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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, 1997 or
| | Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
MERIT MEDICAL SYSTEMS, INC.
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(Exact name of registrant as specified in its charter)
Utah 0-18592 87-0447695
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(State or other jurisdiction (Commission File No.) (IRS Employer
of incorporation) Identification 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
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Securities registered pursuant to Section 12(g) of the Act:
Title of Class
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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 | |
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 26, 1998, was approximately $48,114,229
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 26, 1998 the Registrant had 7,402,189 shares of Common
Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The Registrant's definitive Proxy Statement relating to the Annual
Meeting of Shareholders scheduled for May 27, 1998 is incorporated by reference
in Part III of this report.
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|
TABLE OF CONTENTS
PART I............................................................ 1
Disclosure regarding forward-looking statements.............................. 1
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Item 1. Business.................................................... 1
GENERAL ........................................................... 1
PRODUCTS........................................................... 2
Inflation Devices.......................................... 3
Control Syringes........................................... 2
Custom Kits................................................ 3
Specialty Syringes......................................... 3
High Pressure Contrast Injection Line and Sherlock
Connectors.............................................. 3
Manifolds.................................................. 3
Waste Containment System................................... 3
Disposable Blood Pressure Transducer....................... 4
Safety Basin............................................... 4
Hemostasis Valves.......................................... 4
Torque Device.............................................. 4
Stopcock .................................................. 4
Contrast Management Systems................................ 4
Angiographic Needles....................................... 4
Captiva Blood Containment Device .......................... 4
Fountain Infusion Guidewire ............................... 4
Tomcat (PTCA) Guidewire ................................... 4
Mentor .................................................. 4
MARKETING AND SALES................................................ 4
Market Strategy............................................ 4
U.S. Sales................................................. 5
International Sales........................................ 5
CUSTOMERS.......................................................... 5
RESEARCH AND DEVELOPMENT........................................... 5
MANUFACTURING...................................................... 6
COMPETITION........................................................ 6
PATENTS, PATENT APPLICATIONS, LICENSES, TRADEMARKS AND COPYRIGHTS.. 6
REGULATION......................................................... 7
EMPLOYEES.......................................................... 7
FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND
EXPORT SALES............................................. 8
Item 2. Properties................................................. 8
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Item 3. Legal Proceedings.......................................... 9
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Item 4. Submission of Matters to a Vote of Security Holders........ 9
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PART II ................................................................... 10
Item 5. Market for Registrant's Common Stock and Related Shareholder
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Matters................................................. 10
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Item 6. Selected Financial Data.................................... 10
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Item 7. Management's Discussion and Analysis of Financial Condition
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and Results of Operations............................... 10
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Item 8. Financial Statements and Supplementary Data................ 10
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Item 9. Changes and Disagreements with Accountants on Accounting
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and Financial Disclosure................................ 10
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PART III ................................................................... 11
Item 10, 11, 12 and 13....................................................... 11
PART IV ................................................................... 12
Item 14. Exhibits, Financial Statement Schedules and Reports
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on Form 8-K............................................. 13
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SIGNATURES................................................................... 14
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PART I
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This Form 10-K Report may include "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
statement of assumptions underlying any of the foregoing. In some cases,
Forward-Looking Statements can be identified by the use of terminology such as
"may," "will," "expects," "plans," "anticipates," "estimates," "potential," or
"continue," or the negative thereof or other comparable terminology. Although
the Company believes that the expectations reflected in the Forward-Looking
Statements contained herein are reasonable, there can be no assurance that such
expectations or any of the Forward- Looking Statements will prove to be correct,
and actual results could differ materially from those projected or assumed in
the Forward-Looking Statements. Future financial condition and results of
operations, as well as any Forward- Looking Statements are subject to inherent
risks and uncertainties, including market acceptance of the Company's products,
potential product recalls, delays in obtaining regulatory approvals, cost
increases, price and product competition, availability of labor and material,
foreign currency fluctuations, changes in health care markets related to health
care reform initiatives and other factors referred to in the Company's press
releases and reports filed with the Securities and Exchange Commission. All
subsequent Forward-Looking Statements attributable to the Company or persons
acting on its behalf are expressly qualified in their entirety by these
cautionary statements.
Item 1. Business.
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GENERAL
Merit Medical Systems, Inc. (the "Company") was formed in 1987 by
members of its current management for the purpose of producing single use
medical products of high quality and superior value primarily for use in
diagnosis and treatment of cardiovascular disease. The Company's products are
designed to provide physicians and other health care professionals with devices
that enable them to perform interventional and diagnostic procedures safely and
effectively. Initially, the Company's expertise in innovative product design and
its proprietary technology and skills in injection and insert molding enabled it
to introduce innovative new products and capture significant market share. The
Company subsequently combined its plastics molding capability with the
application of proprietary electronics and sensor-based technologies to develop
a line of angioplasty inflation products with electronic sensing and display
features. These devices are now included in a series of sensor-based products
that address a broad range of needs related to diagnostic and interventional
catheterization procedures performed in hospitals.
The Company's strategy is to offer a broad line of innovative,
disposable products for use in angiography, angioplasty and similar procedures
and 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 plastics molding, electronic and
sensor-based technologies to develop products for diagnostic and interventional
procedures in additional markets such as neuroradiology, urology and critical
care. The Company's sales of products in combination and in custom kits have
increased as additions have been made to the Company's product lines. In 1997,
approximately 60% of the Company's sales were made directly to U.S. hospitals
and approximately 17% of sales were made to custom packagers who also distribute
to U.S. hospitals. Approximately 23% of the Company's sales in 1997 were made in
international markets.
The Company was organized in July 1987 as a Utah corporation. In July
1994, the Company purchased controlling interest in Sentir, Inc., a
California-based manufacturer of silicon sensors. The Company has also organized
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
Instrument Corp.("UMI"). The Company also leased from UMI a 32,000 square foot
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facility in Saratoga Springs, New York. The Company's principal offices are
located in a manufacturing and office facility at 1600 West Merit Parkway, South
Jordan, Utah 84095, and its telephone number is (801) 253-1600. See "Item 2.
Properties."
PRODUCTS
The Company's products have been designed and developed in response to
the needs of customers and patients. These needs have been identified primarily
through observation of procedures in the cardiac catheterization laboratories,
consultation with the Company's cardiologist advisors and through direct
communication with customers. Since 1988, the Company has developed and
introduced several product lines, including control syringes ("CCS"and "Smart
Tip"), inflation devices ("Intellisystem," "Monarch," and " Basix," including
new 25-atmosphere versions of the Intellisystem, Monarch and Basix devices),
specialty syringes ("Medallion" and "VacLoc"), high pressure tubing and
connectors ("Sherlock") , waste handling and disposal products ("Merit Disposal
Depot" and "Backstop"), a disposable blood pressure transducer ("Meritrans"),
disposable hemostasis valves ("Passage" and "Access-9"), stopcocks ("Marquis
Series") a torque device ("Scout") and contrast management systems ("Miser" and
"In-line Contrast Management System"). These products are sold separately and in
custom kits consisting primarily of selected combinations of products.
On January 31, 1997, Merit Medical acquired four new product lines and
technologies from UMI (needles, guide wires, sheath introducers and catheters).
During January 1997, the Company began marketing a new line of angiographic
needles through its direct sales organization world wide. The Company's strategy
is to combine these newly acquired technologies and product platforms with
Merit's existing products and sales force to address larger markets and to
expand sales to existing customers.
The Company has not experienced any product liability claims; however,
the sale and use of its products entails an inherent risk that product liability
claims may be asserted against the Company. The Company maintains product
liability insurance in the amount of $5,000,000 per occurrence and in the
aggregate, which may not be adequate for expenses or liabilities actually
incurred.
Inflation Devices. Inflation devices are specialized syringes used in
interventional catheterization procedures to inflate and deflate balloon-tipped
catheters. Each of the Company's inflation devices incorporates proprietary
design features which contribute to ease of use, including allowing the
cardiologist or radiologist to engage or release the syringe plunger with one
hand while increasing or decreasing the pressure. Each syringe also provides a
clear view of the fluid path that simplifies debubbling and contributes to
accurate measurement of balloon pressure. The Company recently received
marketing clearance for use of it's inflation devices for a wide range of
additional clinical applications such as esophageal dilation, compartmental
compression, retinal detachment and discography.
The Company's IntelliSystem inflation device, which was the first such
device to incorporate electronic sensing and display features, consists of a
disposable 20cc inflation syringe and an integral pressure transducer which
connects to an electronic monitor outside of the sterile field. To aid the
marketing process and encourage use of the Company's products, the electronic
monitor is provided without charge to customers using the IntelliSystem. The
IntelliSystem measures, times, records and digitally displays information
concerning the pressure, duration and number of each inflation and deflation of
the angioplasty balloon. The Company believes that electronic sensing and
display of such information is much more accurate and precise than can be
obtained from conventional analog gauges. The data is stored and may be
displayed, retrieved, graphed and printed.
The Monarch is a disposable inflation device which digitally displays
data concerning pressure and duration of inflations and deflations on a small
electronic monitor mounted on the barrel of the inflation syringe. The monitor
does not offer all of the display, storage or printing capabilities of the
IntelliSystem but offers the convenience of portable operation.
The Basix is a disposable inflation device which incorporates a
conventional analog pressure gauge, which is mounted on the barrel of the
inflation syringe. The Basix more closely resembles devices marketed by the
Company's competitors but incorporates the Company's proprietary design features
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and benefits. The Company believes that the Basix represents a significant
addition to its line of inflation devices that will contribute to sales where
cost considerations are important, such as in certain international markets.
In January 1996, the Company began shipping 25-atmosphere versions of
the Intellisystem, Monarch and Basix devices in response to market demand for
devices capable of performing at higher pressures, such as in procedures
involving the placement of stents.
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 and angioplasty procedures. 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 which respond primarily to physician
preferences. These features include different configurations of syringe handles
and plungers and connections which allow operation of the syringe in a fixed or
rotating position. In 1997, Merit introduced a new line of high quality control
syringes with a very sensitive low resistance plunger tip ("Smart Tip").
Custom Kits. Custom kits allow physicians to obtain the medical
devices and accessories that they most frequently use during angiography,
angioplasty and similar procedures in a convenient, prepackaged and preassembled
form. Custom kits also provide cost savings over purchasing single products and
reduce the hospital's administrative costs associated with maintaining an
inventory of individual, sterile products.
Specialty Syringes. Merit's Medallion syringes, a line of disposable,
color coded specialty syringes are used for injection of medications, flushing
of manifolds and other general purposes. These syringes are molded of
polycarbonate material for added strength and are available in hundreds of size,
color and custom printing combinations. The color coding allows a clinician to
assign a color for each medication to be dispensed and to differentiate syringes
by their contents. The syringes can also be custom printed to the specifications
of the user. In response to customer requests, the Company has developed and
added additional sizes of its specialty syringes which have applications in
dispensing various medication required in a broader range of peripheral
procedures. The Company believes that the design, color coding and materials
used in its specialty syringes contribute to patient safety and more efficient
procedures. The specialty syringes are sold separately but are an important
component of the Company's custom kits.
High Pressure Contrast Injection Line and Sherlock Connectors. During
angiographic and diagnostic radiology procedures, contrast media must be
injected through a catheter into the blood vessel. This is sometimes
accomplished by a mechanical injector which can generate pressures up to 1200
psi, and requires tubing that can withstand these pressures. The Company offers
high pressure specialty tubing with proprietary Sherlock connectors. The
specialty tubing is clear so that the fluid path can be observed and debubbled.
Sherlock connectors allow coupling and uncoupling of tubing with injectors,
syringes and manifolds without overtightening or breakage. The Company is
currently offering specialty tubing which can handle pressures ranging from 500
to 1200 psi. The specialty tubing with Sherlock connectors is an important
component of custom kits.
Manifolds. The administration of saline, imaging and contrast fluids
and the management of blood pressure monitoring, fluid injection and waste
collection in angiography or angioplasty procedures is accomplished through a
series of valves on a manifold which controls the flow of various fluids in
different directions. The Company has designed its own manifold consisting of
two, three, four or five valves. The Company believes its manifold offers
greater ease of use, simplified identification of flow direction and leak-free
operation under the pressures of manual or mechanical injection of fluids when
compared to manifolds sold by competitors. The Merit Manifold is sold separately
but is also a key component of the Company's custom kits.
Waste Containment System. Because of heightened awareness of the
dangers associated with contacting blood and related waste materials, hospitals
have moved toward closed systems whenever possible. To address these concerns,
the Company has designed a waste containment bag which connects to a manifold
and collects waste materials such as blood and other fluids during angiography,
angioplasty or other procedures. The Merit Disposal Depot is self-contained for
ease of disposal and reduces risk of contamination.
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Disposable Blood Pressure Transducer. The Meritrans is a disposal
blood pressure transducer designed to provide reliable and precise blood
pressure measurements. The device has a clear transducer housing and a
flow-through design for easy flushing and debubbling.
Safety Basin. The BackStop is a fluid disposal basin designed to
reduce human exposure to contaminated blood and fluids.
Hemostasis Valves. The Passage and Access-9 hemostasis valves are used
in conjunction with the Company's new inflation devices and as a component of
the Company's Angioplasty Pack. These valves are made with polycarbonate
plastics for clarity and include Sherlock connectors. The Passage and Access-9
valves differ primarily in size.
Torque Device. The Scout is a torque device which is a guidewire
steering device with a tapered design and contrasting colors for improved
visibility. The Scout is typically included as a component of the Company's
Angioplasty Pack.
Stopcock. The Company's Marquis Series Stopcock offers improvements on
competitive stopcock devices, including a larger, easy grip handle. The Marquis
Series Stopcock is used in connection with Sherlock connectors to provide
improved connections during procedures.
Contrast Management Systems. The Miser and the In-line Contrast
Management System have been designed to increase catheterization lab
efficiencies by reducing or eliminating contrast media waste.
Angiographic Needles. The angiography needle creates the percutaneous
access site for all angiography and angioplasty procedures. This site is the
point-of-entry for the introducer sheath, guidewires, catheters and any
interventional devices. The Merit Majestik Needle helps the physician achieve
precision vascular access.
Captiva(TM) Blood Containment Device. The Captiva helps protect health
care workers from the potential of blood-borne pathogens by minimizing the
escape of blood during an initial needle puncture in vascular access procedures.
This new product is complementary to the recently introduced angiographic
needles and can be utilized in virtually every diagnostic and interventional
case where needle introducers are used.
Fountain(TM) Infusion Catheter. The Fountain catheter delivers
specialized clot-dissolving drugs to help remove blood clots (thrombi) in
peripheral vessels. This catheter will be used to treat peripheral arterial
occlusions, hemodialysis graft occlusions, and deep vein thrombosis. Marketing
clearance was recently obtained for U.S. and European markets and sales of the
Fountain catheter are expected to begin in the second quarter of 1998.
Tomcat (TM) (PTCA) Guidewire. Tomcat guidewires are used in
percutaneous transluminal coronary angioplasty (PTCA) and stent deployment
procedures. Guidewires are used to guide and place balloon angioplasty and stent
deployment catheters in coronary arteries. This new product complements our
existing lines of inflation devices and accessories currently used in balloon
angioplasty procedures. This product was designed, developed and will be
manufactured in the Company's Ireland facility. Marketing clearance was recently
obtained for U.S. and European markets and sales of the Tomcat guidewire are
expected to begin in the second quarter of 1998.
MARKETING AND SALES
Market Strategy. The Company's marketing strategy is strongly focused
on identifying and introducing highly 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 and other
radiologists and other technicians who perform the clinical procedures.
When a product suggestion demonstrates sustainable competitive
advantage, meets customer needs, fits strategically and technologically, and has
good potential financial return, a "project team" is chartered with individuals
4
from Marketing, Engineering, Manufacturing and Quality Assurance. This team
quickly and efficiently clarify the customer requirements, integrate the design,
compile all necessary documentation and testing and prepare 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.
U.S. Sales. The Company's direct sales force currently consists of a
vice president of sales, four regional sales managers and 36 direct sales
representatives located in major metropolitan areas throughout the U.S. The
Company's sales persons are trained by Company personnel at the Company's
facilities, by a senior sales person in their respective territories, at regular
national and regional sales meetings by consulting cardiologists and employees
of the Company and by observation of procedures in catheterization laboratories.
International Sales. Outside of the U.S., the Company's products are
presently sold by 42 independent dealer organizations and 13 direct sales
representatives in Germany, France, the United Kingdom, Canada, Belgium, the
Netherlands, and Ireland. In 1997, the Company's international sales grew by 15%
and accounted for approximately 23% of total sales. The Company has appointed a
vice president for international sales and established an international sales
office in Paris, France. 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 they
are sold. International dealers are responsible for compliance with all
applicable laws and regulations in their respective countries.
CUSTOMERS
The Company's principal customers in the U.S. are hospitals where the
Company's primary contacts are with the catheterization laboratory directors,
cardiologists, radiologists and technicians. Hospitals also purchase the
Company's products in the U.S. through custom packagers and packers who assemble
and combine products in custom kits and packs. The Company's customers outside
the U.S. are hospitals and other end users in those countries where a direct
sales force has been established and, in other countries are independent dealers
in medical products who resell to hospitals and other customers.
Sales to the Company's single largest customer, a foreign dealer,
accounted for 5.1% of total sales during the year ended December 31, 1997. In
1997, approximately 60% of the Company sales were made directly to domestic
hospitals, 17% to custom packagers and packers and 23% to international markets.
RESEARCH AND DEVELOPMENT
The Company believes that one of its important strengths is its
ability to quickly adapt its expertise and experience in injection molding and
to apply its electronic and sensor technologies to a perceived need for a new
product or product improvement. The Company's development efforts are presently
focused on disposable, innovative single-patient or single-use items which can
be included in the Company's custom kits or sold separately. Longer-term
projects include use of sensor-based technologies in a variety of applications
and additional inflation devices with added capacities and features. With the
addition of the technologies acquired from UMI 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 $4,446,795, $2,533,171, and $2,330,324 in 1997, 1996
and 1995, respectively. There was no customer sponsored research and
development. The Company anticipates that such expenses will be at approximately
4.0% to 6.0% of sales for 1998.
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MANUFACTURING
Many of the Company's products are manufactured utilizing its
proprietary technology and expertise in plastic injection and insert molding.
Tooling of molds is contracted with third parties but the Company designs and
owns all of its molds. The Company utilizes its experience in injection and
insert molding technologies in the manufacture of most of the custom components
used in its products.
The electronic monitors and sensors used in the Company's
IntelliSystem and Monarch inflation devices are assembled from standard
electronic components or purchased from suppliers. In July 1994, the Company
acquired a 73% interest in Sentir, Inc. ("Sentir"), a Utah corporation with its
principal offices in Santa Clara, California, which is engaged in development
and marketing of silicon sensors. Sentir was founded in 1991 by the Company's
President and Chief Executive Officer, Fred P. Lampropoulos, to develop
micromachining technology and silicon sensors. Sentir is presently providing
substantially all of the sensors utilized by the Company in certain of its
inflation devices.
The Company's products are manufactured at several facilities,
including in South Jordan, Utah, Galway, Ireland, Saratoga Springs, New York and
at recently leased expansion facilities in Murray, Utah. See "Item 2.
Properties."
COMPETITION
The principal competitive factors in the markets in which the
Company's products compete are quality, performance, service and price. The
Company believes that its products have achieved rapid market acceptance due, in
part, to the quality of materials and workmanship, innovative design and ease of
operation, the Company's attention to customer service and product managers who
respond promptly to customer inquiries. The Company's products are priced
competitively, but not below prices for competing products.
There are several companies which are in the business of designing,
manufacturing and marketing devices similar to the Company's products, most of
which have substantially greater financial, technical and marketing resources
than the Company. There are several companies which compete with the Company in
the U.S. market for products and accessories used in angiography and angioplasty
procedures. The Company believes, based on available industry data with respect
to the number of such procedures performed, that it is one of two market leaders
in the U.S. for control syringes (together with NAIMIC USA Corporation, a
subsidiary of Pfizer), and is the leader in the U.S. market for inflation
devices. The Company also believes that the recent and planned additions to its
product lines will enable it to compete more effectively in both U.S. and
international markets. There is no assurance, however, that the Company will be
able to maintain its existing competitive advantages or to compete successfully
in the future.
A substantial majority of the Company's revenues are presently derived
from sales of products used in coronary angiography and angioplasty procedures.
Other procedures, devices and drugs for the treatment and prevention of coronary
artery disease have been developed and are currently being used such as laser
angioplasty, vascular stents, atherectomy procedures and drug therapies, the
effect of which may be to render certain of the Company's products obsolete or
to limit the markets for its products.
PATENTS, PATENT APPLICATIONS, LICENSES, TRADEMARKS AND COPYRIGHTS
The Company considers its proprietary technology to be important in
the development and manufacture of its products and seeks to protect its
technology through a combination of patents and confidentiality agreements with
its employees and others. Two U.S. patents covering the mechanical aspects of
the Company's angioplasty inflation devices which relate to the ability of the
user to engage or release the syringe plunger while increasing or decreasing
pressure were issued in 1991 and two U.S. patents covering digital control
aspects of the Company's IntelliSystem inflation device and for displaying,
storing and retrieving inflation data were obtained in 1992 and 1993. The
Company has obtained other patents covering each of its Monarch and Basix
inflation devices and additional features of the IntelliSystem.
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Corresponding patent applications covering the claims included in the
Company's U.S. patents and patent applications have been initiated in several
foreign countries. The Company deems its patents and patents pending to be
materially important to its business but does not believe its business is
dependent on securing such patents. The Company negotiated a license in 1992
with respect to patents concerning technology utilized in its IntelliSystem and
Monarch inflation devices in consideration of a 5.75% ongoing royalty not to
exceed $450,000 annually. Royalties paid in each of 1997, 1996 and 1995 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." 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. In general, these statutes and regulations require that
manufacturers adhere to certain standards designed to ensure the safety and
effectiveness of medical devices. The Company employs a director of regulatory
affairs who is responsible for compliance with all applicable FDA regulations.
Although the Company believes it is currently in material compliance with all
applicable FDA requirements, the Company's business could be adversely affected
by failure to comply with all applicable FDA and other government regulations
presently existing and promulgated in the future.
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 health authorities in foreign countries. New
products in either category require extensive documentation, careful engineering
and manufacturing controls to ensure quality. Products needing PMA approval
require extensive pre-clinical and clinical testing and clearance by the FDA
prior to marketing. Products subject to the Section 510(k) Pre-Market
Notification regulations require FDA clearance prior to marketing. To date, the
Company's products have required only compliance with the Section 510(k)
Pre-Market Notification regulations. The Company's products are subject to
foreign regulatory approvals before they may be marketed abroad. The Company has
been advised that it may place the "CE" mark on all nonelectronic devices and
products sold in Europe. The Company has received ISO 9001 certification for its
South Jordan facility.
EMPLOYEES
As of March 23, 1998, the Company employed 989 persons, including 780
in manufacturing, 92 in sales and marketing, 63 in engineering, research and
development and 54 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
7
turnover among its entry level assembly workers as well as occasional shortages
of such workers, resulting in increased labor costs and administrative expenses
related to hiring and training of replacement and new entry-level employees. The
Company has confidentiality agreements with its key employees, including each of
its executive officers. None of the Company's employees are represented by a
union or other collective bargaining group and management of the Company
believes that its relations with its employees are good.
FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES
For financial information relating to the Company's foreign and
domestic sales, transfers between geographic areas net income and indentifiable
assets, see note 8 to the Consolidated Financial Statements incorporated by
reference in this report
Item 2. Properties.
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The Company is the owner of approximately 35 acres of real property
situated in the city of South Jordan, Utah, which surrounds the site of its
175,000 square foot principal office and manufacturing facility where it
relocated and consolidated 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 $108,000. 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 has been constructed to the
Company's specifications and is presently 75% 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 and distribution headquarters to support the European direct
sales force. The facility also houses a research and development team which has
developed a new PTCA guidewire and is developing other new products. Beginning
in the fourth quarter of 1997, the Company initiated manufacturing operations
for several new and existing products at the Galway facility, including custom
kits, the BASIX inflation device and the Company's PTCA guidewire. The property
has been been improved and equipped on terms favorable to the Company in
connection with economic development grant incentives and grants provided by the
Irish Government. This lease is for 20 years at approximately $135,000 per year,
less a 40% subsidy from the Irish government, available through 1999. The
Company also has a purchase option exercisable on terms deemed favorable to the
Company through the term of the lease.
The Company has acquired approximately 1 1/2 acres of land and a
building of approximately 25,000 square feet in Castlerea, County Roscommon,
Republic of Ireland, which is being held for sale.
In February, 1997, the Company entered into an 18-month lease (with
options to extend for three additional two-year terms) of a 32,000 square foot
facility in Saratoga Springs, New York, from UMI where the product lines
acquired from UMI (needles, catheters and guidewires) are currently being
manufactured.
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. The additional manufacturing space
was obtained to create room at the company's principal manufacturing facility
for production of new products. The lease is for a term of five years with
monthly lease payments of approximately $13,900.
The Company believes that its facilities are generally adequate for
its present level of operations and for anticipated increases in the level of
operations.
8
Item 3. Legal Proceedings.
------------------
On February 4, 1994, an action was filed in the Third District Court
of Salt Lake County, State of Utah by an individual claiming to be a shareholder
of the Company and naming the Company, Fred P. Lampropoulos, President of the
Company, and Sentir, a company founded by Mr. Lampropoulos, as defendants. The
claims against the Company were subsequently dismissed. The complaint also
asserts claims on behalf of the Company (derivative claims) against Mr.
Lampropoulos and Sentir, alleging breach of fiduciary duty, and the improper
taking of a corporate opportunity in connection with the formation of Sentir.
The relief sought in connection with the derivative claims included
disgorgement, costs, and attorney's fees. The Company appointed an independent
Special Litigation Committee of the Board to determine the Company's course of
action on the derivative claims which engaged counsel separate from the
Company's usual counsel for purposes of the derivative claims. On November 7,
1995, pursuant to a Motion filed on behalf of the Company's Special Litigation
Committee, the Court made a minute entry granting the motion to Dismiss the
derivative claims, without prejudice. On November 4, 1996, the Special
Litigation Committee delivered its report essentially concluding that the
derivative claims were not well founded. Nevertheless, on November 22,1996, the
plaintiff refiled only the derivative claims in the Third District court of Salt
Lake County, State of Utah and on January 22, 1997, a motion to dismiss was
filed on behalf of the Company, seeking to terminate the litigation and
asserting that the report of the Special Litigation Committee is entitled to
deference under the law.
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.
9
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, 1997 furnished herewith to the
Commission as Exhibit 13.1 to this report on Form 10-K, is incorporated herein
by reference.
Item 6. Selected Financial Data.
------------------------
The "Selected Financial Data" included in Company's Annual Report to
Shareholders for the year ended December 31, 1997 furnished herewith to the
Commission as Exhibit 13.1 to this report on Form 10-K, is incorporated herein
by reference.
Item 7. Management's Discussion and Analysis of Financial Condition
-----------------------------------------------------------
and Results of Operations.
--------------------------
The "Management's Discussion and Analysis of Financial Condition"
included in the Company's Annual Report to Shareholders for the year ended
December 31, 1997 furnished herewith to the Commission as Exhibit 13.1 to this
report on Form 10-K, is incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data.
--------------------------------------------
The Company's financial statements and notes included in the Company's
Annual Report to Shareholders for the year ended December 31, 1997 furnished
herewith to the Commission as Exhibit 13.1 to this report on Form 10-K are
incorporated herein by reference.
Item 9. Changes and Disagreements with Accountants on Accounting
--------------------------------------------------------
and Financial Disclosure.
-------------------------
There has been no Form 8-K filed reporting a change of accountants or
reporting disagreements on any matter of accounting principle, practice,
financial statement disclosure or auditing scope or procedure.
10
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
27, 1998. The definitive Proxy Statement will be filed with the Commission not
later than 120 days after December 31, 1997, pursuant to Regulation 14A of the
Securities Exchange Act of 1934, as amended.
11
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
------------------------------------------------------
Form 8-K.
---------
(a) Documents Filed as Part of this Report:
Financial Statements. The following financial statements are
incorporated by reference as provided in Item 8 of this report:
-- Independent Auditors' Report
-- Balance Sheets as of December 31, 1997 and 1996
-- Statements of Operations for the Years Ended December
31, 1997, 1996 and 1995
-- Statements of Stockholders' Equity for the Years
Ended December 31, 1997, 1996 and 1995
-- Statements of Cash Flows for the Years Ended December
31, 1997, 1996 and 1995
-- Notes to Financial Statements
(b) Reports on Form 8-K:
None.
(C) Exhibits:
The following exhibits required by Item 601 of Regulation S-K
are filed herewith or have been filed previously with the Commission
as indicated below:
Description Exhibit No.
----------------------------------------------------------------------- -------------------------------
3.1 Articles of Incorporation of the Company, as amended and restated* [Form 10-Q filed August 14,
1996, Exhibit No. 1]
3.2 Bylaws of the Company* [Form S-18 filed October 19,
1989, Exhibit No. 2]
4 Specimen Certificate of the Company's Common Stock, no par value* [Form S-18 filed October 19,
1989, Exhibit No. 10]
10.1 Merit Medical Systems, Inc. Long Term Incentive Plan (as amended and [Form 10-Q filed August 14,
restated) dated March 25, 1996* 1996, Exhibit No. 2]
10.2 Merit Medical Systems, Inc. 401(k) Profit Sharing Plan (as amended [Form S-1 filed February 14,
effective January 1, 1991* 1992, Exhibit No. 8]
10.3 License Agreement, dated April 8, 1992 between the Company and Utah [Form S-1 filed February 14,
Medical Products, Inc.* 1992, Exhibit No. 5]
10.4 Lease Agreement dated as of June 8, 1993 for office and manufacturing [Form 10-K for year ended
facility* December 31, 1994, Exhibit
No. 10.5]
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]
12
Description Exhibit No.
----------------------------------------------------------------------- -------------------------------
10.6 Amendment to Loan Agreement with Zions First National Bank dated Filed herewith
October 10, 1997
13.1 Annual Report to Shareholders for the year ended December 31, 1997.
Filed herewith Certain portions of this exhibit are incorporated by
reference into this report on Form 10-K; except as so incorporated by
reference, the Annual Report to Shareholders is not deemed filed as
part of this report on Form 10-K.
23.1 Consent of Independent Auditors Filed herewith
27 Financial Data Schedule - Twelve months ended December 31, 1997 Filed herewith
27.1 Financial Data Schedule - Restated nine months ended September 30,
1996 Filed herewith
- -------- -----------------
* These exhibits are incorporated herein by reference.
(d) Financial Statement Schedules: There are no financial
statement schedules required to be filed with this report.
13
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on March 29, 1998.
MERIT MEDICAL SYSTEMS, INC.
By:_____________________________________
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 29,1998.
Signature Capacity in Which Signed
--------- ------------------------
___________________________________ President, Chief Executive Officer
Fred P. Lampropoulos and Director
___________________________________ Chief Financial Officer, Secretary,
Kent W. Stanger Treasurer and Director (Principal
financial and accounting officer)
___________________________________ Director
Richard W. Edelman
___________________________________
Rex C. Bean Director
___________________________________
James J. Ellis Director
___________________________________
Michael E. Stillabower Director
14