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 ---- ---------- (State or other jurisdiction of (I.R.S. Identification No.) incorporation or organization) 1600 West Merit Parkway, South Jordan UT, 84095 ----------------------------------------------- (Address of Principal Executive Offices) (801) 253-1600 -------------- (Registrant's telephone number, including area code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ----- ---- Indicate the number of shares outstanding of each of the Registrant's classes of common stock, as of the latest practicable date. Common Stock 7,883,055 ------------ --------- TITLE OR CLASS Number of Shares Outstanding at May 14, 2001
<TABLE> <CAPTION> MERIT MEDICAL SYSTEMS, INC. INDEX TO FORM 10-Q <S> <C> PART I. FINANCIAL INFORMATION PAGE ---- 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 </TABLE>
MERIT MEDICAL SYSTEMS, INC. CONSOLIDATED BALANCE SHEETS MARCH 31, 2001 AND DECEMBER 31, 2000 - -------------------------------------------------------------------------------- <TABLE> <CAPTION> March 31, December 31, ASSETS 2001 2000 ------------ ------------ (Unaudited) CURRENT ASSETS: <S> <C> <C> 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 ------------ ------------ Total current assets 40,741,591 41,975,486 ------------ ------------ 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 ------------ ------------ Total 40,648,146 39,705,520 Less accumulated depreciation and amortization (18,788,557) (17,860,490) ------------ ------------ Property and equipment - net 21,859,589 21,845,030 ------------ ------------ 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 ------------ ------------ Total other assets 7,611,066 7,626,115 ------------ ------------ TOTAL ASSETS $ 70,212,246 $ 71,446,631 ============ ============ </TABLE> (Continued) See Notes to Consolidated Financial Statements 1
MERIT MEDICAL SYSTEMS, INC. CONSOLIDATED BALANCE SHEETS MARCH 31, 2001 AND DECEMBER 31, 2000 - -------------------------------------------------------------------------------- <TABLE> <CAPTION> March 31, December 31, LIABILITIES AND STOCKHOLDERS' EQUITY 2001 2000 ------------- ------------- (Unaudited) CURRENT LIABILITIES: <S> <C> <C> 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 ------------- ------------- 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 ------------- ------------- Total Liabilities 34,186,871 36,673,929 ------------- ------------- 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 ------------- ------------- Total stockholders' equity 36,025,375 34,772,702 ------------- ------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 70,212,246 $ 71,446,631 ============ ============ </TABLE> 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) - -------------------------------------------------------------------------------- March 31, March 31, 2001 2000 ------------ ------------ NET SALES $ 26,788,373 $ 22,080,435 COST OF SALES 17,568,999 14,446,385 ------------ ------------ GROSS PROFIT 9,219,374 7,634,050 ------------ ------------ OPERATING EXPENSES: Selling, general and administrative 6,006,073 6,338,539 Research and development 1,130,072 1,005,936 ------------ ------------ TOTAL OPERATING EXPENSES 7,136,145 7,344,475 ------------ ------------ INCOME FROM OPERATIONS 2,083,229 289,575 OTHER EXPENSE - NET 436,067 517,404 ------------ ------------ 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 ============ ============ 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) - -------------------------------------------------------------------------------- <TABLE> <CAPTION> March 31, March 31, 2001 2000 ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: <S> <C> <C> Net income (loss) $ 1,186,425 $ (159,482) ----------- ----------- 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) ----------- ----------- Total adjustments 4,087,749 (757,454) ----------- ----------- Net cash provided by ( used in) operating activities 5,274,174 (916,936) ----------- ----------- 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 ----------- ----------- Net cash used in investing activities (842,885) (1,278,765) ----------- ----------- </TABLE> 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) - -------------------------------------------------------------------------------- <TABLE> <CAPTION> March 31, March 31, 2001 2000 ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: <S> <C> <C> 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) ----------- ----------- Net cash provided by (used in) financing activities (4,331,690) 2,314,538 ----------- ----------- EFFECT OF EXCHANGE RATES ON CASH (42,891) (36,178) ----------- ----------- NET INCREASE IN CASH 56,708 82,659 CASH AT BEGINNING OF PERIOD 412,384 668,711 ----------- ----------- CASH AT END OF PERIOD $ 469,092 $ 751,370 =========== =========== 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 =========== =========== </TABLE> 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) - -------------------------------------------------------------------------------- 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 ------------ ------------ 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) ------------ ------------ Total $ 23,123,591 $ 25,273,428 ============ ============ 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 ----------- ----------- Net Income (loss) $ 1,186,425 $ (159,482) Foreign currency translation ( 42,891) (36,178) ----------- ------------ Comprehensive income (loss) $ 1,143,534 $ (195,660) =========== ============ 6
MERIT MEDICAL SYSTEMS, INC NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)( Continued) - -------------------------------------------------------------------------------- 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 - -------------------------------------------------------------------------------- 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 -------- -------- 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 ----------- ----------- 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 ------------ ----------------------- KENT W. STANGER SECRETARY AND CHIEF FINANCIAL OFFICER 10