UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-K

 

(Mark One)

 

x        Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2007,

 

or

 

o        Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

 

MERIT MEDICAL SYSTEMS, INC.

(Exact name of registrant as specified in its charter)

 

Utah

 

0-18592

 

87-0447695

(State or other jurisdiction

 

(Commission File No.)

 

(IRS Employer

of incorporation)

 

 

 

Identification No.)

 

1600 West Merit Parkway

South Jordan, Utah 84095

(Address of principal executive offices, including zip code)

 

Registrant’s telephone number, including area code:  (801) 253-1600

 

Securities registered pursuant to Section 12(b) of the Act:  Common Stock, No Par Value

 

Securities registered pursuant to Section 12(g) of the Act:  None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o  No x

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes o  No x

 

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 o

 

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

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer o

 

Accelerated filer x

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No x

 

The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant, on June 30, 2007, which is the last day of the registrant’s most recently completed second fiscal quarter (based upon the closing sale price of the registrant’s common stock on the NASDAQ National Market System on June 30, 2007), was approximately $307 million.  Shares of common stock held by each officer and director of the registrant and by each person who may be deemed to be an affiliate have been excluded.

 

As of March 4, 2008, the registrant had 27,566,163 shares of the registrant’s common stock outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the following document are incorporated by reference in Part III of this Report: the registrant’s definitive proxy statement relating to the Annual Meeting of Shareholders scheduled for May 21, 2008.

 

 



TABLE OF CONTENTS

 

PART I

 

 

 

1

 

 

 

 

 

Item 1.

 

Business

 

1

 

 

 

 

 

Item 1A.

 

Risk Factors

 

8

 

 

 

 

 

Item 1B.

 

Unresolved Staff Comments

 

11

 

 

 

 

 

Item 2.

 

Properties

 

11

 

 

 

 

 

Item 3.

 

Legal Proceedings

 

12

 

 

 

 

 

Item 4.

 

Submission of Matters to a Vote of Security Holders

 

12

 

 

 

 

 

PART II

 

 

 

13

 

 

 

 

 

Item 5.

 

Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities

 

13

 

 

 

 

 

Item 6.

 

Selected Financial Data

 

16

 

 

 

 

 

Item 7.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

17

 

 

 

 

 

Item 7A.

 

Quantitative and Qualitative Disclosures About Market Risk

 

21

 

 

 

 

 

Item 8.

 

Financial Statements and Supplementary Data

 

22

 

 

 

 

 

Item 9.

 

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 

52

 

 

 

 

 

Item 9A.

 

Controls and Procedures

 

52

 

 

 

 

 

Item 9B.

 

Other Information

 

54

 

 

 

 

 

PART III

 

 

 

54

 

 

 

 

 

Items 10, 11, 12, 13 and 14.

 

54

 

 

 

 

 

PART IV

 

 

 

54

 

 

 

 

 

Item 15.

 

Exhibits and Financial Statement Schedules

 

54

 

 

 

 

 

SIGNATURES

 

58

 


 


 

PART I

 

Unless otherwise indicated in this report, “we,” “us,” “our,” and similar terms refer to Merit Medical Systems, Inc. and our consolidated subsidiaries.

 

DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

 

This report includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).  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 report are made as of the date hereof and are based on information available to us as of such date.  We assume 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 we believe 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 infringement of our proprietary technology or our inability to protect our proprietary technology, termination or interruption of relationships with our suppliers, potential delays in obtaining regulatory approvals, product recalls, product liability claims, our inability to successfully manage growth through acquisitions, our failure to comply with governing regulations, high concentrations of revenue from a few products and/or customers, market acceptance of our products, market price of our Common Stock and foreign currency fluctuations, dependency on key personnel, cost increases on limits on reimbursement and other factors referred to in our press releases and reports filed with the Securities and Exchange Commission (the “SEC”).  All subsequent forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements.  Additional factors that may have a direct bearing on our operating results are described under Item 1A. “Risk Factors” beginning on page 8.

 

Item 1.         Business.

 

GENERAL

 

Merit Medical Systems, Inc. was formed in 1987 by several members of our current management to produce high-quality, single-use medical products.  Our initial focus was on creating products to be used by doctors in diagnosing and treating cardiovascular disease.  Our products are designed to enable physicians and other health care professionals to perform interventional and diagnostic procedures safely and effectively.  Early in our development, we were able to introduce innovative new products and capture significant market share because of our expertise in product design, our proprietary technology, and our skills in injection and insert molding.  Later, we developed an innovative line of angioplasty inflation products that included electronic sensing and display features.  Angioplasty and stent placement are procedures used to clear out blockages and blood clots in arteries by inserting and inflating a small balloon in the clogged arteries.  We market these devices along with a group of sensor-based products designed to be used by hospital personnel in various diagnostic and interventional catheterization procedures.  Recently, we have expanded our product offerings to include angiographic catheters, guide wires, needles, safety products, therapeutic infusion catheters and accessories, drainage catheters and accessories, sheath introducers, pressure infusion bags, syringes, kits, and procedure trays.  Additionally, we have sought to improve our line of core products.

 

We offer a broad line of innovative, disposable products designed to assist physicians in diagnosing disease and intervening in the areas of radiology and cardiology.  During 2007, our sales of new and existing products increased both in the United States and in foreign markets.  We intend to create new products based on our sensor-based technologies, plastics molding, catheter, guide wire, and electronic capabilities, and to develop products for diagnostic and interventional procedures in additional markets.  Our sales of stand-alone products, in combination with custom kits, have increased as we have expanded our product lines.  In 2007, our U.S. domestic sales force made approximately 41% of our sales directly to U.S. hospitals and approximately 14% of sales through other channels such as U.S. customs packagers and distributors.  Original equipment manufacturers, or “OEM”, companies accounted for approximately 15% of our 2007 sales.  Approximately 31% of our sales in 2007 were made in international markets (of which OEM international sales accounted for approximately 1%).

 

 

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During the first quarter of 2007, we entered into a distribution agreement with Milamy Partners LLC, (“Milamy”) a Maine corporation, wherein we purchased the exclusive, worldwide right to distribute Milamy’s KanguruWeb® Abdominal Retraction System in the vascular lab markets.  In the first quarter of 2007, we entered into an asset purchase agreement with Datascope Corporation, a New Jersey corporation, to purchase its ProGuide™ catheter.   In connection with this agreement we acquired assets, inventory, customer lists, patents and trademarks.  In the third quarter of 2007, we entered into a distribution agreement with GMA Company, Ltd., a Japanese corporation, for the exclusive distribution rights to sell a micro-catheter.  Also in the third quarter of 2007 we entered into a patent assignment and royalty agreement with Lightek Corporation, a Wyoming corporation, to manufacture and sell a radio-opaque marker band.

 

Merit Medical Systems, Inc. was organized in July 1987 as a Utah corporation.  We also conduct our operations through a number of domestic and foreign subsidiaries.  Our principal offices are located at 1600 West Merit Parkway, South Jordan, Utah, 84095, and our telephone number is (801) 253-1600.   See Item 2. “Properties.”

 

PRODUCTS

 

We develop, manufacture and market products that offer a high level of quality, value, and safety to our customers, as well as the patients they serve.  In response to feedback from health care professionals, we have built an extensive product offering in the market for interventional cardiology and interventional radiology procedures.  In addition, we are making our mark in the areas of dialysis and interventional nephrology, pain management (discography), vein therapy, and other areas of the health care industry.

 

The competitive advantages of our products are enhanced by our twenty years of experience in the health care industry; our experienced direct sales force and distributors; our ability to combine and customize devices, kits, and trays at the request of our customers; and our dedication to offering “stick to stitch” solutions in the markets we serve worldwide.

 

Interventional Cardiology and Radiology Products

 

Interventional cardiology is a branch of the medical specialty of cardiology that deals specifically with the catheter-based diagnosis and treatment of heart diseases.  A large number of procedures can be performed by catheterization, and more commonly, involve the insertion of a sheath into the femoral, radial, or brachial artery. Fluoroscopy (X-ray) and computed tomography (CT) are most often used to visualize the vessels and chambers of the heart during these diagnostic and interventional procedures.  Percutaneous Transluminal Coronary Angioplasty (PTCA) is used to treat coronary atherosclerosis and the resulting narrowing of the arteries of the heart.  Interventional Radiology is related to the minimally invasive treatment of disease in other (peripheral) vessels and organs of the body and Percutaneous Transluminal Angioplasty (PTA) is used to treat similar disease conditions outside the heart.

 

Inflation Devices.  During PTCA and PTA procedures, balloons and/or stents are placed within the vasculature.  The balloons must be carefully placed, inflated, and deflated within the vessel in order to achieve optimal results without injury to the patient.  For almost two decades, we have offered an extensive, innovative line of inflation devices on the market.  Products like our IntelliSystem® and Monarch® (state of the art digital inflation systems), as well as the Basix COMPAK inflation device, offer the clinician a wide range of features and prices—along with the quality and ergonomic superiority we are known for.  We estimate that we currently supply more than 50% of the worldwide inflation device market.

 

Hemostasis Valves.  We have developed a complete line of technically sophisticated, clinically acclaimed hemostasis valves (also known as Touhy-Borst adaptors) and angioplasty accessories.  These valves connect to catheters and allow passage of additional guide wires, balloon catheters, and other devices into the vasculature while reducing the amount of blood loss during the procedures.  We believe we currently supply more than 40% of the worldwide market for these devices.

 

Vascular Access Products.  We offer a broad line of devices used to gain and maintain vascular access while protecting the clinician from accidental cuts and needle-sticks during the procedure.  These effective and useful devices and kits include the Futura® Safety Scalpel and an improved line of angiography needles (Merit Advance®), as well as the SecureLoc™ Angiographic Needle—all introduced in 2006.  In addition, we offer an extensive line of sheath introducers (Prelude®) and mini access kits (MAK and S-MAK), which are designed to allow the clinician smooth, less traumatic, and convenient access to the patient’s vasculature.

 

Diagnostic Catheters, Guide Wires, and Torque Devices.   We offer diagnostic catheters and guide wires for use during both cardiology and radiology angiographic procedures.  In 2007, we introduced our new IMPRESS® line of

 

 

2



 

diagnostic radiology catheters.  These catheters offer interventional radiologists superior performance during a variety of angiography procedures.  In addition, our diagnostic guide wires are used to traverse vascular anatomy to aid in placing catheters and other devices.  Our pre-coated, high performance InQwire® guide wires are lubricious and are available in a wide range of configurations to meet the clinicians’ diagnostic needs.  Introduced in 2005, the Merit H2O® hydrophilic guide wire provides enhanced maneuverability through tortuous anatomy.  We also offer a line of torque devices (guide wire steering tools) that can be used on both standard and hydrophilic guide wires—in both large and small diameters — and are often included as a component in our angioplasty packs.  In 2007, we released our new SeaDragon™ torque device which is designed for use with hydrophilic guide wires.

 

Angiography and Angioplasty Accessories.  Since our introduction of the CCS line of disposable coronary control syringes in 1988, we have continued to develop innovative, problem-solving devices; accessories; kits; and procedure trays for use during minimally invasive diagnosis and treatment of coronary artery and peripheral disease.  Additionally, we offer an extensive line of kits containing manifolds, syringes, tubing, and disposable pressure transducers (MeriTrans®) for measurement of pressures within the vessels and chambers of the heart.  We also provide devices, kits, and procedure trays used to effectively and safely manage fluids, contrast media, and waste during angiography and interventional procedures.  For example, in 2007, we introduced a new line of  CT-Transfer Sets to address the growing CT angiography market.

 

Safety and Waste Management Systems.  We offer a variety of safety-related products and kits.  Our ShortStop® and ShortStop Advantage® temporary sharps holders address the potential safety issues associated with accidental needle sticks.  Our extensive line of color-coded Medallion® specialty syringes and the PAL™ medication labeling system (which complies with the Joint Commission on Accreditation of Healthcare Organization’s (“JCAHO”) latest patient safety initiatives) help prevent mix-ups in the administration of medication.  We also offer waste management products to avoid accidental exposure to contaminated fluids.  These include our OSHA-compliant waste disposal basins, including the BackStop®, BackStop Plus™, MiniStop™ and MiniStop+, DugOut®, and TriplePlay™.  These products have been designed to complement other Merit devices and are included in many of our kits and procedure trays in order to make the clinical setting safer for both clinicians and the patients.

 

Obesity-Related Products.  Patient obesity presents an ever-growing challenge to clinicians and patients during vascular access, angiography, and interventional procedures.  In 2007, we acquired the KanguruWeb® abdominal retraction device from Milamy in an effort to address this issue.  This device allows easier vessel access to clinicians while maintaining patient comfort and dignity during interventional cardiology and radiology procedures.  In addition, we offer longer angiography and anesthesia needles, as well as mini access kits for improved vascular access of obese patients.

 

Specialty Procedure Products

 

In addition to the procedures and devices detailed above, interventional radiology (also referred to as the special procedures or specials lab) performs a multitude of additional minimally invasive diagnostic and interventional procedures.  We offer a variety of devices and accessories used during these procedures.

 

Drainage Catheters and Accessories.  We have a complete line of catheters for nephrostomy, abscess, and other drainage procedures.  Our ReSolve® non-locking and locking drainage catheter line was expanded in 2006 and 2007.  These catheters’ unique, convenient locking mechanisms are appreciated by clinicians and patients, who often comment on the enhanced comfort that the catheter provides them.  We also offer a range of catheter fixation devices including the Revolution™ catheter fixation device which was designed to be cost effective, save time, and enhance patient comfort.  In addition, Merit provides a wide selection of accessories that complement our drainage catheters, including tubing sets and drainage bags.  In 2007, for example, we expanded our Drainage Depot™ product line to include the new Drainage Depot™ Bag with soft cloth backing which is more comfortable for patients than traditional bags.

 

Paracentesis and Pericardiocentesis Catheters.  Paracentesis is a procedure to remove fluid that has accumulated in the abdominal cavity (peritoneal fluid).  Merit’s One-Step™ centesis catheter, as well as our Safety Paracentesis Procedure Tray, are designed to provide clinicians with a safe, convenient, and cost-effective alternative for paracentesis procedures.  Pericardiocentesis is a procedure in which fluid is aspirated from the pericardium (the sac enveloping the heart).  In 2007,we introduced a new, large (8.3F) outer diameter pericardiocentesis catheter.  Our Pericardiocentesis Kit is designed as an organized, ready-to-use, convenient tray to assist the clinician in draining fluid quickly from the pericardial sac.

 

Therapeutic Infusion Catheters.  We offer a complete line of therapeutic thrombolytic infusion systems featuring the Fountain® Infusion Systems and the Mistique® Infusion Catheters.  These technically-advanced catheters are used to treat thrombus (blood clot) formation in the peripheral vessels of the body.

 

 

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                Products for Dialysis and Interventional Nephrology.  In 2007, we acquired the ProGuide™ Chronic Dialysis Catheter product line from Datascope Corporation.  The ProGuide™ is considered a “workhorse” catheter for long-term dialysis and provides a platform for additional Merit products in the dialysis and interventional nephrology market.  For example, the Merit DialEase® sheath introducers provide vascular access to dialysis grafts and our extensive line of vascular access devices (Prelude® and MAK™/S-MAK™), guide wires, diagnostic catheters, therapeutic infusion systems, and safety products are also used during these dialysis-related procedures.

 

                Discography Products.  Discography is a technique used to determine whether a disc is the source of pain in patients with back or neck pain.  During discography, contrast medium is injected into the disc and the patient’s response to the injection is noted.  Because of their quality and accuracy, our digital inflation devices (IntelliSystem® and Monarch®) are used in many pain management clinics for injecting contrast into the disc.

 

MARKETING AND SALES

 

Target Market/Industry.  Cardiovascular disease continues to be a leading health problem in the United States.  The American Heart Association estimated that cardiovascular disease accounted for more than one-third (36.3 percent) of all deaths in the United States in 2004.  We derive a majority of our sales revenues from products used in angiography and angioplasty procedures designed to treat cardiovascular disease.  We believe that the greatest potential to diagnose and treat the disease comes from the use of transcatheter technologies, meaning products utilizing vascular catheterization procedures such as balloons, bare metal and drug eluding stents, and technologies aimed at defect repair.  Catheterization refers to the process of inserting a catheter, usually into one or more of a patient’s arteries.  We intend to pursue additional sales growth by building on our existing market position in both catheter technology and accessory products.

 

The global market for transcatheter products stands at a major crossroads, even when considering the continued dynamic evolution in vascular stent placement.  The core diagnostic and therapeutic applications for basic transcatheter technologies (balloons, stents and defect repair) are well established, with the future growth of procedures and products dependent upon demographic trends.  Several companies, however, are researching and developing new technologies and applications designed to enhance patient outcomes and enable the treatment of new populations that have been traditionally limited to surgical intervention.  Much of this additional research and development has led to new or enhanced procedures, devices and drugs designed to treat or prevent cardiovascular disease.  These procedures, devices and drugs include laser angioplasty, atherectomy procedures and drug therapies.  Because these new procedures and therapies do not involve the use of catheterization, they may either render some of our products obsolete or limit the markets for our products.  However, with the advent of vascular stents and other procedures, such as discography and kyphoplasty, we have experienced continued growth in our proprietary inflation technology.  We are monitoring trends in the industry and believe we are in a position to launch catheters and accessories to support growing clinical applications.

 

A large number of current research and development projects focus on improving the diagnosis of cardiovascular disease, improving the issue of restenosis, and developing other less invasive alternatives to open-heart surgery.  In recent years, many researchers have focused their interests on technologies and products that support the increased use of transcatheter approaches to reduce the mortality rate of cardiovascular disease.  These new technologies and procedures include drug-coated stents, radiated stents and balloons, anti-platelet therapy, gene therapy, percutaneous coronary thrombectomy, and transmyocardial revascularization.  We plan to continue to develop and launch innovative products to support these clinical trends.

 

Market Strategy.  Our marketing strategy is focused on identifying and introducing a continual flow of highly profitable differentiated products that meet customer needs.  In order to stay abreast of customer needs, we seek suggestions from hospital personnel working with our products in cardiology and radiology applications.  Suggestions for new products and product improvements may come from engineers, sales people, physicians and technicians who perform the clinical procedures.

 

When we determine that a product suggestion demonstrates sustainable competitive advantage, meets customer needs, fits strategically and technologically with our business, and has a good potential financial return, we generally assemble a “project team” comprised of individuals from our sales, marketing, engineering, manufacturing, legal, and quality assurance departments.  This team works to identify the customer requirements, integrate the design, compile necessary documentation and testing, and prepare the product for market introduction.  We believe that one of our marketing strengths is our capacity to rapidly conceive, design, develop, and introduce new products.

 

U. S. Sales.  Sales of our products in the United States accounted for 68%, 72% and 73% of our total sales for the years ended December 31, 2007, 2006 and 2005, respectively.  Our direct sales force currently consists of a Vice

 

 

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President of Sales, eight regional sales managers and 62 direct sales representatives and clinical specialists located in major metropolitan areas throughout the United States.  We consider training to be a critical factor in the success of our direct sales force.  Our sales people are trained by our personnel at our 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.  Approximately 100 independent dealer organizations distribute our products worldwide, including territories in Europe, Africa, the Middle East, Asia, South and Central America, and Canada.  We have appointed a Vice President for International Sales, residing in South Jordan, Utah, who oversees Asia, South and Central America and Canada.  We also have a Vice President of European Sales who oversees Europe and the Middle East from our distribution office located in Maastricht, The Netherlands.  Approximately 20 direct sales representatives and country managers presently sell our products in Germany, France, the United Kingdom, Belgium, The Netherlands, Denmark, Sweden, Ireland, and beginning in 2008, Australia.  In 2007, our international sales grew approximately 21% over our total sales for the year ended December 31, 2006, and accounted for approximately 31% of total sales.  With the recent and planned additions to our product lines, we believe that our international sales will continue to increase.

 

We generally require our international dealers to inventory products and sell directly to customers within defined sales territories.  Each of our products must be approved for sale under the laws of the country in which it is sold.  International dealers are responsible for compliance with all applicable laws and regulations in their respective countries.

 

OEM Sales.   We currently have an OEM division that sells molded components, sub-assembled goods, and bulk non-sterile goods, which may be combined with other components and/or goods from other companies and then sold under a Merit or non-Merit label.   We engage in both international and domestic OEM sales.

 

CUSTOMERS

 

We serve hospital and clinic-based cardiologists, radiologists, anesthesiologists, physiatrists (pain management physicians), neurologists, nephrologists, vascular surgeons, technicians, and nurses, all of whom influence the purchasing decisions for our products.   Hospitals and acute care facilities in the United States purchase our products through our direct sales force, distributors, OEM partners, custom packagers and packers who assemble and combine products in custom kits and packs.  Outside the United States, hospitals and acute care facilities purchase our products through our direct sales force, or in the absence of a sales force, through independent distributors or OEM partners.

 

In 2007, our U.S. domestic sales force made approximately 41% of our sales directly to U.S. hospitals, and they made approximately 14% of U.S. sales through other channels such as U.S. customs packagers and distributors.  Approximately 31% of our sales were made by our direct European sales force, international distributors, and our OEM sales force to international markets.  Sales to our single largest customer, an OEM partner, accounted for approximately 7% of total sales during the year ended December 31, 2007.  We generally manufacture products for other medical device companies through our OEM division.  During the year ended December 31, 2007, OEM sales represented approximately 15% of our total revenue, approximately 1% of which was purchased by international OEM companies.

 

RESEARCH AND DEVELOPMENT

 

Our future growth and success will depend largely on our ability to design and develop innovative new products and improve existing products.  We have directed our development efforts towards innovative technologies to expand our current market and enter new markets.  In order to address our customers’ needs, we involve our sales and marketing personnel, clinicians and physicians in the product development process.  Through collaboration with physicians we are able to respond to customer needs in successfully bringing innovative products to the market.

 

Our Chief Executive Officer frequently devotes a portion of his time to research and development.  Research and development expenses were approximately $8.7 million, $8.6 million, and $7.0 million in 2007, 2006, and 2005, respectively.  We have research and development facilities in Utah, Texas, The Netherlands, and Ireland that allow us to diversify our development efforts worldwide to meet our customers’ needs.

 

 

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MANUFACTURING

 

We manufacture many of our products utilizing our proprietary technology and our expertise in plastic injection and insert molding.  We generally contract with third parties for the tooling of molds, but we design and own all of our molds.  We utilize our experience in injection and insert molding technologies in the manufacture of most of the custom components used in our products.

 

We either assemble the electronic monitors and sensors used in our IntelliSystem® and Monarch® inflation devices from standard electronic components or we purchase them from suppliers.  Merit Sensor Systems, Inc., a wholly-owned subsidiary of Merit Medical Systems, Inc., develops and markets silicon sensors.  It is presently supplying all of the sensors we utilize in our digital inflation devices.

 

Our products are manufactured at several factories, including facilities located in South Jordan and Murray, Utah; Galway, Ireland; Venlo, The Netherlands; Angleton, Texas; and Chester, Virginia.  Our manufacturing capabilities are being expanded into a contract manufacturing facility in Mexico.  See Item 2. “Properties.”

 

We have distribution centers located in South Jordan, Utah, Angleton, Texas, and Maastricht, The Netherlands.

 

We believe that our variety of suppliers for raw materials and components necessary for the manufacture of our products, as well as our long-term relationships with such suppliers, promote stability in our manufacturing process.  Historically, we have not been materially affected by interruptions with such suppliers.  Furthermore, we seek to develop back-up suppliers for materials and components in the event of supply interruptions.

 

COMPETITION

 

We compete in the domestic and international cardiology and radiology markets, which encompass a large number of suppliers of varying sizes.  We compete with more than 30 different companies.  These firms include small firms, such as Possis Medical and Angio Dynamics; medium-sized companies like Cook, Arrow, and ICU Medical; and large, international, multi-supply medical companies, such as Johnson & Johnson, Boston Scientific, Medtronic, and C.R. Bard.   Many of our competitors have substantially greater financial, technical, and marketing resources than we do.

 

The principal competitive factors in the markets in which our products are sold are quality, performance, service, breadth of line, and price.  We believe that our products have achieved market acceptance due, in part, to the quality of materials and workmanship, innovative design, ease of operation and our prompt attention to customer inquiries.  Our products are priced competitively, but generally not below prices for competing products.  One of our primary competitive strengths is a comprehensive, broad line of ancillary products used in both cardiology and radiology.

 

Based on available industry data with respect to the number of procedures performed, we believe that we are one of two market leaders in the United States for control syringes, tubing, and manifold kits (together with NAMIC USA Corporation, a subsidiary of Boston Scientific, recently acquired by Avista Capital Partners in February of 2008), and we are the world market leader for inflation devices, hemostasis accessories, and torque devices.  We also believe that the recent and planned additions to our product lines will enable us to compete more effectively in both the U.S. and international markets.  We believe that we are a leading provider of digital inflation technology in the world.  There is no assurance, however, that we will be able to maintain our existing competitive advantages or compete successfully in the future.

 

                We derive a substantial majority of our revenues from sales of products used in diagnostic angiography and interventional angioplasty and stent procedures.  Medical professionals are starting to use newer procedures, devices, and drugs for the treatment and prevention of cardiovascular disease such as laser angioplasty, atherectomy procedures, and drug therapies, the effect of which may be to render some of our products obsolete or to limit the markets for our products.  However, with the advent of vascular stents and other procedures, we have experienced continued growth in proprietary inflation technology.

 

PATENTS, LICENSES, TRADEMARKS AND COPYRIGHTS

 

We consider our proprietary technology to be important in the development and manufacture of our products.  We seek to protect our technology through a combination of patents, trademarks, trade secrets, copyrights, confidentiality agreements and non-compete agreements.  We generally seek patent protection of our technology in the United States and certain foreign countries where such protection appears to be advantageous.

 

 

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As of December 31, 2007, we owned 81 U.S. patents and had licenses to 11 U.S. patents.  Additionally, we either owned or had exclusive rights to 36 pending U.S. patent applications.  Internationally, we owned 22 patents, and either owned or had exclusive rights to 18 pending patent applications, all of which are foreign counterparts of the U.S. cases.

 

We believe that our patents and pending patent applications are materially important to our business, but we do not believe that our business is dependent upon securing such patents.  We also operate under licenses from other owners of certain patents, patent applications, technology, trade secrets, know-how, copyrights, or trademarks.  We believe, however, that no single patent, patent application, technology, trade secret, know-how, copyright, trademark, or license is material in relation to our business as a whole.

 

Certain minor patents related to the locking mechanism in our inflation devices will expire in 2008 and other patents will expire thereafter.  We expect that related patents will continue to be valuable, in part because of proprietary innovations made since the issuance of our first patent.  In 1992, we were granted a license to use patented technology which we have incorporated into our inflation devices.  In return, we are paying a 5.75% ongoing royalty to the licensee, not to exceed $450,000 annually.  Royalties paid for such license in each of 2007, 2006 and 2005 were $450,000.  The license agreement will terminate upon the expiration or invalidation of the last related patents, which will expire in August, 2008.

 

While we have obtained U.S. patents and filed additional U.S. and foreign patent applications, there can be no assurance that any patents we hold will provide us with any significant competitive advantages, that third parties will not challenge our patents, or that patents owned by others will not have an adverse effect on our ability to conduct business.  We could incur substantial costs in preventing patent infringement, in curbing the unauthorized use of our proprietary technology by others, or in defending against similar claims of others.  Since we rely on trade secrets and proprietary know-how to maintain our competitive position, there can be no assurance that others may not independently develop similar or superior technologies.

 

We operate in an increasingly competitive medical technology marketplace.  There has also been substantial litigation regarding patent and other intellectual property rights in the medical device industry.  There are risks that our activities may require us to defend against claims and actions alleging infringement of the intellectual rights of others.  If a court rules against us in any patent litigation, any of several negative outcomes could occur: we could be subject to significant liabilities, we could be forced to seek licenses from third parties, or we could conceivably be prevented from marketing certain products.  Any of these outcomes could have a material adverse effect on our business.

 

We have also registered or applied for registration of several trade names or trademarks.  See “Products” above.  We have received 128 U.S. and foreign trademark registrations, and other U.S. and foreign trademark applications are currently pending.  We have registered copyrights relating to certain software used in our electronic inflation devices.

 

REGULATION

 

The U.S. Congress has passed the Federal Food, Drug, and Cosmetic Act (the “Food, Drug and Cosmetic Act”).  Under the Food, Drug and Cosmetic Act, and through its own rules, the U.S. Food and Drug Administration (“FDA”) regulates the development, testing, packaging, labeling, and marketing of medical devices and manufacturing procedures relating to these devices.  In general, the FDA requires that manufacturers adhere to certain standards designed to ensure the safety and effectiveness of medical devices.  We employ a Vice President of Regulatory Affairs and a Vice President of Quality Systems who are responsible for compliance with all applicable FDA regulations.  Although we believe that we are currently in material compliance with these requirements, any failure on our part to comply with all applicable current and future regulations could adversely affect our business.

 

The FDA’s Quality Systems Regulations define the requirements for our manufacturing processes, require the maintenance of certain records, and provide for unscheduled inspections of our facilities.  We must also comply with certain requirements of state, local, and foreign governments 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 promulgated by the FDA and similar regulatory requirements 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 approval by the FDA prior to marketing.  Products subject to Section 510(k) of the Food Drug and Cosmetic Act require FDA clearance prior to marketing.  To date, our products have required only compliance with Section 510(k).  Most of our products are subject to foreign regulatory approvals before they may be marketed abroad.  We place the “CE” mark on devices sold in Europe.  The CE mark represents that a product has met EU health, safety, and environmental requirements.  We have received ISO 13485 certification for our Utah and Texas facilities.  We have received EN ISO

 

 

7



 

13485 certification for our Galway, Ireland facility.  We have also received ISO 9001:2000 certification for our Merit Sensor Systems facility in South Jordan, Utah.

 

EMPLOYEES

 

As of December 31, 2007, we employed 1,515 people, including 1,137 in manufacturing; 143 in sales and marketing; 119 in engineering, research and development; and 116 in administration.

 

Many of our present employees are highly skilled.  Our failure or success will depend, in part, upon our ability to retain such employees.  We believe that an adequate supply of skilled employees is available.  We have, from time-to-time, experienced rapid turnover among our 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 replacement and new entry-level employees.  Our key employees are bound by agreements or policies of confidentiality.  None of our employees are represented by a union or other collective bargaining group.  We believe that our relations with our employees are generally good.

 

AVAILABLE INFORMATION

 

We file annual, quarterly and current reports and other information with the SEC.  These materials can be inspected and copied at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549.  Copies of these materials may also be obtained by mail at prescribed rates from the SEC’s Public Reference Room at the above address.  Information about the Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330.  The SEC also maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC.  The address of the SEC’s Internet site is www.sec.gov.

 

We make available, free of charge, on our Internet website, located at www.merit.com, our most recent Annual Report on Form 10-K, our most recent Quarterly Report on Form 10-Q, any current reports on Form 8-K filed since our most recent Annual Report on Form 10-K, and any amendments to such reports as soon as reasonably practicable following the electronic filing of such report with the SEC.  In addition, we provide electronic or paper copies of our filings free of charge upon request.

 

FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES

 

For financial information relating to our foreign and domestic sales, transfers between geographic areas, net income and identifiable assets, see Note 11 to our consolidated financial statements set forth in Item 8 of this report.

 

Item 1A.      Risk Factors.

 

Our business, operations, and financial condition are subject to certain risks and uncertainties.  Should one or more of these risks or uncertainties materialize, or should any underlying assumptions prove incorrect, our actual results will vary, and may vary materially from those anticipated, estimated, projected or expected.  Among the key factors that may have a direct bearing on our business, operations, or financial condition are the factors identified below:

 

We may be unable to protect our proprietary technology or may infringe on the proprietary technology of others.

 

Our ability to remain competitive is dependent, in part, upon our ability to prevent other companies from using our proprietary technology incorporated into our products.  We seek to protect our technology through a combination of patents, trademarks, and trade secrets, as well as licenses, proprietary know-how and confidentiality agreements.  We may be unable, however, to prevent others from using our proprietary information, or continue to use such information our self, for numerous reasons, including the following, any of which could have a material adverse effect on the Company’s business, operations, or financial condition:

 

·                  Our issued patents may not be sufficiently broad to prevent others from copying our proprietary technologies;

 

·                  Our issued patents may be challenged by third parties and deemed to be overbroad or unenforceable;

 

·                  Our products may infringe on the patents or other intellectual property rights of other parties, requiring us to alter or discontinue our manufacture or sale of such products;

 

·                  Costs associated with seeking enforcement of our patents against infringement, or defending our self against allegations of infringement, may be significant;

 

 

8



 

·                  Our pending patent applications may not be granted for various reasons, including over breadth or conflict with an existing patent; and

 

·                  Other persons may independently develop, or have developed, similar or superior technologies.

 

Termination or interruption of relationships with our suppliers, or failure of such suppliers to perform, could disrupt our business.

 

We rely on raw materials, component parts, finished products, and services supplied by outside third parties in connection with our business.  For example, substantially all of our products are sterilized by only a few different entities.  In addition, some of our products are manufactured or assembled by third parties.  If a supplier of significant raw materials, component parts, finished goods, or services were to terminate its relationship with us, or otherwise cease supplying raw materials, component parts, finished goods or services consistent with past practice, our ability to meet our obligations to our end customers may be disrupted.  A disruption with respect to numerous products, or with respect to a few significant products, could have a material adverse effect on our business, operations or financial condition.

 

Our products may be subject to recall or product liability claims.

 

Our products are used in connection with invasive procedures and in other medical contexts in which it is important that those products function with precision and accuracy.  If our products do not function as designed, or are designed improperly, we may choose to or be forced by regulatory agencies to withdraw such products from the market.  In addition, if medical personnel or their patients suffer injury as a result of any failure of our products to function as designed, or an inappropriate design, we could be subject to lawsuits seeking significant compensatory and punitive damages.  Any product recall or lawsuit seeking significant monetary damages may have a material adverse effect on our business, operations or financial condition.

 

We generally offer a limited warranty for product returns which are due to defects in quality and workmanship.  We attempt to estimate our potential liability for future product returns and establish reserves on our financial statements in amounts that we believe will be sufficient to address our warranty obligations; however, our actual liability for product returns may significantly exceed the amount of our reserves.  If we underestimate our potential liability for future product returns, or if unanticipated events result in returns or warranty obligations that exceed our historical experience, our financial condition and operating results could be materially and adversely affected.

 

We may be unable to successfully manage growth, particularly if accomplished through acquisitions.

 

Successful implementation of our business strategy will require that we effectively manage any associated growth.  To manage growth effectively, our management will need to continue to implement changes in certain aspects of our business, to improve our information systems and operations to respond to increased demand, to attract and retain qualified personnel, and to develop, train, and manage an increasing number of management-level and other employees.  Growth could place an increasing strain on our management, financial, product design, marketing, distribution and other resources, and we could experience operating difficulties.  Any failure to manage growth effectively could have a material adverse effect on our business, operations or financial condition.

 

To the extent that we grow through acquisition, we will face the additional challenges of integrating our current operations, culture, informational management systems and other characteristics with that of the acquired entity.  We may incur significant expenses in connection with negotiating and consummating one or more transactions, and we may inherit certain liabilities in connection with each acquisition.  In addition, we may not realize competitive advantages, synergies or other benefits anticipated in connection with such acquisition(s).  If we do not adequately identify targets for, or manage issues related to, our future acquisitions, such acquisitions may have a negative adverse effect on our business and financial results.

 

A significant adverse change in, or failure to comply with, governing regulations could adversely affect our business.

 

Substantially all of our products are “devices,” as defined in the U.S. Food, Drug and Cosmetic Act, and the manufacture, distribution, record keeping, labeling and advertisement of our products are subject to regulation by the United States Food and Drug Administration (the “FDA”) in the United States and its equivalent regulatory agencies in various foreign countries in which our products are manufactured, distributed, labeled, offered or sold.  Further, we are subject to continual review and periodic inspections at our current facilities with respect to the FDA’s Quality System Regulations and similar requirements of foreign countries.  In addition, we are subject to certain export control restrictions governed by the U.S. Department of the Treasury and may be governed by other regulatory agencies in

 

 

9



 

various foreign countries in which products are exported.  Our business, operations, or financial condition could be adversely affected if we are found to be out of compliance with governing regulations.

 

A significant portion of our revenues are derived from a few products, procedures and/or customers.

 

A significant portion of our revenues are attributable to sales of our inflation devices.  During the year ended December 31, 2007, sales of our inflation devices (including inflation devices sold in custom kits and through OEM channels) accounted for approximately 29% of our total revenues.  Sales of our inflation devices to a single OEM customer, representing our largest customer, is approximately 7% of our total sales.  Any material decline in market demand, or change in OEM supplier preference, for our inflation devices could have an adverse effect on our business, operations or financial condition.

 

In addition, the products that have accounted for a majority of our historical revenues are designed for use in connection with a few related medical procedures, including angioplasty, stent placement procedures, and spinal procedures.  If subsequent developments in medical technology or drug therapy make such procedures obsolete, or alter the methodology of such procedures so as to eliminate the usefulness of our products, we may experience a material decrease in demand for our products and experience deteriorating financial performance.

 

We may be unable to compete in our markets, particularly if there is a significant change in relevant practices and technology.

 

The market for each of our products is highly competitive.  We face competition from many companies which are larger, better established and have greater financial, technical and other resources and greater market presence than we do.  Such resources and market presence may enable our competition to more effectively market competing products or to market competing products at reduced prices in order to gain market share.

 

In addition, our ability to compete successfully is dependent, in part, upon our response to changes in technology and to our efforts to develop and market new products which achieve significant market acceptance.  Competing companies with substantially greater resources than us are actively engaged in research and development of new methods, treatments, drugs, and procedures to treat or prevent cardiovascular disease that could limit the market for our products and eventually make certain products obsolete.  A reduction in the demand for a significant number of our products, or a few key products, could have a material adverse effect on our business, operations or financial condition.

 

The market price of our common stock has been, and may continue to be, volatile.

 

The market price of our common stock has been, and may continue to be, volatile for various reasons, including the following, which could have a material adverse effect on our business, operations or financial condition:

 

·                  Our announcement of new products or technical innovations, or similar announcements by our competitors;

 

·                  Development of new procedures that use, or do not use, our technology;

 

·                  Quarter-to-quarter variances in our financial results;

 

·                  Claims involving potential infringement of patents and other intellectual property rights;

 

·                  Analysts’ and other projections or recommendations regarding our common stock or medical technology stocks generally;

 

·                  Any restatement of our financial statements or any investigation of us by the SEC, the FDA or another domestic or foreign regulatory authority; and

 

·                  A decline, or rise, of stock prices in the capital markets generally.

 

 

10



 

Fluctuations in Euro and GBP exchange rates may negatively impact our financial results.

 

Fluctuations in the rate of exchange between the Euro and GBP relative to the value of the U.S. Dollar could have a negative impact on our margins and financial results.  For example, during 2007, the exchange rate between the Euro and the U.S. Dollar resulted in an increase in our gross revenues of approximately $1.8 million and 0 12% in gross profit.

 

For the year ended December 31, 2007, approximately $22.8 million, or 11%, of our sales, were denominated in Euros and GBP.  If the rate of exchange between the Euro and the GBP declines, against the U.S. Dollar, we may not be able to increase the prices we charge our European customers for products whose prices are denominated in Euros and GBP.  Furthermore, we may be unable or elect not to enter into hedging transactions which could mitigate the effect of declining exchange rates.  As a result, if the rate of exchange between Euros and GBP declines, against the U.S. Dollar, our financial results may be negatively impacted.

 

We are dependent upon key personnel.

 

Our success is dependent on key management personnel, including Fred P. Lampropoulos, our Chairman of the Board, President and Chief Executive Officer.  Mr. Lampropoulos is not subject to any agreement prohibiting his departure, and we do not maintain key man life insurance on his life.  The loss of Mr. Lampropoulos, or of certain other key management personnel, could have a material adverse effect our business and operations.  Our success also depends on, among other factors, the successful recruitment and retention of key operating, manufacturing, sales and other personnel.

 

We are subject to work stoppage, transportation and related risks.

 

We manufacture products at various locations in the United States and international locations, and sell our products worldwide.  We depend on third-party transportation companies to deliver supplies necessary to manufacture our products from vendors to our various facilities and to move our products to customers, operating divisions, and other subsidiaries located worldwide.  Our manufacturing operations, and the operations of the transportation companies on which we depend, may be adversely affected by natural disasters or significant human events, such as a war, terrorist attack, riot, strike, slowdown or similar event.  Any disruption in our manufacturing or transportation could materially adversely affect our ability to meet customer demands or our operations.

 

Limits on reimbursement imposed by governmental and other programs may adversely affect our business.

 

The cost of a significant portion of medical care is funded by governmental, social security or other insurance programs.  Limits on reimbursement imposed by such programs may adversely affect the ability of hospitals and others to purchase our products.  In addition, limitations on reimbursement for procedures which utilize our products could adversely affect sales.

 

Item 1B.      Unresolved Staff Comments.

 

There are no outstanding SEC Staff comments.

 

Item 2.         Properties.

 

We own approximately 23 acres of real property situated in the city of South Jordan, Utah, surrounding an additional ten acres of leased real property on which our principal office and manufacturing facility is located.  We sold the ten-acre site to an unrelated developer in order to facilitate construction of such facility and entered into a 25-year lease agreement (beginning in 1995) to finance the new facility.  Monthly lease payments attributable to the ten-acre parcel are approximately $138,000.  We also hold an option to purchase the facility, exercisable at market value after 25 years.  During 2004, we acquired an additional four acres of property south of and adjacent to our main property in South Jordan, Utah.  During 2005, we acquired an additional seven acres of property just west of our current facility in South Jordan, Utah.  The acquisition of these additional properties will potentially enable us to expand our operations in the future as property surrounding our existing facilities is limited due to increased development over the past few years.

 

At the end of 2004, we completed construction of a 47,000 square foot manufacturing facility in South Jordan, Utah.  This facility is used for research, development and pilot production clean rooms and for production of sensors.  In the fourth quarter of 2007, our wholly-owned subsidiary, Merit Sensor Systems, Inc., relocated to our South Jordan campus for the anticipated purpose of long-term improvements in costs, quality, efficiency and capacity.

 

 

11



 

We completed a 140,000 square foot manufacturing facility located in South Jordan, Utah in September of 2005.  This facility is used for injection and insert molding production, an automated finished goods warehouse, and management information system employees.  The new facilities in South Jordan, Utah are designed to increase our clean room production capacity and administrative office space to meet current and projected demand that we anticipate we will experience over the next several years.

 

We own a building of approximately 65,000 square feet with approximately three acres of land, in Galway, County Galway, Republic of Ireland, which serves as our principal office and manufacturing facility for our European operations.  The facility houses a research and development team, which developed our diagnostic guide wire, and is working to develop other new products.  We also manufacture other products at the Galway facility.

 

We lease a manufacturing facility of approximately 52,000 square feet located in Murray, Utah.  The Murray facility is used for production of several of our products.  The leases related to seven of the units at the Murray facility expired in 2007.  Given the expiration of these leases, we  currently use the seven units on a month-to-month basis, and are currently negotiating extensions to those leases.  The aggregate lease payments on these Murray facilities are approximately $27,000 per month.

 

We own approximately 19 acres of land and a 75,000 square foot building in Angleton, Texas.  The facility is used for the production of catheter-related products.

 

We own approximately 12 acres of land and a 100,000 square foot building in Chester, Virginia.  The facility is used for production of custom procedure trays used in the medical industry.

 

We relocated our MCTec operations to a manufacturing facility of approximately 10,000 square feet located in Venlo, The Netherlands.  The facility is used for the coating of wires and tubing for medical devices.  The lease will expire in January of 2011.  The current monthly lease payment is approximately $7,000.  In addition, we purchased approximately three acres of land in Beek, The Netherlands and we have started construction of a 31,000 square foot European headquarters with customer service and a distribution center.

 

We believe that our existing and proposed facilities will generally be adequate for our present and future anticipated levels of operations.

 

Item 3.         Legal Proceedings.

 

In the course of conducting our business operations, we are, from time to time, involved in litigation and other disputes.  Our management does not currently anticipate that any pending litigation or dispute against us will have a materially adverse effect on our business, operations or financial condition.

 

Item 4.         Submission of Matters to a Vote of Security Holders.

 

No matters were submitted to a vote of our security holders during the fourth quarter of the year ended December 31, 2007.

 

 

12


 


 

PART II

 

Item 5.                           Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

 

MARKET PRICE FOR THE COMMON STOCK

 

Our common stock (the “Common Stock”) is traded on the NASDAQ National Market System under the symbol “MMSI.”  The following table sets forth high and low sale prices for the Common Stock for the periods indicated.

 

For the year ended December 31, 2007

 

High

 

Low

 

First Quarter

 

$

15.74

 

$

11.83

 

Second Quarter

 

$

13.41

 

$

10.89

 

Third Quarter

 

$

13.38

 

$

11.25

 

Fourth Quarter

 

$

16.50

 

$

12.36

 

 

For the year ended December 31, 2006

 

High

 

Low

 

First Quarter

 

$

15.00

 

$

11.90

 

Second Quarter

 

$

13.76

 

$

10.60

 

Third Quarter

 

$

14.74

 

$

12.42

 

Fourth Quarter

 

$

16.79

 

$

12.66

 

 

OUTSTANDING SHARES AND NUMBER OF SHAREHOLDERS

 

As of March 4, 2008, the number of shares of Common Stock outstanding was 27,566,163 held by approximately 178 shareholders of record, not including shareholders whose shares are held in securities position listings.

 

DIVIDENDS

 

We have never declared or paid cash dividends on the Common Stock.  We presently intend to retain any future earnings for use in our business and, therefore, do not anticipate paying any dividends on the Common Stock in the foreseeable future.  In addition, our revolving line of credit contains covenants prohibiting the declaration and distribution of a cash dividend at any time prior to the termination of such line of credit.

 

 

 

13



 

PERFORMANCE GRAPH

 

                The following graph compares the performance of the Common Stock with the performance of the NASDAQ Stock Market (US Companies) and NASDAQ Stocks (SIC 3840-3849 US Companies - Surgical, Medical and Dental Instruments and Supplies) for a five year period by measuring the changes in Common Stock prices from December 31, 2002 to December 31, 2007.

 

 

 

 

12/2002

 

12/2003

 

12/2004

 

12/2005

 

12/2006

 

12/2007

 

Merit Medical System Inc.

 

$

100

 

$

199

 

$

136

 

$

108

 

$

141

 

$

124

 

NASDAQ Stock Market (US Companies)

 

$

100

 

$

150

 

$

163

 

$

166

 

$

183

 

$

198

 

NASDAQ Stocks (SIC 3840-3849 US Companies)

 

$

100

 

$

146

 

$

171

 

$

188

 

$

199

 

$

255

 

 

The stock performance graph assumes for comparison that the value of the Common Stock and of each index was $100 on December 31, 2002 and that all dividends were reinvested.  Past performance is not necessarily an indicator of future results.

 

 

14



 

SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS

 

The following table contains information regarding our equity compensation plans as of December 31, 2007 (in thousands):

 

Plan category

 

Number of securities to be issued upon exercise of outstanding options, warrants and rights
(a)

 

Weighted-average exercise price of outstanding options, warrants and rights
(b)

 

Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a) )
(c)

 

Equity compensation Plans approved by security holders

 

3,951

(1),(3)

$

11.34

 

1,558

(2),(3)

Equity compensation Plans not approved by security holders

 

100

(4)

$

10.13

 

 

 

Total

 

4,051

 

$

11.31

 

1,558

 


(1)          Consists of 3,950,975 shares of Common Stock subject to the options granted under the Merit Medical Systems, Inc. 2006 Long Term Incentive Plan.

 

(2)          Consists of 379,587 shares available to be issued under the Merit Medical Systems, Inc. Qualified and Non-Qualified Employee Stock Purchase Plan and 1,178,889 shares available to be issued under the Merit Medical Systems, Inc. 2006 Long Term Incentive Plan.

 

(3)          See Note 10 to our consolidated financial statements set forth in Item 8 of this report for additional information regarding these plans.

 

(4)          Consists of warrants issued in the acquisition of MedSource Packaging Concepts LLC (“MedSource”) in 2004.

 

 

15



 

Item 6.                          Selected Financial Data  (in thousands).

 

 

 

Years Ended December 31,

 

 

 

2007

 

2006

 

2005

 

2004

 

2003

 

OPERATING DATA:

 

 

 

 

 

 

 

 

 

 

 

Net Sales

 

$

207,768

 

$

190,674

 

$

166,585

 

$

151,398

 

$

135,953

 

Cost of Sales

 

127,977

 

117,596

 

97,493

 

83,908

 

75,230

 

Gross Profit

 

79,791

 

73,078

 

69,092

 

67,490

 

60,723

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Expenses:

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

48,133

 

45,486

 

38,579

 

35,071

 

30,468

 

Research and development

 

8,688

 

8,582

 

6,992

 

5,079

 

4,626

 

 

 

 

 

 

 

 

 

 

 

 

 

Total operating expenses

 

56,821

 

54,068

 

45,571

 

40,150

 

35,094

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Operating Income

 

 

 

 

 

 

 

 

 

 

 

Gain on sale of land

 

 

 

 

 

 

 

 

 

508

 

 

 

 

 

 

 

 

 

 

 

 

 

Income From Operations

 

22,970

 

19,010

 

23,521

 

27,340

 

26,137

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Income(Expense):

 

 

 

 

 

 

 

 

 

 

 

Litigation settlement

 

 

 

 

 

 

 

100

 

475

 

Interest income

 

393

 

250

 

491

 

556

 

386

 

Interest expense

 

(3

)

(12

)

(18

)

(6

)

(10

)

Miscellaneous income (expense)

 

39

 

(64

)

(94

)

16

 

34

 

Other income—net

 

429

 

174

 

379

 

666

 

885

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

23,399

 

19,184

 

23,900

 

28,006

 

27,022

 

 

 

 

 

 

 

 

 

 

 

 

 

Income Tax Expense

 

7,811

 

6,883

 

8,122

 

10,074

 

9,727

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income

 

$

15,588

 

$

12,301

 

$

15,778

 

$

17,932

 

$

17,295

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings Per Common Share:

 

 

 

 

 

 

 

 

 

 

 

Diluted

 

$

0.55

 

$

0.44

 

$

0.57

 

$

0.65

 

$

0.64

 

 

 

 

 

 

 

 

 

 

 

 

 

Average Common Shares:

 

 

 

 

 

 

 

 

 

 

 

Diluted

 

28,204

 

28,245

 

27,847

 

27,691

 

27,034

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE SHEET DATA:

 

 

 

 

 

 

 

 

 

 

 

Working capital

 

$

60,194

 

$

54,972

 

$

43,693

 

$

54,944

 

$

56,931

 

Total assets

 

200,420

 

182,668

 

162,247

 

139,877

 

107,301

 

Long-term debt

 

0

 

0

 

2

 

5

 

0

 

Stockholders’ equity

 

$

164,368

 

$

151,212

 

$

132,484

 

$

111,052

 

$

88,244

 

 

During the quarter ended December 31 2006, we determined it was not likely that we would pursue the product associated with the intellectual property and assets acquired from Sub-Q, due to other priorities and opportunities.  Therefore, we recorded an impairment charge of approximately $929,000, during the quarter primarily relating to intellectual property assets acquired from Sub-Q Inc. in March, 2005.

 

During the quarter ended December 31, 2005, we adopted Statement of Financial Accounting Standards (“SFAS”) No. 151, Inventory Costs and recorded additional expenses to cost of sales of $415,000, research and development expense of $83,000 and selling, general and administrative expense of $37,000.

 

During the year ended December 31, 2004, we accrued severance costs totaling approximately $663,000 related to the termination of certain executive employees.

 

 

16



 

Item 7.         Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

OVERVIEW

 

During 2007, we made substantial progress in the Company’s financial condition, particularly our net income which increased 26.7%, compared to the same period of 2006.  This improvement was largely the result of an increase in sales in 2007 of 9%, a slight increase in gross margins, a decrease in our operating expenses as a percentage of sales by 1.1%, and an improvement of 2.5% in our effective income tax rate, when compared to the operating results for the same period in 2006.  For the first time in three years, our net income and gross margins improved when compared to the same period in the prior year.  Our focus in 2007, on reducing costs and becoming more efficient, has started to make a difference in gross margin improvements.  We have had three consecutive quarters of gross margin improvement, which is up 2.8% of sales since the first quarter of 2007.  During 2007, we improved our gross margins, principally through improved production efficiencies which resulted in lower headcount, improved product mix, the transfer of the manufacturing process of four products to Mexico, and certain automation projects.  Management believes future improvement in profitability will be driven by increases in gross margins.  During 2008, we plan to transfer one additional product line to Mexico, continue to implement new automation and efficiency projects and focus our sales efforts on a product mix with higher gross margins, including the introduction of several new high margin products.

 

For the year ended December 31, 2007, we reported net sales of $207.8 million, up $17.1 million or 9% over the comparable period in 2006.  Net sales growth in 2007 was primarily driven by increased sales of our stand-alone products (hemostasis valves, safety scalpels, and stopcocks), procedure tray business, catheters (particularly our Prelude® sheath product line, Mini Access Kit™ catheter product line and Resolve® locking drainage catheter line) and ProGuide™ dialysis catheters.

 

Our gross margins as a percentage of sales were 38.4% for the year ended December 31, 2007, compared to 38.3% for year ended December 31, 2006.  This slight increase resulted primarily from items discussed above.

 

Net income increased for the year ended December 31, 2007 to $15.6 million, compared to $12.3 million for the prior year period.  When compared to the prior year, net income for the year ended December 31, 2007 was positively affected by increased sales volumes, higher gross margins, lower operating expenses as a percentage of sales, and a lower effective income tax rate.

 

RESULTS OF OPERATIONS

 

The following table sets forth certain operational data as a percentage of sales for the periods indicated:

 

 

 

2007

 

2006

 

2005

 

Sales

 

100.0

%

100.0

%

100.0

%

Gross profit

 

38.4

 

38.3

 

41.5

 

Selling, general and administrative expenses

 

23.2

 

23.9

 

23.2

 

Research and development expenses

 

4.2

 

4.5

 

4.2

 

Income from operations

 

11.1

 

10.0

 

14.1

 

Income before income tax expense

 

11.3

 

10.1

 

14.3

 

Net income

 

7.5

 

6.5

 

9.5

 

 

Our net sales increased by $17.1 million, or 9%, in 2007, compared to an increase of $24.1 million, or 14.5%, in 2006, and an increase of $15.2 million, or 10%, in 2005.  We report sales in four product categories.  Listed below are the sales relating to these product categories for the years ended December 31, 2007, 2006 and 2005:

 

 

 

Twelve Months Ended
December  31,

 

 

 

% Change

 

2007

 

% Change

 

2006

 

% Change

 

2005

 

2004

 

Stand-alone devices

 

12%

 

$

62,417

 

19%

 

$

55,824

 

8%

 

$

46,900

 

$

43,226

 

Custom kits & procedure trays

 

7%

 

60,013

 

15%

 

56,009

 

15%

 

48,740

 

42,533

 

Inflation devices

 

5%

 

59,595

 

9%

 

56,978

 

5%

 

52,319

 

49,672

 

Catheters

 

18%

 

25,743

 

17%

 

21,863

 

17%

 

18,626

 

15,967

 

Total

 

9%

 

$

207,768

 

14%

 

$

190,674

 

10%

 

$

166,585

 

$

151,398

 

 

 

17



 

                Our sales increased during 2007, notwithstanding the fact that the markets for many of our products are experiencing slight pricing declines as our customers try to reduce their costs.  Substantially all of the increase in our revenues was attributable to increased unit sales, except for a slight increase in revenues attributable to an increase in the exchange rate between the Euro and the U.S. Dollar which increased sales by 0.9% in 2007 compared to 2006, 0.1% in 2006 compared to 2005, 0.9% in 2005 compared to 2004.  Historically, an important part of the Company’s revenue growth came from increases in the number of procedures performed for patients in a given year.  Starting in April of 2007, the growth rate of coronary stents and other related procedures in the U.S. dropped significantly, reducing the traditional growth rate of our U.S. direct sales.  New products are another source of revenue growth.  In 2007, 2006, and 2005, our sales of new products represented 6%, 9% and 4% of sales, respectively.  Included in those sales are revenues from recent acquisitions of 3%, 3% and 2% for 2007, 2006, and 2005, respectively.  The third main source of revenue increases came from market share gains in our existing product lines.

 

International sales in 2007 were approximately $64.9 million, or 31% of total sales; international sales in 2006 were approximately $53.7 million, or 28% of total sales; international sales in 2005 were approximately $45.3 million, or 26% of total sales.  These increases primarily resulted from greater acceptance of our products in international markets, ongoing growth in our European direct sales, and increased sales related to improvement in the exchange rate between the Euro and the U.S. Dollar, as discussed above.  Our total direct sales in France, Germany, the U.K., Belgium, The Netherlands, Denmark, Sweden and Ireland were $23.8 million, $20.0 million, and $20.0 million in 2007, 2006, and 2005, respectively.

 

Our gross profit as a percentage of sales was 38.4%, 38.3%, and 41.5%, in 2007, 2006, and 2005, respectively.  The increase in gross margins in 2007 was principally the result of production efficiencies resulting in lower headcount, product mix improvement, the transfer of the manufacturing process of four products to Mexico, and certain automation projects.  The decline in gross margins in 2006 resulted primarily from investments made during the second half of 2005 for new facilities and related costs (i.e. utilities, maintenance, cleaning and taxes) and equipment. Gross margins in 2006 were also affected by the increased cost of direct labor, increased health insurance costs, our adoption of Statement of Financial Accounting Standard No. 123(R), Share-Based Payment, (“SFAS No. 123(R)”), effective January 1, 2006, and increased procedure tray sales in 2006, which have lower gross margins than our overall gross margins.  The decline in gross margins in 2005 resulted primarily from the expense of constructing new facilities and purchasing equipment, increased cost of direct labor, higher overhead expenses (i.e. utilities, maintenance, cleaning and taxes) and new product launches.  The decline in gross margins for 2005 was also affected by negative margins in the new procedure tray business we acquired from MedSource during the fourth quarter of 2004.  The effect was a reduction of gross margins by 1.4% for 2005.  Sales of procedure trays contributed 2.4% to our total sales for 2005.

 

Our selling, general, and administrative expenses increased $2.6 million, or 6%, in 2007 over 2006; $6.9 million, or 18%, in 2006 over 2005; $3.5 million, or 10%, in 2005 over 2004.  The significant (70 basis points) decrease in selling, general and administrative expenses in 2007 as a percentage of sales, was primarily the result of operating leverage from reducing the head count while increasing sales.  The increase in selling, general, and administrative costs in 2006 as a percentage of sales, was primarily the result of a full year of costs associated with the hiring of 17 additional sales representatives in the second half of 2005, approximately $945,000 attributable to the adoption of SFAS No. 123(R) and an impairment charge of approximately $929,000, primarily relating to intellectual property assets acquired from Sub-Q Inc. in March 2005.  The increase in selling, general, and administrative expenses in 2005 as a percentage of sales, compared to 2004, was due primarily to the hiring of 17 additional sales people and the sample expense related to new product introductions, costs associated with severance for certain executive employees in the amount of $493,000, and the buy-out of a distribution agreement in the amount of $200,000.

 

We have begun to see operating leverage (30 basis points) in our research and development (“R&D”) expenses.  We have a full pipeline of new products and management believes that we have an effective level of capabilities and expertise to continue the flow of new organically developed products into the near-term future.  Our R&D expense for 2007 increased 1% to $8.7 million, compared to $8.6 million in 2006; R&D expenses for 2006 increased 23% to $8.6 million, compared to $7.0 million in 2005; and R&D expenses for 2005 increased 38% to $7.0 million, compared to $5.1 million for 2004.  The increase in R&D expenses in 2007, 2006, and 2005 was related primarily to R&D head count additions and indirect costs to support an increase in the number of new products we launched.  Our R&D expenses as a percentage of sales were 4.2% for 2007, 4.5% for 2006 and 4.2% for 2005.

 

Our effective income tax rates for 2007, 2006, and 2005 were 33%, 36%, and 34%, respectively.   The decrease in the  effective tax rate for 2007 over 2006 was primarily the result of the unrecognized tax benefits, related to Financial Accounting Standards Board Interpretation (“FIN”) No. 48, Accounting for Uncertainty in Income Taxes, which expired on our 2002 federal, state, and foreign tax returns and a non-taxed gain related to corporate-owned variable life insurance contracts for our deferred compensation plan.  The increase in the effective tax rate for 2006 over 2005 and the decrease in the effective tax rate for 2005 over 2004 was primarily the result of our reimbursement of costs incurred by our Irish subsidiary for the development of two new products which are taxed at a lower income tax rate than our U.S. operations.

 

 

18



 

Our other income for 2007, 2006, and 2005 was approximately $429,000, $174,000, and $379,000, respectively.  The increase in other income for 2007 over 2006 was primarily the result of an increase in interest income as the result of higher average cash balances and higher interest rates.  The decrease in other income for 2006 over 2005 was primarily the result of a decrease in cash balances and therefore interest income of approximately $241,000.  The decrease in other income for 2005 over 2004 was affected by a net decrease in a litigation settlement of $100,000, an increase in foreign currency transaction loss of approximately $67,000 and a decrease in interest income of approximately $65,000.

 

Our net income for 2007, 2006, and 2005 was approximately $15.6 million, $12.3 million and $15.8 million, respectively.  Net income for 2007 was positively affected by increased sales volumes, higher gross margins, lower operating expenses as a percentage of sales and a lower effective income tax rate.  Net income for 2006 and 2005 was negatively affected by lower gross margins, higher research and development spending, increased selling, general and administrative expenses, and positively affected by increased sales volumes.

 

Under SFAS No. 123(R), which we adopted effective January 1, 2006, we are required to apply the expense recognition provisions of this pronouncement to equity-based incentives such as stock options.  In anticipation of this pronouncement, during 2005 and 2004 we made grants of options to management and employees for a total of 774,976 and 807,296 shares of Common Stock, respectively, which vested immediately upon grant, rather than over five years as had been our historical practice.  Additionally, subsequent to December 31, 2005, we accelerated the vesting on 427,448 options with an exercise price of $21.67, which was in excess of the current market price.  The immediate vesting of options and the acceleration of options which have exercise prices that are above the current market value of the Common Stock are anticipated to reduce our compensation expense by approximately $2.8 million and $3.2 million, respectively, over the next four years under the provisions of SFAS No. 123(R).

 

Under SFAS No. 142, Goodwill and Other Intangible Assets (“SFAS No. 142”), which we adopted effective January 1, 2002, we no longer amortize goodwill from business acquisitions, but review annually the impairment of goodwill, or more frequently if impairment indicators arise.  We completed our initial testing of goodwill as of January 1, 2002 and determined that there was no impairment.  We have elected to perform our annual testing of goodwill impairment as of July 1 of the applicable fiscal year.  As of July 1, 2006, we updated our testing of goodwill for impairment and determined that there was no impairment.  However, during the fourth quarter of 2006, we determined that it was unlikely we would pursue the product associated with the intellectual property acquired from Sub-Q due to our decision to pursue other priorities and opportunities that we believe are more favorable to us.  Therefore, we recorded an impairment charge of approximately $929,000 in selling, general and administrative expense for 2006, which included approximately $500,000 related to goodwill.  We had no impairments in goodwill for the years ended December 31, 2007 and 2005.  The remaining unamortized amount of goodwill at December 31, 2007, was approximately $9.5 million.

 

LIQUIDITY AND CAPITAL RESOURCES

 

Capital Commitments and Contractual Obligations

 

The following table summarizes our capital commitments and contractual obligations as of December 31, 2007, including operating lease payments and office lease payments, as well as the future periods in which such payments are currently anticipated to become due:

 

 

 

Payment due by period (in thousands)

 

Contractual Obligations

 

Total

 

Less than 1 Year

 

1-3 Years

 

4-5 Years

 

After 5 Years

 

Unrecognized tax positions

 

1,023

 

1,023

 

 

 

 

 

 

 

Operating leases

 

21,079

 

2,088

 

3,872

 

3,352

 

11,767

 

Royalty obligations

 

1,874

 

644

 

388

 

388

 

454

 

Total contractual cash

 

23,976

 

3,755

 

4,260

 

3,740

 

12,221

 


(1)  The Internal Revenue Service has proposed certain adjustments which will reverse the timing of certain temporary deductions.  Settlement of these proposed adjustments could result in additional tax payments within the next 12 months of which approximately $1.0 million relates to FIN 48 unrecognized tax positions.  The Company does not currently expect this settlement to have a material impact on financial position for 2008 as these tax adjustments relate to timing differences for income tax liabilities already recognized in our financial statements.  The Company has approximately

 

 

19



 

$2.6 million of unrecognized tax positions that have been recognized as liabilities in accordance with FIN 48 that have not be included in the contractual obligations table due to uncertainty as to when such amounts may be settled.

 

Additional information regarding our capital commitments and contractual obligations, including royalty payments, is contained in notes 7, 8, and 12 of the Notes to our consolidated financial statements, set forth in Item 8.

 

Cash Flows

 

The Company’s cash flow from operations reached a record $32.1 million in 2007, the increase, of $13 million over 2006, came mostly from a reduction in inventories and an increase in net income.  Our working capital for 2007, 2006, and 2005 was $60.2 million, $55.0 million, and $43.7 million, respectively.  The increase in working capital for 2007 over 2006 was primarily the result of an increase in cash net of  the reduction in inventory of $4.5 million as we focused on improving our inventory turns.  The increase in working capital for 2006 over 2005 was primarily the result of an increase in cash flow from operations of $8.0 million and a reduction in the amount of capital expenditures made, when compared to 2005.  The decrease in working capital for 2005 over 2004 was primarily the result of cash being used to fund the construction of our new facilities in South Jordan, Utah, and Galway, Ireland; the purchase and remodel of our facility in Chester, Virginia; and the acquisitions of MCTec, MedSource and Sub-Q.  We generated cash from operations for 2007, 2006, and 2005 in the amount of $32.1 million, $19.1 million, and $11.1 million, respectively.

 

On December 7, 2006, we entered into an unsecured loan agreement with Bank of America, N.A. (the “Bank”), whereby the Bank agreed to provide us a line of credit in the amount of $30,000,000.  Prior to December 7, 2006, the Company maintained a long-term revolving credit facility (the “Facility”) with Zion’s First National Bank (“Zion’s”).  The Facility had a credit limit of $500,000 for years 2005 and 2006.  The Facility expired on June 30, 2006.  On December 8, 2006, we entered into an unsecured loan agreement with Zion’s, whereby the Bank agreed to provide us a line of credit in the amount of $1,000,000.   We had $0 outstanding under our lines of credit as of December 31, 2007 and 2006.

 

Historically, we have incurred significant expenses in connection with product development and introduction of new products.  Substantial capital has also been required to finance the increase in our receivables and inventories associated with our increased sales.  During 2007, we spent approximately $9.4 million on various production equipment related to automation and new product launches, approximately $3.0 million for construction costs on a new customer service and distribution facility for our European operations in The Netherlands and $2 million for improvements made to a production clean room in South Jordan, Utah.  During 2006, we spent approximately $9.6 million for various production equipment, approximately $2.1 million on building and leasehold improvements, and approximately $1.7 million on the purchase real estate in The Netherlands to build a distribution facility.  During 2005, we paid approximately $14.6 million for payments to complete the construction of our new molding, technology and logistics (“MTL”) building and cafeteria expansion in South Jordan, Utah.  In addition, during 2005, we spent approximately $4.7 million to purchase a 102,000 square foot facility and add a clean room to our facility in Chester, Virginia, and approximately $1.5 million to purchase seven acres of land just west of our current South Jordan, Utah facilities.  Also during 2005, we made significant investments were made for new equipment including approximately $1.8 million in molding equipment, approximately $3.4 million for an automated warehouse shipping system, and approximately $2 million for automated production equipment.  Our principal source of funding for these and other expenses has been cash generated from operations, sales of equity, and bank lines of credit.  We currently believe that our present sources of liquidity and capital are adequate for current operations and for the foreseeable future.

 

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

 

The SEC has requested that all registrants address their most critical accounting policies.  The SEC has indicated that a “critical accounting policy” is one which is both important to the representation of the registrant’s financial condition and results and requires management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.  We base our estimates on past experience and on various other assumptions our management believes to be reasonable under the circumstances, the results of which form the basis for making judgments about carrying values of assets and liabilities that are not readily apparent from other sources.  Actual results will differ, and may differ materially from these estimates under different assumptions or conditions.  Additionally, changes in accounting estimates could occur in the future from period to period.  Our management has discussed the development and selection of our most critical financial estimates with the audit committee of our Board of Directors.  The following paragraphs identify our most critical accounting policies:

 

Inventory Obsolescence Reserve Our management reviews on a regular basis inventory quantities on hand for unmarketable and/or slow-moving products that may expire prior to being sold.  This review of inventory quantities for unmarketable and/or slow moving products is based on estimates of forecasted product demand prior to expiration lives.  If market conditions become less favorable than those projected by our management, additional inventory write-

 

20



 

downs may be required.  We believe that the amount included in our obsolescence reserve has been a historically accurate estimate of the unmarketable and/or slow moving products that may expire prior to being sold.  Our obsolescence reserve was approximately $2.3 million as of December 31, 2007.

 

Allowance for Doubtful Accounts A majority of our receivables are with hospitals which, over our history, have demonstrated favorable collection rates.  Therefore, we have experienced relatively minimal bad debts from hospital customers.  In limited circumstances we have written off minimal bad debts as the result of the termination of foreign distributors.  The most significant write-offs over our history have come from U.S. packers who bundle our products in surgical trays.

 

We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments.  The allowance is based upon historical experience and a review of individual customer balances.  If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.  Our bad debt reserve was $496,710 at December 31, 2007 which is consistent with historical collection experience.

 

Stock-Based Compensation.  We account for stock-based compensation in accordance with SFAS No. 123(R), Share-Based Payment.  Under the fair value recognition provisions of this statement, we measure share-based compensation cost at the grant date based on the value of the award and recognize the cost as an expense over the term of the vesting period.  Judgment is required in estimating the amount of share-based awards that are expected to be forfeited.  If actual results differ significantly from these estimates, stock-based compensation expense and our results of operations could be materially impacted.

 

Income Taxes.   We adopted the provisions of FIN 48 effective January 1, 2007. Under FIN 48, tax positions shall initially be recognized in the financial statements when it is more likely than not the position will be sustained upon examination by the tax authorities.  Such tax positions shall initially and subsequently be measured as the largest amount of tax benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the tax authorities assuming full knowledge of the position and all relevant facts.  Although we believe our provisions for FIN 48 unrecognized tax positions are reasonable, we can make no assurance that the final tax outcome of these matters will not be different from that which we have reflected in our income tax provisions and accruals.  The tax law is subject to varied interpretations, and we have taken positions related to certain matters where the law is subject to interpretation.  Such differences could have a material impact on our income tax provisions and operating results in the period(s) in which we make such determination.

 

Item 7A.                 Quantitative and Qualitative Disclosure About Market Risk.

 

Our principal market risk relates to changes in the value of the Euro and Great Britain Pound (“GBP”) relative to the value of the U.S. Dollar.  Our consolidated financial statements are denominated in, and our principal currency is, the U.S. Dollar.  A portion of our revenues ($22.8 million, representing approximately 11% of aggregate revenues), for the year ended December 31, 2007 was attributable to sales that were denominated in Euros and GBPs.  Certain  expenses are also denominated in Euros and GBPs, which partially offsets risks associated with fluctuations of exchanges rates between the Euro and GBP on the one hand, and the U.S. Dollar on the other hand.  Because of our Euro and GBP-denominated revenues and expenses, in a year in which our Euro and GBP-denominated revenues exceed our Euro and GBP-based expenses, the value of such Euro and GBP-denominated net income increases if the value of the Euro and GBP increase relative to the value of the U.S. Dollar, and decreases if the value of the Euro and GBP decrease relative to the value of the U. S. Dollar.  During the year ended December 31, 2007, the exchange rate between the Euro and GBP against the U.S. Dollar resulted in an increase of our gross revenues of approximately $1.8 million and 0.12%  in gross profit.

 

At December 31, 2007, we had a net exposure representing the difference between Euro and GBP denominated receivables and Euro and GBP denominated payables of approximately 395,000 Euros and 225,000 GBPs, respectively.  In order to partially offset such risks, on November 30, 2007, we entered into 30-day forward contract for Euro and GBP.  We generally enter into similar economic transactions at various times during the year to partially offset exchange rate risks we bear throughout the year.  During the years ended December 31, 2007 and 2006, we experienced a net gain of approximately $29,000 and a net loss of $56,000, respectively, from financing transactions executed during 2007 and 2006 in an effort to limit our exposure to fluctuations in the Euro and GBP against the U.S. Dollar exchange rate.  We do not purchase or hold derivative financial instruments for speculative or trading purposes.

 

Another market risk relates to variable rate debt.  As of December 31, 2007, we had no variable rate debt.  As long as we do not have variable rate debt, our interest expense would not be affected by changes in interest rates.

 

 

21



 

Item 8.                          Financial Statements and Supplementary Data.

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

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 (the “Company”) as of December 31, 2007 and 2006, and the related consolidated statements of income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2007.  Our audits also included the financial statement schedule listed in the Index at Item 15.  These financial statements and financial statement schedule are the responsibility of the Company’s management.  Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  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 Company as of December 31, 2007 and 2006, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2007, in conformity with accounting principles generally accepted in the United States of America.  Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

 

As discussed in Note 1 to the financial statements, in 2006, the Company changed its method of accounting for stock-based compensation to conform to Statement of Financial Accounting Standards (“SFAS”) No. 123 (revised 2004), Share-Based Payment -  SFAS No. 123(R).

 

Also, as discussed in Note 1 to the financial statements, in 2007 the Company changed its method of accounting for uncertain tax positions to conform with Financial Accounting Interpretation (“FIN”) No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”).

 

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2007, based on the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 10, 2008, expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

 

/s/ Deloitte & Touche LLP

 

Salt Lake City, Utah
March 10, 2008

 

 

22


 


 

MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 2007 AND 2006

(In thousands)

 

 

 

2007

 

2006

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

Cash and cash equivalents

 

$

17,574

 

$

9,838

 

Trade receivables — net of allowance for uncollectible accounts —

 

 

 

 

 

2007 — $497 and 2006 — $560

 

26,619

 

25,745

 

Employee receivables

 

144

 

194

 

Other receivables

 

1,140

 

192

 

Inventories — net

 

34,106

 

38,562

 

Prepaid expenses and other assets

 

1,297

 

1,031

 

Deferred income tax assets

 

811

 

2

 

Income tax refund receivable

 

297

 

82

 

 

 

 

 

 

 

Total current assets

 

81,988

 

75,646

 

 

 

 

 

 

 

PROPERTY AND EQUIPMENT:

 

 

 

 

 

Land and land improvements

 

7,977

 

7,935

 

Buildings

 

43,147

 

43,111

 

Manufacturing equipment

 

61,448

 

54,400

 

Furniture and fixtures

 

17,110

 

15,910

 

Leasehold improvements

 

9,870

 

7,699

 

Construction-in-progress

 

10,680

 

7,313

 

 

 

 

 

 

 

Total property and equipment

 

150,232

 

136,368

 

 

 

 

 

 

 

Less accumulated depreciation

 

(50,536

)

(43,985

)

 

 

 

 

 

 

Property and equipment — net

 

99,696

 

92,383

 

 

 

 

 

 

 

OTHER ASSETS:

 

 

 

 

 

Intangibles — net of accumulated amortization — 2007 — $2,171 and 2006 — $1,519

 

6,163

 

4,350

 

Goodwill

 

9,527

 

7,541

 

Other assets

 

2,964

 

2,656

 

Deferred income tax assets

 

4

 

2

 

Deposits

 

78

 

90

 

 

 

 

 

 

 

Total other assets

 

18,736

 

14,639

 

 

 

 

 

 

 

TOTAL

 

$

200,420

 

$

182,668

 

 

 

 

 

 

 

See notes to consolidated financial statements.

 

 

 

(Continued)

 

 

 

23



 

 

MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 2007 AND 2006

(In thousands)

 

 

 

2007

 

2006

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

Trade payables

 

$

10,275

 

$

10,598

 

Accrued expenses

 

9,492

 

8,464

 

Advances from employees

 

267

 

245

 

Deferred income tax liabilities

 

 

 

190

 

Liabilities related to unrecognized tax positions

 

1,023

 

 

 

Income taxes payable

 

737

 

1,177

 

 

 

 

 

 

 

Total current liabilities

 

21,794

 

20,674

 

 

 

 

 

 

 

DEFERRED INCOME TAX LIABILITIES

 

6,082

 

5,469

 

 

 

 

 

 

 

LIABILITIES RELATED TO UNRECOGNIZED TAX POSITIONS

 

2,588

 

 

 

 

 

 

 

 

 

DEFERRED COMPENSATION PAYABLE

 

3,063

 

2,869

 

 

 

 

 

 

 

DEFERRED CREDITS

 

2,105

 

2,239

 

 

 

 

 

 

 

OTHER LONG-TERM OBLIGATIONS

 

420

 

205

 

 

 

 

 

 

 

Total liabilities

 

36,052

 

31,456

 

 

 

 

 

 

 

COMMITMENTS AND CONTINGENCIES (Notes 2, 7, 8, and 12)

 

 

 

 

 

 

 

 

 

 

 

STOCKHOLDERS’ EQUITY:

 

 

 

 

 

Preferred stock — 5,000 shares authorized as of December 31, 2007 and 2006; no shares issued Common stock, no par value — 50,000 shares authorized; 27,413 and 27,647 issued shares as of December 31, 2007 and 2006, respectively

 

52,477

 

54,394

 

Retained earnings

 

111,947

 

96,969

 

Accumulated other comprehensive loss

 

(56

)

(151

)

 

 

 

 

 

 

Total stockholders’ equity

 

164,368

 

151,212

 

 

 

 

 

 

 

TOTAL

 

$

200,420

 

$

182,668

 

 

 

 

 

 

 

 

 

See notes to consolidated financial statements.

 

 

 

(Concluded)

 

 

 

24



 

MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

YEARS ENDED DECEMBER 31, 2007, 2006, AND 2005

(In thousands except per share data)

 

 

 

2007

 

2006

 

2005

 

 

 

 

 

 

 

 

 

NET SALES

 

$

207,768

 

$

190,674

 

$

166,585

 

 

 

 

 

 

 

 

 

COST OF SALES

 

127,977

 

117,596

 

97,493

 

 

 

 

 

 

 

 

 

GROSS PROFIT

 

79,791

 

73,078

 

69,092

 

 

 

 

 

 

 

 

 

OPERATING EXPENSES:

 

 

 

 

 

 

 

Selling, general, and administrative

 

48,133

 

45,486

 

38,579

 

Research and development

 

8,688

 

8,582

 

6,992

 

 

 

 

 

 

 

 

 

Total operating expenses

 

56,821

 

54,068

 

45,571

 

 

 

 

 

 

 

 

 

INCOME FROM OPERATIONS

 

22,970

 

19,010

 

23,521

 

 

 

 

 

 

 

 

 

OTHER INCOME (EXPENSE):

 

 

 

 

 

 

 

Interest income

 

393

 

250

 

491

 

Interest expense

 

(3

)

(12

)

(18

)

Other income (expense)

 

39

 

(64

)

(94

)

 

 

 

 

 

 

 

 

Other income — net

 

429

 

174

 

379

 

 

 

 

 

 

 

 

 

INCOME BEFORE INCOME TAXES

 

23,399

 

19,184

 

23,900

 

 

 

 

 

 

 

 

 

INCOME TAX EXPENSE

 

7,811

 

6,883

 

8,122

 

 

 

 

 

 

 

 

 

NET INCOME

 

$

15,588

 

$

12,301

 

$

15,778

 

 

 

 

 

 

 

 

 

EARNINGS PER COMMON SHARE:

 

 

 

 

 

 

 

Basic

 

$

0.57

 

$

0.45

 

$

0.59

 

 

 

 

 

 

 

 

 

Diluted

 

$

0.55

 

$

0.44

 

$

0.57

 

 

 

 

 

 

 

 

 

AVERAGE COMMON SHARES:

 

 

 

 

 

 

 

Basic

 

27,424,686

 

27,333,146

 

26,848,447

 

 

 

 

 

 

 

 

 

Diluted

 

28,204,235

 

28,244,948

 

27,847,122

 

 

See notes to consolidated financial statements.

 

25



 

 

MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

YEARS ENDED DECEMBER 31, 2007, 2006, AND 2005

(In thousands)

 

 

 

Total

 

Common Stock

 

Retained Earnings

 

Accumulated Other
Comprehensive Loss

 

Shares

 

Amount

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE — January 1, 2005

 

$

111,052

 

26,486

 

$

42,560

 

$

68,890

 

$

(398

)

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

Net income

 

15,778

 

 

 

 

 

15,778

 

 

 

Foreign currency translation adjustment (net of deferred tax of $10)

 

16

 

 

 

 

 

 

 

16

 

 

 

 

 

 

 

 

 

 

 

 

 

Total comprehensive income

 

15,794

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tax benefit attributable to appreciation of common stock options exercised

 

2,632

 

 

 

2,632

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common stock under Employee Stock Purchase Plans

 

913

 

82

 

913

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Options exercised

 

3,155

 

670

 

3,155

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares surrendered in exchange for the payment of payroll tax liabilities

 

(691

)

(49

)

(691

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares surrendered in exchange for the exercise of stock options

 

(371

)

(26

)

(371

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE — December  31, 2005

 

132,484

 

27,163

 

48,198

 

84,668

 

(382

)

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

Net income

 

12,301

 

 

 

 

 

12,301

 

 

 

Foreign currency translation adjustment (net of deferred tax of $141)

 

231

 

 

 

 

 

 

 

231

 

 

 

 

 

 

 

 

 

 

 

 

 

Total comprehensive income

 

12,532

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tax benefit attributable to appreciation of common stock options exercised

 

1,155

 

 

 

1,155

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation expense

 

1,502

 

 

 

1,502

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common stock under Employee Stock Purchase Plans

 

369

 

29

 

369

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Options exercised

 

3,170

 

455

 

3,170

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE — December 31, 2006

 

151,212

 

27,647

 

54,394

 

96,969

 

(151

)

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

Net income

 

15,588

 

 

 

 

 

15,588

 

 

 

Foreign currency translation adjustment (net of deferred tax of $58)

 

95

 

 

 

 

 

 

 

95

 

 

 

 

 

 

 

 

 

 

 

 

 

Total comprehensive income

 

15,683

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cumulative effect of a change in accounting principle - adoption of FIN 48

 

(610

)

 

 

 

 

(610

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tax benefit attributable to appreciation of common stock options exercised

 

500

 

 

 

500

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation expense

 

1,130

 

 

 

1,130

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of common stock under Employee Stock Purchase Plans

 

323

 

27

 

323

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock repurchases

 

(5,407

)

(464

)

(5,407

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Options exercised

 

1,537

 

203

 

1,537

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE — December 31, 2007

 

$

164,368

 

27,413

 

$

52,477

 

$

111,947

 

$

(56

)

 

    See notes to consolidated financial statements.

 

 

26



 

MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

YEARS ENDED DECEMBER 31, 2007, 2006, AND 2005

(In thousands)

 

 

 

2007

 

2006

 

2005

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

Net income

 

$

15,588

 

$

12,301

 

$

15,778

 

 

 

 

 

 

 

 

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

9,444

 

8,275

 

5,841

 

Losses on sales and/or abandonment of property and equipment

 

317

 

242

 

12

 

Impairment of assets

 

 

 

929

 

 

 

Write-off of certain patents and trademarks

 

245

 

40

 

35

 

Amortization of deferred credits

 

(135

)

(175

)

(199

)

Deferred income taxes

 

984

 

376

 

2,574

 

Tax benefit attributable to appreciation of common stock options exercised

 

(500

)

(1,155

)

2,632

 

Stock-based compensation

 

1,130

 

1,502

 

 

 

Changes in operating assets and liabilities net of effects from acquisitions:

 

 

 

 

 

 

 

Trade receivables

 

(496

)

57

 

(5,489

)

Employee receivables

 

52

 

(76

)

(28

)

Other receivables

 

(930

)

(52

)

(6

)

Inventories

 

5,056

 

(6,045

)

(8,470

)

Prepaid expenses and other assets

 

(258

)

6

 

(214

)

Income tax refund receivable

 

(194

)

 

 

 

 

Other long-term assets

 

 

 

102

 

(93

)

Deposits

 

12

 

9

 

38

 

Trade payables

 

(671

)

305

 

1,852

 

Accrued expenses

 

872

 

(178

)

(627

)

Advances from employees

 

11

 

(81

)

107

 

Current liabilities related to unrecognized tax positions