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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, 2008,

 

 

 

 

 

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  Noo

 

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 or a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer o

 

Accelerated filer x

Non-accelerated filer o
(Do not check if a smaller reporting company)

 

Smaller reporting company o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  Nox

 

The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant, on June 30, 2008, 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, 2008), was approximately $380 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 February 27, 2009, the registrant had 28,093,295 shares of the registrant’s common stock outstanding.

 

 

 



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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 20, 2009.

 



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TABLE OF CONTENTS

 

PART I

 

1

 

 

 

Item 1.

Business

1

 

 

 

Item 1A.

Risk Factors

8

 

 

 

Item 1B.

Unresolved Staff Comments

12

 

 

 

Item 2.

Properties

12

 

 

 

Item 3.

Legal Proceedings

13

 

 

 

Item 4.

Submission of Matters to a Vote of Security Holders

13

 

 

 

PART II

 

14

 

 

 

Item 5.

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

14

 

 

 

Item 6.

Selected Financial Data

17

 

 

 

Item 7.

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

18

 

 

 

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

22

 

 

 

Item 8.

Financial Statements and Supplementary Data

23

 

 

 

Item 9.

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

53

 

 

 

Item 9A.

Controls and Procedures

53

 

 

 

Item 9B.

Other Information

55

 

 

 

PART III

 

55

 

 

 

Items 10, 11, 12, 13 and 14.

55

 

 

 

PART IV

 

55

 

 

 

Item 15.

Exhibits and Financial Statement Schedules

55

 

 

 

SIGNATURES

 

59

 



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PART I

 

Unless otherwise indicated in this report, “Merit”, “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 risks relating to the closing of the proposed Alveolus, Inc. (“Alveolus”) and Biosearch Medical Products, Inc., a wholly-owned subsidiary of Hydromer, Inc. (“Biosearch”)  transactions and the possibility that conditions to closing those transactions may not be satisfied or that either or both of those transactions may not be completed; unanticipated consequences of Merit’s proposed acquisition of the Alveolus and Biosearch assets; challenges associated with Merit’s efforts to pursue new market opportunities, including opportunities in the gastroenterology and pulmonary markets; infringement of Merit’s technology or the assertion that Merit’s technology infringes the rights of other parties; product recalls and product liability claims; infringement of our technology or the assertion that our technology infringes the rights of other parties; product recalls and product liability claims; downturn of the national economy and its effect on our revenues, collections and supplier relations; termination of supplier relationships, or failure of suppliers to perform; inability to successfully manage growth through acquisitions; delays in obtaining regulatory approvals, or the failure to maintain such approvals; concentration of our revenues among a few products and procedures; development of new products and technologies that could render our products obsolete; market acceptance of new products; delayed introduction of products; price and product competition; availability of labor and materials; cost increases; fluctuations in and obsolescence of inventory; volatility of the market price of our common stock; foreign currency fluctuations; changes in key personnel; work stoppage or transportation risks; modification or limitation of governmental or private insurance reimbursement; changes in health care markets related to health care reform initiatives; failure to comply with environmental laws and regulations and other factors referenced 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, dialysis catheters, micro catheters and micro access products, guide wires, needles, safety products, therapeutic infusion catheters and accessories, drainage catheters and accessories, sheath introducers, pressure infusion bags, syringes, safety scalpels, kits, and procedure trays.  Additionally, we have sought to improve our line of core products.

 

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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 2008, 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 2008, 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 17% of our 2008 sales.  Approximately 32% of our sales in 2008 were made in international markets (of which OEM international sales accounted for approximately 4%).

 

During the first quarter of 2008, we entered into an asset purchase and supply agreement with Micrus Endovascular Corporation, a Delaware corporation (“Micrus”), wherein we purchased three catheter platforms, inventories, customer lists and developed technology.

 

In the third quarter of 2008, we entered into an agreement with Milamy Partners LLC, a Maine corporation (“Milamy”), to terminate exclusive license rights with McKnight Investments, LLC (“McKnight”) and substitute Merit as the exclusive licensee of Milamy’s KanguruWeb® technology.  During 2007, we entered into a distribution agreement with Milamy, wherein we purchased the exclusive, worldwide right to distribute Milamy’s KanguruWeb® Abdominal Retraction System in vascular lab markets.

 

In the fourth quarter of 2008, we entered into an asset purchase agreement with Tran PA-C, Inc., a Florida corporation (“Tran PA-C”), to purchase their catheter extraction products.  In connection with this agreement, we purchased inventories, property and equipment, customer lists and developed technology.

 

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.”  We maintain an Internet website at www.merit.com.

 

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-plus 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 Coronary Interventions (“PCI”) are 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 Peripheral Intervention (“PPI”) is used to treat similar disease conditions outside the heart.

 

Inflation Devices.  During PCI and PPI 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.  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 for which we are known.  We estimate that we currently supply more than 50% of the worldwide inflation device market.

 

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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.  In addition, we offer an extensive line of sheath introducers (Prelude®) and mini access kits (MAK, MAK-NV 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 diagnostic radiology catheters and in 2008 we expanded the product line to include specialty catheters for use in additional procedures such as fistulagrams where a shorter angiographic catheter is easier to use.  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 and 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 clinicians’ diagnostic needs.  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™ disposable coronary control syringe line 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 administering 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™, MiniStop+™ and DugOut®.  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.  Our KanguruWeb® abdominal retraction device addresses 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 variety 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, 2007 and 2008.  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, we provide a wide selection of accessories that complement our drainage catheters,

 

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including tubing sets and drainage bags.  In 2007, we expanded our Drainage Depot™ product line to include the new FZ Drainage Depot Bag™ with soft cloth backing which is more comfortable for patients than traditional bags.  In 2008, we introduced the MAK-NV™ Introducer System (mini access introducer system for non-vascular applications).  This popular device was designed for easy visualization and quick access into the drainage area.  For enhanced visibility, the device features an echo enhanced needle and radiopaque marker tip on the introducer.

 

Paracentesis and Pericardiocentesis Catheters.  Paracentesis is a procedure to remove fluid that has accumulated in the abdominal cavity (peritoneal fluid).  Merit’s One-StepTM centesis catheter and 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.  In 2008, the One-Step™ product line was improved and expanded to include a slip-version of the device that we believe will make our products more competitive in the paracentesis market.

 

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.

 

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 new Prelude® Short Sheath provides vascular access to dialysis grafts, along with our extensive line of micro access devices such as the MAK™/S-MAK™ line of mini access kits.  We also offer a wide range of guide wires, diagnostic catheters, therapeutic infusion systems, and safety products that are used during dialysis-related procedures.  In 2008, we acquired the Transcatheter Extractor® from Tran PA-C.  This novel device is used to remove tunneled chronic dialysis catheters from dialysis patients.  Also in 2008, we continued to add to our offering of unique products for the dialysis and interventional nephrology market.  The Slip-Not® Suture Retention Device provides a unique and effective method for securing a purse-string suture that controls bleeding after an arteriovenous (“AV”) fistula intervention. In addition, we introduced the new Impress® 30cm angiographic catheters, so we can now offer our customers almost everything they need for completing AV fistula interventions.

 

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.  Due, in large part, to their quality and accuracy, our digital inflation devices (IntelliSystem® and Monarch®) are used in many pain management clinics.

 

MARKETING AND SALES

 

Target Market/Industry.  Our target markets include diagnostic and interventional cardiology, interventional radiology, vascular surgery, interventional nephrology, cardiothoracic surgery and pain management (discography and kyphoplasty).

 

According to government statistics, coronary and peripheral vascular disease continues to be a leading health problem in the United States.  Treatment options range from dietary changes to surgery, depending on the nature of the specific disease or disorder.  Endovascular techniques, including angioplasty, stenting, and endoluminal stent grafts, continue to represent important therapeutic options for the treatment of vascular disease.  We derive a large percentage of our revenues from sales of products used during percutaneous (through the skin) diagnostic and interventional procedures such as angiography, angioplasty, and stent placement, and we intend to pursue additional sales growth by building on our existing market position in both catheter technology and accessory products.

 

In addition to products used in the treatment of coronary and peripheral vascular disease, we continue our efforts to develop and distribute other devices used in the major markets we serve.  For example, we have developed and are distributing products used for percutaneous abscess drainage.  Prior to the widespread use of CT or ultrasound imaging, major surgery was necessary to drain internal fluid collections.  Now percutaneous drainage is frequently prescribed as the treatment of choice for many types of fluid collections.  Our family of drainage catheters and associated accessory devices are used by physicians in the interventional radiology, vascular surgery, and cardiothoracic surgery markets for the percutaneous drainage of abscess fluid in the biliary system and the urinary tract.

 

We also service the growing interventional nephrology market.  Dialysis, or cleaning of the blood, is necessary in conditions such as acute renal failure, chronic renal failure and end-stage renal disease, or ESRD. The kidneys remove excess water and chemical wastes from blood, permitting clean blood to return to the circulatory system.  When the

 

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kidneys malfunction, waste substances are not properly excreted, creating an abnormal buildup of wastes in the bloodstream.  Dialysis machines are used to treat this condition.  Dialysis catheters, which connect the patient to the dialysis machine, are used at various stages in the treatment of dialysis patients.  In the past few years, we have added both catheters and accessories to our dialysis-related product offering.

 

In general, we serve in are characterized by rapid change resulting from technological advances and scientific discoveries.  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 a 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%, 68% and 72% of our total sales for the years ended December 31, 2008, 2007 and 2006, respectively.  Our direct sales force currently consists of a Vice President of Sales, nine regional sales managers and 72 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 by observation of procedures in catheterization laboratories.

 

International Sales.  Approximately 144 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, based in South Jordan, Utah, who oversees Asia, South and Central America, Australia and Canada.  We also have a Vice President of European Sales who oversees Europe, the Middle East and Africa from our facility located in Maastricht, The Netherlands.  Approximately 24 direct sales representatives and country managers presently sell our products in Germany, France, the United Kingdom, Belgium, The Netherlands, Denmark, Sweden, Ireland and Austria.  In 2008, our international sales grew approximately 12% over our total sales for the year ended December 31, 2007 and accounted for approximately 32% of total sales.  With the recent and planned additions to our product lines, we believe that our international sales will continue to increase.

 

We 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 our 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 2008, our U.S. domestic sales force made approximately 41% of our sales directly to U.S. hospitals, and they made approximately 14% of our sales through other channels such as U.S. custom packagers and distributors.  Approximately 45% of our sales were made by our direct European sales force, international distributors, and our OEM sales force.  Sales to our single largest customer, an OEM partner, accounted for approximately 7% of total sales during the year ended December 31, 2008.  We generally manufacture products for other medical device companies through our

 

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OEM division.  During the year ended December 31, 2008, OEM sales represented approximately 17% of our total revenue.

 

RESEARCH AND DEVELOPMENT

 

In 2008, we continued to innovate in the treatment of cardiovascular disease by offering our customers a number of new products.  We broadened our Prelude® Sheath Introducer line by developing a number of radial artery access sheaths and valves.  The Prelude® Short Sheath line was designed to meet customer expectations for dialysis graft access.  The MAK NV™ is a new product line developed to offer non-vascular access for our drainage products.  Two other novel products were created to add convenience for the clinician.  The Slip-Not® is a device for securing purse string sutures following procedures involving dialysis grafts.  Also, the Grandstand™ is a temporary sharps holder which adds safety and innovation to our sharps container line.

 

Research and development expenses were approximately $9.2 million, $8.7 million, and $8.6 million in 2008, 2007, and 2006, respectively.  Our future growth continues to be fueled with multiple product ideas guided by our Chief Executive Officer and our sales and marketing teams, as well as by collaboration with physicians with whom we have longstanding relationships.  We have research and development facilities in South Jordan, Utah; Angleton, Texas; Galway, Ireland; and Venlo, The Netherlands.  We are also expanding our research and development efforts to include a variety of European technological sources.

 

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; Chester, Virginia 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 several global markets, including diagnostic and interventional cardiology, interventional radiology, vascular surgery, interventional nephrology, cardiothoracic surgery and pain management. These markets encompass a large number of suppliers of varying sizes.

 

In the interventional cardiology and radiology markets, we compete with large international, multi-divisional medical supply companies such as Cordis Corporation (Johnson & Johnson), Boston Scientific Corporation, Medtronic, C.R. Bard, and Terumo.  Medium-size companies we compete with include Cook, Arrow, AngioDynamics, Vascular Solutions, and ICU Medical.  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, price/value, device feature, customer service, breadth of line, and customer relationships.  We believe that our products have achieved market acceptance due to the quality of materials and workmanship of our products, innovative design, our willingness to customize to fit customer needs, and our prompt attention to customer requests.  Our products are priced competitively, but generally not below prices for competing products.  One of our primary competitive strengths is our

 

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relative stability in the marketplace; a comprehensive, broad line of ancillary products; and our history of introducing a variety of new products and product line extensions to the market on a regular basis.

 

Based on available industry data, with respect to the number of procedures performed, we believe we are the leading provider of digital inflation technology in the world.  In addition, we are the world market leader for inflation devices, hemostasis devices, and torque devices.  Together with Navilyst Medical, Inc. (formerly Boston Scientific, NAMIC) we are one of two market leaders in the United States for control syringes, waste-disposal systems, tubing, and manifold kits. We believe the recent and planned additions to our product lines will enable us to compete even more effectively in both the U.S. and international markets.  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 cardiology and radiology stent procedures.  Medical professionals are starting to use new diagnostic methods and interventional procedures and devices, as well as drugs for the treatment and prevention of cardiovascular disease. These new methods, procedures and devices may render some of our products obsolete or limit the markets for our products.  However, with the advent of vascular stents and other procedures, we have experienced continued growth in sales of our products.

 

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.

 

As of December 31, 2008, we owned 84 U.S. patents and had licenses to 13 U.S. patents.  Additionally, we either owned or had exclusive rights to 51 pending U.S. patent applications.  Internationally, we owned 22 patents, and either owned or had exclusive rights to 20 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 and 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 U.S. patents related to the locking mechanism in our inflation devices expired in 2008 and other patent rights are scheduled to 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 incorporated into our inflation devices.  In return, we paid a 5.75% ongoing royalty to the licensee, not to exceed $450,000 annually.  Royalties paid for such license in each of 2008, 2007 and 2006 were $450,000.  The license agreement terminated in August 2008, upon the last expiration date of the licensed patents; however, we continue to use the technology in many of our devices.

 

We have also registered or applied for registration of several trade names or trademarks.  See “Products” above.  We have received 134 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 Chief Regulatory Officer and a Vice President of Quality Systems who are responsible for compliance with all applicable FDA regulations.

 

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.

 

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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 facilities in Utah, Texas, Virginia and Ireland.  We have also received ISO 9001:2000 certification for our Merit Sensor Systems facility in South Jordan, Utah.

 

EMPLOYEES

 

As of December 31, 2008, we employed 1,654 people, including 1,255 in manufacturing; 176 in sales and marketing; 123 in engineering, research and development; and 100 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 website 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 such 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.

 

We have obtained U.S. patents and filed additional U.S. and foreign patent applications; however, there can be no assurance that any patents we hold or for which we have applied 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.

 

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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.  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 be prevented from marketing certain products.  Any of these outcomes could have a material adverse effect on our financial condition and operating results.

 

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;

 

·                  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.

 

Economic and industry conditions constantly change, and negative economic conditions in the United States and other countries could materially and adversely affect our business and results of operations.

 

Our business and our results of operation are affected by many changing economic and other conditions beyond our control.  Actual or potential changes in international, national, regional and local economic, business and financial conditions, including recession and inflation, may negatively affect consumer preferences, perceptions, spending patterns or demographic trends, any of which could adversely affect our business and results of operations.  We may also experience higher bad-debt rates and slower receivable collection rates in our dealings with our customers.  In addition, recent disruptions in the credit markets have resulted in greater volatility, less liquidity, widening of credit spreads, and decreased availability of financing.  As a result of these factors, there can be no assurance that financing will be available to us on acceptable terms, if at all. An inability to obtain necessary additional financing on acceptable terms may have an adverse impact on us and on our ability to grow our business.

 

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

 

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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, information 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 Federal Food, Drug and Cosmetic Act, and the manufacture, distribution, record keeping, labeling and advertisement of our products are subject to regulation by 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 various foreign countries to which our products are exported.  Although we believe 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, operations, or financial condition.

 

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, 2008, sales of our inflation devices (including inflation devices sold in custom kits and through OEM channels) accounted for approximately 27% of our total revenues.  Sales of our inflation devices to a single OEM customer, representing our largest customer, were approximately 6% of our total inflation device sales for the year ended December 31, 2008.  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

 

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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 some of our 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.

 

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 2008, the exchange rate between the Euro and the U.S. Dollar resulted in an increase in our gross revenues of approximately $1.3 million and 0.10% in our gross profit.

 

For the year ended December 31, 2008, approximately $25.6 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 materially 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

 

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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.

 

Operations at our manufacturing facilities may be negatively impacted by certain factors, including severe weather conditions and the impact of natural disasters.

 

Our operations can be affected by many factors beyond our control, including severe weather conditions and the impact of natural disasters, including hurricanes and tornados.  These conditions can cause substantial damage to facilities, interrupt production and disrupt our ability to deliver products to our customers.

 

Our operations in Angleton, Texas have been suspended due to hurricanes in recent years.  In September 2008 we shut down our operations in Angleton in anticipation of Hurricane Ike and production was restored shortly thereafter.  While we incurred minimal damage to our facility, we experienced greater financial damage as a result of the production disruption.  Although our insurance covered some of the losses associated with the event, future natural disasters could increase the cost of insurance.  We cannot be certain that any losses from business interruption or property damages, along with the increases in insurance costs, will not have a material adverse effect on our results of operations or financial condition.

 

Our failure to comply with applicable environmental laws and regulations could affect our business and results of operations.

 

One of our wholly-owned subsidiaries, Merit Sensor Systems, Inc. (“Merit Sensor Systems”), manufactures and assembles certain products that require the use of hazardous materials that are subject to various federal, state and local laws and regulations governing the protection of the environment.  While the cost of compliance with such laws and regulations has not had a material adverse effect on our results of operations historically, compliance with future regulations may require additional capital investments in pollution control equipment or changes in the way Merit Sensor Systems makes its products.  Additionally, because Merit Sensor Systems uses hazardous and other regulated materials in its manufacturing processes, we are subject to certain risks of liabilities and claims resulting from any accidental releases.  While we believe the precautions and infrastructure Merit Sensor Systems has put in place are sufficient, any accidental release may have an adverse affect on our business and results of operations.

 

Item 1B.

Unresolved Staff Comments.

 

 

 

None.

 

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 which totals approximately 200,000 square feet.  We sold the ten-acre site to an unrelated developer in order to facilitate construction of the facility and entered into a 25-year lease agreement (beginning in 1995) to finance the 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.  During 2005, we acquired an additional seven acres of property just west of our current facility in South Jordan.  We believe 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.

 

At the end of 2004, we completed construction of an approximately 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.

 

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We completed an approximately 140,000 square foot manufacturing facility located in South Jordan, Utah in September 2005.  This facility is used for injection and insert molding production, as an automated finished goods warehouse, and as the locale for management information system employees.  The new facilities in South Jordan 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.  The aggregate lease payments on these Murray facilities are approximately $29,000 per month.

 

We own approximately 19 acres of land and an approximately 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 an approximately 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 leased 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 2011.  The current monthly lease payment is approximately $7,000.

 

In May 2008, we completed construction of a new European headquarters in Beek, The Netherlands.  The new 31,000 square foot facility is designed to provide for anticipated growth in our European operations.

 

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, 2008.

 

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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, 2008

 

High

 

Low

 

First Quarter

 

$

17.41

 

$

13.71

 

Second Quarter

 

$

16.97

 

$

14.00

 

Third Quarter

 

$

21.36

 

$

14.18

 

Fourth Quarter

 

$

19.99

 

$

12.35

 

 

For the year ended December 31, 2007

 

High

 

Low

 

First Quarter

 

$

15.74

 

$

11.90

 

Second Quarter

 

$

13.41

 

$

10.89

 

Third Quarter

 

$

13.38

 

$

11.25

 

Fourth Quarter

 

$

16.50

 

$

12.36

 

 

OUTSTANDING SHARES AND NUMBER OF SHAREHOLDERS

 

As of February 27, 2009, the number of shares of Common Stock outstanding was 28,093,295 held by approximately 167 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.

 

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PERFORMANCE GRAPH

 

The following graph compares the performance of the Common Stock with the performance of the NASDAQ Stock Market (U.S. Companies) and NASDAQ Stocks (SIC 3840-3849 U.S. Companies - Surgical, Medical and Dental Instruments and Supplies) for a five-year period by measuring the changes in Common Stock prices from December 31, 2003 to December 31, 2008.

 

Comparison of 5 Year Cumulative Total Return

Among Merit Medical System, Inc., NASDAQ Stock Market (U.S.)

and NASDAQ Stocks (SIC 3840-3849)

 

 

 

 

12/2003

 

12/2004

 

12/2005

 

12/2006

 

12/2007

 

12/2008

 

Merit Medical System Inc.

 

$

100

 

$

69

 

$

55

 

$

71

 

$

62

 

$

81

 

NASDAQ Stock Market (U.S. Companies)

 

 

100

 

 

109

 

 

111

 

 

122

 

 

132

 

 

64

 

NASDAQ Stocks (SIC 3840-3849 U.S. Companies)

 

 

100

 

 

116

 

 

134

 

 

138

 

 

177

 

 

92

 

 

The stock performance graph assumes for comparison that the value of the Common Stock and of each index was $100 on December 31, 2003 and that all dividends were reinvested.  Past performance is not necessarily an indicator of future results.

 

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SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS

 

The following table contains information regarding our equity compensation plans as of December 31, 2008 (in thousands):

 

 

 

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

 

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

 

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

 

Plan category

 

(a)

 

(b)

 

(c)

 

Equity compensation Plans approved by security holders

 

3,833

(1),(3)

$

12.12

 

1,044

(2),(3)

Equity compensation Plans not approved by security holders

 

51

(4)

$

10.13

 

 

 

Total

 

3,884

 

$

12.10

 

1,044

 

 


(1)   Consists of 3,832,953 shares of Common Stock subject to the options granted under the Merit Medical Systems, Inc. 2006 Long-Term Incentive Plan.

 

(2)   Consists of 360,395 shares available to be issued under the Merit Medical Systems, Inc. Qualified and Non-Qualified Employee Stock Purchase Plan and 684,619 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.

 

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Item 6.

Selected Financial Data  (in thousands).

 

 

 

Years Ended December 31,

 

 

 

2008

 

2007

 

2006

 

2005

 

2004

 

OPERATING DATA:

 

 

 

 

 

 

 

 

 

 

 

Net Sales

 

$

227,143

 

$

207,768

 

$

190,674

 

$

166,585

 

$

151,398

 

Cost of Sales

 

133,872

 

127,977

 

117,596

 

97,493

 

83,908

 

Gross Profit

 

93,271

 

79,791

 

73,078

 

69,092

 

67,490

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Expenses:

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

53,127

 

48,133

 

45,486

 

38,579

 

35,071

 

Research and development

 

9,160

 

8,688

 

8,582

 

6,992

 

5,079

 

 

 

 

 

 

 

 

 

 

 

 

 

Total operating expenses

 

62,287

 

56,821

 

54,068

 

45,571

 

40,150

 

 

 

 

 

 

 

 

 

 

 

 

 

Income From Operations

 

30,984

 

22,970

 

19,010

 

23,521

 

27,340

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Income (Expense):

 

 

 

 

 

 

 

 

 

 

 

Litigation settlement

 

 

 

 

 

 

 

 

 

100

 

Interest income

 

781

 

393

 

250

 

491

 

556

 

Interest expense

 

(17

)

(3

)

(12

)

(18

)

(6

)

Other income (expense)

 

97

 

39

 

(64

)

(94

)

16

 

Other income—net

 

861

 

429

 

174

 

379

 

666

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

31,845

 

23,399

 

19,184

 

23,900

 

28,006

 

 

 

 

 

 

 

 

 

 

 

 

 

Income Tax Expense

 

11,118

 

7,811

 

6,883

 

8,122

 

10,074

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income

 

$

20,727

 

$

15,588

 

$

12,301

 

$

15,778

 

$

17,932

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings Per Common Share:

 

 

 

 

 

 

 

 

 

 

 

Diluted

 

$

0.73

 

$

0.55

 

$

0.44

 

$

0.57

 

$

0.65

 

 

 

 

 

 

 

 

 

 

 

 

 

Average Common Shares:

 

 

 

 

 

 

 

 

 

 

 

Diluted

 

28,550

 

28,204

 

28,245

 

27,847

 

27,691

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE SHEET DATA:

 

 

 

 

 

 

 

 

 

 

 

Working capital

 

$

84,283

 

$

60,194

 

$

54,972

 

$

43,693

 

$

54,944

 

Total assets

 

231,776

 

200,420

 

182,668

 

162,247

 

139,877

 

Long-term debt

 

0

 

0

 

0

 

2

 

5

 

Stockholders’ equity

 

$

194,305

 

$

164,368

 

$

151,212

 

$

132,484

 

$

111,052

 

 

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, Inc. (“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 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 employment termination of certain executive employees.

 

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Item 7.

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

 

OVERVIEW

 

Despite difficult worldwide economic conditions during 2008, we reported record sales and earnings for the twelve months ended December 31, 2008.  This improvement, compared to our 2007 results, was largely the result of a 9% increase in sales, a substantial improvement in gross margins of 270 basis points, and relatively flat operating expenses as a percentage of sales, and was partially offset by an increase in our effective tax rate of 150 basis points.  All of these improvements produced record earnings of $20.7 million, up 33% from the prior year.  During 2009, we plan to implement new automation and manufacturing cost saving improvements related to logistics and product labeling, and introduce new products through organic growth and acquisitions, which we believe will increase our average product margins.  Also, we plan to identify a location outside the U.S. to locate a manufacturing site in an effort to reduce our product costs.  To date, the overall slowdown in the economy that began in 2008 and has continued into 2009 has not significantly affected our operations, as many of our products are not used for elective procedures, and are not capital equipment.

 

For the year ended December 31, 2008, we reported net sales of $227.1 million, up $19.4 million or 9% over 2007 net sales.  Net sales growth in 2008 was primarily driven by increased sales of our custom kit and procedure tray products (up 11%), stand-alone products (up 9%), including swabbable valves, stopcocks, OEM parts, tubing, and hemostasis valves and catheters (up 20%), particularly our Prelude® sheath product line, Mini Access Kit™ catheter product line, Micrus catheter product line and diagnostic cardiology catheters.

 

Our gross margins as a percentage of sales were 41.1% for the year ended December 31, 2008, compared to 38.4% for year ended December 31, 2007.  This significant improvement resulted primarily from lower average fixed overhead unit costs resulting from increased production (unit costs decreased as fixed costs were shared over an increased number of units), lower unit costs for products manufactured in Mexico, price increases and production automation.  These improvements also helped offset raw material and production labor cost increases that occurred during 2008.

 

Net income increased for the year ended December 31, 2008 to $20.7 million, compared to $15.6 million for the prior year.  When compared to the prior year, net income for the year ended December 31, 2008 was positively affected by increased sales volumes and higher gross margins, and partially offset by a higher effective income tax rate.

 

RESULTS OF OPERATIONS

 

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

 

 

 

2008

 

2007

 

2006

 

Sales

 

100.0

%

100.0

%

100.0

%

Gross profit

 

41.1

 

38.4

 

38.3

 

Selling, general and administrative expenses

 

23.4

 

23.2

 

23.9

 

Research and development expenses

 

4.0

 

4.2

 

4.5

 

Income from operations

 

13.6

 

11.1

 

10.0

 

Income before income tax expense

 

14.0

 

11.3

 

10.1

 

Net income

 

9.1

 

7.5

 

6.5

 

 

Our net sales increased by $19.4 million, or 9.3%, in 2008, compared to an increase of $17.1 million, or 9.0%, in 2007, and an increase of $24.1 million, or 14.5%, in 2006.  We report sales in four product categories.  Listed below are the sales relating to these product categories for the years ended December 31, 2008, 2007, 2006 and 2005:

 

 

 

December  31,

 

 

 

% Change

 

2008

 

% Change

 

2007

 

% Change

 

2006

 

2005

 

Stand-alone devices

 

9%

 

$

68,005

 

12%

 

$

62,417

 

19%

 

$

55,824

 

$

46,900

 

Custom kits & procedure trays

 

11%

 

66,584

 

7%

 

60,013

 

15%

 

56,009

 

48,740

 

Inflation devices

 

3%

 

61,656

 

5%

 

59,595

 

9%

 

56,978

 

52,319

 

Catheters

 

20%

 

30,898

 

18%

 

25,743

 

17%

 

21,863

 

18,626

 

Total

 

9%

 

$

227,143

 

9%

 

$

207,768

 

14%

 

$

190,674

 

$

166,585

 

 

Our sales increased during 2008, 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

 

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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 0.6% in 2008 compared to 2007, 0.9% in 2007 compared to 2006, and 0.1% in 2006 compared to 2005.  Historically, an important part of our revenue growth came from increases in the number of procedures performed for patients in a given year.  Starting in April 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 2008, 2007 and 2006, our sales of new products represented 2%, 6% and 9% of sales, respectively.  Included in those sales are revenues from recent acquisitions of 1%, 3% and 3% for 2008, 2007 and 2006, respectively.  The third main source of revenue increases came from market share gains in our existing product lines.

 

International sales in 2008 were approximately $72.5 million, or 32% of total sales; 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.  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, Austria and Ireland were $27.1 million, $23.8 million, and $20.0 million in 2008, 2007 and 2006, respectively.

 

Our gross profit as a percentage of sales was 41.1%, 38.4%, and 38.3%, in 2008, 2007 and 2006, respectively.  The increase in gross margins in 2008 resulted primarily from lower average fixed overhead unit costs resulting from increased production (unit costs decreased as fixed costs were shared over an increased number of units), lower unit costs for products manufactured in Mexico, customer price increases and production automation.  These improvements also helped offset raw material and production labor cost increases that occurred during 2008.  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 SFAS 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.

 

Our selling, general, and administrative expenses increased $5.0 million, or 10%, in 2008 over 2007; $2.6 million, or 6%, in 2007 over 2006; $6.9 million, or 18%, in 2006 over 2005.  Selling, general and administrative expenses as a percentage of sales increased slightly in 2008 when compared to the prior year.  This increase was primarily the result of higher commissions commensurate with higher sales, management and sales bonuses for meeting quarterly and annually objectives, increased travel-related expenses and increased national account administration fees. Selling, general and administrative expenses for 2008 were also affected by approximately $415,000 of damages (net of insurance reimbursement of $179,000) sustained by our Angleton, Texas facility during Hurricane Ike in September 2008.  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 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 in March 2005.

 

Research and development expenses increased 5% to $9.2 million in 2008, compared to $8.7 million in 2007.  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.  The increase in R&D expenses in 2008, 2007 and 2006 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 4.0% for 2008, 4.2% for 2007 and 4.5% for 2006.  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 internally-developed products into the future.

 

Our effective income tax rates for 2008, 2007, and 2006 were 35%, 33%, and 36%, respectively.   The increase in the effective income tax rate for 2008 over 2007 was primarily the result of investment losses sustained in our deferred compensation plan that are not deductible for tax purposes.  The decrease in the effective income 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 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.

 

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Our other income for 2008, 2007, and 2006 was approximately $861,000, $429,000, and $174,000, respectively.  The increase in other income for 2008 over 2007 and 2007 over 2006 was primarily the result of an increase in interest income attributable to 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 a corresponding decrease in interest income of approximately $241,000.

 

Our net income for 2008, 2007, and 2006 was approximately $20.7 million, $15.6 million and $12.3 million, respectively.  Net income for 2008 was positively affected by increased sales volumes and higher gross margins, and partially offset by higher effective income tax rates.  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 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. 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, 2008, we performed our annual testing of goodwill for impairment and determined that there was no impairment.  Also, as of December 31, 2008, we concluded there were no events or circumstances indicating that impairment had occurred.  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, 2008 and 2007.  The remaining unamortized amount of goodwill at December 31, 2008 was approximately $13.0 million.

 

LIQUIDITY AND CAPITAL RESOURCES

 

Capital Commitments and Contractual Obligations

 

The following table summarizes our capital commitments and contractual obligations as of December 31, 2008, 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

 

Operating leases

 

19,381

 

2,122

 

3,791

 

3,362

 

10,106

 

Royalty obligations

 

258

 

50

 

100

 

50

 

58

 

Total contractual cash

 

19,639

 

2,172

 

3,891

 

3,412

 

10,164

 

 

We have approximately $2.8 million of unrecognized tax positions that have been recognized as liabilities in accordance with FIN 48 that have not been 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

 

Our cash flow from operations was $28.0 million in 2008, a decrease, of $4.0 million over 2007.  This decrease in cash flow from operations in 2008, when compared to 2007, came mostly from an increase in inventories compared to a decrease in 2007 (an approximate change of $9.1 million), which was partially offset by an increase in net income in 2008 over 2007.  Our working capital for 2008, 2007, and 2006 was $84.3 million, $60.2 million, and $55.0 million, respectively.  The increase in working capital for 2008 over 2007 was primarily the result of an increase in cash generated from our net income and cash generated from the issuance of shares of Common Stock related to employee stock option exercises.  The increase in working capital for 2007 over 2006 was primarily the result of an increase in cash net of the reduction in inventories 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.

 

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Table of Contents

 

On December 7, 2006, we entered into an unsecured loan agreement with Bank of America, N.A. (“Bank of America”), whereby Bank of America agreed to provide us a line of credit in the amount of $30,000,000.  Prior to December 7, 2006, we maintained a long-term revolving credit facility (the “Facility”) with Zions First National Bank (“Zions”).  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 Zions, whereby Zions 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, 2008, 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 2008, we spent approximately $7.8 million on various production equipment related to automation, capacity increases, and product launches, and approximately $2.1 million to complete our new customer service and distribution facility for our European operations in The Netherlands.  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 $2.0 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 of real estate in The Netherlands to build a distribution facility.  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-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, 2008.

 

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 approximately $505,000 at December 31, 2008 which is consistent with historical collection experience.

 

Stock-Based Compensation.  We account for stock-based compensation in accordance with SFAS No. 123(R).  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

 

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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 ($25.6 million, representing approximately 11% of aggregate revenues), for the year ended December 31, 2008 was attributable to sales that were denominated in Euros and GBPs, all other international sales were denominated in U.S. Dollars.  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, 2008, the exchange rate between the Euro and GBP against the U.S. Dollar resulted in an increase of our gross revenues of approximately $1.3 million and 0.10% in gross profit.

 

On November 28, 2008, we forecasted a net exposure for December 31, 2008 representing the difference between Euro and GBP denominated receivables and Euro and GBP denominated payables of approximately 147,000 Euros and 264,000 GBPs, respectively.  In order to partially offset such risks, on November 28, 2007, we entered into a 30-day forward contract for Euros and GBPs.  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, 2008 and 2007, we experienced a net gain of approximately $52,000 and $29,000, respectively, from financing transactions executed during 2008 and 2007 in an effort to limit our exposure to fluctuations in the exchange rates of the Euro and GBP relative to the U.S. Dollar.  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, 2008, 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.

 

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Table of Contents

 

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, 2008 and 2007, and the related consolidated statements of income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2008.  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, 2008 and 2007, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2008, 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 consolidated 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, in 2007, the Company changed its method of accounting for uncertain tax positions to conform to Financial Accounting Standards Board Interpretation (“FIN”) No. 48,  Accounting for Uncertainty in Income Taxes, and in 2008, the Company adopted SFAS No. 157, Fair Value Measurements.

 

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, 2008, based on the criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 2, 2009, 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 2, 2009

 

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Table of Contents

 

MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 2008 AND 2007

(In thousands)

 

 

 

2008

 

2007

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

Cash and cash equivalents

 

$

34,030

 

$

17,574

 

Trade receivables — net of allowance for uncollectible accounts — 2008 – $505 and 2007 – $497

 

27,749

 

26,619

 

Employee receivables

 

126

 

144

 

Other receivables

 

818

 

1,140

 

Inventories — net

 

38,358

 

34,106

 

Prepaid expenses and other assets

 

985

 

1,297

 

Deferred income tax assets

 

2,782

 

811

 

Income tax refund receivable

 

607

 

297

 

 

 

 

 

 

 

Total current assets

 

105,455

 

81,988

 

 

 

 

 

 

 

PROPERTY AND EQUIPMENT:

 

 

 

 

 

Land and land improvements

 

7,992

 

7,977

 

Buildings

 

49,793

 

43,147

 

Manufacturing equipment

 

68,184

 

61,448

 

Furniture and fixtures

 

16,689

 

17,110

 

Leasehold improvements

 

9,868

 

9,870

 

Construction-in-progress

 

7,599

 

10,680

 

 

 

 

 

 

 

Total property and equipment

 

160,125

 

150,232

 

 

 

 

 

 

 

Less accumulated depreciation

 

(56,186

)

(50,536

)

 

 

 

 

 

 

Property and equipment — net

 

103,939

 

99,696

 

 

 

 

 

 

 

OTHER ASSETS:

 

 

 

 

 

Intangibles — net of accumulated amortization — 2008 — $3,122 and 2007 – $2,171

 

6,913

 

6,163

 

Goodwill

 

13,048

 

9,527

 

Other assets

 

2,325

 

2,964

 

Deferred income tax assets

 

23

 

4

 

Deposits

 

73

 

78

 

 

 

 

 

 

 

Total other assets

 

22,382

 

18,736

 

 

 

 

 

 

 

TOTAL

 

$

231,776

 

$

200,420

 

 

See notes to consolidated financial statements.

 

 

 

(Continued)

 

24



Table of Contents

 

MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 2008 AND 2007

(In thousands)

 

 

 

2008

 

2007

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

Trade payables

 

$

10,622

 

$

10,275

 

Accrued expenses

 

9,973

 

9,492

 

Advances from employees

 

211

 

267

 

Liabilities related to unrecognized tax positions

 

 

 

1,023

 

Income taxes payable

 

366

 

737

 

 

 

 

 

 

 

Total current liabilities

 

21,172

 

21,794

 

 

 

 

 

 

 

DEFERRED INCOME TAX LIABILITIES

 

8,771

 

6,082

 

 

 

 

 

 

 

LIABILITIES RELATED TO UNRECOGNIZED TAX POSITIONS

 

2,818

 

2,588

 

 

 

 

 

 

 

DEFERRED COMPENSATION PAYABLE

 

2,348

 

3,063

 

 

 

 

 

 

 

DEFERRED CREDITS

 

1,994

 

2,105

 

 

 

 

 

 

 

OTHER LONG-TERM OBLIGATIONS

 

368

 

420

 

 

 

 

 

 

 

Total liabilities

 

37,471

 

36,052

 

 

 

 

 

 

 

COMMITMENTS AND CONTINGENCIES (Notes 2, 7, 8, 12 and 16)

 

 

 

 

 

 

 

 

 

 

 

STOCKHOLDERS’ EQUITY:

 

 

 

 

 

Preferred stock — 5,000 shares authorized as of December 31, 2008 and 2007; no shares issued

 

 

 

 

 

Common stock, no par value; shares authorized — 2008 - 100,000 and 2007 - 50,000; issued shares as of December 31, 2008 - 28,093 and December 31, 2007 - 27,413

 

61,689

 

52,477

 

Retained earnings

 

132,674

 

111,947

 

Accumulated other comprehensive loss

 

(58

)

(56

)

 

 

 

 

 

 

Total stockholders’ equity

 

194,305

 

164,368

 

 

 

 

 

 

 

TOTAL

 

$

231,776

 

$

200,420

 

 

See notes to consolidated financial statements.

(Concluded)

 

25



Table of Contents

 

MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

YEARS ENDED DECEMBER 31, 2008, 2007, AND 2006

(In thousands except per share amounts)

 

 

 

2008

 

2007

 

2006

 

 

 

 

 

 

 

 

 

NET SALES

 

$

227,143

 

$

207,768

 

$

190,674

 

 

 

 

 

 

 

 

 

COST OF SALES

 

133,872

 

127,977

 

117,596

 

 

 

 

 

 

 

 

 

GROSS PROFIT

 

93,271

 

79,791

 

73,078

 

 

 

 

 

 

 

 

 

OPERATING EXPENSES:

 

 

 

 

 

 

 

Selling, general, and administrative

 

53,127

 

48,133

 

45,486

 

Research and development

 

9,160

 

8,688

 

8,582

 

 

 

 

 

 

 

 

 

Total operating expenses

 

62,287

 

56,821

 

54,068

 

 

 

 

 

 

 

 

 

INCOME FROM OPERATIONS

 

30,984

 

22,970

 

19,010

 

 

 

 

 

 

 

 

 

OTHER INCOME (EXPENSE):

 

 

 

 

 

 

 

Interest income

 

781

 

393

 

250

 

Interest expense

 

(17

)

(3

)

(12

)

Other income (expense)

 

97

 

39

 

(64

)

 

 

 

 

 

 

 

 

Other income — net

 

861

 

429

 

174

 

 

 

 

 

 

 

 

 

INCOME BEFORE INCOME TAXES

 

31,845

 

23,399

 

19,184

 

 

 

 

 

 

 

 

 

INCOME TAX EXPENSE

 

11,118

 

7,811

 

6,883

 

 

 

 

 

 

 

 

 

NET INCOME

 

$

20,727

 

$

15,588

 

$

12,301

 

 

 

 

 

 

 

 

 

EARNINGS PER COMMON SHARE:

 

 

 

 

 

 

 

Basic

 

$

0.75

 

$

0.57

 

$

0.45

 

 

 

 

 

 

 

 

 

Diluted

 

$

0.73

 

$

0.55

 

$

0.44

 

 

 

 

 

 

 

 

 

AVERAGE COMMON SHARES:

 

 

 

 

 

 

 

Basic

 

27,769

 

27,425

 

27,333

 

 

 

 

 

 

 

 

 

Diluted

 

28,550

 

28,204

 

28,245

 

 

See notes to consolidated financial statements.

 

26



Table of Contents

 

MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

YEARS ENDED DECEMBER 31, 2008, 2007, AND 2006

(In thousands)

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

Common Stock

 

Retained

 

Comprehensive

 

 

 

Total

 

Shares

 

Amount

 

Earnings

 

Loss

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE — January 1, 2006

 

$

132,484

 

27,163

 

$

48,198

 

$

84,668

 

$

(382

)

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

Net income

 

12,301

 

 

 

 

 

12,301

 

 

 

Foreign currency translation adjustment

 

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

 

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

)

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

Net income

 

20,727

 

 

 

 

 

20,727

 

 

 

Foreign currency translation adjustment

 

(2

)

 

 

 

 

 

 

(2

)

 

 

 

 

 

 

 

 

 

 

 

 

Total comprehensive income

 

20,725

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Tax benefit attributable to appreciation of common stock options exercised

 

2,044

 

 

 

2,044

 

 

 

 

 

Stock-based compensation expense

 

962

 

 

 

962

 

 

 

 

 

Issuance of common stock under Employee Stock Purchase Plans

 

305

 

19

 

305

 

 

 

 

 

Warrants exercised

 

496

 

49

 

496

 

 

 

 

 

Options exercised

 

5,405

 

612

 

5,405

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE — December 31, 2008

 

$

194,305

 

28,093

 

$

61,689

 

$

132,674

 

$

(58

)

 

See notes to consolidated financial statements.

 

27



Table of Contents

 

MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

YEARS ENDED DECEMBER 31, 2008, 2007, AND 2006

(In thousands)

 

 

 

2008

 

2007

 

2006

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

Net income

 

$

20,727

 

$

15,588

 

$

12,301

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

Depreciation and amortization

 

10,240

 

9,444

 

8,275

 

Losses on sales and/or abandonment of property and equipment

 

526

 

317

 

242

 

Impairment of assets

 

 

 

 

 

929

 

Write-off of certain patents and license agreement

 

164

 

245

 

40

 

Amortization of deferred credits

 

(111

)

(135

)

(175

)

Purchase of trading investments

 

(349

)

(267

)

(499

)

Proceeds from sale of trading investments

 

 

 

218

 

 

 

Unrealized (gains) losses on trading investments

 

987

 

(259

)

206

 

Deferred income taxes

 

(183

)

984

 

376

 

Tax benefit attributable to appreciation of common stock options exercised

 

(2,044

)

(500

)

(1,155

)

Stock-based compensation

 

962

 

1,130

 

1,502

 

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

 

 

 

 

 

 

 

Trade receivables

 

(1,464

)

(496

)

57

 

Employee receivables

 

10

 

52

 

(76

)

Other receivables

 

304

 

(930

)

(52

)

Inventories

 

(4,036

)

5,056

 

(6,045

)

Prepaid expenses and other assets

 

301

 

(258

)

6

 

Income tax refund receivable

 

(93

)

(194

)

 

 

Other long-term assets

 

 

 

 

 

102

 

Deposits

 

5

 

12

 

9

 

Trade payables

 

758

 

(671

)

305

 

Accrued expenses

 

554

 

872

 

(178

)

Advances from employees

 

(57

)

11

 

(81

)

Current liabilities related to unrecognized tax positions

 

(1,023

)

1,023

 

 

 

Income taxes payable

 

1,692

 

1,595

 

2,724

 

Non-current liabilities related to unrecognized tax positions

 

864

 

(1,010

)

 

 

Deferred compensation payable

 

(715

)

194

 

506

 

Other long-term obligations

 

(52

)

(16

)

 

 

 

 

 

 

 

 

 

 

Total adjustments

 

7,240

 

16,417

 

7,018

 

 

 

 

 

 

 

 

 

Net cash provided by operating activities

 

27,967

 

32,005

 

19,319

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

Capital expenditures for:

 

 

 

 

 

 

 

Property and equipment

 

(14,476

)

(16,288

)

(14,715

)

Patents and trademarks

 

(432

)

(450

)

(283

)

Proceeds from the sale of property and equipment

 

45

 

11

 

27

 

Cash paid in acquisitions

 

(5,112

)

(4,726

)

(3,923

)

 

 

 

 

 

 

 

 

Net cash used in investing activities

 

(19,975

)

(21,453

)

(18,894

)

 

See notes to consolidated financial statements.

 

 

 

 

 

(Continued)

 

28