SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
|X| Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended December 31, 1997 or
| | Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
MERIT MEDICAL SYSTEMS, INC.
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(Exact name of registrant as specified in its charter)
Utah 0-18592 87-0447695
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(State or other jurisdiction (Commission File No.) (IRS Employer
of incorporation) Identification No.)
1600 West Merit Parkway
South Jordan, Utah 84095
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (801) 253-1600
Securities registered pursuant to Section 12(b) of the Act:
None
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Securities registered pursuant to Section 12(g) of the Act:
Title of Class
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Common Stock, No Par Value
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes |X| No | |
The aggregate market value of the Common Stock held by non-affiliates
of the Registrant, based upon the closing sale price of the Common Stock on the
NASDAQ National Market System on March 26, 1998, was approximately $48,114,229
Shares of Common Stock held by each officer and director and by each person who
may be deemed to be an affiliate have been excluded.
As of March 26, 1998 the Registrant had 7,402,189 shares of Common
Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The Registrant's definitive Proxy Statement relating to the Annual
Meeting of Shareholders scheduled for May 27, 1998 is incorporated by reference
in Part III of this report.
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. |X|
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TABLE OF CONTENTS
PART I............................................................ 1
Disclosure regarding forward-looking statements.............................. 1
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Item 1. Business.................................................... 1
GENERAL ........................................................... 1
PRODUCTS........................................................... 2
Inflation Devices.......................................... 3
Control Syringes........................................... 2
Custom Kits................................................ 3
Specialty Syringes......................................... 3
High Pressure Contrast Injection Line and Sherlock
Connectors.............................................. 3
Manifolds.................................................. 3
Waste Containment System................................... 3
Disposable Blood Pressure Transducer....................... 4
Safety Basin............................................... 4
Hemostasis Valves.......................................... 4
Torque Device.............................................. 4
Stopcock .................................................. 4
Contrast Management Systems................................ 4
Angiographic Needles....................................... 4
Captiva Blood Containment Device .......................... 4
Fountain Infusion Guidewire ............................... 4
Tomcat (PTCA) Guidewire ................................... 4
Mentor .................................................. 4
MARKETING AND SALES................................................ 4
Market Strategy............................................ 4
U.S. Sales................................................. 5
International Sales........................................ 5
CUSTOMERS.......................................................... 5
RESEARCH AND DEVELOPMENT........................................... 5
MANUFACTURING...................................................... 6
COMPETITION........................................................ 6
PATENTS, PATENT APPLICATIONS, LICENSES, TRADEMARKS AND COPYRIGHTS.. 6
REGULATION......................................................... 7
EMPLOYEES.......................................................... 7
FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND
EXPORT SALES............................................. 8
Item 2. Properties................................................. 8
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Item 3. Legal Proceedings.......................................... 9
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Item 4. Submission of Matters to a Vote of Security Holders........ 9
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PART II ................................................................... 10
Item 5. Market for Registrant's Common Stock and Related Shareholder
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Matters................................................. 10
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Item 6. Selected Financial Data.................................... 10
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Item 7. Management's Discussion and Analysis of Financial Condition
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and Results of Operations............................... 10
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Item 8. Financial Statements and Supplementary Data................ 10
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Item 9. Changes and Disagreements with Accountants on Accounting
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and Financial Disclosure................................ 10
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PART III ................................................................... 11
Item 10, 11, 12 and 13....................................................... 11
PART IV ................................................................... 12
Item 14. Exhibits, Financial Statement Schedules and Reports
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on Form 8-K............................................. 13
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SIGNATURES................................................................... 14
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PART I
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This Form 10-K Report may include "Forward-Looking Statements" within
the meaning of Section 27A of the Securities Act of 1933, as amended and Section
21E of the Securities Exchange Act of 1934, as amended. All statements other
than statements of historical fact are "Forward-Looking Statements" for purposes
of these provisions, including any projections of earnings, revenues or other
financial items, any statements of the plans and objectives of management for
future operations, any statements concerning proposed new products or services,
any statements regarding future economic conditions or performance, and any
statement of assumptions underlying any of the foregoing. In some cases,
Forward-Looking Statements can be identified by the use of terminology such as
"may," "will," "expects," "plans," "anticipates," "estimates," "potential," or
"continue," or the negative thereof or other comparable terminology. Although
the Company believes that the expectations reflected in the Forward-Looking
Statements contained herein are reasonable, there can be no assurance that such
expectations or any of the Forward- Looking Statements will prove to be correct,
and actual results could differ materially from those projected or assumed in
the Forward-Looking Statements. Future financial condition and results of
operations, as well as any Forward- Looking Statements are subject to inherent
risks and uncertainties, including market acceptance of the Company's products,
potential product recalls, delays in obtaining regulatory approvals, cost
increases, price and product competition, availability of labor and material,
foreign currency fluctuations, changes in health care markets related to health
care reform initiatives and other factors referred to in the Company's press
releases and reports filed with the Securities and Exchange Commission. All
subsequent Forward-Looking Statements attributable to the Company or persons
acting on its behalf are expressly qualified in their entirety by these
cautionary statements.
Item 1. Business.
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GENERAL
Merit Medical Systems, Inc. (the "Company") was formed in 1987 by
members of its current management for the purpose of producing single use
medical products of high quality and superior value primarily for use in
diagnosis and treatment of cardiovascular disease. The Company's products are
designed to provide physicians and other health care professionals with devices
that enable them to perform interventional and diagnostic procedures safely and
effectively. Initially, the Company's expertise in innovative product design and
its proprietary technology and skills in injection and insert molding enabled it
to introduce innovative new products and capture significant market share. The
Company subsequently combined its plastics molding capability with the
application of proprietary electronics and sensor-based technologies to develop
a line of angioplasty inflation products with electronic sensing and display
features. These devices are now included in a series of sensor-based products
that address a broad range of needs related to diagnostic and interventional
catheterization procedures performed in hospitals.
The Company's strategy is to offer a broad line of innovative,
disposable products for use in angiography, angioplasty and similar procedures
and to increase market acceptance and penetration for both its existing and new
products in the U.S. and in international markets. Longer term, the Company's
strategy is to extend the application of its plastics molding, electronic and
sensor-based technologies to develop products for diagnostic and interventional
procedures in additional markets such as neuroradiology, urology and critical
care. The Company's sales of products in combination and in custom kits have
increased as additions have been made to the Company's product lines. In 1997,
approximately 60% of the Company's sales were made directly to U.S. hospitals
and approximately 17% of sales were made to custom packagers who also distribute
to U.S. hospitals. Approximately 23% of the Company's sales in 1997 were made in
international markets.
The Company was organized in July 1987 as a Utah corporation. In July
1994, the Company purchased controlling interest in Sentir, Inc., a
California-based manufacturer of silicon sensors. The Company has also organized
subsidiaries in Ireland, Germany, France, the United Kingdom, Belgium, and the
Netherlands to conduct its international business. On January 31, 1997, the
Company purchased the operating assets and product lines of Universal Medical
Instrument Corp.("UMI"). The Company also leased from UMI a 32,000 square foot
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facility in Saratoga Springs, New York. The Company's principal offices are
located in a manufacturing and office facility at 1600 West Merit Parkway, South
Jordan, Utah 84095, and its telephone number is (801) 253-1600. See "Item 2.
Properties."
PRODUCTS
The Company's products have been designed and developed in response to
the needs of customers and patients. These needs have been identified primarily
through observation of procedures in the cardiac catheterization laboratories,
consultation with the Company's cardiologist advisors and through direct
communication with customers. Since 1988, the Company has developed and
introduced several product lines, including control syringes ("CCS"and "Smart
Tip"), inflation devices ("Intellisystem," "Monarch," and " Basix," including
new 25-atmosphere versions of the Intellisystem, Monarch and Basix devices),
specialty syringes ("Medallion" and "VacLoc"), high pressure tubing and
connectors ("Sherlock") , waste handling and disposal products ("Merit Disposal
Depot" and "Backstop"), a disposable blood pressure transducer ("Meritrans"),
disposable hemostasis valves ("Passage" and "Access-9"), stopcocks ("Marquis
Series") a torque device ("Scout") and contrast management systems ("Miser" and
"In-line Contrast Management System"). These products are sold separately and in
custom kits consisting primarily of selected combinations of products.
On January 31, 1997, Merit Medical acquired four new product lines and
technologies from UMI (needles, guide wires, sheath introducers and catheters).
During January 1997, the Company began marketing a new line of angiographic
needles through its direct sales organization world wide. The Company's strategy
is to combine these newly acquired technologies and product platforms with
Merit's existing products and sales force to address larger markets and to
expand sales to existing customers.
The Company has not experienced any product liability claims; however,
the sale and use of its products entails an inherent risk that product liability
claims may be asserted against the Company. The Company maintains product
liability insurance in the amount of $5,000,000 per occurrence and in the
aggregate, which may not be adequate for expenses or liabilities actually
incurred.
Inflation Devices. Inflation devices are specialized syringes used in
interventional catheterization procedures to inflate and deflate balloon-tipped
catheters. Each of the Company's inflation devices incorporates proprietary
design features which contribute to ease of use, including allowing the
cardiologist or radiologist to engage or release the syringe plunger with one
hand while increasing or decreasing the pressure. Each syringe also provides a
clear view of the fluid path that simplifies debubbling and contributes to
accurate measurement of balloon pressure. The Company recently received
marketing clearance for use of it's inflation devices for a wide range of
additional clinical applications such as esophageal dilation, compartmental
compression, retinal detachment and discography.
The Company's IntelliSystem inflation device, which was the first such
device to incorporate electronic sensing and display features, consists of a
disposable 20cc inflation syringe and an integral pressure transducer which
connects to an electronic monitor outside of the sterile field. To aid the
marketing process and encourage use of the Company's products, the electronic
monitor is provided without charge to customers using the IntelliSystem. The
IntelliSystem measures, times, records and digitally displays information
concerning the pressure, duration and number of each inflation and deflation of
the angioplasty balloon. The Company believes that electronic sensing and
display of such information is much more accurate and precise than can be
obtained from conventional analog gauges. The data is stored and may be
displayed, retrieved, graphed and printed.
The Monarch is a disposable inflation device which digitally displays
data concerning pressure and duration of inflations and deflations on a small
electronic monitor mounted on the barrel of the inflation syringe. The monitor
does not offer all of the display, storage or printing capabilities of the
IntelliSystem but offers the convenience of portable operation.
The Basix is a disposable inflation device which incorporates a
conventional analog pressure gauge, which is mounted on the barrel of the
inflation syringe. The Basix more closely resembles devices marketed by the
Company's competitors but incorporates the Company's proprietary design features
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and benefits. The Company believes that the Basix represents a significant
addition to its line of inflation devices that will contribute to sales where
cost considerations are important, such as in certain international markets.
In January 1996, the Company began shipping 25-atmosphere versions of
the Intellisystem, Monarch and Basix devices in response to market demand for
devices capable of performing at higher pressures, such as in procedures
involving the placement of stents.
Control Syringes. The Company's disposable control syringes are
utilized for one-handed control of the injection of contrast media and other
fluids during angiography and angioplasty procedures. The control syringes are
molded from polycarbonate material which is stronger than glass and other
plastics used in the industry. The Company offers different models and sizes of
the control syringes with varying features which respond primarily to physician
preferences. These features include different configurations of syringe handles
and plungers and connections which allow operation of the syringe in a fixed or
rotating position. In 1997, Merit introduced a new line of high quality control
syringes with a very sensitive low resistance plunger tip ("Smart Tip").
Custom Kits. Custom kits allow physicians to obtain the medical
devices and accessories that they most frequently use during angiography,
angioplasty and similar procedures in a convenient, prepackaged and preassembled
form. Custom kits also provide cost savings over purchasing single products and
reduce the hospital's administrative costs associated with maintaining an
inventory of individual, sterile products.
Specialty Syringes. Merit's Medallion syringes, a line of disposable,
color coded specialty syringes are used for injection of medications, flushing
of manifolds and other general purposes. These syringes are molded of
polycarbonate material for added strength and are available in hundreds of size,
color and custom printing combinations. The color coding allows a clinician to
assign a color for each medication to be dispensed and to differentiate syringes
by their contents. The syringes can also be custom printed to the specifications
of the user. In response to customer requests, the Company has developed and
added additional sizes of its specialty syringes which have applications in
dispensing various medication required in a broader range of peripheral
procedures. The Company believes that the design, color coding and materials
used in its specialty syringes contribute to patient safety and more efficient
procedures. The specialty syringes are sold separately but are an important
component of the Company's custom kits.
High Pressure Contrast Injection Line and Sherlock Connectors. During
angiographic and diagnostic radiology procedures, contrast media must be
injected through a catheter into the blood vessel. This is sometimes
accomplished by a mechanical injector which can generate pressures up to 1200
psi, and requires tubing that can withstand these pressures. The Company offers
high pressure specialty tubing with proprietary Sherlock connectors. The
specialty tubing is clear so that the fluid path can be observed and debubbled.
Sherlock connectors allow coupling and uncoupling of tubing with injectors,
syringes and manifolds without overtightening or breakage. The Company is
currently offering specialty tubing which can handle pressures ranging from 500
to 1200 psi. The specialty tubing with Sherlock connectors is an important
component of custom kits.
Manifolds. The administration of saline, imaging and contrast fluids
and the management of blood pressure monitoring, fluid injection and waste
collection in angiography or angioplasty procedures is accomplished through a
series of valves on a manifold which controls the flow of various fluids in
different directions. The Company has designed its own manifold consisting of
two, three, four or five valves. The Company believes its manifold offers
greater ease of use, simplified identification of flow direction and leak-free
operation under the pressures of manual or mechanical injection of fluids when
compared to manifolds sold by competitors. The Merit Manifold is sold separately
but is also a key component of the Company's custom kits.
Waste Containment System. Because of heightened awareness of the
dangers associated with contacting blood and related waste materials, hospitals
have moved toward closed systems whenever possible. To address these concerns,
the Company has designed a waste containment bag which connects to a manifold
and collects waste materials such as blood and other fluids during angiography,
angioplasty or other procedures. The Merit Disposal Depot is self-contained for
ease of disposal and reduces risk of contamination.
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Disposable Blood Pressure Transducer. The Meritrans is a disposal
blood pressure transducer designed to provide reliable and precise blood
pressure measurements. The device has a clear transducer housing and a
flow-through design for easy flushing and debubbling.
Safety Basin. The BackStop is a fluid disposal basin designed to
reduce human exposure to contaminated blood and fluids.
Hemostasis Valves. The Passage and Access-9 hemostasis valves are used
in conjunction with the Company's new inflation devices and as a component of
the Company's Angioplasty Pack. These valves are made with polycarbonate
plastics for clarity and include Sherlock connectors. The Passage and Access-9
valves differ primarily in size.
Torque Device. The Scout is a torque device which is a guidewire
steering device with a tapered design and contrasting colors for improved
visibility. The Scout is typically included as a component of the Company's
Angioplasty Pack.
Stopcock. The Company's Marquis Series Stopcock offers improvements on
competitive stopcock devices, including a larger, easy grip handle. The Marquis
Series Stopcock is used in connection with Sherlock connectors to provide
improved connections during procedures.
Contrast Management Systems. The Miser and the In-line Contrast
Management System have been designed to increase catheterization lab
efficiencies by reducing or eliminating contrast media waste.
Angiographic Needles. The angiography needle creates the percutaneous
access site for all angiography and angioplasty procedures. This site is the
point-of-entry for the introducer sheath, guidewires, catheters and any
interventional devices. The Merit Majestik Needle helps the physician achieve
precision vascular access.
Captiva(TM) Blood Containment Device. The Captiva helps protect health
care workers from the potential of blood-borne pathogens by minimizing the
escape of blood during an initial needle puncture in vascular access procedures.
This new product is complementary to the recently introduced angiographic
needles and can be utilized in virtually every diagnostic and interventional
case where needle introducers are used.
Fountain(TM) Infusion Catheter. The Fountain catheter delivers
specialized clot-dissolving drugs to help remove blood clots (thrombi) in
peripheral vessels. This catheter will be used to treat peripheral arterial
occlusions, hemodialysis graft occlusions, and deep vein thrombosis. Marketing
clearance was recently obtained for U.S. and European markets and sales of the
Fountain catheter are expected to begin in the second quarter of 1998.
Tomcat (TM) (PTCA) Guidewire. Tomcat guidewires are used in
percutaneous transluminal coronary angioplasty (PTCA) and stent deployment
procedures. Guidewires are used to guide and place balloon angioplasty and stent
deployment catheters in coronary arteries. This new product complements our
existing lines of inflation devices and accessories currently used in balloon
angioplasty procedures. This product was designed, developed and will be
manufactured in the Company's Ireland facility. Marketing clearance was recently
obtained for U.S. and European markets and sales of the Tomcat guidewire are
expected to begin in the second quarter of 1998.
MARKETING AND SALES
Market Strategy. The Company's marketing strategy is strongly focused
on identifying and introducing highly differentiated products that meet customer
needs. The Company has targeted selected hospital market segments in Cardiology
and Radiology where its products are used. Suggestions for new products and
product improvements may come from engineers, sales persons and other
radiologists and other technicians who perform the clinical procedures.
When a product suggestion demonstrates sustainable competitive
advantage, meets customer needs, fits strategically and technologically, and has
good potential financial return, a "project team" is chartered with individuals
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from Marketing, Engineering, Manufacturing and Quality Assurance. This team
quickly and efficiently clarify the customer requirements, integrate the design,
compile all necessary documentation and testing and prepare the product for
market introduction. The Company strongly believes that one of its marketing
strengths is its capacity to rapidly conceive, design, develop, and introduce
new products.
U.S. Sales. The Company's direct sales force currently consists of a
vice president of sales, four regional sales managers and 36 direct sales
representatives located in major metropolitan areas throughout the U.S. The
Company's sales persons are trained by Company personnel at the Company's
facilities, by a senior sales person in their respective territories, at regular
national and regional sales meetings by consulting cardiologists and employees
of the Company and by observation of procedures in catheterization laboratories.
International Sales. Outside of the U.S., the Company's products are
presently sold by 42 independent dealer organizations and 13 direct sales
representatives in Germany, France, the United Kingdom, Canada, Belgium, the
Netherlands, and Ireland. In 1997, the Company's international sales grew by 15%
and accounted for approximately 23% of total sales. The Company has appointed a
vice president for international sales and established an international sales
office in Paris, France. With the recent and planned additions to its product
lines, the Company believes that international sales will continue to increase.
International dealers are required to inventory products and sell
directly to customers within defined sales territories. Each of the Company's
products must be approved for sale under the laws of the country in which they
are sold. International dealers are responsible for compliance with all
applicable laws and regulations in their respective countries.
CUSTOMERS
The Company's principal customers in the U.S. are hospitals where the
Company's primary contacts are with the catheterization laboratory directors,
cardiologists, radiologists and technicians. Hospitals also purchase the
Company's products in the U.S. through custom packagers and packers who assemble
and combine products in custom kits and packs. The Company's customers outside
the U.S. are hospitals and other end users in those countries where a direct
sales force has been established and, in other countries are independent dealers
in medical products who resell to hospitals and other customers.
Sales to the Company's single largest customer, a foreign dealer,
accounted for 5.1% of total sales during the year ended December 31, 1997. In
1997, approximately 60% of the Company sales were made directly to domestic
hospitals, 17% to custom packagers and packers and 23% to international markets.
RESEARCH AND DEVELOPMENT
The Company believes that one of its important strengths is its
ability to quickly adapt its expertise and experience in injection molding and
to apply its electronic and sensor technologies to a perceived need for a new
product or product improvement. The Company's development efforts are presently
focused on disposable, innovative single-patient or single-use items which can
be included in the Company's custom kits or sold separately. Longer-term
projects include use of sensor-based technologies in a variety of applications
and additional inflation devices with added capacities and features. With the
addition of the technologies acquired from UMI there is a new focus on
interventional vascular access products, such as needles, guide wires, and
catheters . Certain of the Company's executive officers also devote a
substantial portion of their time to research and development. Research and
development expenses were $4,446,795, $2,533,171, and $2,330,324 in 1997, 1996
and 1995, respectively. There was no customer sponsored research and
development. The Company anticipates that such expenses will be at approximately
4.0% to 6.0% of sales for 1998.
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MANUFACTURING
Many of the Company's products are manufactured utilizing its
proprietary technology and expertise in plastic injection and insert molding.
Tooling of molds is contracted with third parties but the Company designs and
owns all of its molds. The Company utilizes its experience in injection and
insert molding technologies in the manufacture of most of the custom components
used in its products.
The electronic monitors and sensors used in the Company's
IntelliSystem and Monarch inflation devices are assembled from standard
electronic components or purchased from suppliers. In July 1994, the Company
acquired a 73% interest in Sentir, Inc. ("Sentir"), a Utah corporation with its
principal offices in Santa Clara, California, which is engaged in development
and marketing of silicon sensors. Sentir was founded in 1991 by the Company's
President and Chief Executive Officer, Fred P. Lampropoulos, to develop
micromachining technology and silicon sensors. Sentir is presently providing
substantially all of the sensors utilized by the Company in certain of its
inflation devices.
The Company's products are manufactured at several facilities,
including in South Jordan, Utah, Galway, Ireland, Saratoga Springs, New York and
at recently leased expansion facilities in Murray, Utah. See "Item 2.
Properties."
COMPETITION
The principal competitive factors in the markets in which the
Company's products compete are quality, performance, service and price. The
Company believes that its products have achieved rapid market acceptance due, in
part, to the quality of materials and workmanship, innovative design and ease of
operation, the Company's attention to customer service and product managers who
respond promptly to customer inquiries. The Company's products are priced
competitively, but not below prices for competing products.
There are several companies which are in the business of designing,
manufacturing and marketing devices similar to the Company's products, most of
which have substantially greater financial, technical and marketing resources
than the Company. There are several companies which compete with the Company in
the U.S. market for products and accessories used in angiography and angioplasty
procedures. The Company believes, based on available industry data with respect
to the number of such procedures performed, that it is one of two market leaders
in the U.S. for control syringes (together with NAIMIC USA Corporation, a
subsidiary of Pfizer), and is the leader in the U.S. market for inflation
devices. The Company also believes that the recent and planned additions to its
product lines will enable it to compete more effectively in both U.S. and
international markets. There is no assurance, however, that the Company will be
able to maintain its existing competitive advantages or to compete successfully
in the future.
A substantial majority of the Company's revenues are presently derived
from sales of products used in coronary angiography and angioplasty procedures.
Other procedures, devices and drugs for the treatment and prevention of coronary
artery disease have been developed and are currently being used such as laser
angioplasty, vascular stents, atherectomy procedures and drug therapies, the
effect of which may be to render certain of the Company's products obsolete or
to limit the markets for its products.
PATENTS, PATENT APPLICATIONS, LICENSES, TRADEMARKS AND COPYRIGHTS
The Company considers its proprietary technology to be important in
the development and manufacture of its products and seeks to protect its
technology through a combination of patents and confidentiality agreements with
its employees and others. Two U.S. patents covering the mechanical aspects of
the Company's angioplasty inflation devices which relate to the ability of the
user to engage or release the syringe plunger while increasing or decreasing
pressure were issued in 1991 and two U.S. patents covering digital control
aspects of the Company's IntelliSystem inflation device and for displaying,
storing and retrieving inflation data were obtained in 1992 and 1993. The
Company has obtained other patents covering each of its Monarch and Basix
inflation devices and additional features of the IntelliSystem.
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Corresponding patent applications covering the claims included in the
Company's U.S. patents and patent applications have been initiated in several
foreign countries. The Company deems its patents and patents pending to be
materially important to its business but does not believe its business is
dependent on securing such patents. The Company negotiated a license in 1992
with respect to patents concerning technology utilized in its IntelliSystem and
Monarch inflation devices in consideration of a 5.75% ongoing royalty not to
exceed $450,000 annually. Royalties paid in each of 1997, 1996 and 1995 were
$450,000.
While the Company has obtained U.S. patents and filed additional U.S.
and foreign patent applications as discussed above, there can be no assurance
that issued patents will provide the Company with any significant competitive
advantages or will not be challenged by third parties or that the patents of
others will not have an adverse effect on the ability of the Company to conduct
its business. The Company could incur substantial costs in seeking enforcement
of its patents against infringement or the unauthorized use of its proprietary
technology by others or in defending itself against similar claims of others.
Insofar as the Company relies on trade secrets and proprietary know-how to
maintain its competitive position, there can be no assurance that others may not
independently develop similar or superior technologies.
The Company has registered or applied for registration of several
trade names or trademarks. See "--Products." The Company also places copyright
notices on its instructional and advertising materials and has registered
copyrights relating to certain software used in its electronic inflation
devices.
REGULATION
The development, testing, packaging, labeling and marketing of medical
devices and the manufacturing procedures relating to these devices are regulated
under the Federal Food, Drug and Cosmetic Act and additional regulations
promulgated thereunder. In general, these statutes and regulations require that
manufacturers adhere to certain standards designed to ensure the safety and
effectiveness of medical devices. The Company employs a director of regulatory
affairs who is responsible for compliance with all applicable FDA regulations.
Although the Company believes it is currently in material compliance with all
applicable FDA requirements, the Company's business could be adversely affected
by failure to comply with all applicable FDA and other government regulations
presently existing and promulgated in the future.
The FDA's Good Manufacturing Practices standards regulate the
Company's manufacturing processes, require the maintenance of certain records
and provide for unscheduled inspections of the Company's facilities. Certain
requirements of state, local and foreign governments must also be complied with
in the manufacture and marketing of the Company's products.
New medical devices may also be subject to either the Section 510(k)
Pre-Market Notification regulations or the Pre-Market Approval ("PMA")
regulations of the FDA and similar health authorities in foreign countries. New
products in either category require extensive documentation, careful engineering
and manufacturing controls to ensure quality. Products needing PMA approval
require extensive pre-clinical and clinical testing and clearance by the FDA
prior to marketing. Products subject to the Section 510(k) Pre-Market
Notification regulations require FDA clearance prior to marketing. To date, the
Company's products have required only compliance with the Section 510(k)
Pre-Market Notification regulations. The Company's products are subject to
foreign regulatory approvals before they may be marketed abroad. The Company has
been advised that it may place the "CE" mark on all nonelectronic devices and
products sold in Europe. The Company has received ISO 9001 certification for its
South Jordan facility.
EMPLOYEES
As of March 23, 1998, the Company employed 989 persons, including 780
in manufacturing, 92 in sales and marketing, 63 in engineering, research and
development and 54 in administration.
Many of the Company's present employees are highly skilled. The
Company's failure or success will depend, in part, upon its ability to retain
such employees. Management is of the opinion that an adequate supply of skilled
employees is available. The Company has from time to time experienced rapid
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turnover among its entry level assembly workers as well as occasional shortages
of such workers, resulting in increased labor costs and administrative expenses
related to hiring and training of replacement and new entry-level employees. The
Company has confidentiality agreements with its key employees, including each of
its executive officers. None of the Company's employees are represented by a
union or other collective bargaining group and management of the Company
believes that its relations with its employees are good.
FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES
For financial information relating to the Company's foreign and
domestic sales, transfers between geographic areas net income and indentifiable
assets, see note 8 to the Consolidated Financial Statements incorporated by
reference in this report
Item 2. Properties.
-----------
The Company is the owner of approximately 35 acres of real property
situated in the city of South Jordan, Utah, which surrounds the site of its
175,000 square foot principal office and manufacturing facility where it
relocated and consolidated operations in November 1994. The Company sold to the
developer ten acres of land on which the facility was constructed and entered
into a 25-year lease agreement to finance the new facility. Monthly lease
payments are approximately $108,000. The Company also holds an option to
purchase the facility, exercisable at market value after ten years and, if not
exercised, after 25 years. The new facility has been constructed to the
Company's specifications and is presently 75% utilized.
The Company is leasing a building of approximately 26,500 square feet
in Galway, County Galway, Republic of Ireland as its principal office, and
manufacturing facility for European operations. This facility is used as the
administrative and distribution headquarters to support the European direct
sales force. The facility also houses a research and development team which has
developed a new PTCA guidewire and is developing other new products. Beginning
in the fourth quarter of 1997, the Company initiated manufacturing operations
for several new and existing products at the Galway facility, including custom
kits, the BASIX inflation device and the Company's PTCA guidewire. The property
has been been improved and equipped on terms favorable to the Company in
connection with economic development grant incentives and grants provided by the
Irish Government. This lease is for 20 years at approximately $135,000 per year,
less a 40% subsidy from the Irish government, available through 1999. The
Company also has a purchase option exercisable on terms deemed favorable to the
Company through the term of the lease.
The Company has acquired approximately 1 1/2 acres of land and a
building of approximately 25,000 square feet in Castlerea, County Roscommon,
Republic of Ireland, which is being held for sale.
In February, 1997, the Company entered into an 18-month lease (with
options to extend for three additional two-year terms) of a 32,000 square foot
facility in Saratoga Springs, New York, from UMI where the product lines
acquired from UMI (needles, catheters and guidewires) are currently being
manufactured.
In October 1997, the Company began manufacturing operations in a
facility of approximately 25,000 square feet of manufacturing space formerly
occupied by the Company in Murray, Utah and shifted production of several
well-established products to this facility. The additional manufacturing space
was obtained to create room at the company's principal manufacturing facility
for production of new products. The lease is for a term of five years with
monthly lease payments of approximately $13,900.
The Company believes that its facilities are generally adequate for
its present level of operations and for anticipated increases in the level of
operations.
8
<PAGE>
Item 3. Legal Proceedings.
------------------
On February 4, 1994, an action was filed in the Third District Court
of Salt Lake County, State of Utah by an individual claiming to be a shareholder
of the Company and naming the Company, Fred P. Lampropoulos, President of the
Company, and Sentir, a company founded by Mr. Lampropoulos, as defendants. The
claims against the Company were subsequently dismissed. The complaint also
asserts claims on behalf of the Company (derivative claims) against Mr.
Lampropoulos and Sentir, alleging breach of fiduciary duty, and the improper
taking of a corporate opportunity in connection with the formation of Sentir.
The relief sought in connection with the derivative claims included
disgorgement, costs, and attorney's fees. The Company appointed an independent
Special Litigation Committee of the Board to determine the Company's course of
action on the derivative claims which engaged counsel separate from the
Company's usual counsel for purposes of the derivative claims. On November 7,
1995, pursuant to a Motion filed on behalf of the Company's Special Litigation
Committee, the Court made a minute entry granting the motion to Dismiss the
derivative claims, without prejudice. On November 4, 1996, the Special
Litigation Committee delivered its report essentially concluding that the
derivative claims were not well founded. Nevertheless, on November 22,1996, the
plaintiff refiled only the derivative claims in the Third District court of Salt
Lake County, State of Utah and on January 22, 1997, a motion to dismiss was
filed on behalf of the Company, seeking to terminate the litigation and
asserting that the report of the Special Litigation Committee is entitled to
deference under the law.
Item 4. Submission of Matters to a Vote of Security Holders.
----------------------------------------------------
No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year covered by this report.
9
<PAGE>
PART II
Item 5. Market for Registrant's Common Stock and Related Shareholder
------------------------------------------------------------
Matters.
--------
The "Market Information" included in the Company's Annual Report to
Shareholders for the year ended December 31, 1997 furnished herewith to the
Commission as Exhibit 13.1 to this report on Form 10-K, is incorporated herein
by reference.
Item 6. Selected Financial Data.
------------------------
The "Selected Financial Data" included in Company's Annual Report to
Shareholders for the year ended December 31, 1997 furnished herewith to the
Commission as Exhibit 13.1 to this report on Form 10-K, is incorporated herein
by reference.
Item 7. Management's Discussion and Analysis of Financial Condition
-----------------------------------------------------------
and Results of Operations.
--------------------------
The "Management's Discussion and Analysis of Financial Condition"
included in the Company's Annual Report to Shareholders for the year ended
December 31, 1997 furnished herewith to the Commission as Exhibit 13.1 to this
report on Form 10-K, is incorporated herein by reference.
Item 8. Financial Statements and Supplementary Data.
--------------------------------------------
The Company's financial statements and notes included in the Company's
Annual Report to Shareholders for the year ended December 31, 1997 furnished
herewith to the Commission as Exhibit 13.1 to this report on Form 10-K are
incorporated herein by reference.
Item 9. Changes and Disagreements with Accountants on Accounting
--------------------------------------------------------
and Financial Disclosure.
-------------------------
There has been no Form 8-K filed reporting a change of accountants or
reporting disagreements on any matter of accounting principle, practice,
financial statement disclosure or auditing scope or procedure.
10
<PAGE>
PART III
Item 10, 11, 12 and 13.
These items are incorporated by reference to the Company's definitive
Proxy Statement relating to the Annual Meeting of Shareholders scheduled for May
27, 1998. The definitive Proxy Statement will be filed with the Commission not
later than 120 days after December 31, 1997, pursuant to Regulation 14A of the
Securities Exchange Act of 1934, as amended.
11
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
------------------------------------------------------
Form 8-K.
---------
(a) Documents Filed as Part of this Report:
Financial Statements. The following financial statements are
incorporated by reference as provided in Item 8 of this report:
-- Independent Auditors' Report
-- Balance Sheets as of December 31, 1997 and 1996
-- Statements of Operations for the Years Ended December
31, 1997, 1996 and 1995
-- Statements of Stockholders' Equity for the Years
Ended December 31, 1997, 1996 and 1995
-- Statements of Cash Flows for the Years Ended December
31, 1997, 1996 and 1995
-- Notes to Financial Statements
(b) Reports on Form 8-K:
None.
(C) Exhibits:
The following exhibits required by Item 601 of Regulation S-K
are filed herewith or have been filed previously with the Commission
as indicated below:
<TABLE>
<CAPTION>
Description Exhibit No.
----------------------------------------------------------------------- -------------------------------
<S> <C> <C>
3.1 Articles of Incorporation of the Company, as amended and restated* [Form 10-Q filed August 14,
1996, Exhibit No. 1]
3.2 Bylaws of the Company* [Form S-18 filed October 19,
1989, Exhibit No. 2]
4 Specimen Certificate of the Company's Common Stock, no par value* [Form S-18 filed October 19,
1989, Exhibit No. 10]
10.1 Merit Medical Systems, Inc. Long Term Incentive Plan (as amended and [Form 10-Q filed August 14,
restated) dated March 25, 1996* 1996, Exhibit No. 2]
10.2 Merit Medical Systems, Inc. 401(k) Profit Sharing Plan (as amended [Form S-1 filed February 14,
effective January 1, 1991* 1992, Exhibit No. 8]
10.3 License Agreement, dated April 8, 1992 between the Company and Utah [Form S-1 filed February 14,
Medical Products, Inc.* 1992, Exhibit No. 5]
10.4 Lease Agreement dated as of June 8, 1993 for office and manufacturing [Form 10-K for year ended
facility* December 31, 1994, Exhibit
No. 10.5]
10.5 Loan Agreement with Zions First National Bank dated October 10, [Form 10-K for year ended
1995* December 31, 1995, Exhibit
No. 10.5]
12
<PAGE>
Description Exhibit No.
----------------------------------------------------------------------- -------------------------------
10.6 Amendment to Loan Agreement with Zions First National Bank dated Filed herewith
October 10, 1997
13.1 Annual Report to Shareholders for the year ended December 31, 1997.
Filed herewith Certain portions of this exhibit are incorporated by
reference into this report on Form 10-K; except as so incorporated by
reference, the Annual Report to Shareholders is not deemed filed as
part of this report on Form 10-K.
23.1 Consent of Independent Auditors Filed herewith
27 Financial Data Schedule - Twelve months ended December 31, 1997 Filed herewith
27.1 Financial Data Schedule - Restated nine months ended September 30,
1996 Filed herewith
</TABLE>
- -------- -----------------
* These exhibits are incorporated herein by reference.
(d) Financial Statement Schedules: There are no financial
statement schedules required to be filed with this report.
13
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on March 29, 1998.
MERIT MEDICAL SYSTEMS, INC.
By:_____________________________________
Fred P. Lampropoulos, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on March 29,1998.
Signature Capacity in Which Signed
--------- ------------------------
___________________________________ President, Chief Executive Officer
Fred P. Lampropoulos and Director
___________________________________ Chief Financial Officer, Secretary,
Kent W. Stanger Treasurer and Director (Principal
financial and accounting officer)
___________________________________ Director
Richard W. Edelman
___________________________________
Rex C. Bean Director
___________________________________
James J. Ellis Director
___________________________________
Michael E. Stillabower Director
14
LOAN EXTENSION AND MODIFICATION AGREEMENT
(REVOLVING LINE OF CREDIT)
In consideration of the promises contained in this Loan Extension and
Modification Agreement (the "Agreement"), MERIT MEDICAL SYSTEMS, INC., a Utah
corporation ("Merit Medical"), and ZIONS FIRST NATIONAL BANK, a national
association ("Zions Bank"), each referred to as a "Party" and both collectively
referred to as the "Parties" to this Agreement, agree as follows:
1. Merit Medical has a revolving line of credit (the "Line of Credit")
with Zions Bank in the current maximum principal amount of $8,500,000.00,
evidenced and governed by the following documents, among others (collectively
the "Loan Documents"):
A. Loan Agreement, dated October 10, 1995 (the "Loan
Agreement");
B. Promissory Note, dated October 10, 1995, in the
original maximum principal amount of $8,500,000.00
(the "Note");
C. Trust Deed with Assignment of Rents, dated October
10, 1995, and recorded on October 18, 1995, as Entry
No. 6192795 in Book 7251 beginning at Page 0903 of
the official records of the Salt Lake County Recorder
(the "Trust Deed"); and
D. Security Agreement, dated October 10, 1995,
whereby Merit Medical granted to Zions Bank a
security interest in, among other things, all of
its inventory, accounts, general intangibles
(including without limitation certain patents
described in the Security Agreement), equipment,
furnishings and fixtures, all as more particularly
described in the Security Agreement (the "Security
Agreement").
2. The Line of Credit matured on September 1, 1997, on which date all
amounts owing on the Line of Credit became immediately due and payable.
3. Merit Medical failed to pay off the Line of Credit on September 1,
1997, as agreed, and now have requested Zions Bank to extend the maturity of the
Line of Credit until October 1, 1998, and to modify the terms of the Line of
Credit by: (a) increasing the maximum principal amount of the Line of Credit to
$10,500.00; (b) reducing the interest rate by .25%; (c) increasing the maximum
amount of raw materials and finished goods used to calculate the limitation on
advances under the Line of Credit from $3,000,000.00 to $3,500,000.00; (d)
increasing the ratio of total liabilities to tangible net worth from [1.0 to
1.0] to [1.10 to 1.0]; and (e) increasing the minimum working capital
requirement from $7,000,000.00 to $9,000,000.00. Zions Bank is willing to do so,
subject to the terms and conditions of this Agreement, which include not
interrupting or otherwise adversely affecting the priority of Zions Bank's lien
and security interests created under and evidenced by the Trust Deed and the
Security Agreement.
Loan Extension and
Modification Agreement
Page 1
<PAGE>
4. The Parties represent and warrant to each other that, in deciding to
enter into this Agreement, they each:
A. made their own due diligence investigation and
evaluation;
B. had all of the information they needed;
C. did not rely on any statements, acts or omissions
except as expressly set forth in this Agreement;
D. were not acting under any duress, compulsion or
undue influence; and
E. were (or had the opportunity to be) advised by
independent legal counsel.
5. By this Agreement, the Line of Credit and the Loan Documents are
modified as follows:
A. The maturity date of the Line of Credit is extended
from September 1, 1997, to October 1, 1998. All
amounts owing on the Line of Credit shall become
immediately due and payable on October 1, 1998.
B. The maximum principal amount of the Line of Credit is
increased from $8,500,000.00 to $10,500,000.00.
C. The interest rates specified in the Note shall be
reduced by .25%, or in other words from .25% above
the Base Rate (as defined in the Note) to the Base
Rate, and from 3.10 above the LIBOR Rate (as defined
in the Note) to 2.85% above the LIBOR Rate.
D. The maximum amount of raw materials and finished
goods used to calculate the limitation on advances
under the Line of Credit are increased from
$3,000,000.00 to $3,500,000.00.
E. Effective beginning with the calendar quarter which
ends March 31, 1998, the allowable ratio of total
liabilities to tangible net worth is increased from
[1.0 to 1.0] to [1.10 to 1.0].
F. The minimum working capital which Merit Medical is
required to maintain during the term of the Line of
Credit is increased from $7,000,000.00 to
$9,000,000.00.
6. Contemporaneous with the execution and delivery of this Agreement,
Merit Medical shall execute and deliver to Zions Bank a Supplemental Trust Deed,
Loan Extension and
Modification Agreement
Page 2
<PAGE>
in a form acceptable to Zions Bank, whereby the Trust Deed is supplemented to
state the increased maximum principal amount of the Line of Credit.
7. Except as expressly modified by this Agreement, all of the terms and
conditions of the Line of Credit and the Loan Documents shall remain in full
force and effect, and, as modified by this Agreement, the Line of Credit shall
continue to be secured as provided in the Loan Documents.
8. Zions Bank has incurred approximately $675.00 in attorney fees and
expenses in connection with this Agreement and a Loan Assumption Agreement to be
executed and delivered at the same time as this Agreement, which amount
(together with any additional attorney fees and expenses incurred by Zions Bank)
shall be paid by Merit Medical contemporaneous with the execution of this
Agreement. Additionally, contemporaneous with the execution of this Agreement,
Merit Medical shall pay to Zions Bank a loan modification and extension fee of
$26,250.00.
9. Except for express contractual obligations of Zions Bank, Merit
Medical forever releases Zions Bank and all of its parent, subsidiary and
affiliated corporations and entities, past, present and future, and each of
them, as well as their respective partners, directors, officers, agents,
servants, employees and attorneys, past, present and future, and each of them,
from any and all claims, demands, damages, losses, liabilities and causes of
action, of whatever kind or nature, whether known or unknown, whether suspected
or unsuspected, and whether related, directly or indirectly, or wholly unrelated
to the subject matter of this Agreement.
10. ARBITRATION DISCLOSURES:
A. ARBITRATION IS FINAL AND BINDING ON THE PARTIES
AND SUBJECT TO ONLY VERY LIMITED REVIEW BY A
COURT.
B. IN ARBITRATION THE PARTIES ARE WAIVING THEIR RIGHT
TO LITIGATE IN COURT, INCLUDING THEIR RIGHT TO A
JURY TRIAL.
C. DISCOVERY IN ARBITRATION IS MORE LIMITED THAN
DISCOVERY IN COURT.
D. ARBITRATORS ARE NOT REQUIRED TO INCLUDE FACTUAL
FINDINGS OR LEGAL REASONING IN THEIR AWARDS. THE
RIGHT TO APPEAL OR SEEK MODIFICATION OF ARBITRATORS'
RULINGS IS VERY LIMITED.
E. A PANEL OF ARBITRATORS MIGHT INCLUDE AN ARBITRATOR
WHO IS OR WAS AFFILIATED WITH THE BANKING
INDUSTRY.
Loan Extension and
Modification Agreement
Page 3
<PAGE>
F. IF YOU HAVE QUESTIONS ABOUT ARBITRATION, CONSULT
YOUR ATTORNEY OR THE AMERICAN ARBITRATION
ASSOCIATION.
ARBITRATION AGREEMENT
G. Any claim or controversy ("Dispute") between or
among the Parties, including but not limited to
Disputes arising out of or relating to the Line of
Credit, the Loan Documents, this Agreement, or any
agreement, document, obligation or transaction
contemplated by this Agreement, this paragraph 10
(the "Arbitration Agreement"), or any related
agreements or instruments relating hereto or
delivered in connection herewith (the "Related
Documents"), and including but not limited to a
Dispute based on or arising from an alleged tort,
shall at the request of any Party be resolved by
binding arbitration in accordance with the
applicable arbitration rules of the American
Arbitration Association ("the Administrator").
The provisions of this Arbitration Agreement shall
survive any termination, amendment, or expiration
of this Agreement, the Loan Documents or the
Related Documents.
H. The arbitration proceedings shall be conducted in
Salt Lake City, Utah, at a place to be determined
by the Administrator. The Administrator and the
arbitrator(s) shall have the authority to the
extent practicable to take any action to require
the arbitration proceeding to be completed and the
arbitrator(s)' award issued within one-hundred-
fifty (150) days of the filing of the Dispute with
the Administrator. The arbitrator(s) shall have
the authority to impose sanctions on any Party
that fails to comply with time periods imposed by
the Administrator or the arbitrator(s), including
the sanction of summarily dismissing any Dispute
or defense with prejudice. The arbitrator(s)
shall have the authority to resolve any Dispute
regarding the terms of this Agreement, this
Arbitration Agreement, the Loan Documents or the
Related Documents, including any claim or
controversy regarding the arbitrability of any
Dispute. All limitations periods applicable to
any Dispute or defense, whether by statute or
agreement, shall apply to any arbitration
proceeding hereunder and the arbitrator(s) shall
have the authority to decide whether any Dispute
or defense is barred by a limitations period and,
if so, to summarily dismiss any Dispute or defense
on that basis. The doctrines of compulsory
counterclaim, res judicata, and collateral
estoppel shall apply to any arbitration proceeding
hereunder so that a Party must state as a
Loan Extension and
Modification Agreement
Page 4
<PAGE>
counterclaim in the arbitration proceeding any claim
or controversy which arises out of the transaction or
occurrence that is the subject matter of the Dispute.
The arbitrator(s) may in the arbitrator(s)'
discretion and at the request of any Party: (1)
consolidate in a single arbitration proceeding any
other claim or controversy involving another Party
that is substantially related to the Dispute where
that other Party is bound by an arbitration clause
with the Lender, such as borrowers, guarantors,
sureties, and owners of collateral; (2) consolidate
in a single arbitration proceeding any other claim or
controversy that is substantially similar to the
Dispute; and (3) administer multiple arbitration
claims or controversies as class actions in
accordance with the provisions of Rule 23 of the
Federal Rules of Civil Procedure.
I. The arbitrator(s) shall be selected in accordance
with the rules of the Administrator from panels
maintained by the Administrator. A single
arbitrator shall be knowledgeable in the subject
matter of the Dispute. Where three arbitrators
conduct an arbitration proceeding, the Dispute
shall be decided by a majority vote of the three
arbitrators, at least one of whom must be
knowledgeable in the subject matter of the Dispute
and at least one of whom must be a practicing
attorney. The arbitrator(s) shall award recovery
of all costs and fees (including attorneys' fees
and costs, arbitration administration fees and
costs, and arbitrator(s)' fees). The
arbitrator(s), either during the pendency of the
arbitration proceeding or as part of the
arbitration award, also may grant provisional or
ancillary remedies including but not limited to
injunctive relief, foreclosure, sequestration,
attachment, replevin, garnishment, or the
appointment of a receiver.
J. Judgment upon an arbitration award may be entered
in any court having jurisdiction, subject to the
following limitation: the arbitration award is
binding upon the parties only if the amount does
not exceed four million dollars ($4,000,000.00);
if the award exceeds that limit, any Party may
demand the right to a court trial. Such a demand
must be filed with the Administrator within thirty
(30) days following the date of the arbitration
award; if such a demand is not made within that
time period, the amount of the arbitration award
shall be binding. The computation of the total
amount of an arbitration award shall include
amounts awarded for attorneys' fees and costs,
arbitration administration fees and costs, and
arbitrator(s)' fees.
Loan Extension and
Modification Agreement
Page 5
<PAGE>
K. No provision of this Arbitration Agreement, nor
the exercise of any rights hereunder, shall limit
the right of any Party to: (1) judicially or non-
judicially foreclose against any real or personal
property collateral or other security; (2)
exercise self-help remedies, including but not
limited to repossession and setoff rights; or (3)
obtain from a court having jurisdiction thereover
any provisional or ancillary remedies including
but not limited to injunctive relief, foreclosure,
sequestration, attachment, replevin, garnishment,
or the appointment of a receiver. Such rights can
be exercised at any time, before initiation of or
during an arbitration proceeding, except to the
extent such action is contrary to the arbitration
award. The exercise of such rights shall not
constitute a waiver of the right to submit any
Dispute to arbitration, and any claim or
controversy related to the exercise of such rights
shall be a Dispute to be resolved under the
provisions of this Arbitration Agreement.
L. Notwithstanding the applicability of any other law to
this Agreement, the Loan Documents, the Arbitration
Agreement, or the Related Documents between or among
the Parties, the Federal Arbitration Act, 9 U.S.C.
ss. 1 et seq., shall apply to the construction and
interpretation of this Arbitration Agreement.
11. This Agreement and the Loan Documents, as modified by this
Agreement, constitute the entire agreement between the Parties with respect to
the Line of Credit, and may not be altered or amended except by written
agreement signed by both of the Parties. PURSUANT TO UTAH CODE SECTION 25-5-4,
MERIT MEDICAL IS NOTIFIED THAT THIS AGREEMENT AND THE LOAN DOCUMENTS, AS
MODIFIED BY THIS AGREEMENT, ARE A FINAL EXPRESSION OF THE AGREEMENTS BETWEEN THE
PARTIES, AND MAY NOT BE CONTRADICTED BY EVIDENCE OF ANY ALLEGED ORAL AGREEMENT.
12. This Agreement is made pursuant to and shall be construed in
accordance with the laws of the State of Utah.
DATED: 10 October , 1997.
MERIT MEDICAL SYSTEMS, INC.
By: /s/ Kent Stanger
Title: CFO, Secretary
ZIONS FIRST NATIONAL BANK
By: /s/Grant P.
Title: Vice President
Loan Extension and
Modification Agreement
Page 6
MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
- --------------------------------------------
Selected Financial Data
<TABLE>
<CAPTION>
Year Ended December 31,
- ---------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operating Data:
Sales $ 60,579,011 $ 50,455,766 $ 42,587,284 $ 33,324,245 $ 25,431,180
Cost of sales 37,766,116 29,319,617 24,987,998 18,999,015 13,653,379
Gross profit 22,812,895 21,136,149 17,599,286 14,325,230 11,777,801
Selling, general, and
administrative expenses 15,726,651 14,311,049 12,808,805 10,232,215 7,836,018
Research and
development expenses 4,446,795 2,533,171 2,330,324 2,069,882 1,306,782
Income from operations 2,639,449 4,291,929 2,460,157 2,023,133 2,635,001
Other income (expense) 863,933 (661,777) (459,462) (29,868) 4,860
Income before
income tax expense 1,775,516 3,630,152 2,000,695 1,993,265 2,639,861
Income tax expense 944,981 1,277,431 700,418 775,453 799,650
Minority interest in (income)
loss of subsidiary (33,003) (190,113) (79,040) 33,035
Net income 797,532 2,162,608 1,221,237 1,250,847 1,840,211
Net income per share $ .11 $ .31 $ .18 $ .19 $ .28
Weighted average
shares outstanding 7,369,668 7,051,911 6,851,164 6,678,041 6,679,758
Balance Sheet Data:
Working capital $ 14,737,971 $ 12,761,211 $ 9,518,971 $ 9,032,899 $ 10,226,533
Total assets 45,269,678 41,718,553 34,503,858 27,024,267 20,479,384
Long-term debt 3,913,686 4,822,126 1,778,953 827,592 841,921
Stockholders' equity $ 25,802,149 $ 22,487,123 $ 19,264,525 $ 17,537,029 $ 15,705,152
</TABLE>
<PAGE>
MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
- --------------------------------------------
Management's Discussion & Analysis
OVERVIEW
Since its inception in 1987, Merit Medical has made significant
progress toward accomplishing Its business plan objectives, including becoming a
world leader for accessories in the cardiology and radiology markets;
establishing a quality direct sales force in the United States and in many
important international markets; and developing world-class facilities with
manufacturing, quality and regulatory capabilities supported by state-of-the-art
accounting, data and communications systems.
There have been many challenges in accomplishing Merit's
business objectives, such as major changes and reforms in the health care
industry, particularly in the United States. The Company has experienced
increased product and price competition in its markets. The Company also has
been required to manage rapid growth with limited capital.
Near the end of 1996 Merit's management evaluated the Company's
market position in diagnostic and therapeutic accessory products and determined
that bold new initiatives would be required to expand the Company's technology
bases and product lines. This strategy would focus on new product development to
complement existing product lines, resulting in growth in revenues, margins and
profitability.
Merit's growth strategy resulted in expansion of its marketing
department in 1997, followed by increased research and development expenditures
to design, develop and deliver new, proprietary niche products. These new
products are being marketed through the Company's distribution system to
existing and new customers.
Merit's product development strategy has focused on vascular
access markets with product families such as angiographic needles, introducers,
guide wires and catheters. To accomplish this expansion, the Company has made
long-term investments, increasing its marketing and research and development
capabilities in Salt Lake City, Utah, California, New York and Ireland. In
January, 1997, Merit acquired a small, medical device company in New York which
offered products in the vascular access arena. The acquired technology has led
to the introduction of a line of angiographic needles, a thrombolytic catheter
and a specialty guide wire, with other new, proprietary products to follow.
The Company's facility in Ireland has developed and has begun to
manufacture a significant new product-a PTCA (balloon angioplasty) guide wire.
The Sentir Division in California has expanded its marketing of high-quality
sensors to new markets such as the defense and automotive industries. These
initiatives have required subsequent expenditures, resulting in lower earnings
in 1997; however, management believes the Company is now well positioned for
growth and expansion of products, markets and profits.
<PAGE>
MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
- --------------------------------------------
Management's Discussion & Analysis
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain operational
data as a percent of sales:
1997 1996 1995
- -------------------------------------------------------------------------
Sales 100.0% 100.0% 100.0%
Gross profit 37.7 41.9 41.3
Selling, general and administrative 26.0 28.4 30.1
Research and development 7.3 5.0 5.5
Income from operations 4.4 8.5 5.8
Income before income tax expense 2.9 7.2 4.7
Net income 1.3 4.3 2.9
Sales increased by $10,123,245, or 20.1%, in 1997 compared to an
increase of $7,868,482, or 18.5%, in 1996 and an increase of $9,263, 039, or
27.8%, in 1995. Sales growth from 1995 through 1997 was favorably affected by
the introduction of new products and increased sales of existing products sold
separately and packaged in custom kits, and increased penetration of the market
by Merit's inflation devices. International sales in 1997 were approximately
$13,722,000, or 23%, compared to $11,900,000, or 24%, in 1996 and $8,319,000, or
20%, in 1995. These increases were primarily a result of the ongoing transition
to a direct sales force in Europe, as well as greater acceptance of the
Company's products in other international markets. Direct sales in France,
Germany, U.K., Belgium, Holland and Canada were $6,615,697, $5,350,786 and
$1,882,648 in 1997, 1996 and 1995, respectively.
Gross profit as a percent of sales was 37,7%, 41.9% and 41.3% in
1997, 1996 and 1995, respectively. The decrease in gross profit in 1997 from
1996 was due to several factors, including increased sales of lower-margin
custom kits; price competition, especially in European markets; a strong U.S.
dollar affecting the currency translation of the Company's European sales; and
domestic wage increases in response to competition for direct-labor employees.
Gross margins were also affected by start-up and transition costs in the
Company's newly organized Vascular Access Division relating to acquisition of
assets from UMI. Margins improved in 1996 compared to 1995 through increased
production volumes, automation and efficiencies in the new facility as well as
the conversion to a direct international sales force.
Selling, general and administrative expenses increased
$1,415,602, or 9.9%, in 1997 over 1996 and $1,502,244, or 11.7% in 1996 compared
to 1995. These additional expenditures were related principally to the costs of
training and supporting the Company's growing sales force in domestic and
international markets. Although total selling, general and administrative
expenses have increased during the periods, these expenses as a percent of sales
declined to 26.0% in 1997 compared to 28.4% in 1996 and 30.1% in 1995. These
reductions have been accomplished-despite substantial expenditures related to
starting up the Company's European operations-in part through a Company-wide
<PAGE>
MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
- --------------------------------------------
Management's Discussion & Analysis
focus on achieving greater productivity. In addition, increased sales have
permitted the Company to achieve economies of scale through the spread of fixed
costs over a greater number of units.
Research and development expenditures for 1997 were $4,446,795,
an increase of 76% over $2,533,171 in 1996. Research and development costs in
1996 grew by only 9% from 1995, which as a percent of sales was 7.3%, 5.0% and
5.5% for 1997, 1996 and 1995, respectively. This major increase is related to
new product development and reflects management's decision to expand into new
markets for the future growth of the Company.
Net income from operations in 1997 decreased to $2,639,449, or
38.5%, compared to $4,291,929 in 1996, an increase of 74.5% from $2,460,157 in
1995. The income tax provision for 1997 was $944,981, an effective rate of
53.2%, compared to $1,277,431, or 35.2%, in 1996 and $700,418, or 35.0%, in
1995. The Company's consolidated effective tax rate in 1997 was higher
principally because the tax benefits of losses associated with the start-up of
international operations were limited to Ireland's manufacturing tax rate of
10%. The effective tax rate is expected to improve significantly as the Ireland
facility becomes profitable and the 10% tax rate becomes a benefit.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1997 the Company's working capital was
$14,737,971, representing a current ratio of 2.2 to 1. During 1997 the Company
increased its secured bank line of credit to $10.5 million. The Company had
$4,624,727 outstanding under its line of credit at December 31, 1997. Merit has
financed leasehold improvements and equipment acquisitions through secured notes
payable and capital lease arrangements with an outstanding balance of $5,716,618
at December 31, 1997. For the year ended December 31, 1997 the Company generated
cash from operations in the amount of $1,719,508.
Historically, the Company has incurred significant expenses in
connection with product development and introduction of new products. This was
particularly true in 1997 with regard to new product development and the
start-up of European operations. 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 cash generated from
operations, secured loans on equipment, bank lines of credit and sales equity.
The Company believes that its present sources of liquidity and capital are
adequate for its current operations.
MARKET RISK DISCLOSURES
The Company does not engage in significant derivative financial
instruments. The Company does experience risk associated with foreign currency
fluctuations, and interest rate risk associated with its variable rate debt;
however, such risks have not been material to the Company and, accordingly, the
Company has not deemed it necessary to enter into agreements to hedge such
risks. The Company may enter into such agreements in the event that such risks
become material in the future.
<PAGE>
MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
- --------------------------------------------
Consolidated Balance Sheets
DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
ASSETS 1997 1996
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 976,692 $ 1,262,950
Trade receivables - net of allowance for uncollectible
accounts: 1997 - $175,114; 1996 - $75,324 9,599,443 7,379,079
Employee and related party receivables 288,812 327,425
Irish Development Agency grant receivable 747,888 416,891
Inventories 14,535,440 13,852,360
Prepaid expenses and other assets 538,259 518,823
Deferred income tax assets 782,435 729,060
------- -------
Total current assets 27,468,969 24,486,588
---------- ----------
PROPERTY AND EQUIPMENT:
Land 1,101,544 1,107,351
Building 932,448 1,043,804
Automobiles 112,633 144,535
Manufacturing equipment 10,909,529 8,656,145
Furniture and fixtures 4,817,738 3,816,402
Leasehold improvements 4,483,071 2,673,897
Construction-in-progress 2,747,414 5,193,993
--------- ---------
Total 25,104,377 22,636,127
Less accumulated depreciation and amortization (9,648,746) (7,605,728)
---------- ----------
Property and equipment - net 15,455,631 15,030,399
---------- ----------
OTHER ASSETS:
Intangible assets - net of accumulated amortization:
1997 - $821,641; 1996 - $636,059 2,024,050 1,839,532
Cost in excess of the fair value of assets acquired - net
of accumulated amortization: 1997 - $15,015 167,273
Prepaid royalty - net of accumulated amortization:
1997 - $492,857; 1996 - $407,143 107,143 192,857
Deposits 46,612 169,177
------ -------
Total other assets 2,345,078 2,201,566
--------- ---------
TOTAL $ 45,269,678 $ 41,718,553
============ ============
</TABLE>
(Continued)
<PAGE>
MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
- --------------------------------------------
Consolidated Balance Sheets
<TABLE>
<CAPTION>
DECEMBER 31, 1997 AND 1996
LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1996
<S> <C> <C>
CURRENT LIABILITIES:
Line of credit $ 4,624,727 $ 4,533,873
Current portion of long-term debt 1,802,932 1,388,576
Trade payables 3,438,349 3,437,477
Accrued expenses 2,414,050 2,241,638
Advances from employees 81,245 107,907
Income taxes payable 369,695 15,906
------- ------
Total current liabilities 12,730,998 11,725,377
DEFERRED INCOME TAX LIABILITIES 883,002 852,578
LONG-TERM DEBT 3,913,686 4,822,126
DEFERRED CREDITS 1,543,151 1,467,660
--------- ---------
Total liabilities 19,070,837 18,867,741
---------- ----------
MINORITY INTEREST IN SUBSIDIARY 396,692 363,689
------- -------
COMMITMENTS AND CONTINGENCIES (Notes 6, 10, and 11)
Stockholders' EQUITY:
Preferred stock - 5,000,000 shares authorized as of
December 31, 1997, no shares issued
Common stock -- no par value; 20,000,000 and 10,000,000 shares
authorized, respectively; 7,395,091 and 6,942,290 shares issued
at December 31, 1997 and 1996, respectively 17,178,971 14,184,975
Foreign currency translation adjustment (490,591) (14,089)
Retained earnings 9,113,769 8,316,237
--------- ---------
Total stockholders' equity 25,802,149 22,487,123
---------- ----------
TOTAL $ 45,269,678 $ 41,718,553
============ ============
</TABLE>
See notes to consolidated financial statements. (Concluded)
<PAGE>
MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
SALES $ 60,579,011 $ 50,455,766 $ 42,587,284
COST OF SALES 37,766,116 29,319,617 24,987,998
---------- ---------- ----------
GROSS PROFIT 22,812,895 21,136,149 17,599,286
---------- ---------- ----------
EXPENSES:
Selling, general, and administrative 15,726,651 14,311,049 12,808,805
Research and development 4,446,795 2,533,171 2,330,324
--------- --------- ---------
Total 20,173,446 16,844,220 15,139,129
---------- ---------- ----------
INCOME FROM OPERATIONS 2,639,449 4,291,929 2,460,157
--------- --------- ---------
OTHER INCOME (EXPENSE):
Interest income 28,223 23,377 15,185
Interest expense (854,859) (707,878) (428,038)
Miscellaneous income (expense) (37,297) 22,724 (46,609)
--------- --------- ---------
Other expense - net (863,933) (661,777) (459,462)
--------- --------- ---------
INCOME BEFORE INCOME TAX EXPENSE 1,775,516 3,630,152 2,000,695
INCOME TAX EXPENSE (944,981) (1,277,431) (700,418)
MINORITY INTEREST IN INCOME OF
SUBSIDIARY (33,003) (190,113) (79,040)
--------- --------- ---------
NET INCOME $ 797,532 $ 2,162,608 $ 1,221,237
============ ============ ============
EARNINGS PER COMMON SHARE -
Basic and diluted $ .11 $ .31 $ .18
============ ============ ============
AVERAGE COMMON SHARES -
Basic and diluted $ 7,369,668 $ 7,051,911 $ 6,851,164
============ ============ ============
</TABLE>
See notes to consolidated financial statements.
<PAGE>
MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statements of stockholders' Equity
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
<TABLE>
<CAPTION>
Foreign
Common Stock Currency
-------------------- Translation Retained
Shares Amount Adjustment Earnings
<S> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1995 6,690,829 $ 12,606,299 $ (1,662) $ 4,932,392
Net income 1,221,237
Issuance of common stock for cash 15,949 99,106
Options and warrants exercised for cash 79,461 370,339
Options to purchase 1,939 shares
surrendered in exchange for the
recording of payroll tax liabilities (9,453)
Foreign currency translation adjustment 24,293
Tax benefit attributable to appreciation of
common stock options exercised 21,974
----------- ----------- ------------ -----------
BALANCE, DECEMBER 31, 1995 6,786,239 13,088,265 22,631 6,153,629
Net income 2,162,608
Issuance of common stock for cash 39,996 309,370
Options and warrants exercised for cash 104,117 643,028
Issuance of common stock under Employee
Stock Purchase Plan 11,938 78,633
Foreign currency translation adjustment (36,720)
Tax benefit attributable to appreciation of
common stock options exercised 65,679
----------- ----------- ------------ -----------
BALANCE, DECEMBER 31, 1996 6,942,290 14,184,975 (14,089) 8,316,237
Net income 797,532
Issuance of common stock for cash 35,582 273,202
Options and warrants exercised for cash 227,200 1,316,812
Issuance of common stock under Employee
Stock Purchase Plan 42,056 245,129
Foreign currency translation adjustment (476,502)
Tax benefit attributable to appreciation of
common stock options exercised 222,887
Stock issued in connection with UMI acquisition 152,424 975,000
Shares surrendered in exchange for the recording
of payroll tax liabilities (861) (7,534)
Shares surrendered in exchange for the exercise
of stock options (3,600) (31,500)
----------- ----------- ------------ -----------
BALANCE, DECEMBER 31, 1997 7,395,091 $ 17,178,971 $ (490,591) $ 9,113,769
=========== =========== ============ ===========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 797,532 $ 2,162,608 $ 1,221,237
----------- ----------- -----------
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities:
Depreciation and amortization 2,796,425 2,497,850 1,718,901
Bad debt expense 99,790 17,708 33,509
Losses on sales and abandonment
of property and equipment 11,245 6,867 61,138
Amortization of deferred credits (91,155) (73,619) (55,761)
Deferred income taxes (22,951) 162,475 (200,768)
Tax benefit attributable to appreciation
of common stock options exercised 222,887 65,679 21,974
Minority interest in income of subsidiary 33,003 190,113 79,040
Changes in operating assets and liabilities,
net of effects from purchase of UMI:
Trade receivables (2,320,154) (668,827) (1,654,077)
Employee and related party receivables 38,613 35,841 (151,802)
Irish Development Agency
grant receivable (330,997) 142,637 (194,440)
Income tax refund receivable 133,048
Inventories (79,236) (1,695,565) (3,786,342)
Prepaid expenses and other assets (19,436) (115,409) (219,725)
Deposits and other 122,565 (122,193) 61,568
Trade payables 872 381,188 547,550
Accrued expenses 133,378 526,563 413,470
Advances from employees (26,662) 55,044 6,196
Income taxes payable 353,789 (113,879) 129,785
----------- ----------- -----------
Total adjustments 921,976 1,292,473 (3,056,736)
----------- ----------- -----------
Net cash provided by (used in)
operating activities 1,719,508 3,455,081 (1,835,499)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Collections on construction
advances receivable 2,184,630
Capital expenditures for:
Property and equipment (1,046,890) (2,736,477) (2,497,060)
Intangible assets (521,270) (486,414) (410,982)
UMI acquisition (70,486)
Proceeds from the sale of property
and equipment 22,645 41,156
----------- ----------- -----------
Net cash used in investing activities (1,616,001) (3,181,735) (723,412)
----------- ----------- -----------
</TABLE>
(Continued)
<PAGE>
MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under line of credit $ 22,954,925 $ 22,551,386 $ 25,390,713
Proceeds from:
Issuance of common stock 1,835,143 1,031,031 469,445
Long-term debt 2,200,000
Principal payments on:
Line of credit (22,864,071) (23,889,052) (22,982,819)
Long-term debt (1,764,343) (1,068,415) (631,887)
Deferred credits (74,917) (69,467) (54,227)
Proceeds included in deferred credits 448,398
Proceeds from sale of subsidiary stock
to minority shareholders 10,000
----------- ----------- -----------
Net cash provided by financing
activities 86,737 755,483 2,649,623
----------- ----------- -----------
EFFECT OF EXCHANGE RATES ON CASH (476,502) (36,720) 24,293
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (286,258) 992,109 115,005
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 1,262,950 270,841 155,836
----------- ----------- -----------
CASH AND CASH EQUIVALENTS
AT END OF YEAR $ 976,692 $ 1,262,950 $ 270,841
============ ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION - Cash paid during the year
for interest (including capitalized interest
of $109,701, $177,133, and $152,469 during
1997, 1996, and 1995, respectively) $ 782,676 $ 761,430 $ 361,062
============ ============ ============
Income taxes $ 591,192 $ 1,163,156 $ 638,353
============ ============ ============
</TABLE>
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING
ACTIVITIES:
- -- During 1997, 1996, and 1995, the Company entered into capital lease
obligations and notes payable for $1,270,259, $2,522,076, and
$1,997,992, respectively, for manufacturing equipment.
- -- During 1997, 1996, and 1995, the Company increased common stock by
$222,887, $65,679, and $21,974, respectively, for the tax benefit
attributable to appreciation of common stock options exercised.
- -- During 1997 and 1995, respectively, options to purchase 861 and 1,939
shares, respectively, of the Company's common stock were surrendered in
exchange for the Company's recording of payroll tax liabilities in the
amount of $7,534 and $9,453, respectively.
- -- During 1997, 3,600 shares of Merit common stock with a value of $31,500
were surrendered in exchange for the exercise of stock options.
- -- During 1997, the Company acquired UMI for 152,424 shares of Merit
restricted common stock. In connection with this acquisition, the
Company recorded the following as of the acquisition date:
Assets acquired $ 863,198
Cost in excess of fair market value 182,288
-------
Total purchase price $1,045,486
==========
See notes to consolidated financial statements. (Concluded)
<PAGE>
MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization - Merit Medical Systems, Inc. (Merit) and its wholly-owned
subsidiaries, Merit Holdings, Inc. (MHI), and Merit Medical International, Inc.
(MMI), and Merit's majority-owned subsidiary, Sentir, Inc. (Sentir),
(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 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, MMI, MHI, and Sentir. All material intercompany balances and
transactions have been eliminated in consolidation.
Revenue Recognition - Sales are recognized at the time the products are shipped.
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, 1997 or 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 4 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.
Earnings per Common Share - Effective December 31, 1997, the Company adopted
SFAS No. 128, "Earnings Per Share", and retroactively restated its earnings per
share for 1996 and 1995, to conform with the statement. Accordingly, net income
per common share is computed by both the basic method, which uses the weighted
average number of the Company's common shares outstanding, and the diluted
method, which includes the dilutive common shares from stock options and
warrants, as calculated using the treasury stock method. The amounts of such
options and warrants are not significant and, accordingly, the Company's basic
and diluted earnings per share are the same.
<PAGE>
MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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.
Financial Instruments - The Company's financial instruments, when valued using
market interest rates, would not be materially different from the amounts
presented in the consolidated financial statements.
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.
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.
Reclassifications - Certain amounts in prior year consolidated financial
statements have been reclassified to conform with current year presentation.
2. ACQUISITION OF UNIVERSAL MEDICAL INSTRUMENT CORPORATION (UMI)
On January 31, 1997, the Company acquired certain assets of Universal Medical
Instrument Corporation ("UMI") in exchange for 152,424 shares of the Company's
restricted common stock. UMI is a privately held company located in Saratoga
County, New York.
The Company's acquisition of UMI's assets was accounted for as a purchase and,
accordingly, the results of operations of UMI are included in the Company's
consolidated financial statements from the date of acquisition. The total
purchase price, including related costs, was allocated to the assets acquired
based on their fair values with the excess purchase price over the fair value of
assets acquired of $182,288 being allocated to goodwill, which is being
amortized over 12 years. The proforma financial information reflecting this
transaction for 1996 and 1995 has not been presented as it is not materially
different from the Company's historical results.
3. INVENTORIES
Inventories consist of the following at December 31, 1997 and 1996:
1997 1996
Finished goods $ 6,261,203 $ 6,284,200
Work-in-process 4,305,202 3,806,150
Raw materials 4,635,593 4,025,497
Less reserve for obsolete inventory (666,558) (263,487)
-------- --------
Total $ 14,535,440 $ 13,852,360
============ ============
<PAGE>
MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
4. INCOME TAXES
Deferred income tax assets and liabilities at December 31, 1997 and 1996 consist
of the following temporary differences and carryforward items:
<TABLE>
<CAPTION>
Current Long-Term
1997 1996 1997 1996
------------------------ ------------------------
<S> <C> <C> <C> <C>
Deferred income tax assets:
Allowance for uncollectible
accounts receivable $ 70,535 $ 29,404
Accrued compensation expense 124,997 82,447
General business credits 29,990 21,757
Inventory capitalization for
tax purposes 82,411 116,608
Inventory obsolescence reserve 181,729 105,497
Other 36,128 62,122
Net operating losses of subsidiaries 256,645 311,225
--------- --------- --------- ---------
Total deferred income tax assets 782,435 729,060
Deferred income tax liabilities -
differences between tax basis
and financial reporting basis
of property and equipment $(883,002) $(852,578)
--------- --------- --------- ---------
Net $ 782,435 $ 729,060 $(883,002) $(852,578)
========= ========= ========= =========
</TABLE>
Income tax expense for the years ended December 31, 1997, 1996, and 1995 differs
from amounts computed by applying the statutory Federal rate to pretax income as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Computed Federal income tax expense at
statutory rate of 35% $ 621,431 $ 1,270,553 $ 700,243
State income taxes 124,878 231,126 160,562
Creation of tax credits (164,319) (61,435) (52,104)
Tax benefit of foreign sales corporation (106,574) (85,614) (46,628)
Losses of subsidiaries recorded at
foreign rates 496,685 289,594 105,000
Change in deferred income tax asset
valuation allowance (353,710) (150,000)
Other - including the effect of graduated rates (27,120) (13,083) (16,655)
------- ------- -------
Total income tax expense $ 944,981 $ 1,277,431 $ 700,418
=========== =========== ===========
Consisting of:
Current $ 967,932 $ 1,114,956 $ 901,186
Deferred (22,951) 162,475 (200,768)
------- ------- --------
Total $ 944,981 $ 1,277,431 $ 700,418
=========== =========== ===========
</TABLE>
<PAGE>
MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
5. LINE OF CREDIT AND LONG-TERM DEBT
Line of Credit - As of December 31, 1997, the Company had a line of credit for
$10,500,000. The credit line is collateralized by trade receivables,
inventories, property and equipment, and intangible assets and accrues interest
at the bank's prime rate. 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 1.1 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
$9,000,000, and is restricted from paying dividends to shareholders. As of
December 31, 1997 and 1996, the Company owed $4,624,727 and $4,533,873,
respectively, under this line of credit.
Long-term Debt - Long-term debt consists of the following at December 31, 1997
and 1996:
1997 1996
Notes payable to financial institutions;
payable in monthly installments
through 2002, including interest at
rates ranging from 6.5% to 10.34%;
collateralized by equipment $4,777,090 $4,847,317
Capital lease obligations (see Note 6) 939,528 1,363,385
------- ---------
Total 5,716,618 6,210,702
Less current portion 1,802,932 1,388,576
--------- ---------
Long-term portion $3,913,686 $4,822,126
========== ==========
Scheduled maturities of long-term debt at December 31, 1997 are as follows: Year
ending December 31:
1998 $ 1,802,932
1999 1,702,069
2000 1,288,177
2001 728,518
2002 194,922
------------
Total $ 5,716,618
============
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 5 years and have renewal options of one
to five years. The Company has subleased these facilities during 1997, 1996, and
1995. Total rental income from these subleases for the years ended December 31,
1997, 1996, and 1995 was approximately $97,000, $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, 1997, 1996, and 1995 approximated $2,783,000, $2,448,000, and
$2,058,000, respectively.
In June 1993, the Company entered into a 25 year lease agreement with a
developer for a new manufacturing and office building. Under the agreement, the
Company was granted an option to purchase the building at fair market value
after 10 years and, if not exercised, after 25 years. 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.
<PAGE>
MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
During 1997, 1996, and 1995, $16,614, $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. 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 2005.
The Company leases manufacturing and office equipment under long-term capital
lease agreements. Capital leases are collateralized by equipment approximating
$1,607,000 and $1,635,000 with accumulated amortization of approximately
$296,000 and $249,000 as of December 31, 1997 and 1996, respectively.
The future minimum lease payments, together with the present value of the net
minimum lease payments as of December 31, 1997, are as follows:
Operating Leases Capital Leases
Year ending December 31:
1998 $ 3,311,164 $ 314,707
1999 3,053,800 296,317
2000 2,101,075 281,785
2001 1,608,249 200,686
2002 1,490,558
Thereafter 24,209,544
------------- --------------
Total minimum lease payments $ 35,774,390 1,093,495
Less amount representing interest =============
and executory costs (153,967)
--------------
Present value of net minimum lease
payments (see Note 5) $ 939,528
=============
Irish Government Development Agency Grants - Through December 31, 1997, the
Company has entered into several grant agreements with the Irish Government
Development Agency of which $747,888 and $416,891 remained in receivables at
December 31, 1997 and 1996, 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 1997, 1996, and 1995
in the amounts of $146,476, $230,654, and $194,440, 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 1997, 1996, and 1995, $74,541,
$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, 1997, the Company had received total advances
under this program of $521,419. As of December 31, 1997 and 1996, the balance
owing and included in deferred credits totaled $328,257 and $397,724,
respectively. The advances are payable over eleven years in monthly
installments.
Preferred Share Purchase Rights - In August 1997, the Company declared a
dividend of one preferred share purchase right (a "Right") for each outstanding
share of Common Stock which entitles the holder of a Right to purchase one
one-hundredth of a share of Series A Junior Participating Preferred Stock at an
exercise price of $40 in the event a person or group acquires or announces an
intention to acquire 15% or more of the Company's Common Stock. Until such an
event, the Rights are not exercisable, and are transferable with the Common
Stock and may be redeemed at a price of $.0001 per Right.
<PAGE>
MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Litigation - Bennett vs. Merit Medical Systems, Inc., et al. - On February 4,
1994, an action was filed in the Third District Court of Salt Lake County, State
of Utah by an individual claiming to be a shareholder of the Company and naming
the Company, Fred P. Lampropoulos, President of the Company, and Sentir, a
company founded by Mr. Lampropoulos, as defendants. The claims against the
Company were subsequently dismissed. The complaint also asserted 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
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 only the
derivative claims in the Third District Court of Salt Lake County, State of Utah
and on January 22, 1997, a Motion to Dismiss was filed on behalf of the Company,
seeking to terminate the litigation and asserting that the report of the Special
Litigation Committee is entitled to deference under the law.
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 53,994 have been purchased as of
December 31, 1997.
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, 1997,
1996, and 1995 are as follows:
<TABLE>
<CAPTION>
Options Warrants
--------------------- --------------------
Weighted Weighted
Average or Average or
Range of Range of
Exercise Exercise
Shares Price Shares Price
1997:
<S> <C> <C> <C> <C>
Granted 522,700 $ 6.65
Exercised 227,200 5.80
Forfeited/expired 43,100 7.19 60,000 $ 7.65
Outstanding at December 31 1,057,100 7.04 155,461 5.25
Exercisable 315,100 7.48 155,461 5.25
Weighted average fair value of
options and warrants granted
during year 6.65
Weighted average fair value of
shares issued under Employee
Stock Purchase Plan 1.03
</TABLE>
<PAGE>
MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
Options Warrants
------- --------
Weighted Weighted
Average or Average or
Range of Range of
Exercise Exercise
Shares Price Shares Price
<S> <C> <C> <C> <C>
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
</TABLE>
The following table summarizes information about stock options and warrants
outstanding at December 31, 1997:
<TABLE>
<CAPTION>
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
<S> <C> <C> <C> <C> <C> <C>
Options:
4.875 - 7.25 575,100 3.52 $6.09 159,700 $ 6.15
7.50 - 10.625 482,000 4.08 8.17 155,400 8.84
Warrants:
$5.25 155,461 7.00 $5.25 155,461 $ 5.25
</TABLE>
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 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):
<PAGE>
MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1997 1996 1995
Net income:
As reported $ 797,532 $ 2,162,608 $ 1,221,237
Pro forma 385,340 1,753,765 1,146,934
Net income per common (both basic
and diluted) share:
As reported $ 0.11 $ 0.31 $ 0.18
Pro forma 0.05 0.25 0.17
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 1997, 1996, and 1995, dividend yield of 0%;
expected volatility of 57.5%, 55%, and 55% for 1997, 1996, and 1995,
respectively; risk-free interest rates ranging from 5.30% to 7.36%; and expected
lives ranging from 2.8 to 4.5 years.
8. SEGMENT REPORTING AND FOREIGN OPERATIONS
During the years ended December 31, 1997, 1996, and 1995, the Company had sales
of approximately $13,722,000, $11,900,000, and $8,319,000 or approximately 23%,
24%, and 20%, respectively, of total sales primarily in Japan, Germany, France,
and United Kingdom.
The Company operates primarily in one industry in which it develops,
manufactures, and markets disposable medical products, primarily for use in the
diagnosis and treatment of cardiovascular disease. Major operations outside the
United States include a manufacturing and distribution facility in Ireland and
sales subsidiaries in Europe. The following is a summary extract of the
Company's foreign operations by geographic area for fiscal year 1997, 1996, and
1995:
<TABLE>
<CAPTION>
Transfers
Sales to Between Net
Unaffiliated Geographic Income Identifiable
Customers Areas Revenue (Loss) Assets
<S> <C> <C> <C> <C> <C>
Fiscal year ended December 31, 1997:
United States, Canada, and
international distributors $ 54,226,210 $ 860,482 $ 55,086,692 $ 2,774,516 $ 36,322,060
Europe direct 6,352,801 838,219 7,191,020 (2,110,415) 8,947,618
Eliminations (1,698,701) (1,698,701) 133,431
------------ ------------ ------------ ------------ ------------
Consolidated $ 60,579,011 None $ 60,579,011 $ 797,532 $ 45,269,678
============ ============ ============ ============ ============
Fiscal year ended
December 31, 1996:
United States, Canada, and
international distributors $ 45,106,815 $ 1,212,962 $ 46,319,777 $ 3,315,534 $ 33,770,512
Europe direct 5,348,951 89,081 5,438,032 (1,029,204) 7,948,041
Eliminations (1,302,043) (1,302,043) (123,722)
------------ ------------ ------------ ------------ ------------
Consolidated $ 50,455,766 None $ 50,455,766 $ 2,162,608 $ 41,718,553
============ ============ ============ ============ ============
Fiscal year ended December 31, 1995:
United States, Canada, and
international distributors $ 40,704,636 $ 1,031,014 $ 41,735,650 $ 2,513,653 $ 31,081,451
Europe direct 1,882,648 1,882,648 (1,289,135) 3,422,407
Eliminations (1,031,014) (1,031,014) (3,281)
------------ ------------ ------------ ------------ ------------
Consolidated $ 42,587,284 None $ 42,587,284 $ 1,221,237 $ 34,503,858
============ ============ ============ ============ ============
</TABLE>
<PAGE>
MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Transfers between geographic areas are accounted for at amounts which are
generally above cost and consistent with the rules and regulations of governing
tax authorities. Such transfers are eliminated in the consolidated financial
statements. Net income by geographic areas reflects foreign earnings reported by
the foreign entities. Identifiable assets are those assets that can be directly
associated with a particular foreign entity and thus do not include assets used
for general corporate purposes.
9. RELATED PARTY TRANSACTIONS
Receivables from employees at December 31, 1997 and 1996 totaled approximately
$245,000 and $275,000, respectively (including approximately $120,000 and
$144,000, 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, 1997, 1996, and 1995.
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 full-time 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 employeesO 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, 1997 and 1996 totaled approximately $223,000 and $227,000,
respectively.
The Plan purchased unissued shares of the Company's common stock at market value
during each of the three years ended December 31, 1997 as follows:
Market
Shares Value
Years ended December 31:
1997 35,582 $ 273,202
1996 39,996 309,370
1995 15,949 99,106
<PAGE>
MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
12. RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS No.
130, "Reporting Comprehensive Income". SFAS No. 130 establishes standards for
reporting and display of comprehensive income and its components (revenues,
expenses, gains, and losses) in a full set of general purpose financial
statements. SFAS No. 130 requires that an enterprise (a) classify items of other
comprehensive income by their nature in a financial statement and (b) display
the accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of a statement of
financial position. SFAS No. 130 is effective for fiscal years beginning after
December 15, 1997. The adoption of SFAS No. 130 will require the Company to add
disclosure to the financial statements about comprehensive income.
In June 1997, the FASB issued SFAS No. 131, "Disclosure About Segments of an
Enterprise and Related Information". SFAS No. 131 establishes standards for the
way that public business enterprises report information about operating segments
in annual financial statements and requires that those enterprises report
selected information about operating segments in interim financial reports
issued to shareholders. It also establishes standards for related disclosure
about products and services, geographic areas, and major customers. SFAS No. 131
is effective for financial statements for periods beginning after December 15,
1997. The adoption of SFAS No. 131 may result in additional disclosures about
the Company's segments.
******
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, 1997 and 1996, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 1997. 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, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997 in conformity with generally accepted accounting principles.
/s/Deloitte & Touch LLP
March 5, 1998
Salt Lake City, Utah
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement Nos.
33-48227, 33-46964, and 333-10509 on Form S-8 of Merit Medical Systems, Inc. of
our report dated March 5, 1998, incorporated by reference in this Annual Report
on Form 10-K of Merit Medical Systems, Inc. for the year ended December 31,
1997.
DELOITTE & TOUCHE LLP
Salt Lake City, Utah
March 30, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM MERIT
MEDICAL SYSTEMS, INC.'S CONSOLIDATED BALANCE SHEET AND INCOME STATEMENT FOR THE
TWELVE-MONTH PERIOD ENDING DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 976692
<SECURITIES> 0
<RECEIVABLES> 9774557
<ALLOWANCES> (175114)
<INVENTORY> 14535440
<CURRENT-ASSETS> 27468969
<PP&E> 25104377
<DEPRECIATION> (9648746)
<TOTAL-ASSETS> 45269678
<CURRENT-LIABILITIES> 12730998
<BONDS> 3913686
0
0
<COMMON> 17178971
<OTHER-SE> 9113769
<TOTAL-LIABILITY-AND-EQUITY> 45269678
<SALES> 60579011
<TOTAL-REVENUES> 60579011
<CGS> 37766116
<TOTAL-COSTS> 37766116
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 27049
<INTEREST-EXPENSE> 854859
<INCOME-PRETAX> 1775516
<INCOME-TAX> 944981
<INCOME-CONTINUING> 2639449
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 797532
<EPS-PRIMARY> 0.11
<EPS-DILUTED> 0.11
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM MERIT
MEDICAL SYSTEMS, INC.'S CONSOLIDATED BALANCE SHEET AND INCOME STATEMENT FOR THE
NINE-MONTH PERIOD ENDING SEPTEMBER 30, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 357768
<SECURITIES> 0
<RECEIVABLES> 7142752
<ALLOWANCES> (78440)
<INVENTORY> 13418409
<CURRENT-ASSETS> 22838227
<PP&E> 20317937
<DEPRECIATION> (7138965)
<TOTAL-ASSETS> 38024818
<CURRENT-LIABILITIES> 9897093
<BONDS> 4552889
0
0
<COMMON> 13949053
<OTHER-SE> 7848557
<TOTAL-LIABILITY-AND-EQUITY> 38024818
<SALES> 37484550
<TOTAL-REVENUES> 37484550
<CGS> 21796638
<TOTAL-COSTS> 21796638
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 15712
<INTEREST-EXPENSE> 517382
<INCOME-PRETAX> 2995370
<INCOME-TAX> 1162823
<INCOME-CONTINUING> 3484794
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1694928
<EPS-PRIMARY> .25
<EPS-DILUTED> .24
</TABLE>
