Exhibit 13.1
ANNUAL REPORT
Merit Medical Systems, Inc.
TABLE OF CONTENTS
LETTER FROM THE PRESIDENT 1
PRODUCTS & TECHNOLOGY 4
SELECTED FINANCIAL DATA 17
MANAGEMENT'S DISCUSSION & ANALYSIS 18
FINANCIAL INFORMATION 21
CORPORATE INFORMATION 39
Year Ended December 31,
--------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
--------------------------------------------------------------------------------------
Operating Data:
Sales $77,959,576 $68,377,357 $60,579,011 $50,455,766 $42,587,284
Gross profit 30,041,761 25,943,484 22,812,895 21,136,149 17,599,286
Income before taxes 4,761,429 4,290,346 1,775,516 3,630,152 2,000,695
Net income 3,225,590 2,451,159 797,532 2,162,608 1,221,237
Net income per share $0.43 $0.33 $0.11 $0.31 $0.18
Weighted average
shares outstanding 7,565,673 7,488,225 7,369,668 7,051,911 6,851,164
Balance Sheet Data:
Working capital $33,933,698 $15,779,725 $14,737,971 $12,761,211 $ 9,518,971
Total assets 72,360,469 50,664,786 45,269,678 41,718,553 34,503,858
Long-term debt 27,817,308 3,388,835 3,913,686 4,822,126 1,778,953
Stockholders' equity $32,690,136 $29,086,368 $25,802,149 $22,487,123 $19,264,525
ABOUT THE COVER
MERIT'S MBA HEMOSTASIS VALVE IS AN EXCELLENT EXAMPLE OF UTILIZING MERIT'S
HIGHLY TECHNICAL PRO-ENGINEERING DESIGN CAPABILITY AND ITS EXPERTISE IN
INJECTION MOLDING OF PLASTICS.
Corporate Headquarters
Merit Medical Systems, Inc.
1600 West Merit Parkway
South Jordan, Utah 84095
801-253-1600
www.merit.com
[PHOTO]
THE ACQUIRED TECHNOLOGY IN CATHETER MANUFACTURING HAS ENABLED MERIT TO
COMBINE THAT KNOW-HOW WITH ITS EXISTING CATHETER MANUFACTURING EXPERTISE TO
DEVELOP NEW, DYNAMIC PRODUCTS, SOME OF WHICH WILL BE INTRODUCED LATER IN 2000.
PRESIDENT'S LETTER
Dear Fellow Shareholders:
In many ways, 1999 has proven to be one of the most rewarding years in
Merit's history. Your company achieved record sales and earnings again this
year and brought its revenues to a new benchmark of over $75 million. In
addition, Merit introduced over 14 new products, as well as a line of
catheters, guide wires and other products acquired in August. Also introduced
last year were several versions of Merit's Fountain-TM- Infusion Catheter,
the MBA Hemostasis Valve which greatly reduces blood loss in interventional
procedures, and the Inject8-TM- Coronary Control Syringe that is specifically
designed for use with small catheters in coronary diagnostic and therapeutic
procedures. All of these products are now contributing to the growth and
success of your company.
In August last year, Merit completed the acquisition of Mallinckrodt
Inc.'s catheter-manufacturing unit. The products acquired consist of
diagnostic and interventional catheters, diagnostic guide wires, guide
catheters, introducer sheaths and needles. The products gained in this
acquisition highly complement Merit's other products, which are necessary to
perform diagnostic and therapeutic procedures both in cardiology and
radiology. In 2000, this acquisition should contribute substantively to
Merit's revenues. Additionally, this transaction has proven to be immediately
profitable for Merit and, along with new product introductions, will be
essential to Merit's bottom-line growth going forward.
The acquired technology in catheter manufacturing has enabled Merit to
combine that know-how with its existing expertise to develop new, dynamic
products, some of which will be introduced later in 2000. These new devices
will have proprietary features and will address niche markets in
interventional radiology where little competition exists.
FINANCIAL PERFORMANCE
Merit's total revenues for 1999 grew by 14 percent to $78.0 million
and net income rose 32 percent to $3.2 million, or $0.43 per share, compared
with $68.4 million in revenues and $2.5 million in net income, or $0.33 per
share, for 1998. Margins improved from 37.9 percent in 1998 to 38.5 percent
last year as a result of a product mix shift toward higher margin products.
During the year, Merit focused to a greater degree on core market
niches where new, higher margin products have been introduced. Merit's
products not sold in kits, or stand-alone devices, grew by 35 percent
including the new catheter lines,
1
MERIT'S RECORD SALES AND EARNINGS ARE A RESULT OF SEVERAL DYNAMIC CHANGES
THAT MERIT HAS BEEN IMPLEMENTING OVER THE LAST SEVERAL YEARS.
the Fountain Infusion Catheter, the MBA Hemostasis Valve and pressure
sensors. Sales from custom kits grew by 5 percent, while sales of inflation
devices grew 6 percent.
GROWTH STRATEGY
For the second consecutive year, Merit Medical produced record sales
and earnings. Several dynamic changes are being implemented to facilitate our
growth strategy. For example, there has been very little change in Merit's
domestic sales force over the last five years. In 1999 the decision was made
to increase the number of representatives from about 40 to about 60 over the
next 18 months, in order to accommodate the additional 1100 catalog items
that were added with the catheter acquisition from Mallinckrodt. This action
should result in more focused sales calls and higher market penetration.
In 1997 a manufacturing facility was built in Ireland to better
address the needs of Merit's overseas customers. The Ireland manufacturing
facility has resulted in a research and development technology center and a
low-cost manufacturing environment, both of which continue to benefit the
Company in terms of new product development and tax reductions. Last year
customer service and distribution of those products was moved to Maastricht,
The Netherlands, generating better efficiencies to customers and reducing
shipping costs, as well as creating room for expansion in the Ireland
facility.
In 1995 Merit formed its European sales force. One of the founders of
our company, Ms. Darla Gill, recently has been retained to live in Europe and
bring her considerable marketing and organizational skills to bear on the
sales team. We feel that with this new leadership strategy, effective at the
beginning of 2000, the European operation will become more effective.
LOOKING AHEAD
The investments have been made and the pieces are in place to support
Merit's plans for expansion. There are more opportunities for growth now than
ever before in Merit's history. Small, developing companies may have
difficulty bringing an exciting new product to market, while other, larger
companies evolve and divest portions of their businesses. These situations
create considerable opportunities for Merit to forge its own destiny.
2
[PHOTO]
THERE ARE MORE POSSIBILITIES FOR GROWTH NOW THAN EVER BEFORE, CREATING MANY
CONSIDERABLE OPPORTUNITIES FOR MERIT TO FORGE ITS OWN DESTINY.
Acquiring products, services and know-how allows us to participate in
emerging and growth markets such as spinal injections and discography, where
it is thought there are potentially one million procedures per year, and
interventional cardiology and radiology niches with new product ideas that
would be less productive for larger companies to develop. In the spinal
markets, Merit is responding to both increased demand from spinal surgeons
for its IntelliSystem-Registered Trademark- and Monarch-Registered
Trademark- pressure-controlled injection systems, and also to an increase in
interest from spinal product OEM customers. The Company is pursuing the
possibility for other opportunities in this emerging spinal market which
could employ both existing and to-be-developed technology.
In the interventional cardiology and radiology niches, Merit currently
has approximately 15 new products in the development pipeline which should
emerge this year. Some of these products are a direct result of the
technology acquired from Mallinckrodt last summer. These new catheter
products address market niches ranging in size from $20 million to $75
million annually worldwide. Merit's expertise in developing proprietary
products with added features and benefits should allow the Company to gain
substantial market share in these niches.
We enter 2000 with the necessary ingredients to move Merit forward
into the next century: a clearly focused market strategy, a strong product
pipeline that complements our existing leadership positions in cardiology and
radiology niches, and a wonderfully dedicated group of very talented
employees. We still face considerable hurdles, some of which are to reduce
inventories of existing products that will necessitate making some
adjustments, as well as to become more efficient and streamlined in both our
manufacturing operations and our overall organization. Merit may find it
desirable in the future to take advantage of some growth opportunities which
may result in adjustments for short periods of time, but which we believe
will fare well in the longer-term plans your management has for the growth of
this company.
We are grateful to all our employees for their tremendous
contributions over the past year, and to you, our shareholders, for your
continuing interest in and support of Merit Medical.
Best personal regards,
/s/ Fred P. Lampropoulos
Fred P. Lampropoulos
Chairman, President and CEO
3
PRODUCTS AND TECHNOLOGY
[PHOTO]
4
[PHOTO]
IN A CLINICAL SETTING, THE MBA HAS BEEN SHOWN TO GREATLY REDUCE THE NEED FOR
PATIENTS TO BE GIVEN ADJUNCT TREATMENTS, MEDICATIONS OR REQUIRE TRANSFUSIONS
FOLLOWING LENGTHY PROCEDURES, RESULTING IN COST SAVINGS AND PATIENT BENEFIT.
FEATURED PRODUCTS
MBA HEMOSTASIS VALVE
Late in 1999 Merit introduced its new hemostasis valve, Merit's
Bleedback Alternative-TM-, or MBA. At least 2.6 million interventional
cardiology and radiology procedures worldwide annually use some type of
hemostasis valve to prevent arterial bleeding during catheter insertion. Most
hemostasis valves restrict blood flow after the catheter is inserted and the
valve is manually closed. The MBA has a patented, double-valve system that
results in virtually bloodless procedures while the valve is open during
guide wire or catheter insertion and manipulation.
In lengthy cases where several different types of wires and catheters
must be exchanged through an open hemostasis valve, excessive arterial
bleeding can occur, resulting in the need for prolonged patient recovery or a
transfusion. In a clinical setting, the MBA has been shown to greatly reduce
the need for patients to be given adjunct treatments, medications or
transfusions following lengthy procedures, resulting in considerable cost
savings and patient benefit. The MBA not only will protect the patient from
blood loss but also will help the physicians and clinicians more safely deal
with blood-borne pathogen issues. In addition, highly technical,
interventional procedures require hemostasis valves with a larger lumen size
to introduce their devices into a patient's vascular system. The MBA has a
large inner lumen and can accommodate catheters up to 9 French size. Some
other models accommodate devices to only 7 French size.
The types of procedures in which the MBA might be used are both
coronary and peripheral balloon angioplasty, coronary and peripheral stent
placement, coronary atherectomies, rotational angioplasty, intravascular
ultrasound and neurological procedures.
The MBA is attached to a guiding catheter and manifold system, which
governs the flow of fluids being used during the procedure. Once the Touhey
valve wheel on the MBA is fully open, the interventional device or wire can
then be placed through the seals of the MBA. Once in place through the
guiding catheter, the interventional device or wire can be manipulated easily
without having to open or close the MBA. To lock the interventional device or
wire in place, the Touhey may be closed.
Merit has received FDA clearance to market this device in the United
States. In addition, the European CE Mark has been granted for sale of the
MBA abroad. The MBA is a prime example of Merit's strategy to introduce
proprietary, higher margin products to benefit both patients and clinicians.
5
[PHOTO]
6
[PHOTO]
THERE ARE APPROXIMATELY 8 MILLION ANGIOGRAMS PERFORMED EACH YEAR WORLDWIDE,
WHICH REPRESENTS THE MOST ESSENTIAL DIAGNOSTIC TOOL IN THE MANAGEMENT OF
PATIENTS WITH VASCULAR DISEASE.
DIAGNOSTIC CATHETERS
Last year, Merit acquired from Mallinckrodt, Inc. a complete line of
diagnostic catheters used to perform angiograms. The newly acquired catheters
highly complement Merit's lines of existing disposable products and reflect
the same point of sale to cardiologists and radiologists around the world.
The acquisition of this new catheter line makes Merit a full-line supplier of
cardiology and radiology products, giving hospitals and national buying
groups a consolidated purchasing opportunity. In addition to the diagnostic
catheters, Merit has acquired considerable technology that will enable it to
design and fabricate new interventional catheter products. These new
products, scheduled for introduction in 2000 and 2001, will offer new design
features that should expand Merit's market participation in radiology markets
worldwide.
There are approximately 8 million diagnostic procedures, called
angiograms, that are performed each year worldwide in both cardiology and
radiology with an estimated market of $7 billion. These procedures involve an
injection of radiopaque fluid, or contrast media, into a patient's coronary
or peripheral blood vessels. A skilled physician can then determine the
nature, severity and precise location of plaque deposits and blockages, in
addition to other abnormalities. Angiography currently represents the most
essential diagnostic tool in the management of patients with vascular disease.
Angiography is performed in either a cardiac catheterization or
radiology laboratory by using fluoroscopy. The physician inserts a long, thin
diagnostic catheter through a sheath introducer inserted in the femoral
artery or, less frequently, the brachial artery. Within the last decade, a
newer insertion technique with access through the radial artery in the wrist
has gained popularity because patients can be discharged from the hospital
sooner.
During an angiogram, the catheter is threaded through the vessel to
the proper site within the patient's vascular system. At that point, a
radiopaque dye, or contrast agent, is injected through the catheter to the
site, where the dye is carried through the circulatory system and fluoro-type
x-rays are taken. In the resulting two-dimensional, digital pictures, the dye
"outlines" areas where plaque deposits on the inner walls of the arteries or
other abnormalities are either limiting or blocking the flow of blood.
7
[PHOTO]
8
GUIDE WIRES ARE USED IN ABOUT 50 MILLION DIAGNOSTIC AND INTERVENTIONAL
PROCEDURES ANNUALLY WORLDWIDE, WITH GUIDE WIRE SALES OF ABOUT $600 MILLION.
Angiography catheters are primarily 4, 5 and 6 French diameters and
100cm in length. However, these devices can vary by configuration, tip size,
and material in order to accommodate the site and nature of the procedure.
Tip sizes range from 3.5 to 6 French. Nylon and polyethylene are the
principal materials for these types of catheters. Multiple catheters may be
used, with an average of 3, during a single cardiology procedure. List prices
range from $15 to $45 each, with an average price of about $19.
DIAGNOSTIC GUIDE WIRES
Complementing the diagnostic catheters purchased from Mallinckrodt in
August 1999, Merit also purchased a line of diagnostic guide wires in the
same transaction. Diagnostic guide wires have numerous applications. The term
"diagnostic guide wire" implies that these wires are used only in diagnostic
procedures when, in actuality, they are used with interventional procedures
as well, such as drainage procedures, micropuncture procedures, and vascular
access. These procedures total at least 50 million annually worldwide and
represent a market estimated to be approximately $600 million in guide wire
sales alone, with an average of 1.3 guide wires used per procedure.
The clinical application will not always be vascular in nature. Guide
wires are tools used to access virtually any area in the human body.
Frequently, organs and body cavities are accessed with a needle directly
through the skin (percutaneous). Ultimately, the guide wire will allow
dilators, catheters, diagnostic and therapeutic devices to be directed and
passed over the guide wire into the vasculature, organ or body cavity.
Guide wires require a considerable amount of technical expertise to
manufacture, which Merit has been developing over the last several years. The
guide wires must have either a fixed or moveable core with an adjacent safety
wire, and the core must be tapered. Some wires must have varied tip
configurations to meet the needs of the physicians performing specific tasks.
"J" tip configurations, when straightened, must be able to return to their
original shape after manual straightening. The core wires are covered with
pre-coated wire coils, which are welded in a smooth and atraumatic fashion.
In addition, the wires must also be radiopaque for viewing under fluoroscopy.
9
[PHOTO]
10
THE INJECT8-TM- CORONARY CONTROL SYRINGE IS THE ONLY SYRINGE DESIGNED
SPECIFICALLY TO ADDRESS THE NEEDS OF PHYSICIANS AND CLINICIANS IN
CATHETERIZATION LABORATORIES AROUND THE WORLD.
Merit's guide wires are supremely complementary to the diagnostic and
therapeutic catheters that it purchased last year from Mallinckrodt. For
every diagnostic or therapeutic procedure in which one or more of Merit's
catheters are used, at least one of Merit's guide wires could be used as
well. It is Merit's goal in 2000 to continue to grow this product line and
increase sales of its guide wires.
INJECT8-TM- CORONARY CONTROL SYRINGE
The Inject8-TM- Coronary Control Syringe is the only 8ml syringe on
the market and was introduced in December 1999 to be used primarily for
coronary angiography and interventional procedures using a guiding catheter.
There are over 3 million of these procedures worldwide each year. This unique
syringe was specifically designed to address the needs of physicians and
clinicians in catheterization laboratories around the world.
The need for an 8ml syringe was not realized until physicians began
performing procedures involving the use of smaller catheters-4 and 5 French
sizes. With these smaller catheters, physicians must use either a 6ml or a
10ml-sized syringe, which injects either too little or too much contrast
solution into the coronary vascular system. In addition, due to the way in
which the syringes are designed, clinicians must exert considerable hand
pressure on the plungers of these syringes in order to inject contrast into
the vessels with enough force to produce a readable x-ray.
Using too little contrast with a 6ml syringe results in the blood
vessels not being displayed clearly during fluoroscopy, possibly jeopardizing
the diagnosis. In addition, contrast solution is very expensive, and using a
standard-sized syringe can yield excess contrast that must be thrown away.
Merit's response to the changing market environment was to develop a
unique syringe, the Inject8, which provides a solution to the problems
clinicians were experiencing. The 8ml volume provides just enough contrast to
sufficiently highlight the blood vessels. This has been shown to reduce
hospital costs by hundreds or even thousands of dollars each year in
hospitals that have large angiography case loads. In addition, the Inject8's
unique design generates twice the pressure with 40% less force required,
making it easier to use while minimizing hand fatigue.
FDA clearance and European CE Mark authorizations were received
earlier in 1999 during the Inject8 product development cycle. While this
product was just recently introduced, sales have accelerated rapidly for the
first quarter of 2000. One of Merit's higher-margin products, the Inject8
promises to be a favorite with hospital management and clinicians alike.
11
[PHOTO]
12
[PHOTO]
IN ADDITION TO WORLD-CLASS INJECTION AND INSERT MOLDING OF PLASTICS, MERIT
HAS ALSO DEVELOPED THE CAPABILITIES TO MANUFACTURE WAFERS AND SEMICONDUCTOR
FABRICATION; CATHETERS, INCLUDING LASER DRILLING AND TIPPING; GUIDE WIRES;
NEEDLES; AND CUSTOM KITS.
MARKET ADAPTATION
In the past ten years, Merit Medical has witnessed dramatic advances
in the diagnosis and treatment of vascular-related diseases. With the aging
population, last year almost 12 million procedures for vascular disease were
performed worldwide, resulting in a market valued at over $13 billion
annually. Progressive medical device manufacturers like Merit have adapted to
the new clinical advances by providing differentiated, progressive products
to help improve patient outcomes worldwide.
Merit's products can be used in procedures such as percutaneous
transluminal coronary angioplasty (PTCA), or placing a stent, which is a
tiny, stainless steel mesh tube used to prop open the artery, as well as
other interventional procedures and a wide range of diagnostic procedures.
Merit is the world leader in sales of inflation devices, which inflate an
angioplasty balloon or expand a stent for placement. Other procedures
including diagnostic angiograms and thrombolysis procedures may use Merit's
catheters, guide wires, fluid delivery systems and manifolds, waste
management products, syringes, needles, and pressure monitoring systems.
ADVANCED TECHNOLOGY
In 1988 Merit began its manufacturing process with a simple coronary
control syringe with a "feels like glass" feature that soon became a market
favorite. Since that time Merit's offering of differentiated ancillary
products has grown to thousands of catalog numbers. Merit has become a leader
in many of the disposable products used for diagnostic and therapeutic
cardiology and radiology. Each new product introduction expands Merit's core
expertise and technology base. In addition to world-class injection molding
and insert molding of plastic medical devices, Merit has also developed wafer
and semiconductor fabrication for pressure transducers and inflation devices;
catheter manufacturing capability, including laser drilling and tipping for
therapeutic infusion catheters and angiography catheters; guide wire
manufacturing; needle fabrication; and custom kit manufacturing.
13
[PHOTO]
14
[PHOTO]
ONE OF MERIT'S PRIMARY GOALS LAST YEAR WAS TO AUGMENT ITS PRODUCT OFFERINGS
AND INTRODUCE NEW, HIGHER-MARGIN PRODUCTS WITH UNIQUE DESIGN OR PERFORMANCE
FEATURES THAT WOULD FACILITATE BETTER PATIENT OUTCOMES, WHILE SAVING HOSPITAL
COSTS.
Merit accomplishes these complicated processes in four manufacturing
facilities located around the world. The home office and main manufacturing
plant is located in South Jordan, Utah, and consists of approximately 175,000
square feet of manufacturing/warehouse and office space. A second
manufacturing plant is located in Galway, Ireland with warehousing and
customer service in Maastricht, The Netherlands, in order to better serve our
European customers. The primary catheter manufacturing process is housed in a
70,000 square-foot facility in Angleton, Texas, and the wafer and
semiconductor fabrication facility is located in Santa Clara, California.
NEW PRODUCT DEVELOPMENT
In order to keep pace with the rapid changes in the health care
market, Merit has developed an extremely active new product development
program. In August 1999, Merit completed the acquisition of Mallinckrodt's
world-class catheter manufacturing facility in Angleton, Texas. With this
acquisition Merit launched a complete offering of high-quality diagnostic
catheters and other products used in cardiology and radiology. The technology
acquired also enabled Merit to expand its technology base. One of Merit's
primary goals last year was to augment its product offerings and introduce
new, higher-margin products with unique design or performance features that
would facilitate better patient outcomes, while saving hospital costs.
Merit's 1999 product introductions included the following:
- - More than a thousand diagnostic catheters for cardiology and radiology
- - Nearly 300 guide catheter configurations
- - A unique 8ml control syringe, "Inject8," which optimizes flow through
very small catheters
- - The MBA--a new and highly differentiated hemostasis valve that minimizes
patient blood loss and helps protect clinicians from the risk of blood-borne
pathogens
- - More than 50 additions to the Fountain Infusion System product line (40 and
50 cm infusion segments for the 5 French diameter line, and a complete 4
French product line) used to deliver clot-dissolving solutions into most
major blood vessels excluding the heart
- - Many improvements and product line additions to the Majestik-TM- needle
family, including a 9cm needle for use in larger patients, both Pillari and
butterfly configurations, and new molded hub improvements
15
[PHOTO]
PHYSICIANS AND CLINICIANS CAN NOW UTILIZE MERIT'S NEW INTELLISYSTEM-Registered
Trademark- II COLOR MONITOR THAT PROVIDES GREATLY INCREASED PRESSURE MEASURING
CAPABILITIES FOR DELICATE PROCEDURES SUCH AS BALLOON ANGIOPLASTY, DISCOGRAPHY
AND KYPHOPLASTY.
- - The Keep-TM-, a unique accessory organizer for catheterization and
radiology laboratories
- - A complete offering of both pigtail and straight pericardiocentesis
catheters with kits, which are used to drain excess fluid from around the
heart muscle
- - A complete line of high-flow diagnostic pigtail catheters made of
Teflon-Registered Trademark- for pediatric patients
- - More than 30 new, percutaneous sheath introducer and vessel dilator
configurations, which are used to enter blood vessels prior to introducing a
catheter or guide wire
- - Almost 100 different diagnostic guide wire models, which are threaded
through a patient's blood vessel to the desired location, facilitating
catheter placement
- - Several PTCA guide wire models including a wire extension
CONTINUING INNOVATION
As Merit moves into the new millennium, the commitment grows stronger to
customers and their patients to provide critically needed, innovative products
and system solutions to help clinicians manage and treat circulatory diseases.
Merit anticipates introducing many more new products in 2000 and 2001. At the
forefront is a product that is poised to transform the drainage catheter
segment, a market estimated at approximately $75 million annually worldwide.
Other products scheduled for launch in 2000 include the following:
- - An angiographic marker band and vessel sizing catheter
- - A new line of micro-access sheath introducers for use with small catheters
- - The IntelliSystem-Registered Trademark- II Color Monitor with fiberoptic
printer and remote monitor capability for use with the IntelliSystem
inflation device
- - ShortStop-TM---a temporary sharps container for use in the catheterization
or radiology laboratory
- - Several new hemostasis valve products, including the Inspector-TM- in-line
model, Double-Play-TM---double "Y" hemostasis valve, and a new
lever-operated hemostasis valve
- - Manifolds with integral check relief valves and stand-alone check relief
valve configurations
- - A new, improved VacLok-TM- syringe
Given the level of investment Merit is making in new product development
and new business acquisition, the Company is well positioned to continue
providing clinicians with an exciting and innovative portfolio of products.
Merit is fully dedicated to raising the bar in quality products for cardiology
and radiology.
16
SELECTED FINANCIAL DATA
Year Ended December 31,
-----------------------------------------------------------------------------------
1999 1998 1997 1996 1995
-----------------------------------------------------------------------------------
Operating Data:
Sales $77,959,576 $68,377,357 $60,579,011 $50,455,766 $42,587,284
Cost of sales 47,917,815 42,433,873 37,766,116 29,319,617 24,987,998
Gross profit 30,041,761 25,943,484 22,812,895 21,136,149 17,599,286
Selling, general,
and administrative
expenses 20,406,927 17,528,002 15,726,651 14,311,049 12,808,805
Research and development
expenses 3,618,041 3,244,477 4,446,795 2,533,171 2,330,324
Income from operations 6,016,793 5,171,005 2,639,449 4,291,929 2,460,157
Other expense 1,255,364 880,659 863,933 661,777 459,462
Income before
income tax expense 4,761,429 4,290,346 1,775,516 3,630,152 2,000,695
Income tax expense 1,454,762 1,687,379 944,981 1,277,431 700,418
Minority interest
in (income) loss
of subsidiary (81,077) (151,808) (33,003) (190,113) (79,040)
Net income 3,225,590 2,451,159 797,532 2,162,608 1,221,237
Net income per share $0.43 $0.33 $0.11 $0.31 $0.18
Weighted average
shares outstanding 7,565,673 7,488,225 7,369,668 7,051,911 6,851,164
Balance Sheet Data:
Working capital $33,933,698 $15,779,725 $14,737,971 $12,761,211 $ 9,518,971
Total assets 72,360,469 50,664,786 45,269,678 41,718,553 34,503,858
Long-term debt 27,817,308 3,388,835 3,913,686 4,822,126 1,778,953
Stockholders' equity $32,690,136 $29,086,368 $25,802,149 $22,487,123 $19,264,525
17
MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION & ANALYSIS
OVERVIEW
In many ways the past year has been the best in the history of the
Company. The Company made significant progress toward its goal of evolving
into a larger, more technically advanced, full line diagnostic and
interventional supplier of the best medical products available to the world's
cardiology and radiology markets. This was accomplished by the introduction
and expansion of its first new line of catheters (Fountain infusion
catheters). Probably even more important was the successful identification,
acquisition and integration of the Angleton catheter business which fit well
into this strategy. The Company was able to synergistically leverage its
well-developed sales force, product and service reputation, regulatory
capabilities and market share by economically adding the catheters,
guidewires, sheath introducers and new specialty needles to the broad line of
accessory products the Company had internally developed over the past decade.
This acquisition also added valuable catheter technology which Merit can now
apply to several new product lines of catheters to compete effectively in
some very interesting niches of interventional radiology. There are three new
catheter lines in development which will be introduced in 2000 and 2001.
1999 was a record-breaking year for both the top and bottom line and
Merit was able to achieve substantially all of its major financial
objectives: Sales growth to $78 million, up 14%. In spite of continuing price
pressures the Company achieved an increase in gross margin percentage for a
second year. The increasing profitability in Ireland resulted in a
significant improvement in Merit's effective tax rate of 30.6%, down from
39.3% in 1998. Merit accomplished an important acquisition of Mallinckrodt
Inc.'s Angleton, Texas catheter division with its accompanying products and
technology. All of these factors contributed to the Company achieving its
goal of making $0.43 per share, an increase in earnings of 32% compared to
1998.
One of the challenges facing the Company in the coming year has to do
with all the many new product additions that must be integrated into the
organization. These include the many products that have been or will soon be
introduced from the Company's R&D efforts as well as all the product
additions from the Angleton acquisition (1100 new catalog items) and very
possibly with other acquisitions to follow. After several years of a fairly
stable sales force, the need is high to expand the domestic sales force to
appropriately sell the breadth and depth of Merit's new expanded product line
and to more effectively serve its customers. Another challenge is to manage
the now large and important asset that is the inventory of these products, as
well as the capital needed to fund it. Management believes an important goal
for the future will be to reduce inventory levels of existing products. A
reduction in inventory will require some adjustments to the operations area
of the Company as production volumes decline temporarily.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
operational data as a percent of sales:
1999 1998 1997
Sales 100.0% 100.0% 100.0%
Gross profit 38.5 37.9 37.7
Selling, general and administrative 26.2 25.6 26.0
Research and development 4.6 4.7 7.3
Income from operations 7.7 7.6 4.4
Income before income tax expense 6.1 6.3 2.9
Net Income 4.1 3.6 1.3
18
MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION & ANALYSIS
Sales increased by $9,582,219, or 14.0%, in 1999 compared to an
increase of $7,798,346, or 12.9%, in 1998, and an increase of $10,123,245, or
20.1%, in 1997. Sales growth from 1997 through 1999 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. The acquisition of the Angleton catheter
product lines in late August 1999 gave a $3.9 million boost to revenue in
1999. International sales in 1999 were approximately $18.3 Million or 24%,
compared to $15.2 million, or 22%, in 1998, and $13.7 million or 23%, in
1997. These increases were primarily a result of the ongoing growth in the
direct sales in Europe, as well as greater acceptance of the Company's
products in other international markets. Direct sales in France, Germany, the
U.K., Belgium, the Netherlands and Canada were $8,217,814, $7,334,793 and
$6,615,697 in 1999, 1998 and 1997, respectively.
Gross profit as a percent of sales was 38.5%, 37.9%, and 37.7% in
1999, 1998, and 1997, respectively. Margins improved in 1999 compared to 1998
and slightly in 1998 compared to 1997, principally through increased
production volumes, automation and efficiencies in manufacturing, and tighter
price controls on some of the Company's lower margin products. Part of the
increased production volumes resulted in a significant increase in
inventories.
Selling, general and administrative expense increased $2,878,926, or
16.4%, in 1999 over1998 and $1,801,351, or 11.5%, in 1998 over 1997. These
additional expenditures were related principally to the costs of implementing
and supporting the Company's new Oracle system and the development of new
business opportunities such as acquisitions, product distribution agreements,
national accounts and the O.E.M segment of the business. These investments in
growth caused selling, general and administrative expenses as a percent of
sales to increase to 26.2% in 1999, compared to 25.6% in 1998 after declining
from 26.0% in 1997.
Research and development expenditures for 1999 were $3,618,041, an
increase of 12%, compared to $3,244,477 in 1998. Over half of this increase
was due to the addition of the R&D capabilities in Angleton, Texas with the
Company's newly acquired catheter technologies. R&D expenses declined in 1998
by 27%, compared to $4,446,795 in 1997. This decrease was due primarily to
the conversion of much of the R&D expenses in Ireland to production resources
for the manufacture of the newly introduced line of guide wires. Research and
development costs as a percent of sales were 4.6%, 4.7% and 7.3% for 1999,
1998 and 1997, respectively.
The higher sales and gross margins, together with modest increases in
operating expenses positively affected income from operations in 1999 which
increased to $6,016,792, up 16.4%, compared to $5,171,005 in 1998, and up
95.9% from $2,639,449 in 1997. The income tax provision for 1999 was
$1,454,762, an effective rate of 30.6%, compared to $1,687,379, or 39.3 % in
1998 and $944,981 or 53.2% in 1997. The Company's consolidated effective tax
rate in 1997 was higher than 1998 and 1999, 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 improved significantly in 1998 and 1999 as the Ireland facility became
profitable and the 10% tax rate became a benefit.
19
MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION & ANALYSIS
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1999 the Company's working capital was $33,933,698,
an increase of over 115%, representing a current ratio of 4.7 to 1. This
increase was due in part to replacing the Company's $7.6 million line of
credit in August 1999 with a new $28 million six-year line. The Company also
negotiated a reduction in the interest rate and fees for its line of credit,
significantly reducing the cost of this capital. The Company had $25,907,596
outstanding under its line of credit at December 31, 1999. The entire
increase of $18.3 million in the line of credit can be attributed to the
Company's two acquisitions, the Angleton division of Mallinckrodt and the
minority interest in Sentir, and to the $7.15 million increase in inventory.
Merit has financed leasehold improvements and equipment acquisitions through
secured notes payable and capital lease arrangements with an outstanding
balance of $2,911,629 at December 31, 1999. For the year ended December 31,
1999 the Company generated cash from operations in the amount of $313,578.
Historically, the Company has incurred significant expenses in
connection with product development and introduction of new products. This
was particularly true in 1999 with regard to an increase in inventory, plant
and equipment associated with the Company's acquisition and new product
introductions. The Company's principal source of funding for these and other
expenses has been the cash generated from operations, secured loans on
equipment, bank lines of credit and sales of equity. The Company believes
that its present sources of liquidity and capital are adequate for its
current operation.
MARKET RISK DISCLOSURES
The Company does not engage in holding 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 any
significant agreements to hedge such risks. The Company may enter into such
agreements in the event that such risks become material in the future.
Y2K ISSUES
As of the date of this report, Merit had encountered no significant
problems in any of its operations in connection with the year 2000 date
change. Merit will continue to monitor all systems to ensure performance
beyond this date change.
20
MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
ASSETS 1999 1998
CURRENT ASSETS:
Cash and cash equivalents $ 668,711 $ 851,910
Trade receivables - net of allowance for uncollectible
accounts: 1999 - $305,475; 1998 - $197,331 12,550,132 10,436,485
Employee and related party receivables 502,803 472,994
Irish Development Agency grant receivable 93,059 198,445
Inventories 27,521,087 17,785,743
Prepaid expenses and other assets 564,213 636,124
Deferred income tax assets 1,052,745 739,595
Income tax refund receivable 210,112
Total current assets 43,162,862 31,121,296
PROPERTY AND EQUIPMENT:
Land 1,365,985 1,065,985
Building 1,500,000
Automobiles 133,316 89,469
Manufacturing equipment 17,617,798 13,669,599
Furniture and fixtures 8,883,297 7,963,835
Leasehold improvements 5,114,964 5,035,288
Construction-in-progress 1,669,725 1,182,669
Total 36,285,085 29,006,845
Less accumulated depreciation and amortization (14,277,666) (12,043,130)
Property and equipment - net 22,007,419 16,963,715
OTHER ASSETS:
Patents, trademarks, and customer lists - net of accumulated
amortization: 1999 - $1,179,246; 1998 - $1,014,617 2,319,581 2,333,456
Cost in excess of the fair value of assets acquired - net
of accumulated amortization: 1999 - $138,022; 1998 - $31,615 4,819,288 150,673
Prepaid royalty - net of accumulated amortization:
1999 - $600,000; 1998 - $578,572 21,428
Deposits 51,319 74,218
Total other assets 7,190,188 2,579,775
TOTAL ASSETS $ 72,360,469 $ 50,664,786
(Continued)
21
MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
LIABILITIES AND STOCKHOLDERS' EQUITY 1999 1998
CURRENT LIABILITIES:
Line of credit $ 7,634,607
Current portion of long-term debt $ 1,001,917 1,808,970
Trade payables 4,749,432 3,573,333
Accrued expenses 3,092,280 2,055,849
Advances from employees 116,094 74,090
Income taxes payable 269,441 194,722
Total current liabilities 9,229,164 15,341,571
DEFERRED INCOME TAX LIABILITIES 1,722,094 1,275,651
LONG-TERM DEBT 27,817,308 3,388,835
DEFERRED CREDITS 901,767 1,023,861
Total liabilities 39,670,333 21,029,918
MINORITY INTEREST IN SUBSIDIARY 548,500
COMMITMENTS AND CONTINGENCIES (Notes 6, 10, and 11)
STOCKHOLDERS' EQUITY:
Preferred stock - 5,000,000 shares authorized as of
December 31, 1999 and 1998, no shares issued
Common stock - no par value; 20,000,000 shares
authorized; 7,591,236 and 7,508,914 shares issued
at December 31, 1999 and 1998, respectively 18,428,572 17,793,094
Retained earnings 14,790,518 11,564,928
Accumulated other comprehensive loss (528,954) (271,654)
Total stockholders' equity 32,690,136 29,086,368
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 72,360,469 $ 50,664,786
See notes to consolidated financial statements.
(Concluded)
22
MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
1999 1998 1997
NET SALES $ 77,959,576 $ 68,377,357 $ 60,579,011
COST OF SALES 47,917,815 42,433,873 37,766,116
GROSS PROFIT 30,041,761 25,943,484 22,812,895
OPERATING EXPENSES:
Selling, general, and administrative 20,406,927 17,528,002 15,726,651
Research and development 3,618,041 3,244,477 4,446,795
Total operating expenses 24,024,968 20,772,479 20,173,446
INCOME FROM OPERATIONS 6,016,793 5,171,005 2,639,449
OTHER INCOME (EXPENSE):
Interest income 50,391 33,662 28,223
Interest expense (1,293,023) (826,778) (854,859)
Miscellaneous expense (12,732) (87,543) (37,297)
Other expense - net (1,255,364) (880,659) (863,933)
INCOME BEFORE INCOME TAX EXPENSE 4,761,429 4,290,346 1,775,516
INCOME TAX EXPENSE (1,454,762) (1,687,379) (944,981)
MINORITY INTEREST IN INCOME OF
SUBSIDIARY (81,077) (151,808) (33,003)
NET INCOME $ 3,225,590 $ 2,451,159 $ 797,532
EARNINGS PER COMMON SHARE -
Basic and diluted $ .43 $ .33 $ .11
AVERAGE COMMON SHARES -
Basic 7,541,562 7,420,224 7,263,253
Diluted 7,565,673 7,488,225 7,369,668
See notes to consolidated financial statements.
23
MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
Accumulated
Other
Compre-
Common Stock hensive Retained
Total Shares Amount Loss Earnings
BALANCE, JANUARY 1, 1997 $ 22,487,123 6,942,290 $ 14,184,975 $ (14,089) $ 8,316,237
Comprehensive income:
Net income 797,532 797,532
Other comprehensive loss - Foreign
currency translation adjustment (net of tax) (476,502) (476,502)
Comprehensive income 321,030
Tax benefit attributable to appreciation
of common stock options exercised 222,887 222,887
Issuance of common stock for cash 273,202 35,582 273,202
Options and warrants exercised 1,316,812 227,200 1,316,812
Issuance of common stock under
Employee Stock Purchase Plans 245,129 42,056 245,129
Stock issued in connection with
UMI acquisition 975,000 152,424 975,000
Shares surrendered in exchange for the
recording of payroll tax liabilities (7,534) (861) (7,534)
Shares surrendered in exchange for the
exercise of stock options (31,500) (3,600) (31,500)
BALANCE, DECEMBER 31, 1997 25,802,149 7,395,091 17,178,971 (490,591) 9,113,769
Comprehensive income:
Net income 2,451,159 2,451,159
Other comprehensive income - Foreign
currency translation adjustment (net of tax) 218,937 218,937
Comprehensive income 2,670,096
Tax benefit attributable to appreciation
of common stock options exercised 33,398 33,398
Issuance of common stock for cash 81,850 13,819 81,850
Issuance of common stock under Employee
Stock Purchase Plans 267,549 52,425 267,549
Options and warrants exercised 370,914 64,840 370,914
Shares surrendered in exchange for the
recording of payroll tax liabilities (4,588) (569) (4,588)
Shares surrendered in exchange for the
exercise of stock options (135,000) (16,692) (135,000)
BALANCE, DECEMBER 31, 1998 29,086,368 7,508,914 17,793,094 (271,654) 11,564,928
Comprehensive income:
Net income 3,225,590 3,225,590
Other comprehensive loss - Foreign
currency translation adjustment (net of tax) (257,300) (257,300)
Comprehensive income 2,968,290
Tax benefit attributable to appreciation of
common stock options exercised 245,200 245,200
Issuance of common stock for cash 62,600 10,990 62,600
Issuance of common stock under Employee
Stock Purchase Plans 312,027 66,330 312,027
Options and warrants exercised 114,746 22,080 114,746
Shares surrendered in exchange for the
recording of payroll tax liabilities (1,583) (264) (1,583)
Shares surrendered in exchange for the
exercise of stock options (97,512) (16,814) (97,512)
BALANCE, DECEMBER 31, 1999 $ 32,690,136 7,591,236 $ 18,428,572 $ (528,954) $ 14,790,518
See notes to consolidated financial statements.
24
MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
1999 1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,225,590 $ 2,451,159 $ 797,532
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 3,757,539 2,923,484 2,796,425
Losses on sales and abandonment of
property and equipment 8,339 46,897 11,245
Amortization of deferred credits (215,894) (114,607) (91,155)
Deferred income taxes 450,734 435,489 (22,951)
Tax benefit attributable to appreciation of
common stock options exercised 245,200 33,398 222,887
Minority interest in income of subsidiary 81,077 151,808 33,003
Changes in operating assets and liabilities, net of
effects from acquistions:
Trade receivables (2,113,647) (837,042) (2,220,364)
Employee and related party receivables (29,809) (184,182) 38,613
Irish Development Agency grant receivable 105,386 549,443 (330,997)
Income tax refund receivable (210,112)
Inventories (7,150,393) (3,250,303) (79,236)
Prepaid expenses and other assets 71,911 (97,865) (19,436)
Deposits and other 22,899 (27,606) 122,565
Trade payables 1,176,099 134,984 872
Accrued expenses 771,936 (358,201) 133,378
Advances from employees 42,004 (7,155) (26,662)
Income taxes payable 74,719 (174,973) 353,789
Total adjustments (2,912,012) (776,431) 921,976
Net cash provided by operating activities 313,578 1,674,728 1,719,508
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures for:
Property and equipment (4,750,608) (4,138,219) (1,046,890)
Intangible assets (269,388) (522,671) (521,270)
Acquisitions (11,322,916) (70,486)
Proceeds from the sale of property and equipment 584,688 22,645
Net cash used in investing activities (16,342,912) (4,076,202) (1,616,001)
(Continued)
25
MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
1999 1998 1997
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from (payments on) line of credit $ (7,567,655) $ 3,009,880 $ 90,854
Proceeds from:
Issuance of common stock 390,278 580,725 1,835,143
Long-term debt 25,907,596 677,802
Deferred credits 93,800
Principal payments on:
Long-term debt (2,403,143) (2,172,753) (1,764,343)
Deferred credits (37,899) (74,917)
Net cash provided by financing activities 16,420,876 2,057,755 86,737
EFFECT OF EXCHANGE RATES ON CASH (574,741) 218,937 (476,502)
NET DECREASE IN CASH AND
CASH EQUIVALENTS (183,199) (124,782) (286,258)
CASH AND CASH EQUIVALENTS
AT BEGINNING OF YEAR 851,910 976,692 1,262,950
CASH AND CASH EQUIVALENTS
AT END OF YEAR $ 668,711 $ 851,910 $ 976,692
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION - Cash paid during
the year for:
Interest (including capitalized interest of
$143,406, $93,142, and $109,701 during
1999, 1998, and 1997, respectively $ 1,288,301 $ 995,417 $ 782,676
Income taxes $ 684,109 $ 1,393,465 $ 591,192
(Continued)
26
MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:
- - During 1999, 1998, and 1997, the Company entered into capital lease
obligations and notes payable for $50,015, $867,629, and $1,270,259,
respectively, for manufacturing equipment.
- - In connection with the sale in 1998 of the Company's manufacturing facility
in Castlerea, Ireland, the buyer assumed debt of the Company in the amount of
$258,275.
- - During 1999, 1998, and 1997, options to purchase 264, 569, and 861 shares of
the Company's common stock were surrendered in exchange for the Company's
recording of payroll tax liabilities in the amount of $1,583, $4,588, and
$7,534, respectively.
- - During 1999, 1998, and 1997, 16,814, 16,692 and 3,600 shares, respectively,
of Company common stock with a value of $97,512, $135,000, and $31,500,
respectively, were surrendered in exchange for the exercise of stock options.
- - During 1997, the Company acquired UMI for 152,424 shares of Company
restricted common stock. In connection with this acquisition, the Company
recorded the following as of the acquisition date:
Fair value of assets acquired $ 863,198
Cost in excess of fair market value 182,288
Total purchase price $ 1,045,486
- - During 1999, the Company acquired substantially all of the assets of the
"Angelton Division" of Mallinckrodt Inc. (Angelton) in a purchase transaction
for $7,867,699 in cash. In conjunction with the acquisition, liabilities were
assumed as follows:
Fair value of assets acquired (including goodwill
of $1,949,383) $8,132,194
Cash paid 7,867,699
Liabilities assumed $ 264,495
- - Additionally, during 1999, the Company acquired the minority interest in its
subsidiary, Sentir, Inc. (Sentir) in a purchase transaction of $3,455,217 in
cash. The minority interest carried by the Company at the date of acquisition
was $629,577. In conjunction with the acquisition, liabilities were assumed
as follows:
Fair value of assets acquired (including goodwill
of $2,825,640) $3,574,016
Cash paid 3,455,217
Liabilities assumed $ 118,799
See Notes to Consolidated Financial Statements. (Concluded)
27
MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION - Merit Medical Systems, Inc. (Merit) and its wholly owned
subsidiaries, Merit Holdings, Inc. (MHI), Merit Medical International, Inc.
(MMI), and Sentir, (collectively, the Company) develop, manufacture, and market
disposable medical products primarily for use in the diagnosis and treatment of
cardiovascular disease which is considered to be one segment line of business.
The Company manufactures its products in plants located in the United States
and, beginning in 1997, commenced manufacturing operations in Ireland. The
Company has export sales to dealers and has direct sales forces in the United
States, Canada, and Western Europe (see Note 8).
The consolidated financial statements of the Company have been prepared in
accordance with accounting principles generally accepted in the United States of
America. The following is a summary of the more significant of such policies.
USE OF ESTIMATES IN PREPARING FINANCIAL STATEMENTS - The preparation of
financial statements in conformity with 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.
INCOME TAXES - The Company utilizes an asset and liability approach for
financial accounting and reporting for income taxes. Deferred income taxes are
provided for temporary differences in the bases of assets and liabilities as
reported for financial statement and income tax purposes.
LONG-LIVED ASSETS - The Company evaluates the carrying value of long-term assets
based on current and anticipated undiscounted cash flows and recognizes
impairment when such cash flows will be less than the carrying values. There
were no impairments as of December 31, 1999 or 1998.
PROPERTY AND EQUIPMENT - Property and equipment are recorded at cost.
Depreciation and amortization are computed using the straight-line method over
estimated useful lives as follows:
Building 20 years
Automobiles 4 years
Manufacturing equipment 5 to 12 years
Furniture and fixtures 3 to 10 years
Leasehold improvements 4 to 25 years
INTANGIBLE ASSETS - Costs associated with obtaining patents, issued and pending,
and trademarks have been capitalized and are amortized over the patent or
trademark period or charged to expense if not approved. Costs associated with
obtaining customer lists are amortized over two years. Cost in excess of fair
value of assets acquired has been allocated to goodwill, which is amortized over
twelve to twenty years. Amortization of intangibles is done on a straight-line
basis.
RESEARCH AND DEVELOPMENT - Research and development costs are expensed as
incurred.
EARNINGS PER COMMON SHARE - Net income per common share is computed by both the
basic method, which uses the weighted average number of the Company's common
shares outstanding, and the diluted method, which includes the dilutive common
shares from stock options and warrants, as calculated using the treasury stock
method. The amounts of such options and warrants are not significant and,
accodingly, the Company's basic and diluted earnings per share are the same.
28
MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FINANCIAL INSTRUMENTS - The Company's financial instruments, when
valued using market interest rates, would not be materially different from the
amounts presented in the consolidated financial statements.
STOCK-BASED COMPENSATION - The Company accounts for its stock compensation
arrangements under the provisions of Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, and intends to continue to do so. The
Company has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation.
STATEMENTS OF CASH FLOWS - For purposes of the statements of cash flows, the
Company considers interest bearing deposits with an original maturity date of
three months or less to be cash equivalents.
CONCENTRATION OF CREDIT RISK - Financial instruments that potentially subject
the Company to concentrations of credit risk consist primarily of temporary cash
and cash equivalents and accounts receivable. The Company maintains its excess
cash primarily in interest-bearing deposits and limits the amount of credit
exposure to any one financial institution. The Company provides credit, in the
normal course of business, primarily to hospitals and independent third-party
packers and distributors. The Company performs ongoing credit evaluations of its
customers and maintains allowances for potential credit losses.
FOREIGN CURRENCY TRANSLATION ADJUSTMENT - The financial statements of the
Company's foreign subsidiaries are generally measured using local currencies as
the functional currency. Assets and liabilities are translated into U.S. dollars
at year-end rates of exchange and results of operations are translated at
average rates for the year. Gains and losses resulting from these translations
are included in accumulated other comprehensive loss as a separate component of
stockholders' equity.
COMPREHENSIVE LOSS - Accumulated other comprehensive loss consists entirely of
foreign currency translation adjustments.
RECLASSIFICATIONS - Certain reclassifications have been made to the prior year
amounts to conform to classifications adopted in the current year.
2. ACQUISITIONS
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.
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 on a straight-line basis over 12 years. The pro forma financial
information reflecting this transaction has not been presented as it is not
materially different from the Company's historical results.
On July 27, 1999, the Company acquired the 28% minority interest in its
subsidiary, Sentir, for a purchase price of $3,574,016 consisting of $3,455,217
in cash and the assumption of liabilities in the amount of $118,799. Of the
$3,574,016 purchase price, $226,463 was paid to related parties. The acquisition
has been accounted for using the purchase method of accounting; as such, 100
percent of Sentir's results of operations have been included in the accompanying
consolidated financial statements from the date of acquisition. Previous to the
acquisition date, the minority interest's share of operations was excluded from
net income on the consolidated statements of operations. The cost of this
acquisition exceeded the estimated fair value of the acquired net assets by
$2,825,640. Such excess has been allocated to goodwill and is being amortized on
a straight-line basis over 20 years.
29
MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On August 20, 1999, the Company acquired substantially all of the assets and
assumed certain liabilities of the Angelton Division of Mallinckrodt, Inc.
(Angelton) for a purchase price of $8,132,194, consisting of $7,867,699 in
cash and the assumption of liabilities in the amount of $264,495. Angelton is
a manufacturer and marketer of medical catheters, introducers, guide wires,
and needles. The acquisition has been accounted for using the purchase method
of accounting; as such, Angelton's results of operations have been included
in the accompanying consolidated financial statements from the date of
acquisition. The cost of this acquisition exceeded the estimated fair value
of the acquired net assets by $1,949,383. Such excess has been allocated to
goodwill and is being amortized on a straight-line basis over 20 years.
The unaudited pro forma results of operations of the Company for the years ended
December 31, 1999 and 1998 (assuming the acquisition of Angelton had occurred as
of January 1, 1998) are as follows:
1999 1998
Net sales $ 87,606,126 $ 79,368,263
Net income 3,944,207 3,816,143
Net income per share (basic and diluted) $ 0.52 $ 0.51
3. INVENTORIES
Inventories consist of the following at December 31, 1999 and 1998:
1999 1998
Finished goods $ 16,816,578 $ 7,458,133
Work-in-process 3,270,163 1,954,696
Raw materials 8,554,635 8,981,007
Less reserve for obsolete inventory (1,120,289) (608,093)
Total $ 27,521,087 $ 17,785,743
4. INCOME TAXES
Deferred income tax assets and liabilities at December 31, 1999 and 1998
consisted of the following temporary differences and carryforward items:
Current Long-Term
1999 1998 1999 1998
Deferred income tax assets:
Allowance for uncollectible
accounts receivable $ 123,026 $ 79,809
Accrued compensation expense 200,799 126,603
Tax credits 79,668 $ 126,563 $ 24,681
Inventory capitalization for
tax purposes 338,753 116,574
Inventory obsolescence reserve 241,150 210,026
Net operating losses of
subsidiaries 90,254 70,000 298,323 368,690
Other 65,078 56,915 367,025 72,713
Total deferred income tax assets 1,059,060 739,595 791,911 466,084
Deferred income tax liabilities:
Tax credits (6,315)
Differences between tax basis
and financial reporting basis
of property and equipment (2,514,005) (1,741,735)
Net $1,052,745 $739,595 $(1,722,094) $(1,275,651)
30
MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 1999 the Company had net operating loss carryforwards from
its foreign subsidiaries of approximately $390,000 most of which has no
expiration date.
Income tax expense for the years ended December 31, 1999, 1998, and 1997 differs
from amounts computed by applying the statutory Federal rate to pretax income as
follows:
1999 1998 1997
Computed Federal income tax expense at
statutory rate of 35% $ 1,666,500 $ 1,501,621 $ 621,431
State income taxes 124,352 186,948 124,878
Creation of tax credits (140,369) (133,529) (164,319)
Tax benefit of foreign sales corporation (109,579) (96,808) (106,574)
(Gains) losses of subsidiaries recorded
at foreign rates (115,803) 183,622 496,685
Other - including the effect of graduated rates 29,661 45,525 (27,120)
Total income tax expense $ 1,454,762 $ 1,687,379 $ 944,981
Consisting of:
Current $ 1,004,028 $ 1,251,890 $ 967,932
Deferred 450,734 435,489 (22,951)
Total $ 1,454,762 $ 1,687,379 $ 944,981
5. LINE OF CREDIT AND LONG-TERM DEBT
LINE OF CREDIT - as of December 31, 1998, the Company had a short-term line
of credit for $10,500,000. The credit line was collateralized by trade
receivables, inventories, property and equipment, and intangible assets and
accrued interest at the bank's prime rate. As of December 31, 1998, the
Company owed $7,634,607 under this line of credit.
REVOLVING CREDIT FACILITY - In August 1999, the Company paid off the
short-term line of credit and entered into a $28 million long-term revolving
credit facility with a bank, which expires and is fully due and payable in
June 2005 and enables the Company to borrow funds at variable interest rates.
The weighted average interest rate applied to the outstanding balance at
December 31, 1999 was 7.55%. 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 2.0 to 1.0, maintain a ratio of current
assets to current liabilities of at least 1.5 to 1.0, maintain minimum
working capital of $25,000,000, and is restricted from paying dividends to
shareholders. As of December 31, 1999, the Company owed $25,907,596 under
this credit facility. The revolving credit facility is collateralized by
trade receivables, inventories, property and equipment and intangible assets.
LONG-TERM DEBT - Long-term debt consisted of the following at December 31,
1999 and 1998:
1999 1998
Notes payable to financial institutions; payable in monthly
installments through 2004, including interest at rates
ranging from 6.5% to 8.89%; collateralized by equipment $ 2,634,977 $ 4,699,219
Capital lease obligations (see Note 6) 276,652 498,586
Revolving credit facility (see above) 25,907,596
Total 28,819,225 5,197,805
Less current portion 1,001,917 1,808,970
Long-term portion $ 27,817,308 $ 3,388,835
31
MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 1999, management of the Company believes the Company was
in compliance with all debt covenants.
Scheduled maturities of long-term debt at December 31, 1999 are as follows:
Year ending December 31:
2000 $ 1,001,917
2001 897,686
2002 508,684
2003 361,252
2004 61,249
Thereafter 25,988,437
Total $ 28,819,225
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 subleased these facilities during
1997 for approximately $97,000. 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, 1999, 1998, and 1997 approximated
$3,094,000, $3,293,000, and $2,783,000, respectively.
In June 1993, the Company entered into a 25 year lease agreement with a
developer for a new manufacturing and office building. Under the agreement,
the Company was granted an option to purchase the building at fair market
value after 10 years and, if not exercised, after 25 years. In connection
with this lease agreement, the Company in 1993 sold to the developer 10 acres
of land on which the building was constructed. The $166,136 gain on the sale
of the land has been recorded as a deferred credit and is being amortized as
a reduction of rent expense over ten years. In connection with the lease
agreement, the Company issued to the developer warrants to purchase 155,461
shares of the Company's Common Stock at $4.95 per share subject to carrying
cost increases of 3% per year ($5.57 as of December 31, 1999). The warrants
expire in 2005.
The Company leases certain manufacturing and office equipment under long-term
capital lease agreements. Capital leases are collateralized by equipment with
a recorded cost approximating $848,500 and $967,000 with accumulated
amortization of approximately $157,000 and $200,000 as of December 31, 1999
and 1998, respectively.
The future minimum lease payments, together with the present value of the net
minimum lease payments as of December 31, 1999, are as follows:
Operating Capital
Leases Leases
Year ending December 31:
2000 $ 2,606,087 $ 149,427
2001 1,944,113 151,896
2002 1,535,145
2003 1,473,821
2004 1,471,229
Thereafter 21,141,113
Total minimum lease payments $ 30,171,508 301,323
Less amount representing interest and executory costs (24,671)
Present value of net minimum lease payments (see Note 5) $ 276,652
32
MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IRISH GOVERNMENT DEVELOPMENT AGENCY GRANTS - Through December 31, 1999, the
Company had entered into several grant agreements with the Irish Government
Development Agency, of which $93,059 and $198,445 remained in receivables at
December 31, 1999 and 1998, 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 1999, 1998, and 1997
in the amounts of $154,548, $164,423, and $146,476, 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 1999, 1998, and 1997, $142,161,
$97,993, and $74,541, respectively, of the deferred credit was amortized as a
reduction of operating expenses.
PREFERRED SHARE PURCHASE RIGHTS - In August 1997, the Company declared a
dividend of one preferred share purchase right (a "Right") for each outstanding
share of Common Stock which entitles the holder of a Right to purchase one
one-hundredth of a share of Series A Junior Participating Preferred Stock at an
exercise price of $40 in the event a person or group acquires or announces an
intention to acquire 15% or more of the Company's Common Stock. Until such an
event, the Rights are not exercisable and are transferable with the Common Stock
and may be redeemed at a price of $.0001 per Right.
LITIGATION - In the course of business, the Company is involved in litigation
and claims which management believes are not considered material to the
Company's operations.
7. EMPLOYEE STOCK PURCHASE PLAN AND STOCK OPTIONS AND WARRANTS
The Company offers to its employees an Employee Stock Purchase Plan which allows
the employees 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 172,749 had been purchased as
of December 31, 1999.
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, 1999, 1998, and 1997 are
as follows:
Options Warrants
Weighted Weighted
Average or Average or
Range of Range of
Exercise Exercise
Shares Price Shares Price
1999:
Granted 448,900 $5.84
Exercised 22,080 4.96
Forfeited/expired 61,150 5.70
Outstanding at December 31 1,513,440 7.02 155,461 $5.57
Exercisable 740,480 7.20 155,461 5.57
Weighted average fair value of
options and warrants granted
during year $2.98
33
MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Weighted average fair value of
shares issued under Employee
Stock Purchase Plan $0.83
Options Warrants
Weighted Weighted
Average or Average or
Range of Range of
Exercise Exercise
Shares Price Shares Price
1998:
Granted 203,500 $6.41
Exercised 64,840 5.80
Forfeited/expired 47,990 6.41
Outstanding at December 31 1,147,770 6.76 155,461 $5.41
Exercisable 486,230 7.45 155,461 5.41
Weighted average fair value of
options and warrants granted
during year $3.14
Weighted average fair value of
shares issued under Employee
Stock Purchase Plan $0.90
Options Warrants
Weighted Weighted
Average or Average or
Range of Range of
Exercise Exercise
Shares Price Shares Price
1997:
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 $3.33
Weighted average fair value of
shares issued under Employee
Stock Purchase Plan 1.03
34
MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes information about stock options and warrants
outstanding at December 31, 1999:
Options and Warrants
Options and Warrants Outstanding Exercisable
Weighted
Average
Remaining Weighted Weighted
Range of Contractual Average Average
Exercise Number Life Exercise Number Exercise
Prices Outstanding (in years) Price Exercisable Price
Options:
$5.63 - $7.25 1,001,440 3.32 $ 6.05 392,280 $ 6.22
$7.5 - $10.63 512,000 2.21 8.13 348,200 8.31
Warrants:
$5.57 155,461 5.00 5.57 155,461 5.57
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):
1999 1998 1997
Net income:
As reported $ 3,225,590 $ 2,451,159 $ 797,532
Pro forma 2,480,928 1,840,182 385,340
Net income per common (both basic and diluted) share:
As reported $0.43 $0.33 $0.11
Pro forma 0.33 0.25 0.05
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 1999, 1998, and 1997: dividend yield of 0%;
expected volatility of 56.0%, 55.2%, and 57.5% for 1999, 1998, and 1997,
respectively; risk-free interest rates ranging from 4.58% to 7.36%; and
expected lives ranging from 2.33 to 4.5 years.
8. SEGMENT REPORTING AND FOREIGN OPERATIONS
During the years ended December 31, 1999, 1998, and 1997, the Company had
sales of approximately $18,336,000, $15,198,000, and $13,722,000 or
approximately 24%, 22%, and 23%, respectively, of total sales primarily in
Japan, Germany, France, and the United Kingdom.
The Company operates primarily in one segment in which it develops,
manufactures, and markets disposable medical products, principally for use in
the diagnosis and treatment of cardiovascular disease. Major operations
outside the United States include a leased manufacturing and distribution
facility in Ireland and sales subsidiaries in Europe. The following is a
summary of the Company's foreign operations by geographic area for fiscal
years 1999, 1998, and 1997:
35
MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Transfers
Sales to Between Net
Unaffiliated Geographic Income Identifiable
Customers Areas Revenue (Loss) Assets
Fiscal year ended December 31, 1999:
United States, Canada, and
international distributors $69,595,418 $ 1,288,485 $70,883,903 $3,761,605 $62,666,167
Europe direct 8,364,158 4,281,400 12,645,558 (319,784) 9,694,302
Eliminations (5,569,885) (5,569,885) (216,231)
Consolidated $77,959,576 None $77,959,576 $3,225,590 $72,360,469
Fiscal year ended December 31, 1998:
United States, Canada, and
international distributors $60,407,019 $ 1,386,073 $61,793,092 $3,373,280 $41,547,669
Europe direct 7,970,338 2,546,099 10,516,437 (593,677) 9,117,117
Eliminations (3,932,172) (3,932,172) (328,444)
Consolidated $68,377,357 None $68,377,357 $2,451,159 $50,664,786
Fiscal year ended December 31, 1997:
United States, Canada, and
international distributors $54,226,210 $ 860,482 $55,086,692 $2,774,516 $36,584,122
Europe direct 6,352,801 838,219 7,191,020 (2,110,415) 8,685,556
Eliminations (1,698,701) (1,698,701) 133,431
Consolidated $60,579,011 None $60,579,011 $ 797,532 $45,269,678
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 and related parties at December 31, 1999 and 1998
totaled approximately $503,000 and $473,000, respectively, (including
approximately $267,000 and $249,000, 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).
36
MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, which concluded during the year ended December 31, 1999. 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, 1999, 1998, and 1997.
The Licensor 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 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 six months of service to the Company. The Company may
contribute at its discretion matching contributions up to 2.25% of the
employees' compensation. Additional employer contributions are determined at
the discretion of the Board of Directors. Contributions made by the Company
to the Plan for the years ended December 31, 1999, 1998, and 1997 totaled
approximately $88,000, $18,000, and $223,000, respectively.
The Plan purchased unissued shares of the Company's CommonStock at market
value during each of the three years ended December 31, 1999 as follows:
Market
Shares Value
Years ended December 31:
1999 10,990 $ 62,600
1998 13,819 81,850
1997 35,582 273,202
12. RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS
In June 1998, SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities, was issued. This statement establishes accounting and reporting
standards for derivative instruments and hedging activities. It requires that
an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
The Company principally hedges the following currencies: Belgian Francs,
French Francs, German Marks, Dutch Gilders, and Irish Pounds. The Company
enters into forward foreign exchange contracts to protect the Company from
the risk that the eventual net dollar cash flows resulting from transactions
with foreign customers and suppliers may be adversely affected by changes in
currency exchange rates. Such contracts are not significant.
SFAS No. 133, as amended by SFAS No. 137, Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133, is effective for all fiscal quarters of fiscal years
beginning after June 15, 2000. Management of the Company is currently
evaluating the effects of this accounting standard.
******
37
MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of Merit Medical Systems, Inc.:
We have audited the accompanying consolidated balance sheets of Merit
Medical Systems, Inc. and subsidiaries as of December 31, 1999 and 1998, and
the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the three years in the period ended December 31, 1999.
These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly,
in all material respects, the financial position of the Companies as of
December 31, 1999 and 1998, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1999
in conformity with accounting principles generally accepted in the United
States of America.
/s/ Deloitte & Touche LLP
March 6, 2000
Salt Lake City, Utah
38
EXECUTIVE OFFICERS
Fred P. Lampropoulos
Chairman, President/Chief Executive Officer
Kent W. Stanger
Secretary-Treasurer, Chief Financial Officer
Leigh Weintraub
Chief Operating Officer
Brian L. Ferrand
Vice President, Sales
BOARD OF DIRECTORS
Fred P. Lampropoulos
Chairman, President/Chief Executive Officer
Kent W. Stanger
Secretary-Treasurer, Chief Financial Officer
Rex C. Bean, Private Investor
Ogden, Utah
Richard W. Edelman, Senior Vice President
Southwest Securities
Dallas, Texas
James J. Ellis, Managing Partner
Ellis/Rosier & Associates
Dallas, Texas
Michael E. Stillabower, M.D.
Chief, Cardiology, Christiana Care Health Systems;
Member, Cardiology Consultants PA
Wilmington, Delaware
CORPORATE OFFICES
Merit Medical Systems, Inc.
1600 West Merit Parkway
South Jordan, Utah 84095
(801) 253-1600
INDEPENDENT ACCOUNTANTS
Deloitte & Touche LLP
Salt Lake City, Utah
LEGAL COUNSEL
Parr Waddoups Brown Gee & Loveless
Securities/General Counsel
Workman, Nydegger & Jensen
Patent Counsel
FORM 10-K
Merit Medical Systems, Inc. filed an annual report on Form 10-K with the
Securities and Exchange Commission for the fiscal year ended December 31, 1999.
A copy may be obtained by written request from Kent W. Stanger, Secretary, at
the Company's offices.
ANNUAL MEETING
All shareholders are invited to attend our Annual Meeting on Wednesday, May 24,
2000 at 3:00 p.m. at the Company's corporate offices in South Jordan, Utah.
STOCK TRANSFER AGENT/REGISTRAR
Zions First National Bank
Stock Transfer Department
P. O. Box 30880
Salt Lake City, Utah 84130
PRIMARY MARKET MAKERS
Piper Jaffray Cos., Inc. Olsen Payne & Company
Dain Rauscher, Inc. Investec Ernst & Company
Schwab Capital Markets Sherwood Securities, Inc.
Herzog, Heine, Geduld, Inc. Island System Corporation
Knight Securities L.P. Sutro & Co., Inc.
Wilson-Davis & Co., Inc. Hill, Thompson, Magid & Co.
Spear, Leeds & Kellogg
MARKET INFORMATION
The Company's common stock is traded on the NASDAQ National Market System under
the symbol "MMSI." As of December 31, 1999, there were 7,591,236 shares of
common stock outstanding. The following chart sets forth the high and low
closing sale prices for the Company's common stock for the last two years:
High Low
---- ---
1999
First Quarter $5.75 $5.75
Second Quarter 5.00 4.97
Third Quarter 6.81 5.75
Fourth Quarter 7.50 7.13
1998
First Quarter $7.63 $5.50
Second Quarter 9.13 6.25
Third Quarter 9.00 5.50
Fourth Quarter 9.00 7.00
As of March 31, 2000, the Company had approximately 300 shareholders of
record, not including shareholders whose shares are held in securities
position listings.
The Company has never declared or paid any cash dividends on its common
stock. The Company intends to retain any earnings for use in its business and
does not anticipate paying any cash dividends in the foreseeable future.
INVESTOR RELATIONS CONTACT
Nancy Schultz, Director, Corporate Communications
(801) 253-1600
FOR MORE INFORMATION, CONTACT
Kent W. Stanger, Chief Financial Officer
Merit Medical Systems, Inc.
(801) 253-1600
39
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This Annual 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 statements of assumptions underlying any
of the foregoing. All Forward-Looking Statements included in this document
are made as of the date hereof and are based on information available to
Merit as of such date. Merit assumes no obligation to update any
Forward-Looking Statement. In some cases, Forward-Looking Statements can be
identified by the use of terminology such as "may," "will," "expects,"
"plans," "anticipates," "intends," "believes," "estimates," "potential," or
"continue," or the negative thereof or other comparable terminology. Although
the Company believes that the expectations reflected in the Forward-Looking
Statements contained herein are reasonable, there can be no assurance that
such expectations or any of the Forward-Looking Statements will prove to be
correct, and actual results could differ materially from those projected or
assumed in the Forward-Looking Statements. Future financial condition and
results of operations, as well as any Forward-Looking Statements are subject
to inherent risks and uncertainties, including market acceptance of the
Company's products, potential product recalls, delays in obtaining regulatory
approvals, cost increases, price and product competition, availability of
labor and materials, foreign currency fluctuations, changes in health care
markets related to health care reform initiatives and other factors referred
to in the Company's press releases and reports filed with the Securities and
Exchange Commission. All subsequent Forward-Looking Statements attributable
to the Company or persons acting on its behalf are expressly qualified in
their entirety by these cautionary statements.
40