MERIT MEDICAL SYSTEMS, INC.
2010 ANNUAL REPORT
Dear Shareholders:
2010 was a very significant year for Merit Medical
Systems, Inc. Merit continued its growth in a difficult
environment by introducing new products, expanding
geographically and completing strategic acquisitions.
Highlights include:
• Opening an office in Beijing, China
• Hitting record revenues of $296.8 million
• Introducing several new innovative products
• Completing the acquisition of
BioSphere Medical, Inc.
The introduction of the Merit Laureate®
Hydrophilic Guide Wire, the ASAP™ Thrombus
Aspiration Catheter and the EN Snare® Endovascular
Snare System establish three new technologies that will
provide growth and a platform for new products in
the future.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
(cid:1) Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended
December 31, 2010,
(cid:1) Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
or
FORM 10-K
MERIT MEDICAL SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Utah
(State or other jurisdiction
of incorporation)
0-18592
(Commission File No.)
87-0447695
(IRS Employer
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 (cid:1) No (cid:1)
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 (cid:1) No (cid:1)
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 (cid:1) No(cid:1)
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 229.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant was required to submit and post such files). Yes (cid:1) No (cid:1)
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. (cid:1)(cid:2)
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 (cid:1)
Non-accelerated filer (cid:1)
(Do not check if a smaller reporting company)
Accelerated filer (cid:1)
Smaller reporting company (cid:1)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes (cid:1) No (cid:1)
The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant, on June 30, 2010, 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, 2010), was approximately $424,399,251. Shares of common stock held by each officer and
director of the registrant and by each person who may be deemed to be an affiliate have been excluded.
As of March 10, 2011, the registrant had 28,496,078 shares of common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the following document are incorporated by reference in Part III of this Report: the registrant’s definitive proxy statement
relating to the Annual Meeting of Shareholders scheduled for May 27, 2011.
TABLE OF CONTENTS
PART I
Item 1.
Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2.
Properties
Item 3.
Legal Proceedings
Item 4.
[Removed and Reserved]
PART II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
Item 6.
Selected Financial Data
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Financial Statements and Supplementary Data
Item 9.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11.
Executive Compensation
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
Item 13.
Certain Relationships and Related Transactions, and Director Independence
Item 14.
Principal Accountant Fees and Services
PART IV
Item 15.
Exhibits and Financial Statement Schedules
SIGNATURES
1
16
23
23
24
24
24
27
28
35
36
68
68
71
71
71
71
71
71
71
76
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 will differ, and
could differ materially, from those projected or assumed in the forward-looking statements. Our 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 product recalls or product liability claims; the consequences of debt
obligations, including the effect of any breach of our credit documents or other agreements; infringement of our
technology or the assertion that our technology infringes the rights of other parties; compliance (or the failure to
comply) with federal, state, local or international laws or regulations; our research, development, product testing and
regulatory compliance efforts, including challenges associated with our efforts to pursue new market opportunities;
increasing regulation of the medical device industry in general and, as a result of our expanded operations, a larger
segment of our operations; prospective reforms or other changes of the regulations administered by the U.S. Food
and Drug Administration (the “FDA”); fluctuations in the price of components we use in our operations; changes in
the national economy and the effect of those changes on our revenues, collections and supplier relations; termination
of supplier relationships, or the failure of suppliers to perform; our failure to successfully manage growth,
particularly growth resulting from acquisitions; currency exchange rate fluctuations; concentration of our revenues
among a few products and procedures; development of new products and technologies that could render our
products obsolete; volatility of the market price of our common stock (the “Common Stock”); weather fluctuations;
changes in, or the loss of, our key personnel; work stoppage or transportation risks; failure to comply with
environmental laws and regulations; changes in health care markets related to health care reform initiatives; and
other factors referenced in our press releases and in our 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 16.
Item 1. Business.
GENERAL
Merit Medical Systems, Inc. is a worldwide designer, developer, manufacturer and marketer of medical
devices used in a vast array of interventional and diagnostic procedures. Our mission is to provide innovative high
quality products to physicians and health care professionals to enhance patient care and enable them to perform
procedures safely and effectively.
Our operations are divided in the following markets: diagnostic and interventional cardiology,
interventional radiology, gastroenterology, pulmonology and vascular surgery. We believe we have been able to
introduce 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.
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On September 10, 2010, we completed our acquisition of BioSphere Medical, Inc. (“BioSphere”) in an all-
cash merger transaction valued at approximately $96 million, inclusive of all common equity and Series A Preferred
preferences. BioSphere develops and markets embolotherapeutic products for the treatment of uterine fibroids,
hypervascularized tumors and arteriovenous malformations. We believe our acquisition of BioSphere gives us a
platform technology applicable to multiple therapeutic areas with significant market potential, while leveraging
existing interventional radiology call points. Embolotherapy is the minimally invasive, image-guided therapeutic
introduction of various biocompatible substances into a patient’s circulatory system to occlude a blood vessel, either
to arrest or prevent hemorrhaging, or to devitalize or destroy the structure by occluding its blood supply.
Our broad offering of cardiology and radiology medical devices is used by physicians to diagnose and treat
coronary artery disease, peripheral vascular disease and other non-vascular diseases. Merit Endotek™, one of our
operating divisions, develops, manufactures and distributes our gastroenterology, pulmonology and thoracic surgery
products to assist clinicians in the treatment of esophageal, tracheobronchial and biliary strictures. These products,
which are distributed through our direct sales force, as well as through distributors, include fully-covered esophageal
and tracheobronchial stents and bare metal biliary stents that are pre-loaded on catheter-based delivery systems,
guide wires, bipolar coagulation probes, inflation devices and sizing devices.
Merit 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 innovative 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 devoted our focus to four primary areas, cardiology, radiology, pulmonology and gastroenterology. We
have expanded our product offerings for radiology segment, including interventional nephrology, computed
tomography (or “CT”) ultrasound labs and, as a result of our BioSphere acquisition, embolization products. Our
products are also used in other clinical areas such as pain management centers, endovascular surgery, and thoracic
surgery, as well as in other areas of the health care industry.
The competitive advantages of our products are enhanced by the extensive experience of our management
team in the healthcare 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.
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 involve the insertion of a sheath into the femoral, radial, or brachial artery. Fluoroscopy (real-
time moving X-ray images) and CT or three-dimensional computer generated images 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 more than two decades, we have offered an extensive, innovative
line of inflation devices that accurately measure pressures during balloon and stent deployment. Products like our
IntelliSystem® and Monarch® inflation systems (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.
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Hemostasis Valves. We have developed a broad line of technically-sophisticated, clinically-acclaimed
hemostasis valves, Merit Angioplasty Packs™ (MAP Kits) and angioplasty accessories. Hemostasis 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. Our hemostasis brands include: Honor®,
AccessPLUS™, Access-9™, DoublePlay™, MBA™ and MBAPlus™ and the Passage®.
Vascular Retrieval Devices. An increase in vascular procedures influenced our acquisition of the EN
Snare® endovascular system from Hatch Medical L.L.C. (“Hatch”) in 2009. Primary target markets for our snare
technology are cardiology, interventional radiology and vascular surgery. The EN Snare® is intended for use in the
cardiovascular system or hollow viscous to retrieve and manipulate foreign objects. The EN Snare® is designed
with three loops to increase the probability of foreign body capture and is offered in seven sizes to accommodate a
broad range of vessels throughout the body.
Embolic Microspheres. With the acquisition of BioSphere we now offer embolic microspheres and
microsphere delivery systems. Microspheres are precisely calibrated, spherical, hydrophilic, micro-porous beads
made with acrylic co-polymer cross-linked with gelatin. Microcatheters and small (“mini”) guide wires are also
available as delivery systems for the embolic particles. These products include:
•Embosphere® Microspheres, which are marketed for symptomatic uterine fibroids, hypervascularized
tumors and arteriovenous malformations in the United States, the European Union, the People’s Republic
of China and several other markets outside the United States;
•EmboGold® Microspheres, which are marketed for hypervascularized tumors and arteriovenous
malformations in the United States, the European Union and several other markets outside the United
States;
•HepaSphere™ Microspheres, which are marketed in the European Union, Brazil and Russia for primary
and metastatic liver cancer, and in the European Union and Russia for drug delivery in the treatment of
primary and metastatic liver cancer; and
•QuadraSphere® Microspheres, which are marketed for the treatment of hypervascularized tumors and
arteriovenous malformations in the United States.
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™ 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. Our diagnostic catheter offering includes our
new Impress® line of diagnostic radiology catheters, as well as the Performa® and Softouch® brands for both
cardiology and peripheral catheters. These catheters offer interventional radiologists and cardiologists superior
performance during a variety of angiography procedures. Additionally, our diagnostic guide wires are used to
traverse vascular anatomy and aid in placing catheters and other devices. Our precoated, high performance
InQwire® guide wires are lubricious and are available in a wide range of configurations to meet clinicians’
diagnostic needs. In 2010, we launched the Merit Laureate® hydrophilic-coated guide wire to complement the
Merit H2O® hydrophilic guide wire line. These wires provide 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.
Radial Artery Compression Devices. In recent years, radial artery catheterization has become
increasingly popular as an alternative to femoral artery access when performing diagnostic and interventional
cardiology procedures. We have developed and now offer two independent, highly-differentiated radial
compression systems, including the Finale® and the RadStat®.
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Angiography and Angioplasty Accessories. Since the 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. We now offer a broad range of specialty syringes including color-coded Medallion® syringes, and the
proprietary, loss-of-resistance VacLok® syringe. The most recent line extensions to the syringe product family are
frosted and sword-handled Medallion® syringes. Additionally, we offer an extensive line of kits containing fluid
management products
transducers
(MeriTrans®) for measurement of pressures within the vessels and chambers of the heart. In 2010, we introduced
the Tram™ and Tram-P™ integrated transducers that combine a low torque manifold with the transducer. We also
provide devices, kits, and procedure trays used to effectively and safely manage fluids, contrast media, and waste
during angiography and interventional procedures. The Miser II™ contrast management system complements our
comprehensive line of fluid management products used in angiography procedures.
like syringes, manifolds, stopcocks,
tubing, and disposable pressure
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 latest patient safety initiatives of the Joint Commission on
Accreditation of Healthcare Organization (“JCAHO”)) help minimize mix-ups in administering medication. We
also offer waste management products to help 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.
Drainage Catheters and Accessories. We have a broad line of catheters for nephrostomy, abscess, and
other drainage procedures. Our ReSolve® non-locking and locking drainage catheter line has been expanded every
year since the product family was introduced in 2006. 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, to save time, and to enhance patient comfort. We also provide a wide selection of
accessories that complement our drainage catheters, including tubing sets and drainage bags. For non-vascular
applications we offer mini access kits (MAK-NV™) 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). Our 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. Our One-Step™ product line includes a valved version of the device that we believe
makes our products more competitive in the thoracentesis market. Pericardiocentesis is a procedure in which fluid is
aspirated from the pericardium (the sac enveloping the heart). Our pericardiocentesis kit is designed as an
organized, ready-to-use, convenient tray to assist the clinician in draining fluid quickly from the pericardial sac.
Therapeutic Infusion Catheters. We offer an extensive 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, including native
dialysis fistula and synthetic grafts.
Multipurpose Microcatheters. With our acquisition of BioSphere, we expanded our multipurpose
microcatheter offering to include the Embocath Plus™ for the controlled and selected infusion of diagnostic media
or the delivery of interventional devices or therapeutic pharmaceuticals into selected blood vessels. These specialty
catheters are used to deliver various embolic agents including microspheres, alcohol, metallic coils, poly-vinyl
alcohol particles, and gel foam that can block blood vessels (e.g. for the purpose of stopping bleeding) to tissues or
organs including uterine artery embolization for percutaneous treatment of uterine fibroids.
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Products for Dialysis and Interventional Nephrology. In 2007, we acquired the ProGuide™ chronic
dialysis catheter product line from Datascope Corporation, a New Jersey corporation (“Datascope”). The
ProGuide™ is considered a “workhorse” catheter for chronic 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™
and 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 can be used during dialysis-related procedures. The OuTake® Catheter
Extractor is used to remove tunneled chronic dialysis catheters from dialysis patients. A curved introducer needle
aids clinicians who choose to place a tunneled dialysis catheter over a wire with a single stick. 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 offer the Impress® 30cm angiographic
catheters which can be used by interventional nephrologists. Our dialysis and interventional nephrology products
are designed to provide comprehensive coverage for completing AV fistula interventions.
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 is designed to address this challenge. 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.
Gastroenterology and Pulmonology Products
Non-Vascular Stents. We also sell airway products, principally our AERO® and AERO DV® Fully
Covered Tracheobronchial Stent, for use in thoracic surgery. These products offer our customers patented, self-
expanding metal stents used to improve patency of patient airways—both tracheal and bronchial—and to offer
palliation to patients suffering from the effects of cancer. Our gastroenterology products, the Alimaxx-ES® Fully
Covered Esophageal Stent System and the Alimaxx-B® Biliary Stent System are used to palliate symptoms
associated with malignant tumors affecting the esophagus and the biliary duct. Additionally, we sell a plastic biliary
stent to restore patency and relieve symptoms associated with strictures and blockages within the biliary system.
These stents are often used to “stage” treatment of malignant tumors such as pancreatic cancer and other serious
conditions. We also sell ancillary products, namely, the AEROSIZER® tracheobronchial stent sizing device used in
interventional pulmonology procedures and the MAXXWIRE®, which is a line of specialty guide wires which have
pulmonology applications.
Bipolar Coagulation Probes. Bipolar probes are used by physicians as one means of controlling bleeding
within a variety of non-vascular systems. Our Brighton™ Bipolar Probe is now sold directly by our Endotek
division and our original bipolar probe is sold on an OEM basis to customers who market them to a large number of
gastroenterologists.
Specialty Procedure Products
In addition to the procedures and devices detailed above, interventional radiology and other special
procedure labs perform a variety of additional minimally invasive diagnostic and interventional procedures. We
offer a variety of devices and accessories used during these procedures.
Discography Products. Discography is a technique used to determine whether a disc is the source of pain
in patients with back or neck pain. During discography, contrast medium is injected into the disc and the patient’s
response to the injection is noted. Due to their quality and accuracy, our digital inflation devices (IntelliSystem®
and Monarch®) are used in many pain management clinics.
Pressure Sensors. Our sensor division manufactures and sells microelectromechanical (“MEMS”)
systems sensor components focusing on piezoresistive pressure sensors in various forms, including bare silicon die,
die mounted on ceramic substrates, and custom assemblies for specific customers.
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MARKETING AND SALES
Target Market/Industry. Our target markets include diagnostic and interventional cardiology,
interventional nephrology,
radiology, gastroenterology, pulmonology, vascular
surgery,
interventional
cardiothoracic surgery, pain management, and thoracic surgery.
According to government statistics, cardiovascular disease continues to be a leading cause of death and a
significant 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 drainage. Prior to the widespread use of CT or ultrasound
imaging, surgery was necessary to drain internal fluid from body cavities and organs. Now percutaneous drainage is
frequently prescribed as the treatment of choice for many types of fluid collections. Our family of drainage
catheters and associated devices are used by physicians in the interventional radiology, vascular surgery and the
cardiology catheter lab for the percutaneous drainage collection of simple serous fluid to viscous fluid (blood, or
infected secretion) within the body.
As part of our embolic microsphere sales and marketing efforts, we attend major medical conventions
throughout the world pertaining to our targeted markets and invest in market development (including physician
training), practice building, referral network education and patient outreach. We work closely with major
interventional radiology centers in the areas of training, therapy awareness programs, clinical studies and ongoing
research. Our initiatives include a program called “Community Health Talks”, or CHTs, an educational outreach to
women likely to have symptomatic fibroids. These programs were executed in partnership with multiple hospitals,
with close collaboration between physicians in interventional radiology and gynecology. The goal of the CHT
initiative is to educate women about fibroids and all their available treatment options, even though they may not
seek immediate consult for Uterine Fibroid Embolization (“UFE”).
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 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 catheters and other accessories to our dialysis-related product offering.
We believe our move into the areas of gastroenterology and pulmonology, as well as thoracic surgery, will
open new opportunities to provide not only existing Merit products, such as inflation devices, syringes, centesis
catheters and procedure kits to those markets, but also to provide additional offerings built upon our non-vascular
stent technology.
In general, our target markets are characterized by rapid change resulting from technological advances and
scientific discoveries. We plan to continue to develop and launch innovative products to support clinical trends
designed to address the demands of those markets.
Market Strategy. Our marketing strategy is focused on identifying and introducing a regular 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, as
well as gastroenterology, pulmonology and thoracic surgery. Suggestions for new products and product
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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. and International Sales. Sales of our products in the United States accounted for 68%, 66% and
68% of our total sales for the years ended December 31, 2010, 2009 and 2008, respectively. Our direct sales force
currently consists of an Executive Vice President of Marketing and Sales, a Vice President of U. S. Sales, ten
regional sales managers and 85 direct sales representatives and clinical specialists located in major metropolitan
areas throughout the United States. To support our U.S. direct sales team we have developed a national account
department that includes a Vice President of National Accounts, field-based Health System Account Directors and
contract administrators. In addition, our Merit Endotek™ division maintains a separate worldwide sales force
consisting of a President, Vice President of Sales, Director of Marketing, two regional sales managers and 14 direct
sales representatives.
Approximately 175 independent dealer organizations and packers distribute our products worldwide,
including territories in Europe, Africa, the Middle East, Asia, South and Central America, Australia and Canada.
We have a Vice President of International Sales, based in South Jordan, Utah, who directs our international sales
efforts in Asia, South and Central America, Australia and Canada. We have a Vice President of Distribution Sales,
based in Maastricht, The Netherlands, who directs distributor sales in Europe, the Middle East, and Africa. We also
have a Vice President of European Sales who oversees direct sales in Europe. Approximately 32 direct sales
representatives and country managers presently sell our products in Germany, France, the United Kingdom,
Belgium, The Netherlands, Denmark, Sweden, Finland, Ireland and Austria. In 2010, our international sales grew
approximately 10% over our 2009 international sales, and accounted for approximately 32% of our total sales. Our
new Merit Endotek division has a small, but growing, presence in international markets. 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.
We consider training to be a critical factor in the success of our direct sales force. Our sales representatives
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, radiologists, endoscopists, and thoracic surgeons and by
observation of procedures in laboratories and operating rooms throughout the U.S.
OEM Sales. We currently have a worldwide 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 third-party label.
CUSTOMERS
We provide products to hospitals and clinic-based cardiologists, radiologists, anesthesiologists, physiatrists
(pain management physicians), neurologists, nephrologists, vascular surgeons, interventional gastroenterologists and
pulmonologists, thoracic surgeons, technicians and nurses. Hospitals and acute care facilities in the United States
purchase our products through our direct sales forces, 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.
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In 2010, our U.S. sales force made approximately 46% of our sales directly to U.S. hospitals (includes 3%
for our Endotek division) and approximately 12% of our sales through other channels such as U.S. custom packers
and distributors. We also sell products to other medical device companies through our U.S. OEM sales force, which
accounted for approximately 10% of our 2010 sales. Approximately 32% of our 2010 sales were made to
international markets by our direct European sales force, international distributors, and our OEM sales force
(includes 3% for OEM international). Sales to our single largest customer accounted for approximately four percent
of total sales during the year ended December 31, 2010.
RESEARCH AND DEVELOPMENT
In 2010, we continued to innovate in the treatment of cardiovascular disease by offering our customers a
number of new products, improvements to existing products and line extensions. Additionally, we expanded our
product offerings by entering the gastrointestinal and pulmonology markets through the acquisition of Alveolus, Inc.
(“Alveolus”). We subsequently retained key research and development personnel and have since added new sizes of
non-vascular stents to the esophageal product line previously developed by Alveolus. Furthermore, we have
introduced the new Brighton™ Bipolar Probe and initiated multiple projects to expand Merit Endotek’s products
scheduled for release in 2011 through 2012.
Our research and development expenses were approximately $15.3 million, $11.2 million, and $9.2 million
in 2010, 2009 and 2008, respectively. Our future growth continues to be fueled with multiple product ideas guided
by our Chief Executive Officer, our Vice President of Research and Development and our sales and marketing
teams, as well as by collaboration with physicians with whom we have long-term relationships. We have research
and development facilities in South Jordan, Utah; Angleton and Dallas, Texas; Howell, New Jersey;
Galway, Ireland; Paris, France and Venlo, The Netherlands.
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 our molds, but we design
and own most 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 have received ISO 13485:2003
certification for our facilities in Utah, Texas, Virginia, Massachusetts, Ireland and France. We have also received
ISO 9001:2000 certification for our Merit Sensor Systems facility in South Jordan, Utah.
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 third-party suppliers. Merit Sensor
Systems, Inc., our wholly-owned subsidiary (“Merit Sensor Systems”), develops and markets silicon sensors. Merit
Sensor Systems presently supplies all of the sensors we utilize in our digital inflation devices.
We currently produce and package all of our microspheres. Manufacturing of our microsphere products
includes the synthesis and processing of raw materials and third-party manufactured compounds.
Our products are manufactured at several factories, including facilities located in South Jordan, West
Jordan and Murray, Utah; Galway, Ireland; Venlo, The Netherlands; Paris, France; Angleton, Texas; and Chester,
Virginia. See Item 2. “Properties.” We also manufacture at a contract manufacturing facility in Mexico.
We have distribution centers located in South Jordan, Utah; Angleton, Texas; Chester, Virginia; Beijing,
China; 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
processes. Historically, we have not been materially affected by interruptions with such suppliers. Furthermore, we
seek to develop relationships with potential back-up suppliers for materials and components in the event of supply
interruptions.
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COMPETITION
We compete in several global markets, including diagnostic and interventional cardiology, interventional
radiology, vascular surgery, interventional nephrology, cardiothoracic surgery, interventional gastroenterology and
pulmonology, anesthesiology and pain management. These markets encompass a large number of suppliers of
varying sizes.
In the interventional cardiology and radiology markets, as well as the gastroenterology and pulmonology
markets, we compete with large international, multi-divisional medical supply companies such as Cordis
Corporation (Johnson & Johnson), Boston Scientific Corporation, Medtronic, C.R. Bard, Abbott, Teleflex, Cook and
Terumo. Medium-size companies we compete with include AngioDynamics, Vascular Solutions, B. Braun,
Olympus, Navilyst, Edwards Lifescience, and ICU Medical.
The primary competitive embolotherapy product has been non-spherical polyvinyl alcohol (or “PVA”)
particles, a product introduced into the market more than 20 years ago. Currently, the primary products with which
our microspheres compete are spherical PVA, sold by Boston Scientific Corporation, Biocompatibles and Terumo
Corporation; Embozene sold by CeloNova Biosciences, Inc.; gel foam, sold by Pfizer Inc.; and non-spherical
(particle) PVA, sold by Boston Scientific and Cook Incorporated. Our principal competitors in UFE are
Biocompatibles, Boston Scientific, Cook, Cordis Corporation, a Johnson & Johnson company, Pfizer and Terumo,
as well as companies selling or developing non-embolotherapy solutions for UFE.
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 our products have
achieved market acceptance due to the quality of materials and workmanship of our products, their innovative
design, our willingness to customize our products 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 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 believe we are one of the world
market leaders for inflation devices, hemostasis devices and torque devices. We believe we are one of two market
leaders in the United States for control syringes, waste-disposal systems, tubing, and manifold kits. We anticipate
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 that we will be able to maintain our existing competitive
advantages or compete successfully in the future.
Within the field of uterine artery embolization, we believe we are the market share leader and one of only
three companies in the United States to have embolic products specifically indicated for use in UFE. Based on both
research and clinical studies conducted on our product for UFE, we believe we offer physicians a high degree of
consistent and predictable product performance, ease of use, targeted delivery, and durable vessel occlusion, and
therefore satisfactory short- and long-term clinical outcomes validated by peer-reviewed publications, when
compared to our competitors.
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 have a number of U.S. and foreign-issued patents and pending patent applications, including patents
and rights to patent applications acquired through strategic transactions, which relate to various aspects of our
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products and technology. The duration of our patents is determined by the laws of the country of issuance and for
the U.S. is typically 20 years from the date of filing of the patent. As of December 31, 2010, we owned more than
200 U.S. and international patents and patent applications. We also operate under licenses from other owners of
certain patents, patent applications, technology, trade secrets, know-how, copyrights and trademarks.
Merit and the Merit logo are trademarks in the U.S. and other countries. In addition to Merit and the Merit
logo, we have used, registered, or applied other specific trademarks and service marks to help distinguish our
products, technologies, and services from those of our competitors in the U.S. and foreign countries. See “Products”
above. The duration of our trademark registrations varies from country to country, and in the U.S. we generally are
able to maintain our trademark rights and renew any trademark registrations for as long as the trademarks are in use.
We have received over 100 U.S. and foreign trademark registrations, and other U.S. and foreign trademark
applications are currently pending.
Some of our products and product documentation are protected under U.S. and international copyright laws
related to the protection of intellectual property and proprietary information. We have registered copyrights relating
to certain software used in our electronic inflation devices.
REGULATION
FDA Regulation. The United States Food and Drug Administration, (“FDA”), and other federal, state
and local authorities regulate our products and product-related activities. Pursuant to the U.S. Food, Drug, and
Cosmetic Act (“FDCA”) and the regulations promulgated under that act, the FDA regulates the design,
development, clinical trials, testing, manufacture, packaging, labeling, storage, distribution and promotion of
medical devices. We believe that our products and procedures are in material compliance with all applicable FDA
regulations, but the regulations regarding the manufacture and sale of our products are subject to change. We cannot
predict the effect, if any, that these changes might have on our business, financial condition and results of
operations. In addition, if the FDA believes that we are not in compliance with the FDCA, it can institute
proceedings to detain or seize products, issue a market withdrawal, enjoin future violations and/or seek civil and
criminal penalties against us and our officers and employees. If we fail to comply with these regulatory
requirements, our business, financial condition and results of operations could be harmed.
FDA Approval. Unless subject to a specific exemption issued by the FDA, before a new medical device
that we develop can be introduced to the market, we must obtain market clearance through a 510(k) premarket
notification or approval through a pre-market approval (“PMA”) application.
The FDA’s 510(k) approval procedure is less rigorous than the PMA procedure, but is available only to
sponsors that can establish that their device is substantially equivalent to a legally-marketed “predicate” device that
was either on the market prior to the enactment of the Medical Devices Amendments of 1976 or has been cleared
through the 510(k) procedure. It usually takes between three months and one year from the date a
510(k) application is submitted, but it may take longer, particularly if a clinical trial is required. The FDA may find
that 510(k) approval is not appropriate or that substantial equivalence has not been shown and, as a result, require
additional clinical or non-clinical testing or a PMA application.
PMA applications must be supported by valid scientific evidence to demonstrate the safety and
effectiveness of the subject device, typically including the results of human clinical trials, bench tests, and laboratory
and animal studies. The PMA application must also contain a complete description of the device and its
components, and a detailed description of the methods, facilities and controls used to manufacture the device. In
addition, the submission must include the proposed labeling and any training materials. As part of the PMA
application review, the FDA will inspect the manufacturer’s facilities for compliance with its Quality System
Regulations (“QSR”). If the FDA approves the PMA, it may place restrictions on the device, such as requiring
additional patient follow-up for an indefinite period of time. If the FDA’s evaluation of the PMA application or the
manufacturing facility is not favorable, the FDA may deny approval of the PMA application or issue a “not
approvable” letter. The FDA may also require additional clinical trials, which can delay the PMA approval process
by several years. The PMA application process can be expensive and generally takes several years to complete.
The PMA application process can be expensive and generally takes several years to complete. After the PMA is
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approved, if significant changes are made to a device, its manufacturing or labeling, a PMA supplement containing
additional information must be filed for prior FDA approval.
If human clinical trials of a medical device are required for FDA approval and the device presents a
significant risk, the sponsor of the trial must file with the FDA an investigational device exemption (“IDE”)
application prior to commencing human clinical trials. The IDE application must be supported by data, typically
including the results of animal and/or laboratory testing. If the IDE application is approved by the FDA and one or
more institutional review boards (“IRBs”), human clinical trials may begin at a specific number of institutional
investigational sites with the specific number of patients approved by the FDA. If the device presents a non-
significant risk to the patient, a sponsor may begin the clinical trial after obtaining approval for the trial by one or
more IRBs without separate approval from the FDA. Submission of an IDE application does not give assurance that
the FDA will issue the IDE. If the IDE application is approved, there can be no assurance the FDA will determine
that the data derived from the trials support the safety and effectiveness of the device or warrant the continuation of
clinical trials. An IDE supplement must be submitted to and approved by the FDA before a sponsor or investigator
may make a change to the investigational plan in such a way that may affect its scientific soundness, study
indication or the rights, safety or welfare of human subjects. The trial must also comply with the FDA’s IDE
regulations, and informed consent must be obtained from each subject.
The FDA clearance and approval processes for medical devices are expensive, uncertain and lengthy.
There can be no assurance that we will be able to obtain necessary regulatory clearances or approvals for any
product on a timely basis or at all. Delays in receipt of or failure to receive such clearances or approvals, the loss of
previously received clearances or approvals, or the failure to comply with existing or future regulatory requirements
could have a material adverse effect on our business, financial condition and results of operations.
In October 2009, BioSphere submitted to the FDA an IDE seeking to commence a clinical trial to compare
the effectiveness of QuadraSphere® Microspheres combined with the chemotherapeutic agent doxorubicin to
conventional transarterial chemoembolization, or cTACE, with doxorubicin in patients with primary liver cancer.
On November 29, 2010, the FDA approved a phase 3 clinical trial protocol to treat primary liver cancer with
QuadraSphere® Microspheres for delivery of doxorubicin. Subsequent to our acquisition of BioSphere, the FDA
approved our application to perform a Phase 3 clinical trial protocol to treat primary liver cancer with
QuadraSphere® Microspheres (hqTACE) for delivery of doxorubicin. Liver cancer is the third leading cause of
cancer deaths worldwide. The sharp rise in hepatitis C infections, alcohol consumption and obesity are reported as
key contributing factors to increased incidence of liver cirrhosis and liver cancer. Currently, surgical treatment of
liver cancer (liver transplantation or tumor resection) is available for only approximately 25% of liver cancer cases.
Surgical removal is not currently possible for more than two-thirds of primary liver cancer patients and 90% of
patients with secondary liver cancer. According to the U.S. National Cancer Institute (“NCI”), no standard
treatment currently exists for liver cancer when tumors cannot be surgically removed and liver transplantation is not
a viable option. However, both the NCI and the Society of Interventional Radiologists (“SIR”) report that
transarterial chemoembolization (“TACE”) has shown promising results in the treatment of liver cancer. We believe
if we are successful with this clinical trial and are able to obtain all FDA approvals required to market our
QuadraSphere® Microspheres in the United States, we will be the only market participant in this area with a product
approved from the FDA. Unfavorable or inconsistent data from this trial may adversely affect our ability to obtain
approval for this new indication.
Changes in Cleared or Approved Devices. We must obtain new FDA 510(k) clearance or premarket
approval when there is a major change or modification in the intended use or indications for use of a legally
marketed device or a change or modification of the device, including product enhancements and product line
extensions of a legally marketed device, as required by FDA regulations. In some cases, supporting clinical data
may be required. The FDA may determine that a new or modified device is not substantially equivalent to a
predicate device or may require that additional information, including clinical data, be submitted before a
determination is made, either of which could significantly delay the introduction of new or modified device
products.
Current Good Manufacturing Practice / Quality System Regulation and Reporting. The FDCA
requires us to comply with the QSR and good manufacturing practice requirements pertaining to all aspects of our
product design and manufacturing processes, including requirements for packaging, labeling and record keeping,
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complaint handling, corrective and preventive actions and internal auditing. The FDA enforces these requirements
through periodic inspections of medical device manufacturers. In addition, the Medical Device Reporting (“MDR”)
regulation require us to inform the FDA whenever information reasonably suggests that one of our devices may have
caused or contributed to a death or serious injury, or when one of our devices has malfunctioned, if the device would
be likely to cause or contribute to a death or a serious injury in the event the malfunction were to recur. We believe
that we, and the third parties who manufacture our delivery systems, are in compliance with all material QSRs and
medical device reporting regulations.
Labeling and Advertising. Labeling and promotional activities are also subject to scrutiny by the FDA.
Labeling includes not only the label on a device, but also includes any descriptive or informational literature that
accompanies or is used to promote the device. Among other things, labeling violates the law if it is false or
misleading in any respect or it fails to contain adequate directions for use. Moreover, product claims that are outside
the labeling either approved or cleared by the FDA violate the FDCA. Allegations of off-label promotion can result
in enforcement action by both federal and state agencies, including the FDA, the Department of Justice, the Office
of Inspector General of the Department of Health and Human Services, state attorneys general, as well as liability
under the False Claims Act, discussed further below.
Federal Trade Commission. Our product promotion is also subject to regulation by the Federal Trade
Commission (the “FTC”), which has primary oversight of the advertising of unrestricted devices. The Federal Trade
Commission Act prohibits unfair methods of competition and unfair or deceptive acts or practices in or affecting
commerce, as well as unfair or deceptive practices such as the dissemination of any false advertisement pertaining to
medical devices.
Import Requirements. To import a device, the importer must file an entry notice and bond with the
United States Bureau of Customs and Border Protection (CBP). All devices are subject to FDA examination before
release from CBP. Any article that appears to be in violation of the FDCA may be refused admission and a notice of
detention and hearing may be issued. If the FDA ultimately refuses admission, CBP may issue a notice for
redelivery and assess liquidated damages for up to three times the value of the lot.
Export Requirements. Products for export from Europe and from the United States are subject to
foreign countries’ import requirements and the exporting requirements of the FDA or European regulating bodies, as
applicable. In particular, international sales of medical devices manufactured in the United States that are not
approved or cleared by the FDA for use in the United States, or are banned or deviate from lawful performance
standards, are subject to FDA export requirements.
Foreign countries often require, among other things, an FDA certificate for products for export, also called
a Certificate for Foreign Government. To obtain this certificate from the FDA, the device manufacturer must apply
to the FDA. The FDA certifies that the product has been granted clearance or approval in the United States and that
the manufacturing facilities were in compliance with Quality Systems Regulation regulations at the time of the last
FDA inspection.
Fines and Penalties for Noncompliance. Failure to comply with applicable FDA regulatory
requirements could result in, among other things, withdrawal of market clearance or approval, injunctions, voluntary
or mandatory patient/physician notifications, recalls, warning letters, product seizures, civil penalties, fines and
criminal prosecutions. FTC enforcement can result in orders requiring, among other things, limits on advertising,
corrective advertising, consumer redress, rescission of contracts and such other relief as may be deemed necessary.
Foreign Regulations. Medical device laws and regulations are also in effect in many countries outside of
the United States. These laws and regulations vary significantly from country to country and range from
comprehensive device approval requirements for some or all of our medical device products to more basic requests
for product data or certification. The number and scope of these requirements are increasing.
In particular, marketing of medical devices in the European Union is subject to compliance with European
Medical Device Directives and requires that the appropriate Regulatory agency has issued CE mark certification
with respect to each device to be marketed. CE mark certification is the European symbol of adherence to quality
assurance standards and compliance with applicable European Medical Device Directives. The European Medical
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Device Directives contain requirements for quality systems and other essential requirements with which all
manufacturers must comply. Failure to materially comply with applicable foreign medical device laws and
regulations would likely have a material adverse effect on our business. In addition, foreign regulations regarding
the manufacture and sale of medical devices are subject to future changes.
Environmental Regulations. We are subject to various federal, state, local and foreign laws and
regulations relating to the protection of the environment, as well as health and safety. In the course of our business,
we are involved in the handling, storage and disposal of limited amounts of certain chemicals. The laws and
regulations applicable to our operations include provisions that regulate the discharge of materials into the
environment. Usually these environmental laws and regulations impose “strict liability,” rendering a person liable
without regard to negligence or fault on the part of such person. Such environmental laws and regulations may
expose us to liability for the conduct of, or conditions caused by, others, or for acts that were in compliance with all
applicable laws at the time the acts were performed. To date, we have not been required to expend material amounts
in connection with our efforts to comply with environmental requirements and currently do not believe that
compliance with such requirements will have a material adverse effect upon our capital expenditures, results of
operations or competitive position in the future. Failure to comply with applicable environmental and related laws
could have a material adverse effect on our business. In addition, because the requirements imposed by such laws
and regulations are frequently changed, we are unable to predict the cost of compliance with such requirements in
the future, or the effect of such laws on our capital expenditures, results of operations or competitive position.
Anti-Kickback Statutes. The Medicare and Medicaid Patient Protection Act of 1987, as amended, which
is more commonly known as the federal health-care Anti-Kickback Statute, prohibits persons from, among other
things, knowingly and willfully offering or paying remuneration, directly or indirectly, to a person to induce the
purchase, order, lease, or recommendation of a good or service for which payment may be made in whole or part
under a federal health-care program such as Medicare or Medicaid. The definition of remuneration has been broadly
interpreted to include anything of value, including, for example, gifts, discounts, the furnishing of supplies or
equipment, credit arrangements, payments of cash and waivers of payments. Several courts have interpreted the
statute’s intended requirement to mean that if any one purpose of an arrangement involving remuneration is to
induce referrals or otherwise generate business involving goods or services reimbursed in whole or in part under
federal health-care programs, the statute has been violated. The law contains several statutory exceptions, including
payments to bona fide employees, certain discounts and certain payments to group purchasing organizations.
Violations can result in significant penalties, imprisonment and exclusion from Medicare, Medicaid and other
federal health-care programs. Exclusion of a manufacturer would preclude any federal health-care program from
paying for its products. In addition, kickback arrangements can provide the basis for an action under the Federal
False Claims Act, which is discussed in more detail below.
The Anti-Kickback Statute is broad and potentially prohibits many arrangements and practices that are
lawful in businesses outside of the health-care industry. Recognizing that the Anti-Kickback Statute is broad and
may technically prohibit many innocuous or beneficial arrangements, the Office of Inspector General of Health and
Human Services, or OIG, issued a series of regulations, known as the safe harbors, beginning in July 1991. These
safe harbors set forth provisions that, if all the applicable requirements are met, will ensure that health-care
providers and other parties will not be prosecuted under the Anti-Kickback Statute. The failure of a transaction or
arrangement to fit precisely within one or more safe harbors does not necessarily mean that it is illegal or that
prosecution will be pursued. However, conduct and business arrangements that do not fully satisfy each applicable
safe harbor may result in increased scrutiny by government enforcement authorities such as the OIG. Arrangements
that implicate the Anti-Kickback Statute, and that do not fall within a safe harbor, are analyzed by the OIG on a
case-by-case basis.
Government officials have focused recent enforcement efforts on, among other things, the sales and
marketing activities of pharmaceutical, medical device, and other health-care companies, and recently have brought
cases against individuals or entities with personnel who allegedly offered unlawful inducements to potential or
existing customers in an attempt to procure their business. Settlements of these cases by health-care companies have
involved significant fines and/or penalties and in some instances criminal pleas.
In addition to the Federal Anti-Kickback Statute, many states have their own anti-kickback laws. Often,
these laws closely follow the language of the federal law, although they do not always have the same exceptions or
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safe harbors. In some states, these anti-kickback laws apply with respect to all payers, including commercial health
insurance companies.
False Claims Laws. Federal false claims laws prohibit any person from knowingly presenting, or causing
to be presented, a false claim for payment to the federal government or knowingly making, or causing to be made, a
false statement to get a false claim paid. Manufacturers can be held liable under false claims laws, even if they do
not submit claims to the government, if they are found to have caused submission of false claims. The Federal Civil
False Claims Act also includes whistle blower provisions that allow private citizens to bring suit against an entity or
individual on behalf of the United States and to recover a portion of any monetary recovery. Many of the recent
highly publicized settlements in the health-care industry relating to sales and marketing practices have been cases
brought under the False Claims Act. The majority of states also have statutes or regulations similar to the federal
false claims laws, which apply to items and services reimbursed under Medicaid and other state programs, or, in
several states, apply regardless of the payor. Sanctions under these federal and state laws may include civil
monetary penalties, exclusion of a manufacturer’s products from reimbursement under government programs,
criminal fines and imprisonment.
Reimbursement. Our products are used in medical procedures generally covered by government or
private health plans. In general, a third-party payer only covers a medical device or procedure when the plan
administrator is satisfied that the product or procedure improves health outcomes, including quality of life or
functional ability, in a safe and cost-effective manner. Even if a device has received clearance or approval for
marketing by the FDA, there is no certainty that third-party payers will reimburse patients for the cost of the device
and related procedures. Even if coverage is available, third-party payers may place restrictions on the circumstances
in which they provide coverage or may offer reimbursement that is not sufficient to cover the cost of our products.
If hospitals and physicians cannot obtain adequate reimbursement for our products or the procedures in which they
are used, our business, financial condition, results of operations, and cash flows could suffer a material adverse
impact.
Privacy and Security. The Health Insurance Portability and Accountability Act of 1996 (“HIPAA”), the
Health Information Technology for Economic and Clinical Health Act (the “HITECH Act”), and the
rules promulgated thereunder, require certain entities, referred to as covered entities, to comply with established
standards, including standards regarding the privacy and security of protected health information, or PHI. HIPAA
further requires that covered entities enter into agreements meeting certain regulatory requirements with their
business associates, as such term is defined by HIPAA, which, among other things, obligate the business associates
to safeguard the covered entity’s PHI against improper use and disclosure. In addition, a business associate may
face significant statutory and contractual liability if the business associate breaches the agreement or causes the
covered entity to fail to comply with HIPAA. In the course of our business operations, we have entered into several
business associate agreements with certain of our customers that are covered entities. Pursuant to the terms of these
business associate agreements, we have agreed, among other things, not to use or further disclose the covered
entity’s PHI except as permitted or required by the agreements or as required by law, to use reasonable
administrative, physical, and technical safeguards to prevent prohibited disclosure of such PHI and to report to the
covered entity any unauthorized uses or disclosures of such PHI. Accordingly, we incur compliance-related costs in
meeting HIPAA-related obligations under business associates agreements to which we are a party. Moreover, if we
fail to meet our contractual obligations under such agreements, we may incur significant liability.
The HITECH Act, enacted in 2009, substantially enhances several of HIPAA’s requirements and
protections. Among other provisions, the HITECH Act extended certain provisions of the HIPAA Security
Rule directly to business associates of covered entities, established a national data breach notification law, and
placed additional restrictions on the use and disclosure of PHI.
In addition, HIPAA’s criminal provisions potentially could be applied to a non-covered entity that aided
and abetted the violation of, or conspired to violate, HIPAA, although we are unable at this time to determine
conclusively whether our actions could be subject to prosecution in the event of an impermissible disclosure of
health information to us. Also, many state laws regulate the use and disclosure of health information, and are not
necessarily preempted by HIPAA, in particular those laws that afford greater protection to the individual than does
HIPAA. Finally, in the event we change our business model and become a HIPAA-covered entity, we would be
directly subject to HIPAA, its rules and its civil and criminal penalties.
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Affordable Care Act. In March 2010, Congress enacted legislation known as the Affordable Care Act,
which will substantially change the way that health care is financed by both governmental and private insurers and
significantly affect the medical device industry. This new law contains a number of provisions, including provisions
governing enrollment in federal health care programs, reimbursement changes, the increased use of comparative
effectiveness research in health care decision-making, and enhancements to fraud and abuse requirements and
enforcement, that will affect existing government health care programs and will result in the development of new
programs. A number of provisions contained in the Affordable Care Act may adversely affect our net revenue for
our marketed products and any future products. The new law, among other things, subjects most medical devices to
a 2.3% excise tax, beginning January 1, 2013, which may have a material effect on our results of operations and
financial condition.
In addition to imposing the excise tax described above, the Affordable Care Act also includes substantial
new provisions affecting the medical device industry. For example, the Affordable Care Act includes new reporting
and disclosure requirements for device manufacturers with regard to payments or other transfers of value made to
health care providers. Those requirements are scheduled to become effective March 2013 for calendar year 2012.
Reports submitted under these new requirements will be placed on a public database. If we fail to provide these
reports, or if the reports we provide are not accurate, we could be subject to significant penalties. In addition,
developing the necessary systems to comply with the new reporting requirement could be financially burdensome.
EMPLOYEES
As of December 31, 2010, we employed 2,178 people, including 1,584 in manufacturing; 279 in sales and
marketing; 178 in engineering, research and development; and 137 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 of 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, NE, 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 SALES
For financial information relating to our foreign and domestic sales see Note 12 to our consolidated
financial statements set forth in Item 8 of this report.
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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:
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 recall such products from the
market. Such a recall could result in significant costs and could divert management’s attention from our business.
In addition, if medical personnel or their patients suffer injury in connection with the use of our products,
whether as a result of a failure of our products to function as designed, an inappropriate design or for any other
reason, we could be subject to lawsuits seeking significant compensatory and punitive damages. We have
previously faced claims by patients claiming injuries from our products. To date, these claims have not resulted in a
material negative impact on our business; however, patients or customers may bring claims in a number of
circumstances, including if our products were misused, if our product’s manufacture or design was flawed, if our
products produced unsatisfactory results, or if the instructions for use and other disclosure of product-related risks
for our products were found to be inadequate. The outcome of this type of personal injury litigation is difficult to
assess or quantify. We maintain product liability insurance but there is no assurance that this coverage will be
sufficient to satisfy any claim made against us. Moreover, any product liability claim brought against us, with or
without merit, could result in significant costs, could increase our product liability insurance rates, or could prevent
us from securing coverage in the future. As a result, 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 that exceed our historical
experience, our financial condition and operating results could be materially and adversely affected.
The agreements and instruments governing our debt contain restrictions and limitations that could
significantly affect our ability to operate our business, as well as significantly affect our liquidity.
We have entered into an unsecured Credit Agreement, dated September 10, 2010 (the “Credit Agreement”),
with the lenders who are or may become party thereto (collectively, the “Lenders”) and Wells Fargo Bank, National
Association (“Wells Fargo”), as administrative agent for the Lenders. The Credit Agreement contains a number of
significant covenants that could adversely affect our ability to operate our business, our liquidity, and our results of
operations. These covenants restrict, among other things, our and our subsidiaries’ ability to incur additional debt;
repurchase; repurchase or redeem equity interests and debt; issue equity; make certain investments or acquisitions;
pay dividends or make other distributions; dispose of assets or merge; enter into related party transactions; and grant
liens and pledge assets.
The breach of any covenants in the Credit Agreement, not otherwise waived or amended, could result in a
default under the applicable debt obligations and could trigger acceleration of those obligations. Any default under
the Credit Agreement could adversely affect our ability to service our debt and to fund our planned capital
expenditures and ongoing operations.
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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.
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 or 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 may be
unable to continue to use such information for our own purposes, for numerous reasons, including the following, any
of which could have a material adverse effect on our business, operations, or financial condition:
•(cid:1)(cid:1)(cid:1) Our issued patents may not be sufficiently broad to prevent others from copying our proprietary
technologies.
•(cid:1)(cid:1)(cid:1) Our issued patents may be challenged by third parties and deemed to be overbroad or unenforceable.
•(cid:1)(cid:1)(cid:1) 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.
•(cid:1)(cid:1)(cid:1) Costs associated with seeking enforcement of our patents against infringement, or defending our
activities against allegations of infringement, may be significant.
•(cid:1)(cid:1)(cid:1) Our pending patent applications may not be granted for various reasons, including over breadth or
conflict with an existing patent.
•(cid:1)(cid:1)(cid:1) Other persons or entities may independently develop, or have developed, similar or superior
technologies.
If our employees or agents violate the U.S. Foreign Corrupt Practices Act or anti-bribery laws in other
jurisdictions, we may incur fines or penalties, or experiences other adverse consequences.
We are subject to the U.S. Foreign Corrupt Practices Act (“FCPA”) and similar anti-bribery laws in non-
U.S. jurisdictions which generally prohibit companies and their intermediaries from making improper payments to
non-U.S. officials for the purpose of obtaining or retaining business. Because of the predominance of government-
sponsored healthcare systems around the world, many of our customer relationships outside of the United States are
with governmental entities and are therefore subject to such anti-bribery laws. We operate in many parts of the
world that have experienced governmental corruption to some degree, and in certain circumstances strict compliance
with anti-bribery laws may conflict with local customs and practices. Our internal control policies and procedures
may not protect us from reckless or criminal acts committed by our employees or agents. If our employees or agents
violate the provisions of the FCPA or other anti-bribery laws, we may incur fines or penalties, we may be unable to
market our products in other countries or we may experience other adverse consequences which could have a
material adverse effect on our operating results or financial condition.
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We will be required to expend significant resources for research, development, testing and regulatory
approval or clearance of our products under development and these products may not be developed
successfully or approved for commercial use.
We are developing and commercializing products for medical applications using embolotherapy
techniques. Most of our products under development will require significant additional research, development,
engineering and preclinical and/or clinical testing, as well as regulatory approval or clearance and a commitment of
significant additional resources prior to their commercialization. It is possible that they may not: be developed
successfully; be proven safe and effective in clinical trials; offer therapeutic or other improvements over current
treatments and products; meet applicable regulatory standards or receive regulatory approvals or clearances; be
capable of production in commercial quantities at acceptable costs and in compliance with regulatory requirements;
or be successfully marketed or covered by private or public insurers.
We are conducting a clinical trial and seeking approval from the FDA to claim the use of the
QuadraSphere® Microspheres for the treatment of a specific disease or condition, such as hepatocellular cancer or
hepatic metastasis in the United States. European Union regulations do not require such an application for this class
of medical devices. In order for us to obtain FDA approval or clearance to promote the use of QuadraSphere®
Microspheres for the embolization of hepatocellular carcinoma and hepatic metastasis, we will need to complete a
clinical trial and submit positive clinical data to the FDA. As we continue our clinical trial and if the results are not
sufficient to obtain FDA approval, then we will not be able to promote our QuadraSphere® Microspheres for liver
cancer indications in the U.S. Although we have not received approval or clearance from the FDA to market our
QuadraSphere® Microspheres for primary or metastatic liver cancer in the United States, we believe that some
physicians are using QuadraSphere® Microspheres in procedures which are not indicated on our labels (referred to
as “off-label” use), including the treatment of primary and metastatic liver cancer. If the FDA or any other federal or
state enforcement agency were to conclude that we have improperly promoted our products for unapproved
indications, the FDA or such other agency could allege that our promotional activities misbrand or adulterate our
products or violate other legal requirements, which could result in investigations, prosecutions, or other civil or
criminal actions.
The medical device industry is experiencing greater scrutiny and regulation by governmental authorities.
Our medical devices and business activities are subject to rigorous regulation by the FDA and other federal,
state and international governmental authorities. These authorities and members of Congress have been increasing
their scrutiny over the medical device industry. In recent years, the U.S. Congress, Department of Justice, the Office
of Inspector General of the Department of Health and Human Services, and the Department of Defense have issued
subpoenas and other requests for information to medical device manufacturers, primarily related to financial
arrangements with health care providers, regulatory compliance and product promotional practices. The Physician
Payment Sunshine Act, enacted as part of the Affordable Care Act, requires device manufacturers to report
payments or other transfers of value made to health care providers, effective March 2013 for calendar year 2012. In
addition, certain states have recently passed or are considering legislation restricting our interactions with health
care providers and/or requiring disclosure of many payments to them. Recent Supreme Court decisions have
clarified that the FDA’s authority over medical devices preempts state tort laws, but some members of Congress
have indicated an interest in introducing tort reform legislation. We anticipate that the government will continue to
scrutinize our industry closely, and that additional regulation by government authorities may increase compliance
costs, exposure to litigation, and other adverse effects to our operations.
Potential reforms to the FDA’s 510(k) process could adversely affect our business, operations, or financial
condition.
In August 2010, the FDA issued its preliminary recommendations on reform of the 510(k) premarket
notification process for medical devices. The FDA’s preliminary recommendations included, among other things,
granting to the FDA authority to rescind 510(k) clearance, revising existing guidance to clarify what types of
modifications to existing 510(k)-cleared devices warrant submission of a new 510(k) application, exploring the
possibility of potentially requiring manufacturers to provide periodic updates to the FDA’s Center for Devices and
Radiological Health (“CRDH”) listing modifications without submitting a new 510(k) application, adopting a
framework for 510(k) submissions that requires formal validation of claims with supporting evidence and
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developing guidance requiring that the complete device description and intended use information be submitted and
described in detail in a single section of a 510(k) application. On January 19, 2011, the FDA announced its “Plan of
Action” for implementing these recommendations. The Plan of Action includes 25 action items for 2011, including
streamlining the review process for innovative, lower risk products (the “de novo” process); improving training for
CDRH staff and industry; increasing reliance on external experts; and addressing and improving CDRH processes.
If implemented, these recommendations could have the effect of making it more difficult and expensive for us, and
other companies, to obtain 510(k) clearance and potentially jeopardizing the regulatory status of certain 510(k)-
cleared devices.
We are subject to laws targeting fraud and abuse in the healthcare industry, the violation of which could
adversely affect our business or financial results.
Our operations are subject to various state and federal laws targeting fraud and abuse in the healthcare
industry, including federal anti-kickback laws, which prohibit any person from knowingly and willfully offering,
paying, soliciting or receiving remuneration, directly or indirectly, to induce or reward either the referral of an
individual, or the furnishing or arranging for an item or service, for which payment may be made under federal
healthcare programs, such as the Medicare and Medicaid programs. Violations of these fraud and abuse-related
laws are punishable by criminal or civil sanctions, including substantial fines, imprisonment and exclusion from
participation in healthcare programs such as Medicare and Medicaid and health programs outside the United States,
any of which could adversely affect our business or 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 FDCA, and the manufacture, distribution,
record keeping, labeling and advertisement of substantially all 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 regular review and periodic
inspections at our current facilities with respect to compliance with the FDCA, 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.
Increases in the price of commodity components, particularly petroleum-based products, or loss of supply
could have an adverse effect on our business.
Many of our products have components that are manufactured using resins, plastics and other petroleum-
based materials. Our ability to operate profitably is dependent, in large part, on the availability and pricing of these
materials. The availability of these products is affected by a variety of factors beyond our control, including
political uncertainty in the Middle East, and there is no assurance that crude oil supplies will not be interrupted in
the future. Any such interruption could have an adverse effect on our ability to produce, or on the cost to produce,
our products. Also, crude oil prices generally fluctuate based on a number of factors beyond our control, including
changes in supply and demand, general economic conditions, labor costs, fuel-related transportation costs,
competition, import duties, tariffs, currency exchange rates and political uncertainty in the Middle East. Our
suppliers may pass some of their cost increases on to us, and if such increased costs are sustained or increase further,
our suppliers may pass further cost increases on to us. In addition to the effect on resin prices, transportation costs
generally increase based on the effect of higher crude oil prices, and these increased transportation costs may be
passed on to us. Our ability to recover such increased costs may depend upon our ability to raise prices on our
products. Due to the highly competitive nature of the healthcare industry and the cost-containment efforts of our
customers and third party payors, we may be unable to pass along cost increases through higher prices. If we are
unable to fully recover these costs through price increases or offset these increases through cost reductions, we could
experience lower margins and profitability and our business, results of operations, financial condition and cash flows
could be materially and adversely affected.
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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 or 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.
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 acquisitions, we will face the additional challenges of integrating the
operations, culture, information management systems and other characteristics of the acquired entity with our own.
We have incurred, and may incur, significant expenses in connection with negotiating and consummating one or
more transactions, and we may inherit significant liabilities in connection with prospective acquisitions. In addition,
we may not realize competitive advantages, synergies or other benefits anticipated in connection with any such
acquisition. If we do not adequately identify targets for, or manage issues related to, our future acquisitions, such
acquisitions may have an adverse effect on our business and financial results.
Fluctuations in Euro and GBP exchange rates may negatively impact our financial results.
Our material market risk relates primarily to fluctuations in the rate of exchange between the Euro and
Great Britain Pound (“GBP”) relative to the value of the U.S. Dollar. Those fluctuations could have a negative
impact on our margins and financial results. For example, during 2010, the exchange rate between all applicable
foreign currencies and the U.S. Dollar resulted in a decrease in our gross revenues of approximately $936,000.
For the year ended December 31, 2010, approximately $32.9 million, or 11%, of our sales, were
denominated in foreign currencies. 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.
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We depend on generating sufficient cash flow to fund our debt obligations, capital expenditures, and ongoing
operations.
We are dependent on our cash on hand and free cash flow to fund our debt obligations, capital expenditures
and ongoing operations. Our ability to service our debt and to fund our planned capital expenditures and ongoing
operations will depend on our ability to continue to generate cash flow. If we are unable to generate sufficient cash
flow or we are unable to access additional liquidity sources, we may not be able to service or repay our debt, operate
our business, respond to competitive challenges, or fund our other liquidity and capital needs.
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, 2010, sales of our inflation devices (including inflation devices sold in custom kits and through
OEM channels) accounted for approximately 21% of our total revenues. Sales of our inflation devices to a single
OEM customer, representing our largest customer, were approximately 18% of our total inflation device sales for
the year ended December 31, 2010. 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 or technology.
The markets in which our products compete are highly competitive. We face competition from many
companies which are larger, better established, have greater financial, technical and other resources and possess a
greater market presence than we do. Such resources and market presence may enable our competition to more
effectively market competing products or to market competing products at reduced prices in order to gain market
share.
In addition, our ability to compete successfully is dependent, in part, upon our response to changes in
technology and upon 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 at times been, and may in the future be, volatile for various
reasons, including those discussed in these risks factors, which could have a material adverse effect on our business,
operations or financial condition. Other events that could cause volatility in our stock, include without limitation,
quarter-to-quarter variances in our financial results; analysts’ and other projections or recommendations regarding
our Common Stock specifically or medical technology stocks generally; any restatement of our financial statements
or any investigation of us by the SEC, the FDA or another regulatory authority; or a decline, or rise, of stock prices
in the capital markets generally.
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Operations at our manufacturing facilities may be negatively impacted by certain factors, including severe
weather conditions and the impact of natural disasters.
Our operations could be affected by many factors beyond our control, including severe weather conditions
and the impact of natural disasters, including hurricanes and tornados. These conditions could cause substantial
damage to our facilities, interrupt our 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 proceeds 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 damage, along with potential increases in insurance costs, will not have
a material adverse effect on our results of operations or financial condition.
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 foreign countries and sell our
products worldwide. We depend on third-party transportation companies to deliver supplies necessary to
manufacture our products from vendors to our various facilities and to move our products to customers, operating
divisions, and other subsidiaries located worldwide. Our manufacturing operations, and the operations of the
transportation companies on which we depend, may be adversely affected by natural disasters or significant human
events, such as a war, terrorist attack, riot, strike, slowdown or similar event. Any disruption in our manufacturing
or transportation could materially and 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.
Our failure to comply with applicable environmental laws and regulations could affect our business and
results of operations.
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 to prevent accidental releases of a
material nature, any accidental release may have an adverse affect on our business and results of operations.
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Recently healthcare reform legislation may have a material adverse effect on our business, financial
condition, results of operations and cash flows.
The Patient Protection and Affordable Care Act and Health Care and Education Affordability
Reconciliation Act of 2010 were enacted into law in the U.S. in March 2010. Certain provisions of the legislation
will not be effective for a number of years. There are many programs and requirements for which the details have
not yet been fully established or consequences not fully understood, and it is unclear what the full impact of the
legislation will be. The legislation imposes on medical device manufacturers a 2.3 percent excise tax on U.S. sales
of certain medical devices beginning in 2013. This tax burden may have a material, negative impact on our results
of operations and our cash flows. We cannot predict what healthcare programs and regulations will be ultimately
implemented at the federal or state level, or the effect of any future legislation or regulation in the U.S. or
internationally. However, any changes that lower reimbursements for our products or reduce medical procedure
volumes could adversely affect our business and results of operations.
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
Our world headquarters is located in South Jordan, Utah, with our principal office for European operations
located in Galway, Republic of Ireland. We also receive support for European operations from a second European
facility located in Beek, The Netherlands. In addition, we lease office space in Washington D.C.; Jackson
Township, New Jersey; and Tokyo, Japan. Our principal manufacturing facilities are located in South Jordan, Utah;
West Jordan, Utah; Murray, Utah; Angleton, Texas; Chester, Virginia; Galway, Republic of Ireland; Paris, France;
and Venlo, The Netherlands. Research and development is principally conducted at facilities located in South
Jordan, Utah; Paris, France; and Galway, Republic of Ireland. The following is an approximate summary of our
facilities as of December 31, 2010 (in square feet):
U.S.
International
Owned
Leased
358,525
96,000
454,525
346,012
38,147
384,159
Total
704,537
134,147
838,684
In February 2010, we acquired 0.79 acres of property located on the southwest corner of our South Jordan
facility. The new property will allow construction of an additional employee entrance and provide a necessary land
buffer between our new production, warehouse and administration offices and a group of office condominiums.
In March 2010, we leased an office of approximately 2,100 square feet located in the financial district of
Beijing, China and a warehouse of approximately 6,900 square feet located in the southeast quadrant of Beijing,
China.
In September 2010, we acquired BioSphere. BioSphere is a party to the lease of an administrative office
located in Rockland, Massachusetts and a production and administrative building located in Paris, France.
In August 2010, we acquired approximately five acres of real property located in the Parkmore East
Business Park in Galway, Ireland. The purpose for this acquisition is to build a new production facility. In
November 2010, we commenced construction of a 74,680 square foot production, warehouse, and research and
development building located on the parcel in the Parkmore East Business Park in Galway, Ireland.
In late 2010, we commenced construction of a production, warehouse and administration office building,
which will total approximately 245,000 square feet, at our world headquarters in South Jordan, Utah. In 2010, we
also commenced construction of a parking structure at our world headquarters.
We believe that our existing and proposed facilities will generally be adequate for our present and future
anticipated levels of operations.
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23(cid:1)
Item 3. Legal Proceedings.
In the course of conducting our business operations, we are, from time to time, involved in litigation or
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. [Removed and Reserved.]
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 is traded on the NASDAQ Global Select Market 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, 2010
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
For the year ended December 31, 2009
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
High
Low
19.85 $
17.03 $
17.75 $
16.60 $
13.78
14.28
15.48
14.64
High
Low
18.00 $
16.99 $
19.54 $
19.90 $
9.57
11.68
15.71
15.65
$
$
$
$
$
$
$
$
As of March 10, 2011, the number of shares of Common Stock outstanding was 28,496,078 held by
approximately 154 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 Credit Agreement contains covenants prohibiting the declaration and
distribution of a cash dividend at any time prior to the termination of such Credit Agreement.
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24(cid:1)
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, 2005 to December 31, 2010.
Comparison of 5 Year Cumulative Total Return
Among Merit Medical Systems, Inc., NASDAQ Stock Market (U.S.)
and NASDAQ Stocks (SIC 3840-3849)
180.00
160.00
140.00
120.00
100.00
80.00
60.00
40.00
20.00
0.00
s
r
a
l
l
o
D
S
U
$130.40
$125.30
$106.75
Dec-05
Jun-06
Dec-06
Jun-07
Dec-07
Dec-08
Jun-09
Dec-09
Jun-10
Jun-08
Date
Merit Medical Systems, Inc.
NASDAQ Stock Market (U.S. Companies)
--------- NASDAQ Stocks (SIC 3840-3849 U.S. Companies
Surgical, Medical and Dental Instruments and Supplies)
Merit Medical Systems, Inc.
NASDAQ Stock Market (U.S.
Companies)
NASDAQ Stocks (SIC 3840-
3849 U.S. Companies)
12/2005
100
$
12/2006
130
$
12/2007
114
$
12/2008
148
$
12/2009
158
$
12/2010
130
$
100
100
110
103
119
135
57
74
83
101
125
107
The stock performance graph assumes for comparison that the value of the Common Stock and of each index was
$100 on December 31, 2005 and that all dividends were reinvested. Past performance is not necessarily an indicator
of future results.
NOTE:
NOTE:
NOTE:
NOTE:
Performance graph data is complete through last fiscal year.
Performance graph with peer group uses peer group only performance (excludes only Merit).
Peer group indices use beginning of period market capitalization weighting.
Index Data: Calculated (or Derived) based from CRSP NASDAQ Stock Market (US Companies) and
CRSP NASDAQ Medical Equipment, Center for Research in Security Prices (CRSP®), Graduate
School of Business, The University of Chicago. Copyright 2011. Used with permission. All rights
reserved.
(cid:1)
25(cid:1)
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
The following table contains information regarding our equity compensation plans as of December 31,
2010 (in thousands):
Number of
securities to be
issued upon
exercise of
outstanding
options, warrants
and rights
(a)
Weighted-average
exercise price of
outstanding options,
warrants and rights
(b)
Number of securities
remaining available for
future issuance under
equity compensation plans
(excluding securities
reflected in column (a) )
(c)
3,511(1),(3)
$13.20
2,085(2),(3)
Plan category
Equity compensation Plans
approved by security
holders
(1) Consists of 3,510,786 shares of Common Stock subject to the options granted under the Merit Medical
Systems, Inc. 2006 Long-Term Incentive Plan.
(2) Consists of 311,829 shares available to be issued under the Merit Medical Systems, Inc. Qualified and Non-
Qualified Employee Stock Purchase Plan and 1,772,800 shares available to be issued under the Merit Medical
Systems, Inc. 2006 Long-Term Incentive Plan.
(3) See Note 11 to our consolidated financial statements set forth in Item 8 of this report for additional information
regarding these plans.
(cid:1)
26(cid:1)
Item 6. Selected Financial Data (in thousands).
OPERATING DATA:
Net Sales
Cost of Sales
Gross Profit
2010
Years Ended December 31,
2008
2007
2009
2006
$ 296,755 $ 257,462 $ 227,143 $ 207,768 $ 190,674
117,596
73,078
148,660
108,802
168,257
128,498
127,977
79,791
133,872
93,271
Operating Expenses:
Selling, general and administrative
Research and development
Goodwill impairment charge
87,615
15,335
8,344
64,787
11,168
53,127
9,160
48,133
8,688
45,486
8,582
Total operating expenses
111,294
75,955
62,287
56,821
54,068
Income From Operations
Other Income (Expense):
Interest income
Interest expense
Other income (expense)
Other income (expense)—net
Income Before Income Taxes
Income Tax Expense
Net Income
Earnings Per Common Share:
Diluted
Average Common Shares:
Diluted
BALANCE SHEET DATA:
Working capital
Total assets
Line of credit
Long-term debt
Stockholders’ equity
17,204
32,847
30,984
22,970
19,010
34
(596)
146
(416)
178
(28)
97
247
781
(17)
97
861
393
(3)
39
429
250
(12)
(64)
174
16,788
4,328
33,094
10,564
31,845
11,118
23,399
19,184
7,811
6,883
$
12,460 $
22,530 $
20,727 $
15,588 $
12,301
$
0.43 $
0.79 $
0.73 $
0.55 $
0.44
28,781
28,606
28,550
28,204
28,245
$
72,125 $
369,480
0
81,538
54,972
182,668
0
0
$ 235,615 $ 218,809 $ 194,305 $ 164,368 $ 151,212
57,706 $
271,513
7,000
0
60,194 $
200,420
0
0
84,283 $
231,776
0
0
During the quarter ended September 30, 2010, we determined that our goodwill related to our endoscopy
reporting unit was impaired and we recorded an impairment charge of approximately $8.3 million, which was offset
by approximately $3.2 million of deferred tax asset. We determined that, based on estimated future cash flows for
this reporting unit, discounted back to their present value using a discount rate that reflects the risk profiles of the
underlying activities, the carry value amount of this reporting unit was less than its estimated fair value. Some of
the factors that influenced our estimated cash flows were slower sales growth in the products acquired from our
Alveolus acquisition in March of 2009, uncertainty regarding acceptance of new products and continued operating
losses for our endoscopy business segment.
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
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27(cid:1)
priorities and opportunities. Therefore, we recorded an impairment charge of approximately $929,000 during the
quarter, which is included in selling, general and administrative expenses, primarily relating to intellectual property
assets acquired from Sub-Q in March 2005.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of our financial condition and results of operation should be read in
conjunction with the Consolidated Financial Statements and related Notes thereto, which are included in this Annual
Report on Form 10-K.
OVERVIEW
We design, develop, manufacture and market single-use medical products for interventional and diagnostic
procedures. We report our operations in two operating segments: cardiovascular and endoscopy. Our
cardiovascular segment consists of cardiology and radiology devices which assist in diagnosing and treating
coronary arterial disease, peripheral vascular disease and other non-vascular diseases and includes the
embolotherapeutic products we acquired through our acquisition of BioSphere. Our endoscopy segment consists of
gastroenterology and pulmonology medical devices which assist in the palliative treatment of expanding esophageal,
tracheobronchial and biliary strictures caused by malignant tumors.
On September 10, 2010, we completed our acquisition of BioSphere in an all-cash merger transaction
valued at approximately $96 million, inclusive of all common equity and Series A preferred shares. BioSphere
develops and markets embolotherapeutic products for the treatment of uterine fibroids, hypervascularized tumors
and arteriovenous malformations. We believe our acquisition of BioSphere gives us a platform technology
applicable to multiple therapeutic areas with significant market potential while leveraging existing interventional
radiology call points. Two immediate applications for the embolotherapy are uterine fibroids and primary liver
cancer.
On November 29, 2010, the FDA approved our application to perform a phase 3 clinical trial protocol to
treat primary liver cancer with QuadraSphere® Microspheres (hqTACE) for delivery of doxorubicin. We anticipate
over the next three to four years that we will spend approximately $10 million to support this clinical trial. We
believe if we are successful with this clinical trial, we will be the only market participant in this area with a product
approved from the FDA which will allow us to take advantage of a highly profitable market.
In September 2010, we began our first direct shipments to Chinese sub-distributors from our distribution
warehouse in China. With our own direct sales force in China contacting sub-distributors we have eliminated one of
the distribution levels in China, which we believe will allow us to increase our sales, gross margins and net income
from our product sales in China. In addition, we are making significant investments in obtaining additional
regulatory licenses from the Chinese State Food and Drug Administration in an effort to expand our product
offerings in China.
We have made substantial investments over the last few years in the acquisition of new products with
higher gross margins. Additionally, during this same timeframe we have made significant investments in our direct
sales forces in the U.S., Europe and China. In order to successfully implement our business strategy, we will need to
manage our operating expenses as a percentage of sales to achieve earnings growth in future periods.
(cid:1)
28(cid:1)
RESULTS OF OPERATIONS
The following table sets forth certain operational data as a percentage of sales for the periods indicated:
Net sales
Gross profit
Selling, general and administrative
expenses
Research and development expenses
Goodwill impairment charge
Income from operations
Income before income taxes
Net income
2010
100.0%
43.3
2009
100.0%
42.3
2008
100.0%
41.1
29.5
5.2
2.8
5.8
5.7
4.2
25.2
4.3
12.8
12.9
8.8
23.4
4.0
13.6
14.0
9.1
Listed below are the sales by business segment for the years ended December 31, 2010, 2009, and 2008 (in
thousands):
Cardiovascular
Stand-alone devices
Custom kits and procedure
trays
Inflation devices
Catheters
Embolization devices
Total
Endoscopy
Endoscopy devices
% Change
2010
% Change
2009
% Change
2008
16%
$ 88,586
12%
$ 76,075
9%
$ 68,005
11%
2%
18%
15%
18%
12%
(1)%
23%
10%
82,799
62,495
44,824
9,003
287,707
9,048
74,541
61,058
38,126
249,800
7,662
11%
3%
20%
9%
66,584
61,656
30,898
227,143
Total
15%
$ 296,755
13%
$ 257,462
9%
$ 227,143
Our endoscopy sales for 2010 of approximately $9.0 million, when compared to 2009 sales of
approximately $7.7 million (sales for 2009 includes only nine and one-half months), were down on an annualized
basis, primarily due to the elimination of sales of certain stent procedures and sales force turnover.
Our cardiovascular sales for 2010 of approximately $287.7 million, compared to 2009 cardiovascular sales
of $249.8 million, were up $37.9 million or approximately 15%. This improvement was largely the result of an
increase in sales of $22.2 million, or 9.5% of sales, related to our base business (which excludes EN Snare® and
embolization devices sales); our acquisition of embolization devices from BioSphere of $9.0 million, or 3.6% of
sales; and $6.7 million, or 2.7% of sales, related to the EN Snare® products we acquired from Hatch in June of
2009. Our growth in the cardiovascular business segment was favorably affected by increased sales of our base
business growth of custom kits and procedure trays of approximately $8.3 million, or 3.3% of base business sales,
catheters (particularly our Prelude® sheath product line, micro access catheter product line and new microcatheter
product line) of approximately $6.7 million, or 2.7% of base business sales, and our stand-alone devices
(particularly our hemostasis valves and stopcocks) of approximately $5.8 million, or 2.3% of base business sales
(excludes $6.7 million in EN Snare® sales). Our sales increased during 2010, 2009, and 2008 notwithstanding the
fact that the markets for many of our products experienced slight pricing declines as our customers tried to reduce
their costs. Substantially all of the increase in our revenues was attributable to increased unit sales. Sales by our
European direct sales force are subject to foreign currency exchange rate fluctuations between the natural currency
of a foreign country and the U.S. Dollar. Foreign currency exchange rate fluctuations decreased sales by 0.3% in
2010 compared to 2009; decreased sales by 1.0% in 2009 compared to 2008; and increased sales by 0.6% in 2008
compared to 2007. New products are another source of revenue growth. In 2010, 2009 and 2008, our sales of new
products represented 10%, 6% and 2% of sales, respectively. Included in those sales are revenues from recent
(cid:1)
29(cid:1)
acquisitions of 3%, 3% and 1% for 2010, 2009 and 2008, respectively. The third main source of revenue increases
came from market share gains in our existing product lines.
International sales in 2010 were approximately $95.2 million, or 32% of total sales; international sales in
2009 were approximately $86.4 million, or 34% of total sales; international sales in 2008 were approximately $72.5
million, or 32% of total sales. The increase in 2010 was primarily related to increased sales in China, Japan,
Germany and the UK. The previous increases in 2009 and 2008 primarily resulted from greater acceptance of our
products in international markets, continued growth in our European direct sales, and to a lesser degree, 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, Finland and
Ireland were $29.7 million, $26.3 million and $27.1 million in 2010, 2009 and 2008, respectively.
Our gross profit as a percentage of sales was 43.3%, 42.3% and 41.1% in 2010, 2009 and 2008,
respectively. The improvement in gross profit in 2010 was primarily the result of the addition of higher-margin EN
Snare® and embolization devices (including $1.7 million in costs related to mark-up on finished goods) acquired
from Hatch and BioSphere. The improved gross profits in 2009 can be attributed primarily to lower average fixed
overhead unit costs through increased productivity as fixed costs are shared over an increased number of units and a
reduction in material costs. The increase in gross profits 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.
Our selling, general and administrative expenses increased $22.8 million, or 35%, in 2010 compared to
2009; $11.7 million, or 22%, in 2009 over 2008; and $5.0 million, or 10%, in 2008 over 2007. The increase in
selling, general and administrative expenses in 2010 was largely the result of our acquisition of BioSphere in
September 2010 and subsequent integration expenses (additional sales representatives, marketing support and
advertising costs). In connection with the BioSphere acquisition, we had $2.8 million in one-time severance costs
and $2.5 million in acquisition costs included in selling, general and administrative expenses. The increased selling,
general and administrative expenses in 2009 were primarily due to the increased expense associated with our
acquisition and operation of the business and assets acquired from Alveolus of $5.7 million and the hiring of
additional domestic and international sales representatives. 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.
Research and development expenses increased 37% to $15.3 million in 2010, compared to $11.2 million in
2009. The increase in research and development expenses in 2010 was primarily the result of product development
initiatives for the endoscopy business segment and embolization devices acquired from BioSphere, as well as related
regulatory support. Research and development increased 22% to $11.2 million in 2009, compared to $9.2 million in
2008. The increase in research and development expenses in 2009 related, in large part, to research and
development project expenses for the Alveolus business we acquired of $1.1 million and to growth in our traditional
organic research and development projects, some of which are nearing completion. Research and development
increased 5% to $9.2 million in 2008, compared to $8.7 million in 2007. The increase in research and development
expenses in 2008 related primarily to research and development head count additions and indirect costs to support an
increase in the number of new products we launched. Our research and development expenses as a percentage of
sales were 5.2% for 2010, 4.3% for 2009 and 4.0% for 2008. We have a full pipeline of new products and we
believe that we have an effective level of capabilities and expertise to continue the flow of new internally-developed
products into the future with higher average gross margins.
(cid:1)
30(cid:1)
Our operating profits by business segment for the years ended December 31, 2010, 2009 and 2008 were as
follows (in thousands):
Operating Income (Loss)
Cardiovascular
Endoscopy
Total operating income
2010
2009
2008
$
$
30,176 $
(12,972)
17,204 $
35,836 $
(2,989)
32,847 $
30,984
—
30,984
Our endoscopy net operating loss from operations for 2010 was approximately $13.0 million, compared to
an operating loss of $3.0 million for 2009. The increase in loss from operations for 2010 was primarily affected by a
goodwill impairment charge of approximately $8.3 million and approximately $2.0 million in additional research
and development expenses over 2009. The increase in research and development expense in the endoscopy segment
during 2010 was principally the result of our investment in new product development to help move this business
segment to profitability. We anticipate that we will launch four to five new endoscopy products during 2011.
Our cardiovascular operating income remained relatively unchanged for 2010 at approximately $25.4
million, compared to net operating income of $25.5 million for 2009.
Our effective income tax rates for 2010, 2009 and 2008 were 26%, 32% and 35%, respectively. The
decrease in the effective income tax rate for 2010 over 2009 was largely due to the fact that our Irish operations,
which are taxed at a lower income tax rate than our U.S. and other foreign operations, made up a greater portion of
our 2010 consolidated income compared to 2009. The decrease in the tax rate was also due to permanent tax
benefits (such as certain tax credits) being applied to a lower pre-tax book income in 2010. The decrease in the
effective income tax rate for 2009 over 2008 was primarily related to the profitability of our Irish operations, which
are taxed at a lower income tax rate than our U.S. and other foreign operations; research and development tax credits
generated from our Irish operations; and investment gains sustained in our deferred compensation that are not
deductible for tax purposes. The increase in the effective income tax rate for 2008 and 2007 was primarily the result
of investment losses sustained in our deferred compensation plan that are not deductible for tax purposes.
Our other income (expense) for 2010, 2009 and 2008 was approximately ($416,000), $247,000 and
$861,000, respectively. The increase in other expenses for 2010 over 2009 was principally the result of interest
expense of approximately $451,000 on our long-term debt incurred in connection with the acquisition of BioSphere.
The decrease in other income for 2009 over 2008 was primarily the result of a decrease in interest income
attributable to lower average cash balances, when compared to 2008. The increase in other income for 2008 and
2007 was primarily the result of an increase in interest income attributable to higher average cash balances and
higher interest rates.
Our net income for 2010, 2009 and 2008 was approximately $12.5 million, $22.5 million and $20.7
million, respectively. Net income for 2010 was unfavorably affected by the goodwill impairment of approximately
$8.3 million, or approximately $5.2 million net of tax, related to our endoscopy reporting unit. In addition, 2010 net
income was negatively affected by BioSphere acquisition costs of approximately $2.5 million, or approximately
$1.5 million net of tax, BioSphere severance costs of approximately $2.8 million, or approximately $1.7 million net
of tax and BioSphere’s increase in the cost of goods sold related to mark-up on finished goods of approximately
$1.7 million, or approximately $1.1 million net of tax. Net income for 2009 was favorably affected by increased
sales volumes, higher gross margins and a lower effective income tax rate, all of which offset higher selling, general
and administrative expenses and research and development expenses, primarily associated with our acquisition of
the Alveolus assets in the first quarter of 2010. Net income for 2008 was positively affected by increased sales
volumes and higher gross margins and partially offset by higher effective income tax rates.
(cid:1)
31(cid:1)
LIQUIDITY AND CAPITAL RESOURCES
Capital Commitments and Contractual Obligations
The following table summarizes our capital commitments and contractual obligations as of December 31,
2010, including operating lease payments and office lease payments, as well as the future periods in which such
payments are currently anticipated to become due:
Contractual Obligations
Operating leases
Royalty obligations
Total contractual cash
$
$
Total
22,483 $
648
23,131 $
Payment due by period (in thousands)
Less than 1 Year
1-3 Years
4-5 Years
3,385 $
85
3,470 $
5,142 $
170
5,312 $
After 5 Years
9,539
315
9,854
4,417 $
78
4,495 $
We have approximately $3.5 million of unrecognized tax positions that have been recognized as liabilities
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, 9 and 13 of the notes to our consolidated financial statements, set forth in Item 8
below.
Cash Flows
Our cash flow from operations was $34.8 million in 2010, an increase of $3.5 million over 2009. This
increase in cash flow from operations in 2010, when compared to 2009, came primarily from an increase in non-
cash amortization of intangibles from our acquisitions of Hatch and BioSphere. Our working capital for 2010, 2009
and 2008, was $72.1 million, $57.7 million and $84.3 million, respectively. The increase in working capital in 2010
from 2009 was primarily the result of the acquisition of BioSphere’s current assets (primarily inventory and
receivables). The decrease in working capital in 2009 from 2008 was primarily the result of a decrease in cash of
$40.1 million related to our acquisition of the Alveolus assets and the EN Snare® product line. 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.
During the year ended December 31, 2010, our inventory balances increased $13.4 million, from $47.2
million at December 31, 2009 to $60.6 million at December 31, 2010. The increase in inventory was primarily
related to our acquisition of the Biosphere’s inventory of approximately $5.7 million, higher inventory levels of
approximately $4.3 million attributable to a 9.2% increase in our base business, approximately $2.0 million related
to new product launches and approximately $900,000 related to our new Chinese distribution warehouse and in-
transit inventory used to support our direct sales efforts in China.
During the year ended December 31, 2009, our inventory balances increased by approximately $8.8
million, from $38.4 million at December 31, 2008 to $47.2 million at December 31, 2009. The increase resulted
from a combination of factors, including the following principal elements: a $3.2 million increase in raw materials,
work in process and finished goods inventory attributable to the products we acquired from Hydromer, Inc.
(“Biosearch”), Hatch and Alveolus; a change in our in-transit finished goods and raw materials inventory shipping
practices (from air freight to ocean freight) between our manufacturing facility in Ireland and our distribution
facility in The Netherlands, which increased our in-transit finished goods and raw materials inventory levels by four
weeks or approximately $1.8 million; higher inventory levels of approximately $3.8 million attributable to a 10%
increase in our cardiovascular operating segment; and our management’s decision to increase inventory levels for
many of our products in order to improve product delivery time frames.
During the year ended December 31, 2008, our inventory balances increased by approximately $4.3
million, from $34.1 million at December 31, 2007 to $38.4 million at December 31, 2008. This increase resulted
primarily from higher inventory levels of approximately $3.1 million attributable to a 9% increase in sales.
(cid:1)
32(cid:1)
On September 10, 2010 we entered into the Credit Agreement with the Lenders and Wells Fargo, as
administrative agent for the Lenders. As of December 31, 2010, Wells Fargo is the only bank involved in the Credit
Agreement. Pursuant to the terms of the Credit Agreement, the Lenders have agreed to make revolving credit loans
up to an aggregate amount of $125 million. Wells Fargo has also agreed to make swingline loans from time to time
through the maturity date of September 10, 2015 in amounts equal to the difference between the amounts actually
loaned by the Lenders and the aggregate credit commitment. Our interest rate as of December 31, 2010 was a fixed
rate of 2.73% on $55.0 million, a fixed rate at 1.52% on $22.0 million and a variable floating rate of 1.56% on
approximately $ 4.5 million.
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 million. Our
outstanding borrowings on this line of credit as of December 31, 2010 and 2009 were $0 million and $7.0 million,
respectively. Available borrowings under this line of credit as of December 31, 2009 were $30 million. In
connection with entering into the Credit Agreement, our unsecured line of credit with Bank of America was
terminated on September 10, 2010.
On December 8, 2006, we entered into an unsecured loan agreement with Zions First National Bank
(“Zions”), whereby Zions agreed to provide us a line of credit in the amount of $1 million. The loan expired on
December 1, 2009; however, it was extended for an additional three years to December 1, 2012 but terminated in
March 2010. There were no outstanding borrowings on this loan agreement as of December 31, 2009.
Historically, we have incurred significant expenses in connection with new facilities, production
automation, product development and the introduction of new products. Over the last two years, we spent a
substantial amount of cash in connection with our acquisition of certain assets and product lines ($96 million to
acquire BioSphere in September of 2010 and $46.2 million to acquire the assets of Alveolus and Hatch, among other
transactions, during 2009). We plan to construct two new production facilities over the next two years, in South
Jordan, Utah and Galway, Ireland, and a parking terrace in South Jordan, Utah, with total anticipated costs of $52
million. In the event we pursue and complete similar transactions or acquisitions in the future, additional funds will
likely be required to meet our strategic needs, which may require us to raise additional funds in the debt or equity
markets. We currently believe that our existing cash balances, anticipated future cash flows from operations, sales
of equity, and existing lines of credit and committed debt financing will be adequate to fund our current and
currently planned future operations for the next twelve months and the foreseeable future.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Critical Accounting Policies
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 quarterly basis inventory quantities on
hand for unmarketable and/or slow-moving products that may expire prior to being sold. This review includes
quantities on hand for both raw materials and finished goods. Based on this review, we provide a reserve for any
slow-moving finished good products or raw materials that we believe will expire prior to being sold or used to
produce a finished good and any products that are unmarketable. This review of inventory quantities for
unmarketable and/or slow moving products is based on forecasted product demand prior to expiration lives.
(cid:1)
33(cid:1)
Forecasted unit demand is derived from our historical experience of product sales and production raw
material usage. If market conditions become less favorable than those projected by our management, additional
inventory write-downs may be required. During the years ended December 31, 2010 and 2009, respectively, we
provided on an annual basis an obsolescence reserve expense of between $1.9 million to $1.5 million and have
written off against such reserves between $1.1 million and $1.3 million on an annual basis. Based on this historical
trend, we believe that the amount included in our obsolescence reserve represents an accurate estimate of the
unmarketable and/or slow moving products that may expire prior to being sold.
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 bad debts as the result of the termination of
our business relationships with 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 relating to 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.
Stock-Based Compensation. 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 fair value of share-based awards granted and their expected forfeiture rate. If actual results differ
significantly from these estimates, stock-based compensation expense and our results of operations could be
materially impacted.
Income Taxes. Under our accounting policies, we initially recognize a tax position in our financial
statements when it becomes more likely than not that the position will be sustained upon examination by the tax
authorities. Such tax positions are initially and subsequently measured as the largest amount of tax positions 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 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.
Goodwill and Intangible Assets Impairment. We test our goodwill balances for impairment as of July 1
of each year, or whenever impairment indicators arise. We utilize several reporting units in evaluating goodwill for
impairment. We assess the estimated fair value of reporting units based on discounted future cash flows. If the
carrying amount of a reporting unit exceeds the fair value of the reporting unit, an impairment charge is recognized
in an amount equal to the excess of the carrying amount of the reporting unit goodwill over implied fair value of that
goodwill. This analysis requires significant judgments, including estimation of future cash flows and the length of
time they will occur, which is based on internal forecasts, and a determination of a discount rate based on our
weighted average cost of capital. During our annual test of goodwill balances, which is completed during the third
quarter of each year, we determined that our goodwill related to our endoscopy reporting unit was impaired. We
determined that based on estimated future cash flows for this reporting unit, discounted back to their present value
using a discount rate that reflects the risk profiles of the underlying activities, the carry value amount of this
reporting unit was less than its estimated fair value. Some of the factors that influence our estimated cash flows
were slower sales growth in the products acquired from our Alveolus acquisition in March of 2009, uncertainty
regarding acceptance of new products and continued operating losses in our endoscopy business segment.
We evaluate the recoverability of intangible assets whenever events or changes in circumstances indicate
that its carrying amount may not be recoverable. This analysis requires similar significant judgments as those
discussed above regarding goodwill, except that undiscounted cash flows are compared to the carrying amount of
intangible assets to determine if impairment exists. All of our intangible assets are subject to amortization.
(cid:1)
34(cid:1)
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Our principal market risk relates to changes in the value of the Euro and 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. During the year ended December 31, 2010, a portion of our revenues ($32.9 million, representing
approximately 11% of total sales) was attributable to sales that were denominated in foreign currencies. All other
international sales were denominated in U.S. Dollars. Certain expenses are also denominated in foreign currencies,
which partially offset risks associated with fluctuations of exchanges rates between foreign currencies 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, 2010, the exchange rate between our foreign currencies against the
U.S. Dollar resulted in a decrease of our gross revenues of approximately $936,000 and an increase of 0.2% in gross
profit.
On November 30, 2010, we forecasted a net exposure for December 31, 2010 (representing the difference
between Euro and GBP-denominated receivables and Euro-denominated payables) of approximately 658,000 Euros
and 222,000 GBPs. In order to partially offset such risks at December 31, 2010, we entered into a 30-day forward
contract for the Euro and GBP with a notional amount of approximately 658,000 Euros and notional amount of
222,000 GBPs. We enter into similar transactions at various times during the year to partially offset exchange rate
risks we bear throughout the year. These contracts are marked to market at each month-end. During the years
ended December 31, 2010, 2009 and 2008, we recorded a net gain on all forward contracts of approximately
$126,000, $83,000 and $52,000, respectively, which is included in other income (expense). We do not purchase or
hold derivative financial instruments for speculative or trading purposes. The fair value of our open positions at
December 31, 2010 and 2009 was not material.
As discussed in Note 10 to our consolidated financial statements, as of December 31, 2010, we had
outstanding borrowings of approximately $81.5 million under the Credit Agreement. Accordingly, our earnings and
after-tax cash flow are affected by changes in interest rates. As part of our efforts to mitigate interest rate risk, on
October 25, 2010, we entered into a LIBOR-based interest rate swap agreement that effectively fixed the interest
rate on $55 million of our current floating rate bank borrowings for a five-year period. The interest rate swap locked
in our interest rate on the expected outstanding balance of $55 million at 2.73%. This instrument is intended to
reduce our exposure to interest rate fluctuations and was not entered into for speculative purposes. Excluding the
$55 million that is subject to a fixed rate under the interest rate swap, assuming the current level of borrowings
remained the same, it is estimated that our interest expense and income before income taxes would change by
approximately $265,000 annually for each one percentage point change in the average interest rate under these
borrowings.
In the event of an adverse change in interest rates, our management would likely take actions, in addition to
the interest rate swap agreement discussed above, to mitigate our exposure. However, due to the uncertainty of the
actions that would be taken and their possible effects, additional analysis is not possible at this time. Further, such
analysis would not consider the effects of the change in the level of overall economic activity that could exist in
such an environment.
(cid:1)
35(cid:1)
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, 2010 and 2009 and the related consolidated statements of income,
stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2010. 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, 2010 and 2009 and the results of its operations and its cash flows for
each of the three years in the period ended December 31, 2010, 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 2009, the Company adopted new
accounting guidance related to business combinations.
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, 2010, based on
the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated March 15, 2011, expressed an unqualified opinion
on the Company’s internal control over financial reporting.
/s/ DELOITTE & TOUCHE LLP
Salt Lake City, Utah
March 15, 2011
(cid:1)
36(cid:1)
MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2010 AND 2009
(In thousands)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents
Trade receivables — net of allowance for uncollectible accounts — 2010 —
$593 and 2009 — $541
Employee receivables
Other receivables
Inventories
Prepaid expenses and other assets
Prepaid income taxes
Deferred income tax assets
Income tax refund receivable
Total current assets
PROPERTY AND EQUIPMENT:
Land and land improvements
Buildings
Manufacturing equipment
Furniture and fixtures
Leasehold improvements
Construction-in-progress
Total property and equipment
Less accumulated depreciation
Property and equipment — net
OTHER ASSETS:
Intangibles — net of accumulated amortization — 2010 — $8,996 and 2009
— $5,450
Goodwill
Deferred income tax assets
Other assets
Total other assets
TOTAL
See notes to consolidated financial statements.
(cid:1)
37(cid:1)
2010
2009
$
3,735 $
37,362
110
1,242
60,597
2,089
452
4,647
2,067
112,301
12,586
50,274
92,839
18,313
12,121
13,775
6,133
30,954
145
827
47,170
1,409
392
3,289
295
90,614
9,777
50,040
77,069
15,586
10,280
13,968
199,908
176,720
(71,853)
(62,074)
128,055
114,646
57,184
58,675
4,140
9,125
129,124
26,898
33,002
6,353
66,253
$
369,480 $
271,513
(Continued)
MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2010 AND 2009
(In thousands)
LIABILITIES AND STOCKHOLDERS’ EQUITY
2010
2009
$
20,092 $
18,890
307
13,352
12,196
212
7,000
148
32,908
11,251
2,945
3,382
1,874
344
887
40,176
81,538
1,267
3,527
4,258
1,763
1,336
133,865
52,704
67,091
167,664
860
63,690
155,204
(85)
235,615
218,809
$
369,480 $
271,513
(Concluded)
CURRENT LIABILITIES:
Trade payables
Accrued expenses
Advances from employees
Line of credit
Income taxes payable
Total current liabilities
LONG-TERM DEBT
DEFERRED INCOME TAX LIABILITIES
LIABILITIES RELATED TO UNRECOGNIZED TAX BENEFITS
DEFERRED COMPENSATION PAYABLE
DEFERRED CREDITS
OTHER LONG-TERM OBLIGATIONS
Total liabilities
COMMITMENTS AND CONTINGENCIES (Notes 2, 7, 8, 9 and 13)
STOCKHOLDERS’ EQUITY:
Preferred stock — 5,000 shares authorized as of December 31, 2010 and 2009;
no shares issued
Common stock, no par value; shares authorized — 2010 and 2009 - 100,000;
issued shares as of December 31, 2010 - 28,397 and December 31, 2009 -
28,181
Retained earnings
Accumulated other comprehensive income (loss)
Total stockholders’ equity
TOTAL
See notes to consolidated financial statements.
(cid:1)
38(cid:1)
MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2010, 2009 AND 2008
(In thousands except per share amounts)
NET SALES
COST OF SALES
GROSS PROFIT
OPERATING EXPENSES:
Selling, general, and administrative
Research and development
Goodwill impairment charge
Total operating expenses
INCOME FROM OPERATIONS
OTHER INCOME (EXPENSE):
Interest income
Interest expense
Other income
Other income (expense) — net
INCOME BEFORE INCOME TAXES
INCOME TAX EXPENSE
NET INCOME
EARNINGS PER COMMON SHARE:
Basic
Diluted
AVERAGE COMMON SHARES:
Basic
Diluted
See notes to consolidated financial statements.
2010
2009
2008
$
296,755 $
257,462 $
227,143
168,257
148,660
133,872
128,498
108,802
93,271
87,615
15,335
8,344
111,294
17,204
34
(596)
146
(416)
16,788
4,328
64,787
11,168
75,955
32,847
178
(28)
97
247
33,094
10,564
53,127
9,160
62,287
30,984
781
(17)
97
861
31,845
11,118
$
12,460 $
22,530 $
20,727
$
$
0.44 $
0.43 $
0.80 $
0.79 $
28,232
28,781
28,011
28,606
0.75
0.73
27,769
28,550
(cid:1)
39(cid:1)
MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
YEARS ENDED DECEMBER 31, 2010, 2009 AND 2008
(In thousands)
Total
Common Stock
Shares
Amount
Retained
Earnings
Accumulated Other
Comprehensive
Income (Loss)
BALANCE — January 1, 2008
$ 164,368
27,413 $ 52,477 $ 111,947 $
(56)
Comprehensive income:
Net income
Foreign currency translation
adjustment
Total comprehensive income
Tax benefit attributable to appreciation
of common stock options exercised
Stock-based compensation expense
Issuance of common stock under
Employee Stock Purchase Plans
Warrants exercised
Options exercised
20,727
(2)
20,727
(2)
20,725
2,044
962
305
496
5,405
2,044
962
305
496
5,405
19
49
612
BALANCE — December 31, 2008
$ 194,305
28,093 $ 61,689 $ 132,674
$
(58)
Comprehensive income:
Net income
Foreign currency translation
adjustment
Total comprehensive income
Tax benefit attributable to appreciation
of common stock options exercised
Stock-based compensation expense
Issuance of common stock under
Employee Stock Purchase Plans
Warrants exercised
Options exercised
Stock repurchased and retired
Shares surrendered in exchange for
payment of payroll tax liabilities
Shares surrendered in exchange for the
exercise of stock options
22,530
(27)
22,530
(27)
22,503
987
1,182
353
517
1,920
(2,474)
(254)
(230)
987
1,182
353
517
1,920
(2,474)
(254)
(230)
24
51
308
(250)
(23)
(22)
BALANCE — December 31, 2009
$ 218,809
28,181 $ 63,690 $ 155,204 $
(85)
See notes to consolidated financial statements.
(Continued)
(cid:1)
(cid:1)
(cid:1)
40(cid:1)
MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
YEARS ENDED DECEMBER 31, 2010, 2009 AND 2008
(In thousands)
Comprehensive income:
Net income
Interest rate swap, net of tax of
$451
Foreign currency translation
adjustment
Total comprehensive income
Tax benefit attributable to
appreciation of common stock
options exercised
Stock-based compensation expense
Issuance of common stock under
Employee Stock Purchase Plans
Options exercised
Common Stock
Shares
Amount
Retained
Earnings
Accumulated Other
Comprehensive
Income (Loss)
12,460
708
237
399
1,294
378
1,330
25
191
Total
12,460
708
237
13,405
399
1,294
378
1,330
BALANCE — December 31, 2010
$ 235,615
28,397 $ 67,091 $
167,664 $
860
See notes to consolidated financial statements.
(Concluded)
(cid:1)
41(cid:1)
MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2010, 2009 AND 2008
(In thousands)
2010
2009
2008
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income
$
12,460 $
22,530 $
20,727
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization
Losses on sales and/or abandonment of property and
equipment
Write-off of certain patents and license agreement
Goodwill impairment charge
Amortization of deferred credits
Purchase of trading investments
Unrealized (gains) losses on trading investments
Deferred income taxes
Tax benefit attributable to appreciation of common stock
options exercised
Stock-based compensation expense
Changes in operating assets and liabilities, net of effects
from acquisitions:
Trade receivables
Employee receivables
Other receivables
Inventories
Prepaid expenses and other assets
Prepaid income taxes
Income tax refund receivable
Other assets
Trade payables
Accrued expenses
Advances from employees
Current liabilities related to unrecognized tax benefits
Income taxes payable
Non-current liabilities related to unrecognized tax
benefits
Deferred compensation payable
Other long-term obligations
Total adjustments
Net cash provided by operating activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures for:
Property and equipment
Patents and trademarks
Proceeds from the sale of marketable securities
Proceeds from the sale of property and equipment
Cash paid in acquisitions, net of cash acquired
Net cash used in investing activities
See notes to consolidated financial statements.
(cid:1)
42(cid:1)
14,856
12,271
10,240
533
134
8,344
(111 )
(644 )
(382 )
(554 )
(399 )
1,294
(2,088 )
29
223
(7,614 )
(192 )
(60 )
(1,573 )
(43 )
5,643
3,090
99
1,037
(372 )
876
174
22,300
34,760
271
154
(120 )
(458 )
(561 )
1,791
(987 )
1,182
(2,131 )
(16 )
(13 )
(6,882 )
(571 )
319
(568 )
296
1,628
825
114
1,034
(38 )
7,540
30,070
526
164
(111)
(349)
987
(183)
(2,044)
962
(1,464)
10
304
(4,036)
301
(93)
5
758
554
(57)
(1,023)
1,692
864
(715)
(52)
7,240
27,967
(23,648 )
(1,083 )
9,673
17
(97,785 )
(18,478 )
(1,191 )
27
(46,150 )
(112,826 )
(65,792 )
(14,476)
(432)
45
(5,112)
(19,975)
(Continued)
MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2010, 2009 AND 2008
(In thousands)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock
Proceeds from issuance of long-term debt
Payments on long-term debt
Borrowings on line of credit
Payments on line of credit
Excess tax benefits from stock-based compensation
Long-term debt issuance costs
Payment of taxes related to an exchange of common stock
Common stock repurchased and retired
$
Net cash provided by financing activities
EFFECT OF EXCHANGE RATES ON CASH
2010
2009
2008
1,708 $
108,491
(26,953)
1,500
(8,500)
399
(522)
76,123
(455)
2,560 $
6,206
19,000
(12,000)
987
(254)
(2,474)
7,819
6
2,044
8,250
214
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS
(2,398)
(27,897)
16,456
CASH AND CASH EQUIVALENTS:
Beginning of year
End of year
6,133
34,030
17,574
$
3,735 $
6,133 $
34,030
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION — Cash paid during the year for (including
capitalized interest of $13, $0 and $0, respectively)
Interest
$
512 $
26 $
17
Income taxes
$
6,050 $
8,215 $
9,853
SUPPLEMENTAL DISCLOSURES OF NON-CASH
INVESTING AND FINANCING ACTIVITIES
Property and equipment purchases in accounts payable
Acquisition of license agreement in accounts payable
$
$
Merit common stock surrendered (21,556 shares) in exchange
for exercise of stock options
$
3,778 $
2,724 $
847
250 $
0 $
0 $
230 $
0
0
See notes to consolidated financial statements.
(Concluded)
(cid:1)
43(cid:1)
MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2010, 2009 and 2008
1.
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization. Merit Medical Systems, Inc. designs, develops, manufactures and markets single-use
medical products for interventional and diagnostic procedures. For financial reporting purposes, we report our
operations in two operating segments: cardiovascular and endoscopy. Our cardiovascular segment consists of
cardiology and radiology devices which assist in diagnosing and treating coronary arterial disease, peripheral
vascular disease and other non-vascular diseases and includes the embolotherapeutic products we acquired through
our acquisition of BioSphere Medical, Inc. (“BioSphere”) as described in Note 2 below. Our endoscopy segment
consists of gastroenterology and pulmonology medical devices which assist in the palliative treatment of expanding
esophageal, tracheobronchial and biliary strictures caused by malignant tumors.
We manufacture our products in plants located in the United States, The Netherlands, Ireland and France.
We export sales to dealers and have direct sales forces in the United States, Western Europe and China (see
Note 12). Our consolidated financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America. The following is a summary of the more significant of such
policies.
Use of Estimates in Preparing Financial Statements. The preparation of financial statements in
conformity with accounting principles generally accepted in the United States of America requires management to
make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those estimates.
Principles of Consolidation. The consolidated financial statements
subsidiaries. Intercompany balances and transactions have been eliminated.
include our wholly-owned
Cash and Cash Equivalents. For purposes of the statements of cash flows, we consider interest bearing
deposits with an original maturity date of three months or less to be cash equivalents.
Receivables. The allowance for uncollectible accounts receivable is based on our historical bad debt
experience and on management’s evaluation of our ability to collect individual outstanding balances.
Inventories. We value our inventories at the lower of cost, determined on a first-in, first-out method, or
market value. Market value for raw materials is based on replacement costs. Inventory costs include material, labor
and manufacturing overhead. We review inventories on hand at least quarterly and record provisions for estimated
excess, slow moving and obsolete inventory, as well as inventory with a carrying value in excess of net realizable
value. The regular and systematic inventory valuation reviews include a current assessment of future product
demand, historical experience and product expiration.
Goodwill and Intangible Assets. We test goodwill balances as of July 1 for impairment on an annual
basis during the third quarter, or whenever impairment indicators arise. We utilize several reporting units in
evaluating goodwill for impairment. We assess the estimated fair value of reporting units based on discounted
future cash flows. If the carrying amount of a reporting unit exceeds the fair value of the reporting unit, an
impairment charge is recognized in an amount equal to the excess of the carrying amount of the reporting unit
goodwill over the implied fair value of that goodwill.
(cid:1)
44(cid:1)
We evaluate the recoverability of intangible assets periodically and take into account events or
circumstances that warrant revised estimates of useful lives or that indicate that impairment exists. All of our
intangible assets are subject to amortization. Intangible assets are amortized on a straight-line basis, except for
customer lists, which are generally amortized on an accelerated basis, over the following useful lives:
Customer lists and developed technology
Distribution agreements
License agreements and trademarks
Covenant not to compete
Patents
Royalty agreements
5 - 15 years
5 - 11 years
5 - 15 years
3 - 10 years
17 years
5 years
Long-Lived Assets. We periodically review the carrying amount of our long-lived assets for impairment.
An asset is considered impaired when estimated future cash flows are less than the carrying amount of the asset. In
the event the carrying amount of such asset is not considered recoverable, the asset is adjusted to its fair value. Fair
value is generally determined based on discounted future cash flow. There were no impairments of long-lived assets
during the years ended December 31, 2010, 2009 and 2008.
Property and Equipment. Property and equipment is stated at the historical cost of construction or
purchase. Construction costs include payroll-related costs and interest costs capitalized during construction.
Maintenance and repairs of property and equipment are charged to operations as incurred. Leasehold improvements
are amortized over the lesser of the base term of the lease or estimated life of the leasehold improvements.
Construction-in-process consists of various production equipment being constructed internally and externally.
Assets in construction-in-process will commence depreciating once the asset has been placed in service.
Depreciation and amortization are computed using the straight-line method over estimated useful lives as follows:
Buildings
Automobiles
Manufacturing equipment
Furniture and fixtures
Land improvements
Leasehold improvements
40 years
4 - 7 years
5 - 20 years
3 - 10 years
10 - 20 years
4 - 25 years
Deferred Compensation. We have a deferred compensation plan that permits certain management
employees to defer a portion of their salary until the future. We established a Rabbi trust to finance obligations
under the plan with corporate-owned variable life insurance contracts. The cash surrender value totaled
approximately $4.3 million and $3.3 million at December 31, 2010 and 2009, respectively, which is included in
other assets in our consolidated balance sheets. We have recorded a deferred compensation payable of
approximately $4.3 million and $3.4 million at December 31, 2010 and 2009, respectively, to reflect the liability to
our employees under this plan.
Other Assets. Other assets consist of our deferred compensation plan cash surrender value discussed
above, an investment in a privately-held company accounted for at cost, deposits related to various leases, the fair
value of an interest rate swap and a long-term income tax refund receivable.
Deferred Credits. Deferred credits consist of grant money received from the Irish government. Grant
money is received for a percentage of expenditures on eligible property and equipment, specific research and
development projects and costs of hiring and training employees. Amounts related to the acquisition of property and
equipment are amortized as a reduction of depreciation expense over the lives of the corresponding property and
equipment.
Revenue Recognition. We sell our single-use disposable medical products through a direct sales force in
the U.S., through OEM relationships, custom packers and a combination of direct sales force and independent
distributors in international markets. Revenues from these customers are recognized when all of the following have
occurred: (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred or services have been rendered,
(cid:1)
45(cid:1)
(iii) the price is fixed or determinable and (iv) the ability to collect is reasonably assured. These criteria are
generally satisfied at the time of shipment when risk of loss and title passes to the customer. We have certain
written agreements with group purchasing organizations to sell our products to participating hospitals. These
agreements have destination shipping terms which require us to defer the recognition of a sale until the product has
arrived at the participating hospitals. We reserve for sales returns of defective products (i.e. warranty liability) as a
reduction in revenue, based on our historical experience. We also offer sales rebates and discounts to purchasing
groups. These reserves are recorded as a reduction in revenue and are not considered material to our consolidated
statements of income for the years ended December 31, 2010, 2009 and 2008. In addition, we invoice our customers
for taxes assessed by governmental authorities such as sales tax and value added taxes. We present these taxes on a
net basis.
Shipping and Handling. We bill our customers for shipping and handling charges, which are included in
total revenues for the applicable period and the corresponding shipping and handling expense is reported in cost of
goods sold.
Cost of Sales. We include product costs (i.e. material, direct labor and overhead costs), shipping and
handling expense, product royalty expense, developed technology expense, production-related depreciation expense
and product license agreement expense in cost of goods sold.
Research and Development. Research and development costs are expensed as incurred.
Income Taxes. We utilize an asset and liability approach for financial accounting and reporting for income
taxes. Deferred income taxes are provided for temporary differences in the basis of assets and liabilities as reported
for financial statement and income tax purposes. Deferred income taxes reflect the tax effects of net operating loss
and tax credit carryovers and temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes. Realization of certain deferred tax
assets is dependent upon future earnings, if any. We make estimates and judgments in determining the need for a
provision for income taxes, including the estimation of our taxable income for each full fiscal year.
Earnings per Common Share. Net income per common share is computed by both the basic method,
which uses the weighted average number of our common shares outstanding and the diluted method, which includes
the dilutive common shares from stock options and warrants, as calculated using the treasury stock method.
Fair Value Measurements. The fair value of a financial instrument is the amount that could be received
upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the
measurement date. Financial assets are marked to bid prices and financial liabilities are marked to offer prices. Fair
value measurements do not include transaction costs. A fair value hierarchy is used to prioritize the quality and
reliability of the information used to determine fair values. Categorization within the fair value hierarchy is based
on the lowest level of input that is significant to the fair value measurement. The fair value hierarchy is defined into
the following three categories:
Level 1: Quoted market prices in active markets for identical assets or liabilities.
Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data.
Level 3: Unobservable inputs that are not corroborated by market data.
Stock-Based Compensation. We recognize the fair value compensation cost relating to share-based
payment transactions in accordance with Accounting Standards Codification (“ASC”) 718, Compensation — Stock
Compensation. Under the provisions of ASC 718, share-based compensation cost is measured at the grant date,
based on the fair value of the award and is recognized over the employee’s requisite service period, which is
generally the vesting period. The fair value of our stock options is estimated using a Black-Scholes option valuation
model. Stock-based compensation expense for the years ended December 31, 2010, 2009 and 2008 was $1.3
million, $1.2 million and $1.0 million, respectively.
Concentration of Credit Risk. Financial instruments that potentially subject us to concentrations of credit
risk consist primarily of cash and cash equivalents and accounts receivable. We provide credit, in the normal course
of business, primarily to hospitals and independent third-party packers and distributors. We perform ongoing credit
(cid:1)
46(cid:1)
evaluations of our customers and maintain allowances for potential credit losses. Sales to our single largest
customer approximated 4%, 6% and 7% of total sales for the years ended December 31, 2010, 2009 and 2008,
respectively.
Foreign Currency. The financial statements of our foreign subsidiaries are measured using local
currencies as the functional currency, with the exception of Ireland which uses the U.S. Dollar as its functional
currency. Assets and liabilities are translated into U.S. Dollars at year-end rates of exchange and results of
operations are translated at average rates for the year. Gains and losses resulting from these translations are included
in accumulated other comprehensive loss as a separate component of stockholders’ equity. Foreign currency
transactions denominated in a currency other than the entity’s functional currency are included in determining net
income for the period. Such foreign currency transaction gains and losses have not been significant for purposes of
our financial reporting.
Derivatives. We use forward contracts to mitigate our exposure to volatility in foreign exchange rates, and
we use an interest rate swap to hedge changes in the benchmark interest rate related to our Credit Agreement
described in Note 7 below. All derivatives are recognized in the consolidated balance sheets at fair value.
Classification of each hedging instrument is based upon whether the maturity of the instrument is less than or greater
than 12 months. We do not purchase or hold derivative financial instruments for speculative or trading purposes.
See Note 8.
Accumulated Other Comprehensive Income (Loss). Accumulated other comprehensive income (loss)
consists of foreign currency translation adjustments and the effective portion of the gain on the derivatives
accounted for as hedges, net of applicable taxes.
Recently Issued Financial Accounting Standards. In December 2010, the Financial Accounting
Standards Board (“FASB”) issued authoritative guidance to address diversity in practice about pro forma revenue
and earnings disclosure requirements. This guidance specifies that if a public entity presents comparative financial
statements, the entity shall disclose revenue and earnings of the combined entity as though the business
combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior
annual reporting period only. This guidance also expands the supplemental pro forma disclosures to include a
description of the nature and amount of material nonrecurring pro forma adjustments directly attributable to the
business combination included in the reported pro forma revenue and earnings. This guidance is effective
prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual
reporting period beginning on or after December 15, 2010. We intend to apply this guidance to future business
combinations.
In December 2010, the FASB issued authoritative guidance which modifies the requirements of step one of
the goodwill impairment test for reporting units with zero or negative carrying amounts. This guidance modifies
step one so that for those reporting units, an entity is required to perform step two of the goodwill impairment test if
it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that a
goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating
that an impairment may exist. This guidance is effective for fiscal years, and interim periods within those years,
beginning after December 15, 2010. We do not expect the adoption of this guidance to have a material effect on our
consolidated financial statements.
In January 2010, the FASB issued additional authoritative guidance on fair value disclosures. The new
guidance clarifies two existing disclosure requirements and requires two new disclosures as follows: (1) a “gross”
presentation of activities (purchases, sales, and settlements) within the Level 3 roll-forward reconciliation, which
will replace the “net” presentation format; and (2) detailed disclosures about the transfers in and out of Level 1 and 2
measurements. This guidance is effective for the first interim or annual reporting period beginning after
December 15, 2009, except for the gross presentation of the Level 3 roll-forward information, which is required for
annual reporting periods beginning after December 15, 2010, and for interim reporting periods within those years.
We adopted the fair value disclosure guidance on January 1, 2010, except for the gross presentation of the Level 3
roll-forward information which we are not required to adopt until January 1, 2011. The adoption of this guidance
did not have a material effect on our consolidated financial statements for the year ended December 31, 2010.
(cid:1)
47(cid:1)
In October 2009, the FASB issued authoritative guidance that addresses whether multiple deliverables
exist, how the deliverables should be separated and how the consideration should be allocated to one or more units
of accounting. This guidance establishes a selling price hierarchy for determining the selling price of a deliverable.
The selling price used for each deliverable will be based on vendor-specific objective evidence, if available, third-
party evidence if vendor-specific objective evidence is not available, or estimated selling price if neither vendor-
specific or third-party evidence is available. We will be required to apply this guidance prospectively for revenue
arrangements entered into or materially modified after January 1, 2011; however, earlier application is permitted.
We do not expect the adoption of this guidance to have a material effect on our consolidated financial statements.
In June 2009, the FASB issued authoritative guidance that amends tests for variable interest entities to
determine whether a variable interest entity must be consolidated. This guidance requires an entity to perform an
analysis to determine whether an entity’s variable interest or interests give it a controlling financial interest in a
variable interest entity. This guidance also requires ongoing reassessments of whether an entity is the primary
beneficiary of a variable interest entity and enhanced disclosures that provide more transparent information about an
entity’s involvement with a variable interest entity. We adopted this guidance on January 1, 2010, the adoption of
which did not have a material impact on our consolidated financial statements.
2.
ACQUISITIONS
On September 10, 2010, we completed our acquisition of BioSphere in an all-cash merger transaction
valued at approximately $96 million, inclusive of all common equity and Series A Preferred preferences. BioSphere
develops and markets embolotherapeutic products for the treatment of uterine fibroids, hypervascularized tumors
and arteriovenous malformations. We anticipate that the acquisition of BioSphere will give us a platform
technology applicable to multiple therapeutic areas with significant market potential while leveraging existing
interventional radiology call points. Two immediate applications for the embolotherapy are uterine fibroids and
primary liver cancer. The gross amount of trade receivables we acquired from BioSphere is approximately $4.6
million, of which $51,000 is expected to be uncollectible. Our consolidated financial statements for the year ended
December 31, 2010 reflect sales subsequent to the acquisition date of approximately $9.0 million related to our
BioSphere acquisition. We report sales and operating expenses related to this acquisition in our cardiovascular
segment. It is not practical to separately report the earnings related to this acquisition as we cannot split out sales
costs related to Biosphere’s products, principally because our sales representatives are selling multiple products in
the cardiovascular business segment. The BioSphere purchase price was allocated as follows (in thousands):
Assets Acquired
Marketable securities
Trade receivables
Inventories
Other assets
Property and equipment
Deferred income tax assets
Intangibles
Developed technology
Customer list
License agreement
Trademark
Goodwill
Total assets acquired
Liabilities Assumed
Accounts payable
Accrued expenses
Deferred income tax liabilities
Liabilities related to unrecognized tax benefits
Other liabilities
Total liabilities assumed
$
9,673
4,529
5,694
1,340
546
16,012
19,000
7,900
380
3,200
34,016
102,290
322
3,617
729
961
936
6,565
Net assets acquired, net of cash acquired of $274
$
95,725
48(cid:1)
(cid:1)
With respect to the assets we acquired from BioSphere, we are amortizing developed technology over 15
years and a license agreement over 10 years and customer lists on an accelerated basis over 10 years. While U.S.
trademarks can be renewed indefinitely, we currently estimate that we will generate cash flow from the acquired
trademarks for a period of 15 years from the acquisition date. The total weighted-average amortization period for
these acquired intangible assets is 13.6 years.
In connection with our BioSphere acquisition, we paid approximately $522,000 in long-term debt issuance
costs to Wells Fargo Bank for our long-term debt (see Note 7). These costs consist of loan origination fees and legal
costs that we intend to amortize over five years, which is the contract term of the Credit Agreement. We also
incurred approximately $2.5 million of acquisition-related costs during the year ended December 31, 2010, which
are included in selling, general and administrative expense in the accompanying consolidated statements of income.
During the fourth quarter of 2010, we terminated several exclusive BioSphere sales distributor agreements
in European countries where we already had previously established direct sales relationships. In connection with the
termination of these agreements, we agreed to purchase customer lists from the terminated distributors. The total
purchase price of the customer lists was approximately $1.3 million and was allocated to customer lists. We are
amortizing the customer lists on an accelerated basis over 10 years.
On February 19, 2010, we entered into a manufacturing and technology license agreement with a medical
device manufacturer for certain medical products. We made an initial payment of $250,000 in February of 2010, a
second payment of $250,000 in May of 2010, a third payment of $250,000 in November of 2010 and have accrued
an additional $250,000 in accrued expenses at December 31, 2010. The final payment is due upon reaching certain
milestones set forth in the agreement. We believe it is probable that we will be required to make the final payment.
We have included the $1.0 million intangible asset in license agreements and are amortizing the asset over an
estimated life of 10 years.
The following table summarizes our unaudited consolidated results of operations for the years ended
December 31, 2010 and 2009, as well as the unaudited pro forma consolidated results of operations as though the
BioSphere acquisition had occurred on January 1, 2009 (in thousands, except per share amounts):
Year Ended
December 31, 2010
Year Ended
December 31, 2009
As Reported
Pro Forma
As Reported
Pro Forma
Sales
Net income
Earnings per common share:
Basic
Diluted
$
$
$
296,755 $
12,460
317,382 $
7,258
257,462 $
22,530
288,589
17,000
.44 $
.43 $
.26 $
.25 $
.80 $
.79 $
.61
.59
The unaudited pro forma information set forth above is for informational purposes only and should not be
considered indicative of actual results that would have been achieved if BioSphere had been acquired the beginning
of 2009, or results that may be obtained in any future period.
On October 21, 2009, we completed a transaction with Vysera Biomedical Limited, a medical products
developer based in Galway, Ireland (“Vysera”). In the transaction, we entered into an Exclusive License,
Development and Supply Agreement with Vysera, pursuant to which Vysera granted to us an exclusive license to
use, modify and sell certain valve technology and biomaterial coating technology for medical devices (the “Licensed
Technology”) and other intellectual property associated with the Licensed Technology and to develop and market
improvements to the Licensed Technology. In the transaction, we also purchased 253,047 A Ordinary Shares of
Vysera, for an aggregate price of approximately $2.4 million. Under the License Agreement, we paid Vysera a
license fee of $1.5 million and agreed to pay royalties on products we sell that incorporate the Licensed
Technology. The license fee of $1.5 million has been allocated to developed technology and will be amortized over
15 years.
(cid:1)
49(cid:1)
On June 2, 2009, we entered into an asset purchase agreement with Hatch Medical, L.L.C., a Georgia
limited liability company (“Hatch”), to purchase assets associated with the EN Snare® foreign body retrieval
system. We paid Hatch $21.0 million as of December 31, 2009. Our consolidated financial statements for the year
ended December 31, 2009 reflect royalty income subsequent to the acquisition date of approximately $1.0 million
and a net income of approximately $210,000 related to our Hatch acquisition. The purchase price was allocated as
follows (in thousands):
Assets Acquired
Intangibles
Developed technology
Customer list
Non-compete
Trademark
Goodwill
Total assets acquired
Liabilities Assumed
Net assets acquired
$
8,100
590
240
650
11,420
21,000
None
$
21,000
With respect to the assets we acquired from Hatch, we are amortizing developed technology over 11 years
and a non-compete covenant over seven years. The acquired trademarks are scheduled to renew in 3.87 years
(based on a weighted-average computation, from December 31, 2009 until the trademark renewal date). While U.S.
trademarks can be renewed indefinitely, we currently estimate that we will generate cash flow from the acquired
trademarks for a period of 15 years from the acquisition date.
On March 9, 2009, we entered into an asset purchase agreement with Alveolus, Inc., a North Carolina
corporation (“Alveolus”), to purchase their non-vascular interventional stents used for esophageal, tracheobronchial,
and biliary stenting procedures. We paid Alveolus $19.1 million in March 2009. The gross amount of trade
receivables we acquired from Alveolus is approximately $1.0 million, of which $49,000 is expected to be
uncollectible. Our consolidated financial statements for the year ended December 31, 2009 reflect sales subsequent
to the acquisition date of approximately $6.1 million and a net loss of approximately $2.3 million related to our
acquisition of the Alveolus assets. The purchase price was allocated as follows (in thousands):
$
Assets Acquired
Inventories
Trade receivables
Other assets
Property and equipment
Intangibles
Developed technology
Trademarks
Customer lists
In-process research and development
Goodwill
1,741
974
241
547
5,700
1,400
1,100
400
8,028
20,131
467
572
1,039
$
19,092
Total assets acquired
Liabilities Assumed
Accounts payable
Other liabilities
Total liabilities assumed
Net assets acquired
(cid:1)
50(cid:1)
With respect to the assets we acquired from Alveolus, we are amortizing the developed technology and
trademarks over 15 years and customer lists on an accelerated basis over seven years. We intend to amortize the in-
process research and development over 15 years, which will begin if the resulting product is successfully launched
in the market. The acquired trademarks are scheduled to renew in 3.52 years (based on a weighted-average
calculation, from December 31, 2009 until the trademark renewal date). While U.S. trademarks can be renewed
indefinitely, we currently estimate that we will generate cash flow from the acquired trademarks for a period of 15
years from the acquisition date.
Our in-process research and development (“IPR&D”) represents the value of in-process projects acquired
in 2009 that have not yet reached technological feasibility and have no alternative future uses as of the date of
acquisition. The primary basis for determining the technological feasibility of these projects is obtaining regulatory
approval to market the underlying products in an applicable geographic region. At the time of acquisition, we
expect all acquired IPR&D will reach technological feasibility, but there can be no assurance that the commercial
viability of these products will actually be achieved. Our IPR&D is currently not subject to amortization, but we
anticipate that amortization will commence upon the related product launch.
On February 19, 2009, we entered into an asset purchase and supply agreement with Biosearch Medical
Products, Inc., a New Jersey corporation (“Biosearch”), to purchase a bipolar coagulation probe and grafted biliary
stents. We paid Biosearch $1.1 million in February 2009 and paid Biosearch an additional $500,000 in June 2009.
Our consolidated financial statements for the year ended December 31, 2009 reflect sales subsequent to the
acquisition date of approximately $1.6 million and net income of approximately $320,000 related to the Biosearch
acquisition. The purchase price was allocated as follows (in thousands):
Assets Acquired
Inventories
Property and equipment
Intangibles
Developed technology
Customer lists
Non-compete
Goodwill
Total assets acquired
Liabilities Assumed
Net assets acquired
$
$
188
31
380
660
25
316
1,600
None
1,600
With respect to the assets we acquired from Biosearch, we are amortizing developed technology over 15
years, customer lists on an accelerated basis over eight years and a non-compete covenant over seven years.
The following table summarizes our unaudited consolidated results of operations for the years ended
December 31, 2009 and 2008, as well as the unaudited pro forma consolidated results of operations as though the
Hatch, Alveolus and Biosearch transactions had occurred on January 1, 2008 (in thousands, except per share
amounts):
Year Ended
December 31, 2009
Year Ended
December 31, 2008
As Reported
Pro Forma
As Reported
Pro Forma
Sales
Net income
Earnings per common share:
Basic
Diluted
$
$
$
257,462 $
22,530
259,914 $
22,470
227,143 $
20,727
238,639
18,532
.80 $
.79 $
.80 $
.79 $
.75 $
.73 $
.67
.65
(cid:1)
51(cid:1)
The unaudited pro forma information set forth above is for informational purposes only and should not be
considered indicative of actual results that would have been achieved if the Hatch, Alveolus and Biosearch
transactions had been completed at the beginning of 2008, or results that may be obtained in any future period.
On December 11, 2008, we entered into an asset purchase agreement with Tran PA-C, Inc., a Florida
corporation (Tran PA-C”), to purchase catheter extraction products for $1.5 million. We also accrued $11,000 in
acquisition costs. Additional payments totaling $1.5 million have not been accrued as they are contingent upon
reaching future certain sales levels. In addition, we agreed to a running royalty payment of 6% of net sales for the
catheter extractor for the next 10 years. The purchase price was preliminarily allocated to inventories for $71,228,
property and equipment for $15,436, customer lists for $80,000, developed technology for $85,000, a covenant not
to compete for $30,000, and goodwill for $1.2 million. We are amortizing customer lists on an accelerated basis
over 14 years, and developed technology over ten years. This product can be used to extract chronic dialysis
catheters, similar to our ProGuide™ dialysis catheter purchased from Datascope Corporation, a New Jersey
corporation (“Datascope”) in 2007.
On January 29, 2008, we entered into an asset purchase and supply agreement with Micrus Endovascular
Corporation, a Delaware corporation (“Micrus”), to purchase three catheter platforms for $3.0 million. We also paid
$12,300 in acquisition costs. The purchase price was allocated to inventories for $143,939, customer lists for
$270,000, developed technology for $330,000, and goodwill for approximately $2.3 million. We are amortizing
customer lists on an accelerated basis over fourteen years, and developed technology over fifteen years.
The goodwill arising from the acquisitions discussed above consists largely of the synergies and economies
of scale we hope to achieve from combining the acquired assets and operations with our historical operations (see
Note 4). The goodwill recognized from these acquisitions is expected to be deductible for income tax purposes,
except for the goodwill recognized in connection with our stock acquisition of BioSphere.
Pro forma consolidated financial results for the acquisitions completed related to year ended December 31,
2008 have not been included in our consolidated financial results because their effects would not be material.
3.
INVENTORIES
Inventories at December 31, 2010 and 2009, consisted of the following (in thousands):
Finished goods
Work-in-process
Raw materials
Total
2010
2009
$
30,780 $
7,012
22,805
24,502
5,542
17,126
$
60,597 $
47,170
4.
GOODWILL AND INTANGIBLE ASSETS
The changes in the carrying amount of goodwill for the years ended December 31, 2010 and 2009, are as
follows (in thousands):
2010
2009
Goodwill balance at January 1
Impairment charge
Additions as the result of
acquisitions
Goodwill balance at
December 31
$
33,002 $
(8,343)
34,016
13,048
—
19,954
$
58,675 $
33,002
(cid:1)
52(cid:1)
During our annual test of goodwill balances, which is completed during the third quarter of each year, we
determined that our goodwill related to our endoscopy reporting unit was impaired. We determined that, based on
estimated future cash flows for this reporting unit, discounted back to their present value using a discount rate that
reflects the risk profiles of the underlying activities, the carry value amount of this reporting unit was less than its
estimated fair value. Some of the factors that influenced our estimated cash flows were slower sales growth in the
products acquired from our Alveolus acquisition in March of 2009, uncertainty regarding acceptance of new
products and continued operating losses in our endoscopy business segment. During the year ended December 31,
2010, we recorded an impairment charge of approximately $8.3 million, which was offset by approximately $3.2
million of deferred tax asset.
Intangible assets at December 31, 2010 and 2009, consisted of the following (in thousands):
Patents
Distribution agreement
License agreements
Trademark
Developed technology
In-process research and development
Covenant not to compete
Customer lists
Royalty agreements
Gross
Carrying
Amount
2010
Accumulated
Amortization
Net
Carrying
Amount
$
4,631 $
2,426
1,833
5,761
36,574
400
315
13,973
267
(1,445) $
(641 )
(352 )
(636 )
(2,301 )
0
(67 )
(3,287 )
(267 )
3,186
1,785
1,481
5,125
34,273
400
248
10,686
Total
$
66,180 $
(8,996) $
57,184
Gross
Carrying
Amount
2009
Accumulated
Amortization
Net
Carrying
Amount
Patents
Distribution agreement
License agreements
Trademark
Developed technology
In-process research and development
Covenant not to compete
Customer lists
Royalty agreements
$
3,757 $
2,400
403
2,538
17,513
400
315
4,755
267
(1,214) $
(385 )
(287 )
(411 )
(535 )
0
(25 )
(2,380 )
(213 )
Total
$
32,348 $
(5,450) $
2,543
2,015
116
2,127
16,978
400
290
2,375
54
26,898
Aggregate amortization expense for the years ended December 31, 2010, 2009 and 2008 was
approximately $3,546,000, $2,342,000 and $963,000, respectively.
Estimated amortization expense for the intangible assets for the next five years consists of the following as
of December 31, 2010 (in thousands):
Year Ending December 31
2011
2012
2013
2014
2015
$
5,880
5,280
5,057
4,658
4,317
(cid:1)
53(cid:1)
5.
INCOME TAXES
For the years ended December 31, 2010, 2009 and 2008, income before income taxes is broken out
between U.S. and foreign-sourced operations and consisted of the following (in thousands):
Domestic
Foreign
Total
2010
2009
2008
$
10,551 $
6,237
26,918 $
6,176
28,184
3,661
$
16,788 $
33,094 $
31,845
The components of the provision for income taxes for the years ended December 31, 2010, 2009 and 2008
consisted of the following (in thousands):
Current expense:
Federal
State
Foreign
Deferred expense (benefit):
Federal
State
Foreign
2010
2009
2008
$
3,547 $
595
740
4,882
7,846 $
689
238
9,693
1,008
600
8,773
11,301
30
(545 )
(39 )
(554 )
1,264
227
300
1,791
(133)
(44)
(6)
(183)
Total
$
4,328 $
10,564 $
11,118
The difference between the income tax expense reported and amounts computed by applying the statutory
federal rate of 35.0% to pretax income for the years ended December 31, 2010, 2009 and 2008 consisted of the
following (in thousands):
Computed federal income tax expense at
statutory rate of 35%
State income taxes
Tax credits
Production activity deduction
Income of subsidiaries recorded at foreign tax
$
rates
Tax-exempt interest income
Uncertain tax positions
Deferred compensation insurance investments
Transaction-related expenses
Other — including the effect of graduated rates
2010
2009
2008
5,876 $
33
(530 )
(355 )
11,583 $
596
(670)
(215)
(1,212 )
(1,062)
(372 )
(133 )
323
698
114
(196)
414
11,146
627
(271)
(114)
(822)
(45)
66
398
133
Total income tax expense
$
4,328 $
10,564 $
11,118
(cid:1)
54(cid:1)
Deferred income tax assets and liabilities at December 31, 2010 and 2009, consisted of the following
temporary differences and carry-forward items (in thousands):
Current
2010
2009
2010
Long-Term
2009
Deferred income tax assets:
Allowance for uncollectible
accounts receivable
Accrued compensation expense
Inventory capitalization for tax
$
purposes
Inventory reserves
Net operating loss carry-
forwards
Deferred revenue
Intangible assets
Stock-based compensation
expense
Uncertain tax positions
Other
242 $
1,184
1,226
570
221 $
750
— $
2,046
—
1,436
696
540
26,273
214
1,923
134
211
152
420
1,476
230
443
1,475
354
1,055
Total deferred income tax
assets
Deferred income tax liabilities:
Prepaid expenses
Property and equipment
Intangible assets
Other
5,140
3,616
30,801
3,714
(493)
(327)
(18,103 )
(9,320 )
(505 )
(13,873)
(1,092)
Net
$
4,647 $
3,289 $
2,873 $
(11,251)
Reported as:
Deferred income tax assets
Deferred income tax liabilities
$
4,647 $
3,289 $
4,140 $
(1,267 )
—
(11,251)
Net
$
4,647 $
3,289 $
2,873 $
(11,251)
The long-term deferred income tax balances are not netted as they represent deferred amounts applicable to
different taxing jurisdictions. Deferred income tax balances reflect the temporary differences between the carrying
amounts of assets and liabilities and their tax bases and are stated at enacted tax rates expected to be in effect when
taxes are actually paid or recovered.
We have not provided U.S. deferred income taxes or foreign withholding taxes on the undistributed
earnings of our foreign subsidiaries that are intended to be reinvested indefinitely in operations outside the United
States. It is not practical to estimate the amount of additional taxes that might be payable on such undistributed
earnings.
As of December 31, 2010 and 2009, we had U.S federal net operating loss carryforwards of approximately
$72.4 million and $0, respectively, which were generated by BioSphere prior to our acquisition of BioSphere in
September 2010. These net operating loss carryforwards, which expire at various dates through 2030, are subject to
an annual limitation under Internal Revenue Code Section 382. We anticipate that we will utilize the net operating
loss carryforwards over a period of seventeen years. During 2010, we utilized approximately $2.6 million in U.S.
federal net operating loss carryforwards.
(cid:1)
55(cid:1)
As of December 31, 2010 and 2009, we had non-U.S. net operating loss carryforwards of approximately
$2.8 million and $0, respectively, which had no expiration date.
We are subject to income taxes in the United States and numerous foreign jurisdictions. Significant
judgment is required in determining our worldwide provision for income taxes and recording the related assets and
liabilities. In the ordinary course of our business, there are many transactions and calculations where the ultimate
tax determination is uncertain. In our opinion, we have made adequate provisions for income taxes for all years
subject to audit. Our federal and state income tax returns for 2007 through 2010 are open tax years. Our returns in
several foreign tax jurisdictions have open tax years from 2005 through 2010.
Although we believe our estimates are reasonable, the final outcomes of these matters may be different
from those which we have reflected in our historical income tax provisions and accruals. Such differences could
have a material adverse effect on our income tax provision and operating results in the period in which we make
such determination.
The total liability for unrecognized tax benefits at December 31, 2010 and 2009, including temporary tax
differences, was approximately $3.5 million and $2.9 million, respectively, of which approximately $2.9 million and
$2.4 million, respectively, would favorably impact our effective tax rate if recognized. As of December 31, 2010
and 2009, we accrued approximately $651,000 and $251,000, respectively, in interest and penalties related to
unrecognized tax benefits. We account for interest expense and penalties for unrecognized tax benefits as part of
our income tax provision. We do not anticipate that unrecognized tax benefits will significantly increase or decrease
within 12 months of the reporting date.
During the year ended December 31, 2010, we added approximately $582,000 to our liability for
unrecognized tax benefits, of which approximately $1.3 million would favorably impact our effective tax rate if
recognized. Included in this amount is approximately $400,000 for the year ended December 31, 2010 related to
interest and penalties. In addition, we recorded an unrecognized tax benefit related to the lapse of applicable statutes
of limitation of approximately $825,000, of which approximately $647,000 favorably impacted our effective tax
rate.
During the year ended December 31, 2009, we added approximately $127,000 to our liability for
unrecognized tax benefits, of which approximately $631,000 would favorably impact our effective tax rate if
recognized. Included in this amount is approximately $9,000 for the year ended December 31, 2009 related to
interest expense. In addition, we recorded an unrecognized tax benefit related to the lapse of applicable statutes of
limitation of approximately $711,000, of which approximately $610,000 favorably impacted our effective tax rate.
A reconciliation of the beginning and ending amount of liabilities associated with uncertain tax positions
for the years ended December 31, 2010, 2009 and 2008 consisted of the following (in thousands):
Tabular Roll-forward
2010
2009
2008
Unrecognized tax benefits, opening balance
Gross increases in tax positions taken in a prior year
Gross decreases in tax positions taken in a prior year
Gross increases in tax positions taken in the current year
Settlements with taxing authorities
Lapse of applicable statute of limitations
Unrecognized tax benefits, ending balance
$
$
2,790 $
518
(51)
520
—
(825)
2,952 $
2,668 $
163
(40)
710
—
(711)
2,790 $
3,611
257
(278)
547
(842)
(627)
2,668
The tabular roll-forward ending balance does not include interest expense (net of tax effect) and penalties
related to unrecognized tax benefits. During the year ended December 31, 2008, we settled two open audits with the
IRS related to certain temporary deductions. As a result of these settlements, we paid an additional $2.2 million on
our 2007 federal and state extension payments. The reversal of these temporary differences and the payment of the
additional taxes did not have a material impact on our consolidated financial statements for the year ended
December 31, 2008, as the income tax liabilities had already been accrued in our consolidated financial statements.
(cid:1)
56(cid:1)
6.
ACCRUED EXPENSES
Accrued expenses at December 31, 2010 and 2009 consisted of the following (in thousands):
Payroll taxes
Payroll
Bonuses
Commissions
Vacation
Royalties
Value-Added Tax
Other accrued expenses
Total
2010
2009
$
1,234 $
3,708
2,387
818
3,792
1,104
874
4,973
823
1,557
2,072
689
2,616
—
—
4,439
$
18,890 $
12,196
7.
REVOLVING CREDIT FACILITY AND LONG-TERM DEBT
We entered into an unsecured Credit Agreement, dated September 10, 2010 (the “Credit Agreement”), with
the lenders who are or may become party thereto (collectively, the “Lenders”) and Wells Fargo, as administrative
agent for the lenders. Pursuant to the terms of the Credit Agreement, the Lenders have agreed to make revolving
credit loans up to an aggregate amount of $125 million. Wells Fargo has also agreed to make swingline loans from
time to time through the maturity date of September 10, 2015 in amounts equal to the difference between the
amounts actually loaned by the Lenders and the aggregate credit commitment.
On September 10, 2015, all principal, interest and other amounts outstanding under the Credit Agreement
are payable in full. At any time prior to the maturity date, we may repay any amounts owing under all revolving
credit loans and all swingline loans in whole or in part, without premium or penalty.
Revolving credit loans made under the Credit Agreement bear interest, at our election, at either (i) the base
rate (described below) plus 0.25%, (ii) the London Inter-Bank Offered Rate (“LIBOR”) Market Index Rate (as
defined in the Credit Agreement) plus 1.25%, or (iii) the LIBOR Rate (as defined in the Credit Agreement) plus
1.25%. Swingline loans bear interest at the LIBOR Market Index Rate plus 1.25%. Interest on each loan featuring
the base rate or the LIBOR Market Index Rate is due and payable on the last business day of each calendar month;
interest on each loan featuring the LIBOR Rate is due and payable on the last day of each interest period selected by
us when selecting the LIBOR Rate as the benchmark for interest calculation. For purposes of the Credit Agreement,
the base rate means the highest of (i) the prime rate (as announced by Wells Fargo), (ii) the federal funds rate plus
0.50%, and (iii) LIBOR for an interest period of one month plus 1.0%.
The Credit Agreement contains covenants, representations and warranties and other terms, that are
customary for revolving credit facilities of this nature. In this regard, the Credit Agreement requires us to maintain a
leverage ratio and EBITDA ratio, consolidated net income and limits the amount of annual capital expenditures.
Additionally, the Credit Agreement contains various negative covenants with which we must comply, including, but
not limited to, limitations respecting: the incurrence of indebtedness, the creation of liens on our property, mergers
or similar combinations or liquidations, asset dispositions, investments in subsidiaries, and other provisions
customary in similar types of agreements. As of December 31, 2010, we were in compliance with all financial debt
covenants set forth in the Credit Agreement.
As of December 31, 2010, we had outstanding borrowings of approximately $81.5 million under the Credit
Agreement, with available borrowings of approximately $40.6 million, based on the leverage ratio in the terms of
the Credit Agreement. Our principal purposes for entering into the Credit Agreement were to allow us to finance the
acquisition of BioSphere and for general corporate purposes. Our interest rate as of December 31, 2010 was a fixed
rate of 2.73% on $55.0 million as a result of an interest rate swap (see Note 8), a fixed rate of 1.52% on $22.0
million and a variable floating rate of 1.56% on approximately $4.5 million.
(cid:1)
57(cid:1)
On December 7, 2006, we entered into an unsecured loan agreement with Bank of America, whereby Bank
of America agreed to provide us with a line of credit in the amount of $30.0 million, which expired on December 7,
2010. The loan agreement required us to pay interest at a rate equal to the lesser of (i) the maximum lawful rate of
interest permitted under applicable usury laws, or (ii) Bank of America’s prime rate, plus a negative margin, as
defined in the loan agreement. Alternatively, we could elect optional interest rates based on LIBOR during interest
periods we agreed to with Bank of America. Our outstanding borrowings on this loan as of December 31, 2009
were $7.0 million. Our interest rate as of December 31, 2009 was set at 1.0%. During the year ended December 31,
2010, all outstanding amounts were repaid and the loan agreement was terminated in September 2010.
On December 8, 2006, we entered into an unsecured loan agreement with Zions, whereby Zions agreed to
provide us with a line of credit in the amount of $1.0 million. The Zions loan agreement required us to pay interest
at a rate of prime minus 0.35%. The loan agreement expired on December 1, 2009; however, it was extended for an
additional three years to December 1, 2012, but terminated in March 2010. There were no outstanding borrowings
on this loan as of December 31, 2009.
8.
DERIVATIVES
General. Our earnings and cash flows are subject to fluctuations due to changes in interest rates and
foreign currency exchange rates, and we seek to mitigate a portion of these risks by entering into derivative
contracts. The derivatives we use are an interest rate swap and forward contracts. We recognize derivatives as
either assets or liabilities at fair value in the accompanying consolidated balance sheets, regardless of whether or not
hedge accounting is applied. We report cash flows arising from our hedging instruments consistent with the
classification of cash flows from the underlying hedged items. Accordingly, cash flows associated with our
derivative programs are classified as operating activities in the accompanying consolidated statements of cash flows.
We formally document, designate and assess the effectiveness of transactions that receive hedge accounting
initially and on an ongoing basis. Changes in the fair value of derivatives that qualify for hedge accounting
treatment are recorded, net of applicable taxes, in accumulated other comprehensive income (loss), a component of
stockholders’ equity in the accompanying consolidated balance sheets. For the ineffective portions of qualifying
hedges, the change in fair value is recorded through earnings in the period of change. Changes in the fair value of
derivatives not designated as cash flow hedges are recorded in earnings throughout the term of the derivative
instrument.
Interest Rate Swap. A portion of our debt bears interest at variable interest rates and therefore, we are
subject to variability in the cash paid for interest expense. In order to mitigate a portion of this risk, we use a
hedging strategy to eliminate the variability of cash flows in the interest payments associated with the first
$55 million of the total variable-rate debt outstanding under our Credit Agreement that is solely due to changes in
the benchmark interest rate. This strategy allows us to fix a portion of our interest payments.
On October 25, 2010, we entered into a $55 million pay-fixed, receive-variable interest rate swap with
Wells Fargo at a fixed interest rate of 2.73%. The variable portion of the interest rate swap is tied to the
1-Month LIBOR (the benchmark interest rate). The interest rates under both the interest rate swap and the
underlying debt are reset, the swap is settled with the counterparty, and interest is paid, on a monthly basis. The
interest rate swap expires September 10, 2015.
At December 31, 2010, the interest rate swap qualified as a cash flow hedge. During the year ended
December 31, 2010, we recorded a net gain on this hedge of approximately $20,000, which is included in interest
expense in the accompanying consolidated statements of income. The fair value of our cash flow hedge at
December 31, 2010 was approximately $1.2 million, which was offset by approximately $451,000 of deferred tax
liability.
Foreign Currency Forward Contracts. On November 30, 2010, we forecasted a net exposure for
December 31, 2010 (representing the difference between Euro and Great Britain Pound (“GBP”)-denominated
receivables and Euro-denominated payables) of approximately 658,000 Euros and 222,000 GBPs. In order to
partially offset such risks at November 30, 2010, we entered into a 30-day forward contract for the Euro and GBP
with a notional amount of approximately 658,000 Euros and notional amount of 222,000 GBPs. On November 30,
(cid:1)
58(cid:1)
2009, we forecasted a net exposure for December 31, 2009 (representing the difference between Euro and GBP
denominated receivables and Euro denominated payables) of approximately 331,000 Euros and 394,000 GBPs. In
order to partially offset such risks at November 31, 2009, we entered into a 30-day forward contract for the Euro and
GBP with a notional amount of approximately 331,000 Euros and notional amount of 394,000 GBPs. We enter into
similar transactions at various times during the year to partially offset exchange rate risks we bear throughout the
year. These contracts are marked to market at each month-end. During the years ended December 31, 2010, 2009
and 2008, we recorded a net gain on all forward contracts of approximately $126,000, $83,000 and $52,000,
respectively, which is included in other expense in the accompanying consolidated statements of income. The fair
value of our open positions at December 31, 2010 and 2009 was not material.
9.
COMMITMENTS AND CONTINGENCIES
We are obligated under non-cancelable operating leases for manufacturing facilities, finished good
distribution, office space and equipment. Total rental expense on these operating leases and on our manufacturing
and office building for the years ended December 31, 2010, 2009 and 2008, approximated $3.7 million, $2.8 million
and $2.6 million, respectively.
The future minimum lease payments for operating leases as of December 31, 2010, consisted of the
following (in thousands):
Year Ending
December 31
2011
2012
2013
2014
2015
Thereafter
$
Operating
Leases
3,385
2,746
2,396
2,266
2,151
9,539
Total minimum lease payments
$
22,483
Irish Government Development Agency Grants. As of December 31, 2010, we had entered into several
grant agreements with the Irish Government Development Agency. We have recorded the grants related to research
and development projects and costs of hiring and training employees as a reduction of operating expenses in 2010
and 2009 in the amounts of approximately $40,000 and $177,000, respectively. Grants related to the acquisition of
property and equipment purchased in Ireland are amortized as a reduction to depreciation expense over lives
corresponding to the depreciable lives of such property and equipment. The balance of deferred credits related to
such grants as of December 31, 2010 and 2009, was approximately $1,763,000 and $1,874,000, respectively.
During 2010, 2009 and 2008, approximately $111,000, $120,000 and $111,000, respectively, of the deferred credit
was amortized as a reduction of operating expenses.
We have committed to repay the Irish government for grants received if we were to cease production in
Ireland prior to the expiration of the grant liability period. The grant liability period is usually between five and
eight years from the last claim made on a grant. As of December 31, 2010, the total amount of grants that could be
subject to refund was approximately $2.9 million. Management does not believe we will ever have to repay any of
these grant monies, as we have no intention of ceasing operations in Ireland.
Letter of Credit. As of December 31, 2010, we had a standby letter of credit with Wells Fargo in the
amount of approximately $88,000 which is related to the construction of a new building.
Litigation. In the ordinary course of business, we are involved in litigation and claims which management
believes will not have a materially adverse effect on our financial position or results of operations.
(cid:1)
59(cid:1)
10.
EARNINGS PER COMMON SHARE (EPS)
The computation of weighted average shares outstanding and the basic and diluted earnings per common
share for the following periods consisted of the following (in thousands, except per share amounts):
Year ended December 31, 2010:
Basic EPS
Effect of dilutive stock options and
warrants
Net
Income
Shares
Per Share
Amount
$
12,460
28,232 $
0.44
549
Diluted EPS
$
12,460
28,781 $
0.43
Year ended December 31, 2009:
Basic EPS
Effect of dilutive stock options and
warrants
$
22,530
28,011 $
0.80
595
Diluted EPS
$
22,530
28,606 $
0.79
Year ended December 31, 2008:
Basic EPS
Effect of dilutive stock options and
warrants
$
20,727
27,769 $
0.75
781
Diluted EPS
$
20,727
28,550 $
0.73
For the years ended December 31, 2010, 2009 and 2008, approximately 878,000, 681,000 and 984,000,
respectively, of stock options were not included in the computation of diluted earnings per share because their effect
would have been anti-dilutive.
Repurchase of Our Common Stock. On April 30, 2007, our Board of Directors approved the repurchase
of up to 1.4 million shares of Common Stock. During the first quarter of 2009, we repurchased a total of 250,158
shares of Common Stock for approximately $2.5 million. We did not repurchase any shares of Common Stock
during 2010.
11.
EMPLOYEE STOCK PURCHASE PLAN STOCK OPTIONS AND WARRANTS.
Our stock-based compensation primarily consists of the following plans:
Stock Incentive Plan. During 1999, we adopted the Merit Medical Systems, Inc. Stock Incentive Plan
(formerly the 1999 Omnibus Stock Incentive Plan), which provides for the issuance of incentive stock options, non-
statutory stock options and certain corresponding stock appreciation rights (the “Stock Incentive Plan”). Options
may be granted to directors, officers, outside consultants and key employees and may be granted upon such terms
and such conditions as the Compensation Committee of our Board of Directors determines. Options typically vest
20% per year over either a four and one-half or five-year life with contractual lives of five, seven and ten years. The
Stock Incentive Plan also provides for options that vest 100% upon grant with contractual lives of ten years. In no
event, however, may the exercise price be less than the fair market value on the date of grant. Under a provision of
our Stock Incentive Plan, participants are allowed to surrender shares of our Common Stock for the payment of the
option price and minimum statutory taxes associated with the exercise of options. The shares surrendered must be
shares the participant has held for more than six months. The value of the shares surrendered is based on the closing
price of our Common Stock on the date of exercise by the participant. During 2009, approximately 224,000 of the
remaining shares expired under this Stock Incentive Plan.
(cid:1)
60(cid:1)
2006 Long-Term Incentive Plan. In May 2006, our Board of Directors adopted and our shareholders
approved, the Merit Medical Systems, Inc. 2006 Long-Term Incentive Plan (the “2006 Incentive Plan”). The 2006
Incentive Plan provides for the granting of stock options, stock appreciation rights, restricted stock, stock units
(including restricted stock units) and performance awards. Options may be granted to directors, officers, outside
consultants and key employees and may be granted upon such terms and such conditions as the Compensation
Committee of our Board of Directors determines. Options will typically vest on an annual basis over a three to five
year life (or one year if performance based) with contractual lives of seven to ten years. As of December 31, 2010, a
total of approximately 1.8 million shares remained available to be issued under the 2006 Incentive Plan.
Employee Stock Purchase Plan. We have a qualified and a non-qualified Employee Stock Purchase Plan
(“ESPP”), which will expire on June 30, 2016. As of December 31, 2010, the total number of shares of Common
Stock that remained available to be issued under our qualified plan was approximately 241,000 shares and 71,000
shares for our non-qualified plan. ESPP participants purchase shares on a quarterly basis at a price equal to 95% of
the market price of the Common Stock at the end of the applicable offering period.
Stock-Based Compensation Expense. The stock-based compensation expense before income tax expense
for the years ended December 31, 2010, 2009 and 2008 consisted of the following (in thousands):
2010
2009
2008
Cost of goods sold
Research and development
Selling, general, and administrative
Stock-based compensation expense before taxes
$
$
201 $
56
1,037
1,294 $
205 $
57
920
1,182 $
101
37
824
962
We recognize stock-based compensation expense (net of a forfeiture rate) for those awards which are
expected to vest on a straight-line basis over the requisite service period. We estimate the forfeiture rate based on
our historical experience and expectations about future forfeitures. As of December 31, 2010, the total remaining
unrecognized compensation cost related to non-vested stock options, net of forfeitures, was approximately $3.3
million and is expected to be recognized over a weighted average period of 2.7 years.
In applying the Black-Scholes methodology to the option grants, the fair value of our stock-based awards
granted were estimated using an expected annual dividend yield of 0% and the following assumptions for the
periods indicated below:
Risk-free interest rate
Expected option life
Expected price volatility
2010
2009
2008
2.24%
6.0 years
41.4%
2.70%
6.0 years
42.4%
3.24%-3.55%
4.2-6.0 years
38.0%-41.7%
The average risk-free interest rate is determined using the U.S. Treasury rate in effect as of the date of
grant, based on the expected term of the stock option. We determine the expected term of the stock options using
the historical exercise behavior of employees. The expected price volatility was determined using a weighted
average of daily historical volatility of our stock price over the corresponding expected option life and implied
volatility based on recent trends of the daily historical volatility. For options with a vesting period, compensation
expense is recognized on a straight-line basis over the service period, which corresponds to the vesting
period. Compensation expense is recognized immediately for options that are fully vested on the date of grant.
During the years ended December 31, 2010, 2009 and 2008, 100,000, 140,000 and 499,000 stock-based
compensation grants were made, respectively, for a total fair value of approximately $705,000, $1.0 million and
$2.5 million, net of estimated forfeitures, respectively.
(cid:1)
61(cid:1)
The table below presents information related to stock option activity for the years ended December 31,
2010, 2009 and 2008 (in thousands):
2010
2009
2008
Total intrinsic value of stock options exercised
Cash received from stock option exercises
Net income tax benefit from the exercises of stock
options
$
1,928 $
1,330
2,757 $
1,690
399
987
6,150
5,405
2,044
Changes in stock options for the years ended December 31, 2010, 2009 and 2008 consisted of the following
(shares and intrinsic value in thousands):
2008:
Beginning balance
Granted
Exercised
Forfeited/expired
Outstanding at December 31
Exercisable
Ending vested and expected to
vest
Weighted average fair value of
options granted during year
2009:
Beginning balance
Granted
Exercised
Forfeited/expired
Outstanding at December 31
Exercisable
Ending vested and expected to
vest
Weighted average fair value of
options granted during year
2010:
Beginning balance
Granted
Exercised
Forfeited/expired
Outstanding at December 31
Exercisable
Ending vested and expected to
vest
Weighted average fair value of
options granted during year
(cid:1)
Weighted
Average
Exercise
Price
Remaining
Contractual
Term
(in years)
Number
of Shares
Intrinsic
Value
3,951
499 $
(612 )
(5 )
3,833
2,964
3,785
14.41
8.85
18.84
12.12
11.74
12.11
$
5.32
3,833
140 $
(308 )
(34 )
3,631
2,854
3,610
17.28
6.60
15.39
12.76
12.37
12.75
$
6.86
3,631
100 $
(191 )
(29 )
3,511
2,859
3,503
16.45
6.28
14.85
13.20
12.87
13.20
$
7.05
62(cid:1)
5.0 $
4.7
5.0
23,579
19,665
23,367
4.2 $
3.9
4.2
24,363
20,459
24,261
3.4 $
3.1
3.4
11,656
10,671
11,650
On November 17, 2004, we acquired all of the assets and assumed certain liabilities of MedSource
Packaging Concepts LLC (“MedSource”). In connection with this acquisition we issued 100,000 warrants to
MedSource at a fair value of approximately $323,000. Changes in these warrants for the years ended December 31,
2009 and 2008, consisted of the following (in thousands):
Number
of
Shares
Weighted
Average
Exercise
Price
Remaining
Contractual
Term
(in Years)
Intrinsic
Value
2008:
Beginning balance
Exercised
Outstanding at December 31
Exercisable
2009:
Beginning balance
Exercised
Outstanding at December 31
Exercisable
100
(49) $
51
51
51 $
(51)
0
0
10.13
10.13
10.13
10.13
10.13
0.00
0.00
0.9 $
0.9
369
369
0.0 $
0.0
0
0
The following table summarizes information about stock options outstanding at December 31, 2010 (shares
in thousands):
Range of
Exercise
Prices
$2.07—$10.47
$11.52—$13.81
$14.26—$15.03
$15.12—$21.67
$2.07—$21.67
Options Outstanding
Weighted
Average
Remaining
Contractual
Life
(in years)
Weighted
Average
Exercise
Price
Number
Outstanding
Options Exercisable
Weighted
Average
Exercise
Price
Number
Exercisable
982
949
911
669
3,511
1.6 $
3.8
4.2
4.3
8.40
12.39
14.63
19.47
982 $
790
630
457
8.40
12.44
14.72
20.67
2,859
(cid:1)
63(cid:1)
12.
SEGMENT REPORTING AND FOREIGN OPERATIONS
We report our operations in two operating segments: cardiovascular and endoscopy. Our cardiovascular
segment consists of cardiology and radiology medical device products which assist in diagnosing and treating
coronary artery disease, peripheral vascular disease and other non-vascular diseases and includes the embolization
devices we acquired through BioSphere. Our endoscopy segment consists of gastroenterology and pulmonology
medical device products which assist in the palliative treatment of expanding esophageal, tracheobronchial and
biliary strictures caused by malignant tumors. During the year ended December 31, 2010, we determined our
endoscopy segment met the quantitative thresholds for separate reporting. Prior period segment data has been
presented to reflect this newly reportable segment. We evaluate the performance of our operating segments based
on operating income (loss). Listed below are the sales by business segment for the years ended December 31, 2010,
2009 and 2008 (in thousands):
Cardiovascular
Stand-alone devices
Custom kits and procedure
trays
Inflation devices
Catheters
Embolization devices
Total
Endoscopy
Endoscopy devices
Total
% Change
2010
% Change
2009
% Change
2008
Year Ended December 31,
16%
11%
2%
18%
15%
18%
15%
$ 88,586
12%
$ 76,075
9%
$ 68,005
82,799
62,495
44,824
9,003
287,707
9,048
12%
(1)%
23%
74,541
61,058
38,126
10%
249,800
11%
3%
20%
9%
66,584
61,656
30,898
227,143
7,662
$ 296,755
13%
$ 257,462
9%
$ 227,143
During the years ended December 31, 2010, 2009 and 2008, we had foreign sales of approximately $95.2
million, $86.4 million and $72.5 million, respectively, or approximately 32%, 34% and 32%, respectively, of total
sales, primarily in China, Japan, Germany, France and the United Kingdom. Foreign sales are attributed based on
location of the customer receiving the product.
Our long-lived assets by geographic area at December 31, 2010 and 2009, consisted of the following (in
thousands):
2010
2009
United States
Ireland
Other foreign countries
$
97,881 $
22,203
7,971
89,428
17,148
8,070
Total
$
128,055 $
114,646
(cid:1)
64(cid:1)
Financial information relating to our reportable operating segments and reconciliations to the consolidated
totals for the years ended December 31, 2010, 2009 and 2008 are as follows (in thousands):
Revenues
Cardiovascular
Endoscopy
Total revenues
Operating expenses
Cardiovascular
Endoscopy
Total operating expenses
Goodwill impairment charge
Cardiovascular
Endoscopy
Total goodwill impairment charge
Operating income (loss)
Cardiovascular
Endoscopy
Total operating income (loss)
Total other income (expense) – net
Income tax expense
2010
2009
2008
$
287,707 $
9,048
296,755
249,800 $
7,662
257,462
227,143
—
227,143
93,884
9,066
102,950
—
8,344
8,344
30,176
(12,972)
17,204
(416)
4,328
69,097
6,858
75,955
—
—
—
35,836
(2,989)
32,847
247
10,564
62,287
—
62,287
—
—
—
30,984
—
30,984
861
11,118
Net income
$
12,460 $
22,530 $
20,727
Total assets by business segment at December 31, 2010 and 2009, consisted of the following (in thousands):
Cardiovascular
Endoscopy
Total
2010
2009
$
$
355,718 $
13,762
369,480 $
249,726
21,787
271,513
Total depreciation and amortization by business segment for the years ended December 31, 2010, 2009 and
2008 consisted of the following (in thousands):
2010
2009
2008
Cardiovascular
Endoscopy
Total
$
$
13,851 $
1,005
14,856 $
11,406 $
865
12,271 $
10,240
10,240
Total capital expenditures by business segment for the years ended December 31, 2010, 2009 and 2008
consisted of the following (in thousands):
2010
2009
2008
Cardiovascular
Endoscopy
Total
$
$
23,494 $
154
23,648 $
18,475 $
3
18,478 $
14,476
14,476
(cid:1)
65(cid:1)
13.
ROYALTY AGREEMENTS
Pursuant to a 1992 settlement agreement, we entered into a license agreement with another medical product
manufacturer (the “Licensor”), whereby the Licensor granted to us a nonexclusive right and license to manufacture
and sell products which are subject to the patents issued to the Licensor. The license agreement terminated in
August 2008 upon the expiration of the last related patent. For the rights and license granted under the agreement,
we paid the Licensor a nonrefundable prepaid royalty in the amount of $600,000. In addition to the prepaid royalty,
we agreed to pay the Licensor a continuing royalty of 5.75% of sales (which will not exceed $450,000 for any
calendar year) made in the United States, of products covered by the license agreement. Royalties of $450,000 were
paid or accrued for the year ended December 31, 2008.
During 2006, in connection with the purchase of the Futura® safety scalpel product line from Hypoguard
USA, Inc. we acquired a license agreement with Innovative Surgical Technology, Inc. (“IST”) whereby IST granted
to us an exclusive worldwide license to manufacture and sell products which are subject to the patents issued to
IST. For the rights and license granted under the agreement, we agreed to pay the IST a royalty of 4% of net sales,
with annual minimum royalty payments of $144,000 for calendar years 2008 through 2014 and $108,000 for 2015.
During the years ended December 31, 2009 and 2008, we paid or accrued a royalty of $108,000 and $144,000,
respectively, under this license agreement. During January 2009, we negotiated to purchase from IST the patents
related to this product for $432,000. The patent will amortize over the remaining life of the patents, which is
approximately five and one-half years. In connection with the purchase of the patents, IST forgave royalties payable
for the three months ended December 31, 2008 in the amount of $36,000 and our royalty obligation for periods
subsequent to December 31, 2009 was terminated.
During 2007, in connection with the purchase of the ProGuide™ chronic dialysis catheter from Datascope,
we entered into a running royalty agreement as partial consideration of the assignment of acquired intellectual
property to us. Under this agreement, we agreed to pay Datascope a royalty of 5% of net sales, with annual
minimum royalty payments of $50,000 for calendar years 2009 through 2013. During each of the years ended
December 31, 2010, 2009 and 2008, we paid or accrued a royalty of $50,000 under this agreement.
During 2010, in connection with our acquisition of BioSphere, we entered into a running royalty agreement
as part of a partnership between BioSphere and L’Assistance Publique-Hôpitaux de Paris, referred to as “AP-HP,”
pursuant to which AP-HP has granted us the exclusive license to use two United States patents and their foreign
counterparts that we jointly own with AP-HP relating to microspheres. We are required to pay to AP-HP a royalty
on the commercial sale of any products that incorporate technology covered by the patents. We may sublicense
these exclusive rights under the agreement only with the prior written consent of AP-HP, which consent cannot be
unreasonably withheld. Under the terms of the royalty agreement our exclusive license extends for the duration of
both (i) the jointly owned U.S. and foreign counterpart patents which will expire in 2014 and 2012, respectively, and
(ii) the products and specialties implementing the patents. On January 26, 2010, BioSphere filed patent applications
which, if issued, will extend the royalty payments until approximately January 2031. The royalty rate in the
agreement is 5% of net sales until the patents expire, and 2.5% of net sales thereafter as long as the product is sold.
We paid or accrued approximately $401,000 in royalty payments to AP-HP for the year ended December 31, 2010
after the BioSphere acquisition.
14.
EMPLOYEE BENEFIT PLANS
We have a contributory 401(k) savings and profit sharing plan (the “Plan”) covering all U.S. full-time
employees who are at least 18 years of age. The Plan has a 90 day minimum service requirement. We may
contribute, at our discretion, matching contributions based on the employees’ compensation. Contributions we made
to the Plan for the years ended December 31, 2010, 2009 and 2008, totaled approximately $1.2 million, $833,000
and $0, respectively. We have defined contribution plans covering some of our foreign employees. We contribute
between three and 36% of the employee’s compensation for certain foreign non-management employees, between
ten and 36% of the employee’s compensation for certain foreign management employees. Contributions made to
these plans for the years ended December 31, 2010, 2009 and 2008, totaled approximately $565,000, $550,000 and
$541,000, respectively.
(cid:1)
66(cid:1)
15.
QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Quarterly data for the years ended December 31, 2010, 2009 and 2008, consisted of the following (in
thousands, except per share amounts):
2010
March 31
Quarter Ended
June 30
September 30
December 31
$
Net sales
Gross profit
Income (loss) from operations
Income tax expense (benefit)
Net income (loss)
Basic earnings (loss) per common share
Diluted earnings (loss) per common
share
2009
Net sales
Gross profit
Income from operations
Income tax expense
Net income
Basic earnings per common share
Diluted earnings per common share
2008
Net sales
Gross profit
Income from operations
Income tax expense
Net income
Basic earnings per common share
Diluted earnings per common share
$
$
67,432 $
28,435
6,346
1,822
4,508
0.16
74,948 $
32,458
8,777
3,124
5,715
0.20
73,172 $
31,247
(3,442 )
(1,539 )
(1,973 )
(0.07 )
0.16
0.20
(0.07 )
58,371 $
24,808
7,900
2,537
5,537
0.20
0.19
53,553 $
21,592
6,604
2,432
4,317
0.16
0.15
64,837 $
28,143
8,963
3,144
5,841
0.21
0.20
57,441 $
24,502
9,009
3,337
5,818
0.21
0.21
66,759 $
28,535
8,463
2,349
6,085
0.22
0.21
58,153 $
23,684
7,169
2,198
5,200
0.19
0.18
81,203
36,358
5,523
921
4,210
0.15
0.15
67,495
27,316
7,521
2,534
5,067
0.18
0.18
57,996
23,493
8,202
3,151
5,392
0.19
0.19
Basic and diluted earnings (loss) per share are computed independently for each of the quarters presented.
Therefore, the sum of the quarterly amounts may not equal the total computed for the year.
16.
FAIR VALUE MEASUREMENTS
Our financial assets and liabilities carried at fair value measured on a recurring basis as of December 31,
2010 consisted of the following (in thousands):
Description
Total Fair
Value at
December 31, 2010
Quoted prices in
active markets
(Level 1)
Fair Value Measurements Using
Significant other
observable inputs
(Level 2)
Significant
unobservable inputs
(Level 3)
Interest rate swap (1)
$
1,159
$
—
$
1,159
$
—
(1) The fair value of the interest rate swap is determined based on forward yield curves.
(cid:1)
67(cid:1)
There were no financial assets and liabilities carried at fair value measured on a recurring basis as of
December 31, 2009.
During the years ended December 31, 2010, 2009 and 2008, we had losses of approximately $8,478,000,
$154,000, $164,000, respectively, related to the measurement of non-financial assets at fair value on a nonrecurring
basis subsequent to their initial recognition. Of the total loss in 2010, approximately $8,344,000 was related to the
impairment of our goodwill related to our endoscopy reporting unit (see Note 4). The fair value of these non-
financial assets was measured using Level 3 inputs. As of December 31, 2010, there was no goodwill remaining in
our consolidated financial statements related to the endoscopy reporting unit.
The carrying amount of cash and cash equivalents, receivables, and trade payables approximates fair value
because of the immediate, short-term maturity of these financial instruments. The carrying amount of long-term
debt approximates fair value, as determined by borrowing rates estimated to be available to us for debt with similar
terms and conditions.
SUPPLEMENTARY FINANCIAL DATA
The supplementary financial information required by Item 302 of Regulation S-K is contained in Note 14
to our consolidated financial statements set forth above.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
DISCLOSURE CONTROLS AND PROCEDURES
Under the supervision and with the participation of our management, including our principal executive
officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such
term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934 as of December 31,
2010. Based on this evaluation, our principal executive officer and principal financial officer concluded that our
disclosure controls and procedures are effective in ensuring that information we are required to disclose in the
reports we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time
periods specified in the SEC’s rules and forms.
INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate internal control over financial
reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended. Our
internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
accounting principles generally accepted in the United States of America. Internal control over financial reporting
includes those written policies and procedures that:
• Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions
and dispositions of the assets of Merit
• Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles in the United States of America
• Provide reasonable assurance that our receipts and expenditures are being made only in accordance with
authorization of our management and directors
(cid:1)
68(cid:1)
• Provide reasonable assurance regarding prevention or timely detection of the unauthorized acquisition, use
or disposition of assets that could have a material effect on the consolidated financial statements
Internal control over financial reporting includes the controls themselves, monitoring and internal auditing
practices and actions taken to correct deficiencies as identified. Because of its inherent limitations, internal control
over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Our management assessed the effectiveness of our internal control over financial reporting as of
December 31, 2010. In making this assessment, our management used the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Based
on those criteria and management’s assessment, we believe that, as of December 31, 2010, our internal control over
financial reporting is effective.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
During the fiscal quarter ended December 31, 2010, there has been no change in internal control over
financial reporting that has materially affected, or is reasonably likely to materially affect our internal control over
financial reporting.
Our independent registered public accountants have also issued an audit report on our internal control over
financial reporting. This report appears below.
(cid:1)
69(cid:1)
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Merit Medical Systems, Inc.
We have audited the internal control over financial reporting of Merit Medical Systems, Inc. and
subsidiaries (the “Company”) as of December 31, 2010, based on criteria established in Internal Control —
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The
Company’s management is responsible for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting, included in the accompanying
Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on
the Company’s internal control over financial reporting based on our audit.
We conducted our audit 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 effective internal control over financial reporting was maintained in all material respects. Our audit
included obtaining an understanding of internal control over financial reporting, assessing the risk that a material
weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the
assessed risk and performing such other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed by, or under the supervision of,
the company’s principal executive and principal financial officers, or persons performing similar functions and
effected by the company’s board of directors, management and other personnel to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company’s internal control over financial reporting
includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of
collusion or improper management override of controls, material misstatements due to error or fraud may not be
prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal
control over financial reporting to future periods are subject to the risk that the controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2010, based on the criteria established in Internal Control — Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated financial statements and financial statement schedule as of and for the year
ended December 31, 2010, of the Company and our report dated March 15, 2011 expressed an unqualified opinion
on those financial statements and financial statement schedule and included an explanatory paragraph regarding the
adoption of new accounting guidance.
/s/ DELOITTE & TOUCHE LLP
Salt Lake City, Utah
March 15, 2011
(cid:1)
70(cid:1)
Item 9B. Other Information.
None.
Items 10, 11, 12, 13 and 14.
PART III
These items are incorporated by reference to our definitive proxy statement relating to our Annual Meeting
of Shareholders scheduled for May 27, 2011. We anticipate that our definitive proxy statement will be filed with the
SEC not later than 120 days after December 31, 2010, pursuant to Regulation 14A of the Securities Exchange Act of
1934, as amended.
Item 15. Exhibits and Financial Statement Schedules.
(a) Documents filed as part of this Report:
PART IV
(1) Financial Statements. The following consolidated financial statements and the notes thereto,
and the Reports of Independent Registered Public Accounting Firm are incorporated by reference
as provided in Item 8 and Item 9A of this report:
Report of Independent Registered Public Accounting Firm — Internal Control
Report of Independent Registered Public Accounting Firm — Financial Statements
Consolidated Balance Sheets as of December 31, 2010 and 2009
Consolidated Statements of Income for the Years Ended December 31, 2010, 2009 and 2008
Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2010, 2009 and 2008
Consolidated Statements of Cash Flows for the Years Ended December 31, 2010, 2009 and 2008
Notes to Consolidated Financial Statements
(cid:1)
71(cid:1)
(2) Financial Statement Schedule.
— Schedule II - Valuation and qualifying accounts
YEARS ENDED DECEMBER 31, 2010, 2009 AND 2008
(In thousands)
Description
ALLOWANCE FOR UNCOLLECTIBLE
ACCOUNTS:
2008
2009
2010
Balance at
Beginning
of Year
Additions
Charged to
Costs and
Expenses (a)
Deduction (b)
Balance at
End of
Year
(497)
(505)
(541)
(139)
(214)
(193)
131
178
141
(505)
(541)
(593)
(a) The Company records a bad debt provision based upon historical experience and a review of individual customer
balances.
(b) When an individual customer balance becomes impaired and is deemed uncollectible a deduction is made against
the allowance for uncollectible accounts.
Description
RESERVE FOR INVENTORY
OBSOLESCENCE:
2008
2009
2010
Balance at
Beginning
of Year
Additions
Charged to
Costs and
Expenses (c)
Deductions (d)
Balance at
End of
Year
(2,335)
(2,261)
(2,433)
(1,096)
(1,469)
(1,949)
1,170
1,297
1,086
(2,261)
(2,433)
(3,296)
(c) The Company writes down its inventory for estimated obsolescence for unmarketable and/or slow moving
products that may expire prior to being sold.
(d) When a previously reserved for inventory item is either disposed of or sold the Company records a deduction to
its reserve for obsolescence inventory.
(cid:1)
72(cid:1)
(b) Exhibits:
The following exhibits required by Item 601 of Regulation S—K are filed herewith or have been filed previously
with the SEC as indicated below:
2.1
Description
Agreement and Plan of Merger dated May 13, 2010 by and among Merit
Medical Systems, Inc., Merit BioAcquisition Co., and BioSphere
Medical, Inc.*
Exhibit No.
[Form 8-K filed May 13,
2010, Exhibit 2.1]
3.1
Articles of Incorporation as amended and restated*
3.2
Bylaws*
3.3
Amended and Restated Bylaws*
4
Specimen Certificate of the Common Stock*
4.3
Articles of Amendment of the Articles of Incorporation dated May 14,
1993*
4.4
Articles of Amendment to Articles of Incorporation dated June 6, 1996*
4.5
Articles of Amendment to Articles of Incorporation dated June 12, 1997*
Articles of Amendment to the Articles of Incorporation dated May 22,
2003*
Articles of Amendment to the Articles of Incorporation dated May 23,
2008*
[Form 8-K filed May 28,
2008, Exhibit 3.1]
4.7
4.8
10.1
10.2
Merit Medical Systems, Inc. Long Term Incentive Plan (as amended and
restated) dated March 25, 1996*†
Merit Medical Systems, Inc. 401(k) Profit Sharing Plan (as amended
effective January 1, 1991*†
10.3
License Agreement, dated April 8, 1992 with Utah Medical Products, Inc.*
(cid:1)
73(cid:1)
[Form 10-Q filed
August 14, 1996,
Exhibit No. 1]
[Form S–18 filed
October 19, 1989,
Exhibit No. 2]
[Form 10-Q filed
November 8, 2007,
Exhibit No. 3.3]
[Form S–18 filed
October 19, 1989,
Exhibit No. 10]
[Form S-3 filed
February 14, 2005,
Exhibit 4.3]
[Form S-3 filed
February 14, 2005,
Exhibit 4.4]
[Form S-3 filed
February 14, 2005,
Exhibit 4.5]
[Form S-3 filed
February 14, 2005,
Exhibit 4.7]
[Form 10-Q filed
August 14, 1996,
Exhibit No. 2]
[Form S–1 filed
February 14, 1992,
Exhibit No. 8]
[Form S–1 filed
February 14, 1992,
Exhibit No. 5]
10.4
Lease Agreement dated as of June 8, 1993 for office and manufacturing
facility*
10.12
Amended and Restated Deferred Compensation Plan*†
10.13
Purchase Agreement dated November 17, 2004 between Merit Medical
Systems, Inc. and MedSource Packaging Concepts LLC*
10.17
Unsecured Loan Agreement with Bank of America, N.A.*
Seventh Amendment to the First Restatement of the Merit Medical
Systems, Inc. 401(k) Profit Sharing Plan*†
[Form 10–K for year ended
December 31, 1994,
Exhibit No. 10.4]
[Form 10-K for year ended
December 31, 2003,
Exhibit No. 10.12]
[Form 10-K for year ended
December 31, 2004,
Exhibit No. 10.13]
[Form 8-K filed
December 7, 2006,
Exhibit 10.1]
[Form 10-K for year ended
December 31, 2006,
Exhibit No. 10.18]
Stock Purchase Agreement by and between Merit Medical Systems, Inc.
and Sheen Man Co. LTD, dated April 1, 2007*
[Form 10-Q filed May 9,
2007, Exhibit No. 10.19]
Eighth Amendment to the First Restatement of the Merit Medical
Systems, Inc. 401(k) Profit Sharing Plan*†
Ninth Amendment to the First Restatement of the Merit Medical
Systems, Inc. 401(k) Profit Sharing Plan*†
Tenth Amendment to the First Restatement of the Merit Medical
Systems, Inc. 401(k) Profit Sharing Plan*†
Merit Medical Systems, Inc. Amended and Restated Deferred
Compensation Plan, effective January 1, 2008*†
Eleventh Amendment to the First Restatement of the Merit Medical
Systems, Inc. 401(k) Profit Sharing Plan*†
Twelfth Amendment to the First Restatement of the Merit Medical
Systems, Inc. 401(k) Profit Sharing Plan*†
[Form 10-K for year ended
December 31, 2007,
Exhibit No. 10.20]
[Form 10-K for year ended
December 31, 2007,
Exhibit No. 10.21]
[Form 10-K for year ended
December 31, 2007,
Exhibit No. 10.22]
[Form 8-K filed
December 18, 2008,
Exhibit 10.1]
[Form 10-K for year ended
December 31, 2008,
Exhibit No. 10.29]
[Form 10-K for year ended
December 31, 2008,
Exhibit No. 10.30]
Second Amendment to the Merit Medical Systems, Inc. 2006 Long-Term
Incentive Plan*†
[Form 8-K filed May 27,
2009, Exhibit 10.1]
Second Restatement of the Merit Medical Systems, Inc. 401(k) Profit
Sharing Plan*†
[Form 8-K filed January 7,
2010, Exhibit 10.1]
Stockholder and Voting Agreement, dated as of May 13, 2010, among
Merit Medical Systems, Inc., Cerberus Partners, L.P. and Cerberus
International, Ltd.*
[Form 8-K/A filed May 14,
2010, Exhibit 10.1]
74(cid:1)
10.18
10.19
10.20
10.21
10.22
10.23
10.29
10.30
10.31
10.32
10.33
(cid:1)
Amendment No. 1 to Stockholder and Voting Agreement, dated as of
June 1, 2010, among Merit Medical Systems, Inc., Cerberus Partners, L.P.
and Cerberus International, Ltd. *
[Form 8-K filed June 2,
2010, Exhibit 10.2]
10.34
10.35
10.36
10.37
10.38
10.39
10.40
Credit Agreement dated as of September 10, 2010 by and among Merit
Medical Systems, Inc. and Wells Fargo Bank, National Association*
Amended and Restated Employment Agreement of Fred P. Lampropoulos
dated December 30, 2010†
Amended and Restated Employment Agreement of Kent Stanger dated
December 30, 2010†
Amended and Restated Employment Agreement of Marty Stephens dated
December 30, 2010†
Amended and Restated Employment Agreement of Rashelle Perry dated
December 30, 2010†
Amended and Restated Employment Agreement of Arlin D. Nelson dated
December 30, 2010†
[Form 8-K/A filed
September 16, 2010,
Exhibit 10.1]
Filed herewith
Filed herewith
Filed herewith
Filed herewith
Filed herewith
Filed herewith
Filed herewith
Filed herewith
Filed herewith
Filed herewith
Filed herewith
21
Subsidiaries of Merit Medical Systems, Inc.
23.1 Consent of Independent Registered Public Accounting Firm
31.1 Certification of Chief Executive Officer
31.2 Certification of Chief Financial Officer
32.1 Certification of Chief Executive Officer
32.2 Certification of Chief Financial Officer
* These exhibits are incorporated herein by reference.
† Indicates management contract or compensatory plan or arrangement.
(c) Schedules:
None
(cid:1)
75(cid:1)
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant
has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly
authorized, on March 15, 2011.
MERIT MEDICAL SYSTEMS, INC.
By:
/s/ FRED P. LAMPROPOULOS
Fred P. Lampropoulos, President and
Chief Executive Officer
ADDITIONAL SIGNATURE AND POWER OF ATTORNEY
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by
the following persons on behalf of the registrant and in the capacities indicated on March 15, 2011. In addition,
each person whose signature to this report appears below hereby constitutes and appoints Fred P. Lampropoulos and
Kent W. Stanger, and each of them, as his true and lawful attorney-in-fact and agent, with full power of substitution,
to sign on his behalf individually and in the capacity stated below and to perform any acts necessary to be done in
order to file all amendments and post-effective amendments to this report, and any and all instruments or documents
filed as part of or in connection with this report or the amendments thereto and each of the undersigned does hereby
ratify and confirm all that said attorney-in-fact and agent, or his substitutes, shall do or cause to be done by virtue
hereof.
Signature
Capacity in Which Signed
/s/: FRED P. LAMPROPOULOS
Fred P. Lampropoulos
President, Chief Executive Officer and Director
(Principal executive officer)
/s/: KENT W. STANGER
Kent W. Stanger
Chief Financial Officer, Secretary, Treasurer and
Director (Principal financial and accounting officer)
/s/: RICHARD W. EDELMAN
Richard W. Edelman
/s/: REX C. BEAN
Rex C. Bean
/s/: JAMES J. ELLIS
James J. Ellis
/s/: MICHAEL E. STILLABOWER
Michael E. Stillabower
/s/: FRANKLIN J. MILLER
Franklin J. Miller
(cid:1)
Director
Director
Director
Director
Director
76(cid:1)
Corporate Information
EXECUTIVE OFFICERS
Fred P. Lampropoulos
Chairman, Chief Executive Officer
Kent W. Stanger
Chief Financial Officer, Secretary, Treasurer
Martin R. Stephens
Executive Vice President, Sales & Marketing
Arlin D. Nelson
Chief Operating Officer
Rashelle Perry
Chief Legal Officer
Gregory L. Barnett
Chief Accounting Officer
BOARD OF DIRECTORS
Rex C. Bean
Private Investor
Ogden, Utah
Richard W. Edelman
Managing Director and
Senior Vice President of SMH Capital Inc.
Dallas, Texas
James J. Ellis
Managing Partner
Ellis Rosier & Associates
Dallas, Texas
Fred P. Lampropoulos
Chairman, Chief Executive Officer
Franklin J. Miller, M.D.
Professor of Interventional Radiology, U. C. San Diego
Kent W. Stanger
Chief Financial Officer, Secretary, Treasurer
Michael E. Stillabower, M.D.
Director, Cardiovascular Research,
Christiana Care Heath Systems, Wilmington, Delaware
Clinical Associate Professor of Medicine,
Jefferson Medical College, Philadelphia, Pennsylvania
CORPORATE OFFICES
Merit Medical Systems, Inc.
1600 West Merit Parkway
South Jordan, Utah 84095
(801) 253-1600
INDEPENDENT ACCOUNTANTS
Deloitte & Touche LLP
LEGAL COUNSEL
Parr Brown Gee & Loveless
Corporate and Securities Counsel
Stoel Rives LLP
Intellectual Property Counsel
FORM 10-K
Merit Medical Systems, Inc. filed an annual report on Form
10-K with the Securities and Exchange Commission for the
fiscal year ended December 31, 2010. A copy may be obtained
by written request from Kent W. Stanger, CFO, at the Com-
pany’s offices.
ANNUAL MEETING
All shareholders are invited to attend our Annual Meeting on
Friday, May 27, 2011 at 3:00 p.m. at the Company’s
corporate offices in South Jordan, Utah.
STOCK TRANSFER AGENT/REGISTRAR
Zions First National Bank
Stock Transfer Department
P. O. Box 30880
Salt Lake City, Utah 84130
MARKET INFORMATION
The Company’s common stock is traded on the NASDAQ
Global Select Market System under the symbol “MMSI.” As
of March 30, 2011, there were 28,707,929 shares of common
stock outstanding. The following chart sets forth the high and
low closing sale prices for the Company’s common stock for
the last two years:
2009
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2010
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
High
$ 18.00
16.99
19.54
19.90
$ 19.85
17.03
17.75
16.60
Low
$ 9.57
11.68
15.71
15.65
$ 13.78
14.28
15.48
14.64
As of March 30, 2011, the Company had approximately 154
shareholders of record, not including shareholders whose
shares are held in securities position listings.
The Company has never declared or paid any cash dividends
on its common stock. The Company intends to retain any
earnings for use in its business and does not anticipate paying
any cash dividends in the foreseeable future.
INVESTOR RELATIONS CONTACT
Anne-Marie Wright
Vice President, Corporate Communications
(801) 253-1600
FOR MORE INFORMATION, CONTACT
Kent W. Stanger, Chief Financial Officer
Merit Medical Systems, Inc.
(801) 253-1600
(This page has been left blank intentionally)
In September, we completed our acquisition of
Of course this is only possible because of the
BioSphere Medical, Inc. . We believe entry into the
talented and driven work force of Merit. Their efforts
embolic market will provide opportunities for
and sacrifices are acknowledged and appreciated.
growth and development, as well as strengthen our
We look forward to reporting the results of our efforts
relationships with physicians which will enhance our
in the future. To our long-term and new shareholders,
presence in the interventional radiology and oncology
we thank you for your support.
markets. Late in the year, we received investigational
device exemption (IDE) approval from the FDA for
Sincerely,
our HiQuality Clinical Trial Protocol for the treat-
ment of primary liver cancer, the first large-scale
multi-site U.S. study comparing doxorubicin-eluting
Fred P. Lampropoulos
QuadraSphere® Microspheres to conventional
Chairman & CEO
chemoembolization. We believe this study is the
most significant study regarding hepatocellular
carcinoma (HCC) in many years.
We are planning for future growth with the
initiation of building projects in Utah and Ireland,
which will provide a net increase of approximately
250,000 square feet of production and research and
development facilities.
This report includes “Forward-Looking Statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements
other than statements of historical fact are Forward-Looking Statements for purposes of these provisions. Merit assumes no obligation to update any Forward-Looking Statement. Although
Merit believes 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 will differ, and may differ materially, from those projected or assumed in the Forward-Looking Statements. Merit’s future financial
condition and results of operations, as well as any Forward-Looking Statements, are subject to inherent risks and uncertainties, including factors referenced in Merit’s press releases and fil-
ings with the Securities and Exchange Commission. A number of the factors that may have a direct bearing on Merit’s financial condition and operating results are described under “Risk
Factors” beginning on page 16 of Merit’s Annual Report on Form 10-K, filed with the U.S. Securities and Exchange Commission on March 15, 2011.
Merit Medical Systems, Inc.
1600 West Merit Parkway
South Jordan, Utah 84095
Phone 801-253-1600
www.merit.com