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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, 1996 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
MERIT MEDICAL SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Utah 0-18592 87-0447695
(State or other jurisdiction (Commission File No.) (IRS Employer
of incorporation) Identification No.)
1600 West Merit Parkway
South Jordan, Utah 84095
(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 [ ]
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, 1997, was approximately $51,248,225
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, 1997 the Registrant had 7,218,514 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 21, 1997 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]
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TABLE OF CONTENTS
PART I ................................................................... 1
Item 1. Business................................................... 1
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GENERAL ........................................................... 1
PRODUCTS........................................................... 1
Inflation Devices.......................................... 2
Control Syringes........................................... 2
Custom Kits................................................ 2
Specialty Syringes......................................... 3
High Pressure Contrast Injection Line and
Sherlock Connectors..................................... 3
Manifolds.................................................. 3
Waste Containment System................................... 3
Disposable Blood Pressure Transducer....................... 3
Safety Basin............................................... 3
Hemostasis Valves.......................................... 3
Torque Device.............................................. 3
Stopcock .................................................. 3
Contrast Management Systems................................ 3
Angiographic Needles....................................... 4
Mentor .................................................. 4
MARKETING AND SALES................................................ 4
Market Strategy............................................ 4
U.S. Sales................................................. 4
International Sales........................................ 4
CUSTOMERS.......................................................... 4
RESEARCH AND DEVELOPMENT........................................... 5
MANUFACTURING...................................................... 5
COMPETITION........................................................ 5
PATENTS, PATENT APPLICATIONS, LICENSES, TRADEMARKS AND COPYRIGHTS.. 6
REGULATION......................................................... 6
EMPLOYEES.......................................................... 7
Item 2. Properties......................................................... 7
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Item 3. Legal Proceedings................................................... 8
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Item 4. Submission of Matters to a Vote of Security Holders................ 8
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PART II ................................................................... 9
Item 5. Market for Registrant's Common Stock and Related Shareholder
Matters............................................................ 9
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Item 6. Selected Financial Data............................................ 9
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Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.............................................. 9
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Item 8. Financial Statements and Supplementary Data........................ 9
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Item 9. Changes and Disagreements with Accountants on Accounting and
Financial Disclosure............................................... 9
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PART III ................................................................... 10
Item 10, 11, 12 and 13....................................................... 10
PART IV ................................................................... 11
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.... 11
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SIGNATURES................................................................... 13
i
PART I
Item 1. Business.
GENERAL
Merit Medical Systems, Inc. (the "Company") was formed in 1987 by
members of its current management for the purpose of producing single use
medical products of high quality and superior value primarily for use in
diagnosis and treatment of cardiovascular disease. The Company's products are
designed to provide physicians and other health care professionals with devices
that enable them to perform interventional and diagnostic procedures safely and
effectively. Initially, the Company's expertise in innovative product design and
its proprietary technology and skills in injection and insert molding enabled it
to introduce innovative new products and capture significant market share. The
Company subsequently combined its plastics molding capability with the
application of proprietary electronics and sensor-based technologies to develop
a line of angioplasty inflation products with electronic sensing and display
features. These devices are now included in a series of sensor-based products
that address a broad range of needs related to diagnostic and interventional
catheterization procedures performed in hospitals.
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 1996,
approximately 60% of the Company's sales were made directly to U.S. hospitals
and approximately 16% of sales were made to custom packagers who also distribute
to U.S. hospitals. Approximately 24% of the Company's sales in 1996 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
factility 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," "Basix" and "Limited,"
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
in the coming months and years will be 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.
1
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'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
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.
The Limited is a disposable inflation device developed for use in
peripheral angioplasty procedures. The Limited does not measure or display
pressures exerted during the procedures but the syringe incorporates the
Company's proprietary design features which provide clarity, ease of use and
other benefits.
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. Merit recently 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.
2
Specialty Syringes. In April 1991, the Company introduced its Merit
Medallion syringes, a line of disposable, color coded specialty syringes 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. In April 1991, the
Company introduced its high pressure specialty tubing with its 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.
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 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 has introduced the Marquis Series Stopcock which
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.
3
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.
Mentor. The Merit Mentor Simulator/Tester, was developed to augment
the use of our Meritrans Disposable Transducer. The Mentor is used to simulate a
pressure to the Meritrans which allows the clinician to verify the calibration
of the patient monitoring system before the case begins.
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. While 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
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 1996, the Company's international sales grew by 43%
and accounted for approximately 24% 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.
4
Sales to the Company's single largest customer, a foreign dealer,
accounted for 7.1% of total sales during the year ended December 31, 1996. In
1996, approximately 60% of the Company sales were made directly to domestic
hospitals, 16% to custom packagers and packers and 24% 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 and 14 new R&D professionals
there is a new focus on interventional vascular access products, such as
needles, guide wires, catheters, introducers . Certain of the Company's
executive officers also devote a substantial portion of their time to research
and development. Research and development expenses were $2,069,882, $2,330,324,
and $ 2,533,171 in 1994, 1995 and 1996, respectively. There was no customer
sponsored research and development. The Company anticipates that such expenses
will continue at approximately 5.0% to 7.0% of sales.
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.
In December 1996 the Company began operation of a new 26,500 square
foot facility in Galway Ireland. This facility will be used as the
administrative and distribution headquarters to support the European direct
sales force. The facility will also house the research and development team
developing a new PTCA guide wire as well as other new products. Beginning the
second quarter of 1997 the Company will startup manufacturing operations for
several new and existing product lines, such as custom kits, the Basix inflation
device and the new PTCA guide wire.
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, and along with acquired assets
began manufacturing the existing product lines of UMI.
The Company does not believe that it is dependent on any single
supplier and considers its relationship with its suppliers to be good.
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, evidenced by same-day
shipment of most orders, and employment of product managers who respond promptly
to customer inquiries. The Company's products are priced competitively, but not
below prices for competing products.
5
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.
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 1996, 1995 and 1994 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 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.
6
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, 1997, the Company employed 755 persons, including 545
in manufacturing, 87 in marketing, 68 in engineering, research and development
and 55 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
employees with requisite training and skill is available. 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.
Item 2. Properties.
The Company is the owner of approximately 35 acres of real property
situated in South Jordan City, Utah, which surrounds the site of its 175,000
square foot 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 $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 utilized to the extent of approximately 75% on a
single-shift basis. The facility is deemed adequate for the Company's present
level of operations and for anticipated increases in the level of operations.
The Company continues to lease approximately 25,000 square feet at its
former location which are being subleased to third parties.
The Company is leasing a building of approximately 26,500 square feet
in Galway County Galway, Republic of Ireland, as its principal office and future
manufacturing and research and development facility for European operations. The
property has been leased and is being improved and equipped on terms deemed
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 $156,000 per year less a 50% subsidy from the Irish government for
3 years. The Company also has a perpetual purchase option available at favorable
terms through the term of the lease.
The Company has also acquired approximately 1 1/2 acres and a building
of approximately 25,000 square feet in Castlerea, County Roscommon, Republic of
Ireland.
7
The Company also entered into a short term (18 months, with options to
extend for three additional two year terms) lease of a 32,000 square foot
facility in Saratoga Springs New York with very favorable terms.
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
complaint 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 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. Plaintiff has not yet responded
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.
8
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, 1996 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, 1996 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, 1996 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, 1996 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.
9
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
21, 1997. The definitive Proxy Statement will be filed with the Commission not
later than 120 days after December 31, 1996, pursuant to Regulation 14A of the
Securities Exchange Act of 1934, as amended.
10
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, 1996 and 1995
-- Statements of Operations for the Years Ended
December 31, 1996, 1995 and 1994
-- Statements of Stockholders' Equity for the Years
Ended December 31, 1996, 1995 and 1994
-- Statements of Cash Flows for the Years Ended
December 31, 1996, 1995 and 1994
-- 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]
11
Description Exhibit No.
----------------------------------------------------------------------- -------------------------------
13.1 Annual Report to Shareholders for the year ended December 31, 1996.
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.
24.1 Consent of Independent Public Accountants. Filed herewith
27 Financial Data Schedule Filed herewith
- -------- -----------------
* These exhibits are incorporated herein by reference.
(d) Financial Statement Schedules: There are no financial statement
schedule required to be filed
with this report.
12
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 27, 1997.
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 27,1997.
Signature Capacity in Which Signed
____________________________ President, Chief Executive Officer and
Director
Fred P. Lampropoulos
____________________________ Chief Financial Officer, Secretary,
Treasurer and Director (Principal
Kent W. Stanger financial and accounting officer)
____________________________ Director
Richard W. Edelman
- ----------------------------
Rex C. Bean Director
- ----------------------------
James J. Ellis Director
- ----------------------------
Michael E. Stillabower Director
13
Pursuant to item 601(b)(13)(ii) of Regulation S-K, only those portions of the
Merit Medical Systems, Inc. 1996 Annyal Report to Shareholders which are
incorporated by reference into the Registrant's Annual Report on Form 10-K are
filed in electronic format as an exhibit to such Annual Reoprt on Form 10-K.
Merit
REPORT
MAGAZINE
EXECUTIVE OFFICERS
Fred P. Lampropoulos
Chairman, President/Chief Executive Officer
Kent W. Stanger
Secretary-Treasurer, Chief Financial Officer
Brian L. Ferrand
Vice President, Sales and Marketing
Leigh Weintraub
Vice President, Operations
BOARD OF DIRECTORS
Fred P. Lampropoulos
Chairman, President/Chief Executive Officer
Kent W. Stanger
Secretary-Treasurer, Chief Financial Officer
Rex C. Bean, Private Investor
Ogden, Utah
Richard W. Edelman, Vice President
Southwest Securities, Inc.
West Palm Beach, Florida
James J. Ellis
Senior Executive
Mutual of New York, Dallas, Texas
Michael E. Stillabower, M.D.
Chief, Cardiology
Medical Center of Delaware
Wilmington, Delaware
CORPORATE OFFICES
Merit Medical Systems, Inc.
1600 West Merit Parkway
South Jordan, Utah 84095
(801) 253-1600
INDEPENDENT ACCOUNTANTS
Deloitte & Touche LLP
Salt Lake City, Utah
LEGAL COUNSEL
Kimball, Parr, Waddoups, Brown & Gee
Securities/General Counsel
Workman, Nydegger & Jensen
Patent Counsel
FORM 10-K
Merit Medical Systems, Inc. filed an annual report on Form 10-K with the
Securities and Exchange Commission for the fiscal year ended December 31, 1996.
A copy may be obtained by written request from Kent W. Stanger, Secretary, at
the company offices.
ANNUAL MEETING
All shareholders are welcome to attend our Annual Meeting on Wednesday, May 21,
1997 at 3:00 p.m. at the company's corporate offices in South Jordan, Utah.
1 Merit REPORT MAGAZINE
Merit
REPORT
MAGAZINE
STOCK TRANSFER AGENT/REGISTRAR
Atlas Stock Transfer
5899 South State Street
Salt Lake City, Utah 84107
PRIMARY MARKET MAKERS
Dain Bosworth Incorporated
Piper Jaffray Companies Inc.
Mayer & Schweitzer, Inc.
Herzog, Heine, Geduld, Inc.
Sherwood Securities Corp.
Nash Weiss/Div. of Shatkin Inv.
Knight Securities L.P.
Wilson-Davis & Co.
Olsen Payne &
Company
Wien Securities Corp.
Ernst & Company
Oscar Gruss & Son, Inc.
MARKET INFORMATION
The Company's common stock is traded on the NASDAQ National Market System under
the symbol "MMSI." As of December 31, 1996, there were 6,942,290 shares of
common stock outstanding. The following chart sets forth the high and low
closing sale prices for the company's common stock for the last two years:
High Low
1996
First Quarter $7.88 $6.63
Second Quarter 11.75 7.00
Third Quarter 9.25 7.25
Fourth Quarter 8.50 6.50
1995
First Quarter $5.50 $4.25
Second Quarter 10.00 5.44
Third Quarter 8.75 6.75
Fourth Quarter 7.13 5.69
As of March 27, 1997, the Company had 319 shareholders of record, not including
shareholders whose shares are held in securities position listings.
The Company has never declared or paid any cash dividends on its common stock.
The Company intends to retain any earnings for use in its business and does not
anticipate paying any cash dividends in the foreseeable future.
INVESTOR RELATIONS COUNSEL Jordan Richard Assoc.
Salt Lake City, Utah, (801) 595-8611
FOR MORE INFORMATION, CONTACT
Kent W. Stanger, Chief Financial Officer
Merit Medical Systems, Inc.
(801) 253-1600
3 Merit REPORT MAGAZINE
Merit Medical Systems, Inc. and Subsidiaries
Selected Financial Data
Year Ended December 31,
- ----------------------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
- ----------------------------------------------------------------------------------------------------------------------------
Operating Data:
Sales $50,455,766 $42,587,284 $33,324,245 $25,431,180 $18,393,338
Cost of sales 29,319,617 24,987,998 18,999,015 13,653,379 8,653,792
Gross profit 21,136,149 17,599,286 14,325,230 11,777,801 9,739,546
Selling, general, and
administrative expenses 14,311,049 12,808,805 10,232,215 7,836,018 6,958,011
Research and
development expenses 2,533,171 2,330,324 2,069,882 1,306,782 1,044,277
Income from operations 4,291,929 2,460,157 2,023,133 2,635,001
1,737,258
Other income (expense) (661,777) (459,462) (29,868) 4,860 (46,988)
Income before
income tax expense 3,630,152 2,000,695 1,993,265 2,639,861 1,690,270
Income tax expense 1,277,431 700,418 775,453 799,650 502,856
Minority interest in (income)
loss of subsidiary (190,113) (79,040) 33,035
Net income 2,162,608 1,221,237 1,250,847 1,840,211 1,187,414
Net income per share $ .31 $ .18 $ .19 $ .28 $ .19
Weighted average
shares outstanding 7,051,911 6,851,164 6,678,041 6,679,758 6,310,499
Balance Sheet Data:
Working capital $12,761,211 $ 9,518,971 $ 9,032,899 $10,226,533 $7,392,771
Total assets 41,718,553 34,503,858 27,024,267 20,479,384 16,360,112
Long-term debt 4,822,126 1,778,953 827,592 841,921 810,418
Stockholders' equity $22,487,123 $19,264,525 $17,537,029 $15,705,152 $13,286,782
9 Merit REPORT MAGAZINE
Merit Medical Systems, Inc. and Subsidiaries
Management's Discussion
OVERVIEW
The Company experienced significant improvements in many aspects of its
business for the year ended December 31, 1996. Sales increased, particularly in
Europe, as conversion to a direct sales force in Europe is well underway (up
179% for 1996 compared to 1995). The decline in selling, general and
administrative expense, as a percentage of sales, reflects establishment of the
direct sales force in Germany, France and the United Kingdom and increasing
production by the European sales force. Sentir, a majority-owned (72%)
subsidiary, experienced a significant year-over-year improvement in net income
(up 132% in 1996 compared to 1995). Cash flow from operations in 1996 was a
positive $3.4 million, an improvement of over $5.2 million as compared to 1995.
Gross margin as a percentage of sales increased, compared to the prior year, for
the first time since 1991. Net income was up 77% in 1996 over 1995, reflecting
all of the positive trends.
Results in 1996, though gratifying, were tempered by several factors,
particularly the need to continue substantial expenditures related to
development and introduction of technologies and new products and preparation
for manufacturing of those products in Ireland. These expenses, together with
costs incurred in establishing and supporting the European sales force, resulted
in approximately $1 million in net losses from European operations. The Company
continues to experience pressures on margins from price competition,
particularly in Europe, as more competitors enter European markets. As markets
for the Company's existing product lines begin to mature, the Company's future
sales growth and margin improvements are expected to come from the introduction
of new technologies and products, including needles, guide wires, sheath
introducers and catheters. The Company's near-term focus will be on these
several objectives. The resulting investment and startup costs required to
support introduction and sale of new products and to support the direct sales in
Europe will necessarily impact near-term profitability. Sales increases and
margin improvements related to these new product lines are expected to begin
later in 1997 and continue to ramp up in the immediate future. Selling, general
and administrative expenses continue to reflect improved efficiencies and higher
sales production, particularly in Europe. Sentir must broaden its markets to
sustain revenue growth and profitability.
In January 1997, the Company acquired Universal Medical Investments
Corp. ("UMI"), a New York based manufacturer of needles, guide wires, sheath
introducers and catheters. The Company will incur substantial costs of
integrating UMI's operations and completing enhancements to UMI's product lines
prior to their release to Merit's sales force and customers. The Company expects
that the UMI division can be profitable by the end of 1997. The addition of up
to 14 new technical and engineering employees to support product development
will accelerate introduction of new products but will also impact near-term
results.
10 Merit REPORT MAGAZINE
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
operational data as a percentage of sales:
Year ended December 31,
1996 1995 1994
Sales 100.0% 100.0% 100.0%
Gross profit 41.9 41.3 43.0
Selling, general and administrative expenses 28.4 30.1 30.7
Research and development expenses 5.0 5.5 6.2
Income from operations 8.5 5.8 6.1
Income before income tax expense 7.2 4.7 6.0
Net income 4.3 2.9 3.8
Sales increased by $7,868,482, or 18.5%, in 1996 compared to an increase of
$9,263,039, or 27.8%, in 1995 and an increase of $7,893,065, or 31.0%, in 1994.
Company sales growth from 1994 through 1996 was favorably affected by
introductions of new and existing products sold separately and packaged in
custom kits, increased penetration of the market for inflation devices and
introduction and sale of new products. International sales in 1996 were
approximately $11,900,000 compared to $8,319,000 in 1995 and $5,450,000 in 1994.
These increases were primarily attributable to the ongoing transition to a
direct sales force in Europe (direct sales in France, Germany and the U.K. were
$5,259,870 in 1996 compared to $1,882,648 in sales in 1995) as well as greater
acceptance of the Company's products in other international markets, such as
Japan.
Gross profit as a percentage of sales was 41.9%, 41.3% and 43.0% in
1996,1995 and 1994, respectively. The increase in gross profit from 1995 to 1996
was attributable to increased production volumes and efficiencies which continue
to be achieved in the Company's new facility. Gross profit was also favorably
affected by higher margins on international sales made through the Company's
direct sales force, although these margins have been declining in recent months
as competitors enter European markets.
The decline in gross profit in 1995 from 1994 was attributable to
increased custom kit sales where margins are lower than on proprietary products
sold separately. Pricing pressure has also been experienced over the three year
period to varying degrees in each of the Company's markets, particularly with
custom kits, as the Company has entered this well-established market. Selling,
general and administrative expenses increased $1,502,244, or 11.7%, in 1996
compared to 1995 and $2,576,590, or 25.2% in 1995 compared to 1994. These
additional expenditures were related principally to the costs of training and
supporting the Company's growing sales force in international and domestic
markets. Although total selling, general and administrative expenses have
increased during the periods, these expenses, as a percentage of sales, declined
to 28.4% in 1996 compared to 30.1% in 1995 and 30.7% in 1994. These reductions
have been accomplished (despite substantial expenditures related to starting up
the Company's European operations) in part through a Company-wide focus on
achieving greater individual productivity. Increased sales have also permitted
the spread of fixed costs over a greater number of units (economies of scale).
The income tax provision for 1996 was $1,277,431, an effective rate of
35.2%, compared to $700,418, or 35.0% in 1995 and $775,453, or 38.9%, in 1994.
The Company's effective tax rate in 1994 was higher principally because of
expenses and losses of approximately $290,000 associated with the acquisition of
Sentir, Inc. and the start -up of international operations for which related tax
benefits were not recognized. The tax rate for 1996 and 1995 decreased compared
to 1994 because of tax benefits recorded for prior year losses of Sentir, Inc.
The benefits of these net operating losses have all been recognized and
therefore the Company's effective tax rate is expected to rise until there are
Ireland manufacturing profits, which are taxed at 10% rate, later in 1997.
11 Merit REPORT MAGAZINE
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1996, the Company's working capital was $12,761,211,
which represented a current ratio of 2.1 to 1. During 1995, the Company
increased its secured bank line of credit to $8.5 million and obtained $2.2
million in term debt due in October 2000. The Company had $4,533,873 outstanding
under the bank line of credit at December 31, 1996. At March 27, 1997 the
outstanding balance was $3,873,156. The Company has financed leasehold
improvements and equipment acquisitions through secured notes payable and
capital lease arrangements with an outstanding balance of $6,210,702 at December
31,1996. For the year ended December 31, 1996, the Company generated cash from
operations in the amount of $3,418,361, which represented an increase of
$5,229,567 over 1995. In addition to the improved profitability of the Company,
better management of accounts receivable and inventories were the primary
factors contributing to increased cash flows from operations.
Historically, the Company has incurred significant expenses in
connection with product development and introduction of new products. This has
particularly been true in 1995 and 1996 with regard to the development of new
products and the start-up of operations in Europe. Substantial capital has also
been required to finance growth in inventories and receivables. The Company's
principal source of funding for these and other expenses has been the sale of
equity, cash generated from operations, secured loans on equipment and bank
lines of credit. The Company believes that its present sources of liquidity and
capital are adequate for its current operations.
12 Merit REPORT MAGAZINE
Merit Medical Systems, Inc. and Subsidiaries
Consolidated Balance Sheets
December 31, 1996 and 1995
ASSETS 1996 1995
CURRENT ASSETS:
Cash (Note 1) $ 1,262,950 $ 270,841
Trade receivables - net of allowance for uncollectible
accounts: 1996 - $75,324; 1995 - $65,237 (Note 5) 7,379,079 6,727,960
Employee and related party receivables (Note 9) 327,425 363,266
Irish Development Agency grant receivable (Note 6) 416,891 544,725
Inventories (Notes 1, 3, and 5) 13,852,360 12,156,795
Prepaid expenses and other assets 518,823 403,414
Deferred income tax assets (Note 4) 729,060 655,609
--------------------------------------------
Total current assets 24,486,588 21,122,610
--------------------------------------------
PROPERTY AND EQUIPMENT (Notes 1, 5, and 6):
Land 1,107,351 595,959
Building 1,043,804 782,195
Automobiles 144,535 174,651
Manufacturing equipment 8,656,145 7,959,952
Furniture and fixtures 3,816,402 3,005,093
Leasehold improvements 2,673,897 3,087,602
Construction-in-progress 5,193,993 1,465,945
--------------------------------------------
Total 22,636,127 17,071,397
Less accumulated depreciation and amortization (7,605,728) (5,479,589)
--------------------------------------------
Property and equipment - net 15,030,399 11,591,808
--------------------------------------------
OTHER ASSETS:
Intangible assets - net of accumulated amortization:
1996 - $636,059; 1995 - $535,155 (Notes 1 and 5) 1,839,532 1,463,885
Prepaid royalty - net of accumulated amortization:
1996 - $407,143; 1995 - $321,429 (Notes 1 and 10) 192,857 278,571
Deposits 169,177 46,984
--------------------------------------------
Total other assets 2,201,566 1,789,440
--------------------------------------------
TOTAL $ 41,718,553 $ 34,503,858
============================================
(Continued)
13 Merit REPORT MAGAZINE
LIABILITIES AND STOCKHOLDERS' EQUITY 1996 1995
URRENT LIABILITIES:
Line of credit (Note 5) $ 4,533,873 $ 5,871,539
Current portion of long-term debt (Notes 5 and 6) 1,388,576 778,088
Trade payables 2,709,869 3,056,289
Accrued expenses 2,969,246 1,715,075
Advances from employees 107,907 52,863
Income taxes payable (Note 4) 15,906 129,785
---------------------------------------
Total current liabilities 11,725,377 11,603,639
DEFERRED INCOME TAX LIABILITIES (Note 4) 852,578 616,652
LONG-TERM DEBT (Notes 5 and 6) 4,822,126 1,778,953
DEFERRED CREDITS (Note 6) 1,467,660 1,066,513
---------------------------------------
Total liabilities 18,867,741 15,065,757
---------------------------------------
MINORITY INTEREST IN SUBSIDIARY (Notes 1 and 2) 363,689 173,576
---------------------------------------
COMMITMENTS AND CONTINGENCIES (Notes 6, 10, 11 and 12)
STOCKHOLDERS' EQUITY (Notes 1, 7, and 11):
Common stock - no par value; authorized: 10,000,000 shares;
issued: 1996 - 6,942,290 shares; 1995 - 6,786,239 shares 14,184,975 13,088,265
Foreign currency translation adjustment (14,089) 22,631
Retained earnings 8,316,237 6,153,629
--------------------------------------
Total stockholders' equity 22,487,123 19,264,525
--------------------------------------
TOTAL $ 41,718,553 $ 34,503,858
======================================
See notes to consolidated financial statements. (Concluded)
14 Merit REPORT MAGAZINE
Merit Medical Systems, Inc. and Subsidiaries
Consolidated Statements of Operations
For the Years Ended December 31, 1996, 1995 and 1994
1996 1995 1994
SALES (Notes 8 and 9) $ 50,455,766 $ 42,587,284 $ 33,324,245
COST OF SALES (Notes 9 and 10) 29,319,617 24,987,998 18,999,015
GROSS PROFIT 21,136,149 17,599,286 14,325,230
EXPENSES:
Selling, general, and administrative (Note 11) 14,311,049 12,808,805 10,232,215
Research and development 2,533,171 2,330,324 2,069,882
Total 16,844,220 15,139,129 12,302,097
INCOME FROM OPERATIONS 4,291,929 2,460,157 2,023,133
OTHER INCOME (EXPENSE):
Interest income (Note 9) 23,377 15,185 86,947
Interest expense (707,878) (428,038) (113,347)
Miscellaneous income (expense) 22,724 (46,609) (3,468)
Other expense - net (661,777) (459,462) (29,868)
INCOME BEFORE INCOME TAX EXPENSE 3,630,152 2,000,695 1,993,265
INCOME TAX EXPENSE (Note 4) (1,277,431) (700,418) (775,453)
MINORITY INTEREST IN (INCOME) LOSS
OF SUBSIDIARY (Notes 1 and 2) (190,113) (79,040) 33,035
NET INCOME $ 2,162,608 $ 1,221,237 $ 1,250,847
NET INCOME PER COMMON AND
COMMON EQUIVALENT SHARE (Note 1) $ .31 $ .18 $ .19
WEIGHTED AVERAGE NUMBER OF
COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING (Note 1) 7,051,911 6,851,164 6,678,041
See notes to consolidated financial statements.
15 Merit REPORT MAGAZINE
Merit Medical Systems, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
For the Years Ended December 31, 1996, 1995 and 1994
Foreign
Currency
Translation Retained
Common Stock Treasury Stock Adjustment Earnings
------------------------------------------------------------------------
Shares Amount Shares Amount
BALANCE, JANUARY 1, 1994 6,437,086 $12,023,607 NONE NONE NONE $ 3,681,545
Net income 1,250,847
Issuance of common stock for cash (Note 11) 13,657 58,063
Options and warrants exercised for cash (Note 7) 167,000 380,290
Options and warrants exercised and treasury
stock acquired through stock option settlement
agreements including the recording of payroll
tax liabilities in the amount of $328,906 (Note 7) 145,301 135,873 85,173 (464,779)
Treasury stock acquired for cash 14,406 (21,967)
Treasury stock acquired for cancellation
of note receivable 29,102 (149,148)
Treasury stock sold for cash (Note 11) (56,466) 293,142
Retirement of treasury stock (72,215) (342,752) (72,215) 342,752
Foreign currency translation adjustment (Note 1) $ (1,662)
Tax benefit attributable to appreciation
of common stock options exercised 351,218
------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1994 6,690,829 12,606,299 NONE NONE (1,662) 4,932,392
Net income 1,221,237
Issuance of common stock for cash (Note 11) 15,949 99,106
Options and warrants exercised for cash (Note 7) 79,461 370,339
Options to purchase 1,939 shares surrendered in
exchange for the recording of payroll tax liabilities
(Note 7) (9,453)
Foreign currency translation adjustment (Note 1) 24,293
Tax benefit attributable to appreciation
of common stock options exercised 21,974
------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1995 6,786,239 13,088,265 NONE NONE 22,631 6,153,629
Net income 2,162,608
Issuance of common stock for cash (Note 11) 39,996 309,370
Options and warrants exercised for cash (Note 7) 104,117 643,028
Issuance of common stock under
Employee Stock Purchase Plan (Note 7) 11,938 78,633
Foreign currency translation adjustment (Note 1) (36,720)
Tax benefit attributable to appreciation
of common stock options exercised 65,679
------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1996 6,942,290 $14,184,975 NONE NONE $(14,089 $ 8,316,237
========================================================================
See notes to consolidated financial statements.
16 Merit REPORT MAGAZINE
Merit Medical Systems, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For the Years Ended December 31, 1996, 1995 and 1994
1996 1995 1994
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,162,608 $ 1,221,237 $ 1,250,847
------------------------------------------------
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 2,497,850 1,718,901 1,561,982
Bad debt expense 17,708 33,509 2,728
Losses on sales and abandonment of
property and equipment 6,867 61,138 11,778
Amortization of deferred credits (Note 6) (73,619) (55,761)
Deferred income taxes 162,475 (200,768) 33,818
Tax benefit attributable to appreciation of
common stock options exercised 65,679 21,974 351,218
Minority interest in income (loss) of subsidiary 190,113 79,040 (33,035)
Changes in operating assets and liabilities net of
effects from purchase of Sentir, Inc. (Notes 1 and 2):
Trade receivables (668,827) (1,654,077) (1,448,376)
Employee and related party receivables 35,841 (151,802) (22,212)
Irish Development Agency grant receivable 142,637 (194,440) (77,612)
Income tax refund receivable 133,048 (133,048)
Inventories (1,695,565) (3,786,342) (2,397,710)
Prepaid expenses and other assets (115,409) (219,725) (10,630)
Deposits and other (158,913) 85,861 (51,617)
Trade payables (346,420) 547,550 1,323,933
Accrued expenses 1,254,171 413,470 103,717
Advances from employees 55,044 6,196 14,670
Income taxes payable (113,879) 129,785 (118,416)
------------------------------------------------
Total adjustments 1,255,753 (3,032,443) (888,812)
------------------------------------------------
Net cash provided by (used in) operating activities 3,418,361 (1,811,206) 362,035
------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Collections on construction advances receivable 2,184,630 Capital
expenditures for:
Property and equipment (2,736,477) (2,497,060) (3,516,100)
Intangible assets (486,414) (410,982) (363,446)
Proceeds from the sale of property and equipment 41,156 6,765
Purchase of Sentir, Inc. - net of cash acquired (140,741)
------------------------------------------------
Net cash used in investing activities (3,181,735) (723,412) (4,013,522)
------------------------------------------------
(Continued)
17 Merit REPORT MAGAZINE
1996 1995 1994
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowing under line of credit $ 22,551,386 $ 25,390,713 $ 25,162,956
Proceeds from:
Issuance of common and treasury stock 1,031,031 469,445 731,495
Long-term debt 2,200,000
Principal payments on:
Line of credit (23,889,052) (22,982,819) (22,885,708)
Long-term debt (1,068,415) (631,887) (338,918)
Deferred credits (69,467) (54,227)
Purchase of treasury stock (21,967)
Proceeds included in deferred credits 448,398 289,294
Proceeds from sale of subsidiary stock to
minority shareholders 10,000
------------------------------------------------
Net cash provided by financing activities 755,483 2,649,623 2,937,152
------------------------------------------------
NET INCREASE (DECREASE) IN CASH 992,109 115,005 (714,335)
CASH AT BEGINNING OF YEAR 270,841 155,836 870,171
------------------------------------------------
CASH AT END OF YEAR $ 1,262,950 $ 270,841 $ 155,836
================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION - Cash paid during the
year for interest (including capitalized interest of $177,133,
$152,469, and $402,059 during 1996, 1995, and 1994, respectively) $ 761,430 $ 361,062 $ 516,001
================================================
Income taxes $ 1,163,156 $ 638,353 $ 641,881
================================================
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:
o During 1996, 1995, and 1994, the Company entered into capital lease
obligations and notes payable for $2,522,076, $1,997,992, and
$415,835, respectively, for manufacturing equipment.
o During 1996, 1995, and 1994, the Company increased common stock by
$65,679, $21,974, and $351,218, respectively, for the tax benefit
attributable to appreciation of common stock options exercised.
o During 1995, options to purchase 1,939 shares of the Company's common
stock were surrendered in exchange for the Company's recording of
payroll tax liabilities in the amount of $9,453.
o During 1994, the Company acquired 29,102 shares of treasury stock in
exchange for the cancellation of a note receivable in the amount of
$149,148.
o During 1994, the Company settled stock option agreements whereby
options to purchase 145,301 shares of the Company's common stock were
exercised in exchange for 85,173 shares of previously issued common
shares of the Company. In addition, options to purchase an additional
59,449 shares of the Company's common stock were surrendered in
exchange for the Company's recording of payroll tax liabilities in the
amount of $328,906.
o During 1994, the Company acquired 73% of the outstanding common stock
of Sentir, Inc. (see Note 2). In connection with this acquisition, the
Company recorded the following as of the acquisition date:
Assets acquired $ 772,028
Liabilities assumed (476,453)
Minority interest (117,571)
----------------------
Total purchase price $ 178,004
======================
See notes to consolidated financial statements. (Concluded)
18 Merit REPORT MAGAZINE
Merit Medical Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
For the Years Ended December 31, 1996, 1995 and 1994
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization - Merit Medical Systems, Inc. (Merit) and its wholly owned
subsidiaries, Merit Holdings, Inc., and Merit Medical International, Inc., and
Merit's majority-owned subsidiary, Sentir, Inc., (collectively, the Company)
develop, manufacture, and market disposable medical products primarily for use
in the diagnosis and treatment of cardiovascular disease. The Company
manufactures its products in plants located in the United States and beginning
in 1997 in Ireland. The Company has export sales to dealers (see Note 8) and has
direct sales forces in the United States, Canada and Western Europe.
The consolidated financial statements of the Company have been prepared in
accordance with generally accepted accounting principles. 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 generally accepted accounting principles
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, Merit Medical International, Inc., Merit Holdings, Inc., and
Merit's majority-owned subsidiary, Sentir, Inc. (Sentir) (see Note 2). All
material intercompany balances and transactions have been eliminated in
consolidation.
Inventories - Inventories are stated at the lower of cost (computed on a
first-in, first-out basis) or market.
Long-lived Assets - Impairment of long-lived assets is determined in accordance
with Statement of Financial Accounting Standards (SFAS) No. 121 "Accounting for
the Impairment of Long-lived Assets and of Long-lived Assets to be Disposed Of,"
which was adopted on January 1, 1996. There were no impairments as of December
31, 1996.
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 30 years
Automobiles 5 years
Manufacturing equipment 5 to 10 years
Furniture and fixtures 5 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. Costs associated with
obtaining customer lists are amortized over two years.
Prepaid Royalty - The prepaid royalty paid by the Company under an agreement
which grants to the Company a license and certain rights to technology has been
capitalized. Amortization of the prepaid royalty is computed using the
straight-line method over the seven year term of the agreement.
Net Income Per Common and Common Equivalent Share - Net income per common and
common equivalent share is based on the weighted average number of shares
outstanding during each year and for common stock equivalents, which assumes the
exercise of stock options and warrants.
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.
19 Merit REPORT MAGAZINE
Foreign Currency Translation Adjustment - The financial statements of the
Company's foreign subsidiaries are 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
accumulated in a separate component of stockholders' equity.
2. ACQUISITION OF SENTIR
On July 1, 1994, the Company acquired 2,702,900 shares, or approximately 73%, of
the issued and outstanding common stock of Sentir, a Santa Clara,
California-based developer and manufacturer of sensors and transducers for
medical and other applications, from Fred P. Lampropoulos, the founder and
President of Sentir, and the Company's President and Chief Executive Officer.
The shares were acquired from Mr. Lampropoulos for an aggregate of $178,004 of
which $40,000 represented the exercise price of an option granted to the Company
by Mr. Lampropoulos for the purchase of 2,176,000 shares of Sentir in 1992 and
the balance was the amount negotiated by an independent committee of the Board
of Directors for the purchase of the balance of the 526,900 shares owned by Mr.
Lampropoulos.
The Company's acquisition of Sentir was accounted for as a purchase and,
accordingly, the results of operations of Sentir are included in the Company's
consolidated financial statements from the date of acquisition. The total
purchase price was allocated to the assets and liabilities of Sentir based on
their fair values with no resulting goodwill.
The pro forma consolidated results of operations of the Company for the year
ended December 31, 1994 (assuming the acquisition of Sentir had occurred as of
January 1, 1994) are as follows:
Sales $ 33,347,749
Net income 1,145,183
Net income per common and common equivalent share 0.17
3. INVENTORIES
Inventories consist of the following at December 31, 1996 and 1995:
1996 1995
Finished goods $ 6,284,200 $ 5,727,801
Work-in-process 3,806,150 3,337,315
Raw materials 4,025,497 3,333,644
Less reserve for obsolete inventory (263,487) (241,965)
-------------------------------------
Total $ 13,852,360 $ 12,156,795
=====================================
20 Merit REPORT MAGAZINE
4. INCOME TAXES
Deferred income tax assets and liabilities at December 31, 1996 and 1995 consist
of the following temporary differences and carryforward items:
Current Long-Term
----------------------------------------------------------------
1996 1995 1996 1995
Deferred income tax assets:
Allowance for uncollectible
accounts receivable $ 29,404 $ 27,044
Accrued compensation expense 82,447 58,060
General business credits 21,757 170,690
Inventory capitalization for
tax purposes 116,608 165,127
Inventory obsolescence reserve 105,497 84,688
Other 62,122
Net operating losses of
subsidiaries 311,225 150,000 $ 481,878
----------------------------------------------------------------
Total 729,060 655,609 481,878
Less deferred income tax asset
valuation allowance (353,710)
----------------------------------------------------------------
Total net deferred income tax assets 729,060 655,609 128,168
----------------------------------------------------------------
Deferred income tax liabilities - differences
between tax basis and financial reporting
basis of property and equipment $ (852,578) (744,820)
----------------------------------------------------------------
Net $ 729,060 $ 655,609 $ (852,578) $ (616,652)
================================================================
Income tax expense for the years ended December 31, 1996, 1995, and 1994 differs
from amounts computed by applying the statutory Federal rate to pretax income as
follows:
1996 1995 1994
Computed Federal income tax expense at statutory rate of 35% $ 1,270,553 $ 700,243 $ 697,643
State income taxes 231,126 160,562 149,333
Creation of tax credits (61,435) (52,104) (103,970)
Tax benefit of foreign sales corporation (85,614) (46,628) (45,868)
Losses of subsidiaries recorded at foreign rates 289,594 105,000 101,775
Change in deferred income tax asset valuation allowance (353,710) (150,000)
Other - including the effect of graduated rates (13,083) (16,655) (23,460)
-------------------------------------------------
Total income tax expense $ 1,277,431 $ 700,418 $ 775,453
=================================================
Consisting of:
Current $ 1,114,956 $ 901,186 $ 741,635
Deferred 162,475 (200,768) 33,818
-------------------------------------------------
Total $ 1,277,431 $ 700,418 $ 775,453
=================================================
21 Merit REPORT MAGAZINE
5. LINE OF CREDIT AND LONG-TERM DEBT
Line of Credit - As of December 31, 1996 and 1995, the Company had a line of
credit for $8,500,000. The credit line is collateralized by trade receivables,
inventories, property and equipment, and intangible assets and accrues interest
at the bank's prime rate plus .25%. Under the terms of the line, among other
things, the Company is required to maintain positive earnings for each fiscal
quarter during the term of the loan, maintain a ratio of total liabilities to
tangible net worth not to exceed 1.0 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 $7,000,000, and is restricted from paying dividends to shareholders. As of
December 31, 1996 and 1995, the Company owed $4,533,873 and $5,871,539,
respectively, under this line of credit.
Long-term Debt - Long-term debt consists of the following at December 31, 1996
and 1995:
1996 1995
Notes payable to financial institutions; payable in monthly installments
through 2001, including interest at rates ranging from 6.50% to 11.96%;
collateralized by equipment $ 4,847,317 $ 2,240,322
Capital lease obligations (see Note 6) 1,363,385 316,719
-------------------------------------
Total 6,210,702 2,557,041
Less current portion 1,388,576 778,088
-------------------------------------
Long-term portion $ 4,822,126 $ 1,778,953
=====================================
Scheduled maturities of long-term debt at December 31, 1996, are as follows:
Year ending December 31:
1997 $ 1,388,576
1998 1,415,981
1999 1,179,565
2000 1,675,235
2001 501,638
Thereafter 49,707
-------------------------
Total $ 6,210,702
=========================
6. 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. The Company has subleased these facilities during 1996 and
1995. Total rental income from these subleases for the years ended December 31,
1996 and 1995 was approximately $153,000 and $69,000, respectively. 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, 1996, 1995, and
1994 approximated $2,448,000, $2,058,000, and $864,000, respectively.
The Company leases manufacturing and office equipment under long-term capital
lease agreements. Capital leases are collateralized by equipment approximating
$1,635,000 and $595,000 with accumulated amortization of approximately $249,000
and $285,000 as of December 31, 1996 and 1995, respectively.
22 Merit REPORT MAGAZINE
In June 1993, the Company entered into a 25 year lease agreement with a
developer (an unrelated party) 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. Upon
the building's completion in February 1995, monthly rental payments were
approximately $108,000. 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. During 1996 and 1995, $16,614 and $15,230, respectively, of this deferred
credit was amortized as a reduction of rent expense. In connection with the
construction of the building, the Company capitalized interest costs of
approximately $402,000 during the year ended December 31, 1994. Such capitalized
costs are included in leasehold improvements as of December 31, 1996 and 1995.
In connection with the lease agreement, the Company issued to the developer
warrants to purchase 155,461 shares of the Company's common stock at $4.95
subject to carrying cost increases of 3% per year. The warrants expire in ten
years.
The future minimum lease payments, together with the present value of the net
minimum lease payments as of December 31, 1996, are as follows:
Operating Capital
Leases Leases
Year ending December 31:
1997 $ 2,602,774 $ 411,669
1998 2,409,124 357,690
1999 2,097,860 330,164
2000 1,886,946 315,632
2001 1,413,645 221,738
Thereafter 23,459,328
---------------------------------------
Total minimum lease payments $ 33,869,677 1,636,893
Less amount representing interest and executory costs 273,508
====================
-------------------
Present value of net minimum lease payments (see Note 5) $ 1,363,385
===================
Irish Government Development Agency Grants - Through December 31, 1996, the
Company has entered into several grant agreements with the Irish Government
Development Agency of which $416,891 and $544,725 remained in receivables at
December 31, 1996 and 1995, 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 and
training employees as a reduction of operating expenses in 1996, 1995, and 1994
in the amounts of $230,654, $194,440, and $36,227, 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 1996 and 1995, $57,005 and $40,531,
respectively, of the deferred credit was amortized as a reduction of operating
expenses.
Other Deferred Credits - The Company has also received non-interest bearing
advances from a utility company under a program whereby such advances are made
available for the cost of energy reduction improvements made to the Company's
facilities. Through December 31, 1996, the Company had received total advances
under this program of $521,419. As of December 31, 1996 and 1995, the balance
owing and included in deferred credits totaled $397,724 and $467,191,
respectively. The advances are payable over eleven years in monthly
installments.
Litigation - Bennett vs. Merit Medical Systems, Inc., et. - 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 complaint asserted claims on
behalf of the Company (derivative claims) against Mr. Lampropoulos and
23 Merit REPORT MAGAZINE
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
attorneys' 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 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. Plaintiff has not
yet responded.
7. 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 250,000 of which 11,938 have been purchased as of
December 31, 1996.
The Company has a long-term incentive plan which provides for the issuance of
incentive stock options, nonstatutory stock options, and certain corresponding
stock appreciation rights. The maximum number of shares of common stock for
which options may be granted is 2,400,000. 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, 1996,
1995, and 1994 are as follows:
Options Warrants
----------------------------------------------------------
Weighted Weighted
Average or Average or
Range of Range of
Shares Price Shares Price
1996:
Granted 340,000 $8.19 517 $6.83
Exercised 84,850 6.08 19,267 6.65
Forfeited/expired 43,750 6.02
Outstanding at December 31 804,700 6.96 215,461 5.85
Exercisable 364,600 6.64 215,461 5.85
Weighted average fair value of
options and warrants granted during year $4.50
Weighted average fair value of
shares issued under Employee
Stock Purchase Plan 1.16
1995:
Granted 182,000 $5.63 - $9.63 155,461 $ 4.95
Exercised 43,511 3.29 - 7.00 35,950 3.20-4.67
Options surrendered to the
Company in exchange for the
recording of payroll tax liabilities 1,939 4.87
Forfeited/expired 56,250 4.87 - 9.63 10,900 3.20
Outstanding at December 31 593,300 4.87 - 9.63 234,211 4.95-7.65
Exercisable 279,150 4.87 - 9.63 234,211 4.95-7.65
24 Merit REPORT MAGAZINE
Options Warrants
------------------------------ ------------------------------
Weighted Weighted
Average or Average or
Range of Range of
Shares Price Shares Price
1994:
Granted 112,200 $ 4.88 - $ 5.50
Exercised 297,301 2.27 - 3.29 15,000 $ 1.33
Options surrendered to the
Company in exchange for the
recording of payroll tax liabilities 59,449 2.27 - 3.29
Forfeited/expired 19,450 5.50 - 6.25 9,999 1.33
Outstanding at December 31 513,000 3.29 - 8.50 125,600 3.20-7.65
Exercisable 251,870 3.29 - 8.50 125,600 3.20-7.65
The following table summarizes information about stock options and warrants
outstanding at December 31, 1996:
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:
$4.875 - $7.25 546,700 2.21 $ 6.12 307,400 $ 5.91
7.50 - 10.625 258,000 4.60 8.71 57,200 10.56
Warrants:
$5.10 155,461 8.00 $ 5.10 155,461 $ 5.10
7.65 60,000 0.42 7.65 60,000 7.65
The Company accounts for stock options granted using Accounting Principles Board
(APB) Opinion 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 Statement of Financial Accounting
Standards (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 (in thousands):
1996 1995
Net income:
As reported $ 2,162,608 $ 1,221,237
Pro forma 1,753,765 1,146,934
Net income per common and common equivalent share:
As reported $0.31 $0.18
Pro forma 0.25 0.17
25 Merit REPORT MAGAZINE
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 1996 and 1995, dividend yield of 0%; expected
volatility of 55%; risk-free interest rates ranging from 5.30% to 7.36%; and
expected lives of approximately 2.8 years following vesting date.
8. EXPORT SALES
During the years ended December 31, 1996, 1995, and 1994, the Company had sales
of approximately $11,900,000, $8,319,000, and $5,450,000 or approximately 24%,
20%, and 16%, respectively, of total sales primarily in Japan, Germany, France,
United Kingdom and Canada.
9. RELATED PARTY TRANSACTIONS
The following summarizes the Company's transactions with Sentir (see Note 2) for
the six months ended June 30, 1994:
Sales $ 3,193
Purchases 363,445
Interest income 16,265
Receivables from employees at December 31, 1996 and 1995 totaled $274,548 and
$269,208, respectively, (including $143,879 and $67,459, respectively, from
officers of the Company).
10. ROYALTY AGREEMENT
On April 8, 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. The royalty was paid upon execution of the agreement and represents a
prepaid royalty covering the first seven years of the agreement. 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, 1996, 1995, and 1994.
The Licensor has released the Company from all damages, claims, or rights of
action which the Licensor may have had related to the alleged infringement of
the patents issued to the Licensor. The Company has also agreed to not proceed
against the Licensor for the alleged misappropriation by the Licensor of the
Company's confidential and proprietary information.
11. EMPLOYEE BENEFIT PLAN
The Company has a contributory 401(k) savings and profit sharing plan (the Plan)
covering all fulltime employees who are at least 21 years of age and have a
minimum of one year of service to the Company. The Company may contribute at its
discretion matching contributions up to 2.25% of the employees' compensation.
Additional employer contributions are determined at the discretion of the Board
of Directors. The Company did not contribute to the Plan for the year ended
December 31, 1995. Contributions made by the Company to the Plan for the years
ended December 31, 1996 and 1994 totaled approximately $227,000 and $108,000,
respectively.
26 Merit REPORT MAGAZINE
The Plan purchased shares of the Company's common stock at market value during
each of the three years ended December 31, 1996 as follows:
Treasury Shares Unissued Shares
------------------------ ------------------------
Market Market
Shares Value Shares Value
Years ended December 31:
1996 39,996 $ 309,370
1995 15,949 99,106
1994 56,466 $ 293,142 13,657 58,063
12. SUBSEQUENT EVENT
On January 14, 1997, the Company announced that the shareholders of Universal
Medical Instrument Corp. (UMI), had approved the sale of substantially all
operating assets in exchange for 152,420 shares of the Company's common stock
which was valued at approximately $1.5 million. UMI is a privately held company
located in Saratoga County, New York.
The Company's acquisition of UMI's assets will be accounted for using the
purchase method of accounting. The total purchase price of approximately $1.5
million will be allocated to the acquired assets based on their fair values with
the excess purchase price over the fair value of assets acquired of
approximately $625,000 being allocated to goodwill.
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
of Merit Medical Systems, Inc.:
We have audited the accompanying consolidated balance sheets of Merit Medical
Systems, Inc. and subsidiaries as of December 31, 1996 and 1995, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 1996. 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 generally accepted auditing
standards. 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, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996 in conformity with generally accepted accounting principles.
/S/Deloitte & Touche LLP
March 7, 1997
Salt Lake City, Utah
27 Merit REPORT MAGAZINE
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement Nos.
33-96738 on Form S-3 and 33-48227, 33-46964, and 333-10509 on Forms S-8 of Merit
Medical Systems, Inc. of our report dated March 7, 1997, appearing in and
incorporated by reference in this Annual Report on Form 10-K of Merit Medical
Systems, Inc. for the year ended December 31, 1996.
/S/ Deloitte & Touche LLP
Salt Lake City, Utah
March 28, 1997
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
5
0000856982
MERIT MEDICAL SYSTEMS, INC.
1
U.S.
12-MOS
DEC-31-1996
JAN-01-1996
DEC-31-1996
1262950
0
7454403
(75324)
13852360
24486588
22636127
(7605728)
41718553
11725377
4822126
0
0
14184975
8316237
41718553
50455766
50455766
29319617
29319617
0
8743
707878
3630152
1277431
0
0
0
0
2162608
0.31
0.31
