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 SEPTEMBER 30, 2002.
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.
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(Exact name of Registrant as specified in its charter)
Utah 87-0447695
- --------------------------------- ---------------------------
(State or other jurisdiction (I.R.S. Identification No.)
of incorporation or organization)
1600 West Merit Parkway, South Jordan Utah, 84095
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(Address of Principal Executive Offices)
(801) 253-1600
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(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of the latest practicable date.
Common Stock 13,845,141
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TITLE OR CLASS Number of Shares Outstanding at
November 13, 2002
MERIT MEDICAL SYSTEMS, INC.
INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION PAGE
----
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 2002
and December 31, 2001 ......................................................... 3
Consolidated Statements of Operations for the three and nine months
ended September 30, 2002 and 2001.............................................. 5
Consolidated Statements of Cash Flows for the nine months
ended September 30, 2002 and 2001.............................................. 6
Notes to Consolidated Financial Statements..................................... 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................................... 10
Item 3. Market Risk Disclosure......................................................... 15
Item 4. Controls and Procedures........................................................ 15
PART II. OTHER INFORMATION
Item 4. Exhibits and Reports on Form 8-K............................................... 16
Item 5. Other Information.............................................................. 16
SIGNATURES................................................................................ 16
Certifications............................................................................ 17
2
MERIT MEDICAL SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2002 AND DECEMBER 31, 2001 (Unaudited)
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PART I - FINANCIAL INFORMATION
ITEM 1: Financial Statements
September 30, December 31,
2002 2001
------------- -------------
ASSETS
- ------
CURRENT ASSETS:
Cash and cash equivalents $ 6,420,658 $ 341,690
Short-term investments 121,146 85,286
Trade receivables - net 14,221,770 14,748,021
Employee and related party receivables 179,949 266,905
Irish Development Agency grant receivable 19,999 98,081
Inventories 20,159,350 20,823,616
Prepaid expenses and other assets 671,310 514,786
Deferred income tax assets 723,299 723,299
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Total current assets 42,517,481 37,601,684
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PROPERTY AND EQUIPMENT:
Land 2,034,522 1,252,066
Building 3,299,439 1,500,000
Automobiles 87,536 91,573
Manufacturing equipment 24,564,200 23,289,880
Furniture and fixtures 10,655,733 9,963,045
Leasehold improvements 6,063,462 5,659,457
Construction-in-progress 3,316,786 1,738,540
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Total 50,021,678 43,494,561
Less accumulated depreciation
and amortization (24,881,419) (21,671,501)
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Property and equipment - net 25,140,259 21,823,060
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OTHER ASSETS:
Intangible assets - net 2,116,825 2,434,632
Goodwill - net 4,764,596 4,764,596
Deposits 35,323 34,843
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Total other assets 6,916,744 7,234,071
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TOTAL ASSETS $ 74,574,484 $ 66,658,815
============= =============
Continued on page 4
See Notes to Consolidated Financial Statements
3
MERIT MEDICAL SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS (Continued)
SEPTEMBER 30, 2002 AND DECEMBER 31, 2001 (Unaudited
- --------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
September 30, December 31,
2002 2001
------------ ------------
CURRENT LIABILITIES:
Current portion of long-term debt $ 456,629 $ 598,086
Trade payables 4,587,862 4,659,295
Accrued expenses 6,960,225 4,817,595
Advances from employees 154,592 128,624
Income taxes payable 881,454 486,763
------------ ------------
Total current liabilities 13,040,762 10,690,363
DEFERRED INCOME TAX LIABILITIES 1,826,234 1,654,383
LONG-TERM DEBT 87,431 5,727,381
DEFERRED CREDITS 886,504 928,280
------------ ------------
Total liabilities 15,840,931 19,000,407
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STOCKHOLDERS' EQUITY:
Preferred stock 5,000,000 shares authorized
as of September 30, 2002, and December 31,
2001, no shares issued
Common stock - no par value;
20,000,000 shares authorized,
13,767,649 and 13,242,914 shares
issued at September 30, 2002
and December 31, 2001, respectively 28,787,711 25,958,295
Retained earnings 30,507,177 22,353,053
Accumulated other comprehensive loss (561,335) (652,940)
------------ ------------
Total stockholders" equity 58,733,553 47,658,408
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS" EQUITY $ 74,574,484 $ 66,658,815
============ ============
See Notes to Consolidated Financial Statements
4
MERIT MEDICAL SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2002 and 2001 (Unaudited)
- --------------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------------------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
NET SALES $ 29,341,129 $ 25,694,128 $ 86,802,667 $ 78,746,516
COST OF SALES 16,784,463 15,968,517 51,061,143 50,375,374
------------ ------------ ------------ ------------
GROSS PROFIT ` 12,556,666 9,725,611 35,741,524 28,371,142
------------ ------------ ------------ ------------
OPERATING EXPENSES:
Selling, general and administrative 6,965,367 6,051,068 20,654,795 18,215,271
Research and development 967,248 944,205 2,875,416 3,165,068
------------ ------------ ------------ ------------
Total operating expenses 7,932,615 6,995,273 23,530,211 21,380,339
------------ ------------ ------------ ------------
INCOME FROM OPERATIONS 4,624,051 2,730,338 12,211,313 6,990,803
OTHER EXPENSE (INCOME) - NET (10,764) 130,814 75,696 99,389
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAX EXPENSE 4,634,815 2,599,524 12,135,617 6,891,414
INCOME TAX EXPENSE 1,509,412 854,528 3,981,493 2,101,200
------------ ------------ ------------ ------------
NET INCOME $ 3,125,403 $ 1,744,996 $ 8,154,124 4,790,214
============ ============ ============ ============
EARNINGS PER COMMON SHARE:
Basic $ .23 $ .14 $ .60 $ .38
============ ============ ============ ============
Diluted $ .21 $ .12 $ .56 $ .37
============ ============ ============ ============
AVERAGE COMMON SHARES:
Basic 13,704,060 12,884,216 13,552,053 12,469,934
============ ============ ============ ============
Diluted 14,815,151 14,053,110 14,658,275 13,092,283
============ ============ ============ ============
See Notes to Consolidated Financial Statements
5
MERIT MEDICAL SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001 (Unaudited)
- ------------------------------------------------------------------------------
September 30, September 30,
2002 2001
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 8,154,124 $ 4,790,214
------------ ------------
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 3,380,893 3,442,261
Bad debt expense 190,837 184,787
Losses (gains) on sales and abandonment of
property and equipment 543 (785,695)
Amortization of deferred credits (117,507) (126,697)
Abandonment of certain patents and trademarks 198,511
Deferred income taxes 171,851 87,695
Changes in operating assets and liabilities net of
effects from acquisitions:
Trade receivables 335,414 (1,195,406)
Employee and related party receivables 86,956 93,249
Irish Development Agency grant receivable 153,813 245,423
Inventories 664,266 3,434,816
Investments (35,860)
Prepaid expenses (156,524) (35,664)
Deposits (480) 6,019
Trade payables (71,433) (6,513)
Accrued expenses 2,142,630 2,860,773
Advances from employees 25,968 44,511
Income taxes payable 394,691 525,412
------------ ------------
Total adjustments 7,364,569 8,774,971
------------ ------------
Net cash provided by operating activities 15,518,693 13,565,185
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures for:
Property and equipment (6,581,837) (2,803,991)
Intangible assets (174,140)
Proceeds from the sale of property and equipment 2,498 939,198
------------ ------------
Net cash used in investing activities (6,579,339) (2,038,933)
------------ ------------
Continued on page 7
See Notes to Consolidated Financial Statements
6
MERIT MEDICAL SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001 (Unaudited)
- -------------------------------------------------------------------------------
September 30, September 30,
2002 2001
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 2,829,416 4,896,716
Principal payments on long-term debt (5,781,407) (16,170,902)
------------ ------------
Net cash used in financing activities (2,951,991) (11,274,186)
------------ ------------
EFFECT OF EXCHANGE RATES ON CASH 91,605 (15,452)
------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 6,078,968 236,614
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 341,690 412,384
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 6,420,658 $ 648,998
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH-FLOW
INFORMATION Cash paid during the period for:
Interest (including capitalized interest
of $17,282 and $71,056, respectively) $ 103,578 $ 948,131
============ ============
Income taxes $ 1,488,830 $ 144,502
============ ============
SUPPLEMENTAL DISCLOSURES OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
During the nine months ended September 30, 2001 the Company issued notes payable
totaling $271,169 for manufacturing equipment, and furniture and fixtures.
See Notes to Consolidated Financial Statements
7
MERIT MEDICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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1. Basis of Presentation. The interim financial statements for the three and
nine months ended September 30, 2002 and 2001, are not audited and the balance
sheet as of December 31, 2002, is derived from audited financial statements. The
financial statements are prepared in accordance with the requirements for
unaudited interim periods and, consequently, do not include all disclosures
required for audited financial statements. 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 September 30, 2002 and December
31, 2001, and the results of its operations and cash flows for the three and
nine months ended September 30, 2002 and 2001, and its cash flows for the nine
months ended September 30, 2002 and 2001. The results of operations for the
three and nine months ended September 30, 2002 and 2001 are not necessarily
indicative of the results for a full-year period.
2. Inventories. Inventories at September 30, 2002 and December 31, 2001
consisted of the following:
September 30, December 31,
2002 2001
------------- --------------
Raw materials $ 7,478,915 $ 7,501,253
Work-in-process 3,983,578 3,001,250
Finished goods 12,392,962 13,716,474
Less reserve for obsolete inventory (3,696,105) (3,395,361)
------------- --------------
Total $ 20,159,350 $ 20,823,616
============= =============
3. Income Taxes. The Company has not fully allocated income tax expense between
current and deferred for the quarters ended September 30, 2002 and 2001. The
effective tax rates for the three and nine months ended September 30, 2002 and
2001 were below the 35% federal statutory rate. Improvements in the effective
tax rate below the 35% federal statutory rate were largely the result of the
Company's operations in Ireland which are currently taxed at a lower rate than
the Company's overall effective tax rate as well as credits received from
research and development expenditures.
4. Reporting Comprehensive Other than Net Income. 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 September 30, 2002 and December 31, 2001, the cumulative effect of such
transactions reduced stockholders' equity by $561,335 and $652,940,
respectively. Comprehensive income for the three and nine months ended September
30, 2002 and 2001 is shown as follows:
Three months ended Nine months ended
--------------------------- ---------------------------
September 30, September 30,
------------- -------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
Net income $ 3,125,403 $ 1,744,996 $ 8,154,124 $ 4,790,214
Foreign currency translation 1,544 41,058 91,605 (15,452)
----------- ----------- ----------- -----------
Comprehensive income $ 3,126,947 $ 1,786,054 $ 8,245,729 $ 4,774,762
============ =========== =========== ===========
8
MEDICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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5. Goodwill and Other Intangible Assets. The Company has adopted, effective
January 1, 2002, Statement of Financial Accounting Standards (SFAS) No. 142,
Goodwill and Other Intangible Assets. Under SFAS No. 142, the Company will no
longer amortize goodwill from past business acquisitions and will review
annually the impairment of goodwill, or more frequently if impairment indicators
arise. The Company has completed its initial testing of goodwill and has
determined that there is no impairment. The unamortized amount of goodwill at
December 31, 2001, was $4.8 million. As of July 1, 2002, the Company updated
it's testing of goodwill for impairment and has determined that there is no
impairment.
With the adoption of SFAS No. 142, the Company reassessed the useful lives and
residual values of all acquired intangible assets to make any necessary
amortization period adjustments. Based on that assessment, no adjustments were
made to the amortization period or residual values of other intangible assets.
The following table reconciles net income and earnings per share information for
the three and nine months ended September 30, 2002 and 2001, for the
non-amortization provision of goodwill for SFAS No. 142:
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------------- --------------------------------
2002 2001 2002 2001
----------------------------------- --------------------------------
Reported net income $3,125,403 $1,744,996 $8,154,124 $4,790,214
Add back: goodwill amortization, net of tax -- 116,166 -- 223,396
--------------- --------------- -------------- --------------
Adjusted net income $3,125,403 $1,861,162 $8,154,124 $5,013,610
=============== =============== ============== ==============
Basic earnings per share:
Reported earnings per common share $0.23 $0.14 $0.60 $0.38
Add back: goodwill amortization, net of tax .00 0.02
--------------- --------------- -------------- --------------
Adjusted earnings per common share $0.23 $0.14 $0.60 $0.40
=============== =============== ============== ==============
Diluted earnings per share:
Reported earnings per common share $0.21 $0.12 $0.56 $0.37
Add back: goodwill amortization, net of tax 0.01
--------------- --------------- -------------- --------------
Adjusted earnings per common share $0.21 $0.13 $0.56 $0.38
=============== =============== ============== ==============
The following table reflects the components of intangible assets as of September
30, 2002:
Gross Carrying Accumulated
Amount Amortization Net
------------------------------------------------------------------
Amortized Intangible Assets
Patents $2,351,547 (631,890) 1,719,657
Trademarks 342,202 (175,390) 166,812
Licenses 591,004 (360,648) 230,356
-----------------------------------------------------------------
Total $3,284,753 $(1,167,928) 2,116,825
=================================================================
Unamortized Intangible Assets:
Goodwill $5,477,356 $ (712,760) $4,764,596
=================================================================
9
MERIT MEDICAL SYSTEMS, INC.
Estimated amortization expense for the intangible assets for the current year
and five succeeding fiscal years is as follows:
Aggregate Amortization Expense:
- ---------------------------------------------
For year ended 12/31/2002 $235,596
Estimated Amortization Expense:
- ----------------------------------------------
For year ended 12/31/2003 $203,940
For year ended 12.31/2004 183,385
For year ended 12/31/2005 177,286
For year ended 12/31/2006 174,496
For year ended 12/31/2007 $172,283
6. Recently Issued Accounting Standards. In June 2002, the Financial Accounting
Standards ("FASB") issued SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities. SFAS No. 146 requires recording costs associated
with exit or disposal activities at their fair values when a liability has been
incurred. Under previous guidance, certain exit costs were accrued upon
management's commitment to an exit plan, which is generally before a liability
has been incurred. The Company will adopt SFAS No. 146 as of January 1, 2003.
The adoption of SFAS No. 146 is not expected to materially impact the Company's
consolidated results of operations, financial position, or cash flow.
In August 2001, the FSAB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. SFAS No. 144 supercedes SFAS No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of, but retains the requirements relating to recognition and measurements of an
impairment loss and resolves certain implementation issues resulting from SFAS
No. 121. SFAS No. 144 was adopted by the Company on January 1, 2002 and did not
have a material impact on the results of operations or financial condition of
the Company.
ITEM 2:
MANAGEMENT"S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Cautionary Statement Regarding Forward-Looking Statements
This Management's Discussion and Analysis of Financial Condition and
Results of Operations should be read in conjunction with the accompanying
Consolidated Financial Statements and related notes included elsewhere in this
Quarterly Report. In addition to historical information, this Quarterly Report
on Form 10-Q contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934. These statements relate to our, and in some cases our customers or
partners', future plans, objectives, expectations, intentions and financial
performance and the assumptions that underlie these statements. These
forward-looking statements include, but are not limited to, statements regarding
the following:
o 0perating expenses;
o the impact of quarterly fluctuations of revenue and operating
results;
o our expectations concerning manufacturing and operating
efficiencies;
o levels of sales;
o future investments in or acquisitions of complementary companies,
products or technologies;
o levels of capital expenditures;
o staffing and expense levels;
o international operations; and
o adequacy of our capital resources to fund operations and growth.
10
MERIT MEDICAL SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
- --------------------------------------------------------------------------------
These statements involve known and unknown risks, uncertainties and other
factors that may cause industry trends or our actual results, level of activity,
performance or achievements to be materially different from any future results,
levels of activity, performance or achievements expressed or implied by these
statements. These factors include market acceptance of our products, product
introductions, the timing of price increases, fluctuations in and obsolescence
of inventory, price and product competition, delays in obtaining regulatory
approvals, recalls, availability and costs associated with labor and materials,
development of new products and techniques that render the Company's products
obsolete, product liability claims, foreign currency fluctuation, changes in
health care markets related to health care reform initiatives and those listed
under "Factors That May Affect Future Results" in this Quarterly Report on Form
10-Q.
Although the Company believes that expectations reflected in the forward-looking
statements are reasonable, the Company cannot guarantee future results, levels
of activity, performance or achievements. The Company will not update any of the
forward-looking statements after the date of this Quarterly Report on Form 10-Q
to conform these statements to actual results or changes in our expectations,
except as required by law. You should not place undue reliance on these
forward-looking statements, which apply only as of the date of this Quarterly
Report on Form 10-Q. You should carefully review the risk factors described in
other documents that we file from time to time with the Securities and Exchange
Commission.
Critical Accounting Policies and Estimates. In December 2001, the SEC requested
that all registrants discuss their most critical accounting policies. The SEC
indicated that a "critical accounting policy" is one which is both important to
the representation of the Company's financial condition and results and requires
management's most difficult, subjective or complex judgments, often as a result
of the need to make estimates about the effect of matters that are inherently
uncertain. The Company bases estimates on past experience and on various other
assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about carrying values of
assets and liabilities that are not readily apparent from other sources. Actual
results may differ from these estimates under different assumptions or
conditions. The following are the Company's most critical accounting policies:
Inventory Obsolescence Reserve: The Company writes down its inventory for
estimated obsolescence for unmarketable and slow moving products that may expire
prior to being sold. If market conditions become less favorable than those
projected by management, additional inventory write-downs may be required. The
Company's obsolescence reserve was $3.7 million on September 30, 2002.
Allowance for Doubtful Accounts: The Company maintains allowances for doubtful
accounts for estimated losses resulting from the inability of customers to make
required payments. The allowance is based upon historical experience and current
customer information. If the financial condition of the Company's customers were
to deteriorate, resulting in an impairment of their ability to make payments,
additional allowances may be required. The Company's bad debt reserve was
$600,561 at September 30, 2002, in line with its historical experience with
collection of receivables.
Overview
Merit Medical Systems, Inc. reported its best quarter and nine months in
history, with record revenues and earnings. Company sales increased over 14% for
the third quarter of 2002 compared to the third quarter of 2001, across all
product lines, particularly custom kits and stand-alone products. Continued
positive momentum in manufacturing efficiency has resulted in favorable labor
and overhead utilization as compared to the first nine months of 2001.
Management has continued to reduce inventory, with a reduction of approximately
$0.7 million since December 31, 2001 and over $8 million during the last 32
months. This reduction in inventory has resulted in lower inventory carrying
costs. The Company's cash flow from operations was $15.5 million for the first
nine months of 2002, and the Company was able to pay off its long-term debt
during this period and began to build substantial cash in the past 6 months.
Therefore, in just over 19 months the Company was able to pay off its long-term
debt by approximately $32 million. This lower debt, combined with growing cash
balances, has resulted in a shift from net interest expense to net interest
income.
Management is pleased to report that the fundamental financial performance of
the Company has improved over the last year in almost every area. Sales are up,
productivity has increased, gross margins have improved, operating expenses have
dropped as a percentage of sales, and debt balances and interest costs are down
significantly, resulting in much improved cash flow, net income, and earnings
per share. The Company is also in a much better position to invest in the
11
MERIT MEDICAL SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
- --------------------------------------------------------------------------------
long-term growth of expanded products. While the Company expects continued
improvement on a number of fronts, the improvements will not be dramatic as they
have been over the last year as much of the benefit of management's initiatives
to reduce costs and increase operating efficiencies have been realized and
continued improvements will be more gradual.
Operations. The Company"s sales and earnings for the three and nine months ended
September 30, 2002, improved compared to the same periods in 2001. The following
table sets forth certain operational data as a percentage of sales for the three
and nine months ended September 30, 2002 and 2001.
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
---- ---- ---- ----
Sales 100.0 % 100.0 % 100.0 % 100.0 %
Gross Profit 42.8 37.9 41.2 36.0
Selling, General and Administrative 23.7 23.6 23.8 23.1
Research & Development 3.3 3.7 3.3 4.0
Income From Operations 15.8 10.6 14.1 8.9
Other Expense .0 .5 .1 1.1
Net Income 10.7 6.8 9.4 6.1
Sales. Sales for the third quarter of 2002 were $29.3 million compared to $25.7
million for the same period last year, which represents a gain of 14 percent.
During the quarter, the Company's stand-alone device sales increased by 22
percent, and custom kit business grew by 17 percent compared to the quarter
ended September 30, 2001. Sales of both inflation devices and catheters grew by
8 percent. Growth in all product sales reflects continued market share gains and
acceptance of the Company's products, as well as increased hospital procedures.
For the nine-month period ended September 30, 2002, total sales were
$86.8million compared with $78.7 million for the same period in 2001, a gain of
11 percent. These gains were led by sales of the Company's stand alone devices,
which rose 12 percent; and custom kits, which grew by 11 percent. Inflation
devices and catheter sales increased by 9%, for the nine month period of 2002
compared to the same periods of 2001.
Gross Profit. Gross profit as a percentage of sales for the third quarter of
2002 was 42.8% compared to 37.9% for the same period of 2001. For the nine
months ended September 30, 2002, gross profit was 41.2% compared to 36.0% for
the first nine months of 2001. The increase in gross profit for the three and
nine months ended September 30, 2002, was primarily due to the much higher
productivity from both labor and overhead applications compared to a year ago as
well as cost reduction programs in the purchase of materials. Gross margins as a
percent of sales have improved quarter to quarter as well, from 41.8% in the
second quarter ended June 30, 2002, to 42.8% in the third quarter of 2002 as a
result of the Company's efforts to reduce inventory, lower costs and increase
employee productivity.
Operating Expenses. Operating expenses were 27.0% of sales for the three months
ended September 30, 2002 compared to 27.3% for the third quarter of 2001. For
the first nine months of 2002 operating expenses decreased to 27.1% compared to
27.2% for the same period in 2001 Selling, general and administrative expenses
as a percentage ofsales were 23.7% and 23.8%, respectively, for the three and
nine months ended September 30, 2002, compared to 23.6% and 23.1%, respectively,
for the same periods in 2001. Research and development costs declined to 3.3% of
sales for both the three and nine months ended September 30, 2002, down from
3.7% and 4.0% of sales, respectively, for the same periods of 2001.
Operating and Net Income. During the quarter ended September 30, 2002, the
Company reported income from operations of $4.6 million compared to $2.7 million
for the comparable period in 2001, an increase of 69%. Operating income for the
first nine months of 2002 was $12.2 million verses $7.0 million for the same
period in 2001, an increase of 76%. Net income has also increased significantly
to $3.1 million for the 3rd Quarter of 2002 up 79% from the $1.7 million for the
3rd Quarter of 2001. Similarly, the nine months of 2002 net income was $8.2
million up 70% over the $4.8 million for the first nine months of 2001.
12
MERIT MEDICAL SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
- --------------------------------------------------------------------------------
The increase. in both income operating income and net income for the three and
nine months ended September 30, 2002 was mainly attributable to the improvement
in gross margins discussed above, as well as increased sales, and lower interest
costs.
Liquidity and Capital Resources. At September 30, 2002, the Company's working
capital was $29.5 million which represented a current ratio of 3.3 to 1. During
the nine months ended September 30, 2002 the principal sources of funds were
$15.5 million generated from operations and $2.8 million from the issuance of
common stock. During this same period, $5.8 million was used to pay down
long-term debt and $6.6 million to purchase plant and equipment. These factors
resulted in an increase of $6.1 million in cash for the nine months ended
September 30, 2002.
In March 2000, the Company increased its long-term revolving credit facilities
with a bank to $35 million for a term of six years. During September 2001, the
Company voluntarily reduced its line of credit under this obligation to $8
million. The credit facility bears interest at or below the bank"s prime rate,
or can be fixed at between 140 and 160 points over LIBOR and contains various
conditions and restrictions. At September 30, 2002, the outstanding balance
under the credit facility was zero. 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, particularly with acquisitions and the introduction
of new product lines. Management expects cash flow requirements to continue at
similar levels in the near future with the possible exception of an increase in
plant capacity in Ireland as well as Utah, starting in 2003 but more likely
2004. The Company's principal source of funding for these and other expenses has
been the cash generated from operations, the sale of equity, secured loans on
equipment and bank credit facilities. The Company believes that its present
sources of liquidity and capital are adequate for its current operations.
Risk Factors.
The market price for our common stock may be particularly volatile, and our
stockholders may be unable to resell their shares at profit.
The market price of our common stock could be subject to significant
fluctuations and may decline. The stock markets have experienced significant
price and trading volume fluctuations. The market for technology stocks,
particularly following an initial public offering, has been extremely volatile
and frequently reaches levels that bear no relationship to the past or present
operating performance of those companies. General economic conditions, such as
recession or interest rate or currency rate fluctuations in the United States or
abroad, could negatively affect the market price of our common stock. In
addition, our operating results potentially could be below the expectations of
securities analysts and investors. If this were to occur, the market price of
our common stock would likely significantly decrease. In the past, following
periods of volatility in the market price of a company's securities, securities
class action litigation has often been instituted against that company. Such
litigation could result in substantial cost and a diversion of management's
attention and resources.
The market price of our common stock may fluctuate in response to various
factors, some of which are beyond our control. These factors include the
following:
o changes in market valuations or earnings of our competitors or
other technology companies;
o actual or anticipated fluctuations in our operating results;
o changes in financial estimates or investment recommendations by
securities analysts who follow our business;
o the loss of key personnel;
o our sale of common stock or other securities in the future;
o intellectual property or litigation developments;
o changes in business or regulatory conditions; and
o the trading volume of our common stock.
Competition. The market for each of the products sold by the Company, or
proposed to be sold, is highly competitive. The Company faces substantial
competition from several companies, including many which are larger, better
established and have greater financial, technical and other resources. There is
no assurance that the Company will be able to compete successfully against such
companies in the future. The ability of the Company to compete successfully is
dependent, in part on its ability to
13
MERIT MEDICAL SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
- --------------------------------------------------------------------------------
respond effectively to changes in technology and to develop and market new
products which achieve significant market acceptance, of which there can be no
assurance. Companies with substantially greater resources than the Company and
others are actively engaged in research and development of other diagnostic and
interventional methods, treatments and procedures that could render the
Company's products obsolete or limit the market for such products.
Dependence on Proprietary Technology. Proprietary technology is important to the
Company in the development and manufacture of its products. The Company seeks to
protect its technology through a combination of patents, trade secrets,
proprietary know-how and confidentiality agreements. While the Company has
obtained U.S. patents and filed additional U.S. and foreign patents
applications, there can be no assurance that issued patents will provide the
Company with any competitive advantages or will not be challenged by third
parties or that the patents of others will not have an adverse effect on the
ability of the Company to conduct its business. The Company could concur
substantial costs in seeking enforcement of its patents against infringement or
the unauthorized use of its proprietary technology by others or in defending
itself against similar claims or others. Insofar as the Company relies on trade
secrets and proprietary know-how to maintain its competitive position, there can
be no assurance that others may not independently develop similar or superior
technologies.
Product Liability. The sale and use of its products entails an inherent risk
that product liability claims may be asserted against the Company. The Company
maintains product liability insurance in the amount of $1,000,000 per occurrence
and $5,000,000 in the aggregate which may not be adequate for expenses or
liabilities actually incurred.
Dependence on Key Personnel. The Company's continued success is dependent on key
management personnel, including Fred P. Lampropoulos, its Chairman of the Board,
President and Chief Executive Officer on whom it maintains key man life
insurance of $2,000,000. The loss of Mr. Lampropoulos or of certain other key
management personnel could materially adversely affect the Company. The success
of the Company will also depend among other factors, on the successful
recruitment and retention of key personnel.
Regulation and Reimbursement Limits. The products manufactured by the Company
are "devices" as defined in the Federal Food, Drug and Cosmetic Act, and are
subject to regulation by the Food and Drug Administration (the "FDA") with
respect to manufacturing, distributing, record keeping, labeling and advertising
in the U.S. The Company's products are also subject to similar regulation in
various foreign countries in which the Company's products are offered and sold.
Further, the Company is subject to continual review and periodic inspections at
its current and proposed facilities with respect to Quality Systems Regulations
and Standards enforced by the FDA and other government agencies outside the
United States. The Company believes it is in material compliance with all
applicable requirements but is unable to predict what additional government
regulations, if any, affecting its business may be promulgated in the future.
The Company's business could be adversely affected by failure to comply with all
applicable regulations.
The cost of a significant portion of medical care is funded by governmental, or
other insurance programs. Limits on reimbursement imposed by such programs may
adversely affect the ability of hospitals and others to purchase the Company's
products. In addition, limitations on reimbursement for procedures which utilize
the Company's products could adversely affect sales.
Fluctuations in the value of foreign currencies could result in currency
transaction losses.
As we expand our international operations, we expect that our international
business will increasingly be conducted in foreign currencies. Fluctuations in
the value of foreign currencies relative to the United States Dollar have
caused, and we expect such fluctuation to increasingly cause, currency
transaction gains and losses. We cannot predict the effect of exchange rate
fluctuations upon future quarterly and annual operating results. We may
experience currency losses in the future. We have adopted a limited hedging
program to help protect us from risk associated with foreign currency
fluctuations. (see item 3 Market risk disclosures)
Our quarterly operating results are difficult to predict, and if we do not meet
quarterly financial expectations of securities analysts or investors, our stock
price is likely to decline.
Our quarterly revenue and operating results are somewhat difficult to predict
and may fluctuate from quarter to quarter. It is possible that our operating
results in some quarters will be below market expectations. If this happens, the
market price of our common stock is likely to decline. As a result, we believe
that quarter-to-quarter comparisons of our financial results are not necessarily
14
MERIT MEDICAL SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
- --------------------------------------------------------------------------------
meaningful, and you should not rely on them as a indication of our future
performance. Fluctuations in our future quarterly operating results may be
caused by many factors, including:
o changes in demand for our products;
o any downturn in our customers' and potential customers businesses,
the domestic economy or international economies where our customers
and potential customers do business;
o the timing of product releases by us or by our competitors;
o changes in the mix of revenue attributable to or from higher-margin
products.
Future acquisitions could require significant management attention and prove
difficult to integrate with our business, which could distract our management,
disrupt our business, dilute stockholder value and adversely affect our
operating results.
As part of our strategy, we intend to continue to make investments in or
acquisitions of complementary companies, products or technologies. If we fail to
integrate successfully any future acquisitions, or the technologies associated
with such acquisitions, into our company, the revenue and operating results of
the combined company could decline. Any integration process will require
significant time and resources, and we may not be able to manage the process
successfully. We may not successfully be able to evaluate or utilize the
acquired technology and accurately forecast the financial impact of an
acquisition transaction, including accounting charges. Acquisitions involve a
number of difficulties and risks to our business, including the following.
o Potential adverse effects on our operating results;
o Integration of acquired technologies with our existing products and
technologies;
o Integration of management information systems, personnel, research
and development, and marketing, sales and support operations;
o Potential loss of key employees from the acquired company; and
o Diversion of management's attention from other business concerns.
Further, we may have to incur debt or issue equity securities to pay for any
future acquisitions, either of which could affect the market price of our common
stock. The sale of additional equity or convertible debt could result in
dilution of our stockholders. The incurrence of indebtedness would result in
increased fixed obligations and could also include covenants or other
restrictions that would impede our ability to manage our operations.
Item 3: Quantitative and Qualitative Disclosure About Market Risk.
Market Risk Disclosures. The Company principally hedges the EURO. 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.
ITEM 4:
CONTROLS AND PROCEDURES
Based on their evaluations as of a date within 90 days of the filing date of
this report, the principal executive officer and principal financial officer of
the Company have concluded that the Company's disclosure controls and procedures
(as defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act)
are effective to ensure that information required to be disclosed by the Company
in reports that the Company files or submits under the Securities Exchange Act
is recorded, processed, summarized and reported within the time periods
specified in the rules and forms of the SEC.
15
MERIT MEDICAL SYSTEMS, INC.
PART II - OTHER INFORMATION
ITEM 4: Exhibits and Reports on Form 8-K
(a) Reports on Form 8-K - none
(b) Exhibits - The following exhibits are included with this
report on Form 10-Q:
Exhibit 99.1 - Certification of Fred P. Lampropoulos
pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section
906 of the Sarbanes - Oxley Act of 2002.
Exhibit 99.2 - Certification of Kent W. Stanger pursuant to
18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the
Sarbanes - Oxley Act of 2002.
ITEM 5: Other Information
In compliance with Section 202 of the Sarbanes-Oxley Act of 2002, the Audit
Commitee of the Board of Directors of the Registrant has approved the continuing
provision of certain non-audit services of Deloitte & Touche LLP, the
Registrant's independent auditor. Such services include tax and tax-related
services.
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.
Date: NOVEMBER 13, 2002 /s/: FRED P. LAMPROPOULOS
----------------------- -----------------------------------
FRED P. LAMPROPOULOS
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Date: NOVEMBER 13, 2002 /s/: KENT W. STANGER
----------------------- -----------------------------------------
KENT W. STANGER
VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
16
MERIT MEDICAL SYSTEMS, INC.
CERTIFICATION PURSUANT TO RULE 13A-14
OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Fred P. Lampropoulos, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Merit Medical
Systems, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the period presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
(b) evaluate the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee or registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002.
/s/ Fred P. Lampropoulos
------------------------
17
MERIT MEDICAL SYSTEMS, INC.
CERTIFICATION PURSUANT TO RULE 13A-14
OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED,
AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Kent W. Stanger, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Merit Medical
Systems, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the period presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
(b) evaluate the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee or registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002.
/s/ Kent W. Stanger
----------------------
18