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, 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
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MERIT MEDICAL SYSTEMS, INC.
(Exact name of Registrant as specified in its charter)
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Utah 87-0447695
(State or other jurisdiction of incorporation (I.R.S. Identification No.)
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 7,282,841
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TITLE OR CLASS Number of Shares Outstanding at
August 12, 1997
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, 1997
and December 31, 1996 .............................................1
Consolidated Statements of Operations for the three and six months
ended June 30, 1997 and 1996.......................................3
Consolidated Statements of Cash Flows for the six months
ended June 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. Submission of Matters to a Vote of Security Holders............10
Item 6. Exhibits and Reports on Form 8-K...............................11
SIGNATURES..................................................................11
PART I - FINANCIAL INFORMATION
ITEM 1: Financial Statements
MERIT MEDICAL SYSTEMS, INC.
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CONSOLIDATED BALANCE SHEETS
JUNE 30, 1997 AND DECEMBER 31, 1996
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June 30,
1997 December 31,
ASSETS (Unaudited) 1996
- ------ ------------ --------------
CURRENT ASSETS:
Cash $ 536,664 $ 1,262,950
Trade receivables - net 8,448,047 7,379,079
Employee and related party receivables 291,103 327,425
Irish Development Agency grant receivable 756,393 416,891
Inventories 14,409,683 13,852,360
Prepaid expenses and other assets 798,602 518,823
Deferred income tax assets 716,005 729,060
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Total current assets 25,956,497 24,486,588
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PROPERTY AND EQUIPMENT:
Land 1,103,813 1,107,351
Building 996,198 1,043,804
Automobiles 142,291 144,535
Manufacturing equipment 10,008,473 8,656,145
Furniture and fixtures 4,053,570 3,816,402
Leasehold improvements 4,396,514 2,673,897
Construction-in-progress 3,344,302 5,193,993
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Total 24,045,161 22,636,127
Less accumulated depreciation
and amortization (8,541,379) (7,605,728)
------------- -------------
Property and equipment - net 15,503,782 15,030,399
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OTHER ASSETS:
Intangible assets - net 1,872,685 1,839,532
Cost in excess of the fair value
of assets acquired - net 600,460
Prepaid royalty - net 150,000 192,857
Deposits 240,517 169,177
Total other assets 2,863,662 2,201,566
TOTAL $ 44,323,941 $ 41,718,553
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Continued on Page 2
See Notes to Consolidated Financial Statements
1
MERIT MEDICAL SYSTEMS, INC.
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CONSOLIDATED BALANCE SHEETS (Continued)
JUNE 30, 1997 AND DECEMBER 31, 1996
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LIABILITIES AND STOCKHOLDERS' EQUITY June 30,
1997 December 31,
(Unaudited) 1996
------------ -------------
CURRENT LIABILITIES:
Line of credit 4,806,644 4,533,873
Current portion of long-term debt 1,451,663 1,388,576
Trade payables 2,303,272 2,709,869
Accrued expenses 2,748,776 2,969,246
Advances from employees 77,447 107,907
Income taxes payable 425,842 15,906
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Total current liabilities 11,813,644 11,725,377
DEFERRED INCOME TAX LIABILITIES 851,891 852,578
LONG-TERM DEBT 4,377,434 4,822,126
DEFERRED CREDITS 1,604,386 1,467,660
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Total liabilities 18,647,355 18,867,741
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MINORITY INTEREST IN SUBSIDIARY 372,083 363,689
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STOCKHOLDERS' EQUITY:
Common stock - no par value;
10,000,000 shares authorized;
7,271,146 and 6,942,290 shares
issued at June 30, 1997
and December 31, 1996, respectively 16,803,729 14,184,975
Retained earnings 8,792,264 8,316,237
Foreign currency translation adjustment (291,490) (14,089)
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Total stockholders' equity 25,304,503 22,487,123
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TOTAL $44,323,941 $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 SIX MONTHS ENDED JUNE 30, 1997 and 1996 (Unaudited)
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Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
1997 1996 1997 1996
---------------------------------------------------
SALES $ 15,326,070 $12,652,128 $ 29,159,213 $ 24,782,143
COST OF SALES 9,423,324 7,431,664 17,875,177 14,444,334
---------- ---------- ---------- ----------
GROSS MARGIN 5,902,746 5,220,464 11,284,036 10,337,809
---------- ---------- ---------- ----------
OPERATING EXPENSES:
Selling, general and administrative 3,928,977 3,621,522 7,768,415 7,039,554
Research and development 1,165,286 575,469 2,075,339 1,191,313
----------- --------- ---------- -----------
TOTAL 5,094,263 4,196,991 9,843,754 8,230,867
----------- --------- ---------- -----------
INCOME FROM OPERATIONS 808,483 1,023,473 1,440,282 2,106,942
OTHER EXPENSE 230,772 184,132 410,305 346,746
---------- --------- ---------- -----------
INCOME BEFORE INCOME TAX EXPENSE 577,711 839,341 1,029,977 1,760,196
INCOME TAX EXPENSE 296,470 312,743 545,556 638,605
MINORITY INTEREST IN (INCOME)
LOSS OF SUBSIDIARY 2,719 (40,140) (8,394) (102,686)
---------- --------- --------- -----------
NET INCOME $ 283,960 $ 486,458 $ 476,027 $ 1,018,905
========== ========= ========= ===========
NET INCOME PER COMMON
AND COMMON EQUIVALENT SHARE $ 0.04 $ 0.07 $ 0.07 $ 0.15
========== ========= ========= ===========
WEIGHTED AVERAGE NUMBER OF
COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING 7,334,727 7,107,358 7,194,421 7,024,424
========== ========= ========= ===========
See Notes to Consolidated Financial Statements
3
MERIT MEDICAL SYSTEMS, INC.
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CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1997 and 1996 (Unaudited)
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June 30, June 30,
1997 1996
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 476,027 $ 1,018,905
----------- -----------
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation and amortization 1,242,618 1,204,057
Bad debt expense 61,130 14,143
(Gains) losses on sales and abandonment of
property and equipment (3,477) 2,150
Amortization of deferred credit (20,972)
Deferred income taxes 12,368 (44,002)
Minority interest in income of subsidiary 8,394 102,686
Changes in operating assets and liabilities net of
effects from purchase of
UMI:
Trade receivables (1,130,098) (665,769)
Employee and related party receivables 36,322 34,742
Irish Development Agency grant receivable (164,437) (119,100)
Inventories 116,521 (828,754)
Prepaid expenses (279,779) (300,761)
Deposits and other (71,340) 8,466
Trade payables (406,597) (482,957)
Accrued expenses (220,470) 462,973
Advances from employees (30,460) 43,044
Income taxes 409,936 49,040
Other (277,401) (39,163)
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Total adjustments (717,742) (559,205)
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Net cash provided by (used in) operating activities (241,715) 459,700
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CASH FLOWS FROM INVESTING ACTIVITIES:
Property and equipment (1,044,906) (1,230,254)
Cash payment in connection with assets purchased from UMI (59,736)
Intangible assets (112,854) (326,888)
Proceeds from the sale of property and equipment 18,588
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Net cash used in investing activities (1,198,908) (1,557,142)
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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 JUNE 30, 1997 AND 1996 (Unaudited)
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June 30, June 30,
1997 1996
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from:
Deferred credit 320,404
Line of credit 272,771
Issuance of common stock 1,118,754 704,801
Long-term debt 2,200,000
Principal payments on:
Long-term debt (659,821) (689,833)
Line of credit (1,245,256)
Deferred credit (17,367) (34,734)
----------- -----------
Net cash provided by financing activities 714,337 1 ,255,382
----------- -----------
NET INCREASE (DECREASE) IN CASH (726,286) 157,940
CASH AT BEGINNING OF PERIOD 1,262,950 270,841
----------- -----------
CASH AT END OF PERIOD $ 536,664 $ 428,781
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION
Cash paid during the period for:
Interest (including capitalized interest
of $63,338 and $85,291, respectively) $ 461,352 $ 315,065
=========== ===========
Income taxes $ 123,252 $ 633,567
=========== ===========
SUPPLEMENTAL DISCLOSURES OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
During the six months ended June 30, 1997 and 1996 the Company issued notes
payable totaling $278,216 and $1,345,830 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 six months ended June 30, 1997. In
connection with this transaction, the following assets were recorded:
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 $59,736 in cash 1,559,736
----------
Cost in excess of the fair value of
assets acquired $ 626,538
==========
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 June 30, 1997 and December 31, 1996, and the
results of its operations and cash flows for the three and six months ended June
30, 1997 and 1996. The results of operations for the three and six months ended
June 30, 1997 and 1996 are not necessarily indicative of the results for a full
year period.
2. Inventories. Inventories at June 30, 1997 and December 31, 1996 consisted of
the following:
June 30, December 31,
1997 1996
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Raw materials $ 4,704,880 $4,025,497
Work-in-process 4,960,135 3,806,150
Finished goods 4,744,668 6,020,713
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Total $ 14,409,683 $13,852,360
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3. Income Taxes. The effective tax for the three and six months ended June 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 $ .04 and $.07 for three and six months ended June 30, 1997,
respectively. Diluted EPS computed under FASB No. 128 would have resulted in net
income per common share of $ .04 and $.07 for the three and six months ended
June 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 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 that
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 six months ended June 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 six months ended June 30, 1997 and 1996.
Three Months Ended Six Months Ended
June 30 June 30
--------- ---------
1997 1996 1997 1996
---- ---- ---- ----
Sales 100.0% 100.0% 100.0% 100.0%
Gross Margin 38.5 41.3 38.7 41.7
Selling, General and Administrative 25.6 28.6 26.6 28.4
Research & Development 7.6 4.5 7.1 4.8
Income From Operations 5.3 8.1 4.9 8.5
Other Expense 1.5 1.5 1.4 1.4
Net Income 1.9 3.8 1.6 4.1
Sales. Sales for the second quarter of 1997 ended June 30 were $15,326,070
compared to $12,652,128 for the same period last year, which represents a gain
of 21 percent. The Company's custom kit business grew by 18 percent during the
three-month period compared to the quarter ended June 30, 1996, while sales of
other devices including inflation devices, syringes, manifolds and needles grew
by 28 percent. Growth in all segments reflects continued market share gains and
acceptance of the Company's products, as well as procedural growth, particularly
in foreign markets. The Company's first product from the acquisition of
Universal Medical Instruments (UMI), introducer needles, has been well received,
with sales on an annualized basis approaching $1.5 million. Sales from
international operations rose by 23 percent for the three-month period compared
to the prior year's same quarter. These sales represented 22 percent of total
sales for the second quarter compared with 10 percent of total sales for the
prior year's same period. For the six-month period ended June 30, 1997 total
sales were $29,159,213 compared with $24,782,143 for the same period in 1996, a
gain of 18 percent. These gains were led by sales of the Company's manifold
devices, which rose 57 percent and stopcocks, which grew by 133 percent, while
custom kits grew by 9 percent. International sales were up 22 percent over the
prior year's period, and accounted for 23 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 second quarter of
1997 was 38.5% compared to 41.3% for the same period in 1996. For the six months
ended June 30, 1997 gross margin was 38.7% as compared to 41.7% for the same
period in 1996. The decrease in gross margin for the three and six months ended
June 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 and
an expected decline in sales at Sentir, as Sentir's customers have been reducing
inventories.
8
MERIT MEDICAL SYSTEMS, INC.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (Continued)
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Operating Expenses. Operating expenses were 33.2% of sales for the three months
ended June 30, 1997 and 1996. For the six months of 1997 operating expenses
increased slightly to 33.8% as compared to 33.2% for the same period in 1996.
Selling, general and administrative expenses as a percentage of sales declined
to 25.6% and 26.6% for the three and six months ended June 30, 1997 compared to
28.6% and 28.4% 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, research and
development costs have increased approximately $600,000 for the second quarter
of 1997 compared to 1996. For the six months ended June 30, 1997 research and
development increased approximately $900,00 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, margins and profitability.
Operating Income. During the quarter ended June 30, 1997, the Company reported
income from operations of $808,483 compared to $1,440,282, for the comparable
period in 1996. Operating income for the first six months of 1997 was $1,203,473
vs. $2,106,942 for the same period in 1996. The decrease in earnings for the
three and six months ended June 30, 1997 was attributable to the investment in
research and development, lower gross margins, increased production costs in
Europe for the release of a PTCA guidewire, and the transition to a direct sales
force in Canada, the Netherlands, Belgium and Luxemburg.
Liquidity and Capital Resources. At June 30, 1997, the Company's working capital
was $14.1 million which represented a current ratio of 2.2 to 1. During 1995,
the Company increased an available secured bank line of credit to $8.5 million
and obtained $2.2 million in term debt which was drawn down in February, 1996.
The line of credit bears interest at .25 percent over the bank's prime rate and
contains various conditions and restrictions. At June 30, 1997, the outstanding
balance under the line of credit was $4.8 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.
9
MERIT MEDICAL SYSTEMS, INC.
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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 21, 1997 in South Jordan Utah. The following items of business were
considered at the Annual Meeting:
A: Election of Directors
Six persons were elected as members of the Board of Directors to serve
until the next annual meeting in 1998 or until their respective successors have
been duly elected and qualified. They are as follows:
Shares
Voted For
---------
Fred P. Lampropoulos 5,475,334
Kent W. Stanger 5,475,334
Rex C. Bean 5,475,334
Richard W. Edelman 5,475,334
James Ellis 5,475,334
Michael Stillabower 5,475,334
B. Amendment of the Company's Articles of Incorporation to classify the
Board of Directors into three classes and to provide for staggered terms.
A proposal to amend the Company's Articles of Incorporation to
classify the Board of Directors into three classes and to provide for staggered
terms was presented at the Annual Meeting and such proposal was approved by the
shareholders of the Company. The number of shares voted for such proposal was
3,161,677. The number of shares voted against such proposal was 970,848. The
number of shares abstaining from voting or broker non votes was 1,043,445.
C. Amendment of the Company's Articles of Incorporation to increase the
number of shares of capital stock which the Company is authorized to issue from
10,000,000 shares of Common Stock to 25,000,000 shares of capital stock,
including 20,000,000 shares of Common Stock and 5,000,000 shares of Preferred
Stock.
A proposal to amend the Company's Articles of Incorporation to
increase the number of shares of capital stock which the Company is authorized
to issue from 10,000,000 shares of Common Stock to 25,000,000 shares of capital
stock 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
2,962,020. The number of shares voted against such proposal was 977,908. The
number of shares abstaining from voting or broker non votes was 1,126,521.
D. Selection of Auditors.
A proposal to ratify the appointment of Deloitte & Touche LLP as the
independent auditor of the Company for 1997 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 5,730,470. The number of shares voted against
such proposal was 4,450. The number of shares abstaining from voting was 16,777.
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.
-------- ----------- -----------
3 Articles of Incorporation as Amended 1
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, 1997
FRED P. LAMPROPOULOS
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Date: AUGUST 12, 1997
KENT W. STANGER
VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
11