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, 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 Parkway, South Jordan UT, 84095
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(Address of Principal Executive Offices)
(801) 253-1600
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(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes x No
--- ---
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of the latest practicable date.
Common Stock 7,372,379
- ---------------- ---------------------------------
TITLE OR CLASS Number of Shares Outstanding at
November 10, 1997
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, 1997
and December 31, 1996 ...............................................1
Consolidated Statements of Operations for the three
and nine months ended September 30, 1997 and 1996....................3
Consolidated Statements of Cash Flows for the nine months
ended September 30, 1997 and 1996....................................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.
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CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1997 AND DECEMBER 31, 1996
- --------------------------------------------------------------------------------
September 30,
1997 December 31,
ASSETS (Unaudited) 1996
- ------ ------------------------------
CURRENT ASSETS:
Cash $ 684,289 $ 1,262,950
Trade receivables - net 9,058,730 7,379,079
Employee and related party receivables 291,098 327,425
Irish Development Agency grant receivable 799,056 416,891
Inventories 14,367,815 13,852,360
Prepaid expenses and other assets 681,398 518,823
Deferred income tax assets 706,545 729,060
------------ ------------
Total current assets 26,588,931 24,486,588
------------ ------------
PROPERTY AND EQUIPMENT:
Land 1,102,385 1,107,351
Building 963,342 1,043,804
Automobiles 112,952 144,535
Manufacturing equipment 10,938,026 8,656,145
Furniture and fixtures 4,641,140 3,816,402
Leasehold improvements 4,431,641 2,673,897
Construction-in-progress 3,113,066 5,193,993
------------ ------------
Total 25,302,552 22,636,127
Less accumulated depreciation
and amortization (9,112,202) (7,605,728)
------------ ------------
Property and equipment - net 16,190,350 15,030,399
------------ ------------
OTHER ASSETS:
Intangible assets - net 2,024,027 1,839,532
Cost in excess of the fair value of assets acquired - net 586,563
Prepaid royalty - net 128,571 192,857
Deposits 105,149 169,177
------------ ------------
Total other assets 2,844,310 2,201,566
TOTAL $ 45,623,591 $ 41,718,553
------------ ------------
Continued on Page 2
See Notes to Consolidated Financial Statements
1
MERIT MEDICAL SYSTEMS, INC.
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CONSOLIDATED BALANCE SHEETS (Continued)
SEPTEMBER 30, 1997 AND DECEMBER 31, 1996
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LIABILITIES AND STOCKHOLDERS' EQUITY September 30,
- ------------------------------------ 1997 December 31,
(Unaudited) 1996
----------- ----------
CURRENT LIABILITIES:
Line of credit 6,035,869 4,533,873
Current portion of long-term debt 1,686,341 1,388,576
Trade payables 2,555,614 2,709,869
Accrued expenses 2,363,932 2,969,246
Advances from employees 77,383 107,907
Income taxes payable 386,128 15,906
------------- ------------
Total current liabilities 13,105,267 11,725,377
DEFERRED INCOME TAX LIABILITIES 819,469 852,578
LONG-TERM DEBT 4,000,290 4,822,126
DEFERRED CREDITS 1,553,145 1,467,660
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Total liabilities 19,478,171 18,867,741
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MINORITY INTEREST IN SUBSIDIARY 379,533 363,689
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STOCKHOLDERS' EQUITY:
Preferred stock -5,000,000 shares authorized
as of September 30, 1997, no shares issued;
Common stock - no par value;
20,000,000 and 10,000,000 shares authorized,
respectively, 7,332,940 and 6,942,290 shares
issued at September 30, 1997
and December 31, 1996, respectively 17,247,477 14,184,975
Retained earnings 8,921,402 8,316,237
Foreign currency translation adjustment (402,992) (14,089)
------------- ------------
Total stockholders' equity 25,765,887 22,487,123
------------- ------------
TOTAL $ 45,623,591 $ 41,718,553
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See Notes to Consolidated Financial Statements
2
MERIT MEDICAL SYSTEMS, INC.
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CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997 and 1996 (Unaudited)
- --------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- ------------------
1997 1996 1997 1996
------------- ------------- -------------- -----------
SALES $ 15,450,336 $12,702,407 $ 44,609,549 $ 37,484,550
COST OF SALES 9,815,145 7,352,304 27,690,322 21,796,638
------------ ------------ ----------- -----------
GROSS MARGIN 5,635,191 5,350,103 16,919,227 15,687,912
------------ ------------ ----------- -----------
OPERATING EXPENSES:
Selling, general and administrative 3,912,461 3,437,619 11,680,876 10,477,173
Research and development 1,207,985 534,632 3,283,324 1,725,945
------------ ------------ ----------- -----------
TOTAL 5,120,446 3,972,251 14,964,200 12,203,118
------------ ------------ ----------- -----------
INCOME FROM OPERATIONS 514,745 1,377,852 1,955,027 3,484,794
OTHER EXPENSE 216,444 142,678 626,749 489,424
------------ ------------ ----------- -----------
INCOME BEFORE INCOME TAX EXPENSE 298,301 1,235,174 1,328,278 2,995,370
INCOME TAX EXPENSE 161,713 524,218 707,269 1,162,823
MINORITY INTEREST IN INCOME
OF SUBSIDIARY 7,450 34,933 5,844 137,619
------------ ------------ ----------- -----------
NET INCOME $ 129,138 $ 676,023 $ 605,165 $ 1,694,928
============ ============ =========== ===========
NET INCOME PER COMMON
AND COMMON EQUIVALENT SHARE $ 0.02 $ 0.10 $ 0.08 $ 0.24
============ ============ =========== ===========
WEIGHTED AVERAGE NUMBER OF
COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING 7,375,057 7,054,457 7,346,533 7,035,095
============ ============ =========== ===========
See Notes to Consolidated Financial Statements
3
MERIT MEDICAL SYSTEMS, INC.
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CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED September 30, 1997 and 1996 (Unaudited)
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September 30, September 30,
1997 1996
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $605,165 $1,694,928
-------------- ----------------
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation and amortization 1,762,111 1,803,489
Bad debt expense 102,189 14,992
(Gains) losses on sales and abandonment of
property and equipment (7,845) 3,705
Amortization of deferred credit (44,939)
Deferred income taxes (10,594) (72,667)
Minority interest in income of subsidiary 15,844 137,619
Changes in operating assets and liabilities net of
effects from purchase of UMI:
Trade receivables (1,781,840) (351,344)
Employee and related party receivables 36,327 8,496
Irish Development Agency grant receivable (225,690) (209,691)
Inventories 158,389 (1,261,614)
Prepaid expenses (162,575) (192,586)
Deposits and other 64,028 (79,277)
Trade payables (154,255) (1,212,162)
Accrued expenses (605,314) 97,682
Advances from employees (30,524) 22,855
Income taxes 370,222 369,545
Other (388,903) (62,941)
--------------- ----------------
Total adjustments (903,369) (983,899)
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Net cash provided by (used in) operating activities (298,204) 711,029
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CASH FLOWS FROM INVESTING ACTIVITIES:
Property and equipment (1,765,025) (1,362,413)
Cash payment in connection with assets purchased from UMI (61,486)
Intangible assets (310,065) (302,437)
Proceeds from the sale of property and equipment 22,646 41,147
--------------- ----------------
Net cash used in investing activities (2,113,930) (1,623,703)
--------------- ----------------
Continued on page 5
See Notes to Consolidated Financial Statements
4
MERIT MEDICAL SYSTEMS, INC.
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CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 (Unaudited)
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September 30, September 30,
1997 1996
------------ -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from:
Deferred credit 341,289
Line of credit 1,501,996
Issuance of common stock 1,562,502 860,788
Long-term debt 2,200,000
Principal payments on:
Long-term debt (1,204,974) (927,236)
Line of credit (1,423,139)
Deferred credit (26,051) (52,101)
------------- ------------
Net cash provided by financing activities 1,833,473 999,601
------------- ------------
NET INCREASE (DECREASE) IN CASH (578,661) 86,927
CASH AT BEGINNING OF PERIOD 1,262,950 270,841
------------- ------------
CASH AT END OF PERIOD $ 684,289 $ 357,768
============= ============
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION
Cash paid during the period for:
Interest (including capitalized interest
of $95,990 and $123,569, respectively) $ 660,530 $ 601,890
============= ============
Income taxes $ 347,641 $ 865,945
============= ============
SUPPLEMENTAL DISCLOSURES OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
During the nine months ended September 30, 1997 and 1996 the Company issued
notes payable totaling $680,903 and $1,960,729 respectively, for manufacturing
equipment, furniture and fixtures, land and building.
The Company purchased certain assets from an unrelated company, Universal
Medical Instruments ("UMI"), during the nine months ended September 30, 1997. In
connection with this transaction, the following assets were acquired:
Inventory $ 673,844
Property and equipment 259,354
----------
933,198
Purchase price-consisting of 152,424 shares of the Company's
common stock valued at $1,500,000 and $61,486 in cash 1,561,486
----------
Cost in excess of the fair value of assets acquired $ 628,288
=========
See Notes to Consolidated Financial Statements
5
MERIT MEDICAL SYSTEMS, INC.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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1. Basis of Presentation. In the opinion of management, the accompanying
consolidated financial statements contain all adjustments, consisting only of
normal recurring accruals, necessary for a fair presentation of the financial
position of the Company as of September 30, 1997 and December 31, 1996, and the
results of its operations and cash flows for the three and nine months ended
September 30, 1997 and 1996. The results of operations for the three and nine
months ended September 30, 1997 and 1996 are not necessarily indicative of the
results for a full year period.
2. Inventories. Inventories at September 30, 1997 and December 31, 1996
consisted of the following:
September 30, December 31,
1997 1996
--------------- ---------------
Raw materials $ 4,125,478 $ 4,025,497
Work-in-process 4,427,675 3,806,150
Finished goods 5,814,662 6,020,713
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Total $ 14,367,815 $ 13,852,360
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3. Income Taxes. The effective tax rate for the three and nine months ended
September 30, 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% statutory 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 $ .02 and $.08 for three and nine months ended September 30,
1997, respectively. Diluted EPS computed under FASB No. 128 would have resulted
in net income per common share of $ .02 and $.08 for the three and nine months
ended September 30,1997, respectively.
In June 1997, the FASB issued SFAS No. 130 " Reporting Comprehensive Income"
which 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. SFAS No. 130 requires that all items that
are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. It does not require a
specific format for that financial statement but requires that an enterprise
display an amount representing total comprehensive income for the period in that
financial statement. SFAS No. 130 is effective for fiscal years beginning after
December 15, 1997. Reclassification of financial statements for earlier periods
provided for comparative purposes is required. The impact on the Company of the
adoption of SFAS 130 has not yet been fully determined.
6
MERIT MEDICAL SYSTEMS, INC.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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In June 1997, the FASB issued SFAS No. 131 "Disclosures About Segments of an
Enterprise and Related Information" which establishes standards for the way the
public businesses report information about operating segments in annual
financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. SFAS No. 131 also establishes standards for related disclosures
about products and services, geographical areas, and major customers. It
supersedes SFAS No. 14 but retains the requirement to report information about
major customers. It amends SFAS No. 94 to remove the special disclosure
requirements for previously unconsolidated subsidiaries. SFAS No. 131 is
effective for financial statements for periods beginning after December 15,
1997. In the initial year of application, comparative information for earlier
years is to be restated. It need not be applied to interim financial statements
in the initial year of its application, but comparative information for interim
periods in the initial year of application is to be reported in financial
statements for interim periods in the second year of application, The adoption
of SFAS No. 131 will result in additional disclosures but is not expected to
have a material impact on the Company's results of operations or financial
condition.
7
MERIT MEDICAL SYSTEMS, INC.
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ITEM 2:
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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Operations. The Company achieved significant increases in sales for the three
and nine months ended September 30, 1997 compared to the same periods in 1996.
The following table sets forth certain operational data as a percentage of sales
for the three and nine months ended September 30, 1997 and 1996.
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1997 1996 1997 1996
---- ---- ---- ----
Sales 100.0 % 100.0 % 100.0 % 100.0 %
Gross Margin 36.5 42.1 37.9 41.9
Selling, General and Administrative 25.3 27.1 26.2 28.0
Research & Development 7.8 4.2 7.4 4.6
Income From Operations 3.3 10.8 4.4 9.3
Other Expense (1.4) (1.1) (1.4) (1.3)
Net Income .8 5.3 1.4 4.5
Sales. Sales for the third quarter of 1997 ended September 30 were $15,450,336
compared to $12,702,407 for the same period last year, which represents a gain
of 22 percent. The Company's custom kit business grew by 18 percent during the
three-month period compared to the quarter ended September 30, 1996, while sales
of other devices including inflation devices, syringes, manifolds and needles
grew by 26 percent. Growth in all segments reflects continued market share gains
and acceptance of the Company's products, as well as growth in procedures
utilizing the Company's products, particularly in foreign markets. Sales from
international operations rose by 10 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 25 percent of total sales for the
prior year's same period. For the nine-month period ended September 30, 1997
total sales were $44,609,549 compared with $37,484,550 for the same period in
1996, a gain of 19 percent. These gains were led by sales of the Company's
manifold devices, which rose 31 percent; stopcocks, which grew by 55 percent;
and custom kits, which grew by 16 percent. International sales were up 15
percent over the prior year's period, and accounted for 23 percent of the
Company's total revenue mix compared with 24 percent of total revenues last
year.
Gross Margin. Gross margin as a percentage of sales for the third quarter of
1997 was 36.5% compared to 42.1% for the same period in 1996. For the nine
months ended September 30, 1997 gross margin was 37.9% as compared to 41.9% for
the same period in 1996. The decrease in gross margin for the three and nine
months ended September 30, 1997 was primarily due to direct and indirect
manufacturing labor costs, which included wage increases in response to
competition for direct labor employees, price competition affecting several
products, especially in European markets, and a strong U.S. dollar affecting the
translation of its foreign European sales into U.S. dollars. Gross margin was
also affected by startup and transition costs in the Company's newly organized
Vascular Access Division relating to the purchase of UMI.
8
MERIT MEDICAL SYSTEMS, INC.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
- --------------------------------------------------------------------------------
Operating Expenses. Operating expenses were 33.1% of sales for the three months
ended September 30,1997 compared to 31.3 % for the third quarter of 1996. For
the first nine months of 1997 operating expenses increased slightly to 33.5% as
compared to 32.6% for the same period in 1996. These comparative increases for
both periods were due to a nearly doubling of the research and development
expenses from 1996 to 1997. Selling, general and administrative expenses as a
percentage of sales declined to 25.3% and 26.2% for the three and nine months
ended September 30, 1997 compared to 27.1% and 28.0% for the same periods in
1996. 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. Although Selling, general and administrative
expenses have declined as a percent of sales, research and development costs
have increased approximately $670,000 for the third quarter of 1997 compared to
1996. For the nine months ended September 30, 1997 research and development
increased approximately $1,560,000 compared with 1996. The substantial increase
in research and development is part of the Company's long-term growth strategy
of expanding its business to new market segments within cardiology and radiology
with a view to increasing sales, and subsequently margins and profitability.
Operating Income. During the quarter ended September 30, 1997, the Company
reported income from operations of $514,745 compared to $1,377,852, for the
comparable period in 1996. Operating income for the first nine months of 1997
was $1,955,027 vs. $3,484,794 for the same period in 1996. The decrease in
earnings for the three and nine months ended September 30, 1997 was attributable
to the investment in research and development, lower gross margins, and the
transition to a direct sales force in Canada, the Netherlands, Belgium and
Luxemburg.
Liquidity and Capital Resources. At September 30, 1997, the Company's working
capital was $13.5 million which represented a current ratio of 2.0 to 1. On
October 10, 1997, the Company increased an available secured bank line of credit
to $10.5 million, an increase of $2 million. The line of credit bears interest
at the bank's prime rate which represents a decrease of .25 percent and contains
various conditions and restrictions. At September 30, 1997, the outstanding
balance under the line of credit was $6.0 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. 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.
9
MERIT MEDICAL SYSTEMS, INC.
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PART II - OTHER INFORMATION
ITEM 4: 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 10, 1997
- ---------------------------- ------------------------------------------
FRED P. LAMPROPOULOS
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Date: NOVEMBER 10, 1997
- --------------------------- ------------------------------------------
KENT W. STANGER
VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
10
5
9-MOS
DEC-31-1997
JAN-01-1997
SEP-30-1997
684289
0
9214453
(155723)
14367815
26588931
25302552
(9112202)
45623591
13105267
4000290
0
0
17247477
8921402
45623591
44609549
44609549
27690322
27690322
0
19610
660530
1328278
707269
0
0
0
0
605165
0.08
0.08
