SEC Filing | Merit Medical Systems, Inc.

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, 1999. 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 Park Way, 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 7,548,642 - -------------- ------------------------------- TITLE OR CLASS Number of Shares Outstanding at August 12, 1999

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, 1999 and December 31, 1998...............................................1 Consolidated Statements of Operations for the three and six months ended June 30, 1999 and 1998........................................3 Consolidated Statements of Cash Flows for the six months ended June 30, 1999 and 1998........................................4 Notes to Consolidated Financial Statements..........................6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations...........................................7 Item 3. Quantitative and Qualitative Disclosure About Market Risk...........9 PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders................10 Item 5. Other Information .................................................10 Item 6. Exhibits and Reports on Form 8-K...................................10 SIGNATURES...................................................................11

PART I - FINANCIAL INFORMATION ITEM 1: Financial Statements MERIT MEDICAL SYSTEMS, INC. --------------------------- CONSOLIDATED BALANCE SHEETS JUNE 30, 1999 AND DECEMBER 31, 1998 - --------------------------------------------------------------------------------------------- June 30, December 31, ASSETS 1999 1998 - ------ ------------ ------------ (Unaudited) CURRENT ASSETS: Cash $ 818,654 $ 851,910 Trade receivables - net 11,088,902 10,436,485 Employee and related party receivables 467,028 472,994 Other receivables 230,599 Irish Development Agency grant receivable 204,117 198,445 Inventories 19,374,643 17,785,743 Prepaid expenses and other assets 879,799 636,124 Deferred income tax assets 739,595 739,595 ------------ ------------ Total current assets 33,803,337 31,121,296 ------------ ------------ PROPERTY AND EQUIPMENT: Land 1,065,985 1,065,985 Manufacturing equipment 14,135,924 13,669,599 Automobiles 134,846 89,469 Furniture and fixtures 8,078,423 7,963,835 Leasehold improvements 4,926,111 5,035,288 Construction-in-progress 2,520,625 1,182,669 ------------ ------------ Total 30,861,914 29,006,845 Less accumulated depreciation and amortization (13,234,900) (12,043,130) ------------ ------------ Property and equipment - net 17,627,014 16,963,715 ------------ ------------ OTHER ASSETS: Intangible assets - net 2,345,496 2,333,456 Deposits 67,422 74,218 Cost in excess of the fair value of assets of acquired-net 143,077 150,673 Prepaid royalty 21,428 ------------ ------------ Total other assets 2,555,995 2,579,775 ------------ ------------ TOTAL $ 53,986,346 $ 50,664,786 ============ ============ Continued on Page 2 See Notes to Consolidated Financial Statements 1

MERIT MEDICAL SYSTEMS, INC. --------------------------- CONSOLIDATED BALANCE SHEETS (Continued) JUNE 30, 1999 AND DECEMBER 31, 1998 - ----------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY - ------------------------------------ June 30, December 31, 1999 1998 ------------ ------------ (Unaudited) CURRENT LIABILITIES: Line of credit $ 8,832,233 $ 7,634,607 Current portion of long-term debt 1,663,916 1,808,970 Trade payables 3,742,592 3,573,333 Accrued expenses 3,605,915 2,055,849 Advances from employees 111,238 74,090 Income taxes payable 459,492 194,722 ------------ ------------ Total current liabilities 18,415,386 15,341,571 DEFERRED INCOME TAX LIABILITIES 1,374,868 1,275,651 LONG-TERM DEBT 2,680,212 3,388,835 DEFERRED CREDITS 986,700 1,023,861 ------------ ------------ Total Liabilities 23,457,166 21,029,218 ------------ ------------ MINORITY INTEREST IN SUBSIDIARY 616,998 548,500 ------------ ------------ STOCKHOLDERS' EQUITY: Preferred stock- 5,000,000 shares authorized as of June 30, 1999 and December 31, 1998, no shares issued Common stock- no par value; 20,000,000 shares authorized; 7,532,274 and 7,508,914 shares issued at June 30, 1999 and December 31, 1998, respectively 17,918,736 17,793,094 Retained earnings 12,882,735 11,564,928 Accumulated other comprehensive loss (889,289) (271,654) ------------ ------------ Total stockholders' equity 29,912,182 29,086,368 ------------ ------------ TOTAL $ 53,986,346 $ 50,664,786 ------------ ============ See Notes to Consolidated Financial Statements 2

MERIT MEDICAL SYSTEM, INC. -------------------------- CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1999 and 1998 (Unaudited) - ---------------------------------------------------------------------------------------------------------- Three Months Ended Six Months Ended June 30, June 30, ------------------------------ ------------------------------ 1999 1998 1999 1998 ------------ ------------ ------------ ------------ SALES $ 18,979,739 $ 17,974,170 $ 36,681,462 $ 34,440,185 COST OF SALES 11,629,974 11,161,429 22,639,595 21,464,283 ------------ ------------ ------------ ------------ GROSS PROFIT 7,349,765 6,812,741 14,041,867 12,975,902 ------------ ------------ ------------ ------------ OPERATING EXPENSES: Selling, general and administrative 4,980,256 4,571,952 9,799,919 8,738,917 Research and development 892,193 858,561 1,693,896 1,746,754 ------------ ------------ ------------ ------------ TOTAL 5,872,449 5,430,513 11,493,815 10,485,671 ------------ ------------ ------------ ------------ INCOME FROM OPERATIONS 1,477,316 1,382,228 2,548,052 2,490,231 OTHER EXPENSE 228,954 198,316 459,500 394,976 ------------ ------------ ------------ ------------ INCOME BEFORE INCOME TAX EXPENSE 1,248,362 1,183,912 2,088,552 2,095,255 INCOME TAX EXPENSE 446,516 548,306 702,247 1,007,421 MINORITY INTEREST IN (INCOME) LOSS OF SUBSIDIARY (49,162) (49,048) (68,498) (73,621) ------------ ------------ ------------ ------------ NET INCOME $ 752,684 $ 586,558 $ 1,317,807 $ 1,014,213 ============ ============ ============ ============ EARNINGS PER COMMON SHARE - Basic and diluted $ 0.10 $ 0.08 $ 0.18 $ 0.14 ============ ============ ============ ============ AVERAGE COMMON SHARES - Basic and diluted $ 7,531,131 $ 7,551,761 $ 7,522,229 $ 7,489,150 ============ ============ ============ ============ See Notes to Consolidated Financial Statements 3

MERIT MEDICAL SYSTEMS, INC. --------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998 (Unaudited) - ------------------------------------------------------------------------------------- June 30, June 30, 1999 1998 ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 1,317,807 $ 1,014,213 Adjustments to reconcile net income to net cash provided by (used in) in operating activities: Depreciation and amortization 1,606,643 1,376,866 Bad debt expense 11,975 164,740 Losses on sales and abandonment of property and equipment 1,267 18,128 Amortization of deferred credits (76,643) (45,602) Deferred income taxes 99,217 143,378 Minority interest in income of subsidiary 68,498 73,621 Changes in operating assets and liabilities: Trade receivables (664,392) (275,908) Employee and related party receivables 5,966 (158,216) Other receivables (230,599) 0 Irish Development Agency grant receivable 33,810 397,791 Inventories (1,588,900) (958,957) Prepaid expenses and other assets (243,675) (189,993) Deposits 6,796 (14,530) Trade payables 169,259 (446,175) Accrued expenses 1,550,066 513,963 Advances from employees 37,148 3,451 Income taxes payable 264,770 (135,919) ----------- ----------- Total adjustments 1,051,206 466,638 ----------- ----------- Net cash provided by operating activities 2,369,013 1,480,851 ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures for: Property and equipment (2,188,879) (1,808,735) Intangible assets (150,576) (268,709) Proceeds from sale of property and equipment 521,805 ----------- ----------- Net cash used in investing activities (2,339,455) (1,555,639) ----------- ----------- Continued on page 5 See Notes to Consolidated Financial Statement 4

MERIT MEDICAL SYSTEMS, INC. --------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998 (Unaudited) - -------------------------------------------------------------------------------- June 30, June 30, 1999 1998 ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings under line of credit 1,197,626 611,610 Proceeds from issuance of common stock 125,642 231,664 Principal payments on: Long-term debt (768,447) (883,887) Deferred credits (34,734) ----------- ----------- Net cash provided by (used in) financing activities 554,821 (75,347) ----------- ----------- NET INCREASE ( DECREASE) IN CASH 584,379 (150,135) EFFECT OF EXCHANGE RATES ON CASH (617,635) (88,829) CASH AT BEGINNING OF PERIOD 851,910 976,692 ----------- ----------- CASH AT END OF PERIOD $ 818,654 $ 737,728 =========== =========== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the period for interest (including capitalized interest of $63,758 and $68,727 respectively) $ 453,765 $ 381,248 =========== =========== Income taxes $ 338,260 $ 999,962 =========== =========== SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES: During the six months ended June 30, 1999 and 1998, the Company issued notes payable totaling $85,230 and $355,404, respectively, for manufacturing equipment and furniture and fixtures. 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 June 30, 1999 and December 31, 1998, and the results of its operations and cash flows for the three and six months ended June 30, 1999 and 1998. The results of operations for the three and six months ended June 30, 1999 and 1998 are not necessarily indicative of the results for a full-year period. 2. Inventories. Inventories at June 30, 1999 and December 31, 1998 consisted of the following: June 30, December 31, 1999 1998 ----------- ------------ Raw materials $ 9,534,714 $ 7,458,133 Work-in-process 2,835,249 1,954,696 Finished goods 7,921,691 8,981,007 Less reserve for obsolete inventory (917,011) (608,093) ----------- ------------ Total $19,374,643 $17,785,743 =========== ============ 3. Income Taxes. The Company has not fully allocated income tax expense between current and deferred for the quarters ended June 30, 1999 and 1998. The effective tax rate for the three and six months ended June 30, 1998 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. The effective tax rate improved during the three and six months ended June 30, 1999, as the Company's operations in Ireland became profitable and their lower tax rate improved the Company's overall effective 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 June 30, 1999 and December 31, 1998, the cumulative effect of such transactions reduced stockholders' equity by $889,289 and $271,654, respectively. Comprehensive income for the three and six months ended June 30, 1999 and 1998 is computed as follows: Three months ended Six months ended June 30, June 30, ---------------------------- ---------------------------- 1999 1998 1999 1998 ----------- ----------- ----------- ----------- Net income $ 752,684 $ 586,558 $ 1,317,807 $ 1,014,213 Foreign currency translation (211,454) 99,517 (617,635) (88,829) ----------- ----------- ----------- ----------- Comprehensive income $ 541,230 $ 686,075 $ 700,172 $ 924,384 =========== =========== =========== =========== 6

MERIT MEDICAL SYSTEMS, INC. --------------------------- ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- Operations. The Company achieved significant increases in sales and income for the three and six months ended June 30, 1999 compared to the same periods in 1998. The following table sets forth certain operational data as a percentage of sales for the three and six months ended June 30, 1999 and 1998: Three Months Ended Six Months Ended June 30, June 30, ---------------- ----------------- 1999 1998 1999 1998 ------ ------ ------ ------ Sales 100.0% 100.0% 100.0% 100.0% Gross Profit 38.7 37.9 38.3 37.7 Selling, general and administrative 26.2 25.4 26.7 25.4 Research and development 4.7 4.8 4.6 5.1 Income from Operations 7.8 7.7 6.9 7.2 Other Expense 1.2 1.1 1.3 1.1 Net Income 4.0 3.3 3.6 2.9 Sales. Sales for the three months of 1999 ended June 30, 1999 were $18,979,739, compared to $17,974,170 for the same period last year, which represents an increase of 6 percent. Sales growth for the three-month period was sustained mainly by sales of the Company's stand-alone products which grew by 9 percent and inflation devices which grew at 6 percent. For the six-month period ended June 30, 1999 total sales were $36,681,462 compared with $34,440,185 for the same period in 1998, an increase of 7 percent. Growth in sales for the six-month period were attributable to a growth in stand-alone products which grew by 11 percent, and inflation devices which grew at 6 percent. International sales for the six-month period ended June 30, 1999 grew by 11 percent, compared with the same period in 1998, and accounted for 22 percent of the Company's total revenue mix. Gross Margin. Gross margin as a percentage of sales for the three months ended June 30, 1999 was 38.7% compared to 37.9% for the same period in 1998. For the six months ended June 30, 1999 gross margin was 38.3% as compared to 37.7% for the same period in 1998. The increase in gross margin for the three and six months ended June 30, 1999 was primarily the result of a mix more heavily weighted to higher-margin products such as inflation devices and stand-alone products. Operating Expenses. Operating expenses were 30.9% of sales for the three months ended June 30, 1999, compared to 30.2% for the three months ended June 30, 1998. For the first six months of 1999 operating expenses increased to 31.3% as compared to 30.4% for the same period in 1998. Selling, general and administrative expenses as a percentage of sales increased to 26.2% and 26.7% for the three and six months ended June 30, 1999 and 1998, respectively compared to 25.4% for both periods in 1998 . The increase in operating expenses for the three and six months ended June 30, 1999, were due mainly to personnel additions to address the fourth quarter 1998 implementation of the Company's Oracle integrated business information system and Y2K compliance issues, as well as strengthening its OEM sales and new business development departments. Research and development costs declined to 4.7% of sales for the three months ended June 30, 1999, compared to 4.8% for the same period in 1998. For the six months ended June 30, 1999, research and development expenditures decreased to 4.6% of sales, down from 5.1% of sales for the six months ended June 30, 1998. 7

MERIT MEDICAL SYSTEMS, INC. --------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) - -------------------------------------------------------------------------------- Operating Income. During the three months ended June 30, 1999, the Company reported income from operations of $1.5 million compared to $1.4 million for the comparable period in 1998. Operating income for the first six months of 1999 and 1998 were $2.5 million. Although operating income for the three and six months ended June 30, 1999 was up slightly over the prior periods, net income for the three months ended June 30, 1999 rose to $752,684, up from $586,558, for the same three-month period of 1998, an increase of 28%, and net income for the six months ended rose to $1.3 million up from $1.0 million, an increase of 30%. The increase in net income for both periods was positively affected by lower tax rates due to the Company's Irish operation becoming profitable. Liquidity and Capital Resources. At June 30, 1999, the Company's working capital was $15.4 million which represented a current ratio of 1.8 to 1. During 1998, the Company increased an available secured bank line of credit to $10.5 million. The line of credit bears interest at the bank's prime rate and contains various conditions and restrictions. At June 30, 1999, the outstanding balance under the line of credit was $8.8 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. In April 1998, the Company sold its land, building, and improvements in Castlerea, Ireland to a third party. In connection with the sale the Company received approximately $520,000 in cash for the building improvements and the buyer's assumption of its note payable with the Irish Development Agency for the land and building. This transaction resulted in an immaterial loss to the Company. Year 2000. In 1996 the Company began the conversion of the principal computer software systems to a new integrated system to support future growth and improve productivity. The Company has completed a review of its business information systems with regard to Year 2000 compliance and is either replacing or correcting those computer systems that have been found to have date-related deficiencies. A new Oracle integrated business information system for the order administration, financial and manufacturing processes was implemented and completed in November 1998. Through June 30, 1999 the Company had incurred approximately $3.8 million in costs to improve the Company's information technology systems and for Year 2000 readiness efforts. Of this amount, a substantial portion represents the costs of implementing and transitioning to new computer hardware and software for the Company's Oracle enterprise-wide business systems. Substantially all of these costs have been capitalized. The Company anticipates incurring an additional $500,000 in connection with the Year 2000 readiness efforts. The Company expects to have all Year 2000 readiness efforts completed by September 30, 1999. The Company believes its non-IT systems and products being shipped today have been assessed and found to be Year 2000 compliant. The Company relies on third-party providers for materials and services such as telecommunications, utilities, financial services and other key services. Interruption of those materials or services due to Year 2000 issues could affect the Company's operations. The Company has completed the process of contacting its major suppliers and has determined that all major suppliers are in the process of ensuring Year 2000 compliance. However, since the Company is dependent on key third parties, there can be no guarantee that the Company's efforts will prevent a material adverse impact on its financial position, results of operations or liquidity in future periods in the event that a significant number of suppliers and /or customers experience business disruptions as a result of their lack of Year 2000 readiness. The Company is in the process of implementing the Oracle system in its Irish facility with a planned completion date for November of 1999. Both the Company's cost estimates and completion time frames could be influenced by the Company's ability to successfully identify all Year 2000 issues, the nature and amount of corrective action required, the availability and cost of trained personnel in this area and the Year 2000 success that key third parties and customers attain. While these 8

MERIT MEDICAL SYSTEMS, INC. --------------------------- PART II - OTHER INFORMATION Item: 4 Submission of Matters to a Vote of Security Holders The Company held its Annual Meeting of Shareholders (the "Annual Meeting") on May 26, 1999 in South Jordan, Utah. The following items of business were considered at the Annual Meeting: A: Election of Directors --------------------- Two persons were elected as members of the Board of Directors to serve three-year term. They are as follows: Shares Voted For --------- Rex C. Bean 5,855,565 Richard W. Edelman 5,859,665 B. Approval of the Company's 1999 Omnibus Incentive Stock Plan. ------------------------------------------------------------ A proposal to approve the Company's 1999 Omnibus Incentive Stock Plan to be substituted in part for the Company's long-term Incentive Stock Option Plan was approved by the shareholders of the Company. The number of shares voted for the amendment was 3,641,950. The number of shares voted against the amendment was 496,905. The number of shares abstaining from voting on was 16,623. C. Selection of Auditors. ---------------------- A proposal to ratify the appointment of Deloitte & Touche LLP as the independent auditor of the Company for 1999 was presented at the Annual Meeting and such proposal was approved by the shareholders of the Company. The number of shares voted for the proposal was 6,350,456. The number of shares voted against such proposal was 19,400. The number of shares abstaining from voting was 6,805. Item 5. Other Information. If a shareholder desiring to raise a proposal at the next annual meeting of shareholders does not seek inclusion of the proposal in the Company's proxy statement and fails to notify the Company at least 45 days prior to the month and day of mailing of the prior year's proxy statement, management proxies will be allowed to use their discretionary voting authority when the proposal is raised at the annual meeting, without any discussion of the proposal in the proxy statement. 10

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 2 - -------------------------------------------------------------------------------- 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 12, 1999 /s/ FRED P. LAMPROPOULOS --------------------- ------------------------------------------ FRED P. LAMPROPOULOS PRESIDENT AND CHIEF EXECUTIVE OFFICER Date: AUGUST 12, 1999 /S/ KENT W. STANGER --------------------- ------------------------------------------ KENT W. STANGER VICE PRESIDENT AND CHIEF FINANCIAL OFFICER 11

5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM MERT MEDICAL SYSTEMS, INC.'S CONSOLIDATED BALANCE SHEET AND INCOME STATEMENT FOR THE SIX MONTH PERIOD ENDING JUNE 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000856982 MERIT MEDICAL SYSTEMS, INC. 1 3-MOS DEC-31-1999 JAN-01-1999 JUN-30-1999 818654 0 11273786 (184884) 19374643 33803337 30861914 (13234900) 53986346 18415386 2680212 0 0 17918736 11993446 53986346 36681462 36681462 22639595 22639595 0 11975 453765 2088552 702247 0 0 0 0 1317807 0.18 0.18