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 SEPTEMBER 30, 1998.
OR
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____ TO _____.
Commission File Number 0-18592
MERIT MEDICAL SYSTEMS, INC.
- --------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Utah 87-0447695
- ---------------------------- ---------------------------
(State or other jurisdiction (I.R.S. Identification No.)
of 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 7,460,441
------------ ---------
TITLE OR CLASS Number of Shares Outstanding at
November 12, 1998
MERIT MEDICAL SYSTEMS, INC.
---------------------------
INDEX TO FORM 10-Q
------------------
PART I. FINANCIAL INFORMATION PAGE
----
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 1998
and December 31, 1997 ...........................................1
Consolidated Statements of Operations for the three and nine
months ended September 30, 1998 and 1997.........................3
Consolidated Statements of Cash Flows for the nine months
ended September 30, 1998 and 1997................................4
Notes to Consolidated Financial Statements.......................6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................8
PART II. OTHER INFORMATION
Item 4. Exhibits and Reports on Form 8-K...............................10
SIGNATURES..................................................................10
PART I - FINANCIAL INFORMATION
ITEM 1: Financial Statements
MERIT MEDICAL SYSTEMS, INC.
- ---------------------------
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1998 AND DECEMBER 31, 1997
- --------------------------------------------------------------------------------
September December 31,
ASSET 1998 1997
- ----- ------------- ---------------
(Unaudited)
CURRENT ASSETS:
Cash $ 820,818 $ 976,692
Trade receivables - net 9,213,201 9,599,443
Employee and related party receivables 538,871 288,812
Irish Development Agency grant receivable 304,514 747,888
Inventories 17,090,578 14,535,440
Prepaid expenses and other assets 576,859 538,259
Deferred income tax assets 546,937 782,435
------------- ---------------
Total current assets 29,091,778 27,468,969
------------- ---------------
PROPERTY AND EQUIPMENT:
Land 1,065,985 1,101,544
Building 932,448
Automobiles 89,709 112,633
Manufacturing equipment 13,218,201 10,909,529
Furniture and fixtures 5,251,605 4,817,738
Leasehold improvements 4,938,929 4,483,071
Construction-in-progress 3,339,136 2,747,414
------------- ---------------
Total 27,903,565 25,104,377
Less accumulated depreciation
and amortization (11,419,465) (9,648,746)
------------- ---------------
Property and equipment - net 16,484,100 15,455,631
------------- ---------------
OTHER ASSETS:
Intangible assets - net 2,350,295 2,024,050
Cost in excess of the fair value
of assets acquired - net 154,470 167,273
Prepaid royalty - net 42,857 107,143
Deposits 68,490 46,612
------------- ---------------
Total other assets 2,616,112 2,345,078
------------- ---------------
TOTAL $ 48,191,990 $ 45,269,678
============= ===============
Continued on Page 2
See Notes to Consolidated Financial Statements
1
MERIT MEDICAL SYSTEMS, INC.
- ---------------------------
CONSOLIDATED BALANCE SHEETS (Continued)
SEPTEMBER 30, 1998 AND DECEMBER 31, 1997
- ----------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
September 30, December 31,
1998 1997
-------------- ---------------
(Unaudited)
CURRENT LIABILITIES:
Line of credit $ 6,353,797 $ 4,624,727
Current portion of long-term debt 1,618,253 1,802,932
Trade payables 3,460,771 3,438,349
Accrued expenses 2,556,586 2,414,050
Advances from employees 55,856 81,245
Income taxes payable 438,308 369,695
-------------- ---------------
Total current liabilities 14,483,571 12,730,998
DEFERRED INCOME TAX LIABILITIES 794,663 883,002
LONG-TERM DEBT 2,964,652 3,913,686
DEFERRED CREDITS 1,334,337 1,543,151
-------------- ---------------
Total liabilities 19,577,223 19,070,837
------------- ---------------
MINORITY INTEREST IN SUBSIDIARY 511,409 396,692
-------------- ---------------
STOCKHOLDERS' EQUITY:
Preferred stock -5,000,000 shares authorized
as of September 30, 1998, and December 31, 1997,
respectively, no shares issued
Common stock - no par value;
20,000,000 and 10,000,000 shares authorized,
respectively, 7,445,968 and 7,395,091 shares
issued at September 30, 1998
and December 31, 1997, respectively 17,462,414 17,178,971
Retained earnings 10,850,819 9,113,769
Foreign currency translation adjustment (209,875) (490,591)
-------------- ---------------
Total stockholders' equity 28,103,358 25,802,149
-------------- ---------------
TOTAL $ 48,191,990 $ 45,269,678
============== ===============
See Notes to Consolidated Financial Statements
2
MERIT MEDICAL SYSTEMS, INC.
- ---------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 and 1997 (Unaudited)
- --------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
-------------- --------------
1998 1997 1998 1997
------------- ------------- -------------- --------------
SALES $16,703,033 $ 15,450,336 $51,143,218 $ 44,609,549
COST OF SALES 10,270,250 9,815,145 31,734,533 27,690,322
------------- ------------- -------------- --------------
GROSS MARGIN 6,432,783 5,635,191 19,408,685 16,919,227
------------- ------------- -------------- --------------
OPERATING EXPENSES:
Selling, general and administrative 4,160,108 3,912,461 12,899,025 11,680,876
Research and development 729,583 1,207,985 2,476,337 3,283,324
------------- ------------- -------------- --------------
TOTAL 4,889,691 5,120,446 15,375,362 14,964,200
------------- ------------- -------------- --------------
INCOME FROM OPERATIONS 1,543,092 514,745 4,033,323 1,955,027
OTHER EXPENSE 236,417 216,444 631,393 626,749
------------- ------------- -------------- --------------
INCOME BEFORE INCOME TAX EXPENSE 1,306,675 298,301 3,401,930 1,328,278
INCOME TAX EXPENSE 542,743 161,713 1,550,163 707,269
MINORITY INTEREST IN INCOME
OF SUBSIDIARY 41,096 7,450 114,717 15,844
------------- ------------- -------------- --------------
NET INCOME $ 722,836 $ 129,138 $ 1,737,050 $ 605,165
============= ============= ============== ==============
EARNINGS PER COMMON SHARE-
Basic and diluted $ .10 $ .02 $ .23 $ .08
============= ============= ============== ==============
AVERAGE COMMON SHARE -
Basic and diluted 7,521,075 7,375,057 7,496,200 7,346,533
============= ============ ============== ==============
COMPREHENSIVE INCOME $ 1,119,381 $ 17,636 $ 2,017,766 $ 216,262
============= ============== ============== ============
See Notes to Consolidated Financial Statements
3
MERIT MEDICAL SYSTEMS, INC.
- ---------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED September 30, 1998 and 1997 (Unaudited)
- --------------------------------------------------------------------------------
September 30, September 30,
1998 1997
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,737,050 $ 605,165
----------- -----------
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 2,121,645 1,762,111
Bad debt expense 75,689 102,189
Losses (gains) on sales and abandonment of
property and equipment 43,475 (7,845)
Amortization of deferred credit (67,423) (44,939)
Deferred income taxes 147,159 (10,594)
Minority interest in income of subsidiary 114,717 15,844
Changes in operating assets and liabilities net of
effects from purchase of UMI:
Trade receivables 310,553 (1,781,840)
Employee and related party receivables (224,805) 36,327
Irish Development Agency grant receivable 340,299 (225,690)
Inventories (2,555,138) 158,389
Prepaid expenses (63,555) (162,575)
Deposits and other (21,878) 64,028
Trade payables 22,422 (154,255)
Accrued expenses 142,536 (605,314)
Advances from employees (25,389) (30,524)
Income taxes 68,613 370,222
----------- -----------
Total adjustments 428,920 (514,466)
----------- -----------
Net cash provided by operating activities 2,165,970 90,699
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures for:
Property and equipment (3,042,791) (1,765,025)
Cash payment in connection with assets purchased from UMI (61,486)
Intangible assets (477,702) (310,065)
Proceeds from the sale of property and equipment 539,202 22,646
----------- -----------
Net cash used in investing activities (2,981,291) (2,113,930)
----------- -----------
Continued on page 5
See Notes to Consolidated Financial Statements
4
MERIT MEDICAL SYSTEMS, INC.
- ---------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997 (Unaudited)
- --------------------------------------------------------------------------------
September 30, September 30,
1998 1997
-------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from:
Line of credit 1,729,070 1,501,996
Issuance of common stock 283,443 1,562,502
Principal payments on:
Long-term debt (1,581,681) (1,204,974)
Deferred credit ( 52,101) (26,051)
-------------- ---------------
Net cash provided by financing activities 378,731 1,833,473
-------------- ---------------
NET DECREASE IN CASH 436,590 189,758
EFFECT OF EXCHANGE RATES ON CASH 280,716 (388,903)
CASH AT BEGINNING OF PERIOD 976,692 1,262,950
-------------- ---------------
CASH AT END OF PERIOD $ 820,818 $ 684,289
============== ===============
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION
Cash paid during the period for:
Interest (including capitalized interest
of $102,958 and $95,990, respectively) $ 606,999 $ 660,530
============== ===============
Income taxes $ 1,334,391 $ 347,641
============== ===============
SUPPLEMENTAL DISCLOSURES OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
During the nine months ended September 30, 1998 and 1997 the Company issued
notes payable totaling $770,848 and $680,903, respectively, for manufacturing
equipment, furniture and fixtures, land and building.
During the nine months ended September 30, 1997, the Company acquired
substantially all of the operating assets of Universal Medical Instrument
Corporation for 152,424 shares of Merit restricted common stock. In connection
with this acquisition date, the Company recorded the following as of the
acquisition date:
Assets Acquired $ 863,198
Cost in excess of fair market value 182,288
----------
Total purchase price $1,045,486
==========
See Notes to Consolidated Financial Statements
5
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 the financial
position of the Company as of September 30, 1998 and December 31, 1997, and the
results of its operations and cash flows for the three and nine months ended
September 30, 1998 and 1997, and its cash flows for the nine months September
30, 1998 and 1997. The results of operations for the three and nine months ended
September 30, 1998 and 1997 are not necessarily indicative of the results for a
full year period.
2. Inventories. Inventories at September 30, 1998 and December 31, 1997
consisted of the following:
September 30, December 31,
1998 1997
--------------- ----------------
Raw materials $ 6,195,424 $ 4,635,593
Work-in-process 4,951,455 4,305,202
Finished goods 6,395,071 6,261,203
Less reserve for obsolete inventory (451,372) (666,558)
--------------- ----------------
Total $ 17,090,578 $ 14,535,440
============== ==============
3. Income Taxes. The effective tax rate for the three and nine months ended
September 30, 1998 and 1997, is higher than the federal statutory tax rate
largely due to losses incurred by the Company's Irish subsidiary for which a tax
benefit was recorded at a rate of 10% vs. a 35% federal statutory tax rate.
4. Reporting Comprehensive Income - In June 1997, the Financial Accounting
Standards Board (FASB) issued SFAS No.130, "Reporting Comprehensive Income."
SFAS No. 130 establishes standards for reporting and display of comprehensive
income and its components (revenues, expenses, gains and losses) in a full set
of general-purpose financial statements. This statement requires that an
enterprise (a) classify items of other comprehensive income by their nature in a
financial statement and (b) display the accumulated balance of other
comprehensive income separately from retained earnings and additional
paid-in-capital in the equity section of a statement of financial position.
Effective January 1, 1998, the Company adopted the provisions of SFAS No. 130.
Accordingly, the Company determined that the only transaction considered to be
an additional component of comprehensive income is the cumulative effect of
foreign currency translation adjustments. As of September 30, 1998 and December
31, 1997, the cumulative effect of such transactions reduced stockholders'
equity by $209,875 and $490,591, respectively. The net impact to operations for
the three months ended September 30, 1998 and 1997 would increase/(reduce)
comprehensive income by approximately $396,545 and ($111,502), respectively. The
net impact to operations for the nine months ended September 30, 1998 and 1997
would increase/ (reduce) comprehensive income by approximately $280,716 and
($388,903), respectively.
6
MERIT MEDICAL SYSTEMS, INC.
- ---------------------------
ITEM 2:
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Operations. The Company achieved increases in sales and earnings for the three
and nine months ended September 30, 1998 compared to the same periods in 1997.
The following table sets forth certain operational data as a percentage of sales
for the three and nine months ended September 30, 1998 and 1997.
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
1998 1997 1998 1997
---- ---- ---- ----
Sales 100.0 % 100.0 % 100.0 % 100.0 %
Gross Margin 38.5 36.5 37.9 37.9
Selling, General and Administrative 24.9 25.3 25.2 26.2
Research & Development 4.4 7.8 4.8 7.4
Income From Operations 9.2 3.3 7.9 4.4
Other Expense 1.4 1.4 1.2 1.4
Net Income 4.3 .8 3.4 1.4
Sales. Sales for the third quarter of 1998 ended September 30 were $16,703,033
compared to $15,450,336 for the same period last year, which represents a gain
of 8 percent. The Company's inflation device sales increased by 19 percent,
custom kit business grew by 5 percent during the three-month period compared to
the quarter ended September 30, 1997, while sales of other devices including
syringes, manifolds and needles grew by 8 percent. Growth in all segments
reflects continued market share gains and acceptance of the Company's products,
as well as procedural growth. Sales from international operations rose by 5
percent for the three-month period compared to the prior year's same quarter.
These sales represented 22 percent of total sales for the third quarter compared
with 23 percent of total sales for the prior year period. For the nine-month
period ended September 30, 1998 total sales were $51,143,218 compared with
$44,609,549 for the same period in 1997, a gain of 15 percent. These gains were
led by sales of the Company's inflation devices, which rose 16 percent;
stopcocks, which grew by 52 percent; and custom kits, which grew by 13 percent.
International sales were up 14 percent over the prior year's period, and
accounted for 22 percent of the Company's total revenue mix compared with 22
percent of total revenues last year.
Gross Margin. Gross margin as a percentage of sales for the third quarter of
1998 was 38.5% compared to 36.5% for the same period in 1997. For the nine
months ended September 30, 1998 and 1997 gross margin was 37.9%. The increase in
gross margin for the three months ended September 30, 1998 was primarily due to
favorable changes in product mix, price strategies, economies of scale
associated with increased sales.
7
MERIT MEDICAL SYSTEMS, INC.
- ---------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Operating Expenses. Operating expenses were 29.3% of sales for the three months
ended September 30,1998 compared to 33.1 % for the third quarter of 1997. For
the first nine months of 1998 operating expenses decreased significantly to
30.1% compared to 33.5% for the same period in 1997. Selling, general and
administrative expenses as a percentage of sales declined to 24.9% and 25.2% for
the three and nine months ended September 30, 1998 compared to 25.3% and 26.2%
for the same periods in 1997. The improvement was primarily due to economies of
scale associated with increasing sales volumes and a continuous Company-wide
focus on achieving greater individual productivity. The completion of the
development and market introduction of the Tomcat P.T.C.A. guidewire in Ireland
added important core technology and a new product line resulted in a decrease in
research and development costs by approximately by $478,000 for the third
quarter of 1998 compared to 1997. For the nine months ended September 30, 1998
research and development decreased approximately $807,000 compared with 1997.
Operating Income. During the quarter ended September 30, 1998, the Company
reported record income from operations of $1,543,092 compared to $514,745, an
increase of 200% for the comparable period in 1997. Operating income for the
first nine months of 1998 was also a record $4,033,323 an increase of 106% vs.
$1,955,027 for the same period in 1997. The increase in earnings for the three
and nine months ended September 30, 1998 was attributable to an increase in
sales with improved gross margins and a reduction in operating expenses as a
percentage of sales.
Liquidity and Capital Resources. At September 30, 1998, the Company's working
capital was $14.6 million which represented a current ratio of 2.0 to 1. On
October 1, 1998, the Company renewed an available secured bank line of credit to
$10.5 million. The line of credit bears interest at the bank's prime rate, or
can be fixed at 1.85 percent below LIBOR and contains various conditions and
restrictions. At September 30, 1998, the outstanding balance under the line of
credit was $6.35 million. 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, particularly with the introduction of new product
lines. 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.
Market Risk Disclosures. The Company does not engage in significant derivative
financial instruments. The Company does experience risk associated with foreign
currency fluctuations, and interest rate risk associated with its variable rate
debt; however, such risks have not been material to the Company and,
accordingly, the Company has not deemed it necessary to enter into agreements to
hedge such risks. The Company may enter into such agreements in the event that
such risks become material in the future.
8
Year 2000. The Company has developed a comprehensive strategy for updating its
systems for Year 2000 ("Y2K") compliance including those systems for all of its
subsidiaries. The Company's information technology ("IT") systems include
in-house developed software and hardware, as well as software and hardware
purchased from outside parties. Merit Medical is in the process of identifying
and assessing all systems to determine the extent of renovations required in
order to be Y2K compliant. Renovations to programs that utilize in-house
developed computer code are nearly complete and the Company anticipates that the
renovations will be fully completed and validated on or before July 1999. Also,
the Company believes vendor developed software will be made Y2K compliant by
July 1999 through vendor-provided updates or replacement with other Y2K
compliant hardware and software.
The Company is in the "inventory and assessment" phases with regard to its state
of readiness related to non-IT devices containing embedded circuitry and issues
related to third parties with which Merit has a material relationship. The
Company is in various stages of the "inventory," "assessment" and "remediation"
phases with regard to its IT systems. In addition, as part of the Year 2000
Project regarding IT systems, the Company continues to implement new or upgraded
YEAR 2000 compliant systems for meeting manufacturing, financial and human
resources. The completion date is expected to be July 1999.
Merit Medical expects that costs to address Y2K issues will total approximately
$300,000, of which approximately $90,000 will be spent in the current fiscal
year, with the remainder being spent during the first two quarters of fiscal
1999. Costs include hardware and software replacement costs, and consulting and
travel expenses associated, directly or indirectly, with addressing Y2K issues.
The Company is in the process of upgrading its manufacturing , financial and
human resources systems for increased functionality. The new systems are Y2K
compliant, and Merit expects these systems to be fully tested and operational by
September, 1999. Management does not anticipate significant unplanned costs or
problems with the new systems for Y2K compliance. Merit Medical has identified
third parties with which it has a significant relationship that , in the event
of a Y2K failure, could have a material impact on its financial position or
operating results. The third parties include material and product suppliers,
communication vendors, the Company's significant customers, creditors, and
energy and utility suppliers. These relationships, especially those associated
with certain suppliers and customers, are material to the Company and a Y2K
failure for one or more of these parties could result in a material adverse
effect on the Company's operation results and financial position. However, the
Company is making inquiries of these third partes to assess their Y2K readiness
and will implement appropriate action to mitigate any such exposure.
Statements contained in this release which are not purely historical are
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. These encompass Merit's beliefs, expectations,
hopes or intentions regarding the future. All forward-looking statements
included in this release are made as of the date hereof and are based on
information available to Merit as of such date. Merit assumes no obligation to
update any forward- looking statement. It is important to note that actual
outcomes and Merit's actual results could differ materially from those in such
forward-looking statements. Factors that could cause actual results to differ
materially include risks and uncertainties related to future market growth such
as product acceptance, product recalls, competition and the overall regulatory
environment.
9
MERIT MEDICAL SYSTEMS, INC.
- ---------------------------
PART II - OTHER INFORMATION
ITEM 6: Exhibits and Reports on Form 8-K
(a) Reports on Form 8-K - none
(b) Exhibits
S - K No. Description Exhibit No.
- --------------------------------------------------------------------------------
27 Financial Data Schedule 1
- --------------------------------------------------------------------------------
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: NOVEMBER 12, 1998
----------------------- ------------------------------------------
FRED P. LAMPROPOULOS
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Date: NOVEMBER 12, 1998
---------------------- ------------------------------------------
KENT W. STANGER
VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
10
5
0000856982
MERIT MEDICAL SYSTEMS, INC.
12-MOS
DEC-31-1998
JAN-01-1998
SEP-30-1998
820,818
0
9,458,380
(245,179)
17,090,578
29,091,778
27,903,565
(11,419,465)
48,191,990
14,483,571
2,964,652
0
0
17,462,414
10,850,819
48,191,990
51,143,218
51,143,218
31,734,533
31,734,533
0
0
682,883
3,401,930
1,550,163
0
0
0
0
1,737,050
0.23
0.23
