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, 2003.
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
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State or other jurisdiction (I.R.S. Identification No.)
of incorporation or organization)
1600 West Merit Parkway, South Jordan UT, 84095
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(Address of Principal Executive Offices)
(801) 253-1600
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(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
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 14,164,591
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TITLE OR CLASS Number of
Shares Outstanding at
May 12, 2003
MERIT MEDICAL SYSTEMS, INC.
INDEX TO FORM 10-Q
PART I. FINANCIAL INFORMATION PAGE
----
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 2003
and December 31, 2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Consolidated Statements of Income for the Three Months
Ended March 31, 2003 and 2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Cash Flows for the Three Months
Ended March 31, 2003 and 2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Item 3. Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . . . . 13
Item 4. Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
CERTIFICATIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . 16
8
PART I - FINANCIAL INFORMATION
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ITEM 1. FINANCIAL STATEMENTS
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MERIT MEDICAL SYSTEMS, INC.
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CONSOLIDATED BALANCE SHEETS
MARCH 31, 2003 AND DECEMBER 31, 2002 (Unaudited)
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March 31, December 31,
ASSETS 2003 2002
------------ ------------
CURRENT ASSETS:
Cash and cash equivalents $ 16,165,429 $ 9,683,578
Short-term investments 273,258 217,451
Trade receivables - net 16,188,869 15,247,892
Other receivables 997,765 1,209,804
Employee and related
party receivables 69,004 299,751
Inventories 17,701,170 18,699,217
Prepaid expenses and other assets 854,712 667,151
Deferred income tax assets 153,150 143,265
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Total current assets 52,403,357 46,168,109
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PROPERTY AND EQUIPMENT:
Land 2,772,961 2,034,522
Building 5,118,683 5,118,683
Manufacturing equipment 26,250,208 25,577,837
Automobiles 87,536 87,536
Furniture and fixtures 11,033,311 10,823,852
Leasehold improvements 4,390,871 4,345,620
Construction-in-progress 3,371,975 3,008,734
------------ ------------
Total 53,025,545 50,996,784
Less accumulated depreciation
and amortization (26,632,937) (25,584,648)
------------ ------------
Property and equipment - net 26,392,608 25,412,136
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OTHER ASSETS:
Patents, trademarks and licenses - net 1,864,360 1,927,160
Deposits 32,163 33,213
Goodwill - net 4,764,596 4,764,596
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Total other assets 6,661,119 6,724,969
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TOTAL ASSETS $ 85,457,084 $ 78,305,214
============ ============
(Continued)
See Notes to Consolidated Financial Statements
1
MERIT MEDICAL SYSTEMS, INC.
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CONSOLIDATED BALANCE SHEETS
MARCH 31, 2003 AND DECEMBER 31, 2002 (Unaudited)
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March 31, December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 2003 2002
- ------------------------------------ ------------ ------------
CURRENT LIABILITIES:
Current portion of long-term debt $ 308,995 $ 400,182
Trade payables 4,118,945 4,121,577
Accrued expenses 6,964,791 6,618,407
Advances from employees 188,840 161,529
Income taxes payable 2,307,132 284,148
------------ ------------
Total current liabilities 13,888,703 11,585,843
DEFERRED INCOME TAX LIABILITIES 2,447,421 2,443,156
LONG-TERM DEBT -- 16,693
DEFERRED CREDITS 749,582 860,931
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Total liabilities 17,085,706 14,906,623
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STOCKHOLDERS' EQUITY:
Preferred stock- 5,000,000 shares authorized
no shares issued
Common stock- no par value; 20,000,000 shares
authorized; 14,146,544 and 13,864,052 shares
issued at March 31, 2003 and December 31, 2002,
respectively 31,479,594 30,265,963
Accumulated other comprehensive loss (523,496) (530,455)
Retained earnings 37,415,280 33,663,083
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Total stockholders' equity 68,371,378 63,398,591
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 85,457,084 $ 78,305,214
============ ============
See Notes to Consolidated Financial Statements
2
MERIT MEDICAL SYSTEMS, INC.
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CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002 (Unaudited)
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March 31, March 31,
2003 2002
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NET SALES $ 31,741,573 $ 28,672,168
COST OF SALES 18,470,384 17,520,388
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GROSS PROFIT 13,271,189 11,151,780
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OPERATING EXPENSES:
Selling, general and administrative 7,189,547 6,705,248
Research and development 1,116,402 963,289
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TOTAL OPERATING EXPENSES 8,305,949 7,668,537
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INCOME FROM OPERATIONS 4,965,240 3,483,243
Other (income) expense (68,106) 60,362
Litigation settlement (475,000)
Gain on sale of land (325,495)
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TOTAL OTHER (INCOME) EXPENSE (868,601) 60,362
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INCOME BEFORE INCOME TAXES 5,833,841 3,422,881
INCOME TAX EXPENSE 2,081,644 1,095,974
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NET INCOME $ 3,752,197 $ 2,326,907
============ ============
See Notes to Consolidated Financial Statements.
EARNINGS PER COMMON SHARE:
Basic
$ .27 $ .17
============ ============
Diluted
$ .25 $ .16
============ ============
AVERAGE COMMON SHARES:
Basic 14,081,020 13,415,144
============ ============
Diluted 14,936,476 14,511,719
============ ============
See Notes to Consolidated Financial Statements
3
MERIT MEDICAL SYSTEMS, INC.
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CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002 (Unaudited)
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March 31, March 31,
2003 2002
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,752,197 $ 2,326,907
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Adjustments to reconcile net income to net
cash provided by in operating activities:
Depreciation and amortization 1,118,482 1,111,747
Bad debt expense 65,597 42,900
Gain on sale of land and equipment (325,495) (204)
Amortization of deferred credits (41,398) (39,996)
Deferred income taxes (5,620) 32,327
Changes in operating assets and liabilities:
Short-term investments (55,807)
Trade receivables (1,006,574) (385,151)
Other receivables 212,039
Employee and related party receivables 230,747 (240,323)
Inventories 998,047 1,671,999
Prepaid expenses and other assets (187,561) (283,353)
Deposits 1,050 9
Trade payables (2,632) (326,982)
Accrued expenses 266,674 1,566,174
Advances from employees 27,311 23,871
Income taxes payable 2,022,984 970,511
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Total adjustments 3,317,844 4,143,529
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Net cash provided by operating activities 7,070,041 6,470,436
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CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures for:
Property and equipment (2,084,379) (1,297,145)
Intangible assets 29,654 37,890
Proceeds from sale of land and equipment 353,825 301
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Net cash used in investing activities (1,700,900) (1,258,954)
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See Notes to Consolidated Financial Statements
4
MERIT MEDICAL SYSTEMS, INC.
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CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002 (Unaudited)
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March 31, March 31,
2003 2002
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock $ 1,213,631 $ 569,545
Principal payments on long-term debt (107,880) (5,253,702)
Deferred credit -- 54,035
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Net cash provided by (used in) financing activities 1,105,751 (4,630,122)
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EFFECT OF EXCHANGE RATES ON CASH 6,959 6,039
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NET INCREASE IN CASH 6,481,851 587,399
CASH AT BEGINNING OF PERIOD 9,683,578 341,690
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CASH AT END OF PERIOD $ 16,165,429 929,089
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION:
Cash paid during the period for:
Interest (including capitalized interest of $0
and $17,282, respectively) $ 11,130 $ 51,510
============ ============
Income taxes $ 154,548 $ 93,136
============ ============
See Notes to Consolidated Financial Statements
5
MERIT MEDICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
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1. Basis of Presentation. The interim financial statements of Merit
Medical Systems, Inc. ("Merit," "we" or "us") for the three months ended March
31, 2003 and 2002 are not audited. The financial statements are prepared in
accordance with the requirements for unaudited interim periods, and
consequently, do not include all disclosures required to be in conformity with
accounting principles generally accepted in the United States of America. In the
opinion of management, the accompanying consolidated financial statements
contain all adjustments, except for the true-up of deferred tax balances,
consisting only of normal recurring accruals, necessary for a fair presentation
of our financial position as of March 31, 2003, and the results of its
operations and cash flows for the three months ended March 31, 2003 and 2002.
The results of operations for the three months ended March 31, 2003 and 2002 are
not necessarily indicative of the results for a full-year period.
Stock-Based Compensation. We account for stock compensation arrangements under
the provisions of Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees, (APB 25) and intend to continue to do so.
Accordingly, no compensation cost has been recognized for our stock compensation
arrangements. If the compensation cost for our compensation plans had been
determined consistent with Statement of Financial Accounting Standards (SFAS)
No. 123, Accounting for Stock-Based Compensation, our net income and net income
per common and common share equivalent would have changed to the pro forma
amounts indicated below:
Three Months Ended March 31,
2003 2002
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Net income:
As reported $ 3,752,197 $ 2,326,907
Pro forma 3,159,411 1,992,335
Net income per common share:
Basic:
As reported $ .27 $ .17
Pro forma .22 .15
Diluted:
As reported .25 .16
Pro forma .21 .14
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 2003 and 2002: dividend yield of 0%; expected
volatility of 62.60% and 63.24% for 2003 and 2002, respectively; risk-free
interest rates ranging from 3.97% to 6.71%; and expected lives ranging from 2.33
to 4.80 years.
2. Inventories. Inventories at March 31, 2003 and December 31, 2002
consisted of the following:
March 31, December 31,
2003 2002
------------ ------------
Raw materials $ 8,422,271 $ 10,223,180
Work-in-process 3,682,242 2,343,500
Finished goods 8,233,476 8,900,959
Less reserve for obsolete inventory (2,636,819) (2,768,422)
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Total $ 17,701,170 $ 18,699,217
============ ============
6
MERIT MEDICAL SYSTEMS, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued
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3. Reporting Comprehensive Income. Comprehensive income for the three months
ended March 31, 2003 and 2002, consisted of net income and foreign currency
translation adjustments. As of March 31, 2003 and December 31, 2002, the
cumulative effect of such adjustments reduced stockholders' equity by $523,496
and $530,455, respectively. Comprehensive income for the three months ended
March 31, 2003 and 2002 has been computed as follows:
Three Months Ended
March 31,
-----------------------
2003 2002
---------- ----------
Net income $3,752,197 $2,326,907
Foreign currency translation 6,959 6,039
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Comprehensive income $3,759,156 $2,332,946
========== ==========
4. Recently Issued Accounting Standards. In November 2002, the Financial
Accounting Standards Board (FASB) issued Financial Accounting Standards Board
Interpretation No. ("FIN") 45, Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others, which require the guarantor to recognize as a liability the fair value
of the obligation at the inception of the guarantee. The disclosure requirements
in FIN 45 were effective for financial statements of interim or annual periods
ending after December 15, 2002. We adopted the initial recognition and
measurement provisions in FIN 45, effective January 1, 2003. As of March 31,
2003, there were no guarantees required to be disclosed or recorded in the
financial statements under FIN 45.
In January 2003, the Financial Accounting Standards Board issued FASB
Interpretation No. (FIN) 46, "Consolidation of Variable Interest Entities." FIN
46 addresses the requirements for business enterprises to consolidate related
entities, for which they do not have controlling interests through voting or
other rights, if they are determined to be the primary beneficiary as a result
of variable economic interests. FIN 46 provides guidance for determining the
primary beneficiary for entities with multiple economic entities with multiple
economic interests. FIN 46 is effective at the time of investment for interests
obtained in a variable economic entity after January 31, 2003. Beginning in the
second quarter of fiscal year 2004, FIN 46 applies to interests in variable
interest entities (VIE) acquired prior to February 1, 2003. The adoption of FIN
46 is not expected to have a material impact on our consolidated earnings,
financial position, or cash flows since we have no VIE.
5. Stock Split. On April 8, 2002 we effected a five-for-four stock split.
All earnings per share and share data have been adjusted to reflect the split.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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Disclosure Regarding Forward-Looking Statements
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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 Act of 1934, as amended (the "Exchange Act"). All statements other than
statements of historical fact are "forward-looking statements" for purposes 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 Report are made as of the date hereof and are based
on information available to us as of such date. We assume 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 we
believe 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,
7
and actual results will vary, and may vary 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 our products,
product introductions, potential product recalls, delays in obtaining regulatory
approvals, or the failure to maintain such approvals, cost increases,
fluctuations in and obsolescence of inventory, price and product competition,
availability of labor and materials, development of new products and technology
that could render our products obsolete, product liability claims, modification
or limitation of governmental or private insurance reimbursement procedures,
infringement of our technology or the assertion that our technology infringes
the rights of other parties, foreign currency fluctuations, challenges
associated with the Company's growth strategy changes in health care markets
related to health care reform initiatives and other factors referred to in our
press releases and reports filed with the Securities and Exchange Commission
(the "SEC"). All subsequent forward-looking statements attributable to Merit or
persons acting on its behalf are expressly qualified in their entirety by these
cautionary statements. Additional factors that may have a direct bearing on our
operating results are described under "Factors That May Affect Future Results"
beginning on page 10.
Overview
- --------
During the three months ended March 31, 2003 we experienced our best quarter
performance in history, with record revenues and earnings. We reported net
income of $3.8 million, or $.25 per share, on revenues of $31.7 million for the
three months ended March 31, 2003. For the comparable period of 2002, we
reported net income of $2.3 million, or $.16 per share, on revenues of $28.7
million. During the three months ended March 31, 2003 our sales increased by
more than 11% compared to the same period in 2002. Additionally, during the
three months ended March 31, 2003, we settled a legal dispute, which generated
approximately $475,000 in settlement proceeds, and sold a parcel of land
adjacent to our principal facilities, which generated sales proceeds in the
amount of $325,495. These two events increased net income for the quarter by
approximately $512,317 (net of tax) or $.03 per share.
Our management has continued its efforts to reduce inventory with an additional
reduction of almost $1.0 million since December 31, 2002 and over $11 million
during the last three years. Inventory turns improved during the three months
ended March 31, 2003 to 3.73 times per year from 3.12 times per year for the
same period of 2002. The improvement contributed to lower inventory carrying
costs for the three months ended March 31, 2003. Our cash flow from operations
was strong at $7.1 million for the first three months of 2003. Our cash position
was $16.2 million at March 31, 2003, compared to $341,690 at March 31, 2002.
Results of Operations
- ---------------------
Our sales and net income increased to record levels for the three months ended
March 31, 2003 compared to the same period of 2002. We reported record net
income of $3.8 million for the three months ended March 31, 2003, compared to
net income of $2.3 million for the same period of 2002. The following table sets
forth certain operational data as a percentage of sales for the three months
ended March 31, 2003 and 2002:
Three Months Ended March 31,
2003 2002
----------------------------------
Sales 100.0 % 100.0%
Gross profit 41.8 38.9
Selling, general and administrative expenses 22.7 23.4
Research and development expenses 3.5 3.4
Income from operations 18.4 11.9
Other (income) expense (2.7) .2
Net income 11.8 8.1
Sales. Sales for the three months ended March 31, 2003 increased by 11%, or $3.1
million, compared to the same period of 2002. All product categories of our
business contributed to our revenues growth during the first three months of
8
2003. Sales of inflation devices rose 15%, stand alone device sales grew by 12%,
custom kit sales rose 7% and catheter sales rose by 3%. Sales of our inflation
devices were driven primarily by increased orders from our hospital customers
due to our Broadlane Tenet agreement, as well as growth in spinal procedures
using our digital inflation technology. New contracts with HealthTrust and
Consorta contributed to our stand-alone device sales growth.
Gross Profit. Gross profit as a percentage of sales increased significantly
during the first three months of 2003 to 41.8%, compared to 38.9% for the same
period of 2002. Gross profit improved primarily due to an increase in efficiency
and productivity gains achieved by the operation groups in our Utah facilities.
A lower head count in both direct labor and overhead areas of production
contributed to higher productivity. Gross profit was also favorably impacted
during the first three months of 2003 by a 24% increase in the exchange rate of
the Euro against the U.S. Dollar when compared to the same period of 2002,
resulting in an increase of 1.3% in gross profit.
Operating Expenses. Operating expenses decreased slightly as a percentage of
sales to 26.2% of sales for the three months ended March 31, 2003 compared to
26.7% for the same period of 2002. Selling, general and administrative expenses
as a percentage of sales decreased to 22.7% for the three months ended March 31,
2003, compared to 23.4% for the same period of 2002. The decrease as a
percentage of sales during the three months ended March 31, 2003 was due
primarily to our increased revenues during the three months ended March 31,
2003. Research and development expenses increased to 3.5% of sales during the
three months ended March 31, 2003, compared to 3.4% of sales for the same period
of 2002.
Other (Income) Expense. Other income for the three months ended March 31, 2003
was $868,601 compared to other expenses of $60,362 for the same period in 2002.
The increase in the quarter was primarily due to a gain from the settlement of a
legal dispute of $475,000 and a gain on sale of land adjacent to the Company's
South Jordan, Utah facility for $325,495. Also, as a result of our strong cash
position other income for the 2003 quarter was positively affected by an
increase in interest income in the amount of $66,000 and a decrease in interest
expense in the amount of $29,000 when compared to the same period in 2002.
Income Taxes. The effective tax rate for the three months ended March 31, 2003
and 2002 was 35.7% and 32.0%, respectively. The increase in the effective tax
rate for the three months ended March 31, 2003, as compared to the same period
of the prior year was the result of an increase in the incremental corporate tax
rate of 3% on taxable income from $15 million to $18.3 million and a dilution of
our Extra Territorial Income Exclusion ("ETI") and research and development
("R&D) tax credits on higher income before tax expense. Also, taxable income
from our Galway, Ireland operations, which is taxed at a lower rate than U.S.
operations, was lower in the first quarter of 2003 compared to the first quarter
of 2002, which helped contribute to our increased effective tax rate for the
first quarter.
Income. During the three months ended March 31, 2003, we reported income from
operations of $5.0 million, an increase of 43% from income from operations of
$3.5 million for the comparable period in 2002. The increase in operating income
for the three months ended March 31, 2003 was attributable primarily to
increased sales, higher gross margins, and lower selling, general and
administrative expenses as a percentage of sales. These factors contributed to
our net income of $3.8 million for the three months ended March 31, 2003
compared to net income of $2.3 million for the same period of 2002.
Liquidity and Capital Resources.
- --------------------------------
At March 31, 2003, our working capital was $38.5 million, which represented a
current ratio of 3.8 to 1. Our cash balance at March 31, 2003 was $16.2 million.
Historically, we have incurred significant expenses in connection with product
development and introduction of new products. Substantial capital has also been
required to finance the increase in our receivables associated with our
increased sales. During the quarter ended March 31, 2003 we purchased 1.66 acres
of land adjacent to our Galway, Ireland facility for approximately $738,000. The
purchase of this land will allow for future building expansion to the extent
that operations grow. Our principal source of funding for these and other
expenses has been cash generated from operations, sale of equity and cash
secured from loans on equipment and bank lines of credit. Management believes
that Merit's present sources of liquidity and capital are adequate for our
current operations.
9
Critical Accounting Policies
- ----------------------------
The SEC has requested that all registrants discuss their most critical
accounting policies. We understand that a "critical accounting policy" is one
which is both important to the representation of the subject 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. We base our estimates on past
experience and on various other assumptions that we believe are 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 our most critical
accounting policies:
Inventory Obsolescence Reserve. We write down our inventory for estimated
obsolescence for unmarketable and or slow moving products that may expire prior
to being sold. If market conditions become less favorable than those projected
by our management, additional inventory write-downs may be required. Our
obsolescence reserve was $2.6 million on March 31, 2003.
Allowance for Doubtful Accounts. We maintain 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 a review of
individual customer balances. If the financial condition of our customers were
to deteriorate, resulting in an impairment of their ability to make payments,
additional allowances may be required. Our bad debt reserve was $541,478 at
March 31, 2003, in line with our historical experience with collection of
receivables.
Factors that May Affect Future Results
- --------------------------------------
Our business, operations and financial condition are subject to certain risks
and uncertainties. Should one or more of these risks or uncertainties
materialize, or should any underlying assumptions prove incorrect, actual
results will vary, and may vary materially, from those anticipated, estimated,
projected or expected. The following are among the key factors that may have a
direct bearing on our business, operations and financial condition:
Our products may be subject to recall or product liability claims.
- --------------------------------------------------------------------------------
Merit products are used in connection with surgical procedures and in other
medical contexts in which it is important that those products function with
precision and accuracy. If our products do not function as designed, or are
designed improperly, we may be forced by regulatory agencies to withdraw such
products from the market. In addition, if medical personnel or their patients
suffer injury as a result of any failure of our products to function as
designed, or an inappropriate design, we may be subject to lawsuits seeking
significant compensatory and punitive damages. Any product recall or lawsuit
seeking significant monetary damages may have a material effect on our business
and financial condition.
Substantially all of our products are backed by a limited warranty for returns
due to defects in quality and workmanship. We maintain a reserve for these
future returned products, but the actual costs of such returns may significantly
exceed the reserve, which could have a material adverse effect on our
operations.
Termination of relationships with our suppliers, or failure of such suppliers to
perform, could disrupt our business.
- --------------------------------------------------------------------------------
We rely on raw materials, component parts, finished products, and services
supplied by outside third parties in connection with our business. For example,
substantially all of our products are sterilized by two entities. In addition,
some of our products are manufactured or assembled by third parties. If a
supplier of significant raw materials, component parts, finished goods or
services were to terminate its relationship with Merit, or otherwise cease
supplying raw materials, component parts, finished goods or services consistent
with past practice, our ability to meet our obligations to our end customers may
be disrupted. A disruption with respect to numerous products, or with respect to
a few significant products, could have a material adverse effect on our business
and financial condition.
We may be unable to compete in our markets, particularly if there is a
significant change in relevant practices and technology.
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The market for each of our existing and potential products is highly
competitive. We face competition from several companies, many of which are
larger, better resources and greater market presence than does Merit. Such
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resources and market presence may enable our competitors to more effectively
market competing products or to market competing products at reduced prices in
order to gain market share.
In addition, our ability to compete successfully is dependent, in part, upon our
ability to respond effectively to changes in technology and to develop and
market new products which achieve significant market acceptance. Competing
companies with substantially greater resources than Merit are actively engaged
in research and development of diagnostic and interventional methods, treatments
and procedures that could limit the market for our products and eventually make
certain Merit products obsolete. A reduction in the demand for a significant
number of our products, or a few key products, could have a material adverse
effect on our business and financial condition.
A significant adverse change in, or failure to comply with, governing
regulations could adversely affect our business.
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Substantially all of our products are "devices," as defined in the Federal Food,
Drug and Cosmetic Act, and the manufacture, distribution, record keeping,
labeling and advertisement of our products is subject to regulation by the Food
and Drug Administration (the "FDA") in the United States and equivalent
regulatory agencies in various foreign countries in which our products are
manufactured, distributed, labeled, offered and sold. Further, we are subject to
continual review and periodic inspections at our current facilities with respect
to the FDA Good Manufacturing Practices and similar requirements of foreign
countries. Our business and financial condition could be adversely affected if
we are found to be out of compliance with governing regulations. In addition, if
such regulations are amended to become more restrictive and costly to comply
with, the costs of compliance could adversely affect our business and financial
condition.
Limits on reimbursement imposed by governmental and other programs may adversely
affect our business.
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The cost of a significant portion of medical care is funded by governmental,
social security or other insurance programs. Limits on reimbursement imposed by
such programs may adversely affect the ability of hospitals and others to
purchase Merit products. In addition, limitations on reimbursement for
procedures which utilize Merit products could adversely affect our sales.
We are subject to work stoppage, transportation and related risks.
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We manufacture our products at various locations in the United States and in
Ireland and sell our products throughout the United States, Europe and other
parts of the world. We depend on third-party transportation companies to deliver
supplies necessary to manufacture Merit products from vendors to our various
facilities and to move Merit products to customers, operating divisions and
other subsidiaries located within and outside the United States. Our
manufacturing operations, and the operations of the transportation companies on
which our operations depend, may be adversely affected by natural disasters and
significant human events, such as a war, terrorist attack, riot, strike,
slowdown or similar event. Any disruption in our manufacturing or transportation
could materially adversely affect our ability to meet customer demands or
conduct our operations.
We may be unable to protect our proprietary technology or our technology may
infringe on the proprietary technology of others.
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Our ability to remain competitive is dependent, in part, upon our ability to
prevent other companies from using proprietary technology incorporated into our
products. We seek to protect our technology through a combination of patents and
trade secrets, as well as license, proprietary know-how and confidentiality
agreements. We may be unable, however, to prevent others from using our
proprietary information, or continue to use such information ourselves, for
numerous reasons, including the following:
o Our issued patents may not be sufficiently broad to prevent others
from copying our proprietary technologies;
o Our issued patents may be challenged by third parties and deemed
to be overbroad or unenforceable;
o Our products may infringe on the patents of others, requiring us
to alter or discontinue our manufacture or sale of such products;
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o Costs associated with seeking enforcement of our patents against
infringement, or defending ourselves against allegations of
infringement, may be significant;
o Our pending patent applications may not be granted for various
reasons, including overbreadth or conflict with an existing
patent; and
o Other persons may independently develop, or have developed,
similar or superior technologies.
A significant portion of our revenues are derived from a few products and
procedures.
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A significant portion of our revenues are attributable to sales of our inflation
devices. During the year ended December 31, 2002, sales of our inflation devices
(including inflation devices sold in custom kits) accounted for approximately
33% of our total revenues. During the three months ended March 31, 2003, sales
of our inflation devices (including inflation devices sold in custom kits)
accounted for approximately 34% of our total revenues. Any material decline in
market demand for our inflation devices could have an adverse effect on our
business and financial condition.
In addition, the products that have accounted for a majority of our historical
revenues are designed for use in connection with a few related medical
procedures, including angiography, angioplasty and stent placement procedures.
If subsequent developments in medical technology or drug therapy make such
procedures obsolete, or alter the methodology of such procedures so as to
eliminate the usefulness of our products, we may experience a material decrease
in demand for our products and experience deteriorating financial performance.
Fluctuations in Euro exchange rates may negatively impact our financial results.
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Fluctuations in the rate of exchange between the Euro and the U.S. Dollar could
have a negative impact on our margins and financial results. For example, for
the year ended December 31, 2000, the exchange rate between the Euro and the U.
S. Dollar dropped by approximately 13.2%, resulting in a reduction in our gross
revenues of $1,076,695 and 1.2% in gross profit. For the year ended December 31,
2001, the exchange rate between the Euro and the U. S. Dollar resulted in a
reduction of our gross revenues of $467,283 and 0.4% in gross profit. However,
for the year ended December 31, 2002, the exchange rate resulted in an increase
of gross revenues of $497,644 and 0.4% in gross profit. For the quarter ended
March 31, 2003, the exchange rate resulted in an increase of gross revenues of
$675,583 and 1.3% in gross profit.
For the year ended December 31, 2002, approximately $10.1 million, or 8.7%, of
our sales were denominated in Euros. If the rate of exchange between the Euro
and the U.S. Dollar declines, we may not be able to increase the prices that we
charge our European customers for products whose prices are denominated in
Euros. Furthermore, we may be unable or elect not to enter into hedging
transactions which could mitigate the effect of declining exchange rates. As a
result, as the rate of exchange between Euros and the U.S. Dollars declines, our
financial results may be negatively impacted.
We may be unable to successfully manage growth, particularly if accomplished
through acquisitions.
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Successful implementation of our business strategy will require that we
effectively manage any associated growth. To manage growth effectively, our
management will need to continue to implement changes in certain aspects of our
business, to enhance our information systems and operations to respond to
increased demand, to attract and retain qualified personnel and to develop,
train and manage an increasing number of management-level and other employees.
Growth could place an increasing strain on our management, financial, product
design, marketing, distribution and other resources, and we could experience
operating difficulties. Any failure to manage growth effectively could have a
material adverse effect on our results of operations and financial condition.
To the extent that we grow through acquisition, we will face the additional
challenges of integrating our current operations, culture, informational
management systems and other characteristics with that of the acquired entity.
We may incur significant expenses in connection with negotiating and
consummating one or more transactions, and we may inherit certain liabilities in
connection with the acquisition as a result of our failure to conduct adequate
due diligence or otherwise. In addition, we may not realize competitive
advantages, synergies or other benefits anticipated in connection with such
acquisition(s). If we do not adequately identify targets for, or manage issues
related to our future acquisitions, such acquisitions may have a negative
adverse effect on our business and financial results.
12
The market price of our common stock has been, and may continue to be, volatile.
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The market price of our common stock has been, and may continue to be, highly
volatile for various reasons, including the following:
o Our announcement of new products or technical innovations, or
similar announcements by our competitors;
o Development of new procedures that use, or do not use, our
technology;
o Quarter-to-quarter fluctuations in our financial results;
o Claims involving potential infringement of patents and other
intellectual property rights;
o Analyst and other projections or recommendations regarding our
common stock or medical technology stocks generally;
o Any restatement of our financial statements or any investigation
into Merit by the SEC or another regulatory authority; and
o A general decline, or rise, of stock prices in the capital
markets.
We are dependent upon key personnel.
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Our continued success is dependent on key management personnel, including Fred
P. Lampropoulos, our Chairman of the Board, President and Chief Executive
Officer. Mr. Lampropoulos is not subject to any agreement prohibiting his
departure, and we do not maintain key man life insurance with his life. The loss
of Mr. Lampropoulos, or of certain other key management personnel, could
materially adversely affect our business and operations. Our success also
depends, among other factors, on the successful recruitment and retention of key
operations, manufacturing, sales and other personnel.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our principal market risk relates to changes in the value of the Euro relative
to the value of the U.S. Dollar. Our consolidated financial statements are
denominated in, and our principal currency is, the U.S. Dollar. A portion of our
revenues during the three months ended March 31, 2003 ($3.1 million,
representing approximately 9.9% of aggregate revenues) came from sales that were
denominated in Euros. Certain of our expenses are also denominated in Euros,
partially offsetting any risk associated with fluctuations of the Euro/Dollar
exchange rate. As a result of our Euro-denominated revenues and expenses, in a
year in which our Euro-denominated revenues exceed our Euro-based expenses, the
value of such Euro-denominated net income increases if the value of the Euro
increases relative to the value of the U.S. Dollar, and decreases if the value
of the Euro decreases relative to the value of the U. S. Dollar. For example, in
2000, a 13.2% drop in the value of the Euro in relation to the U.S. Dollar led
to reduced revenues and gross profit of $1.1 million. By contrast, in 2002, an
increase in the value of the Euro relative to the U.S. Dollar led to increased
revenue and gross profit of approximately $500,000.
At March 31, 2003, we had a net exposure (representing the difference between
Euro-denominated receivables and Euro-denominated payables) of approximately
$1.7 million. In order to partially offset such risk, on February 28, 2003, we
entered into a 30-day Euro hedge contract. We enter into similar hedging
transactions at various times during the year in an effort to partially offset
exchange rate risks we bear throughout the year. We do not purchase or hold
derivative financial instruments for speculative or trading purposes. During the
three months ended March 31, 2003, we experienced a net gain of $2,750 on
hedging transactions we executed during the three months ended March 31, 2003 in
an effort to limit our exposure to fluctuations in the Euro/Dollar exchange
rate.
As of March 31, 2003, we had no variable rate debt. As long as we do not have
variable rate debt, our interest expense would not be affected by changes in
interest rates.
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ITEM 4: CONTROLS AND PROCEDURES
Under the supervision and with the participation of our management, including
our principal executive officer and principal financial officer, we conducted an
evaluation of our disclosure controls and procedures, as such term is defined
under Rule 13a-14I promulgated under the Exchange Act, within 90 days of the
filing date of this Report. Based on this evaluation, our principal executive
officer and principal financial officer concluded that our disclosure controls
and procedures are effective in alerting them on a timely basis to material
information relating to Merit (including our consolidated subsidiaries) required
to be included in our reports filed or submitted under the Exchange Act.
There have been no significant changes (including corrective actions with regard
to significant deficiencies or material weaknesses) in our internal controls or
in other factors that could significantly affect these controls subsequent to
the date of the evaluation referenced in the preceding paragraph.
PART II - OTHER INFORMATION
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits -
Exhibit No. Description
----------- -----------
99.1 Certification of Principal Executive Officer
99.2 Certification of Principal Financial Officer
(b) The following Current Reports on Form 8-K were filed during
the quarter ended March 31, 2003:
Form 8-K Date of Event Description
Item 9 2/19/2003 Merit Medical Chairman and
CEO says sales are robust for
January and first half of
February.
Item 11 2/20/2003 Required notice of special
trading Restrictions under
rule 104 of SEC regulation
BTR.
14
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.
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REGISTRANT
Date: May 12, 2003 /s/: FRED P. LAMPROPOULOS
--------------------- -----------------------------------------
FRED P. LAMPROPOULOS
PRESIDENT AND CHIEF
EXECUTIVE OFFICER
Date: May 12, 2003 /s/: KENT W. STANGER
--------------------- -----------------------------------------
KENT W. STANGER
SECRETARY AND CHIEF FINANCIAL OFFICER
15
Certification of Chief Executive Officer
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
Medial 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 periods 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) evaluated 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 of 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: May 12, 2003 /s/: FRED P. LAMPROPOULOS
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Fred P. Lampropoulos, Chief Executive Officer
16
Certification of Chief Financial Officer
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 annual report, fairly
present in all material respects the financial condition,
results of operations and cash flows of the registrant as of,
and for, the periods 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) evaluated 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 of 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: May 12, 2003 /s/:KENT W. STANGER
- ------------------- --------------------------------------------
Kent W. Stanger, Chief Financial Officer
17