,250 $ 4,533,873
Current portion of long-term debt 1,510,864 1,388,576
Trade payables 2,382,516 2,709,869
Accrued expenses 2,648,274 2,969,246
Advances from employees 76,729 107,907
Income taxes payable 205,083 15,906
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Total current liabilities 11,322,716 11,725,377
DEFERRED INCOME TAX LIABILITIES 868,444 852,578
LONG-TERM DEBT 4,687,100 4,822,126
DEFERRED CREDITS 1,628,216 1,467,660
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Total Liabilities 18,506,476 18,867,741
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MINORITY INTEREST IN SUBSIDIARY 374,802 363,689
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STOCKHOLDERS' EQUITY:
Common stock - no par value;
10,000,000 shares authorized;
7,229,579 and 6,942,290 shares
issued and outstanding at March 31, 1997
and December 31, 1996, respectively 16,537,343 14,184,975
Foreign currency translation adjustment (169,689) (14,089)
Retained earnings 8,508,305 8,316,237
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Total stockholders' equity 24,875,959 22,487,123
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TOTAL $ 43,757,237 $ 41,718,553
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See Notes to Consolidated Financial Statements
2
MERIT MEDICAL SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996 (Unaudited)
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March 31, March 31,
1997 1996
SALES $ 13,833,143 $12,130,015
COST OF SALES 8,451,853 7,012,670
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GROSS PROFIT 5,381,290 5,117,345
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OPERATING EXPENSES:
Selling, general and administrative 3,839,438 3,418,032
Research and development 910,053 615,844
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TOTAL 4,749,491 4,033,876
----------- ----------
INCOME FROM OPERATIONS 631,799 1,083,469
OTHER EXPENSE - NET 179,533 162,614
----------- ------------
INCOME BEFORE INCOME TAX EXPENSE 452,266 920,855
INCOME TAX EXPENSE (249,086) (325,862)
MINORITY INTEREST IN INCOME OF SUBSIDIARY 11,113 62,546
----------- ------------
NET INCOME $ 192,067 $ 532,447
=========== =========
NET INCOME PER COMMON
AND COMMON EQUIVALENT SHARE $ .03 $ .08
=============== =============
WEIGHTED AVERAGE NUMBER OF COMMON
AND COMMON EQUIVALENT SHARES OUTSTANDING 7,307,292 6,941,491
========== ===========
See Notes to Consolidated Financial Statements
3
MERIT MEDICAL SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996 (Unaudited)
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March 31, March 31,
1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 192,067 $532,447
--------- --------
Adjustments to reconcile net income to net
cash used in operating activities:
Depreciation and amortization 508,143 568,955
Bad debt expense 28,780
(Gains) losses on sales and abandonment of
property and equipment (3,394) 2,186
Deferred income taxes 42,463 1,934
Minority interest in income of subsidiary 11,113 62,546
Tax benefit attributable to appreciation of
common stock options exercised
Changes in operating assets and liabilities:
Trade receivables (592,872) (242,446)
Employee and related party receivables 40,339 49,835
Irish Development Agency grant receivable 5,247 (44,305)
Inventories 21,890 (400,054)
Prepaid expenses and other assets (324,659) (285,700)
Deposits (11,329) 12,657
Trade payables (327,353) (579,164)
Accrued expenses (320,972) (143,956)
Advances from employees (31,178) 49,239
Income taxes payable 189,177 144,760
Other, net (155,600) (39,482)
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Total adjustments (920,205) (842,995)
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Net cash used in operating activities (728,138) (310,548)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures for:
Property and equipment (487,513) (996,598)
Goodwill (49,265)
Intangible assets 66,556 (92,891)
Proceeds from sale of property and equipment 16,482 20,119
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Net cash used in investing activities (453,740) (1,069,370)
---------------------------
Continued on page 5
See Notes to Consolidated Financial Statements
4
MERIT MEDICAL SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1996 (Unaudited)
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March 31, March 31,
1997 1996
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds included in deferred credits 277,719
Proceeds from issuance of common stock 852,368 394,869
Principal payments on:
long-term debt (290,954) (190,920)
line of credit (34,623) (1,257,811)
deferred credits (17,367) (17,367)
Proceeds from issuance of long-term debt 2,200,000
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Net cash provided by financing activities 509,424 1,406,490
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NET INCREASE (DECREASE) IN CASH (672,454) 26,572
CASH AT BEGINNING OF PERIOD 1,262,950 270,841
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CASH AT END OF PERIOD $ 590,496 $ 297,413
============ ===========
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION
Cash paid during the period for interest (including
capitalized interest of $29,428 and $34,384, respectively) $ 205,042 $ 136,695
============ ===========
Income taxes $ 17,446 $ 179,168
============= ===========
SUPPLEMENTAL DISCLOSURE OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
During the three month period ended March 31, 1997 and 1996, the Company entered
into notes payable totaling $278,216 and $583,006, respectively, for
manufacturing equipment and furniture and fixtures.
On January 31, 1997, the Company exchanged 152,424 shares of the Company's
common stock valued at $1.5 million for the purchase of substantially all of the
operating assets of Universal Medical Instrument Corp. The purchase price of
$1.5 million was allocated to inventory at $673,844, property and equipment at
$259,354, and goodwill at $566,802.
See Notes to Consolidated Financial Statements
5
MERIT MEDICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation. In the opinion of management, the accompanying
consolidated financial statements contain all adjustments, consisting only of
normal recurring accruals, necessary for a fair presentation of financial
position of the Company as of March 31, 1997 and December 31, 1996, and the
results of its operations and cash flows for the three months ended March 31,
1997 and 1996. The results of operations for the three months ended March 31,
1997 and 1996 are not necessarily indicative of the results for a full year
period.
2. Inventories. Inventories at March 31, 1997 and December 31, 1996 consisted
of the following:
March 31, December 31,
1997 1996
-------------- ------------
Raw materials $ 4,146,044 $ 4,025,497
Work-in-process 4,434,811 3,806,150
Finished goods 5,923,459 6,020,713
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Total $14,504,314 $13,852,360
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3. Income Taxes. The Company has not fully allocated income tax expense between
current and deferred for the quarters ended March 31, 1997 and 1996. The
effective tax rate for the quarter ended March 31, 1997 is higher than the
federal statutory tax rate largely due to losses incurred by the Company's Irish
subsidiary for which a tax benefit was recorded at a rate of 10% vs a 35%
federal statutory tax rate.
4. Recently Issued Financial Accounting Standards. In February 1997, the
Financial Accounting Standards Board issued SFAS No. 128, "Earnings per Share".
This standard established standards for computing and presenting earnings per
share (EPS). SFAS No. 128 simplifies the approach for computing earnings per
share previously found in Accounting Principles Board Opinion (APB) Opinion No.
15. It replaces the presentation of primary EPS with a presentation of basic
EPS. It also requires dual presentation of basic and diluted EPS on the face of
the income statement for all entities with complex capital structures.
Under the new statement, basic EPS excludes dilution and is computed by dividing
income available to common stockholders by the weighted-average number of common
shares outstanding for the period. Diluted EPS reflects the potential dilution
that could occur if securities or other contracts to issue common stock were
exercised or converted into common stock. Diluted EPS is computed similarly to
fully diluted EPS pursuant to APB Opinion No. 15.
SFAS No. 128 is effective for financial statements issued for periods ending
after December 15, 1997, including interim periods with earlier application not
permitted. The computation of basic EPS under SFAS No. 128 would have resulted
in net income per common share of $ .03 for the quarter ended March 31, 1997.
Diluted EPS computed under FASB No. 128 would have resulted in net income per
common share of $ .03 for the quarter ended March 31, 1997.
6
MERIT MEDICAL SYSTEMS, INC.
ITEM 2:
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Operations. The Company's sales increased for the three months ended March 31,
1997 compared to the same period in 1996. The following table sets forth certain
operational data as a percentage of sales for the three months ended March 31,
1997 and 1996:
Three Months Ended
March 31,
1997 1996
Sales 100.0 % 100.0%
Gross Profit 38.9 42.2
Selling, general and administrative 27.8 28.2
Research and development 6.6 5.1
Income From Operations 4.6 8.9
Other Expense 1.3 1.3
Net Income 1.4 4.4
Sales for the first quarter of 1997 increased by 14%, or $1,703,128, compared to
the same period for 1996. This increase was attributable to growth in sales of
inflation devices, custom kits, and new products such as angiographic needles.
International sales for the first quarter of 1997 represented 23% of total
Company sales compared to 21% of sales for the comparable period in 1996. In the
first quarter of 1997, the Company continued its transition from sales through a
dealer network in the Netherlands, Belgium and Canada to a direct sales force.
For the first quarter of 1997 the direct sales force accounted for sales of
$1,593,871, an increase of 36%, which represented 51% of total international
sales. On January 31, 1997 Merit Medical Systems acquired certain of the assets,
technologies and products of Universal Medical Instrument Corporation which were
transferred to the Company's new Vascular Access division. This division was
organized as part of a strategy to accelerate the Company's entry into new
complementary markets and for the months of February and March, added $267,467
in sales.
Gross Profit. Gross profit as a percentage of sales decreased in the first
quarter of 1997 to 38.9% as compared to 42.2% in the first quarter of 1996.
Factors contributing to the decrease resulted from increases in direct and
indirect labor costs, which included market adjustments in response to
competition for employees, and price competition affecting several products,
especially in European markets. The Company also incurred startup and transition
costs in the Company's newly organized Vascular Access division and experienced
an expected temporary decline in sales at Sentir, as Sentir's customers have
been reducing inventories.
7
MERIT MEDICAL SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
Operating Expenses. Operating expenses increased as a percentage of sales to
34.4% of sales in the first quarter of 1997 compared to 33.3% in the first
quarter of 1996. The increase was primarily due to an almost $300,000 (48%)
increase in research and development expenses incurred in both Ireland and the
U.S. This investment in new product development is part of the Company's long
term growth strategy of expanding its business to new market segments within
cardiology and radiology. Although the costs of supporting a direct sales force
in Europe continued to be high, selling general and administrative costs as a
percentage of sales declined to 27.8% compared to 28.2% for the first quarter of
1996. The improvement in the current period was due primarily to economies of
scale associated with increasing sales volumes and a continuous Company wide
focus on achieving greater individual productivity.
Income. During the quarter ended March 31, 1997, the Company reported income
from operations of $631,799 a decrease of 41.7% from income from operations of
$1,083,469 for the comparable period in 1996. Lower earnings for the most recent
quarter were attributable to increased research and development expense, lower
margins ,expenses incurred by the Company related to the aquisition of UMI and
the ramp-up of production in Europe, as well as the transititon to a direct
sales force in Canada, Belgium and the Netherlands.
Liquidity and Capital Resources. At March 31, 1997, the Company's working
capital was $14,137,864 which represented a current ratio of 2.25 to 1. During
1995, the Company increased an available secured bank line of credit to
$8,500,000 and obtained $2.2 million in term debt which was drawn down in
February of 1996. The line of credit bears interest at .25 percent over the
banks prime rate and contains various conditions and restrictions. At March 31,
1997, the outstanding balance under the line of credit was $4,499,250.
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.
8
MERIT MEDICAL SYSTEMS, INC.
PART II - OTHER INFORMATION
ITEM 6: Exhibits and Reports on Form 8-K
(a) Exhibits - none required to be filed
(b) Reports on Form 8-K - none
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MERIT MEDICAL SYSTEMS, INC.
- ----------------------------
REGISTRANT
Date: May 14, 1997 /s/ Fred P. Lampropoulos
------------------ -----------------------------------
FRED P. LAMPROPOULOS
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Date: May 14, 1997 /s/ Kent W. Stanger
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KENT W. STANGER
SECRETARY AND CHIEF FINANCIAL OFFICER
9
5
3-MOS
DEC-31-1997
JAN-01-1997
MAR-31-1997
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192067
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