MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
- --------------------------------------------
Selected Financial Data
Year Ended December 31,
- ---------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------
Operating Data:
Sales $ 60,579,011 $ 50,455,766 $ 42,587,284 $ 33,324,245 $ 25,431,180
Cost of sales 37,766,116 29,319,617 24,987,998 18,999,015 13,653,379
Gross profit 22,812,895 21,136,149 17,599,286 14,325,230 11,777,801
Selling, general, and
administrative expenses 15,726,651 14,311,049 12,808,805 10,232,215 7,836,018
Research and
development expenses 4,446,795 2,533,171 2,330,324 2,069,882 1,306,782
Income from operations 2,639,449 4,291,929 2,460,157 2,023,133 2,635,001
Other income (expense) 863,933 (661,777) (459,462) (29,868) 4,860
Income before
income tax expense 1,775,516 3,630,152 2,000,695 1,993,265 2,639,861
Income tax expense 944,981 1,277,431 700,418 775,453 799,650
Minority interest in (income)
loss of subsidiary (33,003) (190,113) (79,040) 33,035
Net income 797,532 2,162,608 1,221,237 1,250,847 1,840,211
Net income per share $ .11 $ .31 $ .18 $ .19 $ .28
Weighted average
shares outstanding 7,369,668 7,051,911 6,851,164 6,678,041 6,679,758
Balance Sheet Data:
Working capital $ 14,737,971 $ 12,761,211 $ 9,518,971 $ 9,032,899 $ 10,226,533
Total assets 45,269,678 41,718,553 34,503,858 27,024,267 20,479,384
Long-term debt 3,913,686 4,822,126 1,778,953 827,592 841,921
Stockholders' equity $ 25,802,149 $ 22,487,123 $ 19,264,525 $ 17,537,029 $ 15,705,152
MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
- --------------------------------------------
Management's Discussion & Analysis
OVERVIEW
Since its inception in 1987, Merit Medical has made significant
progress toward accomplishing Its business plan objectives, including becoming a
world leader for accessories in the cardiology and radiology markets;
establishing a quality direct sales force in the United States and in many
important international markets; and developing world-class facilities with
manufacturing, quality and regulatory capabilities supported by state-of-the-art
accounting, data and communications systems.
There have been many challenges in accomplishing Merit's
business objectives, such as major changes and reforms in the health care
industry, particularly in the United States. The Company has experienced
increased product and price competition in its markets. The Company also has
been required to manage rapid growth with limited capital.
Near the end of 1996 Merit's management evaluated the Company's
market position in diagnostic and therapeutic accessory products and determined
that bold new initiatives would be required to expand the Company's technology
bases and product lines. This strategy would focus on new product development to
complement existing product lines, resulting in growth in revenues, margins and
profitability.
Merit's growth strategy resulted in expansion of its marketing
department in 1997, followed by increased research and development expenditures
to design, develop and deliver new, proprietary niche products. These new
products are being marketed through the Company's distribution system to
existing and new customers.
Merit's product development strategy has focused on vascular
access markets with product families such as angiographic needles, introducers,
guide wires and catheters. To accomplish this expansion, the Company has made
long-term investments, increasing its marketing and research and development
capabilities in Salt Lake City, Utah, California, New York and Ireland. In
January, 1997, Merit acquired a small, medical device company in New York which
offered products in the vascular access arena. The acquired technology has led
to the introduction of a line of angiographic needles, a thrombolytic catheter
and a specialty guide wire, with other new, proprietary products to follow.
The Company's facility in Ireland has developed and has begun to
manufacture a significant new product-a PTCA (balloon angioplasty) guide wire.
The Sentir Division in California has expanded its marketing of high-quality
sensors to new markets such as the defense and automotive industries. These
initiatives have required subsequent expenditures, resulting in lower earnings
in 1997; however, management believes the Company is now well positioned for
growth and expansion of products, markets and profits.
MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
- --------------------------------------------
Management's Discussion & Analysis
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain operational
data as a percent of sales:
1997 1996 1995
- -------------------------------------------------------------------------
Sales 100.0% 100.0% 100.0%
Gross profit 37.7 41.9 41.3
Selling, general and administrative 26.0 28.4 30.1
Research and development 7.3 5.0 5.5
Income from operations 4.4 8.5 5.8
Income before income tax expense 2.9 7.2 4.7
Net income 1.3 4.3 2.9
Sales increased by $10,123,245, or 20.1%, in 1997 compared to an
increase of $7,868,482, or 18.5%, in 1996 and an increase of $9,263, 039, or
27.8%, in 1995. Sales growth from 1995 through 1997 was favorably affected by
the introduction of new products and increased sales of existing products sold
separately and packaged in custom kits, and increased penetration of the market
by Merit's inflation devices. International sales in 1997 were approximately
$13,722,000, or 23%, compared to $11,900,000, or 24%, in 1996 and $8,319,000, or
20%, in 1995. These increases were primarily a result of the ongoing transition
to a direct sales force in Europe, as well as greater acceptance of the
Company's products in other international markets. Direct sales in France,
Germany, U.K., Belgium, Holland and Canada were $6,615,697, $5,350,786 and
$1,882,648 in 1997, 1996 and 1995, respectively.
Gross profit as a percent of sales was 37,7%, 41.9% and 41.3% in
1997, 1996 and 1995, respectively. The decrease in gross profit in 1997 from
1996 was due to several factors, including increased sales of lower-margin
custom kits; price competition, especially in European markets; a strong U.S.
dollar affecting the currency translation of the Company's European sales; and
domestic wage increases in response to competition for direct-labor employees.
Gross margins were also affected by start-up and transition costs in the
Company's newly organized Vascular Access Division relating to acquisition of
assets from UMI. Margins improved in 1996 compared to 1995 through increased
production volumes, automation and efficiencies in the new facility as well as
the conversion to a direct international sales force.
Selling, general and administrative expenses increased
$1,415,602, or 9.9%, in 1997 over 1996 and $1,502,244, or 11.7% in 1996 compared
to 1995. These additional expenditures were related principally to the costs of
training and supporting the Company's growing sales force in domestic and
international markets. Although total selling, general and administrative
expenses have increased during the periods, these expenses as a percent of sales
declined to 26.0% in 1997 compared to 28.4% in 1996 and 30.1% in 1995. These
reductions have been accomplished-despite substantial expenditures related to
starting up the Company's European operations-in part through a Company-wide
MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
- --------------------------------------------
Management's Discussion & Analysis
focus on achieving greater productivity. In addition, increased sales have
permitted the Company to achieve economies of scale through the spread of fixed
costs over a greater number of units.
Research and development expenditures for 1997 were $4,446,795,
an increase of 76% over $2,533,171 in 1996. Research and development costs in
1996 grew by only 9% from 1995, which as a percent of sales was 7.3%, 5.0% and
5.5% for 1997, 1996 and 1995, respectively. This major increase is related to
new product development and reflects management's decision to expand into new
markets for the future growth of the Company.
Net income from operations in 1997 decreased to $2,639,449, or
38.5%, compared to $4,291,929 in 1996, an increase of 74.5% from $2,460,157 in
1995. The income tax provision for 1997 was $944,981, an effective rate of
53.2%, compared to $1,277,431, or 35.2%, in 1996 and $700,418, or 35.0%, in
1995. The Company's consolidated effective tax rate in 1997 was higher
principally because the tax benefits of losses associated with the start-up of
international operations were limited to Ireland's manufacturing tax rate of
10%. The effective tax rate is expected to improve significantly as the Ireland
facility becomes profitable and the 10% tax rate becomes a benefit.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1997 the Company's working capital was
$14,737,971, representing a current ratio of 2.2 to 1. During 1997 the Company
increased its secured bank line of credit to $10.5 million. The Company had
$4,624,727 outstanding under its line of credit at December 31, 1997. Merit has
financed leasehold improvements and equipment acquisitions through secured notes
payable and capital lease arrangements with an outstanding balance of $5,716,618
at December 31, 1997. For the year ended December 31, 1997 the Company generated
cash from operations in the amount of $1,719,508.
Historically, the Company has incurred significant expenses in
connection with product development and introduction of new products. This was
particularly true in 1997 with regard to new product development and the
start-up of European operations. 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 cash generated from
operations, secured loans on equipment, bank lines of credit and sales equity.
The Company believes that its present sources of liquidity and capital are
adequate for its current operations.
MARKET RISK DISCLOSURES
The Company does not engage in significant derivative financial
instruments. The Company does experience risk associated with foreign currency
fluctuations, and interest rate risk associated with its variable rate debt;
however, such risks have not been material to the Company and, accordingly, the
Company has not deemed it necessary to enter into agreements to hedge such
risks. The Company may enter into such agreements in the event that such risks
become material in the future.
MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
- --------------------------------------------
Consolidated Balance Sheets
DECEMBER 31, 1997 AND 1996
ASSETS 1997 1996
CURRENT ASSETS:
Cash and cash equivalents $ 976,692 $ 1,262,950
Trade receivables - net of allowance for uncollectible
accounts: 1997 - $175,114; 1996 - $75,324 9,599,443 7,379,079
Employee and related party receivables 288,812 327,425
Irish Development Agency grant receivable 747,888 416,891
Inventories 14,535,440 13,852,360
Prepaid expenses and other assets 538,259 518,823
Deferred income tax assets 782,435 729,060
------- -------
Total current assets 27,468,969 24,486,588
---------- ----------
PROPERTY AND EQUIPMENT:
Land 1,101,544 1,107,351
Building 932,448 1,043,804
Automobiles 112,633 144,535
Manufacturing equipment 10,909,529 8,656,145
Furniture and fixtures 4,817,738 3,816,402
Leasehold improvements 4,483,071 2,673,897
Construction-in-progress 2,747,414 5,193,993
--------- ---------
Total 25,104,377 22,636,127
Less accumulated depreciation and amortization (9,648,746) (7,605,728)
---------- ----------
Property and equipment - net 15,455,631 15,030,399
---------- ----------
OTHER ASSETS:
Intangible assets - net of accumulated amortization:
1997 - $821,641; 1996 - $636,059 2,024,050 1,839,532
Cost in excess of the fair value of assets acquired - net
of accumulated amortization: 1997 - $15,015 167,273
Prepaid royalty - net of accumulated amortization:
1997 - $492,857; 1996 - $407,143 107,143 192,857
Deposits 46,612 169,177
------ -------
Total other assets 2,345,078 2,201,566
--------- ---------
TOTAL $ 45,269,678 $ 41,718,553
============ ============
(Continued)
MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
- --------------------------------------------
Consolidated Balance Sheets
DECEMBER 31, 1997 AND 1996
LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1996
CURRENT LIABILITIES:
Line of credit $ 4,624,727 $ 4,533,873
Current portion of long-term debt 1,802,932 1,388,576
Trade payables 3,438,349 3,437,477
Accrued expenses 2,414,050 2,241,638
Advances from employees 81,245 107,907
Income taxes payable 369,695 15,906
------- ------
Total current liabilities 12,730,998 11,725,377
DEFERRED INCOME TAX LIABILITIES 883,002 852,578
LONG-TERM DEBT 3,913,686 4,822,126
DEFERRED CREDITS 1,543,151 1,467,660
--------- ---------
Total liabilities 19,070,837 18,867,741
---------- ----------
MINORITY INTEREST IN SUBSIDIARY 396,692 363,689
------- -------
COMMITMENTS AND CONTINGENCIES (Notes 6, 10, and 11)
Stockholders' EQUITY:
Preferred stock - 5,000,000 shares authorized as of
December 31, 1997, no shares issued
Common stock -- no par value; 20,000,000 and 10,000,000 shares
authorized, respectively; 7,395,091 and 6,942,290 shares issued
at December 31, 1997 and 1996, respectively 17,178,971 14,184,975
Foreign currency translation adjustment (490,591) (14,089)
Retained earnings 9,113,769 8,316,237
--------- ---------
Total stockholders' equity 25,802,149 22,487,123
---------- ----------
TOTAL $ 45,269,678 $ 41,718,553
============ ============
See notes to consolidated financial statements. (Concluded)
MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
1997 1996 1995
SALES $ 60,579,011 $ 50,455,766 $ 42,587,284
COST OF SALES 37,766,116 29,319,617 24,987,998
---------- ---------- ----------
GROSS PROFIT 22,812,895 21,136,149 17,599,286
---------- ---------- ----------
EXPENSES:
Selling, general, and administrative 15,726,651 14,311,049 12,808,805
Research and development 4,446,795 2,533,171 2,330,324
--------- --------- ---------
Total 20,173,446 16,844,220 15,139,129
---------- ---------- ----------
INCOME FROM OPERATIONS 2,639,449 4,291,929 2,460,157
--------- --------- ---------
OTHER INCOME (EXPENSE):
Interest income 28,223 23,377 15,185
Interest expense (854,859) (707,878) (428,038)
Miscellaneous income (expense) (37,297) 22,724 (46,609)
--------- --------- ---------
Other expense - net (863,933) (661,777) (459,462)
--------- --------- ---------
INCOME BEFORE INCOME TAX EXPENSE 1,775,516 3,630,152 2,000,695
INCOME TAX EXPENSE (944,981) (1,277,431) (700,418)
MINORITY INTEREST IN INCOME OF
SUBSIDIARY (33,003) (190,113) (79,040)
--------- --------- ---------
NET INCOME $ 797,532 $ 2,162,608 $ 1,221,237
============ ============ ============
EARNINGS PER COMMON SHARE -
Basic and diluted $ .11 $ .31 $ .18
============ ============ ============
AVERAGE COMMON SHARES -
Basic and diluted $ 7,369,668 $ 7,051,911 $ 6,851,164
============ ============ ============
See notes to consolidated financial statements.
MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statements of stockholders' Equity
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
Foreign
Common Stock Currency
-------------------- Translation Retained
Shares Amount Adjustment Earnings
BALANCE, JANUARY 1, 1995 6,690,829 $ 12,606,299 $ (1,662) $ 4,932,392
Net income 1,221,237
Issuance of common stock for cash 15,949 99,106
Options and warrants exercised for cash 79,461 370,339
Options to purchase 1,939 shares
surrendered in exchange for the
recording of payroll tax liabilities (9,453)
Foreign currency translation adjustment 24,293
Tax benefit attributable to appreciation of
common stock options exercised 21,974
----------- ----------- ------------ -----------
BALANCE, DECEMBER 31, 1995 6,786,239 13,088,265 22,631 6,153,629
Net income 2,162,608
Issuance of common stock for cash 39,996 309,370
Options and warrants exercised for cash 104,117 643,028
Issuance of common stock under Employee
Stock Purchase Plan 11,938 78,633
Foreign currency translation adjustment (36,720)
Tax benefit attributable to appreciation of
common stock options exercised 65,679
----------- ----------- ------------ -----------
BALANCE, DECEMBER 31, 1996 6,942,290 14,184,975 (14,089) 8,316,237
Net income 797,532
Issuance of common stock for cash 35,582 273,202
Options and warrants exercised for cash 227,200 1,316,812
Issuance of common stock under Employee
Stock Purchase Plan 42,056 245,129
Foreign currency translation adjustment (476,502)
Tax benefit attributable to appreciation of
common stock options exercised 222,887
Stock issued in connection with UMI acquisition 152,424 975,000
Shares surrendered in exchange for the recording
of payroll tax liabilities (861) (7,534)
Shares surrendered in exchange for the exercise
of stock options (3,600) (31,500)
----------- ----------- ------------ -----------
BALANCE, DECEMBER 31, 1997 7,395,091 $ 17,178,971 $ (490,591) $ 9,113,769
=========== =========== ============ ===========
See notes to consolidated financial statements.
MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
1997 1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 797,532 $ 2,162,608 $ 1,221,237
----------- ----------- -----------
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities:
Depreciation and amortization 2,796,425 2,497,850 1,718,901
Bad debt expense 99,790 17,708 33,509
Losses on sales and abandonment
of property and equipment 11,245 6,867 61,138
Amortization of deferred credits (91,155) (73,619) (55,761)
Deferred income taxes (22,951) 162,475 (200,768)
Tax benefit attributable to appreciation
of common stock options exercised 222,887 65,679 21,974
Minority interest in income of subsidiary 33,003 190,113 79,040
Changes in operating assets and liabilities,
net of effects from purchase of UMI:
Trade receivables (2,320,154) (668,827) (1,654,077)
Employee and related party receivables 38,613 35,841 (151,802)
Irish Development Agency
grant receivable (330,997) 142,637 (194,440)
Income tax refund receivable 133,048
Inventories (79,236) (1,695,565) (3,786,342)
Prepaid expenses and other assets (19,436) (115,409) (219,725)
Deposits and other 122,565 (122,193) 61,568
Trade payables 872 381,188 547,550
Accrued expenses 133,378 526,563 413,470
Advances from employees (26,662) 55,044 6,196
Income taxes payable 353,789 (113,879) 129,785
----------- ----------- -----------
Total adjustments 921,976 1,292,473 (3,056,736)
----------- ----------- -----------
Net cash provided by (used in)
operating activities 1,719,508 3,455,081 (1,835,499)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Collections on construction
advances receivable 2,184,630
Capital expenditures for:
Property and equipment (1,046,890) (2,736,477) (2,497,060)
Intangible assets (521,270) (486,414) (410,982)
UMI acquisition (70,486)
Proceeds from the sale of property
and equipment 22,645 41,156
----------- ----------- -----------
Net cash used in investing activities (1,616,001) (3,181,735) (723,412)
----------- ----------- -----------
(Continued)
MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
1997 1996 1995
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under line of credit $ 22,954,925 $ 22,551,386 $ 25,390,713
Proceeds from:
Issuance of common stock 1,835,143 1,031,031 469,445
Long-term debt 2,200,000
Principal payments on:
Line of credit (22,864,071) (23,889,052) (22,982,819)
Long-term debt (1,764,343) (1,068,415) (631,887)
Deferred credits (74,917) (69,467) (54,227)
Proceeds included in deferred credits 448,398
Proceeds from sale of subsidiary stock
to minority shareholders 10,000
----------- ----------- -----------
Net cash provided by financing
activities 86,737 755,483 2,649,623
----------- ----------- -----------
EFFECT OF EXCHANGE RATES ON CASH (476,502) (36,720) 24,293
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (286,258) 992,109 115,005
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 1,262,950 270,841 155,836
----------- ----------- -----------
CASH AND CASH EQUIVALENTS
AT END OF YEAR $ 976,692 $ 1,262,950 $ 270,841
============ ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION - Cash paid during the year
for interest (including capitalized interest
of $109,701, $177,133, and $152,469 during
1997, 1996, and 1995, respectively) $ 782,676 $ 761,430 $ 361,062
============ ============ ============
Income taxes $ 591,192 $ 1,163,156 $ 638,353
============ ============ ============
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING
ACTIVITIES:
- -- During 1997, 1996, and 1995, the Company entered into capital lease
obligations and notes payable for $1,270,259, $2,522,076, and
$1,997,992, respectively, for manufacturing equipment.
- -- During 1997, 1996, and 1995, the Company increased common stock by
$222,887, $65,679, and $21,974, respectively, for the tax benefit
attributable to appreciation of common stock options exercised.
- -- During 1997 and 1995, respectively, options to purchase 861 and 1,939
shares, respectively, of the Company's common stock were surrendered in
exchange for the Company's recording of payroll tax liabilities in the
amount of $7,534 and $9,453, respectively.
- -- During 1997, 3,600 shares of Merit common stock with a value of $31,500
were surrendered in exchange for the exercise of stock options.
- -- During 1997, the Company acquired UMI for 152,424 shares of Merit
restricted common stock. In connection with this acquisition, the
Company recorded the following as of the acquisition date:
Assets acquired $ 863,198
Cost in excess of fair market value 182,288
-------
Total purchase price $1,045,486
==========
See notes to consolidated financial statements. (Concluded)
MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization - Merit Medical Systems, Inc. (Merit) and its wholly-owned
subsidiaries, Merit Holdings, Inc. (MHI), and Merit Medical International, Inc.
(MMI), and Merit's majority-owned subsidiary, Sentir, Inc. (Sentir),
(collectively, the Company) develop, manufacture, and market disposable medical
products primarily for use in the diagnosis and treatment of cardiovascular
disease. The Company manufactures its products in plants located in the United
States and, beginning in 1997, in Ireland. The Company has export sales to
dealers and has direct sales forces in the United States, Canada, and Western
Europe.
The consolidated financial statements of the Company have been prepared in
accordance with generally accepted accounting principles. The following is a
summary of the more significant of such policies.
Use of Estimates in Preparing Financial Statements - The preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Principles of Consolidation - The consolidated financial statements include
those of Merit, MMI, MHI, and Sentir. All material intercompany balances and
transactions have been eliminated in consolidation.
Revenue Recognition - Sales are recognized at the time the products are shipped.
Inventories - Inventories are stated at the lower of cost (computed on a
first-in, first-out basis) or market.
Long-lived Assets - Impairment of long-lived assets is determined in accordance
with Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for
the Impairment of Long-lived Assets and of Long-lived Assets to be Disposed Of,"
which was adopted on January 1, 1996. There were no impairments as of December
31, 1997 or 1996.
Property and Equipment - Property and equipment are recorded at cost.
Depreciation and amortization are computed using the straight-line method over
estimated useful lives as follows:
Building 30 years
Automobiles 4 years
Manufacturing equipment 5 to 10 years
Furniture and fixtures 5 to 10 years
Leasehold improvements 4 to 25 years
Intangible Assets - Costs associated with obtaining patents, issued and pending,
and trademarks have been capitalized and are amortized over the patent or
trademark period or charged to expense if not approved. Costs associated with
obtaining customer lists are amortized over two years.
Earnings per Common Share - Effective December 31, 1997, the Company adopted
SFAS No. 128, "Earnings Per Share", and retroactively restated its earnings per
share for 1996 and 1995, to conform with the statement. Accordingly, net income
per common share is computed by both the basic method, which uses the weighted
average number of the Company's common shares outstanding, and the diluted
method, which includes the dilutive common shares from stock options and
warrants, as calculated using the treasury stock method. The amounts of such
options and warrants are not significant and, accordingly, the Company's basic
and diluted earnings per share are the same.
MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Prepaid Royalty - The prepaid royalty paid by the Company under an agreement
which grants to the Company a license and certain rights to technology has been
capitalized. Amortization of the prepaid royalty is computed using the
straight-line method over the seven year term of the agreement.
Financial Instruments - The Company's financial instruments, when valued using
market interest rates, would not be materially different from the amounts
presented in the consolidated financial statements.
Statements of Cash Flows - For purposes of the statements of cash flows, the
Company considers interest bearing deposits with an original maturity date of
three months or less to be cash equivalents.
Foreign Currency Translation Adjustment - The financial statements of the
Company's foreign subsidiaries are measured using local currencies as the
functional currency. Assets and liabilities are translated into U.S. dollars at
year-end rates of exchange and results of operations are translated at average
rates for the year. Gains and losses resulting from these translations are
accumulated in a separate component of stockholders' equity.
Reclassifications - Certain amounts in prior year consolidated financial
statements have been reclassified to conform with current year presentation.
2. ACQUISITION OF UNIVERSAL MEDICAL INSTRUMENT CORPORATION (UMI)
On January 31, 1997, the Company acquired certain assets of Universal Medical
Instrument Corporation ("UMI") in exchange for 152,424 shares of the Company's
restricted common stock. UMI is a privately held company located in Saratoga
County, New York.
The Company's acquisition of UMI's assets was accounted for as a purchase and,
accordingly, the results of operations of UMI are included in the Company's
consolidated financial statements from the date of acquisition. The total
purchase price, including related costs, was allocated to the assets acquired
based on their fair values with the excess purchase price over the fair value of
assets acquired of $182,288 being allocated to goodwill, which is being
amortized over 12 years. The proforma financial information reflecting this
transaction for 1996 and 1995 has not been presented as it is not materially
different from the Company's historical results.
3. INVENTORIES
Inventories consist of the following at December 31, 1997 and 1996:
1997 1996
Finished goods $ 6,261,203 $ 6,284,200
Work-in-process 4,305,202 3,806,150
Raw materials 4,635,593 4,025,497
Less reserve for obsolete inventory (666,558) (263,487)
-------- --------
Total $ 14,535,440 $ 13,852,360
============ ============
MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
4. INCOME TAXES
Deferred income tax assets and liabilities at December 31, 1997 and 1996 consist
of the following temporary differences and carryforward items:
Current Long-Term
1997 1996 1997 1996
------------------------ ------------------------
Deferred income tax assets:
Allowance for uncollectible
accounts receivable $ 70,535 $ 29,404
Accrued compensation expense 124,997 82,447
General business credits 29,990 21,757
Inventory capitalization for
tax purposes 82,411 116,608
Inventory obsolescence reserve 181,729 105,497
Other 36,128 62,122
Net operating losses of subsidiaries 256,645 311,225
--------- --------- --------- ---------
Total deferred income tax assets 782,435 729,060
Deferred income tax liabilities -
differences between tax basis
and financial reporting basis
of property and equipment $(883,002) $(852,578)
--------- --------- --------- ---------
Net $ 782,435 $ 729,060 $(883,002) $(852,578)
========= ========= ========= =========
Income tax expense for the years ended December 31, 1997, 1996, and 1995 differs
from amounts computed by applying the statutory Federal rate to pretax income as
follows:
1997 1996 1995
Computed Federal income tax expense at
statutory rate of 35% $ 621,431 $ 1,270,553 $ 700,243
State income taxes 124,878 231,126 160,562
Creation of tax credits (164,319) (61,435) (52,104)
Tax benefit of foreign sales corporation (106,574) (85,614) (46,628)
Losses of subsidiaries recorded at
foreign rates 496,685 289,594 105,000
Change in deferred income tax asset
valuation allowance (353,710) (150,000)
Other - including the effect of graduated rates (27,120) (13,083) (16,655)
------- ------- -------
Total income tax expense $ 944,981 $ 1,277,431 $ 700,418
=========== =========== ===========
Consisting of:
Current $ 967,932 $ 1,114,956 $ 901,186
Deferred (22,951) 162,475 (200,768)
------- ------- --------
Total $ 944,981 $ 1,277,431 $ 700,418
=========== =========== ===========
MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
5. LINE OF CREDIT AND LONG-TERM DEBT
Line of Credit - As of December 31, 1997, the Company had a line of credit for
$10,500,000. The credit line is collateralized by trade receivables,
inventories, property and equipment, and intangible assets and accrues interest
at the bank's prime rate. Under the terms of the line, among other things, the
Company is required to maintain positive earnings for each fiscal quarter during
the term of the loan, maintain a ratio of total liabilities to tangible net
worth not to exceed 1.1 to 1.0, maintain a ratio of current assets to current
liabilities of at least 1.5 to 1.0, maintain minimum working capital of
$9,000,000, and is restricted from paying dividends to shareholders. As of
December 31, 1997 and 1996, the Company owed $4,624,727 and $4,533,873,
respectively, under this line of credit.
Long-term Debt - Long-term debt consists of the following at December 31, 1997
and 1996:
1997 1996
Notes payable to financial institutions;
payable in monthly installments
through 2002, including interest at
rates ranging from 6.5% to 10.34%;
collateralized by equipment $4,777,090 $4,847,317
Capital lease obligations (see Note 6) 939,528 1,363,385
------- ---------
Total 5,716,618 6,210,702
Less current portion 1,802,932 1,388,576
--------- ---------
Long-term portion $3,913,686 $4,822,126
========== ==========
Scheduled maturities of long-term debt at December 31, 1997 are as follows: Year
ending December 31:
1998 $ 1,802,932
1999 1,702,069
2000 1,288,177
2001 728,518
2002 194,922
------------
Total $ 5,716,618
============
6. COMMITMENTS AND CONTINGENCIES
Leases - The Company has noncancelable operating lease agreements for off-site
office and production facilities and equipment. The leases for the off-site
office and production facilities are for 5 years and have renewal options of one
to five years. The Company has subleased these facilities during 1997, 1996, and
1995. Total rental income from these subleases for the years ended December 31,
1997, 1996, and 1995 was approximately $97,000, $153,000, and $69,000,
respectively. Total rental expense on these operating leases and on the
Company's new manufacturing and office building (see below) for the years ended
December 31, 1997, 1996, and 1995 approximated $2,783,000, $2,448,000, and
$2,058,000, respectively.
In June 1993, the Company entered into a 25 year lease agreement with a
developer for a new manufacturing and office building. Under the agreement, the
Company was granted an option to purchase the building at fair market value
after 10 years and, if not exercised, after 25 years. Upon the building's
completion in February 1995, monthly rental payments were approximately
$108,000. In connection with this lease agreement, the Company in 1993 sold to
the developer 10 acres of land on which the building was constructed. The
$166,136 gain on the sale of the land has been recorded as a deferred credit and
is being amortized as a reduction of rent expense over ten years.
MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
During 1997, 1996, and 1995, $16,614, $16,614, and $15,230, respectively, of
this deferred credit was amortized as a reduction of rent expense. In connection
with the construction of the building, the Company capitalized interest costs of
approximately $402,000 during the year ended December 31, 1994. In connection
with the lease agreement, the Company issued to the developer warrants to
purchase 155,461 shares of the Company's common stock at $4.95 subject to
carrying cost increases of 3% per year. The warrants expire in 2005.
The Company leases manufacturing and office equipment under long-term capital
lease agreements. Capital leases are collateralized by equipment approximating
$1,607,000 and $1,635,000 with accumulated amortization of approximately
$296,000 and $249,000 as of December 31, 1997 and 1996, respectively.
The future minimum lease payments, together with the present value of the net
minimum lease payments as of December 31, 1997, are as follows:
Operating Leases Capital Leases
Year ending December 31:
1998 $ 3,311,164 $ 314,707
1999 3,053,800 296,317
2000 2,101,075 281,785
2001 1,608,249 200,686
2002 1,490,558
Thereafter 24,209,544
------------- --------------
Total minimum lease payments $ 35,774,390 1,093,495
Less amount representing interest =============
and executory costs (153,967)
--------------
Present value of net minimum lease
payments (see Note 5) $ 939,528
=============
Irish Government Development Agency Grants - Through December 31, 1997, the
Company has entered into several grant agreements with the Irish Government
Development Agency of which $747,888 and $416,891 remained in receivables at
December 31, 1997 and 1996, respectively. The grant agreements reimburse the
Company for a portion of the cost of property and equipment purchased in
Ireland, specific research and development projects in Ireland, and costs of
hiring and training employees located in Ireland. The Company has recorded the
grants related to research and development projects and costs of hiring and
training employees as a reduction of operating expenses in 1997, 1996, and 1995
in the amounts of $146,476, $230,654, and $194,440, respectively. Grants related
to the acquisition of property and equipment purchased in Ireland are recorded
as deferred credits and are amortized to income over lives corresponding to the
depreciable lives of such property. During 1997, 1996, and 1995, $74,541,
$57,005, and $40,531, respectively, of the deferred credit was amortized as a
reduction of operating expenses.
Other Deferred Credits - The Company has also received non-interest bearing
advances from a utility company under a program whereby such advances are made
available for the cost of energy reduction improvements made to the Company's
facilities. Through December 31, 1997, the Company had received total advances
under this program of $521,419. As of December 31, 1997 and 1996, the balance
owing and included in deferred credits totaled $328,257 and $397,724,
respectively. The advances are payable over eleven years in monthly
installments.
Preferred Share Purchase Rights - In August 1997, the Company declared a
dividend of one preferred share purchase right (a "Right") for each outstanding
share of Common Stock which entitles the holder of a Right to purchase one
one-hundredth of a share of Series A Junior Participating Preferred Stock at an
exercise price of $40 in the event a person or group acquires or announces an
intention to acquire 15% or more of the Company's Common Stock. Until such an
event, the Rights are not exercisable, and are transferable with the Common
Stock and may be redeemed at a price of $.0001 per Right.
MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Litigation - Bennett vs. Merit Medical Systems, Inc., et al. - On February 4,
1994, an action was filed in the Third District Court of Salt Lake County, State
of Utah by an individual claiming to be a shareholder of the Company and naming
the Company, Fred P. Lampropoulos, President of the Company, and Sentir, a
company founded by Mr. Lampropoulos, as defendants. The claims against the
Company were subsequently dismissed. The complaint also asserted claims on
behalf of the Company (derivative claims) against Mr. Lampropoulos and Sentir,
alleging breach of fiduciary duty and the improper taking of a corporate
opportunity in connection with the formation of Sentir. The relief sought in
connection with the derivative claims included disgorgement, costs, and
attorneys' fees. The Company appointed an independent Special Litigation
Committee of the Board to determine the Company's course of action on the
derivative claims which engaged counsel separate from the Company's usual
counsel for purposes of the derivative claims. On November 7, 1995, pursuant to
a Motion filed on behalf of the Company's Special Litigation Committee, the
Court made a minute entry granting the Motion to Dismiss the derivative claims,
without prejudice. On November 4, 1996, the Special Litigation Committee
delivered its report essentially concluding that the derivative claims were not
well founded. Nevertheless, on November 22, 1996, the plaintiff refiled only the
derivative claims in the Third District Court of Salt Lake County, State of Utah
and on January 22, 1997, a Motion to Dismiss was filed on behalf of the Company,
seeking to terminate the litigation and asserting that the report of the Special
Litigation Committee is entitled to deference under the law.
7. EMPLOYEE STOCK PURCHASE PLAN AND STOCK OPTIONS AND WARRANTS
The Company offers to its employees an Employee Stock Purchase Plan which allows
the employee on a quarterly basis to purchase shares of the Company's common
stock at the lesser of 85% of the market value on the offering commencement date
or offering termination date. The total number of shares available to employees
to purchase under this plan is 250,000 of which 53,994 have been purchased as of
December 31, 1997.
The Company has a long-term incentive plan which provides for the issuance of
incentive stock options, nonstatutory stock options, and certain corresponding
stock appreciation rights. The maximum number of shares of common stock for
which options may be granted is 2,400,000. Options may be granted to directors,
officers, outside consultants, and key employees of the Company and may be
granted upon such terms and such conditions as the Compensation Committee in its
sole discretion shall determine. In no event, however, shall the exercise price
be less than the fair market value on the date of grant.
Changes in stock options and warrants for the years ended December 31, 1997,
1996, and 1995 are as follows:
Options Warrants
--------------------- --------------------
Weighted Weighted
Average or Average or
Range of Range of
Exercise Exercise
Shares Price Shares Price
1997:
Granted 522,700 $ 6.65
Exercised 227,200 5.80
Forfeited/expired 43,100 7.19 60,000 $ 7.65
Outstanding at December 31 1,057,100 7.04 155,461 5.25
Exercisable 315,100 7.48 155,461 5.25
Weighted average fair value of
options and warrants granted
during year 6.65
Weighted average fair value of
shares issued under Employee
Stock Purchase Plan 1.03
MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Options Warrants
------- --------
Weighted Weighted
Average or Average or
Range of Range of
Exercise Exercise
Shares Price Shares Price
1996:
Granted 340,000 $8.19 517 $6.83
Exercised 84,850 6.08 19,267 6.65
Forfeited/expired 43,750 6.02
Outstanding at December 31 804,700 6.96 215,461 5.85
Exercisable 364,600 6.64 215,461 5.85
Weighted average fair value of
options and warrants granted
during year 4.50
Weighted average fair value of
shares issued under Employee
Stock Purchase Plan 1.16
1995:
Granted 182,000 $5.63 - 9.63 155,461 $4.95
Exercised 43,511 3.29 -- 7.00 35,950 3.20 -- 4.67
Options surrendered to the
Company in exchange for the
recording of payroll tax liabilities 1,939 4.87
Forfeited/expired 56,250 4.87 -- 9.63 10,900 3.20
Outstanding at December 31 593,300 4.87 -- 9.63 234,211 4.95 -- 7.65
Exercisable 279,150 4.87 -- 9.63 234,211 4.95 -- 7.65
The following table summarizes information about stock options and warrants
outstanding at December 31, 1997:
Options and Warrants
Options and Warrants Outstanding Exercisable
----------------------------------------------- ---------------------
Weighted
Average
Remaining Weighted Weighted
Range of Contractual Average Average
Exercise Number Life Exercise Number Exercise
Prices Outstanding (in years) Price Exercisable Price
Options:
4.875 - 7.25 575,100 3.52 $6.09 159,700 $ 6.15
7.50 - 10.625 482,000 4.08 8.17 155,400 8.84
Warrants:
$5.25 155,461 7.00 $5.25 155,461 $ 5.25
The Company accounts for stock options granted using Accounting Principles Board
(APB) Opinion 25. Accordingly, no compensation cost has been recognized for its
fixed stock option plans. Had compensation cost for the Company's stock-based
compensation plans been determined based on the fair value at the grant dates
for awards under those plans consistent with SFAS No. 123, the Company's net
income and net income per common and common equivalent share would have changed
to the pro forma amounts indicated below (in thousands):
MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1997 1996 1995
Net income:
As reported $ 797,532 $ 2,162,608 $ 1,221,237
Pro forma 385,340 1,753,765 1,146,934
Net income per common (both basic
and diluted) share:
As reported $ 0.11 $ 0.31 $ 0.18
Pro forma 0.05 0.25 0.17
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1997, 1996, and 1995, dividend yield of 0%;
expected volatility of 57.5%, 55%, and 55% for 1997, 1996, and 1995,
respectively; risk-free interest rates ranging from 5.30% to 7.36%; and expected
lives ranging from 2.8 to 4.5 years.
8. SEGMENT REPORTING AND FOREIGN OPERATIONS
During the years ended December 31, 1997, 1996, and 1995, the Company had sales
of approximately $13,722,000, $11,900,000, and $8,319,000 or approximately 23%,
24%, and 20%, respectively, of total sales primarily in Japan, Germany, France,
and United Kingdom.
The Company operates primarily in one industry in which it develops,
manufactures, and markets disposable medical products, primarily for use in the
diagnosis and treatment of cardiovascular disease. Major operations outside the
United States include a manufacturing and distribution facility in Ireland and
sales subsidiaries in Europe. The following is a summary extract of the
Company's foreign operations by geographic area for fiscal year 1997, 1996, and
1995:
Transfers
Sales to Between Net
Unaffiliated Geographic Income Identifiable
Customers Areas Revenue (Loss) Assets
Fiscal year ended December 31, 1997:
United States, Canada, and
international distributors $ 54,226,210 $ 860,482 $ 55,086,692 $ 2,774,516 $ 36,322,060
Europe direct 6,352,801 838,219 7,191,020 (2,110,415) 8,947,618
Eliminations (1,698,701) (1,698,701) 133,431
------------ ------------ ------------ ------------ ------------
Consolidated $ 60,579,011 None $ 60,579,011 $ 797,532 $ 45,269,678
============ ============ ============ ============ ============
Fiscal year ended
December 31, 1996:
United States, Canada, and
international distributors $ 45,106,815 $ 1,212,962 $ 46,319,777 $ 3,315,534 $ 33,770,512
Europe direct 5,348,951 89,081 5,438,032 (1,029,204) 7,948,041
Eliminations (1,302,043) (1,302,043) (123,722)
------------ ------------ ------------ ------------ ------------
Consolidated $ 50,455,766 None $ 50,455,766 $ 2,162,608 $ 41,718,553
============ ============ ============ ============ ============
Fiscal year ended December 31, 1995:
United States, Canada, and
international distributors $ 40,704,636 $ 1,031,014 $ 41,735,650 $ 2,513,653 $ 31,081,451
Europe direct 1,882,648 1,882,648 (1,289,135) 3,422,407
Eliminations (1,031,014) (1,031,014) (3,281)
------------ ------------ ------------ ------------ ------------
Consolidated $ 42,587,284 None $ 42,587,284 $ 1,221,237 $ 34,503,858
============ ============ ============ ============ ============
MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Transfers between geographic areas are accounted for at amounts which are
generally above cost and consistent with the rules and regulations of governing
tax authorities. Such transfers are eliminated in the consolidated financial
statements. Net income by geographic areas reflects foreign earnings reported by
the foreign entities. Identifiable assets are those assets that can be directly
associated with a particular foreign entity and thus do not include assets used
for general corporate purposes.
9. RELATED PARTY TRANSACTIONS
Receivables from employees at December 31, 1997 and 1996 totaled approximately
$245,000 and $275,000, respectively (including approximately $120,000 and
$144,000, respectively, from officers of the Company).
10. ROYALTY AGREEMENT
On April 8, 1992, the Company settled litigation involving, among other things,
allegations that certain of the Company's inflation device products infringed
patents issued to another medical product manufacturing company (the Licensor).
Pursuant to the settlement, the Company entered into a license agreement with
the Licensor, whereby the Licensor granted to the Company a nonexclusive right
and license to manufacture and sell products which are subject to the patents
issued to the Licensor. For the rights and license granted under the agreement,
the Company paid the Licensor a nonrefundable prepaid royalty in the amount of
$600,000. The royalty was paid upon execution of the agreement and represents a
prepaid royalty covering the first seven years of the agreement. In addition to
the prepaid royalty, the Company agreed to pay the Licensor a continuing royalty
beginning January 1, 1992 of 5.75% of sales (which will not exceed $450,000 for
any calendar year) made in the United States, of products covered by the license
agreement. Royalties of $450,000 were paid or accrued in each of the years ended
December 31, 1997, 1996, and 1995.
The Licensor has released the Company from all damages, claims, or rights of
action which the Licensor may have had related to the alleged infringement of
the patents issued to the Licensor. The Company has also agreed to not proceed
against the Licensor for the alleged misappropriation by the Licensor of the
Company's confidential and proprietary information.
11. EMPLOYEE BENEFIT PLAN
The Company has a contributory 401(k) savings and profit sharing plan (the Plan)
covering all full-time employees who are at least 21 years of age and have a
minimum of one year of service to the Company. The Company may contribute at its
discretion matching contributions up to 2.25% of the employeesO compensation.
Additional employer contributions are determined at the discretion of the Board
of Directors. The Company did not contribute to the Plan for the year ended
December 31, 1995. Contributions made by the Company to the Plan for the years
ended December 31, 1997 and 1996 totaled approximately $223,000 and $227,000,
respectively.
The Plan purchased unissued shares of the Company's common stock at market value
during each of the three years ended December 31, 1997 as follows:
Market
Shares Value
Years ended December 31:
1997 35,582 $ 273,202
1996 39,996 309,370
1995 15,949 99,106
MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
12. RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS
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. SFAS No. 130 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. SFAS No. 130 is effective for fiscal years beginning after
December 15, 1997. The adoption of SFAS No. 130 will require the Company to add
disclosure to the financial statements about comprehensive income.
In June 1997, the FASB issued SFAS No. 131, "Disclosure About Segments of an
Enterprise and Related Information". SFAS No. 131 establishes standards for the
way that public business enterprises 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. It also establishes standards for related disclosure
about products and services, geographic areas, and major customers. SFAS No. 131
is effective for financial statements for periods beginning after December 15,
1997. The adoption of SFAS No. 131 may result in additional disclosures about
the Company's segments.
******
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
of Merit Medical Systems, Inc.:
We have audited the accompanying consolidated balance sheets of Merit Medical
Systems, Inc. and subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Merit Medical Systems, Inc. and
subsidiaries as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997 in conformity with generally accepted accounting principles.
/s/Deloitte & Touch LLP
March 5, 1998
Salt Lake City, Utah