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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, 2001 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) Identi-fication No.)
1600 West Merit Parkway
South Jordan, Utah 84095
------------------------
(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. [X]
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, 2002, was approximately $198 million.
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, 2002 the Registrant had 10,807,928 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 23, 2002 (Part
III).
TABLE OF CONTENTS
PART I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Disclosure regarding forward-looking statements. . . . . . . . . . . . . . . . . . . . . . . . . 1
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Item 1. Business. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
--------
GENERAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
PRODUCTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
MARKETING AND SALES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Market Strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
U.S. Sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
International Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
CUSTOMERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
RESEARCH AND DEVELOPMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
MANUFACTURING. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
COMPETITION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
PATENTS, PATENT APPLICATIONS, LICENSES, TRADEMARKS AND COPYRIGHTS. . . . . . . . . . . . . . . . 10
REGULATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
EMPLOYEES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS
AND EXPORT SALES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
-----------------
Item 4. Submission of Matters to a Vote of Security Holders. . .. . . . . . . . . . . . . . . . 13
---------------------------------------------------
PART II. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Item 5. Market for Registrant's Common Stock and Related Shareholder Matters . . . . . . . . . 14
---------------------------------------------------------------------
Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
-----------------------
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations . 15
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Item 7A. Quantitative and Qualitative Disclosure About Market Risk. . . . . . . . . . . . . . . 18
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Item 8. Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . 18
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Item 9. Changes and Disagreements with Accountants on Accounting and Financial Disclosure . . . 39
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PART III. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Items 10, 11, 12 and 13 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
PART IV . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K . . . . . . . . . . . 39
---------------------------------------------------------------
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
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, product introductions, 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, development of new products and techniques that render the
Company's products obsolete, product liability claims, 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.
1
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 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 group 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 safety products 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 both stand-alone products
in combination with custom kits have increased as additions have been made to
the Company's product lines. In 2001, approximately 53% of the Company's sales
were made directly to U.S. hospitals and approximately 24% of sales were made to
custom packagers, distributors and O.E.M. companies who also distribute to U.S.
hospitals. Approximately 23% of the Company's sales in 2001 were made in
international markets.
The Company was organized in July 1987 as a Utah corporation. In July
1994, the Company purchased a controlling interest in Merit Sensor Systems, Inc.
(formally Sentir), a California-based manufacturer of silicon sensors, and
during 1999 the Company purchased the remaining interest. The Company also has
established subsidiaries in Ireland, Germany, France, the United Kingdom,
Belgium, and 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, Texas 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."
2
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), Smart Tip(TM) and Inject8(TM)), inflation devices (Intellisystem(R),
Monarch(R), Basix(R), and BasixCOMPAK(TM) including new 25-atmosphere versions),
specialty syringes (Medallion(R),and VacLok(R)), high-pressure tubing and
connectors (Excite(TM), flexible, braided, rigid, pvc, and Sherlock(TM)) , waste
handling and disposal products (Merit Disposal Depot(R), Backstop(R) and
ShortStop(R)), a disposable blood pressure transducer (Meritrans(R)), disposable
hemostasis valves (MBA(TM), Passage(R), Access-9,(TM) Access Plus(TM),
Double-Play(TM) and Inspector(TM)), manifolds and stopcocks (Marquis(R) Series),
a torque device, contrast management systems (Miser(R) and In-Line(TM) Contrast
Management System(TM)), angiography needles (Majestik(R) Series, Majestik(R)
Sheilded needle), blood containment devices (Captiva(R) ), pericardiocentesis
catheters and procedure trays, PTCA guide wires (TomCat(R) ) and extension
wires, thrombolytic infusion catheters (Fountain(R) and Mistique(TM)) and
accessories (Squirt(R)), diagnostic angiographic pigtail catheters, diagnostic
cardiology and radiology catheters, (SofTouch(R) and Performa(R)) sheath
introducers (DialEase(TM)), diagnostic guide wires (Inqwire(R)), and
RadStat(TM). These products are sold separately and in custom kits consisting
primarily of selected combinations of products.
The Company has not experienced any significant 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 and Angioplasty Accessories.
----------------------------------------------
Inflation devices are large, specialized syringes used in
interventional catheterization procedures to inflate balloon-tipped catheters.
Each of the Company's inflation devices incorporates patented, 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 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 (R) 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 internal pressure transducer which
connects to a monitor outside of the sterile field. The IntelliSystem monitor
measures, times, records, and digitally displays information concerning the
pressure, duration and number of each inflation and deflation of the angioplasty
balloon. The Company believes that electronic sensing 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.
The patented IntelliSystem II(TM) color monitor is an advanced balloon inflation
system. It gives physicians several highly desirable options, including: a large
touch screen, an instant readout of positive and negative pressures, and an
enlarged graphing display to show extremely subtle changes in pressure
measurements. In addition the readouts are available in four languages by
touching the screen. Merit is the only company with digital technology sensitive
enough to show minute changes in pressure.
The Monarch(R) is a disposable inflation device which digitally displays data
concerning pressure and duration of inflations and deflations on a small digital
readout mounted on the barrel of the inflation syringe. The small monitor does
not offer the same display, storage or printing capabilities of the
IntelliSystem & IntelliSystem II(TM) but offers the convenience of portable
digital operation. In 2002 Merit will launch a 30 atmosphere version to provide
clinicians with additional options.
3
The Basix(R) 25 and the new BasixCOMPAK(TM) are disposable inflation syringes
which incorporate a conventional analog pressure gauge mounted on the barrel of
the inflation syringe. The Basix(R) 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(R) and BasixCOMPAK(TM)
represent a significant addition to its line of inflation devices that will
contribute to increased sales where both clinical outcomes and price are a
priority.
Hemostasis Valves.
------------------
The MBA(TM), Passage(R), AccessPlus(TM), Double Play(TM), and the
Inspector(R) 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 of polycarbonate plastic for clarity and include Sherlock(TM)
connectors. The devices differ in size and function. The MBA(TM) features a
valve mechanism that minimizes blood loss during exchange of wires, catheters
and other tools through the valve. The Access Plus(TM) and Access 9(TM) are
large-bore configurations. The Double Play(TM) incorporates a double "Y"
configuration for kissing-balloon techniques. The Inspector(R) is a
single-lumen, flow-through configuration.
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.
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, including a popular 8ml model, Inject8(TM). In
response to customer demand, Merit launched latex-free control syringes in 1998.
60ml VacLok(R).
---------------
The 60ml VacLok(R) syringe is used to create negative pressure. There
are many clinical applications for a negative pressure syringe, including:
abscess drainage and biopsy, balloon preparation, nephrostomy drainage, and
more.
Large-Bore Stopcock(TM).
------------------------
The large-bore(TM) stopcock launched in 2001 is designed to facilitate
movement of fluid. The large internal diameter (0.120") is ideal for moving
drainage fluid from the body. Like all Merit stopcocks, the large-bore version
incorporates a clear body for easy visualization and a large, easy-to-manipulate
handle.
Percu-Stay(R) - Catheter Fixation Device.
-----------------------------------------
Percu-Stay(R) is a one piece catheter tube securing device and site
dressing for percutaneous drainage sites. The product provides a comfortable,
low-profile fixation device for catheters and tubes. The device is used in
interventional radiology, special procedures, cardiology, urology, home health
care, and skilled nursing facilities.
MDD600(TM).
-----------
The Merit Drainage Depot(TM) was launched in 2001 and is specifically
designed to temporarily collect fluids. It incorporates a drainage spout for
quick and easy fluid disposal. It incorporates an internal anti-reflux valve to
help prevent fluid from backing up the line. The bag also comes packaged with an
adjustable Velcro strap that can be used to attach the device to the patient's
waist or leg.
Specialty Syringes.
-------------------
Merit's Medallion(R) syringes, a line of disposable, latex-free,
color-coded specialty syringes, are used for injection of medications, flushing
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 minimizes medication errors by
allowing a clinician to assign a color for each medication to be dispensed and
to differentiate syringes by their contents. The syringes also can be custom
printed to the specifications of the user. 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
and are an important component of the Company's custom kits.
4
High-Pressure Contrast Injection Line and Sherlock(TM) Connectors.
------------------------------------------------------------------
During angiographic and diagnostic radiology procedures, contrast media
must be injected through a catheter into a patient's artery or vein. 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(TM) 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(TM) connectors allow coupling and
uncoupling of tubing with injectors, syringes and manifolds without
over-tightening or breakage. The Company is currently offering specialty tubing
that can handle pressures ranging from 500 to 1200 psi. The specialty tubing
with Sherlock(TM) 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. The Company has designed
its own manifold consisting of two, three, four or five valves. When compared to
manifolds sold by competitors, 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. The Merit
Manifold is sold separately but is also a key component of the Company's custom
kits.
RadStat(TM) Radial Artery Compression Device.
---------------------------------------------
The RadStat(TM) Radial Artery Compression Device is intended to be used
to apply direct pressure to the radial artery puncture site after diagnostic and
interventional procedures. In addition to rapid controlled hemostasis, the
RadStat(TM) immobilizes the wrist comfortably, permitting rapid patient
ambulation.
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 in a closed system and collects
waste materials such as blood and other fluids during angioplasty or other
procedures. The Merit Disposal Depot(TM) is self-contained for ease of disposal
and reduces the risk of contamination. The Backstop(R) is a unique and
proprietary alternative fluid disposal basin designed to reduce exposure to
blood-borne pathogens. In 2002 Merit will launch the DugOut(TM), a large volume
(1000 ml) line extension to the Backstop(R). The DugOut(TM) also contains an
additional compartment for the storage of accessories.
Marquis(TM) Series Stopcock.
----------------------------
The Company's Marquis(TM) Series Stopcock offers improvements to
competitive stopcock devices, including a large, easy-grip handle. The
Marquis(TM) Series Stopcock is used in connection with Sherlock(TM) connectors
to provide improved connections during procedures.
Contrast Management Systems.
----------------------------
The Miser(TM) and the In-Line(TM) Contrast Management System have been
designed to increase catheterization lab efficiencies by reducing contrast media
waste. This small system helps save hospitals thousands of dollars a year in
wasted contrast.
Majestik(R) Angiographic Needles.
---------------------------------
The angiography needle creates the percutaneous (through the skin)
access site for virtually all invasive diagnostic and interventional procedures
performed in cardiology and radiology. The needle provides the initial point of
entry site for the introducer sheath, guide wires, catheters and any other
interventional devices. The Merit Majestik(R) Needle helps the physician achieve
precision vascular access with one of the sharpest angiography needles on the
market.
Majestik(R) Shielded Angiography Needles.
-----------------------------------------
The needlestick safety and prevention act that passed in November 2000,
requires healthcare employers to document their exposure control plan and
evaluate safety-engineered products to protect clinicians. In 2002 Merit will
launch a new line of shielded, 18-gauge angiography introducer needles that meet
the requirements of the law. The Majestik(R) shielded needle will be one of the
first safety-engineered devices designed to promote safer needles in cardiology
and radiology.
5
Fountain(R) and Mistique(TM) Infusion Catheters.
------------------------------------------------
Vascular occlusion is a common anomaly and affects millions of patients
each year. Both the Fountain(R) catheter and the Mistique(TM) catheters deliver
therapeutic solutions to dissolve thrombolytic occlusions (blood clots) in
peripheral arteries, hemodialysis grafts and deep veins. The Fountain catheter
utilizes an occluding wire to effectively block off the end hole and direct the
infusion therapy uniformly through the laser-drilled side holes. The
Mistique(TM) is designed to be used over standard 0.035 or 0.038 guide wires to
block off the end hole and direct the infusion therapy uniformly through the
side holes.
InQwire(R) Diagnostic Guide Wires.
----------------------------------
Guide wires consist of a small-diameter wire tightly wrapped in a
coated wire coil. The technology needed to produce these wires is considerable,
and Merit utilizes its guide wire center of excellence in Ireland to manufacture
the Inquire Diagnostic Guide Wire, as well as PTCA guide wires. Guide wires vary
in length, outside diameter and tip configuration, and are used to place either
a diagnostic or therapeutic catheter into a patient's heart artery or other area
of the body.
Tomcat(TM) Interventional PTCA Guide Wires.
-------------------------------------------
Tomcat(TM) PTCA 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 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.
RingMaster(TM).
---------------
The RingMaster(TM) guide wire basin, launched in 2001, allows
clinicians to conveniently store guide wires to maintain sterility and
organization. It separates wires for quick selection, uses less table space than
conventional basins because it's stackable and it helps keep wires hydrated
throughout the procedure.
KEEP(TM).
---------
The Merit KEEP(TM)is an accessory organizer that holds and organizes
guide wires, catheters and tubing.
Performa(R) Introducer Sheaths.
-------------------------------
Introducer Sheaths are used to create the access through which guide
wires and catheters are passed into the vasculature. Most sheaths incorporate a
valved hub to minimize bleeding, and a side port for drug delivery, pressure
monitoring and standard flushing.
Vessel Dilators.
----------------
Dilators are used to dilate puncture sites. They are commonly used in
Radiology and Cardiology over a 0.035" or 0.038" guide wire to dilate the site
prior to placing sheaths and catheters in the femoral artery.
Squirt(R) Fluid Dispensing System.
----------------------------------
The Squirt(R) fluid dispensing system is a unique and proprietary
product designed specifically for therapeutic infusion for controlled, accurate
and consistent fluid delivery. Some Fountain catheter configurations contain a
Squirt(R) packaged with it.
DialEase(R) Introducer Sheath.
------------------------------
The DialEase(TM) Sheath is a short introducer ideally suited for
dialysis graft intervention. It is commonly used in conjunction with the
Fountain(R) and Mistique(TM) therapeutic infusion catheters to declot dialysis
grafts.
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, (Teflon(R)), high-flow, pigtail
angiographic catheters ideally suited for smaller patients.
Pericardiocentesis.
-------------------
On occasion, the pericardial sack surrounding the heart becomes filled
with blood or fluid. To remove the fluid and the potential for heart
strangulation (tamponade), a catheter is placed in the pericardial sack to drain
the excess fluid. Merit offers a complete pericardiocentesis kit which combines
a high-flow drainage catheter with virtually all components needed to place the
device in the pericardial sack. The kit combination saves the physician both
time and money by having all components in one convenient tray.
One-Step(TM) Centesis Catheter.
-------------------------------
The One Step(TM) Catheter launched in the first quarter of 2002 is
intended to be used for short-term centesis procedures. It incorporates a
luer-locked introducer needle for secure, one-handed placement. The tip of the
introducer needle is echogenically enhanced for visualization during
ultrasound-guided placement. The transition between the catheter and needle is
perfectly smooth to facilitate insertion.
6
Resolve(TM) Universal Drainage Catheter with Locking Pigtail.
-------------------------------------------------------------
The Resolve(TM) Universal Drainage Catheter with locking pigtail and
hydrophilic coating will be another key addition to Merit's offering of drainage
catheters and accessories in 2002. It is intended for percutaneous drainage of
body fluids where a locking pigtail is required for extended catheter placement.
With the unique, patented pigtail release mechanism there is no need to cut the
catheter for removal and exchange. With a new hub design, the clinician can
close the hub and lock the pigtail with one hand. There is no longer a
requirement to wind a locking suture around the hub to keep the pigtail locked
in place.
Resolve(TM) Universal Drainage Catheter with Non-Locking Pigtail.
-----------------------------------------------------------------
The Resolve(TM) Universal Drainage Catheter with non-locking pigtail
will also be launched in 2002. It is a standard drainage catheter that will
round out the Merit offering of drainage products.
Meritrans(R) Pressure Transducer and Accessories.
-------------------------------------------------
Diagnostic blood pressure monitoring is a critical priority in
virtually all diagnostic and interventional procedures. The Meritrans(R)
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 vital component of many custom kit configurations. Pressure
Monitoring Tubing and Stopcocks are common ancillary products to complement the
Meritrans(R). Merit provides several reusable accessories to support the
Meritrans(R). The Merit Mentor(TM) is a transducer calibration and
troubleshooting device to insure accuracy and repeatability of physiologic
pressure measurements. Reusable transducer cables connect the Meritrans(R) to
the bedside monitor. Organizing brackets hold multiple transducers to beds and
IV poles.
Pressure Infusor Bag.
---------------------
In 2001 Merit signed a distribution agreement for a line of Pressure
Infusor Bags. These devices are used hospital-wide to apply pressure to a sealed
bag of fluid, such as IV solutions or blood products. The pressure exerted is
shown by a color-coded pressure gauge, and the device has a valve that releases
pressure to prevent inadvertent over-pressurization.
ShortStop(R).
-------------
In 2000, Merit introduced the ShortStop(R), a small, temporary sharps
container with an adhesive base that fits on the back table in a clinical lab.
It is used for the temporary containment of needles, scalpels and other sharp
tools to help prevent inadvertent clinician injury.
Custom Kits.
------------
Custom kits allow physicians to obtain the medical devices and
accessories they most frequently use during angiography, angioplasty and similar
procedures in a convenient, pre-packaged and preassembled form. Custom kits also
provide cost savings over purchasing single products and reduce the hospital's
administrative costs associated with maintaining inventory of individual,
sterile products.
Universal Fluid Dispensing Syringe.
-----------------------------------
In 1997 the company received 510(k) approval from the U.S. Food and
Drug Administration ("the FDA") for use of its digital inflation devices
(Intellisystem(R) and Monarch(R)) for a wide range of additional clinical
applications such as discography, esophageal dilatation, trigeminal nerve
compression, and retinal detachment. Universal fluid dispensing syringes
incorporate patented, 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 pressure. Each syringe also
provides a clear view of the fluid path that simplifies debubbling and
contributes to accurate measurement of pressure. When used in other clinical
applications such as discography, the IntelliSystem(R) accurately dispenses
fluid while documenting and graphing pressures in the disc. The Company believes
that electronic sensing display of such information is much more accurate and
precise than the tactile feel of standard syringes and that which can be
obtained from conventional analog gauges. The data is stored and may be
displayed, retrieved, graphed and printed.
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.
7
Diagnostic Radiology Catheters.
-------------------------------
Radiology catheters are engineered and designed with distinct tip
configurations to access specific vessels and organs outside the heart (head,
kidneys, legs, etc). Merit acquired a strong radiology catheter product
portfolio from Mallickrodt's Angleton Division in 1999.
Vessel-Sizing Catheters.
------------------------
In 2000 Merit introduced a complete line of adult vessel-sizing
catheters, which are used by radiologists to measure the internal diameter and
length of a blood vessel under fluoroscopy. Procedures in which these catheters
are used include angioplasty, embolization, abdominal aortic aneurysm (AAA)
stent-grafts and vena cava filter placements. In 2001. Pediatric vessel-sizing
catheters were introduced to complement the line
Guide Catheters.
----------------
The Mallinckrodt acquisition brought with it a line of high-quality
guide catheters used in cardiology. Coronary angioplasty requires the use of a
guiding catheter to place the balloon within the vasculature. The catheter is
inserted through a 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 radiopaque dye that is used to provide fluoroscopic
visualization during the procedure.
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 technicians
who perform the clinical procedures.
When a product suggestion demonstrates sustainable competitive
advantage, meets customer needs, fits strategically and technologically with the
Company's business, 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.
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, have 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 dependent
upon demographic trends. This has not, however, prevented significant investment
in 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: drug-coated stents, 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.
8
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 44
direct sales representatives located in major metropolitan areas throughout the
U.S. The Company's sales people are trained by 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., approximately 100 independent dealer organizations
and 17 direct sales representatives in Germany, France, the United Kingdom,
Belgium, Netherlands, and Ireland presently sell the Company's products. In
2001, the Company's international sales grew by 9% and accounted for
approximately 23% 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, technicians and
nurses, all of whom 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 where we do not have a direct sales force, independent dealers
in medical products resell to hospitals and other customers.
In 2001, approximately 53% of the Company sales were made directly to
domestic hospitals, 24% to custom packagers and packers and 23% to international
markets. Sales to the Company's single largest customer, a packer, accounted for
7.3% of total sales during the year ended December 31, 2001. Merit manufactures
products for other medical device companies through its OEM program. In 2001,
OEM sales represented 8.7% of Merit's total revenue.
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 as well as its recently developed and
acquired technologies of guide wires and catheters 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 $4,117,839, $3,864,171 and $3,618,041 in 2001, 2000
and 1999, respectively. There was no customer-sponsored research and
development. The Company anticipates that its research and development expenses
will range between approximately 3% and 4% of net sales for 2002.
9
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(R) and Monarch(R) 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 Merit Sensor Systems, Inc., which is engaged in development and
marketing of silicon sensors. Merit Sensor Systems, Inc. is presently providing
virtually all of the sensors utilized by the Company in its digital inflation
devices.
The Company's products are manufactured at several facilities including
South Jordan, Utah; Santa Clara, California; 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 are sold 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, and the Company's prompt attention to customer inquiries. The
Company's products are priced competitively, but generally 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. 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 manifold 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. The Company's new IntelliSystem(R) II color monitor provides
considerable improvements, including sensitivity, in Merit's existing, patented
digital technology. The Company is the only provider of digital inflation
technology in the world. There is no assurance, however, that the Company will
be able to maintain its existing competitive advantages or to compete
successfully in the future.
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, 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. However, with the advent of vascular stents and other
procedures such as discography, the Company has experienced continued growth in
its proprietary inflation technology. 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, Medtronic 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. Merit has received 92 issued U.S. and Foreign patents and
many more pending. Two U.S. patents were issued in 1991 covering the mechanical
aspects of the Company's angioplasty inflation devices which relate to the
10
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(R) inflation
device and for displaying, storing and retrieving inflation data. The Company
has obtained other patents covering each of its Monarch(R) and Basix(R)
inflation devices and additional features of the IntelliSystem(R).
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(R)
and Monarch(R) inflation devices in consideration of a 5.75% ongoing royalty,
not to exceed $450,000 annually. Royalties paid in each of 2001, 2000 and 1999
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 trade
names 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 these requirements, the Company's business could be adversely
affected by failure to comply with all applicable FDA and other government
regulations presently existing or promulgated in the future.
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) regulations
require FDA clearance prior to marketing. To date, the Company's products have
required only compliance with the Section 510(k) 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 and Murray,
Utah facilities, for its Galway, Ireland facility, and for its Angleton, Texas
facility. The Company has also received the ISO 9002 certification for its Merit
Sensor Systems, Inc. facility in Santa Clara, California.
11
EMPLOYEES
As of March 20, 2002, the Company employed 1,071 persons, including 818
in manufacturing, 112 in sales and marketing, 70 in engineering, research and
development and 71 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 is 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 10 to the Consolidated Financial Statements incorporated by
reference in this report.
Item 2. Properties.
The Company is the owner of approximately 26 acres of real property
situated in the City of South Jordan, Utah, surrounding an additional 10-acre
site which includes 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 $122,000. 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 was constructed to
the Company's specifications and is presently estimated to be 80% 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 a diagnostic 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(R) inflation device and the Company's
PTCA guide wire. In 1998 Merit began the manufacture of the hemostasis valve
products in Ireland. Toward the end of 2001 the Company finished an R&D project
and began manufacturing a new diagnostic guide wire. The property has been
improved and equipped on terms favorable to the Company in connection with
economic development incentives and grants provided by the Irish Government.
This lease is for 20 years at approximately $210,000 per year. The Company also
has a purchase option exercisable throughout 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 the production of new products. The leases are for a
term of five years with monthly lease payments of approximately $30,000.
In August 1999, the Company purchased the operating assets of
Mallinckrodt's Angleton division, including approximately 19 acres of land and a
75,000 square feet building in Angleton, Texas.
12
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 will not have a materially adverse effect on
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.
13
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, 2001, furnished herewith to the
Commission as Exhibit 13.1 to this Report, is incorporated herein by reference.
Item 6. Selected Financial Data.
(In Thousands except for EPS)
Year Ended December 31,
2001 2000 1999 1998 1997
--------- --------- --------- --------- ---------
Operating Data:
Sales $ 104,036 $ 91,448 $ 77,960 $ 68,377 $ 60,579
Cost of Sales 65,938 60,824 47,918 42,434 37,766
Gross Profit 38,098 30,624 30,042 25,943 22,813
Selling, General and Administrative
Expenses 24,040 23,300 20,407 17,528 15,727
Research and Development Expenses 4,118 3,864 3,618 3,244 4,446
Severance Costs -- 331 -- -- --
Income from operations 9,940 3,129 6,017 5,171 2,640
Other Expense 938 2,355 1,256 881 864
Gain on sale of land (786) -- -- -- --
Income Before Income Tax Expense 9,788 774 4,761 4,290 1,776
Income Tax Benefit (Expense) (3,052) 53 (1,454) (1,687) (945)
Minority Interest in Subsidiary -- -- (81) (152) (33)
Net Income $ 6,736 $ 827 $ 3,226 $ 2,451 $ 798
Net Income Per Share (Diluted) $ 0.63 $ 0.08 $ 0.34 $ 0.26 $ 0.09
Weighted Average Shares Outstanding
(Diluted) 10,744 9,826 9,457 9,360 9,212
Balance Sheet Data:
Working Capital $ 26,911 $ 32,447 $ 33,934 $ 15,780 $ 14,738
Total Assets 66,659 71,447 72,360 50,665 45,270
Long-Term Debt 5,727 24,012 27,817 3,389 3,914
Stockholders' Equity $ 47,658 $ 34,773 $ 32,690 $ 29,086 $ 25,802
14
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
OVERVIEW
2001 was by far the most exciting and rewarding year in the history of
Merit Medical, particularly on the heels of the challenging year preceding it.
The Company has not only achieved a 14% top line growth but improved just about
every area of its financial statements, especially the bottom line, up 715% over
an albeit "troubled" 2000. Income for 2001 was also up 109% over 1999, the
previous best year ever, and within 8% of exceeding the total net income of the
previous four years (1997 - 2000).
2001 was a year of great accomplishments and important milestones. To
start with Merit passed a major milestone of $100 million in revenues. The
Company also passed important milestones in equity market capitalization of
first $100 million, and now $200 million. Merit Medical surpassed the milestone
of over $100,000 of sales per employee for 2001, up 54% from just two years ago.
From January 2000 to February 2002, the Company's revenue has increased over 30%
while inventory has dropped over 31%. The preceding two accomplishments, along
with our upgraded MIS systems and our new incentive pay system, have worked
together to make the Company much more productive. The productivity gains are
evident in both the gross margin and SG&A improvements as a percent of sales.
Maybe the best milestone of all is that since late August 2000 (in just 19
months), Merit Medical has paid off approximately $32 million in debt and as of
March 27, 2002 the line of credit is paid in full. All of these accomplishments
and milestones have contributed to a record year for "the bottom line".
So what made this happen and why do we believe it will continue? Higher
productivity from all of our employees has come from a Company-wide incentive
pay program that compensates each employee for individual, team and Company
goals, the benefit from which it shares with the employees. The Company's new
Oracle system, now learned, is increasing productivity. Management throughout
the Company has learned important lessons from our 1999 to 2000 experiences.
Continuing leverage of long-term investments in: (1) product breadth, quality
and innovation (2) direct sales force in U.S. and Europe (3) quality systems and
facilities.
With the Company's cash flow improving and its debt paid off, it is in
the position to take advantage of the many opportunities now becoming available
to a company with the market leadership and reputation of Merit Medical. The
Company has recently added products to its offerings which "weren't invented
here" because Merit is the best option for these products to get the focused
exposure they needed. Management believes there are many more opportunities to
grow the company in addition to the continued growth of the market in which the
Company sells, and the continued acceptance by the market of the Company's new
and existing products, namely in the form of newly acquired products,
technologies and/or business that will enhance and leverage further the strong
position Merit Medical has achieved.
15
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain operational
data as a percentage of sales:
2001 2000 1999
----- ----- -----
Sales 100.0% 100.0% 100.0%
Gross margins 36.6 33.5 38.5
Selling, general and administrative 23.1 25.5 26.2
Research and development 4.0 4.2 4.6
Income from operations 9.6 3.4 7.7
Income before income tax expense 9.4 .8 6.1
Net Income 6.5 .9 4.1
Sales increased by $12.6 million, or 13.8%, in 2001 compared to an
increase of $13.5 million, or 17.3%, in 2000, and an increase of $9.6 million,
or 14.0%, in 1999. The increase in sales for 2001 came from a 19% increase in
custom kits, an 18% increase in stand-alone products and a 14% increase in
inflation devices. Incremental sales of $7.1 million from the August 1999,
Angleton catheter line acquisition was the largest contributing factor to the
sales rise in 2000. Sales growth from 1999 through 2001 was also favorably
affected by the introduction of new products and increased sales of existing
products sold separately and packaged in custom kits, and increased penetration
of the market by Merit's inflation devices. International sales in 2001 were
approximately $23.8 million, or 23%, compared to $21.8 million, or 24%, in 2000,
and $18.3 million, or 24%, in 1999. These increases were primarily a result of
the addition of the Angleton product lines, ongoing growth in the direct sales
in Europe, as well as greater acceptance of the Company's products in other
international markets. Direct sales in France, Germany, the U.K., Belgium, the
Netherlands and Canada were $10.6 million, $8.6 million and $8.2 million in
2001, 2000 and 1999, respectively.
Gross profit as a percent of sales was 36.6%, 33.5%, and 38.5% in 2001,
2000, and 1999, respectively. The increase in the gross margin percentage in
2001 over 2000 was due primarily to an increase in efficiency and productivity
gains by the operations group in the Utah facilities. A lower head count in both
direct labor and overhead areas of production contributed to higher
productivity. This margin percentage increase is expected to continue into 2002
as demonstrated by the 38.5% gross margin achieved in the fourth quarter of
2001. The Company is operating in a generally declining price market. There is
also a general cost-increasing manufacturing environment. Merit has been able to
battle this difficult situation with ever-increasing production volumes until
2000. Beginning in early 1999, the Company suffered through the implementation
of a comprehensive new software system, which in the operations areas lead to
difficulties in efficiently operating the purchasing, planning and manufacturing
processes of the business. Merit also made a purposeful effort to increase its
safety stock levels of inventory in preparation for higher, anticipated sales
orders ahead of Y2K. The combination of these increased production demands
created a build-up of capacity in labor and overhead. As the end of 1999
approached, however, the Company needed to reduce production levels to match
cash-flow expectations. The reduced production volumes created higher overhead
costs per unit, lower gross margins, and lower bottom-line results. Another
important factor negatively affecting gross margins was the large (13.2%) drop
in the Euro in relation to the Dollar during 2000. This reduced revenues and
gross profit of the European operation by $1.1 million and reduced overall gross
margins by 1.2%. In December 1999, the Company began the difficult process of
down-sizing the labor and overhead capacities in the operation of its Utah
facilities. The Company has eliminated the large excess negative production
variances that were caused by the slow-down in production volumes. This was
accomplished by the reduction of approximately 240 people from its high point in
December of 1999, or an average reduction of 100 people in 2000 compared to
1999. This was accomplished primarily by attrition.
16
Selling, general and administrative expenses increased $739,945, or
3.2%, in 2001 over 2000 and $2.9 million, or 14.2%, in 2000 over 1999. These
additional expenditures were related principally to increased costs of expanding
the direct sales force and their management both in U.S. and Europe. Another
important factor has been the costs of the development of new business
opportunities such as acquisitions, product distribution agreements, national
accounts and the O.E.M portion of the business. These increases in costs have
grown slower than sales, causing selling, general and administrative expenses as
a percent of sales to decrease to 23.1 % in 2001, from 25.5% in 2000, and 26.2%
in 1999.
Research and development expenditures for 2001 were $4.1 million, an
increase of 6.6%, compared to $3.9 million for 2000, which was an increase of
6.8%, compared to $3.6 million in 1999. Most of this increase was due to the
addition of the R&D capabilities in Angleton, Texas with the Company's newly
acquired catheter technology. Research and development costs as a percent of
sales were 4.0%, 4.2% and 4.6% for 2001, 2000 and 1999, respectively.
In 2001 higher sales, better gross margins and lower selling,
administrative and research costs per dollar of sales combined to increase
income from operations (up 218%), income before tax (up 1,066% without the
benefit of the sale of land), and net income (up 715% to record levels),
compared to 2000.
In 2000, significantly lower gross margins more than offset the gains
in sales as well as the efficiencies in SG&A and R&D Expenses, the net of which
resulted in income from operations of $3.1 million, down 48% from 1999. The
higher sales and gross margins, together with modest increases in operating
expenses, positively affected income from operations in 1999 which increased to
$6.0 million, up 16.4%. The income tax benefit for 2000 was $52,712, an
effective rate of -6.8%. This negative tax rate was due principally to R&D tax
credits which the Company was able to realize in the fourth quarter of 2000,
including a portion of which related to prior years. Management expects the R&D
tax credit to continue to favorably affect the Company's tax rate for 2002 year.
The income tax provision for 1999 was $1.5 million, an effective rate of 30.6%.
The effective tax rate improved significantly in 1999 as the Ireland facility
became profitable and the 10% tax rate became a benefit.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2001 the Company's working capital was $26.9
million, a decrease of over 17%, representing a current ratio of 3.5 to 1. This
decrease was due primarily to the reduction of almost $4.5 million in inventory.
The Company had $5.1 million outstanding under its line of credit at December
31, 2001. As of March 27, 2002, the line of credit balance is $0. Merit has
financed leasehold improvements and equipment acquisitions through secured notes
payable and capital lease arrangements with an outstanding balance of $1.2
million at December 31, 2001. For the year ended December 31, 2001 the Company
generated cash from operations in the amount of $18.4 million, the most in the
history of the Company, and an increase of 158% over 2000.
The Company has certain commitments related to long-term debt,
operating leases, and royalty payments as set forth in Notes 6, 7 and 12 of the
Notes to Consolidated Financial Statements.
Historically, the Company has incurred significant expenses in
connection with product development and introduction of new products. This was
particularly true in 1999 with regard to an increase in inventory, plant and
equipment associated with the Company's acquisition and new product
introductions. The Company's principal source of funding for these and other
expenses has been the cash generated from operations, secured loans on
equipment, bank lines of credit and sales of equity. The Company believes that
its present sources of liquidity and capital are adequate for its current
operation.
Critical Accounting Policies and Estimates
In December 2001, the SEC requested that all registrants discuss their
most critical accounting policies in their MD&A. The SEC indicated that a
"critical accounting policy" is one which is both important to the
representation of the Company's financial condition and results and requires
management's most difficult, subjective or complex judgments, often as a result
of the need to make estimates about the effect of matters that are inherently
uncertain. The Company bases estimates on past experience and on various other
assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about carrying values of
assets and liabilities that are not readily apparent from other sources. Actual
results may differ from these estimates under different assumptions or
conditions. The following are the Company's most critical accounting policies:
17
Inventory Obsolescence Reserve: The Company writes down its inventory
for estimated obsolescence for unmarketable products and slow moving products
that may expire prior to being sold. If market conditions become less favorable
than those projected by management, additional inventory write-downs may be
required.
Allowance for Doubtful Accounts: The Company maintains allowances for
doubtful accounts for estimated losses resulting from the inability of customers
to make required payments. The allowance is based upon historical experience. If
the financial condition of the Company's customers were to deteriorate,
resulting in an impairment of their ability to make payments, additional
allowances may be required.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
The Company principally hedges the Euro. The Company enters into a
forward foreign exchange contract to protect the Company from the risk that the
eventual net dollar cash flows resulting from transactions with foreign
customers and suppliers may be adversely affected by changes in currency
exchange rates. Such contracts are not significant.
As of December 31, 2001 the Company had $5.1 million (2000- $ 23.0 million) of
variable rate debt, all denominated in U.S. dollars. Annual interest expense
would change by approximately $51,000 for every 1% change in interest rates.
Item 8. Financial Satements and Supplementary Data
DEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
of Merit Medical Systems, Inc.:
We have audited the accompanying consolidated balance sheets of Merit Medical
Systems, Inc. and subsidiaries as of December 31, 2001 and 2000, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 2001. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Merit Medical Systems, Inc. and
subsidiaries as of December 31, 2001 and 2000, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2001 in conformity with accounting principles generally accepted in
the United States of America.
By: /s/ DELOITTE & TOUCHE LLP
- -----------------------------
DELOITTE & TOUCHE LLP
Salt Lake City, Utah
February 15, 2002
(March 27, 2002 as to the effects of the stock split described in Note 15)
18
MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2001 AND 2000
- --------------------------------------------------------------------------------
ASSETS 2001 2000
------------ ------------
CURRENT ASSETS:
Cash and cash equivalents $ 341,690 $ 412,384
Short-term investments 85,286 --
Trade receivables - net of allowance for uncollectible
accounts: 2001 - $408,851; 2000 - $440,275 14,748,021 13,235,858
Employee and related party receivables 266,905 440,654
Irish Development Agency grant receivable 98,081 177,477
Inventories 20,823,616 25,273,428
Prepaid expenses and other assets 514,786 663,101
Deferred income tax assets 723,299 1,183,944
Income tax refund receivable -- 588,640
------------ ------------
Total current assets 37,601,684 41,975,486
------------ ------------
PROPERTY AND EQUIPMENT:
Land 1,252,066 1,260,985
Building 1,500,000 1,500,000
Automobiles 91,573 131,036
Manufacturing equipment 23,289,880 19,696,550
Furniture and fixtures 9,963,045 9,576,084
Leasehold improvements 5,659,457 5,420,194
Construction-in-progress 1,738,540 2,120,671
------------ ------------
Total 43,494,561 39,705,520
Less accumulated depreciation and amortization (21,671,501) (17,860,490)
------------ ------------
Property and equipment - net 21,823,060 21,845,030
------------ ------------
OTHER ASSETS:
Patents and trademarks - net of accumulated amortization:
2001 - $1,630,528; 2000 - $1,382,672 2,434,632 2,522,384
Cost in excess of the fair value of assets acquired - net of
accumulated amortization: 2001 - $712,760; 2000 - $417,398 4,764,596 5,062,458
Deposits 34,843 41,273
------------ ------------
Total other assets 7,234,071 7,626,115
------------ ------------
TOTAL ASSETS $ 66,658,815 $ 71,446,631
============ ============
Continued)
19
MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2001 AND 2000
- --------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY 2001 2000
------------ ------------
CURRENT LIABILITIES:
Current portion of long-term debt $ 598,086 $ 1,091,725
Trade payables 4,659,295 4,835,517
Accrued expenses 4,817,595 3,471,039
Advances from employees 128,624 96,778
Income taxes payable 486,763 33,420
------------ ------------
Total current liabilities 10,690,363 9,528,479
DEFERRED INCOME TAX LIABILITIES 1,654,383 2,177,833
LONG-TERM DEBT 5,727,381 24,011,778
DEFERRED CREDITS 928,280 955,839
------------ ------------
Total liabilities 19,000,407 36,673,929
------------ ------------
COMMITMENTS AND CONTINGENCIES (Notes 6, 7 and 11)
STOCKHOLDERS' EQUITY:
Preferred stock - 5,000,000 shares authorized as
of December 31, 2001 and 2000, no shares issued
Common stock - no par value; 20,000,000 shares
authorized; 10,701,617 and 9,735,260 shares issued
at December 31, 2001 and 2000, respectively 25,958,295 19,779,765
Retained earnings 22,353,053 15,617,075
Accumulated other comprehensive loss (652,940) (624,138)
------------ ------------
Total stockholders' equity 47,658,408 34,772,702
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 66,658,815 $ 71,446,631
============ ============
See notes to consolidated financial statements. (Concluded)
20
MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999
- --------------------------------------------------------------------------------
2001 2000 1999
------------- ------------- -------------
NET SALES $ 104,035,806 $ 91,447,512 $ 77,959,576
COST OF SALES 65,938,044 60,823,459 47,917,815
------------- ------------- -------------
GROSS PROFIT 38,097,762 30,624,053 30,041,761
------------- ------------- -------------
OPERATING EXPENSES:
Selling, general, and administrative 24,040,297 23,300,352 20,406,927
Research and development 4,117,839 3,864,171 3,618,041
Severance costs -- 330,975 --
------------- ------------- -------------
Total operating expenses 28,158,136 27,495,498 24,024,968
------------- ------------- -------------
INCOME FROM OPERATIONS 9,939,626 3,128,555 6,016,793
------------- ------------- -------------
OTHER INCOME (EXPENSE):
Interest income 40,530 39,091 50,391
Interest expense (978,009) (2,319,500) (1,293,023)
Miscellaneous income (expense) 786,248 (74,301) (12,732)
------------- ------------- -------------
Other expense - net (151,231) (2,354,710) (1,255,364)
------------- ------------- -------------
INCOME BEFORE INCOME TAXES 9,788,395 773,845 4,761,429
INCOME TAX BENEFIT (EXPENSE) (3,052,417) 52,712 (1,454,762)
MINORITY INTEREST IN INCOME OF
SUBSIDIARY -- -- (81,077)
------------- ------------- -------------
NET INCOME $ 6,735,978 $ 826,557 $ 3,225,590
============= ============= =============
EARNINGS PER COMMON SHARE -
Basic $ .66 $ .09 $ .34
============= ============= =============
Diluted $ .63 $ .08 $ .34
============= ============= =============
AVERAGE COMMON SHARES:
Basic 10,142,089 9,661,618 9,426,953
============= ============= =============
Diluted 10,743,668 9,826,131 9,457,091
============= ============= =============
PROFORMA EARNINGS PER COMMON
SHARE (see Note 15):
Earnings per common share:
Basic $ 0.53 $ 0.07 $ 0.27
============= ============= =============
Diluted $ 0.50 $ 0.07 $ 0.27
============= ============= =============
Average common shares:
Basic 12,677,611 12,077,023 11,783,691
============= ============= =============
Diluted 13,429,585 12,282,664 11,821,364
============= ============= =============
See notes to consolidated financial statements.
21
MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999
- --------------------------------------------------------------------------------
Accumulated
Common Stock Other Compre- Retained
Total Shares Amount hensive Loss Earnings
------------ ------------ ------------ ------------ ------------
BALANCE, JANUARY 1, 1999 $ 29,086,368 9,386,143 $ 17,793,094 $ (271,654) $ 11,564,928
Comprehensive income:
Net income 3,225,590 -- -- -- 3,225,590
Other comprehensive loss -
Foreign currency translation adjustment
(net of tax (257,300) -- -- (257,300) --
Comprehensive income 2,968,290 -- -- -- --
Tax benefit attributable to appreciation of common
stock options exercised 245,200 -- 245,200 -- --
Issuance of common stock for cash 62,600 13,738 62,600 -- --
Issuance of common stock under Employee Stock
Purchase Plans 312,027 82,913 312,027 -- --
Options and warrants exercised 114,746 27,600 114,746 -- --
Shares surrendered in exchange for the payment of
payroll tax liabilities (1,583) (330) (1,583) -- --
Shares surrendered in exchange for the exercise of
stock options (97,512) (21,018) (97,512) -- --
------------ ------------ ------------ ------------ ------------
BALANCE, DECEMBER 31, 1999 32,690,136 9,489,046 18,428,572 (528,954) 14,790,518
Comprehensive income:
Net income 826,557 -- -- -- 826,557
Other comprehensive loss -
Foreign currency translation adjustment
(net of tax) (95,184) -- -- (95,184) --
Comprehensive income 731,373 -- -- -- --
Tax benefit attributable to appreciation of common
stock options exercised 172,818 -- 172,818 -- --
Issuance of common stock under Employee Stock
Purchase Plans 350,248 80,215 350,248 -- --
Options and warrants exercised 933,605 183,325 933,605 -- --
Shares surrendered in exchange for the payment of
payroll tax liabilities (9,109) (1,339) (9,109) -- --
Shares surrendered in exchange for the
extinguishment of related party receivable (45,004) (8,183) (45,004) -- --
Shares surrendered in exchange for the exercise of
stock options (51,365) (7,804) (51,365) -- --
------------ ------------ ------------ ------------ ------------
BALANCE, DECEMBER 31, 2000 34,772,702 9,735,260 19,779,765 (624,138) 15,617,075
Comprehensive income:
Net income 6,735,978 -- -- -- 6,735,978
Other comprehensive loss -
Foreign currency translation adjustment
(net of tax) (28,802) -- -- (28,802) --
Comprehensive income 6,707,176 -- -- -- --
Tax benefit attributable to appreciation of common
stock options exercised 2,514,392 -- 2,514,392 -- --
Deferred compensation (37,084) (5,960) (37,084) -- --
Issuance of common stock under Employee Stock
Purchase Plans 257,702 44,479 257,702 -- --
Options and warrants exercised 5,019,939 1,036,279 5,019,939 -- --
Shares surrendered in exchange for the payment of
payroll tax liabilities (537,375) (34,644) (537,375) -- --
Shares surrendered in exchange for the
extinguishment of related party receivable (214,558) (19,427) (214,558) -- --
Shares surrendered in exchange for the exercise of
stock options (824,486) (54,370) (824,486) -- --
------------ ------------ ------------ ------------ ------------
BALANCE, DECEMBER 31, 2001 $ 47,658,408 10,701,617 $ 25,958,295 $ (652,940) $ 22,353,053
============ ============ ============ ============ ============
See notes to consolidated financial statements
22
MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999
- --------------------------------------------------------------------------------
2001 2000 1999
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 6,735,978 $ 826,557 $ 3,225,590
------------ ------------ ------------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 4,767,588 4,486,291 3,757,539
(Gain) losses on sales and abandonment of
property and equipment (784,729) 49,833 8,339
Write-off of certain patents and trademarks 93,291 -- --
Amortization of deferred credits (203,131) (166,609) (215,894)
Deferred income taxes (45,152) 389,635 450,734
Tax benefit attributable to appreciation of
common stock options exercised 2,514,392 172,818 245,200
Minority interest in income of subsidiary -- -- 81,077
Changes in operating assets and liabilities, net of
effects from acquisitions:
Short-term investments (85,286) -- --
Trade receivables (1,512,163) (685,726) (2,113,647)
Employee and related party receivables (40,809) 17,145 (29,809)
Irish Development Agency grant receivable 79,396 (84,418) 105,386
Inventories 4,449,812 2,274,934 (7,150,393)
Prepaid expenses and other assets 148,315 6,112 71,911
Income tax refund receivable 588,640 (378,528) (210,112)
Deposits 6,430 10,046 22,899
Trade payables (176,222) 86,085 1,176,099
Accrued expenses 1,346,556 378,759 771,936
Advances from employees 31,846 (19,316) 42,004
Income taxes payable 453,343 (236,021) 74,719
------------ ------------ ------------
Total adjustments 11,632,117 6,301,040 (2,912,012)
------------ ------------ ------------
Net cash provided by operating activities 18,368,095 7,127,597 313,578
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures for:
Property and equipment (4,091,399) (4,690,107) (4,750,608)
Patents and trademarks (263,427) (406,229) (269,388)
Acquisitions -- (607,129) (11,322,916)
Proceeds from the sale of property and equipment 952,308 1,347,613 --
------------ ------------ ------------
Net cash used in investing activities (3,402,518) (4,355,852) (16,342,912)
------------ ------------ ------------
(Continued)
23
MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999
- --------------------------------------------------------------------------------
2001 2000 1999
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net payments on revolving credit facility $(17,884,761) $ (2,907,596) $ (7,567,655)
Proceeds from:
Issuance of common stock 3,915,780 1,223,379 390,278
Notes payable to financial institutions
and capital lease -- -- 25,907,596
Deferred credits 175,572 132,513 93,800
Principal payments on notes payable to
financial institutions and capital leases (1,164,444) (1,316,089) (2,403,143)
Purchase of treasury stock for deferred
compensation (37,084) -- --
------------ ------------ ------------
Net cash provided by (used in)
financing activities (14,994,937) (2,867,793) 16,420,876
------------ ------------ ------------
EFFECT OF EXCHANGE RATES ON CASH (41,334) (160,279) (574,741)
------------ ------------ ------------
NET DECREASE IN CASH AND
CASH EQUIVALENTS (70,694) (256,327) (183,199)
CASH AND CASH EQUIVALENTS
AT BEGINNING OF YEAR 412,384 668,711 851,910
------------ ------------ ------------
CASH AND CASH EQUIVALENTS
AT END OF YEAR $ 341,690 $ 412,384 $ 668,711
============ ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION - Cash paid during
the year for:
Interest (including capitalized interest of
approximately $105,000, $128,000, and $143,000
during 2001, 2000, and 1999, respectively) $ 1,286,872 $ 2,309,634 $ 1,288,301
============ ============ ============
Income taxes $ 127,553 $ 172,202 $ 684,109
============ ============ ============
(Continued)
24
MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999
- --------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:
o During 2001, 2000, and 1999, the Company entered into capital lease
obligations and notes payable for approximately $271,000, $508,000, and
$50,000, respectively, for manufacturing equipment.
o During 2001, 2000, and 1999, options to purchase 34,644, 1,339, and 330
shares of the Company's common stock were surrendered in exchange for the
Company's recording of payroll tax liabilities in the amount of
approximately $537,000, $9,000, and $1,600.
o During 2001, 2000, and 1999, 54,370, 7,804, and 21,018 shares of Company
common stock with a value of approximately $824,000, $51,000, and $98,000,
respectively, were surrendered in exchange for the exercise of stock
options.
o During 1999, the Company acquired substantially all of the assets of the
"Angleton Division" of Mallinckrodt Inc. (Angleton) in a purchase
transaction for $7,867,699 in cash. In conjunction with the acquisition,
liabilities were assumed as follows:
Fair value of assets acquired (including goodwekk of $1,949,383) $8,132,194
Cash paid 7,867,699
----------
Liabilities assumed $ 264,495
==========
o Additionally, during 1999, the Company acquired the minority interest in
its subsidiary, Merit Sensor Systems, Inc. (formerly Sentir) in a purchase
transaction for $3,455,217 in cash. The minority interest carried by the
Company at the date of acquisition was $629,577. In conjunction with the
acquisition, liabilities were assumed as follows:
Fair value of assets acquired (including goodwill of $2,825,640) $3,574,016
Cash paid 3,455,217
----------
Liabilities assumed $ 118,799
==========
See notes to consolidated financial statements. (Concluded)
25
MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999
- --------------------------------------------------------------------------------
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization - Merit Medical Systems, Inc. (Merit) and its wholly-owned
subsidiaries, Merit Holdings, Inc. (MHI), and Merit Sensor Systems,
Inc. collectively own 100% of Merit Medical Systems LP (MMSLP).
Combined with its other wholly-owned subsidiary, Merit Medical
International, Inc. (MMI), Merit, MHI, and Merit Sensor Systems, Inc.
collectively own 100% of Merit Services, Inc. (MSI) (collectively, the
Company). The Company develops, manufactures, and markets disposable
medical products primarily for use in the diagnosis and treatment of
cardiovascular disease which is considered to be one segment line of
business. The Company manufactures its products in plants located in
the United States and in Ireland. The Company has export sales to
dealers and has direct sales forces in the United States, and Western
Europe (see Note 10).
The consolidated financial statements of the Company have been prepared
in accordance with accounting principles generally accepted in the
United States of America. The following is a summary of the more
significant of such policies.
Use of Estimates in Preparing Financial Statements - The preparation of
financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could
differ from those estimates.
Principles of Consolidation - The consolidated financial statements
include those of Merit, MMI, MHI, MSI, MMSLP and Merit Sensor systems,
Inc. All material intercompany balances and transactions have been
eliminated in consolidation.
Receivables - The allowance for uncollectible accounts receivable is
based on the Company's historical bad debt experience and on
management's evaluation of collectibility of the individual outstanding
balances.
Revenue Recognition - The Company recognizes revenues when the product
is shipped which meets the criteria required by Staff Accounting
Bulletin (SAB) No. 101, Revenue Recognition in Financial Statements,
which was issued by the Securities and Exchange Commission in December
1999. The adoption of SAB No. 101, which provides guidance on the
recognition, presentation and disclosure of revenue in financial
statements, during 2000 was not significant to the Company's financial
statements.
Inventories - Inventories are stated at the lower of cost (computed on
a first-in, first-out basis) or market.
Income Taxes - The Company utilizes an asset and liability approach for
financial accounting and reporting for income taxes. Deferred income
taxes are provided for temporary differences in the bases of assets and
liabilities as reported for financial statement and income tax
purposes.
Long-Lived Assets - The Company evaluates the carrying value of
long-term assets based on current and anticipated undiscounted cash
flows and recognizes impairment when such cash flows will be less than
the carrying values. There were no impairments as of December 31, 2001
or 2000.
26
Property and Equipment - Property and equipment are recorded at cost.
Depreciation and amortization are computed using the straight-line
method over estimated useful lives as follows:
Building 20 years
Automobiles 4 years
Manufacturing equipment 5 to 12 years
Furniture and fixtures 3 to 10 years
Leasehold improvements 4 to 25 years
Intangible Assets - Costs associated with obtaining patents, issued and
pending, and trademarks have been capitalized and are amortized over
the patent or trademark period or charged to expense if not approved.
Cost in excess of fair value of assets acquired has been allocated to
goodwill, which is amortized over twelve to twenty years. Amortization
of intangibles is done on a straight-line basis.
Accrued Expenses - Accrued expenses consist of the following at
December 31, 2001 and 2000:
December 31,
-----------------------
2001 2000
---------- ----------
Accrued payroll taxes $ 377,254 $ 213,322
Accrued payroll 706,538 724,764
Accrued bonuses 883,056 34,502
Accrued commissions 278,675 230,857
Accrued vacation 836,380 713,225
Other accrued expenses 1,735,692 1,554,369
---------- ----------
Total $4,817,595 $3,471,039
========== ==========
Research and Development - Research and development costs are expensed
as incurred.
Stockholders' Equity - On August 14, 2001, the Company's Board of
Directors approved a five-for-four split of the Company's common stock
effective August 27, 2001 for stockholders of record as of August 24,
2001. All historical share and per share amounts have been restated to
reflect the stock split.
Earnings per Common Share - Net income per common share is computed by
both the basic method, which uses the weighted average number of the
Company's common shares outstanding, and the diluted method, which
includes the dilutive common shares from stock options and warrants, as
calculated using the treasury stock method.
Financial Instruments - The Company's financial instruments, when
valued using market interest rates, would not be materially different
from the amounts presented in the consolidated financial statements.
Stock-Based Compensation - The Company accounts for its stock
compensation arrangements under the provisions of Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees, (APB
25) and intends to continue to do so. The Company has adopted the
disclosure-only provisions of Statement of Financial Accounting
Standards (SFAS) No. 123, Accounting for Stock-Based Compensation.
Statements of Cash Flows - For purposes of the statements of cash
flows, the Company considers interest bearing deposits with an original
maturity date of three months or less to be cash equivalents.
Concentration of Credit Risk - Financial instruments that potentially
subject the Company to concentrations of credit risk consist primarily
of temporary cash and cash equivalents and accounts receivable. The
Company provides credit, in the normal course of business, primarily to
hospitals and independent third-party packers and distributors. The
Company performs ongoing credit evaluations of its customers and
maintains allowances for potential credit losses.
27
Foreign Currency Translation Adjustment - The financial statements of
the Company's foreign subsidiaries are generally measured using local
currencies as the functional currency. Assets and liabilities are
translated into U.S. dollars at year-end rates of exchange and results
of operations are translated at average rates for the year. Gains and
losses resulting from these translations are included in accumulated
other comprehensive loss as a separate component of stockholders'
equity.
Comprehensive Loss - Accumulated other comprehensive loss consists
entirely of foreign currency translation adjustments.
Recently Issued Financial Accounting Standards - SFAS 133, Accounting
for Derivative Instruments and Hedging Activities, as amended, requires
that all derivative instruments be recognized as either assets or
liabilities at fair market value. The Company adopted this statement
beginning January 1, 2001. The effect on the Company's financial
statements of adopting this statement was not significant.
In June 2001, SFAS No. 141, Business Combinations, and SFAS No. 142,
Goodwill and Other Intangible Assets were issued. Statement 141
requires all business combinations initiated after June 30, 2001 to be
accounted for using the purchase method. Statement 142 became effective
January 1, 2002 and eliminates the amortization of goodwill relating to
past and future acquisitions. Instead, goodwill is subject to an
impairment assessment that must be performed upon adoption of Statement
142 and at least annually thereafter.
The initial application of Statements 141 and 142 will not have a
material impact on the results of operations or financial condition of
the Company. However, the adoption of Statements 141 and 142 will
eliminate approximately $300,000 of goodwill amortization expense on an
annual basis.
In August of 2001, SFAS No. 144, Accounting for the Impairment or
Disposal of Long-lived Assets, was issued which addresses accounting
and financial reporting for the impairment or disposal of long-lived
assets. This statement was effective for the Company beginning January
1, 2002. The effect on the Company's financial statements of adopting
this statement was not significant.
Short-term Investments - Trading securities are recorded at estimated
fair value with unrealized gains and losses included in income. The
basis of cost used in determining realized gains and losses is specific
identification. The estimated fair value of all securities is
determined by quoted market prices.
Deferred Compensation - During 2001, the Company established certain
deferred compensation plans (the "deferred compensation plans") for
eligible participants. The deferred compensation plans permit each
participant to defer a portion of their salary until the future. As
permitted by the deferred compensation plans, the deferred salary may
be invested on behalf of the participant in marketable securities,
money market funds or the company's own stock. However, as the Company
is the owner of the invested assets, such assets are reflected in the
consolidated balance sheet at December 31, 2001. Short-term investments
in marketable securities are classified as trading and recorded at fair
value with unrealized gains and losses included in income. Common stock
of the Company held for the deferred compensation plans is reported as
a contra-equity account and is recorded at original cost. The deferred
compensation obligation is classified as an accrued expense and
adjusted, with a corresponding charge (or credit) to compensation cost,
to reflect changes in the fair value of the underlying assets. Because
the deferred compensation obligation may be settled by delivery of
cash, shares of Company stock, or diversified assets, Company shares
acquired are not included in basic earnings per share but are included
in the calculation of diluted earnings per share.
2. SEVERANCE COSTS
During the year ended December 31, 2000, the Company terminated
approximately 30 employees and correspondingly accrued a termination
cost of approximately $331,000. This amount is included in operating
expenses as severance costs.
3. ACQUISITIONS
On July 27, 1999, the Company acquired the 28% minority interest in its
subsidiary, Merit Sensor Systems, Inc., for a purchase price of
$3,574,016 consisting of $3,455,217 in cash and the assumption of
28
liabilities in the amount of $118,799. Of the $3,574,016 purchase
price, $226,463 was paid to related parties. The acquisition has been
accounted for using the purchase method of accounting; as such, 100
percent of Merit Sensor Systems, Inc.'s results of operations have been
included in the accompanying consolidated financial statements from the
date of acquisition. Previous to the acquisition date, the minority
interest's share of operations was excluded from net income in the
consolidated statements of operations. The cost of this acquisition
exceeded the estimated fair value of the acquired net assets by
$2,825,640. Such excess has been allocated to goodwill and is being
amortized on a straight-line basis over 20 years.
On August 20, 1999, the Company acquired substantially all of the
assets and assumed certain liabilities of the Angleton Division of
Mallinckrodt, Inc. (Angleton) for a purchase price of $8,132,194
consisting of $7,867,699 in cash and the assumption of liabilities in
the amount of $264,495. Angleton is a manufacturer of medical
catheters. The acquisition has been accounted for using the purchase
method of accounting; as such, Angleton's results of operations have
been included in the accompanying consolidated financial statements
from the date of acquisition. The cost of this acquisition exceeded the
estimated fair value of the acquired net assets by $1,949,383. Such
excess has been allocated to goodwill and is being amortized on a
straight-line basis over 20 years.
The unaudited pro forma results of operations of the Company for the
year ended December 31, 1999 (assuming the acquisition of Angleton had
occurred as of January 1, 1999) are as follows:
1999
Net Sales $87,606,126
Net Income 3,944,207
Net income per share (basic and diluted) 0.52
On May 18, 2000, the Company acquired certain assets of
Electro-Catheter Corporation (Elecath) for a purchase price of $607,129
in cash. Elecath develops, manufactures and sells a broad range of
cardiovascular catheters for use primarily in the Electro physiology,
Cath Lab and Critical Care departments of hospitals. The cost of this
acquisition exceeded the estimated fair value of the acquired assets by
$533,793. Such excess has been allocated to goodwill and is being
amortized on a straight-line basis over 12 years.
4. INVENTORIES
Inventories consist of the following at December 31, 2001 and 2000:
2001 2000
------------ ------------
Finished goods $ 13,716,474 $ 15,255,622
Work-in-process 3,001,250 3,678,807
Raw materials 7,501,253 8,325,314
Less reserve for obsolete inventory (3,395,361) (1,986,315)
------------ ------------
Total $ 20,823,616 $ 25,273,428
============ ============
29
5. INCOME TAXES
Deferred income tax assets and liabilities at December 31, 2001 and
2000 consist of the following temporary differences and carry forward
items:
Current Long-Term
2001 2000 2001 2000
--------- --------- --------- -------
Deferred income tax assets:
Allowance for uncollectible
accounts receivable $ 163,540 $ 17,788 -- --
Accrued compensation expense 263,126 198,338 -- $ 9,612
Tax credits -- -- $ 813,599 282,630
Inventory capitalization for
tax purposes 106,937 137,513 -- --
Inventory obsolescence reserve 1,427,188 576,319
Net operating losses of subsidiaries 120,779 95,704 278,639 231,989
Other 65,004 192,113 444,915 407,810
Total deferred income tax assets 2,146,574 1,217,775 1,537,153 932,041
--------- --------- --------- -------
Deferred income tax liabilities:
Prepaid expenses (1,419,916) -- -- --
Differences between tax basis
and financial reporting basis
of property and equipment -- -- (2,880,088) (3,098,747)
Other (3,359) (33,831) (311,448) (11,127)
Net $ 723,299 $ 1,183,944 $(1,654,383) $(2,177,833)
Income tax expense for the years ended December 31, 2001, 2000, and
1999 differs from amounts computed by applying the statutory Federal
rate to pretax income as follows:
2001 2000 1999
Computed Federal income tax expense at
statutory rate of 35% $ 3,425,938 $ 270,846 $ 1,666,500
State income taxes 159,770 25,153 124,352
Creation of tax credits (399,001) (444,551) (140,369)
Tax benefit of foreign sales corporation (141,565) (53,139) (109,579)
Income of subsidiaries recorded at
foreign tax rates (63,517) (13,746) (115,803)
Other - including the effect of graduated rates 70,792 162,725 29,661
Total income tax (benefit) expense $ 3,052,417 $ (52,712) $ 1,454,762
30
The components of the provision for income taxes are as follows:
2001 2000 1999
----------- ----------- -----------
Current expense (benefit):
Federal $ 2,608,391 $ (423,470) $ 735,293
State 370,707 (29,922) 196,642
Foreign 118,471 11,045 72,093
----------- ----------- -----------
3,097,569 (442,347) 1,004,028
----------- ----------- -----------
Deferred expense (benefit):
Federal (57,070) 196,470 509,077
State (124,908) 132,281 (8,230)
Foreign 136,826 60,884 (50,113)
----------- ----------- -----------
(45,152) 389,635 450,734
----------- ----------- -----------
Total $ 3,052,417 $ (52,712) $ 1,454,762
=========== =========== ===========
6. REVOLVING CREDIT FACILITY AND LONG-TERM DEBT
Revolving Credit Facility - The Company maintains a long-term revolving
credit facility (the Facility) with a bank, which enables the Company
to borrow funds at variable interest rates. In March 2000, the Company
amended the Facility by increasing the amount of borrowings available
to $35 million. Then, during September 2001, the Company voluntarily
reduced the facility to $8 million. The Facility is fully due and
payable on June 30, 2006. Additionally, the facility is reduced by
$375,000 on the last day of each quarter commencing with the quarter
ending September 30, 2001. The weighted average interest rates applied
to the outstanding balances at December 31, 2001 and 2000 were 3.42%
and 8.20%, respectively. Under the terms of the Facility, among other
things, the Company is required to maintain a ratio of total
liabilities to tangible net worth not to exceed 2.0 to 1.0, maintain a
ratio of current assets to current liabilities of at least 1.5 to 1.0,
maintain minimum working capital of $25,000,000, and is restricted from
paying dividends to shareholders. For the years ended December 31, 2001
and 2000, management of the Company believes the Company was in
compliance with all debt covenants. As of December 31, 2001 and 2000,
the Company owed $5,115,239 and $23,000,000 under the Facility,
respectively. The Facility is collateralized by trade receivables,
inventories, property and equipment, and intangible assets.
Long-term Debt - Long-term debt consists of the following at December
31, 2001 and 2000:
2001 2000
Notes payable to financial institutions; payable in
monthly installments through 2004, including interest
at rates ranging from 6.26% to 8.89%; collateralized
by equipment $ 1,210,228 $ 1,963,368
Capital lease obligations (see Note 7) -- 140,135
Revolving credit facility (see above) 5,115,239 23,000,000
----------- -----------
Total 6,325,467 25,103,503
Less current portion 598,086 1,091,725
----------- -----------
Long-term portion $ 5,727,381 $24,011,778
=========== ===========
31
Scheduled maturities of long-term debt at December 31, 2001 are as
follows:
Year ending December 31:
2002 $ 598,086
2003 457,508
2004 78,266
2005 66,137
2006 5,125,470
----------
Total $6,325,467
==========
7. COMMITMENTS AND CONTINGENCIES
Leases - The Company has noncancelable operating lease agreements for
off-site office and production facilities and equipment. The leases for
the off-site office and production facilities are for five years and
have renewal options of one to five years. Total rental expense on
these operating leases and on the Company's new manufacturing and
office building (see below) for the years ended December 31, 2001,
2000, and 1999 approximated $2,539,000, $2,539,000, and $3,094,000,
respectively.
In June 1993, the Company entered into a 25 year lease agreement with a
developer for a new manufacturing and office building. Under the
agreement, the Company was granted an option to purchase the building
at fair market value after 10 years and, if not exercised, after 25
years. In connection with this lease agreement, the Company in 1993
sold to the developer 10 acres of land on which the building was
constructed. The $166,136 gain on the sale of the land has been
recorded as a deferred credit and is being amortized as a reduction of
rent expense over ten years. In connection with the lease agreement,
the Company issued to the developer warrants to purchase 194,326 shares
of the Company's common stock at $3.96 per share subject to carrying
cost increases of 3% per year ($4.73 as of December 31, 2001). The
warrants expire in 2005.
On December 22, 2000, the Company sold certain of its manufacturing
equipment with a net carrying value of approximately $1,210,000 to a
financial institution. The Company then entered into a six-year
operating lease agreement for the same equipment. The approximate
$70,000 gain on sale has been recorded as a deferred credit and is
being amortized as a reduction of rental expense over six years.
The future minimum lease payments for operating leases as of December
31, 2001, are as follows:
Operating
Leases
Year ending December 31:
2002 $ 2,490,777
2003 2,226,808
2004 2,167,641
2005 2,101,241
2006 2,096,110
Thereafter 21,566,087
-----------
Total minimum lease payments $32,648,664
===========
Irish Government Development Agency Grants - Through December 31, 2001,
the Company has entered into several grant agreements with the Irish
Government Development Agency of which approximately $98,000 and
$177,000 remained in receivables at December 31, 2001 and 2000,
respectively. The grant agreements reimburse the Company for a portion
of the cost of property and equipment purchased in Ireland, specific
research and development projects in Ireland, and costs of hiring and
training employees located in Ireland. The Company has recorded the
grants related to research and development projects and costs of hiring
32
and training employees as a reduction of operating expenses in 2001,
2000, and 1999 in the amounts of approximately $36,000, $67,000, and
$154,000, respectively. Grants related to the acquisition of property
and equipment purchased in Ireland are recorded as deferred credits and
are amortized to income over lives corresponding to the depreciable
lives of such property. During 2001, 2000, and 1999, approximately
$175,000, $149,000, and $142,000, respectively, of the deferred credit
was amortized as a reduction of operating expenses. There is a
commitment to repay the government grants if Merit Medical were to
cease production in Ireland within 10 years of the receipt of the last
grant payment.
Preferred Share Purchase Rights - In August 1997, the Company declared
a dividend of one preferred share purchase right (a "Right") for each
outstanding share of Common Stock which entitles the holder of a Right
to purchase one one-hundredth of a share of Series A Junior
Participating Preferred Stock at an exercise price of $40 in the event
a person or group acquires, or announces an intention to acquire, 15%
or more of the Company's common stock. Until such an event, the Rights
are not exercisable and are transferable with the common stock and may
be redeemed at a price of $.0001 per Right.
Litigation - In the ordinary course of business, the Company is
involved in litigation and claims which management believes will not
have a materially adverse effect on the Company's operations.
8. EARNINGS PER COMMON SHARE (EPS)
The following table sets forth the computation of basic diluted
earnings per common share:
Net Per Share
Income Shares Amount
Year ended December 31, 2001:
Basic EPS $6,735,978 10,142,089 $ 0.66
Effect of dilutive stock options and warrants -- 601,579 --
---------- ---------- --------
Diluted EPS $6,735,978 10,743,668 $ 0.63
========== ========== ========
Year ended December 31, 2000:
Basic EPS $ 826,557 9,661,618 $ 0.09
Effect of dilutive stock options and warrants -- 164,513 --
---------- ---------- --------
Diluted EPS $ 826,557 9,826,131 $ 0.08
========== ========== ========
Year ended December 31, 1999:
Basic EPS $3,225,590 9,426,953 $ 0.34
Effect of dilutive stock options and warrants -- 30,138 --
---------- ---------- --------
Diluted EPS $3,225,590 9,457,091 $ 0.34
========== ========== ========
For the years ended December 31, 2001, 2000, and 1999, approximately
486,000, 928,000, and 960,000 respectively, of stock options were not
included in the computation of diluted earnings per share because they
would have been antidilutive. See Note 15.
9. EMPLOYEE STOCK PURCHASE PLAN AND STOCK OPTIONS AND WARRANTS
The Company offers to its employees an Employee Stock Purchase Plan
which allows the employee on a quarterly basis to purchase shares of
the Company's common stock at the lesser of 85% of the market value on
the offering commencement date or offering termination date. The total
number of shares available to employees to purchase under this plan is
625,000 of which 281,400 have been purchased as of December 31, 2001.
33
The Company has a long-term incentive plan which provides for the
issuance of incentive stock options, non-statutory stock options, and
certain corresponding stock appreciation rights. The maximum number of
shares of common stock for which options may be granted is 3,000,000.
Options may be granted to directors, officers, outside consultants, and
key employees of the Company and may be granted upon such terms and
such conditions as the Compensation Committee in its sole discretion
shall determine. In no event, however, shall the exercise price be less
than the fair market value on the date of grant.
Changes in stock options and warrants for the years ended December 31,
2001, 2000, and 1999 are as follows:
Options Warrants
--------------------------------- -------------------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
2001:
Granted 1,131,911 $10.05
Exercised 1,036,279 4.84
Forfeited/expired 248,425 6.57
Outstanding at December 31 2,007,140 7.64 194,326 $4.73
Exercisable 644,373 4.57 194,326 4.73
Weighted average fair value of
options granted during year $5.49
Weighted average fair value of
shares issued under Employee
Stock Purchase Plan $1.02
Options Warrants
--------------------------------- -------------------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
2000:
Granted 607,000 $3.60
Exercised 183,325 5.10
Forfeited/expired 155,550 5.55
Outstanding at December 31 2,159,933 4.91 194,326 $4.59
Exercisable 1,025,250 5.58 194,326 4.59
Weighted average fair value of
options granted during year $1.60
Weighted average fair value of
shares issued under Employee
Stock Purchase Plan $0.77
34
Options Warrants
--------------------------------- -------------------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
1999:
Granted 561,125 $4.67
Exercised 27,600 3.97
Forfeited/expired 76,438 4.56
Outstanding at December 31 1,891,808 5.62 194,326 $4.46
Exercisable 925,600 5.76 194,326 4.46
Weighted average fair value of
options granted during year $2.38
Weighted average fair value of
shares issued under Employee
Stock Purchase Plan $0.66
The following table summarizes information about stock options and
warrants outstanding at December 31, 2001:
Options and Warrants
Options and Warrants Outstanding Exercisable
- ------------------------------------------------------------------------- ----------------------------
Weighted
Average
Remaining Weighted Weighted
Range of Contractual Average Average
Exercise Number Life Exercise Number Exercise
Prices Outstanding (in years) Price Exercisable Price
Options:
$3.60-$6.33 1,508,355 5.03 $ 4.64 644,373 $ 4.57
$9.02-$16.91 498,785 9.93 16.71
Warrants:
$4.73 194,326 3.08 4.73 194,326 4.73
The Company accounts for stock options granted using APB 25.
Accordingly, no compensation cost has been recognized for its fixed
stock option plans. Had compensation cost for the Company's stock-based
compensation plans been determined based on the fair value at the grant
dates for awards under those plans consistent with SFAS No. 123, the
Company's net income and net income per common and common equivalent
share would have changed to the pro forma amounts indicated below:
35
2001 2000 19999
Net income:
As reported $ 6,735,978 $ 826,557 $ 3,225,590
Pro forma 5,379,236 140,145 2,480,928
Net income per common share:
Basic:
As reported $ 0.66 $ 0.09 $ 0.34
Pro forma 0.53 0.00 0.24
Diluted:
As reported 0.63 0.08 0.34
Pro forma 0.50 (0.01) 0.24
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 2001, 2000, and 1999:
dividend yield of 0%; expected volatility of 63.48%, 61.04%, and 56.0%
for 2001, 2000, and 1999, respectively; risk-free interest rates
ranging from 4.58% to 6.71%; and expected lives ranging from 2.33 to
4.58 years.
10. SEGMENT REPORTING AND FOREIGN OPERATIONS
During the years ended December 31, 2001, 2000, and 1999, the Company
had foreign sales of approximately $23,801,000, $21,773,000, and
$18,336,000 or approximately 23%, 24%, and 24%, respectively, of total
sales, primarily in Japan, Germany, France, and the United Kingdom.
The Company operates primarily in one segment in which it develops,
manufactures, and markets disposable medical products, principally for
use in the diagnosis and treatment of cardiovascular disease. Major
operations outside the United States include a leased manufacturing and
distribution facility in Ireland and sales subsidiaries in Europe. The
following is a summary of the Company's foreign operations by
geographic area for fiscal years 2001, 2000, and 1999:
36
Transfers
Sales to Between Net
Unaffiliated Geographic Income Identifiable
Customers Areas Revenue (Loss) Assets
------------- ------------- ------------- ------------- -------------
Fiscal year ended December 31, 2001:
United States, Canada, and
international distributors $ 89,208,943 $ 1,770,388 $ 90,979,331 $ 7,807,510 $ 57,151,956
Europe direct and European
distributors 14,826,863 6,101,400 20,928,263 (884,181) 9,506,859
Eliminations -- (7,871,788) (7,871,788) (187,351) --
------------- ------------- ------------- ------------- -------------
Consolidated $ 104,035,806 None $ 104,035,806 $ 6,735,978 $ 66,658,815
============= ============= ============= ============= =============
Fiscal year ended December 31, 2000:
United States, Canada, and
international distributors $ 80,380,485 $ 1,060,749 $ 81,441,234 $ 2,301,524 $ 61,897,460
Europe direct and European
distributors 11,067,027 4,906,800 15,973,827 (1,608,513) 9,549,171
Eliminations -- (5,967,549) (5,967,549) 133,546 --
------------- ------------- ------------- ------------- -------------
Consolidated $ 91,447,512 None $ 91,447,512 $ 826,557 $ 71,446,631
============= ============= ============= ============= =============
Fiscal year ended December 31, 1999:
United States, Canada, and
international distributors $ 69,595,418 $ 1,288,485 $ 70,883,903 $ 3,761,605 $ 62,666,167
Europe direct and European
distributors 8,364,158 4,281,400 12,645,558 (319,784) 9,694,302
Eliminations -- (5,569,885) (5,569,885) (216,231) --
------------- ------------- ------------- ------------- -------------
Consolidated $ 77,959,576 None $ 77,959,576 $ 3,225,590 $ 72,360,469
============= ============= ============= ============= =============
Transfers between geographic areas are accounted for at amounts which
are generally above cost and consistent with the rules and regulations
of governing tax authorities. Such transfers are eliminated in the
consolidated financial statements. Net income by geographic areas
reflects foreign earnings reported by the foreign entities.
Identifiable assets are those assets that can be directly associated
with a particular foreign entity and thus do not include assets used
for general corporate purposes.
11. RELATED PARTY TRANSACTIONS
Receivables from employees and related parties at December 31, 2001 and
2000 totaled approximately $267,000 and $441,000, respectively,
(including approximately $15,000 and $208,000, respectively, from
officers of the Company). During 2001, approximately 19,427 shares of
Company stock were surrendered in exchange for the extinguishment of a
related party receivable in the amount of approximately $215,000.
12. ROYALTY AGREEMENT
In 1992, the Company settled litigation involving, among other things,
allegations that certain of the Company's inflation device products
infringed patents issued to another medical product manufacturing
company (the Licensor). Pursuant to the settlement, the Company entered
into a license agreement with the Licensor, whereby the Licensor
granted to the Company a nonexclusive right and license to manufacture
and sell products which are subject to the patents issued to the
Licensor. For the rights and license granted under the agreement, the
Company paid the Licensor a nonrefundable prepaid royalty in the amount
of $600,000. In addition to the prepaid royalty, the Company agreed to
pay the Licensor a continuing royalty beginning January 1, 1992 of
5.75% of sales (which will not exceed $450,000 for any calendar year)
made in the United States, of products covered by the license
agreement. Royalties of $450,000 were paid or accrued in each of the
years ended December 31, 2001, 2000, and 1999.
37
13. EMPLOYEE BENEFIT PLAN
The Company has a contributory 401(k) savings and profit sharing plan
(the Plan) covering all full-time employees who are at least 18 years
of age. The Plan has no minimum service requirement. The Company may
contribute at its discretion matching contributions based on the
employees' compensation. Contributions made by the Company to the Plan
for the years ended December 31, 2001, 2000, and 1999 totaled
approximately $361,000, $258,000, and $88,000, respectively.
The Plan purchased unissued shares of the Company's common stock at
market value during each of the three years ended December 31, 2001 as
follows:
Market
Shares Value
Years ended December 31:
2001 None None
2000 None None
1999 13,819 $81,850
14. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Quarterly data (unaudited) for the years ended December 31, 2001, 2000,
and 1999 is as follows:
Quarter Ended
-----------------------------------------------------------------------
2001 March 31 June 30 September 30 December 31
Net sales $ 26,788,373 $ 26,264,015 $ 25,694,128 $ 25,289,290
Gross profit 9,219,374 9,426,157 9,725,611 9,726,620
Income from operations 2,083,229 2,177,236 2,730,338 2,948,823
Income tax expense 460,737 785,935 854,528 951,217
Net income 1,186,425 1,858,793 1,744,996 1,945,764
Basic earnings per common share 0.12 0.19 0.17 0.18
Diluted earnings per common share 0.12 0.18 0.16 0.17
2000
Net sales $ 22,080,435 $ 23,552,859 $ 23,330,203 $ 22,484,015
Gross profit 7,634,050 7,616,239 7,958,848 7,414,916
Income from operations 289,575 647,698 1,224,604 966,678
Income tax expense (benefit) (68,347) 19,254 169,026 (172,645)
Net income (loss) (159,482) 44,927 394,397 546,715
Basic and diluted earnings
(loss) per common share (0.02) 0.01 0.05 0.07
1999
Net sales $ 17,701,723 $ 18,979,739 $ 19,920,419 21,357,695
Gross profit 6,692,102 7,349,765 7,763,440 8,236,454
Income from operations 1,070,736 1,477,316 1,705,782 1,762,959
Income tax expense 255,731 446,516 463,321 289,194
Net income 565,123 752,684 928,768 979,015
Basic and diluted earnings
per common share 0.06 0.08 0.10 0.10
38
15. SUBSEQUENT EVENT
On March 27, 2002, the Company's Board of Directors approved a
five-for-four stock split of the Company's common stock which is
expected to be effective April 11, 2002 for stockholders of record as
of April 8, 2002. Average dilutive common stock shares outstanding,
giving retroactive effect to the stock split, at December 31, 2001,
2000, and 1999 are 13,429,585, 12,282,664, and 11,821,364. Proforma
earnings per dilutive common stock share, giving retroactive effect to
the stock split, at December 31, 2001, 2000, and 1999 are $0.50, $0.07,
and $0.27.
................................................................................
Item 9. Changes and Disagreements with Accountants on Accounting and Financial
Disclosure
None
PART III
Item 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
23, 2002. The definitive Proxy Statement will be filled with the Commission not
later than 120 days after December 31, 2001, pursuant to Regulation 14A of the
Securities Exchange Act of 1934, as amended.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) Documents filed as part of this report:
(1) 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, 2000 and 1999
-- Consolidated Statements of Operations for the Years Ended December
31, 2000, 1999 and 1998
-- Consolidated Statements of Stockholders' Equity for the Years
Ended December 31, 2000, 1999 and 1998
-- Consolidated Statements of Cash Flows for the Years Ended December
31, 2000, 1999 and 1998
-- Notes to Consolidated Financial Statements
(2) Financial Statement Schedule
-- Schedule II - Valuation and qualifying account
39
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 2001, 2000, AND 1999
Additions
Balance at Charged to Balance at
Beginning Costs End of
Description of Year Expenses Deductions Year
- ----------- ------- -------- ---------- ----
ALLOWANCE FOR
UNCOLLECTIBLE
ACCOUNTS:
1999 $(197,331) $(158,722) $50,578 $(305,475)
2000 (305,475) (626,263) 491,463 (440,275)
2001 (440,275) (50,892) 82,316 (408,851)
All other schedules have been omitted because they are not
required, not applicable, or the information is otherwise set
forth in the financial statements or notes thereto.
(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:
41
Description Exhibit No.
----------------------------------------------------------------- ------------------------------
3.1 Articles of Incorporation of the Company, as amended and [Form 10-Q filed August 14,
restated* 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 [Form 10-Q filed August 14,
and restated) dated March 25, 1996* 1996, Exhibit No. 2]
10.2 Merit Medical Systems, Inc. 401(k) Profit Sharing Plan (as [Form S-1 filed February 14,
amended effective January 1, 1991* 1992, Exhibit No. 8]
10.3 License Agreement, dated April 8, 1992 between the Company and [Form S-1 filed February 14,
Utah Medical Products, Inc.* 1992, Exhibit No. 5]
10.4 Lease Agreement dated as of June 8, 1993 for office and [Form 10-K for year ended
manufacturing facility* December 31, 1994, Exhibit
No. 10.5]
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 [Form 10-K for year ended
August 11, 1999 December 31, 1999, Exhibit
No.10.8]
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]
10.10 Amendment to Loan Agreement with Zion's First National Bank [Form 10-K for year ended
3/11/2000 December 31, 2000, Exhibit
10.10]
10.11 Merit Medical Systems, Inc. Highly Compensated Deferred [Form 10-K for year ended
Compensation Plan. December 31, 2000, Exhibit
10.11]
13.1 Annual Report to Shareholders for the year ended December 31,
Filed herewith[ 2000. 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
* These exhibits are incorporated herein by reference.
(d) Financial Statement Schedules: There are no financial statement schedules required to be filed
with this report.
42
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, 2002.
MERIT MEDICAL SYSTEMS, INC.
By: /s/ 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, 2002.
Signature Capacity in Which Signed
--------- ------------------------
/s/: FRED P. LAMPROPOULOS President, Chief Executive Officer and
- ------------------------- Director
Fred P. Lampropoulos
/s/: KENT W.STANGER Chief Financial Officer, Secretary,
- ------------------- Treasurer and Director (Principal financial
Kent W. Stanger and accounting officer)
/s/: RICHARD W. EDELMAN Director
- -----------------------
Richard W. Edelman
/s/: REX C. BEAN Director
- ----------------
Rex C. Bean
/s/: JAMES J. ELLIS Director
- -------------------
James J. Ellis
/s/: MICHAEL E. STILLABOWER Director
- ---------------------------
Michael E. Stillabower
43