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 - -------------------------------------------------------------------------------- MERIT MEDICAL SYSTEMS, INC. (Exact name of Registrant as specified in its charter) - -------------------------------------------------------------------------------- Utah 87-0447695 (State or other jurisdiction of incorporation (I.R.S. Identification No.) 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 7,282,841 - -------------- ------------------------------- 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. - --------------------------- CONSOLIDATED BALANCE SHEETS JUNE 30, 1997 AND DECEMBER 31, 1996 - -------------------------------------------------------------------------------- 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 ------------- ------------- Total current assets 25,956,497 24,486,588 ------------- ------------- 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 ------------- ------------- 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 ------------- ------------- 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 ------------- ------------- Continued on Page 2 See Notes to Consolidated Financial Statements 1
MERIT MEDICAL SYSTEMS, INC. - --------------------------- CONSOLIDATED BALANCE SHEETS (Continued) JUNE 30, 1997 AND DECEMBER 31, 1996 - -------------------------------------------------------------------------------- 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 ------------ ------------- 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 ------------ ------------- Total liabilities 18,647,355 18,867,741 ------------ ------------- MINORITY INTEREST IN SUBSIDIARY 372,083 363,689 ------------ ------------- 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) ------------ ------------- Total stockholders' equity 25,304,503 22,487,123 ------------ ------------- TOTAL $44,323,941 $41,718,553 ------------ ------------- See Notes to Consolidated Financial Statements 2
MERIT MEDICAL SYSTEMS, INC. - --------------------------- CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1997 and 1996 (Unaudited) - -------------------------------------------------------------------------------- <TABLE> <CAPTION> Three Months Ended Six Months Ended June 30, June 30, ------------------ ---------------- 1997 1996 1997 1996 --------------------------------------------------- <S> <C> <C> <C> <C> 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 ========== ========= ========= =========== </TABLE> See Notes to Consolidated Financial Statements 3
MERIT MEDICAL SYSTEMS, INC. - --------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 1997 and 1996 (Unaudited) - -------------------------------------------------------------------------------- <TABLE> <CAPTION> June 30, June 30, 1997 1996 ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: <S> <C> <C> 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) ----------- ----------- Total adjustments (717,742) (559,205) ----------- ----------- Net cash provided by (used in) operating activities (241,715) 459,700 ----------- ----------- 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 ----------- ----------- Net cash used in investing activities (1,198,908) (1,557,142) ----------- ----------- </TABLE> Continued on page 5 See Notes to Consolidated Financial Statements 4
MERIT MEDICAL SYSTEMS, INC. - --------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996 (Unaudited) - -------------------------------------------------------------------------------- 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. - --------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 1. Basis of Presentation. In the opinion of management, the accompanying consolidated financial statements contain all adjustments, consisting only of normal recurring accruals, necessary for a fair presentation of 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 -------------- ------------- 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 -------------- ------------- Total $ 14,409,683 $13,852,360 -------------- ------------- 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. - --------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) - -------------------------------------------------------------------------------- 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. - --------------------------- ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- 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. - --------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued) - -------------------------------------------------------------------------------- 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. - --------------------------- 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