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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
/x/ Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended December 31, 1999 or
/ / Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
MERIT MEDICAL SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
UTAH 0-18592 87-0447695
- ---------------------------- --------------------- -------------------
(State or other jurisdiction (Commission File No.) (IRS Employer
of incorporation) Identification No.)
1600 WEST MERIT PARKWAY
SOUTH JORDAN, UTAH 84095
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(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (801) 253-1600
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
TITLE OF CLASS
--------------
Common Stock, No Par Value
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 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 if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of the Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. / /
The aggregate market value of the Common Stock held by
non-affiliates of the Registrant, based upon the closing sale price of the
Common Stock on the NASDAQ National Market System on March 27, 2000, was
approximately $60,628,323. Shares of Common Stock held by each officer and
director and by each person who may be deemed to be an affiliate have been
excluded.
As of March 27, 2000 the Registrant had 7,683,372 shares of Common
Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following documents are incorporated by reference in
Parts II, III and IV of this Report. The Registrant's definitive Proxy
Statement relating to the Annual Meeting of Shareholders scheduled for May 24,
2000 (Part III).
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TABLE OF CONTENTS
PART I................................................................................... 1
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS.......................................... 1
Item 1. BUSINESS....................................................................... 1
GENERAL........................................................................ 1
PRODUCTS....................................................................... 2
Inflation Devices...................................................... 2
Control Syringes....................................................... 3
Specialty Syringes..................................................... 3
High Pressure Contrast Injection Line and Sherlock Connectors.......... 3
Manifolds.............................................................. 3
Waste Containment Systems.............................................. 3
Hemostasis Valves...................................................... 3
Torque Device.......................................................... 4
Stopcock............................................................... 4
Majestik Angiographic Needles.......................................... 4
Contrast Management Systems............................................ 4
Angiographic Needles................................................... 4
Captiva Blood Containment Device....................................... 4
Fountain Infusion Catheters or Systems................................. 4
Tomcat (PTCA) Guide Wire............................................... 4
Squirt................................................................. 4
Angiography Pigtail Catheter........................................... 4
Pericardiocentesis..................................................... 4
Meritrans Pressure Transducers......................................... 5
Custom Kits............................................................ 5
Diagnostic Cardiology Catheters........................................ 5
Diagnostic Radiology Catheters......................................... 5
Percutaneous Sheath Introducers........................................ 5
Diagnostic Guide Wire.................................................. 5
Guide Catheters........................................................ 5
Keep Accessory Organizer............................................... 5
MARKETING AND SALES............................................................ 5
Market Strategy........................................................ 5
U.S. Sales............................................................. 6
International Sales.................................................... 6
CUSTOMERS...................................................................... 6
RESEARCH AND DEVELOPMENT....................................................... 7
MANUFACTURING.................................................................. 7
COMPETITION.................................................................... 7
PATENTS, PATENT APPLICATIONS, LICENSES, TRADEMARKS AND COPYRIGHTS.............. 8
REGULATION..................................................................... 8
EMPLOYEES...................................................................... 9
FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND
EXPORT SALES.......................................................... 9
Item 2. PROPERTIES..................................................................... 9
Item 3. LEGAL PROCEEDINGS.............................................................. 10
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............................ 10
PART II ............................................................................... 11
Item 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS........... 11
Item 6. SELECTED FINANCIAL DATA........................................................ 11
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS........................................................... 11
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK........................ 11
ii
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA..................................... 11
Item 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE...................................................................... 11
PART III ................................................................................ 11
Items 10, 11, 12 and 13................................................................... 11
PART IV ................................................................................ 13
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K................. 13
SIGNATURES................................................................................ 14
Exhibit 23.1 Consent of Independent Public Accountants.................................... 15
iii
PART I
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This Report includes "Forward-Looking Statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended and Section
21E of the Securities Exchange Act of 1934, as amended. 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 document are made
as of the date hereof and are based on information available to Merit as of
such date. Merit assumes no obligation to update any forward-looking
statement. In some cases, Forward-Looking Statements can be identified by the
use of terminology such as "may," "will," "expects," "plans," "anticipates,"
"intends" or "believes," "estimates," "potential," or "continue," or the
negative thereof or other comparable terminology. Although the Company
believes that the expectations reflected in the Forward-Looking Statements
contained herein are reasonable, there can be no assurance that such
expectations or any of the Forward-Looking Statements will prove to be
correct, and actual results could differ materially from those projected or
assumed in the Forward-Looking Statements. Future financial condition and
results of operations, as well as any Forward-Looking Statements are subject
to inherent risks and uncertainties, including market acceptance of the
Company's products, potential product recalls, delays in obtaining regulatory
approvals, cost increases, fluctuations in and obsolescence of inventory,
price and product competition, availability of labor and materials, foreign
currency fluctuations, changes in health care markets related to health care
reform initiatives and other factors referred to in the Company's press
releases and reports filed with the Securities and Exchange Commission. All
subsequent Forward-Looking Statements attributable to the Company or persons
acting on its behalf are expressly qualified in their entirety by these
cautionary statements.
ITEM 1. BUSINESS.
GENERAL
Merit Medical Systems, Inc. (the "Company") was formed in 1987 by
members of its current management for the purpose of producing single-use
medical products of high quality and superior value primarily for use in
diagnosis and treatment of cardiovascular disease. The Company's products are
designed to provide physicians and other health care professionals with
devices that enable them to perform interventional and diagnostic procedures
safely and effectively. Initially, the Company's expertise in innovative
product design and its proprietary technology and skills in injection and
insert molding enabled it to introduce innovative new products and capture
significant market share. The Company subsequently combined its plastics
molding capability with the application of proprietary electronics and
sensor-based technologies to develop a line of angioplasty inflation products
with electronic sensing and display features. These devices are now included
in a series of sensor-based products that address a broad range of needs
related to diagnostic and interventional catheterization procedures performed
in hospitals. Since 1997 the Company has expanded its product offerings to
include catheters, guide wires, sheath introducers, needles and drug infusion
devices.
The Company's strategy is to offer a broad line of innovative,
disposable products for diagnosis and intervention in radiology and
cardiology. Merit continues to increase market acceptance and penetration for
both its existing and new products in the U.S. and in international markets.
Longer term, the Company's strategy is to extend the application of its
sensor-based technologies, plastics molding, catheter, guide wire, and
electronic capabilities and to develop products for diagnostic and
interventional procedures in additional markets such as neuroradiology,
nephrology, pain management and critical care. The Company's sales of
stand-alone products in combination with custom kits have increased as
additions have been made to the Company's product lines. In 1999,
approximately 51% of the Company's sales were made directly to U.S. hospitals
and approximately 25% of sales were made to custom packagers, distributors
and O.E.M. companies who also distribute to U.S. hospitals. Approximately 24%
of the Company's sales in 1999 were made in international markets.
1
The Company was organized in July 1987 as a Utah corporation. In
July 1994, the Company purchased a controlling interest in Sentir, Inc., a
California-based manufacturer of silicon sensors, ("Sentir") and during 1999
the Company purchased the remaining interest. The Company also has
established subsidiaries in Ireland, Germany, France, the United Kingdom,
Belgium, and in Sentir the Netherlands to conduct its international business.
On January 31, 1997, the Company purchased the operating assets and product
lines of Universal Medical Instruments Corp. ("UMI"). On August 20, 1999 the
Company purchased the operating assets and product lines of the Angleton
division of Mallinckrodt Inc. ("Mallinckrodt"). The Company's principal
offices are located in a manufacturing and office facility at 1600 West Merit
Parkway, South Jordan, Utah 84095, and its telephone number is (801)
253-1600. See "Item 2. Properties."
PRODUCTS
The Company's products have been designed and developed in response
to the needs of customers and patients. These needs have been identified
primarily through observation of procedures in the cardiac catheterization
and radiology laboratories, consultation with the Company's medical advisors
and consultants and through direct communication with customers. Since 1988,
the Company has developed and introduced several product lines, including
control syringes (CCS-TM- and Smart Tip-TM-), inflation devices
(Intellisystem-Registered Trademark- Monarch-Registered Trademark-,
Basix-TM-, and basixCOMPAK-TM- including new 25-atmosphere versions),
specialty syringes (Medallion-Registered Trademark-,and VacLok-Registered
Trademark-, high-pressure tubing and connectors (Excite-TM-, Flexible,
Braided, rigid, pvc, and Sherlock-TM-) , waste handling and disposal products
(Merit Disposal Depot-Registered Trademark- and Backstop-Registered
Trademark-), a disposable blood pressure transducer (Meritrans-Registered
Trademark-), disposable hemostasis valves (Passage-Registered Trademark-,
Access-9,-TM- Access Plus-TM-, and MBA-TM-), manifolds and stopcocks
(Marquis-Registered Trademark- Series), a torque device, contrast management
systems (Miser-Registered Trademark- and In-Line Contrast Management
System-TM-), angiography needles (Majestik-Registered Trademark- Series),
blood containment devices (Captiva-Registered Trademark-),
pericardiocentesis catheters and procedure trays, PTCA Guide wires
(TomCat-Registered Trademark-) and extension wires, thrombolytic infusion
catheters (Fountain-Registered Trademark-) and accessories (Squirt-TM-),
diagnostic angiographic pigtail catheters, and diagnostic cardiology and
radiology catheters, (SofTouch-Registered Trademark- and Performa-Registered
Trademark-, sheath introducers (DialEase-TM-), diagnostic guide wires, and
guide catheters, (Trax-Registered Trademark- and Trax-Registered Trademark-
Cavern). These products are sold separately and in custom kits consisting
primarily of selected combinations of products.
The Company has not experienced any product liability claims;
however, 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 $5,000,000 per
occurrence and in the aggregate, which may not be adequate for expenses or
liabilities actually incurred.
INFLATION DEVICES. Inflation devices are specialized syringes used
in interventional catheterization procedures to inflate and deflate
balloon-tipped catheters. The Company has received 510(k) approved from the
U.S. Food and Drug Administration ("the FDA") for use of its digital
inflation devices for a wide range of additional clinical applications such
as discography, esophageal dilitation, trigeminal nerve compression, and
retinal detachment. Each of the Company's inflation devices and universal
fluid dispensing syringes incorporates proprietary design features which
contribute to ease of use, including allowing the clinicians to engage or
release the syringe plunger with one hand while increasing or decreasing the
pressure. Each syringe also provides a clear view of the fluid path that
simplifies debubbling and contributes to accurate measurement of pressure.
The Company's IntelliSystem 25 inflation device, which was the
first such device to incorporate electronic sensing and display features,
consists of a disposable 20cc inflation syringe and an integral pressure
transducer which connects to an electronic monitor outside of the sterile
field. To aid the marketing process and encourage use of the Company's
products, the electronic monitor is provided without charge to large volume
customers using the IntelliSystem. The IntelliSystem measures, times, records
and digitally displays information concerning the pressure, duration and
number of each inflation and deflation of the angioplasty balloon. When used
in other clinical applications such as discography, the Intellisystem
accurately dispenses fluid while documenting and graphing pressures in the
disc. The Company believes that electronic sensing and display of such
information is much more accurate and precise than that which can be obtained
from conventional analog gauges. The data is stored and may be displayed,
retrieved, graphed and printed.
2
The Monarch 25 is a disposable inflation device which digitally
displays data concerning pressure and duration of inflations and deflations
on a small electronic monitor mounted on the barrel of the inflation syringe.
The monitor does not offer all of the same display, storage or printing
capabilities of the IntelliSystem but offers the convenience of portable
operation.
The Basix 25 and the new basixCOMPAK are disposable inflation
devices which incorporate a conventional analog pressure gauge mounted on the
barrel of the inflation syringe. The Basix more closely resembles devices
marketed by the Company's competitors but includes the Company's proprietary
design features and benefits. The Company believes that the Basix and
basixCOMPAK represent a significant addition to its line of inflation devices
that will contribute to sales where both clinical and economic outcomes are a
priority.
CONTROL SYRINGES. The Company's disposable control syringes are
utilized for one-handed control of the injection of contrast media and other
fluids during angiography, angioplasty and stent placement. The control
syringes are molded from polycarbonate material which is stronger than glass
and other plastics used in the industry. The Company offers different models
and sizes of the control syringes with varying features, according to
physician preference. These features include different configurations of
syringe handles, plungers and connectors which allow operation of the syringe
in a fixed or rotating position and varying volume sizes. In response to
customer demand, Merit launched latex-free control syringes in 1998.
SPECIALTY SYRINGES. Merit's Medallion syringes, a line of
disposable, latex-free, color-coded specialty syringes are used for injection
of medications, flushing of manifolds and other general purposes. These
syringes are molded of polycarbonate material for added strength and are
available in hundreds of sizes, colors and custom printing combinations. The
color coding allows a clinician to assign a color for each medication to be
dispensed and to differentiate syringes by their contents. The syringes can
also be custom printed to the specifications of the user. In response to
customer requests, the Company has developed and added additional sizes of
its specialty syringes which have applications in dispensing various
medications required in a broader range of peripheral procedures. The Company
believes that the design, color coding and materials used in its specialty
syringes contribute to patient safety and more efficient procedures. The
specialty syringes are sold separately but are an important component of the
Company's custom kits.
HIGH-PRESSURE CONTRAST INJECTION LINE AND SHERLOCK CONNECTORS.
During angiographic and diagnostic radiology procedures, contrast media must
be injected through a catheter into the blood vessel. This is sometimes
accomplished by a mechanical injector which can generate pressures up to 1200
pounds per square inch ("psi"), and requires tubing that can withstand these
pressures. The Company offers high-pressure, specialty tubing with
proprietary Sherlock connectors. In 1998 the Company launched Excite-TM-, a
new line of clear, flexible high-pressure tubing that combines the features
of tubing clarity and strength. Sherlock connectors allow coupling and
uncoupling of tubing with injectors, syringes and manifolds without
over-tightening or breakage. The Company is currently offering specialty
tubing which can handle pressures ranging from 500 to 1200 psi. The specialty
tubing with Sherlock connectors is an important component of custom kits.
MANIFOLDS. The administration of saline, imaging and contrast
fluids and the management of blood-pressure monitoring, fluid injection and
waste collection in angiography or angioplasty procedures is accomplished
through a series of valves on a manifold which control the flow of various
fluids in different directions. The Company has designed its own manifold
consisting of two, three, four or five valves. The Company believes its
manifold offers greater ease of use, simplified identification of flow
direction and leak-free operation under the pressures of manual or mechanical
injection of fluids when compared to manifolds sold by competitors. The Merit
Manifold is sold separately but is also a key component of the Company's
custom kits.
WASTE CONTAINMENT SYSTEMS. Because of heightened awareness of the
risks, associated with blood and related waste materials, hospitals have
moved toward closed systems whenever possible. To address these concerns, the
Company has designed a waste containment bag which connects to a manifold and
collects waste materials such as blood and other fluids during angiography,
angioplasty or other procedures. The Merit Disposal Depot-TM- is
self-contained for ease of disposal and reduces risk of contamination. The
Backstop-TM- is a unique and proprietary alternative fluid disposal basin
designed to reduce exposure to blood-borne pathogens.
3
HEMOSTASIS VALVES. The Passage, Access 9, Access Plus and MBA
hemostasis valves are used in conjunction with the Company's inflation
devices and as a component of the Company's angioplasty packs. These valves
are made with polycarbonate plastic for clarity and include Sherlock
connectors. The devices differ in size and function. The MBA features a valve
mechanism that minimizes blood loss.
TORQUE DEVICE. The Merit torque device is a guide wire steering
tool with a tapered design and contrasting colors for improved visibility.
The torque device typically is included as a component of the Company's
angioplasty packs.
MARQUIS SERIES STOPCOCK. The Company's Marquis Series Stopcock
offers improvements to competitive stopcock devices, including a large, easy
grip handle. The Marquis Series Stopcock is used in connection with Sherlock
connectors to provide improved connections during procedures.
CONTRAST MANAGEMENT SYSTEMS. The Miser and the In-Line Contrast
Management System have been designed to increase catheterization lab
efficiencies by reducing contrast media waste.
MAJESTIK ANGIOGRAPHIC NEEDLES. The angiography needle creates the
percutaneous (through the skin) access site for all angiography and
angioplasty procedures. This site is the point of entry for the introducer
sheath, guide wires, catheters and any other interventional devices. The
Merit Majestik Needle helps the physician achieve precision vascular access
with one of the sharpest angiography needles on the market.
CAPTIVA BLOOD CONTAINMENT DEVICE. The Captiva helps protect health
care workers from the potential of blood-borne pathogens by minimizing the
escape of blood during an initial needle puncture in vascular access
procedures. This product is complementary to the angiographic needles and can
be utilized in virtually every diagnostic and interventional case where
needle introducers are used.
FOUNTAIN INFUSION CATHETER. The Fountain catheter delivers
therapeutic solutions to help remove blood clots (thrombi) in peripheral
vessels. This catheter is used to treat peripheral arterial occlusions,
hemodialysis graft occlusions, and deep vein thrombosis. This product
incorporates the Squirt fluid dispensing system for controlled fluid delivery.
TOMCAT (PTCA) GUIDE WIRE. Tomcat guide wires are used in
percutaneous transluminal coronary angioplasty (PTCA) and stent deployment
procedures. Guide wires are used to guide and place balloon angioplasty and
stent deployment catheters into coronary arteries. This new product
complements our existing lines of inflation devices and accessories currently
used in balloon angioplasty procedures, and was designed, developed and
manufactured in the Company's Ireland facility.
SQUIRT WOUND IRRIGATION. In any traumatic wound, the risk of
infection is greatly decreased by the removal of bacteria and soil from the
site. Merit launched a new line of Squirt wound irrigation products in 1998
designed for the emergency room to deliver large volumes of irrigation fluid.
The product features a proprietary, one-handed Squirt fluid delivery syringe,
an adjustable nozzle and splash protecting shield.
ANGIOGRAPHY PIGTAIL CATHETER. In 1997 Merit acquired new product
lines and technologies from UMI, a small specialty medical manufacturing firm
in upstate New York. At that time the Company began marketing a new line of
thin-wall, FEP (Teflon), high-flow, pigtail angiographic catheters ideally
suited for smaller patients.
PERICARDIOCENTESIS. Merit offers a complete pericardiocentesis kit
which combines a high-flow drainage catheter and virtually all components
needed to place the device in the pericardial sack. This combination saves
the physician both time and money by having all components in one convenient
tray. On occasion, the sack surrounding the heart becomes filled with blood
or fluid. To remove the fluid and the potential for cardiac tamponade, a
catheter is placed in the pericardial sack. The Company designed,
manufactured and launched two proprietary kits (pigtail and straight)
including the catheter and necessary components to perform the procedure.
4
MERITRANS PRESSURE TRANSDUCERS. Diagnostic blood pressure
monitoring is a clinical priority in virtually all diagnostic and
interventional procedures. The Meritrans provides clinicians with reliable
and precise blood-pressure measurement. The clear, flow-through design makes
flushing and debubbling simple and safe. The transducer is a critical
component in many custom kit configurations.
CUSTOM KITS. Custom kits allow physicians to obtain the medical
devices and accessories that they most frequently use during angiography,
angioplasty and similar procedures in a convenient, pre-packaged and
pre-assembled form. Custom kits also provide cost savings over purchasing
single products and reduce the hospital's administrative costs associated
with maintaining an inventory of individual, sterile products.
DIAGNOSTIC CARDIOLOGY CATHETERS. Cardiac catheterization is
performed to diagnose the nature, severity, and precise location of blockages
and other abnormalities of the heart. This technique represents the most
essential diagnostic tool in the management of patients with cardiovascular
disease. The Company manufactures and sells a complete line of diagnostic
catheters used for these procedures.
DIAGNOSTIC RADIOLOGY CATHETERS. Radiology catheters are engineered
and designed with distinct tip configurations to access specific vessels and
organs outside the heart (head, kidneys, etc). Merit acquired a strong
radiology catheter product portfolio from Mallickrodt's Angleton Division in
1999.
PERCUTANEOUS SHEATH INTRODUCERS. Sheaths are used to create the
access through which guide wires and catheters are passed into the
vasculature. Most sheaths incorporate a valve hub to minimize bleeding and a
side port for drug delivery. The Company acquired the Performa line of sheath
introducers from Mallinckrodt in 1999.
DIAGNOSTIC GUIDE WIRES. Guide wires are relatively simple,
spring-type products that provide the necessary firmness and control to
advance catheters to the site where angiograms will be taken. Guide wires
vary in length, outside diameter and tip configuration. The Company
distributes an OEM wire made to exact specifications.
GUIDE CATHETERS. Coronary angioplasty requires the use of a guiding
catheter to place the balloon within the arterial system. The catheter is
inserted through the sheath into the arterial system. Once in place, the
guiding catheter acts as a conduit for the guide wire, the dilating balloon
catheter, coronary stents and the radiopaque dye that is used to provide
fluoroscopic visualization during the procedure. The Mallinckrodt acquisition
brought with it a line of high-quality guide catheters used in cardiology.
The Company intends to dedicate resources to expand this offering.
KEEP ACCESSORY ORGANIZER. In 1999 the Company designed and launched
a unique, proprietary accessory organizer that affixes to the sterile field
to hold guide wires, catheters and cables. The product was launched late in
the year and increased sales are projected for 2000 and beyond.
MARKETING AND SALES
MARKET STRATEGY. The Company's marketing strategy is strongly
focused on identifying and introducing highly profitable, differentiated
products that meet customer needs. The Company has targeted selected hospital
market segments in cardiology and radiology where its products are used.
Suggestions for new products and product improvements may come from
engineers, sales persons, physicians and other technicians who perform the
clinical procedures.
When a product suggestion demonstrates sustainable competitive
advantage, meets customer needs, fits strategically and technologically, and
has good potential financial return, a "project team" is chartered with
individuals from the Company's marketing, engineering, manufacturing and
quality assurance departments . This team identifies the customer
requirements, integrates the design, compiles all necessary documentation and
testing and prepares the product for market introduction. The Company
strongly believes that one of its marketing strengths is its capacity to
rapidly conceive, design, develop, and introduce new products.
5
Cardiovascular disease is the number-one health problem in the U.S.
According to American Heart Association estimates, nearly 60 million
Americans, or approximately 25% of the population, has one or more types of
the disease. Cardiovascular disease accounts for an estimated one million
deaths annually, more than 40% of the U.S. total. Transcatheter modalities
currently represent the greatest potential to diagnose and treat the disease.
The Company intends to leverage its strong market position in both catheter
technology and accessory products to continue sales growth.
The global market for transcatheter products stands at a major
crossroad, even when considering the continued dynamic evolution in vascular
stent placement. Laser techniques have not demonstrated the success that was
expected in the last few years. The core diagnostic and therapeutic
applications for basic transcatheter technologies (balloons, stents and
defect repair) are well established, with the future growth of procedures and
products dependant upon demographic trends. This has not, however, prevented
significant investment of new technologies and applications designed to
enhance patient outcomes and enable the treatment of new populations that
have been traditionally limited to surgical intervention. The Company
believes it is well positioned to monitor these trends and launch catheters
and accessories to support growing clinical applications.
There are a large number of projects focused on improving the
diagnosis of cardiovascular disease, solving the issue of restenosis and
other less invasive alternatives to open-heart surgery. In recent years
researchers have focused their interests on technologies and products that
support the growth of transcatheter approaches to reducing the morbidity and
mortality of cardiovascular disease, including: radiated stents and balloons,
anti-platelet therapy, gene therapy, percutaneous coronary thrombectomy and
transmyocardial revascularization. One area of specific interest to the
Company is transradial catheterization. The Company will continue to develop
and launch innovative products to support these clinical trends.
U.S. SALES. The Company's direct sales force currently consists of
a vice president of sales, two executive sales managers, five regional sales
managers and 46 direct sales representatives located in major metropolitan
areas throughout the U.S. The Company's sales people are trained by Company
personnel at the Company's facilities, by a senior sales person in their
respective territories, at regular national and regional sales meetings by
consulting cardiologists and employees of the Company, and by observation of
procedures in catheterization laboratories.
INTERNATIONAL SALES. Outside of the U.S., the Company's products
are presently sold by 42 independent dealer organizations and 15 direct sales
representatives in Germany, France, the United Kingdom, Canada, Belgium,
Netherlands, and Ireland. In 1999, the Company's international sales grew by
21% and accounted for approximately 24% of total sales. The Company has
appointed a vice president for international sales and established an
international sales and distribution office in Maastricht, The Netherlands.
With the recent and planned additions to its product lines, the Company
believes that international sales will continue to increase.
International dealers are required to inventory products and sell
directly to customers within defined sales territories. Each of the Company's
products must be approved for sale under the laws of the country in which it
is sold. International dealers are responsible for compliance with all
applicable laws and regulations in their respective countries.
CUSTOMERS
The Company serves hospital-based cardiologists, radiologists,
anesthesiologists, physiatrists (pain management), neurologists, ER
physicians, technicians and nurses who influence the purchasing decision for
Merit's products. Hospitals also purchase the Company's products in the U.S.
through custom packagers and packers who assemble and combine products in
custom kits and packs. The Company's customers outside the U.S. are hospitals
and other end users in those countries where a direct sales force has been
established, and in other countries are independent dealers in medical
products who resell to hospitals and other customers.
In 1999, approximately 51% of the Company sales were made
directly to domestic hospitals, 25% to custom packagers and packers and 24%
to international markets. Sales to the Company's single largest customer, a
foreign dealer, accounted for 6.2% of total sales during the year ended
December 31, 1999. In 1999 OEM sales represented
6
4.4 % of Merit's total revenue. The Company is investing heavily in people
and programs to expand the OEM business. Merit recognizes the growth
opportunity in this area.
RESEARCH AND DEVELOPMENT
The Company believes that one of its important strengths is its
ability to quickly adapt its expertise and experience in injection molding
and to apply its electronic and sensor technologies to a perceived need for a
new product or product improvement. The Company's development efforts are
presently focused on disposable, innovative single-patient or single-use
items which can be included in the Company's custom kits or sold separately.
Longer-term projects include use of sensor-based technologies in a variety of
applications and additional inflation devices with added capacities and
features. There is a new focus on interventional vascular access products,
such as needles, guide wires, and catheters. Certain of the Company's
executive officers also devote a substantial portion of their time to
research and development. Research and development expenses were $3,618,041,
$3,244,477 and, $4,446,795, in 1999, 1998 and 1997, respectively. There was
no customer-sponsored research and development. The Company anticipates that
such expenses will range between approximately 4.0% to 6.0% of sales for 2000.
MANUFACTURING
Many of the Company's products are manufactured utilizing its
proprietary technology and expertise in plastic injection and insert molding.
Tooling of molds is contracted with third parties but the Company designs and
owns all of its molds. The Company utilizes its experience in injection and
insert molding technologies in the manufacture of most of the custom
components used in its products.
The electronic monitors and sensors used in the Company's
IntelliSystem and Monarch inflation devices are assembled from standard
electronic components or purchased from suppliers. In July 1994, the Company
acquired a 73% interest and in August 1999 the Company acquired the remaining
interest in Sentir, which is engaged in development and marketing of silicon
sensors. Sentir was founded in 1991 by the Company's President and Chief
Executive Officer, Fred P. Lampropoulos, to develop micromachine technology
and silicon sensors. Sentir is presently providing virtually all of the
sensors utilized by the Company in digital inflation devices.
The Company's products are manufactured at several facilities,
including South Jordan, Utah; Galway, Ireland; Angleton, Texas and a leased
expansion facility in Murray, Utah. See "Item 2. Properties."
COMPETITION
The principal competitive factors in the markets in which the
Company's products compete are quality, performance, service and price. The
Company believes that its products have achieved rapid market acceptance due,
in part, to the quality of materials and workmanship, innovative design and
ease of operation, the Company's attention to customer service and product
managers who respond promptly to customer inquiries. The Company's products
are priced competitively, but not below prices for competing products.
There are several companies which are in the business of designing,
manufacturing and marketing devices similar to the Company's products, most
of which have substantially greater financial, technical and marketing
resources than the Company. There are several companies which compete with
the Company in the U.S. market for products and accessories used in
cardiology and radiology procedures. The Company believes, based on available
industry data with respect to the number of procedures performed, that it is
one of two market leaders in the U.S. for control syringes, tubing and
maiforld kits (together with NAMIC USA Corporation, a subsidiary of Boston
Scientific), and is the leader in the U.S. market for inflation devices and
hemostasis accessories. The Company also believes that the recent and planned
additions to its product lines will enable it to compete more effectively in
both U.S. and international markets. There is no assurance, however, that the
Company will be able to maintain its existing competitive advantages or to
compete successfully in the future.
7
A substantial majority of the Company's revenues are presently
derived from sales of products used in coronary angiography and angioplasty
procedures. Other procedures, devices and drugs for the treatment and
prevention of coronary artery disease have been developed and are currently
being used such as laser angioplasty, vascular stents, atherectomy procedures
and drug therapies, the effect of which may be to render certain of the
Company's products obsolete or to limit the markets for its products. The
radiology and cardiology markets encompass a large number of suppliers of
many different sizes. The Company competes with small firms, such as Possis
Medical and Microtherapeutics; medium sized companies like Cook, Arrow and
Angio Dynamics; and large, international, multi- supply medical companies,
such as Johnson & Johnson, Boston Scientific, Guidant and C.R. Bard.
PATENTS, PATENT APPLICATIONS, LICENSES, TRADEMARKS AND COPYRIGHTS
The Company considers its proprietary technology to be important in
the development and manufacture of its products and seeks to protect its
technology through a combination of patents and confidentiality agreements
with its employees and others. Two U.S. patents were issued in 1991 covering
the mechanical aspects of the Company's angioplasty inflation devices which
relate to the ability of the user to engage or release the syringe plunger
while increasing or decreasing pressure, and two U.S. patents were obtained
in 1992 and 1993 covering digital control aspects of the Company's
IntelliSystem inflation device and for displaying, storing and retrieving
inflation data. The Company has obtained other patents covering each of its
Monarch and Basix inflation devices and additional features of the
IntelliSystem.
Corresponding patent applications covering the claims included in
the Company's U.S. patents and patent applications have been initiated in
several foreign countries. The Company deems its patents and patents pending
to be materially important to its business but does not believe its business
is dependent on securing such patents. The Company negotiated a license in
1992 with respect to patents concerning technology utilized in its
IntelliSystem and Monarch inflation devices in consideration of a 5.75%
ongoing royalty not to exceed $450,000 annually. Royalties paid in each of
1999, 1998 and 1997 were $450,000.
While the Company has obtained U.S. patents and filed additional
U.S. and foreign patent applications as discussed above, there can be no
assurance that issued patents will provide the Company with any significant
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 incur 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 of 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.
The Company has registered or applied for registration of several
tradenames or trademarks. See "Products." (Page 2). The Company also places
copyright notices on its instructional and advertising materials and has
registered copyrights relating to certain software used in its electronic
inflation devices.
REGULATION
The development, testing, packaging, labeling and marketing of
medical devices and the manufacturing procedures relating to these devices
are regulated under the Federal Food, Drug and Cosmetic Act and additional
regulations promulgated thereunder by the FDA. In general, these statutes and
regulations require that manufacturers adhere to certain standards designed
to ensure the safety and effectiveness of medical devices. The Company
employs a director of regulatory affairs who is responsible for compliance
with all applicable FDA regulations. Although the Company believes it is
currently in material compliance with all applicable FDA requirements, the
Company's business could be adversely affected by failure to comply with all
applicable FDA and other government regulations presently existing and
promulgated in the future.
8
The FDA's Good Manufacturing Practices standards regulate the
Company's manufacturing processes, require the maintenance of certain records
and provide for unscheduled inspections of the Company's facilities. Certain
requirements of state, local and foreign governments must also be complied
with in the manufacture and marketing of the Company's products.
New medical devices may also be subject to either the Section
510(k) Pre-Market Notification regulations or the Pre-Market Approval ("PMA")
regulations of the FDA and similar regulatory authorities in foreign
countries. New products in either category require extensive documentation,
careful engineering and manufacturing controls to ensure quality. Products
needing PMA approval require extensive pre-clinical and clinical testing and
clearance by the FDA prior to marketing. Products subject to the Section
510(k) Pre-Market Notification regulations require FDA clearance prior to
marketing. To date, the Company's products have required only compliance with
the Section 510(k) Pre-Market Notification regulations. The Company's
products are subject to foreign regulatory approvals before they may be
marketed abroad. The Company places the "CE" mark on devices and products
sold in Europe. The Company has received ISO 9001 certification for its South
Jordan facility, as well as ISO 9002 for its Galway, Ireland facility.
EMPLOYEES
As of March 23, 2000, the Company employed 1,214 persons, including
947 in manufacturing, 107 in sales and marketing, 79 in engineering, research
and development and 81 in administration.
Many of the Company's present employees are highly skilled. The
Company's failure or success will depend, in part, upon its ability to retain
such employees. Management is of the opinion that an adequate supply of
skilled employees is available. The Company has from time to time experienced
rapid turnover among its entry level assembly workers as well as occasional
shortages of such workers, resulting in increased labor costs and
administrative expenses related to hiring and training of replacement and new
entry-level employees. The Company has confidentiality agreements with its
key employees, including each of its executive officers. None of the
Company's employees are represented by a union or other collective bargaining
group and management of the Company believes that its relations with its
employees are good.
FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES
For financial information relating to the Company's foreign and
domestic sales, transfers between geographic areas, net income and
identifiable assets, see Note 8 to the Consolidated Financial Statements
incorporated by reference in this report.
ITEM 2. PROPERTIES.
The Company is the owner of approximately 35 acres of real property
situated in the City of South Jordan, Utah, which surrounds the site of its
175,000 square foot principal office and manufacturing facility where it
relocated and consolidated its operations in November 1994. The Company sold
to the developer ten acres of land on which the facility was constructed and
entered into a 25-year lease agreement to finance the new facility. Monthly
lease payments are approximately $122,117. The Company also holds an option
to purchase the facility, exercisable at market value after ten years and, if
not exercised, after 25 years. The new facility has been constructed to the
Company's specifications and is presently 90% utilized.
The Company is leasing a building of approximately 26,500 square
feet in Galway, County Galway, Republic of Ireland as its principal office
and manufacturing facility for European operations. This facility is used as
the administrative headquarters to support the European direct sales force.
The facility also houses a research and development team which has developed
a new PTCA guide wire and is developing other new products. Beginning in the
fourth quarter of 1997, the Company initiated manufacturing operations for
several new and existing products at the Galway facility, including custom
kits, the BASIX inflation device and the Company's PTCA guide wire. In 1998
Merit began the manufacture of the hemostasis valve products in Ireland. The
property has been improved and equipped
9
on terms favorable to the Company in connection with economic development
grant incentives and grants provided by the Irish Government. This lease is
for 20 years at approximately $135,000 per year, less a 40% subsidy from the
Irish government, available through 2000. The Company also has a purchase
option exercisable on terms deemed favorable to the Company through the term
of the lease.
In October 1997, the Company began manufacturing operations in a
facility of approximately 25,000 square feet of manufacturing space formerly
occupied by the Company in Murray, Utah and shifted production of several
well-established products to this facility. In 1998 Merit added an additional
25,000 square feet of manufacturing space to its Murray location. The
additional manufacturing space was obtained to create room at the Company's
principal manufacturing facility for production of new products. The leases
are for a term of five years with monthly lease payments of approximately
$26,365.
In August 1999, the Company purchased the operating assets of
Mallinckrodt's Angleton division, including approximately 19 acres of land
and 75,000 square feet of building in Angleton, Texas, from Mallinckrodt.
The Company believes that its facilities are generally adequate for
its present level of operations and for anticipated increases in the level of
operations.
ITEM 3. LEGAL PROCEEDINGS.
In the course of business, the Company is involved in litigation
and claims which management believes are not considered material to the
Company's operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year covered by this report.
10
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS.
The "Market Information" included in the Company's Annual Report to
Shareholders for the year ended December 31, 1999, furnished herewith to the
Commission as Exhibit 13.1 to this Report, is incorporated herein by
reference.
ITEM 6. SELECTED FINANCIAL DATA.
The "Selected Financial Data" included in the Company's Annual
Report to Shareholders for the year ended December 31, 1999, furnished
herewith to the Commission as Exhibit 13.1 to this Report, is incorporated
herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The "Management's Discussion and Analysis of Financial Condition"
included in the Company's Annual Report to Shareholders for the year ended
December 31, 1999 furnished herewith to the Commission as Exhibit 13.1 to
this Report, is incorporated herein by reference.
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
The "Market Risk Disclosure" included in the Company's Report to
Shareholders for the year ended December 31, 1999, furnished herewith to the
Commission as Exhibit 13.1 to this Report, is incorporated herein by
reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Company's consolidated financial statements and notes included
in the Company's Annual Report to Shareholders for the year ended December
31, 1999, furnished herewith to the Commission as Exhibit 13.1 to this
Report, are incorporated herein by reference.
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEMS 10, 11, 12 AND 13.
These items are incorporated by reference to the Company's
definitive Proxy Statement relating to the Annual Meeting of Shareholders
scheduled for May 24, 2000. The definitive Proxy Statement will be filed with
the Commission not later than 120 days after December 31, 1999, pursuant to
Regulation 14A of the Securities Exchange Act of 1934, as amended.
11
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) Documents filed as part of this report:
FINANCIAL STATEMENTS. The following financial statements are
incorporated by reference as provided in Item 8 of this report:
-- Independent Auditors' Report
-- Consolidated Balance Sheets as of December 31, 1999 and
1998
-- Consolidated Statements of Operations for the Years
Ended December 31, 1999, 1998 and 1997
-- Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 1999, 1998 and 1997
-- Consolidated Statements of Cash Flows for the Years
Ended December 31, 1999, 1998 and 1997
-- Notes to Consolidated Financial Statements
(b) Reports on Form 8-K:
None.
(c) Exhibits:
The following exhibits required by Item 601 of Regulation S-K
are filed herewith or have been filed previously with the Commission
as indicated below:
DESCRIPTION EXHIBIT NO.
----------------------------------------------------------------------- ------------------------------
3.1 Articles of Incorporation of the Company, as amended and restated* [Form 10-Q filed August 14,
1996, Exhibit No. 1]
3.2 Bylaws of the Company* [Form S-18 filed October 19,
1989, Exhibit No. 2]
4 Specimen Certificate of the Company's Common Stock, no par value* [Form S-18 filed October 19,
1989, Exhibit No. 10]
10.1 Merit Medical Systems, Inc. Long Term Incentive Plan (as amended and [Form 10-Q filed August 14,
restated) dated March 25, 1996* 1996, Exhibit No. 2]
10.2 Merit Medical Systems, Inc. 401(k) Profit Sharing Plan (as amended [Form S-1 filed February 14,
effective January 1, 1991* 1992, Exhibit No. 8]
10.3 License Agreement, dated April 8, 1992 between the Company and Utah [Form S-1 filed February 14,
Medical Products, Inc.* 1992, Exhibit No. 5]
10.4 Lease Agreement dated as of June 8, 1993 for office and manufacturing [Form 10-K for year ended
facility* December 31, 1994, Exhibit
No. 10.5]
12
DESCRIPTION EXHIBIT NO.
----------------------------------------------------------------------- ------------------------------
10.5 Loan Agreement with Zions First National Bank dated October 10, [Form 10-K for year ended
1995* December 31, 1995, Exhibit
No. 10.5
10.6 Amendment to Loan Agreement with Zions First National Bank dated [Form 10-K for year ended
October 10, 1997 December 31, 1997, Exhibit
No. 10.5]
10.7 Amendment to Loan Agreement with Zions First National Bank dated [Form 10-K for year ended
October 10, 1998 December 31, 1998, Exhibit
No.10.7]
10.8 Amendment to Loan Agreement with Zions First National Bank dated Filed herewith
August 11, 1999
10.9 Agreement of sale by and between Merit Medical Systems, Inc. and [Form 8-K dated August 20,
Mallinckrodt Inc. dated August 20, 1999 1999, Exhibit No. 10.1]
13.1 Annual Report to Shareholders for the year ended December 31, 1999. Filed herewith
Certain portions of this exhibit are incorporated by
reference into this Report on Form 10-K; except as so incorporated by
reference, the Annual Report to Shareholders is not deemed filed as
part of this Report on Form 10-K.
23.1 Consent of Independent Auditors Filed herewith
27 Financial Data Schedule - Twelve months ended December 31, 1999 Filed herewith
- ---------------------
* These exhibits are incorporated herein by reference.
(d) Financial Statement Schedules: There are no financial statement
schedules required to be filed with this report.
13
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, on March 29, 2000.
MERIT MEDICAL SYSTEMS, INC.
By: FRED P. LAMPROPOULOS, PRESIDENT
---------------------------------
Fred P. Lampropoulos, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities indicated on March 29,2000.
SIGNATURE CAPACITY IN WHICH SIGNED
FRED P. LAMPROPOULOS President, Chief Executive Officer and Director
- ---------------------------------------------------
Fred P. Lampropoulos
KENT W. STANGER Chief Financial Officer, Secretary, Treasurer and
- --------------------------------------------------- Director (Principal financial and accounting officer)
Kent W. Stanger
RICHARD W. EDELMAN Director
- ---------------------------------------------------
Richard W. Edelman
REX C. BEAN Director
- ---------------------------------------------------
Rex C. Bean
JAMES J. ELLIS Director
- ---------------------------------------------------
James J. Ellis
MICHAEL E. STILLABOWER Director
- ---------------------------------------------------
Michael E. Stillabower
14