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, 2001.
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
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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
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Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of the latest practicable date.
Common Stock 7,883,055
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TITLE OR CLASS Number of Shares Outstanding at
May 14, 2001
MERIT MEDICAL SYSTEMS, INC.
INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION PAGE
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Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 2001
and December 31, 2000..........................................................1
Consolidated Statements of Operations for the three months
ended March 31, 2001and 2000...................................................3
Consolidated Statements of Cash Flows for the three months
ended March 31, 2001 and 2000..................................................4
Notes to Consolidated Financial Statements.....................................6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................................7
Item 3. Qualitative and Quantitative Disclosures About Market Risk.....................9
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K..............................................9
SIGNATURES................................................................................10
MERIT MEDICAL SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2001 AND DECEMBER 31, 2000
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March 31, December 31,
ASSETS 2001 2000
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(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 469,092 $ 412,384
Trade receivables - net 14,372,128 13,235,858
Employee and related
party receivables 406,603 440,654
Irish Development Agency grant receivable 46,617 177,477
Inventories 23,123,591 25,273,428
Prepaid expenses and other assets 900,658 663,101
Deferred income tax assets 1,183,944 1,183,944
Income tax refund receivable 238,958 588,640
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Total current assets 40,741,591 41,975,486
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PROPERTY AND EQUIPMENT:
Land 1,260,985 1,260,985
Building 1,500,000 1,500,000
Manufacturing equipment 21,141,914 19,696,550
Automobiles 91,496 131,036
Furniture and fixtures 9,632,975 9,576,084
Leasehold improvements 5,456,297 5,420,194
Construction-in-progress 1,564,479 2,120,671
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Total 40,648,146 39,705,520
Less accumulated depreciation
and amortization (18,788,557) (17,860,490)
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Property and equipment - net 21,859,589 21,845,030
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OTHER ASSETS:
Patents & trademarks - net 2,584,214 2,522,384
Deposits 38,859 41,273
Cost in excess of the fair value of assets of acquired-net 4,987,993 5,062,458
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Total other assets 7,611,066 7,626,115
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TOTAL ASSETS $ 70,212,246 $ 71,446,631
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(Continued)
See Notes to Consolidated Financial Statements
1
MERIT MEDICAL SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2001 AND DECEMBER 31, 2000
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March 31, December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 2001 2000
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(Unaudited)
CURRENT LIABILITIES:
Current portion of long-term debt $ 872,428 $ 1,091,725
Trade payables 4,557,909 4,835,517
Accrued expenses 5,113,941 3,471,039
Advances from employees 138,206 96,778
Income taxes payable 318,872 33,420
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Total current liabilities 11,001,356 9,528,479
DEFERRED INCOME TAX LIABILITIES 2,210,088 2,177,833
LONG-TERM DEBT 20,061,415 24,011,778
DEFERRED CREDITS 914,012 955,839
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Total Liabilities 34,186,871 36,673,929
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STOCKHOLDERS' EQUITY:
Preferred stock- 5,000,000 shares authorized as of
March 31, 2001 and December 31, 2000, respectively,
no shares issued
Common stock- no par value; 20,000,000 shares authorized;
7,801,988 and 7,788,208 shares issued at March 31, 2001
and December 31, 2000, respectively 19,888,904 19,779,765
Accumulated other comprehensive loss (667,029) (624,138)
Retained earnings 16,803,500 15,617,075
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Total stockholders' equity 36,025,375 34,772,702
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 70,212,246 $ 71,446,631
============ ============
See Notes to Consolidated Financial Statements
2
MERIT MEDICAL SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND 2000 (Unaudited)
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March 31, March 31,
2001 2000
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NET SALES $ 26,788,373 $ 22,080,435
COST OF SALES 17,568,999 14,446,385
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GROSS PROFIT 9,219,374 7,634,050
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OPERATING EXPENSES:
Selling, general and administrative 6,006,073 6,338,539
Research and development 1,130,072 1,005,936
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TOTAL OPERATING EXPENSES 7,136,145 7,344,475
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INCOME FROM OPERATIONS 2,083,229 289,575
OTHER EXPENSE - NET 436,067 517,404
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INCOME (LOSS) BEFORE INCOME TAXES 1,647,162 (227,829)
INCOME TAX EXPENSE (BENEFIT) 460,737 (68,347)
NET INCOME (LOSS) $ 1,186,425 $ (159,482)
============ ============
EARNINGS (LOSS) PER COMMON SHARE -
Basic and diluted $ .15 $ (.02)
============ ============
AVERAGE COMMON SHARES -
Basic 7,795,253 7,622,918
============ ============
Diluted 7,894,084 7,893,646
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See Notes to Consolidated Financial Statements
3
MERIT MEDICAL SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND 2000 (Unaudited)
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March 31, March 31,
2001 2000
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 1,186,425 $ (159,482)
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Adjustments to reconcile net income to net
cash provided by (used in) in operating activities:
Depreciation and amortization 1,112,130 1,081,220
Bad debt expense 59,417 390,780
Gain on sales and abandonment of
property and equipment (1,679)
Amortization of deferred credits (34,710) (32,832)
Deferred income taxes 32,255 29,435
Changes in operating assets and liabilities:
Trade receivables (1,195,687) (1,035,235)
Employee and related party receivables 34,051 (34,375)
Irish Development Agency grant receivable 123,743 8,751
Inventories 2,149,837 (880,489)
Prepaid expenses and other assets (237,557) (292,230)
Deposits 2,414 (59,970)
Trade payables (277,608) (762,655)
Accrued expenses 1,642,902 1,086,493
Advances from employees 41,428 21,843
Income taxes payable 635,134 (276,511)
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Total adjustments 4,087,749 (757,454)
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Net cash provided by ( used in) operating activities 5,274,174 (916,936)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures for:
Property and equipment (743,856) (1,152,049)
Intangible assets (99,029) (127,701)
Proceeds from sale of property and equipment 985
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Net cash used in investing activities (842,885) (1,278,765)
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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, 2001 AND 2000 (Unaudited)
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March 31, March 31,
2001 2000
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CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under line of credit 1,700,576
Proceeds from issuance of common stock 109,139 950,608
Principal payments on:
Long-term debt (4,440,829) (336,646)
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Net cash provided by (used in) financing activities (4,331,690) 2,314,538
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EFFECT OF EXCHANGE RATES ON CASH (42,891) (36,178)
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NET INCREASE IN CASH 56,708 82,659
CASH AT BEGINNING OF PERIOD 412,384 668,711
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CASH AT END OF PERIOD $ 469,092 $ 751,370
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SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Cash paid during the period for:
Interest (including capitalized interest of $16,771
and $27,037, respectively) $ 70,792 $ 110,186
=========== ===========
Income taxes $ 118,360 $ 202,327
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SUPPLEMENTAL DISCLOSURE OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
During the three month periods ended March 31, 2001 and 2000, the Company
entered into notes payable totaling $271,169 and $509,963 respectively, for
manufacturing equipment and furniture and fixtures.
See Notes to Consolidated Financial Statements
5
MERIT MEDICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
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1. Basis of Presentation. 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 March 31, 2001 and December 31, 2000, and the
results of its operations and cash flows for the three months ended March 31,
2001 and 2000. The results of operations for the three months ended March 31,
2001 and 2000 are not necessarily indicative of the results for a full year
period.
2. Inventories. Inventories at March 31, 2001 and December 31, 2000 consisted of
the following:
March 31, December 31,
2001 2000
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Raw materials $ 8,527,737 $ 8,325,314
Work-in-process 3,792,119 3,678,807
Finished goods 12,845,048 15,255,622
Less reserve for obsolete inventory (2,041,313) (1,986,315)
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Total $ 23,123,591 $ 25,273,428
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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, 2001 and 2000. The
effective tax rate for the three months ended March 31, 2001 and 2000 is below
the 35% federal statutory tax rate, as the result of increased researched tax
credits now available and the Company's profitable operations in Ireland which
are taxed at a tax rate that is lower than the Company's U.S. overall effective
rate.
4. Reporting Comprehensive Income - In June 1997, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standards (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 March 31, 2001 and December 31,
2000, the cumulative effect of such transactions reduced stockholders' equity by
approximately $667,029 and $624,138, respectively. Comprehensive income for the
three months ended March 31, 2001 and 2000 is computed as follows:
Three Months Ended
March 31,
2001 2000
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Net Income (loss) $ 1,186,425 $ (159,482)
Foreign currency translation ( 42,891) (36,178)
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Comprehensive income (loss) $ 1,143,534 $ (195,660)
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6
MERIT MEDICAL SYSTEMS, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)( Continued)
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5. Recently Issued Financial Accounting Standards - Statement of Financial
Accounting Standards No.133, Accounting for Derivative Instruments and Hedging
Activities, as amended, requires that all derivative instruments be recognized
as either assets or liabilities at fair market value. The Company adopted this
statement beginning January 1, 2001. The effect on the Company's financial
statements of adopting this statement was not significant.
ITEM 2:
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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Overview
Merit Medical Systems enjoyed its best quarter in history, experiencing record
revenues and earnings. The Company's sales increased across almost all of its
product lines and distribution areas, particularly in kits to packers and OEM
sales. The increased sales seem to come from a broad-based increase in customer
ordering patterns. The Company believes that this level of increase may be
temporary.
Management is happy to report that the new, comprehensive software system has
moved from being a major challenge to an asset. With this Oracle software as a
valuable tool and with the plan that management put in motion starting in the
first quarter of 2000, we have made major progress in the efficiency and
profitability of our Salt Lake operations. The result has been a tremendous
improvement from a situation of large, unapplied overheads in the first quarter
of 2000, to significant positive overhead variances for this quarter. If sales
volumes continue to grow, and with inventories at much more manageable levels,
these positive variances bode well for improved margins in the future.
The Company is seeing real opportunities to leverage the sales, general and
administration and research and development strengths of the Company. Merit is
also significantly reducing its inventory, debt balances, interest costs, as
well as effective tax rates all of which are contributing to a much improved
bottom line.
With the decline in inventories and its associated increase in inventory turns,
and with a significant drop in long term debt, the Company has more capital
available to invest in growth. Whether it be through new internal product
development, acquisitions or distribution agreements, management has seen an
increase in interesting, viable technology and/or product acquisition
opportunities.
Operations. The Company's sales increased to record levels for the three months
ended March 31, 2001 compared to the same period in 2000. The Company also
experienced record earnings of $1.2 million for the three months ended March 31,
2001, compared to a net loss of $159,482 for the same period of 2000. The
following table sets forth certain operational data as a percentage of sales for
the three months ended March 31, 2001 and 2000:
Three Months Ended
March 31,
2001 2000
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Sales 100.0 % 100.0%
Gross Profit 34.4 34.6
Selling, general and administrative 22.4 28.7
Research and development 4.2 4.6
Income From Operations 7.8 1.3
Other Expense 1.6 2.3
Net Income (Loss) 4.4 (.7)
7
MERIT MEDICAL SYSTEMS, INC
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (Continued)
- --------------------------------------------------------------------------------
Sales. Sales for the first quarter of 2001 increased by 21.4%, or $4,707,938,
compared to the same period for 2000. This increase is due to sales volume
increases across most of the companies product families. The Company experienced
increased sales of many of its custom kits (up 32%). To a lesser degree, this
increase was attributable to growth in sales of inflation devices (up 16%),
stand alone products (up 22%) and catheters up (11%).
Gross Profit. Gross profit as a percentage of sales decreased slightly in the
first quarter of 2001 to 34.4% as compared to 34.6% in the first quarter of
2000. The Company's margins are improving after the past three quarters of
working through the overhead and efficiency deficits in the Salt Lake core
operations unit. Continued improvements are still possible at the Angleton plant
which continues to have excess inventory, overhead and capacity that negatively
effect margins, but the negative variances are beginning to shrink.
Operating Expenses. Operating expenses decreased significantly as a percentage
of sales to 26.6% of sales in the first quarter of 2001 compared to 33.3% in the
first quarter of 2000. Selling, general and administrative costs as a percentage
of sales decreased to 22.4%, in 2001, compared to 28.7% for the first quarter of
2000. The decrease as a percentage of sales in the current period was due
primarily to a 5.2% decline in expense while sales increased significantly. Part
of the comparative decline was due to the recognition in the first quarter of
2000 of an unusual bad debt as a result of one of the Company's larger customers
going insolvent. Research and development expenses rose by $124,136 and were
4.2% of sales in the first quarter of 2001 compared to 4.6% of sales for the
first quarter of 2000. This increase in expense was due primarily to the
increased research & development resources associated with the new diagnostic
wire project in Ireland.
Income. During the quarter ended March 31, 2001, the Company reported income
from operations of $2,083,229, and increase of 619% from income from operations
of $289,525 for the comparable period in 2000. The increase in operating income
for the most recent quarter was attributable primarily to increased sales while
selling, general & administrative expenses declined. Lower debt balances and
interest rates are helping decrease interest expense. This combined for a net
income of $1,186,425 for the quarter ended March 31, 2001 compared to a net loss
of $159,482 for the same quarter of 2000.
Liquidity and Capital Resources. At March 31, 2001, the Company's working
capital was $29,740,235, which represented a current ratio of 3.7 to 1. In March
2001, in an effort to reduce bank fees, the Company decreased an available
secured bank line of credit to $22 million. At March 31, 2000, the outstanding
balance under the line of credit was $19,000,000. As of May 11, 2001 the line of
credit balance has been reduced to $16,846,760, or a reduction of over $13.5
million in less than nine months. 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.
Forward-Looking Statements. This Report includes "Forward-Looking Statements"
within the meaning of Section 27A of the Securities Act of 1933, as amended and
Section 21E of the Securities Exchange of 1934, as amended. All statements other
than statements of historical fact are "Forward-Looking Statements" for purpose
of these provisions, including any projections of earnings, revenues or other
financial items, any statements of the plans and objectives of management for
future operations, any statements concerning proposed new products or services,
any statements regarding future economic conditions or performance, and any
statements of assumptions underlying any of the foregoing. All Forward-Looking
Statements included in this document 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. In some cases,
Forward-Looking Statements can be identified by the use of terminology such as
"may," "will," "expects," "plans," "anticipates," "intends," or "believes,"
"estimates," "potential," or "continue," or the negative thereof or other
comparable terminology. Although the Company believes that the expectations
reflected in the Forward-Looking Statements contained herein are reasonable,
there can be no assurance that such expectations or any of the Forward-Looking
Statements will prove to be correct, and actual results could differ materially
from those projected or assumed in the Forward-Looking Statements. Future
financial condition and results of operations, as well as any Forward-Looking
Statements are subject to inherent risks and uncertainties, including market
acceptance of the Company's products, product introductions, potential product
recalls, delays in obtaining regulatory approvals, cost increases, fluctuations
in and obsolescence of inventory, price and product completion, availability of
8
MERIT MEDICAL SYSTEMS, INC
labor and materials, development of new products and techniques that render the
Company's products obsolete, foreign currency fluctuation, changes in health
care markets related to health care reform initiatives and other factors
referred to in the Company's press releases and reports filed with the
Securities and Exchange Commission. All subsequent Forward-Looking Statements
attributable to the Company or person acting on its behalf are expressly
qualified in their entirety by these cautionary statements.
ITEM 3:
QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
The Company principally hedges the following EURO currencies: Belgian Francs,
French Francs, German Marks, Dutch Gilders, and Irish Pounds. The Company enters
into forward foreign exchange contracts to protect the Company from the risk
that the eventual net dollar cash flows resulting from transactions with foreign
customers and suppliers may be adversely affected by changes in currency
exchange rates. Such contracts are not significant. The Company does not invest
in hedges for speculative proposes.
PART II - OTHER INFORMATION
ITEM 6: Exhibits and Reports on Form 8-K
(a) Exhibits Exhibit No. Description
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1 Amendment to Loan Agreement with
Zions First National Bank dated
March 14, 2001
(b) Reports on Form 8-K - The Company filed a report on Form 8-K
dated April 19, 2001 to report certain financial information for
the quarter ended March 31, 2001 for the purpose of complying
with Reg. F.D.
9
MERIT MEDICAL SYSTEMS, INC
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, 2001 BY: /S/ FRED P. LAMPROPOULOS
------------ ----------------------------
FRED P. LAMPROPOULOS
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Date: May 14, 2001 BY: /S/ KENT W. STANGER
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KENT W. STANGER
SECRETARY AND CHIEF FINANCIAL OFFICER
10