**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**WASHINGTON, D.C. 20549

 

**FORM10-Q**

 

**(Mark one)**

**ý****                                ****QUARTERLY REPORT UNDER SECTION 13OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the quarterly period ended July 3, 2005**

 

**o****                                ****TRANSITION REPORT UNDER SECTION13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the transition period from                 to                 .**

 

**Commission file number: 0-51348**

** **

**ev3 Inc.**

(Exact name ofregistrant as specified in its charter)

 
| **Delaware**                                                    | ** ** | **32-0138874**                       |
|-----------------------------------------------------------------|------------|--------------------------------------|
| (State or other jurisdiction of  incorporation or organization) |       | (IRS Employer Identification Number) |

 

**4600 Nathan Lane NorthPlymouth, Minnesota 55442**

(Address ofprincipal executive offices)

 

**(763) 398-7000**

(Registrant’stelephone number including area code)

 

Indicate by check mark whether the registrant(1) has filed all reports required to be filed by Section 13 or 15(d) ofthe Securities Exchange Act of 1934 during the preceding 12 months (or for suchshorter 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  o  NO  ý*

 

Indicate by check mark whether the registrantis an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).  YES  o  NO  ý

 

As of August 1, 2005, there were 49,116,454shares of common stock, par value $0.01 per share, of the registrantoutstanding.

 

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*  The registrant has not been subject to thefiling requirements for the past 90 days as the registration statement inconnection with its initial public offering became effective on June 16,2005.  The registrant has filed allreports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 since such time.

 

 

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**ev3 Inc.**

**FORM 10-Q**

**For the Quarterly Period Ended July 3, 2005**

 

**TABLEOF CONTENTS**

 
| **Description** | ** **                                                                                                                  | **Page**   |
|-----------------|-----------------------------------------------------------------------------------------------------------------------------|------------|
|            |                                                                                                                        |       |
| **PART I.**     | **FINANCIAL INFORMATION**                                                                                                   | ** ** |
|            |                                                                                                                        |       |
| ITEM 1.         | Financial Statements                                                                                                        | 1          |
|            |                                                                                                                        |       |
|            | Consolidated Balance Sheets as of  July 3, 2005 (unaudited) and December 31, 2004                                           | 1          |
|            |                                                                                                                        |       |
|            | Consolidated Statements of  Operations for the three months and six months ended July 3, 2005 and July 4,  2004 (unaudited) | 2          |
|            |                                                                                                                        |       |
|            | Consolidated Statements of  Cash Flows for the six months ended July 3, 2005 and July 4, 2004 (unaudited)                   | 3          |
|            |                                                                                                                        |       |
|            | Notes to the  Consolidated Financial Statements                                                                             | 4          |
|            |                                                                                                                        |       |
| ITEM 2.         | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                 | 16         |
|            |                                                                                                                        |       |
| ITEM 3.         | Quantitative  and Qualitative Disclosures About Market Risk                                                                 | 53         |
|            |                                                                                                                        |       |
| ITEM 4.         | Controls and  Procedures                                                                                                    | 54         |
|            |                                                                                                                        |       |
| **PART II.**    | **OTHER INFORMATION**                                                                                                       | ** ** |
|            |                                                                                                                        |       |
| ITEM 1.         | Legal Proceedings                                                                                                           | 55         |
|            |                                                                                                                        |       |
| ITEM 2.         | Unregistered  Sales of Equity Securities and Use of Proceeds                                                                | 57         |
|            |                                                                                                                        |       |
| ITEM 3.         | Defaults  Upon Senior Securities                                                                                            | 58         |
|            |                                                                                                                        |       |
| ITEM 4          | Submission of  Matters to a Vote of Security Holders                                                                        | 59         |
|            |                                                                                                                        |       |
| ITEM 5.         | Other Information                                                                                                           | 59         |
|            |                                                                                                                        |       |
| ITEM 6.         | Exhibits                                                                                                                    | 60         |
|            |                                                                                                                        |       |
| SIGNATURE PAGE  | 62                                                                                                                          |
|            |                                                                                                                        |       |
| Exhibit Index   | 63                                                                                                                          |
|                 |                                                                                                                             |            |  |

 

In this report, references to “ev3,” “thecompany,” “we,” “our” or “us,” unless the context otherwise requires, refer toev3 Inc. and its subsidiaries.

 

*All trademarks or trade namesreferred to in this report are the property of their respective owners.*

 

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**PART I:****                         ****FINANCIAL INFORMATION**

**ITEM I:****                             ****FINANCIAL STATEMENTS**

 

**ev3 Inc.CONSOLIDATED BALANCE SHEETS***(Dollarsin thousands, except per share amounts)*****
| ** **                                                                                                                                       | ** ** | **July 3,  2005** | ** ** | **December 31,  2004** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|------------------------|------------|
| ** **                                                                                                                                       | ** ** | **(unaudited)**   | ** ** | ** **             | ** ** |
| **Assets**                                                                                                                                       |       |              |       |                   |       |
| ***Current assets***                                                                                                                             |       |              |       |                   |       |
| Cash and  cash equivalents                                                                                                                       |       | $                 | 128,399    |                   | $          | 20,131 |   |
| Accounts  receivable, less allowance of $3,233 and $2,694, respectively                                                                          |       | 22,128            |       | 18,956                 |       |
| Inventories                                                                                                                                      |       | 28,219            |       | 22,500                 |       |
| Prepaid  expenses and other assets                                                                                                               |       | 6,030             |       | 4,576                  |       |
| Other  receivables                                                                                                                               |       | 2,549             |       | 2,446                  |       |
|                                                                                                                                             |       |              |       |                   |       |
| *Total  current assets*                                                                                                                          |       | 187,325           |       | 68,609                 |       |
|                                                                                                                                             |       |              |       |                   |       |
| Restricted  cash                                                                                                                                 |       | 3,074             |       | 2,638                  |       |
| Property and  equipment, net                                                                                                                     |       | 13,030            |       | 9,130                  |       |
| Goodwill                                                                                                                                         |       | 94,456            |       | 94,514                 |       |
| Other  intangible assets, net                                                                                                                    |       | 30,844            |       | 31,851                 |       |
| Other assets                                                                                                                                     |       | 4,017             |       | 5,304                  |       |
|                                                                                                                                             |       |              |       |                   |       |
| *Total  assets*                                                                                                                                  |       | $                 | 332,746    |                   | $          | 212,046 |   |
|                                                                                                                                             |       |              |       |                   |       |
| **Liabilities  and stockholders’ equity (deficit)**                                                                                         |       |              |       |                   |       |
| ***Current liabilities***                                                                                                                        |       |              |       |                   |       |
| Accounts  payable                                                                                                                                |       | $                 | 11,703     |                   | $          | 8,931 |   |
| Accrued  compensation and benefits                                                                                                               |       | 11,176            |       | 9,523                  |       |
| Accrued  liabilities                                                                                                                             |       | 14,300            |       | 13,821                 |       |
| Accrued  acquisition consideration                                                                                                               |       | —            |       | 3,750                  |       |
|                                                                                                                                             |       |              |       |                   |       |
| *Total  current liabilities*                                                                                                                     |       | 37,179            |       | 36,025                 |       |
|                                                                                                                                             |       |              |       |                   |       |
| Demand notes  payable—related parties                                                                                                       |       | —            |       | 299,453                |       |
| Other  long-term liabilities                                                                                                                     |       | 561               |       | 702                    |       |
|                                                                                                                                             |       |              |       |                   |       |
| *Total  liabilities*                                                                                                                             |       | 37,740            |       | 336,180                |       |
|                                                                                                                                             |       |              |       |                   |       |
| Commitments  and contingencies                                                                                                                   |       | —            |       | —                 |       |
|                                                                                                                                             |       |              |       |                   |       |
| Class A  preferred membership units: stated value $3.56; 24,040,718 units authorized;  issued and outstanding: zero and 24,040,718, respectively |       | —            |       | 95,105                 |       |
| Class B  preferred membership units: stated value $3.56; 41,077,336 units authorized;  issued and outstanding: zero and 41,077,336, respectively |       | —            |       | 158,923                |       |
|                                                                                                                                             |       |              |       |                   |       |
| Minority  interest                                                                                                                               |       | 13,754            |       | 16,310                 |       |
|                                                                                                                                             |       |              |       |                   |       |
| ***Stockholders’ equity (deficit)***                                                                                                        |       |              |       |                   |       |
|                                                                                                                                             |       |              |       |                   |       |
| Members’  capital                                                                                                                           |       | —            |       | 47,927                 |       |
| Common  stock: $0.01 par value; 100,000,000 shares authorized; issued and  outstanding: 48,910,654 and zero, respectively                        |       | 489               |       | —                 |       |
| Additional  paid in capital                                                                                                                      |       | 801,252           |       | —                 |       |
| Accumulated  deficit                                                                                                                             |       | (520,208          | )          | (440,705               | )          |
| Accumulated  other comprehensive loss                                                                                                            |       | (281              | )          | (1,694                 | )          |
|                                                                                                                                             |       |              |       |                   |       |
| *Total  stockholders’ equity (deficit)*                                                                                                     |       | 281,252           |       | (394,472               | )          |
|                                                                                                                                             |       |              |       |                   |       |
| *Total  liabilities and stockholders’ equity (deficit)*                                                                                     |       | $                 | 332,746    |                   | $          | 212,046 |   |

 

*The accompanying notes are an integral part ofthese consolidated financial statements.*

 

1

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**ev3 Inc.CONSOLIDATED STATEMENTSOF OPERATIONS***(Dollars in thousands,except per share amounts)******(unaudited)*

 
| ** **                                                                             | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|----------------------------------------------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                                                             | ** ** | **July 3,  2005**      | ** ** | **July 4,  2004**    | ** ** | **July 3,  2005** | ** ** | **July 4,  2004** | ** ** |
| **Net  sales**                                                                         |       | $                      | 31,540     |                 | $          | 20,569 |   | $ | 59,222 |   | $ | 41,149 |   |
| ** **                                                                             |       |                   |       |                 |       |   |   |   |   |   |   |   |   |
| **Operating  expenses**                                                                |       |                   |       |                 |       |   |   |   |   |
| Cost of  goods sold (a)                                                                |       | 12,785                 |       | 9,368                |       | 24,894 |   | 18,157 |   |
| Sales,  general and administrative (a)                                                 |       | 32,297                 |       | 23,520               |       | 64,157 |   | 47,957 |   |
| Research and  development (a)                                                          |       | 11,891                 |       | 10,589               |       | 22,217 |   | 19,743 |   |
| Amortization  of intangible assets                                                     |       | 2,548                  |       | 2,447                |       | 5,203 |   | 4,978 |   |
| (Gain) loss  on sale or disposal of assets, net                                        |       | 111                    |       | (1                   | )          | 164 |   | 19 |   |
| Acquired  in-process research and development                                          |       | 868                    |       | —               |       | 868 |   | — |   |
| ** **                                                                             | ** ** | ** **             | ** ** | ** **           | ** ** | ** ** |   |   |   |
| Total  operating expenses                                                              |       | 60,500                 |       | 45,923               |       | 117,503 |   | 90,854 |   |
|                                                                                   |       |                   |       |                 |       |   |   |   |   |
| Loss from  operations                                                                  |       | (28,960                | )          | (25,354              | )          | (58,281 | ) | (49,705 | ) |
|                                                                                   |       |                   |       |                 |       |   |   |   |   |
| **Other  (income) expense**                                                            |       |                   |       |                 |       |   |   |   |   |
| Gain on sale  of investments, net                                                      |       | (878                   | )          | (1,728               | )          | (4,611 | ) | (1,728 | ) |
| Interest  expense, net                                                                 |       | 6,078                  |       | 4,458                |       | 11,786 |   | 10,613 |   |
| Minority  interest in loss of subsidiary                                               |       | (705                   | )          | (1,315               | )          | (726 | ) | (5,072 | ) |
| Other  expense, net                                                                    |       | 1,828                  |       | 206                  |       | 2,920 |   | 106 |   |
| ** **                                                                             | ** ** | ** **             | ** ** | ** **           | ** ** | ** ** |   |   |   |
| **Loss  before income taxes**                                                          |       | (35,283                | )          | (26,975              | )          | (67,650 | ) | (53,264 | ) |
| Income tax  benefit                                                                    |       | (61                    | )          | —               |       | (59 | ) | — |   |
| ** **                                                                             | ** ** | ** **             | ** ** | ** **           | ** ** | ** ** |   |   |   |
| **Net loss**                                                                           |       | (35,222                | )          | (26,975              | )          | (67,591 | ) | (53,624 | ) |
| Accretion of  preferred membership units to redemption value                           |       | 5,635                  |       | 5,869                |       | 12,061 |   | 11,804 |   |
| ** **                                                                             | ** ** | ** **             | ** ** | ** **           | ** ** | ** ** |   |   |   |
| **Net loss  attributable to common stockholders**                                      |       | $                      | (40,857    | )                    | $          | (32,844 | ) | $ | (79,652 | ) | $ | (65,428 | ) |
|                                                                                   |       |                   |       |                 |       |   |   |   |   |
| Net loss per  common share attributable to common stockholders (basic and diluted) (b) |       | $                      | (4.60      | )                    | $          | (18.29 | ) | $ | (13.95 | ) | $ | (37.36 | ) |
|                                                                                   |       |                   |       |                 |       |   |   |   |   |
| Weighted  average common shares outstanding (b)                                        |       | 8,877,898              |       | 1,795,745            |       | 5,711,852 |   | 1,751,092 |   |

 

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| (a) Includes  stock based compensation charges of: |       |       |       |       |       |       |   |   |   |
|----------------------------------------------------|------------|------------|------------|------------|------------|------------|--------|--------|--------|
| Cost of  goods sold                                |       | $          | 135        |       | $          | 47         |   | $      | 247    |   | $ | 98 |   |
| Sales,  general and administrative                 |       | 591        |       | 206        |       | 1,045      |   | 1,373  |   |
| Research and  development                          |       | 189        |       | 182        |       | 434        |   | 398    |   |
| ** **                                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |   |   |   |
|                                               |       | $          | 915        |       | $          | 435        |   | $      | 1,726  |   | $ | 1,869 |   |

 

(b) Net loss per common share attributable tocommon stockholders and the weighted average common shares outstanding reflectthe June 21, 2005 1-for-6 reverse stock split for all periods presented.

 

*The accompanying notes arean integral part of these consolidated financial statements.*

 

2

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**ev3 Inc.CONSOLIDATED STATEMENTSOF CASH FLOWS ***(Dollars in thousands,except per share amounts)******(unaudited)*

 
| ** **                                                                                        | ** ** | **Six Months Ended** | ** ** |
|---------------------------------------------------------------------------------------------------|------------|----------------------|------------|
| ** **                                                                                        | ** ** | **July 3,  2005**    | ** ** | **July 4,  2004** | ** ** |
| **Operating  activities**                                                                         |       |                 |       |   |   |
| Net loss                                                                                          |       | $                    | (67,591    | ) | $ | (53,624 | ) |
| Adjustments  to reconcile net loss to net cash used in operating activities                       |       |                 |       |   |   |
| Depreciation  and amortization                                                                    |       | 7,340                |       | 6,990 |   |
| Provision  for bad debts                                                                          |       | 327                  |       | 278 |   |
| Provision  for inventory obsolescence                                                             |       | 1,156                |       | 264 |   |
| Acquired  in-process research and development                                                     |       | 868                  |       | — |   |
| Loss on  disposal of assets                                                                       |       | 157                  |       | 19 |   |
| Amortization  of beneficial conversion feature and non-cash interest expense                      |       | —               |       | 1,857 |   |
| Gain on sale  of investment                                                                       |       | (4,611               | )          | (1,728 | ) |
| Stock  compensation expense                                                                       |       | 1,726                |       | 1,869 |   |
| Minority  interest in loss of subsidiary                                                          |       | (726                 | )          | (5,072 | ) |
| Increase  (decrease) in cash resulting from changes in operating assets and liabilities           |       |                 |       |   |   |
| Accounts  receivable                                                                              |       | (3,965               | )          | (3,847 | ) |
| Inventories                                                                                       |       | (6,980               | )          | (4,534 | ) |
| Prepaids and  other assets                                                                        |       | 102                  |       | (667 | ) |
| Accounts  payable                                                                                 |       | 3,024                |       | 3,672 |   |
| Accrued  expenses and other liabilities                                                           |       | 2,509                |       | 292 |   |
| Accrued  interest on notes payable                                                                |       | 12,156               |       | 8,752 |   |
| ** **                                                                                        | ** ** | ** **           |       |   |   |
| Net cash  used in operating activities                                                            |       | (54,508              | )          | (45,479 | ) |
|                                                                                              |       |                 |       |   |   |
| **Investing  activities**                                                                         | ** ** | ** **           | ** ** | ** ** | ** ** |
| Purchase of  property and equipment                                                               |       | (6,119               | )          | (1,483 | ) |
| Purchase of  patents and licenses                                                                 |       | (982                 | )          | (571 | ) |
| Proceeds  from sale of property and equipment                                                     |       | 8                    |       | — |   |
| Proceeds  from sale of investments                                                                |       | 4,611                |       | 1,728 |   |
| Acquisitions,  net of cash acquired                                                               |       | (1,626               | )          | (3,750 | ) |
| Change in  restricted cash                                                                        |       | (221                 | )          | (31 | ) |
| Other                                                                                             |       | 894                  |       | — |   |
| ** **                                                                                        | ** ** | ** **           |       |   |   |
| Net cash  used in investing activities                                                            |       | (3,435               | )          | (4,107 | ) |
|                                                                                              |       |                 |       |   |   |
| **Financing  activities**                                                                         |       |                 |       |   |   |
| Issuance of  demand notes payable                                                                 |       | 49,100               |       | 30,840 |   |
| Payments on  demand notes payable                                                                 |       | (36,475              | )          | — |   |
| Proceeds  from issuance of notes payable, net of costs                                            |       | —               |       | 21,008 |   |
| Proceeds  from exercise of stock options                                                          |       | 660                  |       | 79 |   |
| Proceeds  from issuance of subsidiary stock to minority shareholders                              |       | 227                  |       | 178 |   |
| Proceeds  from initial public offering, net                                                       |       | 152,713              |       | — |   |
| Other                                                                                             |       | —               |       | (827 | ) |
| ** **                                                                                        | ** ** | ** **           |       |   |   |
| Net cash  provided by financing activities                                                        |       | 166,225              |       | 51,278 |   |
|                                                                                              |       |                 |       |   |   |
| Effect of  exchange rate changes on cash                                                          |       | (14                  | )          | (8 | ) |
| ** **                                                                                        | ** ** | ** **           |       |   |   |
| Net increase  in cash and cash equivalents                                                        |       | 108,268              |       | 1,684 |   |
| Cash and  cash equivalents, beginning of year                                                     |       | 20,131               |       | 23,625 |   |
| ** **                                                                                        | ** ** | ** **           |       |   |   |
| Cash and  cash equivalents, end of year                                                           |       | $                    | 128,399    |   | $ | 25,309 |   |
|                                                                                              |       |                 |       |   |   |
| Supplemental  disclosure of non-cash activities:                                                  |       |                 |       |   |   |
|                                                                                              |       |                 |       |   |   |
| Assets  acquired in conjunction with MTI step acquisition (see Note 6)                            |       | $                    | 7,536      |   | $ | — |   |
| Contribution  of demand notes payable upon initial public offering (see Note 11)                  |       | $                    | 324,230    |   | $ | — |   |
| Preferred  membership units converted to common stock upon initial public offering (see  Note 12) |       | $                    | 266,089    |   | $ | — |   |

 

*The accompanying notes arean integral part of these consolidated financial statements.*

 

3

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**ev3 Inc.NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS***(unaudited)*

 

**1.Description of Business**

 

 ev3 Inc. (the “Company”)is a global medical device company focused on catheter-based, or endovascular,technologies for the minimally invasive treatment of vascular diseases anddisorders. The Company develops, manufactures and markets a wide range ofproducts that includes stents, embolic protection devices, thrombectomydevices, balloon angioplasty catheters, foreign objectretrieval devices, guidewires, embolic coils, liquid embolics, microcatheters,and occlusion balloon systems. The Company markets its products in the UnitedStates, Europe, Canada, and Japan through a direct sales force, and throughdistributors in certain other international markets.

 

The Company holdsownership interests directly in two companies: ev3 Endovascular, Inc. (“ev3Endovascular”) and Micro Investment, LLC (“MII”), a holding company that owns acontrolling interest in Micro Therapeutics, Inc. (“MTI”), a publiclytraded operating company. The Company’s majority equity holder, Warburg, PincusEquity Partners, L.P. and certain of its affiliates (collectively “WarburgPincus”), owns a majority, controlling interest in ev3 Inc.The Company is organized in two businesssegments: cardio peripheral and neurovascular. The Company manages its businessand reports its operations internally and externally on this basis. The Company’scardio peripheral segment contains products that are used in bothcardiovascular and peripheral vascular procedures by cardiologists,radiologists, vascular surgeons and other endovascular specialists. The Company’sneurovascular segment contains products that are used primarily byneuro-radiologists and neurosurgeons for neurovascular procedures.

 

**2.Basis of Presentation**

 

The accompanyingunaudited financial statements have been prepared by the Company in accordancewith accounting principles generally accepted in the United States of America(U.S.) for interim financial information and pursuant to the instructions toForm 10-Q and Article 10 of Regulation S-X of the Securities and ExchangeCommission.  Accordingly, they do not includeall of the information and footnotes required by generally accepted accountingprinciples for complete financial statements. In the opinion of management, all adjustments (consisting of normalrecurring adjustments) considered necessary for a fair presentation have beenincluded.  The results for the three andsix months ended July 3, 2005 are not necessarily indicative of the resultsthat may be expected for the year ending December 31, 2005, or for any futureperiod.  These financial statements andnotes should be read in conjunction with the audited financial statements andthe notes thereto included in the Company’s registration statement on Form S-1,initially filed with the Securities and Exchange Commission on April 5, 2005(File No. 333-123851), as subsequently amended (the “Registration Statement”).

 

The consolidatedfinancial statements of ev3 Inc. include the financial results of MTI,which ev3 Inc. consolidates for accounting purposes but is not wholly owned. OnMay 26, 2005, Warburg Pincus and The Vertical Group L.P. and certain ofits affiliates (collectively “Vertical”) contributed all of the shares of MTI’scommon stock directly owned by them to ev3 LLC in exchange for commonmembership units. These commonmembership units were subsequently converted into shares of ev3 Inc. commonstock in connection with a subsequent merger of ev3 LLC with and into ev3 Inc. onJune 21, 2005.  As a result of thismerger, ev3 Inc. became the holding company of ev3 LLC’s subsidiaries.****Themerger of ev3 LLC with and into ev3 Inc. was accounted for as a combinationunder common control with the result that the financial statements for allperiods presented were such that the historical financial statements of thegroup were carried forward without adjustment.

 

As the controllingshareholder of the Company, the contribution of the shares by Warburg Pincus,representing a 15.7% interest in MTI as of May 26, 2005, was accounted for as atransfer of assets between entities under common control resulting in the retentionof historical based accounting. These consolidated financial statements giveeffect to the contribution of MTI shares owned by Warburg Pincus as though suchcontribution occurred in 2003 and 2004 when Warburg Pincus acquired itsinterest in MTI. The contribution of the MTI shares owned by Vertical,representing a 4.3% interest in MTI as of May 26, 2005, was accounted for underthe purchase method of

 

4

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accounting on the contribution date (see Note 6).  As of July 3, 2005, ev3 Inc. owned 70.3%of the outstanding shares of common stock of MTI.  The consolidation of MTI for accountingpurposes results in all of MTI’s assets and liabilities being included in theCompany’s consolidated balance sheets. Although all of MTI’s assets areincluded in the Company’s consolidated balance sheets, not all of these assetswould be available to the Company for distribution to its stockholders in theevent of MTI’s liquidation.

 

Prior to the consummation of the Company’s initialpublic offering on June 21, 2005, the Company amended and restated itscertificate of incorporation to authorize 100,000,000 shares of common stock,par value $0.01 per share, and 100,000,000 shares of preferred stock, par value$0.01 per share.  On June 21, 2005,immediately prior to the Company’s initial public offering, the Companycompleted a one-for-six reverse stock split of its outstanding commonstock.  All share and per share amountsfor all periods presented in these consolidated financial statements reflectthis split.

 

The Company operates on amanufacturing calendar with its fiscal year always ending on December 31.Each quarter is 13 weeks, consisting of one five-week and two four-weekperiods.  Accordingly, the first three fiscalquarters in 2004 ended on April 4, July 4 and October 3.  The corresponding fiscal quarters in 2005ended or end on April 3, July 3 and October 2.

 

**3.  StockBased Compensation**

 

TheCompany accounts for its stock based compensation plans under the fair value recognitionprovisions of SFAS 123, *Accounting for StockBased Compensation. *Under thefair value method, compensation expense is measured at the grant date based onthe estimated fair value of the award. The fair value is estimated using the Black-Scholes option pricing modeland is recognized over the service period, which is typically the vestingperiod.   The Company recognizedcompensation expense related to stock options of $915 thousand and $1.7 million for the three andsix months ended July 3, 2005, respectively, as compared to the compensation expense related to stockoptions of $435 thousand and $1.9 million for the three and six monthsended July 4, 2004, respectively.

 

The Company used theBlack-Scholes option pricing model, with a minimum value pricing method, formeasuring the fair value of its options granted for the year endedDecember 31, 2004 and for the three-month period ended April 3,2005.  The minimum value pricing methoddoes not take into consideration volatility. In accordance with SFAS 123,subsequent to April 5, 2005, the date of the Company’s initial filing ofthe registration statement relating to its initial public offering with theSecurities and Exchange Commission, the Company used the Black-Scholes model,including a volatility assumption, to estimate the fair value of all optiongrants. Forfeitures and cancellations are recognized as they occur. Expensepreviously recognized related to options that are cancelled or forfeited priorto vesting is reversed in the period of the cancellation or forfeiture.

 

The fair value of optionswas estimated at the date of grant using the Black-Scholes option pricing modelwith the following assumptions by plan:  

 
| ** **               | ** ** | **July 3, 2005** | ** ** | **July 4, 2004** | ** ** |
|--------------------------|------------|------------------|------------|------------------|------------|
| ** **               | ** ** | **ev3 Inc.**     | ** ** | **MTI**          | ** ** | **ev3 Inc.** | ** ** | **MTI** | ** ** |
| Risk free interest  rate |       | 3.8              | %          | 3.6              | %          | 3.5 | % | 3.7 | % |
| Expected  dividend yield |       | 0.0              | %          | 0.0              | %          | 0.0 | % | 0.0 | % |
| Expected  volatility     |       | 50.0             | %          | 44.9             | %          | — |   | 63.0 | % |
| Expected  option term    |       | 4 years          |       | 4 years          |       | 5 years |   | 4 years |   |

 

In accordance with theprovisions of SFAS 123 and Emerging Issues Task Force Issue 96-18, *Accounting for Equity Instruments that are Issued toOther than Employees for Acquiring, or in Conjunction with Selling, Goods orServices*, the Company accounts for non-employee equity based awards,in which goods or services are the consideration received for the equityinstruments issued, at their fair value. The assumptions used to determine fairvalue under the Black-Scholes pricing model are as disclosed above for ev3 Inc.and MTI as appropriate.

 

5

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**4.  NewAccounting Pronouncements**

 

In November 2004,the FASB issued SFAS 151, *InventoryCosts, An Amendment of Accounting Research Bulletin No. 43, Chapter 4*,which adopts wording from the International Accounting Standards Board’s (“IASB”)IAS 2 *Inventories* in an effort toimprove the comparability of cross-border financial reporting. The new standardindicates that abnormal freight, handling costs, and wasted materials(spoilage) are required to be treated as current period charges rather than asa portion of inventory cost. Additionally, the standard clarifies that fixedproduction overhead should be allocated based on the normal capacity of aproduction facility. The statement is effective for the Company beginning in2006. Adoption is not expected to have a material impact on the Company’sconsolidated earnings, financial position or cash flows.

 

On December 16,2004, the FASB issued SFAS 123(R), *Share-BasedPayment*, which is a revision of SFAS 123 and supersedes APBOpinion 25. SFAS 123(R) requires all share-based payments to employees,including grants of employee stock options, to be valued at fair value on thedate of grant, and to be expensed over the applicable vesting period and iseffective for the Company on January 1, 2006. The Company has not yetdetermined the impact of the provisions of SFAS 123(R) on its consolidatedearnings, financial position or cash flows.

 

**5.Liquidity and Capital Resources**

 

On June 21, 2005, theCompany completed an initial public offering in which it sold 11,765,000 sharesof common stock at $14.00 per share for net cash proceeds of $152.7 million,net of underwriting discounts and other offering costs.  Immediately prior to the consummation of theoffering, ev3 LLC merged with and into ev3 Inc. and 24,040,718 Class Apreferred membership units, 41,077,336 Class B preferred membership units, and18,799,962 common membership units of ev3 LLC were converted into 83,918,016shares of common stock of ev3 Inc. (on a pre-split basis).  Immediately thereafter, the Company completeda one for six reverse stock split whereby the83,918,016 shares of common stock were converted into 13,986,350 shares ofcommon stock.  Prior to the consummationof the offering, and subsequent to the reverse stock split, the Company alsoissued 21,964,815 and 1,194,489 shares of common stock to Warburg Pincus andVertical, respectively, in exchange for their contribution of $324.2 millionaggregate principal amount of demand notes and accrued and unpaid interestthereon.  The remaining balance of theaccrued and unpaid interest on the demand notes, totaling $36.5 million, wasrepaid using proceeds from the offering.

 

*Thefollowing summarizes the changes in stockholders’ equity (deficit) sinceDecember 31, 2004:*

*(inthousands, except unit and share amounts)*

* *
| ** **                                         | ** ** | ** **     | ** ** | **Members’** | ** ** | **Common  Stock** | ** ** | **Additional  Paid In** | ** ** | **Accumulated  Other  Comprehensive** | ** ** | **Accumulated**    | ** ** | **Total  Stockholders’** | ** ** |
|----------------------------------------------------|------------|----------------|------------|-------------------|------------|-------------------|------------|-------------------------|------------|---------------------------------------|------------|--------------------|------------|-------------------------------|------------|
| ** **                                         | ** ** | **Units**      | ** ** | **Capital**       | ** ** | **Shares**        | ** ** | **Amount**              | ** ** | **Capital**                           | ** ** | **Income  (Loss)** | ** ** | **Deficit**                   | ** ** | **Deficit** | ** ** |
| ** **                                         | ** ** | ** **     | ** ** | ** **        | ** ** | ** **        | ** ** | ** **              | ** ** | ** **                            | ** ** | ** **         | ** ** | ** **                    | ** ** | ** ** | ** ** |
| **Balance  January 1, 2005**                       | ** ** | **15,293,490** | ** ** | **$**             | **47,927** | ** **        | **—** | ** **              | **$**      | **—**                            | ** ** | **$**              | **—** | ** **                    | **$**      | **(1,694** | **)** | **$** | **(440,705** | **)** | **$** | **(394,472** | **)** |
| Accretion of preferred membership units            |       | —         |       | —            |       | —            |       | —                  |       | —                                |       | —             |       | (6,426                        | )          | (6,426 | ) |
| Compensation expense on unit options               |       | —         |       | 796               |       | —            |       | —                  |       | —                                |       | —             |       | —                        |       | 796 |   |
| Exercise of unit options                           |       | 495,809        |       | 651               |       | —            |       | —                  |       | —                                |       | —             |       | —                        |       | 651 |   |
| Comprehensive loss:                                |       |           |       |              |       |              |       |                    |       |                                  |       |               |       |                          |       |   |   |
| Net loss                                           |       |           |       |              |       |              |       |                    |       |                                  |       | —             |       | (32,369                       | )          | (32,369 | ) |
| Cumulative translation  adjustment                 |       |           |       |              |       |              |       |                    |       |                                  |       | 770                |       | —                        |       | 770 |   |
| Comprehensive loss:                                |       |           |       |              |       |              |       |                    |       |                                  |       | 770                |       | (32,369                       | )          | (31,599 | ) |
| **Balance  April 3, 2005**                         | ** ** | **15,789,299** | ** ** | **$**             | **49,374** | ** **        | **—** | ** **              | **$**      | **—**                            | ** ** | **$**              | **—** | ** **                    | **$**      | **(924** | **)** | **$** | **(479,500** | **)** | **$** | **(431,050** | **)** |
| Accretion of preferred  membership units           |       | —         |       | —            |       | —            |       | —                  |       | —                                |       | —             |       | (5,635                        | )          | (5,635 | ) |
| Compensation expense on  unit/stock options        |       | —         |       | 513               |       | —            |       | —                  |       | 409                                   |       | —             |       | —                        |       | 922 |   |
| Exercise of unit options                           |       | 6,331          |       | 9                 |       | —            |       | —                  |       | —                                |       | —             |       | —                        |       | 9 |   |
| Members’ contribution                         |       | 3,004,332      |       | 8,404             |       | —            |       | —                  |       | —                                |       | —             |       | —                        |       | 8,404 |   |
| Conversion of preferred  / common membership units |       | (18,799,962    | )          | (58,300           | )          | 83,918,016        |       | 839                     |       | 323,550                               |       | —             |       | —                        |       | 266,089 |   |

 

6

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| ** **                                                       | ** ** | ** ** | ** ** | **Members’** | ** ** | **Common  Stock** | ** **     | **Additional  Paid In** | ** ** | **Accumulated  Other  Comprehensive** | ** ** | **Accumulated**    | ** **  | **Total  Stockholders’** | ** ** |
|------------------------------------------------------------------|------------|------------|------------|-------------------|------------|-------------------|----------------|-------------------------|------------|---------------------------------------|------------|--------------------|-------------|-------------------------------|------------|
| ** **                                                       | ** ** | **Units**  | ** ** | **Capital**       | ** ** | **Shares**        | ** **     | **Amount**              | ** ** | **Capital**                           | ** ** | **Income  (Loss)** | ** **  | **Deficit**                   | ** ** | **Deficit** | ** ** |
| ** **                                                       | ** ** | ** ** | ** ** | ** **        | ** ** | ** **        | ** **     | ** **              | ** ** | ** **                            | ** ** | ** **         | ** **  | ** **                    | ** ** | ** ** | ** ** |
| 1-for-6 reverse common stock split                               |       | —     |       | —            |       | (69,931,666       | )              | (699                    | )          | 699                                   |       | —             |        | —                        |       | — |   |
| Contribution of demand notes                                     |       | —     |       | —            |       | 23,159,304        |           | 231                     |       | 323,999                               |       | —             |        | —                        |       | 324,230 |   |
| Common stock issued in conjunction with initial  public offering |       | —     |       | —            |       | 11,765,000        |           | 118                     |       | 152,595                               |       | —             |        | —                        |       | 152,713 |   |
| Comprehensive loss:                                              |       |       |       |              |       |              |           |                    |       |                                  |       |               |        |                          |       |   |   |
| Net loss                                                         |       |       |       |              |       |              |           |                    |       |                                  |       | —             |        | (35,222                       | )          | (35,222 | ) |
| Cumulative translation adjustment                                |       |       |       |              |       |              |           |                    |       |                                  |       | 643                |        | —                        |       | 643 |   |
| Gain on change in ownership % of MTI                             |       |       |       |              |       |              |           |                    |       |                                  |       | —             |        | 149                           |       | 149 |   |
| Comprehensive loss:                                              |       |       |       |              |       |              |           |                    |       |                                  |       | 643                |        | (35,073                       | )          | (34,430 | ) |
| **Balance July 3, 2005**                                         |       | —     | ** ** | **$**             | **—** | ** **        | **48,910,654** | ** **              | **$**      | **489**                               | ** ** | **$**              | **801,252** | ** **                    | **$**      | **(281** | **)** | **$** | **(520,208** | **)** | **$** | **281,252** | ** ** |
|                                                                  |            |            |            |                   |            |                   |                |                         |            |                                       |            |                    |             |                               |            |  |  |  |  |  |  |  |  |

 

Comprehensive lossconsists of net loss, gains on changes of interest related to ownership changesin MTI, and the effects of foreign currency translation.  The components of comprehensive loss resultedin a decrease to our net loss of $792 thousand and $1.6 million for the threeand six months ended July 3, 2005, respectively, and a decrease to our net lossof $47 thousand and $742 thousand for the three and six months ended July 4,2004, respectively.

 

The Company’s futureliquidity and capital requirements will be influenced by numerous factors,including clinical research and product development programs, receipt of andtime required to obtain regulatory clearances and approvals, sales andmarketing programs and continuing acceptance of the Company’s products in the marketplace.The Company believes that the resources generated through its initial publicoffering are sufficient to meet the Company’s liquidity requirements throughthe end of fiscal 2006; however, if the Company requires additional workingcapital, but is not able to raise additional funds, it may be required tosignificantly curtail or cease ongoing operations.

 

**6.MTI Step Acquisitions**

 

The Company, through itswholly owned subsidiary, MII, has acquired a controlling interest in MTI invarious step investments.  MTI is apublicly held Delaware corporation that develops, manufactures and marketsminimally invasive medical devices for diagnosis and treatment primarily ofneurovascular diseases. The investments were accounted for using the stepacquisition method prescribed by ARB 51, *ConsolidatedFinancial Statements*. Step acquisition accounting requires theallocation of the excess purchase price to the fair value of net assetsacquired. The excess purchase price is determined as the difference between thecash paid and the historical book value of the interest in net assets acquired.

 

On May 26, 2005, theshares of MTI’s common stock directly held by Warburg Pincus and Vertical werecontributed to ev3 LLC in exchange for 10,804,500 and 3,004,332 common membershipunits, respectively.  These common membership units weresubsequently converted into shares of ev3 Inc. common stock in connection withthe subsequent merger of ev3 LLC with and into ev3 Inc. on June 21, 2005.  MTI shares contributed byWarburg Pincus, representing a 15.7% interest in MTI, have been accounted foras a transfer of assets between entities under common control and theconsolidated financial statements give effect to the contribution by WarburgPincus as though such contributions occurred in 2003 and 2004 when WarburgPincus acquired its interest in MTI. Shares of MTI contributed by Vertical,representing a 4.3% interest, have been accounted for under the purchase methodof accounting at the date of the contribution by Vertical.  As a result, the Company held an approximateinterest in MTI of 70.3% and 66.0% at July 3, 2005 and December 31, 2004,respectively.

 

The number of membershipunits of ev3 LLC issued in exchange for the MTI shares directly held by WarburgPincus and Vertical was determined based on fair value.  Fair value of the MTI shares contributed wasmeasured as the average closing price per share of MTI’s common stock on theNASDAQ National Market System for the twenty trading days from and includingthe date the Company’s Registration Statement with respect to the Company’sinitial public offering was first filed by the Company with the Securities andExchange Commission. Fair value of

 

7

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ev3 LLC’s equity issued in exchange for theMTI shares was based on the midpoint of the range of estimated initial publicoffering prices per share, after consideration of the reverse stock split (SeeNote 2).

 

*Thefollowing summarizes the allocation of the excess purchase price over historicalbook values arising from the May 26, 2005 contribution of MTI shares byVertical (in thousands):*

 
| ** **                                    | ** ** | **May 26,  2005** | ** ** |
|-----------------------------------------------|------------|-------------------|------------|
| Inventory                                     |       | $                 | 104        |   |
| Developed  technology                         |       | 2,043             |       |
| Customer  relationships                       |       | 894               |       |
| Trademarks  and tradenames                    |       | 458               |       |
| Acquired  in-process research and development |       | 868               |       |
| Goodwill                                      |       | 2,066             |       |
| Minority  interest                            |       | 2,021             |       |
| Accrued  liabilities                          |       | (50               | )          |
|                                          |       |              |       |
| Total                                         |       | $                 | 8,404      |   |

 

The acquired in-processresearch and development charge was estimated considering an appraisal andrepresents the estimated fair value of the in-process projects at the date ofcontribution of the MTI shares.  As ofthe acquisition date, the in-process projects had not yet reached technologicalfeasibility and had no alternative use. The primary basis for determiningtechnological feasibility of these projects is obtaining regulatory approval tomarket the products. Accordingly, the value attributable to these projects,which had yet to obtain regulatory approval, was expensed in conjunction withthe acquisition. If the projects are not successful, or completed in a timelymanner, the Company may not realize the financial benefits expected from theseprojects.

 

To the extent thatinvestments in MTI by third party investors reduced the Company’s ownershipinterest, the difference between the carrying value ofthe interest indirectly sold by the Company, and the consideration paid by thethird party investor is considered a change in interest transaction. TheCompany has adopted an accounting policy of recording change of interest gainsor losses within equity as permitted by Staff Accounting Bulletin (“SAB”) 5H.Change of interest gains recorded in equity were $149 thousand and $149thousand for the three and six months ended July 3, 2005, respectively, ascompared with $71 thousand and $731 thousand for the three months and sixmonths ended July 4, 2004, respectively.

 

**7.  Inventories**

 

 *Inventory consists of the following (in thousands):*

 
| ** **         | ** ** | **July 3,** | ** ** | **December 31,** | ** ** |
|--------------------|------------|-------------|------------|------------------|------------|
| ** **         | ** ** | **2005**    | ** ** | **2004**         | ** ** |
| ** **         | ** ** | ** **  | ** ** | ** **       | ** ** |
| Raw  materials     |       | $           | 6,826      |             | $          | 6,874 |   |
| Work-in-progress   |       | 1,859       |       | 1,832            |       |
| Finished  goods    |       | 23,128      |       | 17,481           |       |
|               |       |        |       |             |       |
|               |       | 31,813      |       | 26,187           |       |
| Inventory  reserve |       | (3,594      | )          | (3,687           | )          |
|               |       |        |       |             |       |
| Inventory,  net    |       | $           | 28,219     |             | $          | 22,500 |   |

 

8

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**8.Goodwill and Other Intangible Assets**

 

 *The changes in the carrying amount of goodwill byoperating segment for the three and six months ended July 3, 2005 were asfollows (in thousands):*

 
| ** **                                                | ** ** | **Cardio  Peripheral** | ** ** | **Neuro-  vascular** | ** ** | **Total** | ** ** |
|-----------------------------------------------------------|------------|------------------------|------------|----------------------|------------|-----------|------------|
| Balance as  of January 1, 2005                            |       | $                      | 73,431     |                 | $          | 21,083    |       | $ | 94,514 |   |
| Settlement  of litigation over purchase price adjustments |       | (2,124                 | )          | —               |       | (2,124    | )          |
|                                                      |       |                   |       |                 |       |      |       |
| Balance as  of April 3, 2005                              |       | 71,307                 |       | 21,083               |       | 92,390    |       |
| Goodwill  related to MTI step acquisitions                |       | —                 |       | 2,066                |       | 2,066     |       |
|                                                      |       |                   |       |                 |       |      |       |
| Balance as of  July 3, 2005                               |       | $                      | 71,307     |                 | $          | 23,149    |       | $ | 94,456 |   |

 

*Otherintangible assets consist of the following (in thousands):*

 
| ** **                  | ** ** | **Weighted  average  useful life  (in years)** | ** ** | **July 3, 2005**          | ** ** | **December 31, 2004**       | ** ** |
|-----------------------------|------------|------------------------------------------------|------------|---------------------------|------------|-----------------------------|------------|
| **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization**                  | ** ** | **Net  Carrying  Amount** | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Net  Carrying  Amount** |
| ** **                  | ** ** | ** **                                     | ** ** | ** **                | ** ** | ** **                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Patents and  licenses       |       | 5.0                                            |       | $                         | 4,189      |                        | $          | (1,762 | ) | $ | 2,427 |   | $ | 3,496 |   | $ | (1,655 | ) | $ | 1,841 |   |
| Developed  technology       |       | 6.0                                            |       | 51,472                    |       | (26,986                     | )          | 24,486 |   | 47,836 |   | (21,126 | ) | 26,710 |   |
| Trademarks  and tradenames  |       | 5.0                                            |       | 3,085                     |       | (1,358                      | )          | 1,727 |   | 2,627 |   | (1,041 | ) | 1,586 |   |
| Customer  relationships     |       | 5.0                                            |       | 6,071                     |       | (3,867                      | )          | 2,204 |   | 5,177 |   | (3,463 | ) | 1,714 |   |
|                        |       |                                           |       |                      |       |                        |       |   |   |   |   |   |   |   |   |
| Other  intangible assets    |       |                                           |       | $                         | 64,817     |                        | $          | (33,973 | ) | $ | 30,844 |   | $ | 59,136 |   | $ | (27,285 | ) | $ | 31,851 |   |

 

Intangible assets areamortized using methods which approximate the benefit provided by theutilization of the assets. Patents and licenses, developed technology andtrademarks and tradenames are amortized on a straight line basis. Customerrelationships are amortized using the double declining balance method. TheCompany continually evaluates the amortization period and carrying basis ofintangible assets to determine whether later events and circumstances warrant arevised estimated useful life or reduction in value.

 

Total amortization ofintangibles was $2.5 million and $5.2 million for the three and six monthsended July 3, 2005, respectively, as compared to  $2.4 million and $5.0 million for thethree and six months ended July 4, 2004. The estimated amortization expense (inclusive of amortization expensealready recorded for the six months ended July 3, 2005) for the five yearsending December 31 is as follows (in thousands):

 

| 2005 |   | $     | 10,568 |   |
|------|--------|-------|--------|--------|
| 2006 |   | 9,409 |   |
| 2007 |   | 7,140 |   |
| 2008 |   | 3,818 |   |
| 2009 |   | 1,369 |   |

 

9

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**9.Investments**

 

MTI had a licensingagreement and an approximate 14% interest in Genyx Medical, Inc. (“Genyx”).The carrying value of MTI’s investment in Genyx was $0 as of December 31,2004, and MTI had no obligation to fund Genyx’s operations. In January 2005,MTI sold its interest in Genyx and recorded a gain of $3.7 million.

 

In connection with the2002 sale of its investment in Enteric Medical Technologies, Inc., MTI has aright to receive certain contingent consideration.  In the three months ended July 3, 2005 andJuly 4, 2004, MTI received $878 thousand and $1.7 million, respectively, basedupon the achievement of certain milestones.  These receipts were recognized as additional gain on sale of investmentwhen received by MTI.

 

**10.Accrued Liabilities**

 

*Accrued liabilities consist of the following (in thousands):***   **

 
| ** **                     | ** ** | **July 3,** | ** ** | **December 31,** | ** ** |
|--------------------------------|------------|-------------|------------|------------------|------------|
| ** **                     | ** ** | **2005**    | ** ** | **2004**         | ** ** |
| ** **                     | ** ** | ** **  | ** ** | ** **       | ** ** |
| Accrued  professional services |       | $           | 2,903      |             | $          | 3,591 |   |
| Accrued  clinical studies      |       | 2,899       |       | 1,580            |       |
| Office  closure                |       | 1,919       |       | 2,698            |       |
| Accrued  other                 |       | 6,589       |       | 5,952            |       |
|                           |       |        |       |             |       |
| Total  accrued liabilities     |       | $           | 14,300     |             | $          | 13,821 |   |

 

**11.Debt**

 

At June 21, 2005, theclosing date of the Company’s initial public offering, ev3 Endovascular hadoutstanding $316.0 million aggregate principal amount of demand notes plus$44.7 million of accrued and unpaid interest thereon.  These notes were payable to Warburg Pincus,our majority stockholder, and Vertical, our second largest stockholder.  Immediately prior to the Company’s initialpublic offering, the Company issued 21,964,815 and 1,194,489 shares of commonstock to Warburg Pincus and Vertical, respectively, in exchange for theircontribution of $324.2 million principal amount of the demand notes and aportion of the accrued and unpaid interest thereon.  Upon successful consummation of the initialpublic offering, the Company utilized $36.5 million of the net proceeds torepay the remaining accrued and unpaid interest, reducing the Company’s debtbalance to zero at June 21, 2005.

 

On May 6, 2005, MTIentered into a Loan and Security Agreement with Silicon Valley Bank (“SVB”),which will expire on May 6, 2007. Pursuant to the terms of the Agreement, MTImay borrow up to the lesser of (i) $3.0 million or (ii) the sum of (a) 80% ofMTI’s eligible accounts receivable, which exclude among other things accountsreceivable relating to international sales, and (b) the lesser of (1) 30% ofMTI’s eligible inventory, which excludes among other things inventory locatedoutside of the United States, (2) 50% of outstanding loans under (a) above or(3) $750 thousand. All outstanding amounts under the Agreement bear interest ata variable rate equal to SVB’s prime rate plus 2%. The Agreement also containscustomary covenants regarding operations of MTI’s business and financialcovenants relating to minimum tangible net worth.  As of July 3, 2005, MTI had no borrowingsunder the Agreement.

 

**12.Redeemable Convertible Preferred Membership Units**

 

In connection with themerger of ev3 LLC with and into ev3 Inc., 24,040,718 Class A preferredmembership units of ev3 LLC with a carrying value of $98.7 million and41,077,336 Class B preferred membership units of ev3 LLC with a carrying valueof $167.4 million were converted into common membership units of ev3 LLC, and

 

10

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subsequently into shares of the Company’s commonstock, on a 1:1 basis.  The newlyconverted shares were then subject to a 1-for-6 reverse stock split (See Note2).

 

Pursuant to the terms ofthe preferred membership units, prior to conversion they were being accreted toa redemption value and that accretion for the three and six months ended July3, 2005 was $5.6 million and $12.1 million, respectively.  Accretion for the three and six months endedJuly 4, 2004 was $5.9 million and $11.8 million, respectively. Accretion wasdiscontinued at the time of conversion.

 

**13.Equity Based Compensation Plans**

 

Upon consummation of the Company’s initial publicoffering, the ev3 LLC 2003Incentive Plan was terminated with respect to options available for grant thatwere not granted prior to the offering and the ev3 Inc. 2005Incentive Stock Plan became effective. Subject to adjustment as provided in the plan, 2,000,000 shares of the Company’s commonstock are available for issuance under the plan. Under the plan, the Company’s eligibleemployees, outside directors and consultants may be awarded options, stockgrants, stock units or stock appreciation rights. The terms and conditions ofan option, stock grant, stock unit or stock appreciation right (including anyvesting or forfeiture conditions) are set forth in the certificate evidencing thegrant.  During the three months ended July3, 2005, options to purchase 56,859 shares of ev3 LLC common membership unitswere granted under the ev3 LLC 2003 Incentive Plan. In connection with themerger of ev3 LLC with and into ev3 Inc., these options were converted intooptions to purchase an equivalent number of shares of the Company’s common stock.   During thethree months ended July 3, 2005, options to purchase 1,491,619 shares of theCompany’s common stock were granted under the ev3 Inc. 2005 Incentive StockPlan.      

 

**14.Commitments and Contingencies**

 

*Lettersof Credit*

 

As of July 3, 2005, theCompany had $2.4 million of outstanding letters of credit. These outstandingcommitments are fully collateralized by restricted cash.

 

*Contingencies*

 

The Company’s acquisitionagreements relating to the purchase of MitraLife, Appriva Medical, Inc. andDendron GmbH require the Company to make additional payments to the sellers ofthese businesses if certain milestones related to regulatory steps in theproduct commercialization process are achieved. The potential milestonepayments total $25.0 million, $175.0 million and $15.0 millionwith respect to the MitraLife, Appriva and Dendron acquisitions, respectively,during the period of 2003 to 2009. On September 29, 2004, the Company soldsubstantially all of the assets constituting the MitraLife business to EdwardsLifesciences and is no longer pursuing commercialization of the product lineacquired in the MitraLife transaction. As of the date that the Company sold these assets to EdwardsLifesciences, none of the milestones set forth in the Company’s agreement withthe sellers of MitraLife had been met. The Company has determined that it has no current obligations in respectof these milestone payments, and the Company does not believe that it is likelythat it will have obligations with respect to these milestones in the future.  The Company has determined that the firstmilestone with respect to the Appriva agreement was not achieved by theJanuary 1, 2005 milestone date and that the first milestone is notpayable. It is possible that the Company will meet one or more of the remainingmilestones with respect to the Appriva acquisition and could become obligatedto make the corresponding milestone payments totaling $125.0 million inperiods subsequent to 2005. Under the terms of the stock purchase agreement theCompany entered into in connection with its acquisition of Dendron, the Companymay be required to make additional payments which are contingent upon Dendronproducts achieving certain revenue targets between 2003 and 2008. In 2003, the$4.0 million revenue target for sales of Dendron products during 2003 wasmet. Accordingly, an additional payment to the former Dendron stockholders of$3.75 million was made in 2004. In 2004, the $5.0 million revenuetarget for sales of Dendron products during 2004 was met. Accordingly, apayment to the former Dendron stockholders of $3.75 million was accrued in2004 and was paid during the second quarter of 2005. The Company may berequired to make a final payment of $7.5 million, which is contingent uponDendron products achieving annual revenues of

 

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$25 millionin any year during the period between 2003 and 2008. Any such final payment would be due inthe year following the year of target achievement.

 

The Company is from timeto time subject to, and is presently involved in, litigation or other legalproceedings.

 

In September 2000,Dendron, which was acquired by MTI in 2002, was named as the defendant in threepatent infringement lawsuits brought by the Regents of the University ofCalifornia, as the plaintiff, in the District Court (Landgericht) inDusseldorf, Germany. The complaints requested a judgment that Dendron’s EDC Icoil device infringed three European patents held by the plaintiff and askedfor relief in the form of an injunction that would prevent Dendron fromproducing and selling the devices within Germany and selling from Germany tocustomers abroad, as well as an award of damages caused by Dendron’s allegedinfringement, and other costs, disbursements and attorneys’ fees. InAugust 2001, the court issued a written decision that the EDC I coildevices did infringe the plaintiff’s patents, enjoined Dendron from selling thedevices within Germany and from Germany to customers abroad, and requested thatDendron disclose the individual products’ costs as the basis for awardingdamages. In September 2001, Dendron appealed the decision. In addition,Dendron instituted challenges to the validity of each of these patents by filingopposition proceedings with the European Patent Office, or EPO, against one ofthe patents (MTI joined Dendron in this action in connection with itsacquisition of Dendron), and by filing, with MTI, nullity proceedings with theGerman Federal Patents Court against the German component of the other twopatents.  The opposition proceedings withthe EPO on the one patent are complete, and the EPO has rejected the oppositionand has upheld the validity of the one patent.

 

On July 4, 2001, theUniversity of California filed another suit against Dendron alleging that theEDC I coil device infringed another European patent held by the plaintiff.The complaint was filed in the District Court of Dusseldorf, Germany seekingadditional monetary and injunctive relief. In April 2002, the Court foundthat EDC I coil devices did infringe the plaintiff’s patent. The patentinvolved is the same patent that was involved in the case before the EnglishPatents Court (see below) and that was ruled by a Dutch court to be invalid(see below).  The opposition proceedingson the patent are complete, and the EPO has rejected the opposition and hasupheld the validity of the patent.  Thecase is under appeal and an oral hearing is scheduled to be held in theDusseldorf Court of Appeal on March 9, 2006.

 

An accrual for thematters discussed above was included in the balance sheet of Dendron as of thedate of its acquisition by MTI. As of July 3, 2005, approximately $800 thousandwas recorded in accrued liabilities in our consolidated balance sheet. Dendronceased all activities with respect to the EDC I coil device prior to MTI’sOctober 2002 acquisition of Dendron.

 

Concurrent with itsacquisition of Dendron, MTI initiated a series of legal actions related to itsSapphire coils in the Netherlands and the United Kingdom, which included across-border action that was heard by a Dutch court, as further describedbelow. The primary purpose of these actions was to assert both invalidity andnon-infringement by MTI of certain patents held by others. The range of patentsat issue are held by the Regents of the University of California, with BostonScientific Corporation subsidiaries named as exclusive licensees, collectivelyreferred to as the “patent holders,” related to detachable coils and certaindelivery catheters.

 

In October 2003, theDutch court ruled that the three patents at issue related to detachable coilsare valid and that MTI’s Sapphire coils do infringe such patents. The Dutchcourt also ruled that the patent holders’ patent at issue related to thedelivery catheter was invalid. Under the court’s ruling, MTI has been enjoinedfrom engaging in infringing activities related to the Sapphire coils in mostcountries within the European Union, and may be liable for then-unspecified monetarydamages for activities engaged in by MTI since September 27, 2002. InFebruary 2005, MTI received an initial claim from the patent holders withrespect to monetary damages, amounting to €3.6 million, or approximately$4.3 million as of July 3, 2005, with which MTI disagrees. Courthearings will be held regarding these claims. MTI has filed an appeal with theDutch court, and believes that since the date of injunction in each separatecountry it is in compliance with the Dutch court’s injunction and MTI intendsto continue such compliance. Because the Company believes that MTI has validlegal grounds for appeal, it has determined that a loss is not probable at thistime as defined by SFAS 5, *Accountingfor Contingencies*. However, there can be no assurance that theultimate resolution of this matter will not result in a material adverse effecton the Company’s business, financial condition or results of operations.

 

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In January 2003, MTIinitiated a legal action in the English Patents Court seeking a declarationthat a patent held by the patent holders related to delivery catheters wasinvalid, and that MTI’s products did not infringe this patent. The patent inquestion was the U.K. designation of the same patent that was found by theDutch court in October 2003 to be invalid, as discussed above. The patentholders counterclaimed for alleged infringement by MTI. In February 2005,the court approved an interim settlement between the parties under which thepatent holders are required to surrender such patent to the U.K. Comptroller ofPatents, and to pay MTI’s costs associated with the legal action, includinginterest. As a result, MTI received interim payments from the patent holdersaggregating £500 thousand (equivalent to approximately $950 thousand based onthe dates of receipt), which MTI recorded as a reduction of litigation expenseupon receipt of such funds in February and March 2005. The parties intend tocontinue discussions regarding payment by the patent holders of the remainingcosts incurred by MTI in such litigation. As a result of the interimsettlement, MTI anticipates that it will no longer be involved in litigation inthe United Kingdom, although no assurance can be given that no other litigationinvolving MTI may arise in the United Kingdom.

 

In the United States,concurrent with the FDA’s marketing clearance of the Sapphire line of emboliccoils received in July 2003, MTI initiated a declaratory judgment actionagainst the patent holders in the United States District Court for the WesternDistrict of Wisconsin. The action included assertions of non-infringement byMTI and invalidity of a range of patents held by the patent holders related todetachable coils and certain delivery catheters. In October 2003, thecourt dismissed MTI’s actions for procedural reasons without prejudice andwithout decision as to the merits of the parties’ positions. InDecember 2003, the University of California filed an action against MTI inthe United States District Court for the Northern District of Californiaalleging infringement by MTI with respect to a range of patents held by theUniversity of California related to detachable coils and certain deliverysystems. MTI has filed a counterclaim against the University of Californiaasserting non-infringement by MTI, invalidity of the patents and inequitableconduct in the procurement of certain patents. In addition, MTI filed a claimagainst the University of California and Boston Scientific Corporation for violationof federal antitrust laws, with the result that the court has subsequentlydecided to add Boston Scientific as a party to the litigation. A trial date hasnot been set. Because these matters are in early stages, the Company cannotestimate the possible loss or range of loss, if any, associated with theirresolution. However, there can be no assurance that the ultimate resolution ofthese matters will not result in a material adverse effect on the Company’sbusiness, financial condition or results of operations.

 

In March 2005, Medtronic, Inc. contacted the Companyto express its view that the Company’s Protégé stents infringe on one or moreof Medtronic’s patents. The Company informed Medtronic that it disagrees withMedtronic’s assertions, and has since had several discussions withMedtronic.  No lawsuit with respect tothis matter has been filed.  The Companyalso received notice from an individual claiming that he believes that theCompany’s PLAATO device infringes on two of his patents.  The Company has informed this individual thatit does not believe that its PLAATO device infringes on these patents.  On March 30, 2005, the Company wasserved with a complaint by Boston Scientific Corporation and one of itsaffiliates which claims that some of the Company’sproducts, including its SpideRX Embolic Protection Device, infringe certain ofBoston Scientific’s patents.  This actionwas brought in the United States District Court for the District ofMinnesota.  The Company has answered thecomplaint and intends to vigorously defend this action. Because these mattersare in early stages, the Company cannot estimate the possible loss or range ofloss, if any, associated with their resolution. However, there can be no assurance that the ultimate resolution of thesematters will not result in a material adverse effect on the Company’s business,financial condition or results of operations.

 

During 2002, the Company acquired Appriva Medical, Inc., a developer ofa technology to reduce stroke in patients with atrial fibrillation whichprovided the platform for the Company’s current PLAATO device.  The acquisition agreement relating to theCompany’s acquisition of Appriva contains four milestones to which paymentsrelate.  The first milestone was required by its terms to be achieved byJanuary 1, 2005 in order to trigger a payment equal to $50 million. The Company has determined that the first milestone was not achieved byJanuary 1, 2005 and that the first milestone is not payable.  On May20, 2005, Michael Lesh, as an individual seller of Appriva stock and purportingto represent certain other sellers of Appriva stock, filed acomplaint in the Superior Court of the State of Delaware with individuallyspecified damages aggregating $70 million and other unspecified damagesfor several allegations, including that the Company, along with otherdefendants,  breached the acquisition agreement and an implied covenant ofgood faith and fair dealing by willfully failing to take the steps necessary tomeet the first milestone under the agreement, and thereby also failing tomeet certain other milestones, and further that one

 

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milestone was actually met.   The complaintalso alleges fraud, negligent misrepresentation and violation of statesecurities laws in connection with the negotiation of the acquisitionagreement.  The Company believes these allegations are without merit andintends to vigorously defend this action.  On August 5, 2005, the Company’sattorneys received a letter from attorneys representing certain other sellersof Appriva stock (who are not purported to be represented in the action filedby Lesh), asking the Company’s attorneys to enter into a dialogue regardingtheir assertions that certain milestones should have been paid. The Companybelieves their assertions are without merit. Failure to reach agreement withthese new claimants on a resolution of the parties’ differences, could lead toadditional litigation on this matter.  Because these matters are in earlystages, the Company cannot estimate the possible loss or range of loss, if any,associated with their resolution. However, there can be no assurance that theultimate resolution of these matters will not result in a material adverseeffect on the Company’s business, financial condition or results of operations.

 

**15.Segment and Geographic Information**

 

  *The following is segment and geographic information(in thousands):*

 
| ** **                           | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|--------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                           | ** ** | **July 3,  2005**      | ** ** | **July 4,  2004**    | ** ** | **July 3,  2005** | ** ** | **July 4,  2004** | ** ** |
| **Segment  Data**                    |       |                   |       |                 |       |   |   |   |   |
| **Net  sales**                       |       |                   |       |                 |       |   |   |   |   |
| **Cardio  Peripheral**               |       |                   |       |                 |       |   |   |   |   |
| Stents                               |       | $                      | 8,781      |                 | $          | 4,681 |   | $ | 15,879 |   | $ | 10,005 |   |
| Thrombectomy  and embolic protection |       | 3,223                  |       | 1,835                |       | 6,461 |   | 3,935 |   |
| Procedural  support and other        |       | 7,204                  |       | 5,647                |       | 13,709 |   | 11,792 |   |
| ** **                           | ** ** | ** **             | ** ** | ** **           | ** ** | ** ** |   |   |   |
| Total Cardio  Peripheral             |       | $                      | 19,208     |                 | $          | 12,163 |   | $ | 36,049 |   | $ | 25,732 |   |
|                                 |       |                   |       |                 |       |   |   |   |   |
| **Neurovascular**                    |       |                   |       |                 |       |   |   |   |   |
| Embolic  products                    |       | 4,219                  |       | 3,209                |       | 8,197 |   | 5,487 |   |
| Neuro access  and delivery products  |       | 8,113                  |       | 5,197                |       | 14,976 |   | 9,930 |   |
| ** **                           | ** ** | ** **             | ** ** | ** **           | ** ** | ** ** |   |   |   |
| Total  Neurovascular                 |       | $                      | 12,332     |                 | $          | 8,406 |   | $ | 23,173 |   | $ | 15,417 |   |
|                                 |       |                   |       |                 |       |   |   |   |   |
| Total net  sales                     |       | $                      | 31,540     |                 | $          | 20,569 |   | $ | 59,222 |   | $ | 41,149 |   |
| ** **                           | ** ** | ** **             | ** ** | ** **           | ** ** | ** ** |   |   |   |
| **Gross  Profit**                    | ** ** | ** **             | ** ** | ** **           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cardio  peripheral                   |       | $                      | 10,314     |                 | $          | 6,307 |   | $ | 19,001 |   | $ | 14,337 |   |
| Neurovascular                        |       | 8,441                  |       | 4,894                |       | 15,328 |   | 8,655 |   |
| ** **                           | ** ** | ** **             | ** ** | ** **           |       |   |   |   |   |
| Total gross  profit (1)              |       | 18,755                 |       | 11,201               |       | 34,328 |   | 22,992 |   |
| Operating  expenses                  |       | 47,715                 |       | 36,555               |       | 92,609 |   | 72,697 |   |
|                                 |       |                   |       |                 |       |   |   |   |   |
| Loss from  Operations                |       | $                      | (28,960    | )                    | $          | (25,354 | ) | $ | (58,281 | ) | $ | (49,705 | ) |

 

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(1) Gross profit for internalmeasurement purposes is defined as net sales less cost of goods sold excludingthe amortization of intangible assets.

 
| ** **        | ** ** | **July 3,  2005** | ** ** | **December 31,  2004** | ** ** |
|-------------------|------------|-------------------|------------|------------------------|------------|
| **Total  assets** | ** ** | ** **        | ** ** | ** **             | ** ** |
| Cardio Peripheral |       | $                 | 270,573    |                   | $          | 146,722 | ** ** |
| Neurovascular     |       | 62,173            |       | 65,324                 | ** ** |
| ** **        | ** ** | ** **        | ** ** | ** **             | ** ** |
| Total assets      |       | $                 | 332,746    |                   | $          | 216,046 | ** ** |

 

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| ** **           | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|----------------------|------------|------------------------|------------|----------------------|------------|
| ** **           | ** ** | **July 3,  2005**      | ** ** | **July 4,  2004**    | ** ** | **July 3,  2005** | ** ** | **July 4,  2004** | ** ** |
| **Geographic  Data** | ** ** | ** **             | ** ** | ** **           | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Net  sales**       | ** ** | ** **             | ** ** | ** **           | ** ** | ** ** | ** ** | ** ** | ** ** |
| United  States       |       | $                      | 15,939     | ** **           | $          | 10,212 |   | $ | 30,060 |   | $ | 20,710 |   |
| International        |       | 15,601                 |       | 10,357               |       | 29,162 |   | 20,439 |   |
| ** **           | ** ** | ** **             | ** ** | ** **           | ** ** | ** ** |   |   |   |
| Total net  sales     |       | $                      | 31,540     |                 | $          | 20,569 |   | $ | 59,222 |   | $ | 41,419 |   |

 

**16.Earnings Per Share**

 

Thefollowing outstanding convertible preferred units of ev3 LLC, convertibledemand notes, and options of the Company and ev3 LLC were excluded from thecomputation of diluted earnings per share as they had an antidilutive effect.  In connection with the merger of ev3 LLC withand into ev3 Inc. immediately prior to the Company’s initial public offering,  each preferredmembership unit of ev3 LLC was converted into a share of our common stock andeach option to purchase common membership units of ev3 LLC was converted intoan option to purchase an equivalent number of shares of the Company’s commonstock (see Note 13).

 
| ** **                                                                                                         | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|--------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                                                                                         | ** ** | **July 3,  2005**      | ** ** | **July 4,  2004**    | ** ** | **July 3,  2005** | ** ** | **July 4,  2004** | ** ** |
| Convertible  preferred stock class A (assuming conversion using the contractual conversion  ratio to common units) |       | —                 |       | 24,040,718           |       | — |   | 24,040,718 |   |
| Convertible  preferred stock class B (assuming conversion using the contractual conversion  ratio to common units) |       | —                 |       | 41,077,336           |       | — |   | 41,077,336 |   |
| Convertible  demand notes (assuming conversion at stated value into common units)                                  |       | —                 |       | 64,611,847           |       | — |   | 64,611,847 |   |
| Options                                                                                                            |       | 3,493,961              |       | 1,388,468            |       | 3,493,961 |   | 1,388,468 |   |
|                                                                                                               |       | 3,493,961              |       | 131,118,369          |       | 3,493,961 |   | 131,118,369 |   |

 

**17.Subsequent Events**

 

On July 20, 2005,subsequent to the end of the fiscal quarter, the Company sold 205,800 shares ofcommon stock pursuant to the over-allotment option granted to the underwritersin connection with its initial public offering. Net proceeds to the Company from this sale totaled $2.5 million, afterdeducting underwriting discounts and commissions and offering expenses, andincreased the Company’s outstanding shares to 49,116,454.

 

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**ITEM 2.****                ****MANAGEMENT’S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

Thefollowing management’s discussion and analysis of financial condition andresults of operations describes the principal factors affecting the results ofour operations, financial condition and changes in financial condition for thethree and six months ended July 3, 2005. You should read this discussion together with the accompanying unauditedconsolidated financial statements, related notes and other financialinformation included herein. As discussed under the heading “Forward-LookingStatements” below, the following discussion and other portions of this reportmay contain predictions, estimates and other forward-looking statements thatinvolve a number of risks and uncertainties, including those discussed underthe heading “Risk Factors” below and elsewhere in this report. These riskscould cause our actual results to differ materially from any future performancesuggested in such forward-looking statements.

 

**Overview**

 

We are a global medical device company focused oncatheter-based, or endovascular, technologies for the minimally invasivetreatment of vascular diseases and disorders. Our broad product portfolio is focused on applications in each of thethree sub-markets of the endovascular device market: peripheral vascular,cardiovascular and neurovascular.  Wesell over 100 products consisting of over 1,000 SKUs in these markets.  From 2000 to 2002, our investor groupacquired certain of the assets in our cardio peripheral division to build thefoundation of our current peripheral and cardiovascular product portfolios.During this period, our investor group also purchased certain neurovascularassets to expand our neurovascular product portfolio and, through a series ofinvestments,  obtainedour indirect controlling investment in Micro Therapeutics, Inc., or MTI.  Beginning in 2002, we entered into long-term,exclusive agreements to market or distribute MTI’s full product portfolio inEurope, Japan, Canada and the major markets of Asia Pacific and LatinAmerica.  Since our last acquisition in2002, we have dedicated significant capital and management effort to advancethe acquired technologies and broaden our product lines in order to execute ourstrategies.

 

We have corporate infrastructure and direct salescapabilities in the United States, Canada, Europe and Japan and haveestablished distribution relationships in other large internationalmarkets.  Our corporate headquarters islocated in Plymouth, Minnesota and contains our manufacturing, research anddevelopment, and U.S. sales operations for our peripheral vascular andcardiovascular product lines.  MTI isheadquartered in Irvine, California, which contains our manufacturing, researchand development, and U.S. sales operations for our neurovascular productlines.  Outside of the United States, ourprimary offices are in Paris, France and Tokyo, Japan. During the three and sixmonths ended July 3, 2005, approximately 49.5% and 49.2% of our net sales,respectively, were generated outside of the United States, as a result of whichwe are sensitive to risks related to fluctuation in exchange rates, which couldaffect our business results in the future.

 

Since our inception, we have focused on building ourU.S. and international direct sales and marketing infrastructure that nowincludes a sales force of 199 direct sales representatives as of August 1, 2005in the United States, Canada, Europe and Japan. Our direct sales representatives accounted for approximately 87% and 88%of our net sales during the three and the six months ended July 3, 2005,respectively, with the balance generated by independent distributors.  In 2004,****we increased ourU.S. direct sales force from 44 to 82 and our Japan sales force from four toeleven.  In order to drive sales growth,we have invested heavily throughout our history in new product development,clinical trials to obtain regulatory approvals and the expansion of our globaldistribution system.  As a result, ourcosts and expenses have significantly exceeded our net sales, resulting in anaccumulated deficit of $520.2 million at July 3, 2005.  Consequently, we have financed our operationsthrough debt and equity offerings.  Weexpect to continue to generate operating losses for at least the next 18months.

 

Our cash, cashequivalents and short-term investments available to fund current operationswere $128.4 million and $20.1 million at July 3, 2005 and December 31, 2004,respectively.  We completed an initialpublic offering of our common stock on June 21, 2005 in which we sold11,765,000 shares of our common stock at $14.00 per share, resulting in netproceeds to us of approximately $152.8 million, after deducting underwritingdiscounts and commissions and offering expenses.  We used $36.5 million of these net proceedsto repay a portion of the accrued and unpaid interest on certain demand notesheld by Warburg, Pincus Equity Partners, L.P. and certain of its

 

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affiliates, which we refer to collectively asWarburg Pincus, and The Vertical Group L.P. and certain of its affiliates,which we refer to collectively as Vertical. In addition, on July 20, 2005, we sold 205,800 shares of common stockpursuant to an over-allotment option granted to the underwriters which resultedin net proceeds to us of $2.5 million, after deducting underwriting discounts andcommissions and offering expenses.  Weinvested the remaining portion of the net proceeds in short-term,investment-grade, interest bearing securities. We expect to use these funds for general corporate purposes, which mayinclude funding the operations of MTI. We expect our cash balance to decrease as we continue to use cash tofund our operations. We do not have any debt for borrowed money. We believe ourcash, cash equivalents and short-term investments will be sufficient to meetour liquidity requirements through the end of fiscal 2006.  There can be no assurance,however, that we will be able to achieve such positive cash flow or that wewill not need additional financing to fund our operations.

 

We believe the overall market for endovasculardevices will grow as the demand for minimally invasive treatment of vasculardiseases and disorders continues to increase. Our broad product portfolio isfocused on applications that we estimate represented an addressable worldwideendovascular market opportunity of approximately $1.6 billion in 2004. Weintend to capitalize on this market opportunity by the continued introductionof new products. We intend to originate these new products primarily throughour internal research and development and clinical efforts, but we maysupplement them with acquisitions or other external collaborations.Additionally, our growth has been, and will continue to be, impacted by ourexpansion into new geographic markets and the expansion of our direct salesorganization in existing geographic markets

 

We report and manage our operations in two reportable business segmentsbased on similarities in the products sold, customer base and distributionsystem.  Our cardio peripheral segmentcontains products that are used in both cardiovascular and peripheral vascularprocedures by cardiologists, radiologists and vascular surgeons.  Our neurovascular segment contains productsthat are used primarily by neuro-radiologists and neurosurgeons.  Our sales activities and operations arealigned closely with our business segments. We generally have dedicated cardio peripheral sales teams in the UnitedStates and Europe that target customers who often perform procedures in bothanatomic areas (cardiovascular and peripheral vascular).  We generally have separate, dedicatedneurovascular sales teams in the United States and Europe that are specificallyfocused on this customer base.

 

MTI, our public operating subsidiary, is focused onthe neurovascular market.  However, asmall portion of MTI’s sales relate to products sold into the cardio peripheralmarket, which we classify as cardio peripheral sales in our reporting.  In addition, some of MTI’s sales aregenerated at a transfer price to our international sales entities where theyare resold by our sales organization. For consolidated reporting, these intercompany sales are eliminated.  As a result, the neurovascular sales we reportwill be different from the sales that MTI reports publically. Based on MTI’spublic financial statements, approximately 41.5% of our net sales and 6.2% ofour net losses during the three months ended July 3, 2005 and 41.3% of our netsales and 3.3% of our net losses during the six months ended July 3, 2005 wereattributable to MTI.

 

On January 28, 2005, we were formed as a subsidiaryof ev3 LLC.  Immediately prior to theclosing of our initial public offering on June 21, 2005, ev3 LLC merged withand into us, and we became the holding company for all of ev3 LLC’ssubsidiaries.  Warburg Pincus and Vertical directlyowned an aggregate of 9,704,819 shares of MTI’s common stock, or 20.0% of theoutstanding shares of MTI’s common stock as of May 1, 2005. On May 26, 2005, pursuantto a contribution and exchange agreement dated as of April 4, 2005, WarburgPincus and Vertical contributedthese shares of MTI’s common stock to ev3 LLC in exchange for 10,804,500 and3,004,332 common membership units of ev3 LLC, respectively.  As a result of the merger described above, as of July 3, 2005,we owned34,041,578 shares of MTI’s common stock, or 70.3% of the outstanding shares ofMTI’s common stock.

 

As the controllingstockholder, the contribution of the MTI shares by Warburg Pincus, representinga 15.7% interest in MTI as of May 26, 2005, was accounted for as a transfer ofassets between entities under common control resulting in the retention ofhistorical based accounting.  The consolidatedfinancial statements included in this report give effect to the contribution ofMTI shares owned by Warburg Pincus as though such contribution occurred in 2003and 2004 when Warburg Pincus acquired its interest in MTI.  The contribution of the MTI shares owned byVertical was accounted for under the purchase method of accounting on thecontribution date. As of July 3, 2005 and December 31, 2004, we owned70.3% and 66.0% of the outstanding shares of common stock of MTI, respectively.The following results of operations data include the financial results of MTI,which we consolidate for

 

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accounting purposes but is not wholly owned. Theconsolidation of MTI for accounting purposes results in all of MTI’s assets andliabilities being included in our consolidated balance sheets. Although all ofMTI’s assets are included in our consolidated balance sheets, not all of theseassets would be available to us for distribution to our stockholders in theevent of MTI’s liquidation.

 

Immediately prior to the consummation of our initialpublic offering, we completed a one-for-six reverse stock split of ouroutstanding common stock.  All share andper share amounts for all periods presented in this report reflect this split.

 

**Salesand Expense Components**

 

The following is adescription of the primary components of our net sales and expenses:

 

*Net sales.*    We derive our net sales fromthe sale of endovascular devices in two primary business segments: cardioperipheral and neurovascular devices. Most of our sales are generated by ourglobal, direct sales force and are shipped and billed to hospitals or clinicsthroughout the world. In countries where we do not have a direct sales force,sales are generated by shipments to distributors who, in turn, sell tohospitals and clinics. In cases where our products are held in consignment at acustomer’s location, we generate sales at the time the product is used insurgery rather than at shipment. We charge our customers for shipping andrecord shipping income as part of net sales.

 

*Costof goods sold.*    Wemanufacture a substantial majority of the products that we sell. Our cost ofgoods sold consists primarily of direct labor, allocated manufacturingoverhead, raw materials and components and excludes amortization of intangibleassets, which is presented as a separate component of operating expenses.

 

*Sales, general and administrative expenses.*    Our selling andmarketing expenses consist primarily of sales commissions and support costs forour global, direct distribution system, royalty and consulting expensesassociated with our medical advisors, marketing costs and facility costs,including any costs related to closing facilities. General and administrativeexpenses consist primarily of salaries and benefits, compliance systems,accounting, finance, legal, information technology, human resources and freightexpense that we pay to ship products to customers.

 

*Research and development.*    Research anddevelopment expense includes costs associated with the design, development,testing, deployment, enhancement and regulatory approval of our products. Italso includes costs associated with design and execution of clinical trials andregulatory submissions.

 

*Amortization of intangible assets.*    Intangibleassets, such as purchased completed technology, distribution channels,intellectual property, including trademarks and patents, are amortized overtheir estimated useful life. We amortize intangible assets over periods rangingfrom 5 to 8 years.

 

*(Gain)loss on sale of assets, net.*    (Gain) loss on sale of assets,net includes the difference between the proceeds received from the sale of anoperating asset and its carrying value.

 

*Acquired in-process research and development.*    Acquiredin-process research and development is related to value assigned to thoseprojects acquired in business combinations or in the acquisition of assets forwhich the related products have not received regulatory approval and have noalternative future use.

 

*Gainon sale of investments, net.*    Gain on sale of investments,net includes the difference between the proceeds received from the sale of aninvestment and its carrying value. In addition, this caption includes lossesfrom other than temporary declines in investments accounted for on a costbasis.

 

*Interest expense, net.*    Interest expense, net consistsprimarily of interest associated with loans from our principal investors,Warburg Pincus and Vertical.

 

18

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*Minority interest in loss of subsidiary.*    Minority interestin loss of subsidiary is the portion of MTI’s net losses allocated to minoritystockholders.

 

*Other expense, net.*    Other expense, net primarilyincludes foreign exchange losses net of certain other expenses.

 

*Income tax benefit.*    Income tax benefit isgenerated in certain of our European subsidiaries. Due to our history ofoperating losses, we have not recorded a provision for U.S. income taxesthrough 2004 and the six months ended July 3, 2005.

 

*Accretion of preferred membership units to redemption value.*    Accretion ofpreferred membership units to redemption value represents the increase incarrying value of preferred membership units of ev3 LLC prior to ev3 LLC’s merger with and into us on June 21,2005.  The increase in carrying value wasbased on the rights to which the preferred membership units were entitledrelated to a liquidation, dissolution or winding up ofev3 LLC. Accretion was recorded as a reduction to members’ equityand increased the loss attributable to common unit holders. Accretion wasdiscontinued upon conversion of the preferred units to common membership units,and subsequently into shares of our common stock, on June 21, 2005, inconnection with the merger.

 

19

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**Resultsof Operations**

 

The following table setsforth, for the periods indicated, our results of operations expressed as dollaramounts (in thousands), and the changes between the specified periods expressedas percent increases or decreases: 

 
| ** **                                                                         | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|------------------------------------------------------------------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                                                                         | ** ** | **July 3,**            | ** ** | **July 4,**          | ** ** | **Percent** | ** ** | **July 3,** | ** ** | **July 4,** | ** ** | **Percent** | ** ** |
| ** **                                                                         | ** ** | **2005**               | ** ** | **2004**             | ** ** | **Change** | ** ** | **2005** | ** ** | **2004** | ** ** | **Change** | ** ** |
|                                                                               |       |                   |       |                 |       |   |   |   |   |   |   |   |   |
| Net sales                                                                          |       | $                      | 31,540     |                 | $          | 20,569 |   | 53.3 | % | $ | 59,222 |   | $ | 41,149 |   | 43.9 | % |
|                                                                               |       |                   |       |                 |       |   |   |   |   |   |   |   |   |
| Operating  expenses                                                                |       |                   |       |                 |       |   |   |   |   |   |   |   |   |
| Cost of  goods sold (1)                                                            |       | 12,785                 |       | 9,368                |       | 36.5 | % | 24,894 |   | 18,157 |   | 37.1 | % |
| Sales,  general and administrative (1)                                             |       | 32,297                 |       | 23,520               |       | 37.3 | % | 64,157 |   | 47,957 |   | 33.8 | % |
| Research and  development (1)                                                      |       | 11,891                 |       | 10,589               |       | 12.3 | % | 22,217 |   | 19,743 |   | 12.5 | % |
| Amortization  of intangible assets                                                 |       | 2,548                  |       | 2,447                |       | 4.1 | % | 5,203 |   | 4,978 |   | 4.5 | % |
| (Gain) loss  on sale or disposal of assets, net                                    |       | 111                    |       | (1                   | )          | NM |   | 164 |   | 19 |   | 763.2 | % |
| Acquired  in-process research and development                                      |       | 868                    |       | —               |       | NM |   | 868 |   | — |   | NM |   |
| Total  operating expenses                                                          |       | 60,500                 |       | 45,923               |       | 31.7 | % | 117,503 |   | 90,854 |   | 29.3 | % |
|                                                                               |       |                   |       |                 |       |   |   |   |   |   |   |   |   |
| Loss from  operations                                                              |       | (28,960                | )          | (25,354              | )          | 14.2 | % | (58,281 | ) | (49,705 | ) | 17.3 | % |
|                                                                               |       |                   |       |                 |       |   |   |   |   |   |   |   |   |
| Other  (income) expense:                                                           |       |                   |       |                 |       |   |   |   |   |   |   |   |   |
| Gain on sale  of investments, net                                                  |       | (878                   | )          | (1,728               | )          | (49.2 | )% | (4,611 | ) | (1,728 | ) | 166.8 | % |
| Interest  expense, net                                                             |       | 6,078                  |       | 4,458                |       | 36.3 | % | 11,786 |   | 10,613 |   | 11.1 | % |
| Minority  interest in loss of subsidiary                                           |       | (705                   | )          | (1,315               | )          | (46.4 | )% | (726 | ) | (5,072 | ) | (85.7 | )% |
| Other  expense, net                                                                |       | 1,828                  |       | 206                  |       | 787.4 | % | 2,920 |   | 106 |   | 2654.7 | % |
| Loss before  income taxes                                                          |       | (35,283                | )          | (26,975              | )          | 30.8 | % | (67,650 | ) | (53,624 | ) | 26.2 | % |
| Income tax  benefit                                                                |       | (61                    | )          | —               |       | NM |   | (59 | ) | — |   | NM |   |
|                                                                               |       |                   |       |                 |       |   |   |   |   |   |   |   |   |
| Net loss                                                                           |       | (35,222                | )          | (26,975              | )          | 30.6 | % | (67,591 | ) | (53,624 | ) | 26.0 | % |
|                                                                               |       |                   |       |                 |       |   |   |   |   |   |   |   |   |
| Accretion of  preferred membership units to redemption value (2)                   |       | 5,635                  |       | 5,869                |       |   |   | 12,061 |   | 11,804 |   |   |   |
|                                                                               |       |                   |       |                 |       |   |   |   |   |   |   |   |   |
| Net loss  attributable to common stockholders                                      |       | $                      | (40,857    | )                    | $          | (32,844 | ) | 24.4 | % | $ | (79,652 | ) | $ | (65,428 | ) | 21.7 | % |
|                                                                               |       |                   |       |                 |       |   |   |   |   |   |   |   |   |
| Net loss per  common share attributable to common stockholders (basic and diluted) |       | $                      | (4.60      | )                    | $          | (18.29 | ) |   |   | $ | (13.95 | ) | $ | (37.36 | ) |   |   |
|                                                                               |       |                   |       |                 |       |   |   |   |   |   |   |   |   |
| Weighted  average common shares outstanding                                        |       | 8,877,898              |       | 1,795,745            |       |   |   | 5,711,852 |   | 1,751,092 |   |   |   |

 

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| (1) Includes  stock based compensation charges of: |   |   |   |   |   |   |   |   |   |   |   |   |   |
|----------------------------------------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|
|                                               |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Cost of  goods sold                                |   | $      | 135    |   | $      | 47     |   |   |   | $      | 247    |   | $      | 98 |   |   |   |
| Sales,  general and administrative                 |   | 591    |   | 206    |   |   |   | 1,045  |   | 1,373  |   |   |   |
| Research and  development                          |   | 189    |   | 182    |   |   |   | 434    |   | 398    |   |   |   |
|                                               |   | $      | 915    |   | $      | 435    |   |   |   | $      | 1,726  |   | $      | 1,869 |   |   |   |

 

(2)               The accretion of preferred membership units toredemption value presented above is based on the rights to which theClass A and Class B preferred membership unit holders of ev3 LLC wereentitled related to a liquidation, dissolution or winding up of ev3 LLC.Notwithstanding this accretion right, in connection with the merger of ev3 LLCwith and into us, each membership unit representing a preferred equity interestin ev3 LLC was converted into the right to receive one share of our commonstock and did not receive any additional rights with respect to the liquidationpreference.  As a result, no furtheraccretion related to these preferred units will be recorded.

 

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Thefollowing tables set forth, for the periods indicated, our net sales by segmentand geography expressed as dollar amounts (in thousands) and the changes in netsales between the specified periods expressed as percentages: 

 
| ** **                           | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|--------------------------------------|------------|------------------------|------------|----------------------|------------|
| **NET  SALES BY SEGMENT**            | ** ** | **July 3,  2005**      | ** ** | **July 4,****2004**  | ** ** | **Percent  Change** | ** ** | **July 3,****2005** | ** ** | **July 4,****2004** | ** ** | **Percent  Change** | ** ** |
|                                 |       |                   |       |                 |       |   |   |   |   |   |   |   |   |
| Cardio  Peripheral                   |       |                   |       |                 |       |   |   |   |   |   |   |   |   |
| Stents                               |       | $                      | 8,781      |                 | $          | 4,681 |   | 87.6 | % | $ | 15,879 |   | $ | 10,005 |   | 58.7 | % |
| Thrombectomy and  embolic protection |       | 3,223                  |       | 1,835                |       | 75.6 | % | 6,461 |   | 3,935 |   | 64.2 | % |
| Procedural  support and other        |       | 7,204                  |       | 5,647                |       | 27.6 | % | 13,709 |   | 11,792 |   | 16.3 | % |
| Total Cardio  Peripheral             |       | $                      | 19,208     |                 | $          | 12,163 |   | 57.9 | % | $ | 36,049 |   | $ | 25,732 |   | 40.1 | % |
|                                 |       |                   |       |                 |       |   |   |   |   |   |   |   |   |
| Neurovascular                        |       |                   |       |                 |       |   |   |   |   |   |   |   |   |
| Embolic  products                    |       | 4,219                  |       | 3,209                |       | 31.5 | % | 8,197 |   | 5,487 |   | 49.4 | % |
| Neuro access  and delivery products  |       | 8,113                  |       | 5,197                |       | 56.1 | % | 14,976 |   | 9,930 |   | 50.8 | % |
| Total  Neurovascular                 |       | $                      | 12,332     |                 | $          | 8,406 |   | 46.7 | % | $ | 23,173 |   | $ | 15,417 |   | 50.3 | % |
|                                 |       |                   |       |                 |       |   |   |   |   |   |   |   |   |
| Total net  sales                     |       | $                      | 31,540     |                 | $          | 20,569 |   | 53.3 | % | $ | 59,222 |   | $ | 41,149 |   | 43.9 | % |

 
| ** **                      | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|---------------------------------|------------|------------------------|------------|----------------------|------------|
| **NET SALES BY GEOGRAPHY**      | ** ** | **July 3,****2005**    | ** ** | **July 4,****2004**  | ** ** | **Percent  Change** | ** ** | **July 3,****2005** | ** ** | **July 4,****2004** | ** ** | **Percent  Change** | ** ** |
|                            |       |                   |       |                 |       |   |   |   |   |   |   |   |   |
| United States                   |       | $                      | 15,939     |                 | $          | 10,212 |   | 56.1 | % | $ | 30,060 |   | $ | 20,710 |   | 45.1 | % |
| International                   |       |                   |       |                 |       |   |   |   |   |   |   |   |   |
| Before foreign  exchange impact |       | 15,146                 |       | 10,357               |       | 46.2 | % | 28,212 |   | 20,439 |   | 38.0 | % |
| Foreign  exchange impact        |       | 455                    |       | —               |       | — |   | 950 |   | — |   | — |   |
| Total                           |       | 15,601                 |       | 10,357               |       | 50.6 | % | 29,162 |   | 20,439 |   | 42.7 | % |
|                            |       |                   |       |                 |       |   |   |   |   |   |   |   |   |
| Total net  sales                |       | $                      | 31,540     |                 | $          | 20,569 |   | 53.3 | % | $ | 59,222 |   | $ | 41,149 |   | 43.9 | % |

 

***Comparison of the Three Months EndedJuly 3, 2005 to the Three Months Ended July 4, 2004***

 

*Net sales.*    Net sales increased 53.3% to $31.5 million inthe three months ended July 3, 2005 compared to $20.6 million in the threemonths ended July 4, 2004, primarily as a result of continued unit sales growthin the 23 new product introductions since October 1, 2004 and theexpansion of our distribution system. We increased our U.S. direct sales forcefrom 44 persons at the beginning of 2004 to 82 persons at the beginning of2005, with most of the growth occurring in the fourth quarter of 2004. The salesforce expansion was primarily to support new product introductions that beganin late 2004 and continued in the first and second quarters of 2005. Weintroduced 16 new products in the first quarter of 2005 and 3 new products inthe second quarter of 2005.  We expect tointroduce additional new products during the remainder of the year.

 

*Net sales of cardio peripheral products.*    Net sales of cardioperipheral products increased 57.9% to $19.2 million in the three months endedJuly 3, 2005 compared to $12.2 million in the three months ended July 4, 2004.This sales growth was primarily the result of new product introductions and theexpansion of our U.S. sales force in the fourth quarter of 2004 as describedabove, partially offset by sales declines in older generation products. Key newproduct launches since the second quarter of 2004 that contributed to the salesincrease for the three months ended July 3, 2005 included the ProtégéLong, Primus and ParaMount Mini stents, the SpideRX embolic protection system,the X-Sizer thrombectomy catheter system and Invatec percutaneous transluminalangioplasty, or PTA, balloon catheters.

 

Netsales in our stent product line increased 87.6% to $8.8 million in the threemonths ended July 3, 2005 compared to $4.7 million in the three months endedJuly 4, 2004. This increase is attributable to the introduction of the Protégé,Primus and ParaMount Mini families of stents into the U.S. and internationalmarkets during the previous twelve months, partially offset by sales declinesin older generation products. Net sales of our thrombectomy and embolicprotection devices increased 75.6% to $3.2 million in the three monthsended July 3, 2005 compared to the

 

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threemonths ended July 4, 2004 largely due to the introduction of the SpideRXinternationally and the introduction of the X-Sizer in the United States inlate 2004.  Net sales in our proceduralsupport and other product line increased 27.6% to $7.2 million in the threemonths ended July 3, 2005 compared to $5.6 million in the three months endedJuly 4, 2004.  This increase is primarilyattributable to the increase in sales of our PTA balloons which were launchedearly in  2005.  We expect cardio peripheral net sales toincrease during the remainder of 2005 primarily as a result of introducingseveral new products during the year, especially in our stent family, andcontinued market penetration from our recently expanded sales force.

 

*Net sales of neurovascular products.*    Net sales of ourneurovascular products increased 46.7% to $12.3 million in the three monthsended July 3, 2005 compared to $8.4 million in the three months ended July 4,2004, primarily as a result of volume increases in the NXT families of emboliccoils and continued penetration by our microcatheters and occlusion balloonsystems. We experienced a 31.5% increase, or $1.0 million, in net sales of ourembolic products in the three months ended July 3, 2005 over the comparableperiod in 2004 primarily due to volume increases in sales of the NXT coilfamily. Net sales of our neuro access and delivery products increased 56.1% to$8.1 million in the three months ended July 3, 2005 compared to the threemonths ended July 4, 2004 due primarily to volume increases across multipleproduct lines including the Echelon microcatheters, the Marathon microcatheter,and the HyperForm and HyperGlide occlusion balloon systems.

 

*Net sales by geography.*    Net sales in theUnited States increased 56.1% to $15.9 million in the three months ended July3, 2005 compared to $10.2 million in the three months ended July 4, 2004.International net sales increased 50.6% to $15.6 million in the three monthsended July 3, 2005 compared to $10.4 million in the three months ended July 4,2004 and represented approximately 50% of company-wide sales in both periods.Our international net sales in the three months ended July 3, 2005includes a favorable currency impact of approximately 3.0%, or $0.5 million,compared to the three months ended July 4, 2004,  principally resulting from the performance ofthe Euro against the U.S. dollar. Company-wide, 87% of our net sales weregenerated by our direct sales operations during the three months ended July 3,2005 compared to 86% in the comparable period of 2004.  Our direct sales force operations in Europecontributed $3.0 million, or 57%, of the total international sales growth, withthe remainder coming from our distribution operations in the Asia Pacific marketsand our direct sales force operations in Japan. The sales growth in our international markets was primarily a result ofnew product introductions and increased penetration.

 

*Cost of goods sold.*    Cost of goods soldincreased 36.5% to $12.8 million in the three months ended July 3, 2005 comparedto $9.4 million in the three months ended July 4, 2004 as a result of increasedsales as discussed above. As a percentage of net sales, cost of goods solddecreased to 40.5% of net sales in the three months ended July 3, 2005 comparedto 45.5% of net sales in the three months ended July 4, 2004. This decrease wasattributable to improved yields in the manufacturing of recently releasedproducts related to increases in volumes and increased efficiencies associatedwith the consolidation of our manufacturing facilities. In our cardioperipheral segment, cost of goods sold as a percent of net sales decreased to46.3% in the three months ended July 3, 2005 compared to 48.1% in the threemonths ended July 4, 2004.  This decreasewas due primarily to leveraging fixed costs relative to higher sales andproduction. In our neurovascular segment, cost of goods sold as a percent ofsales decreased to 31.6% in the three months ended July 3, 2005 compared to41.8% in the three months ended July 4, 2004 due to increased productionvolume. We expect cost of goods sold as a percentage of net sales to continueto decline during 2005 due to higher volume in our manufacturing facilities andefficiency improvements from manufacturing initiatives.

 

*Sales, general and administrative expense.*    Sales, general andadministrative expense increased 37.3% to $32.3 million in the three monthsended July 3, 2005 compared to $23.5 million in the three months ended July 4,2004. The increase was due to a $7.0 million increase in selling expensesprimarily related to the increase in the U.S. direct sales force describedabove and an increase in expenses related to expanding our international salespresence, a $1.5 million increase in marketing and distribution expensesand $0.4 million of costs related to our initial public offering which did notoccur in the second quarter of 2004.  These increases were partially offset by an approximately$1.2 million decrease in legal expenses at MTI. **  **We expect sales,general and administrative expenses to decline as a percentage of net sales aswe believe our current infrastructure can support a higher level of sales.

 

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*Research and development.*    Research anddevelopment expense increased 12.3% to $11.9 million in the three months endedJuly 3, 2005 compared to $10.6 million in the three months ended July 4, 2004.This increase was primarily due to a $0.9 million increase in clinical trialexpenses in our cardio peripheral segment and a $0.8 million increase inproduct development expenses in our neurovascular segment, partially offset bya $0.5 million reduction in clinical and regulatory expenses in ourneurovascular segment related to the completion of certain clinical trials.  The remaining $0.1 million increase is due toincreases in other research and development expenses. Research and developmentexpense, as a percentage of net sales, decreased to 38% for the three monthsended July 3, 2005 from 51% for the three months ended July 4, 2004.  We expect research and development spendingto decline both in total dollars and as a percentage of net sales as wecomplete several clinical trials during the second half of 2005 and we continueto expand our sales base.

 

*Amortization of intangible assets.*    Amortization ofintangible assets increased 4.1% to $2.5 million in the three months ended July3, 2005 compared to $2.4 million in the three months ended July 4, 2004.  This increase is primarily a result ofadditional amortizable intangible assets related to Vertical’s May 26, 2005contribution to ev3 LLC of shares of MTI. This contribution was accounted forunder the purchase method of accounting based upon the proportionate ownershipcontributed to ev3 LLC and resulted in an increase in amortizable intangibleassets of approximately $3.4 million.

 

*(Gain) loss on sale or disposal of assets, net.*    (Gain) loss on saleor disposal of assets, net was immaterial in the three months ended July 3,2005 and July 4, 2004.

 

*Acquired in-process research and development.*    We incurred a chargefor acquired in-process research and development of $0.9 million in the threemonths ended July 3, 2005 as a result of the Vertical’s May 26, 2005contribution to ev3 LLC of shares of MTI. This contribution was accounted forunder the purchase method of accounting based upon the proportionate ownershipcontributed to ev3 LLC.  We did not incurcharges for acquired in-process research and development expense in the threemonths ended July 4, 2004.  For adiscussion of this amount, see Note 6 to our unaudited consolidated financialstatements included in this report.

 

*Gain on sale of investments, net.*    Gain on sale ofinvestments, net was  $0.9 millionin the three months ended July 3,  2005compared to $1.7 million in the three months ended July 4, 2004. The gainsin both periods were the result of our receipt of milestone payments relatingto the 2002 sale of an investment in Enteric Medical Technologies,  Inc.

 

*Interest expense, net.*    Interest expense, netincreased 36.3% to $6.1 million in the three months ended July 3, 2005compared to $4.5 million in the three months ended July 4, 2004.  The increase is due to additional borrowingsof $85.9 million subsequent to the second quarter of 2004 which resulted in ahigher average outstanding debt balance during the second quarter of 2005 ascompared to the second quarter of 2004.

 

*Minority interest in loss of subsidiary.*    Minority interest inloss of subsidiary, which represents the portion of MTI’s losses allocated to minorityinvestors, was $0.7 million in the three months ended July 3, 2005 compared to$1.3 million in the three months ended July 4, 2004. The decrease is dueprimarily to lower losses at MTI in the three months ended July 3, 2005compared to the three months ended July 4, 2004.

 

*Other expense, net.*    Other expense, netwas $1.8 million in the three months ended July 3, 2005 compared to otherexpense, net of $0.2 million in the three months ended July 4, 2004. Theincrease in other expense, net is primarily related to increases in foreignexchange losses in the three months ended July 3, 2005 compared to the threemonths ended July 4, 2004.

 

*Income tax benefit.*    We incurred a modestincome tax benefit in the three months ended July 3, 2005 related to certain ofour European sales offices and we incurred no income tax expense or benefit inthe three months ended July 4, 2004.  We recorded no provision for U.S. income taxes in the three months endedJuly 3, 2005 or July 4, 2004 due to our history of operating losses.

 

23

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*Accretion of preferred membership units to redemptionvalue.*    Accretionof preferred membership units to redemption value decreased 4.0% to $5.6million in the three months ended July 3, 2005 compared to $5.9 million in thethree months ended July 4, 2004 primarily due to the conversion of thepreferred membership units into common membership units, and subsequently intoshares of common stock, on June 21, 2005 in conjunction with the merger of ev3LLC with and into us immediately prior to our initial public offering.  Accretion was discontinued upon conversion ofthe preferred units to common membership units.

 

***Comparison of the Six Months Ended July 3,2005 to the Six Months Ended July 4, 2004***

 

*Net sales.*    Net sales increased 43.9% to $59.2 millionin the six months ended July 3, 2005 compared to $41.1 million in the sixmonths ended July 4, 2004, primarily as a result of new product introductionsand the expansion of our distribution system during 2004. We increased our U.S.direct sales force from 44 persons at the beginning of 2004 to 82 persons atthe beginning of 2005 with most of the growth occurring in the fourth quarterof 2004. The sales force expansion was primarily to support new productintroductions that began in late 2004 and continued in the first and secondquarters of 2005. We introduced 16 new products in the first quarter of 2005and 3 new products in the second quarter of 2005.

 

*Net sales of cardio peripheral products.*    Net sales of cardioperipheral products increased 40.1% to $36.0 million in the six monthsended July 3, 2005 compared to $25.7 million in the six months ended July4, 2004. This sales growth was primarily the result of new product introductionsand the expansion of our U.S. sales force in the fourth quarter of 2004 asdescribed above, partially offset by sales declines in older generationproducts. Key new product launches that contributed to the sales increase forthe six months ended July 3, 2005 included the Protégé Long and ParaMount Ministents, SpideRX embolic protection system and the X-Sizer thrombectomycatheter.  Net sales in our stent product line increased 58.7% to$15.9 million in the six months ended July 3, 2005 compared to$10.0 million in the six months ended July 4, 2004. This increase isattributable to the introduction of the Protégé, Primus and ParaMount Minifamilies of stents into the U.S. and international markets during 2004,partially offset by sales declines in older generation products. Net sales ofour thrombectomy and embolic protection devices increased 64.2% to$6.5 million in the six months ended July 3, 2005 compared to the sixmonths ended July 4, 2004 largely due to the introduction of the SpideRXinternationally and the introduction of the X-Sizer in the United States inlate 2004. Net sales of our procedural support and other products increased16.3% to $13.7 million in the six months ended July 3, 2005 compared to the sixmonths ended July 4, 2004, largely due to the introduction of PTA ballooncatheters in early 2005.

 

*Net sales of neurovascular products.*    Net sales of ourneurovascular products increased 50.3% to $23.2 million in the six monthsended July 3, 2005 compared to $15.4 million in the six months ended July 4,2004, primarily as a result of volume increases in the NXT families of emboliccoils and continued penetration by our microcatheters and occlusion balloonsystems. Net sales of our neuro access and delivery products increased 50.8% to$15.0 million in the six months ended July 3, 2005 compared to the six monthsended July 4, 2004 largely as a result of volume increases across multipleproduct lines including the Echelon microcatheters, the Marathon microcatheter,and the HyperForm and HyperGlide occlusion balloon systems.  Net sales of our embolic products increased49.4% to $8.2 million in the six months ended July 3, 2005 compared to the sixmonths ended July 4, 2004 primarily due to volume increases in sales of the NXTfamilies of embolic coils.

 

*Net sales by geography.*    Net sales in theUnited States increased 45.1% to $30.1 million in the six months endedJuly 3, 2005 compared to $20.7 million in the six months ended July 4,2004. International net sales increased 42.7% to $29.2 million in the sixmonths ended July 3, 2005 compared to $20.4 million in six months endedJuly 4, 2004 and represented 49.2% of company-wide sales in the six monthsended July 3, 2005 compared to 49.7% in the six months ended July 4, 2004. Ourinternational net sales for the six months ended July 3, 2005 include afavorable currency impact of approximately 3.4%, or $1.0 million, comparedto the six months ended July 4, 2004, principally resulting from theperformance of the Euro against the U.S. dollar.   Our direct sales force operations in Europecontributed $5.2 million, or 60%, of the total international sales growth, withthe remainder coming from our distribution operations in the Asia Pacificmarkets and our direct sales force operations in Japan.  The sales growth in our international marketswas primarily a result of new product introductions and increased penetration.

 

24

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*Cost ofgoods sold*.    Costof goods sold increased 37.1% to $24.9 million in the six months ended July3, 2005 compared to $18.2 million in the six months ended July 4, 2004primarily as a result of increased sales, as discussed above. As a percentageof net sales, cost of goods sold decreased to 42.0% of net sales in the sixmonths ended July 3, 2005 compared to 44.1% of net sales in the six monthsended July 4, 2004. This decrease was primarily attributable to initiatives inour neurovascular segment.   In ourcardio peripheral segment, cost of goods sold as a percent of net salesincreased to 47.3% in the six months ended July 3, 2005 compared to 44.3% inthe six months ended July 4, 2004, primarily due to production scrap and otherstart up costs related to the introduction of new products.  In our neurovascular segment, cost of goodssold as a percent of net sales decreased to 33.9% in the six months ended July3, 2005 compared to 43.9% in the six months ended July 4, 2004 due to increasedproduction volume.

 

*Sales, general and administrative expense.*    Sales, general andadministrative expense increased 33.8% to $64.2 million in the six monthsended July 3, 2005 compared to $48.0 million in the six months ended July4, 2004. The increase was due to a $12.1 million increase in sellingexpenses primarily related to the increase in the U.S. direct sales forcedescribed above and an increase in expenses related to expanding ourinternational sales presence, a $2.0 million increase in marketing anddistribution expenses and a $1.8 million increase in general andadministrative expenses. These increases were partially offset by anapproximately $1.0 million decrease in legal expenses at MTI.

 

*Research and development.*    Research anddevelopment expense increased 12.5% to $22.2 million in the six monthsended July 3, 2005 compared to $19.7 million in the six months ended July4, 2004.  This increase was primarily dueto a $2.2 million increase in clinical trial expenses in our cardio peripheralsegment and an $1.4 million increase in product development expenses primarilyin our neurovascular segment, partially offset by a $1.2 million reduction inclinical and regulatory expenses in our neurovascular segment related to thecompletion of certain clinical trials. The remaining $0.1 million increase is due to increases in otherresearch and development expenses. Research and development expenses, as apercentage of net sales, decreased to 38% for the six months ended July 3, 2005from 48% for the six months ended July 4, 2004.

 

*Amortization of intangible assets.*    Amortization ofintangible assets increased 4.5% to $5.2 million in the six months endedJuly 3, 2005 compared to $5.0 million in the six months ended July 4,2004. This increase is primarily a result of additional amortizable intangibleassets related to Vertical’s May 26, 2005 contribution to ev3 LLC of shares ofMTI. This contribution was accounted for under the purchase method ofaccounting based upon the proportionate ownership contributed to ev3 LLC andresulted in an increase in the amortizable intangible assets of approximately$3.4 million.

 

*(Gain) loss on sale or disposal of assets, net.*    (Gain) loss on saleor disposal of assets, net was immaterial in the six months ended July 3, 2005and July 4, 2004.

 

*Acquired in-process research and development.*    During the six monthsended July 3, 2005, we incurred a charge of $0.9 million for acquiredin-process research and development as a result of Vertical’s contribution toev3 LLC of shares of MTI.  Thiscontribution was accounted for under the purchase method of accounting basedupon the proportionate ownership contributed to ev3 LLC.  For a discussion of this amount, see Note 6to our unaudited consolidated financial statements included in thisreport.  We did not incur charges foracquired in-process research and development expense during the six monthsended July 4, 2004.

 

*Gain on sale of investments, net.*    Gain on sale ofinvestments, net was  $4.6 millionin the six months ended July 3, 2005 compared to $1.7 million in the sixmonths ended July 4, 2004. During the six months ended July 3, 2005, wereceived a $3.7 million milestone payment related to the sale of our investmentin Genyx Medical, Inc. and we received a $0.9 million milestone paymentrelating to the 2002 sale of an investment in Enteric MedicalTechnologies, Inc.  During the sixmonths ended July 4, 2004, we received a $1.7 milestone payment relating to the2002 sale of the investment in Enteric Medical Technologies, Inc.

 

*Interest expense, net.*    Interest expense, netincreased 11.1% to $11.8 million in the six months ended July 3, 2005compared to $10.6 million for the six months ended July 4, 2004.  Interest expense, net increased by $3.2million,

 

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primarilydue to additional borrowings of $85.9 million subsequent to the secondquarter of 2004 which resulted in a higher average outstanding debt balanceduring the six months ended July 3, 2005 as compared to the six months endedJuly 4, 2004. The increase was partially offset by a $2.0 million chargeincurred in the first six months of 2004 related to a beneficial conversionfeature arising from the minority interests’ participation in two financings ofMTI during the year.

 

*Minority interest in loss of subsidiary.*    Minority interest inloss of subsidiary, which represents the portion of MTI’s losses allocated tominority investors, was $0.7 million in the six months ended July 3, 2005and $5.1 million in the six months ended July 4, 2004.  The decrease is primarily due to lower lossesat MTI in the six months ended July 3, 2005 compared to the six months endedJuly 4, 2004.

 

*Other expense, net.*    Other expense, netwas $2.9 million in the six months ended July 3, 2005 compared to$0.1 million in the six months ended July 4, 2004. This increase isprimarily related to increases in foreign exchange losses in the six monthsended July 3, 2005 compared to the six months ended July 4, 2004.

 

*Income tax benefit.*    We incurred a modestincome tax benefit in the six months ended July 3, 2005 related to certain ofour European sales offices and we incurred no income tax expense or benefit inthe six months ended July 4, 2004. We recorded no provision forU.S. income taxes in the six months ended July 3, 2005 orJuly 4, 2004 due to our history of operating losses.

 

*Accretion of preferred membership units to redemptionvalue.*    Accretionof preferred membership units to redemption value increased 2.2% to$12.1 million in the six months ended July 3, 2005 compared to$11.8 million in the six months ended July 4, 2004 due to higher carryingvalues of preferred investments during the six months ended July 3, 2005,offset by a decrease in accretion caused by conversion of the preferredmembership units into common membership units, and subsequently into shares ofcommon stock, on June 21, 2005 in connection with the merger of ev3 LLC withand into us immediately prior to our initial public offering.   Accretion was discontinued upon conversionof the preferred units to common membership units on June 21, 2005.

 

**Liquidity and Capital Resources**

 

*Financing history.*    Since inception, wehave generated significant operating losses. These operating losses, includingcumulative non-cash charges for acquired in-process research and development of$127 million since inception, have resulted in an accumulated deficit of $520.2million as of July 3, 2005. Historically, our liquidity needs and theliquidity needs of MTI have been met separately. In general, MTI has beenfunded through equity private placements and the issuance of promissory notes, whilewe have been funded through a series of preferred investments and through theissuance of demand notes to private investors and most recently our initialpublic offering. We have negotiated an agreement with Warburg Pincus pursuantto which we have the first right to negotiate an investment in MTI to furtherfund MTI’s operations, if necessary, and we may elect to do so in the future.The following provides a discussion of our liquidity and capital resourcesincluding MTI, followed by a brief discussion of the liquidity and capitalresources of MTI on an independent basis.

 

*Cash and cash equivalents.*    As of July 3,2005, we had cash and cash equivalents of $128.4 million. 

 
| **Balance  Sheet Data****(in thousands)**  | ** ** | **As of July 3, 2005** | ** ** | **As of December 31, 2004** | ** ** |
|--------------------------------------------|------------|------------------------|------------|-----------------------------|------------|
| ** **                                 | ** ** | ** **             | ** ** | ** **                  | ** ** |
| Cash and cash equivalents                  |       | $                      | 128,399    |                        | $          | 20,131 |   |
| Current assets                             |       | 187,325                |       | 68,609                      |       |
| Total assets                               |       | 332,746                |       | 212,046                     |       |
| Current liabilities excluding demand notes |       | 37,179                 |       | 36,025                      |       |
| Demand notes payable—related parties  |       | —                 |       | 299,453                     |       |
| Total liabilities                          |       | 37,740                 |       | 336,180                     |       |
| Preferred membership units                 |       | —                 |       | 254,028                     |       |
| Total stockholders’ equity (deficit)  |       | $                      | 281,252    |                        | $          | (394,472 | ) |

 

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*Contractual cash obligations.*    At July 3, 2005,we had contractual cash obligations and commercial commitments as follows: 

 
| ** **              | ** ** | **Payments Due by Period** | ** ** |
|-------------------------|------------|----------------------------|------------|
| ** **              | ** ** | **Total**                  | ** ** | **Less than  1 Year** | ** ** | **1-3 Years** | ** ** | **3-5 Years** | ** ** | **More than  5 Years** | ** ** |
| ** **              | ** ** | **(dollars in thousands)** | ** ** |
|                    |       |                       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Purchase commitments(1) |       | $                          | 50,299     |   | $ | 11,406 |   | $ | 38,893 |   | $ | — |   | $ | — |   |
| Operating leases(2)     |       | 9,414                      |       | 3,575 |   | 4,138 |   | 1,553 |   | 148 |   |
|                    |       |                       |       |   |   |   |   |   |   |   |   |
| Total                   |       | $                          | 59,713     |   | $ | 14,981 |   | $ | 43,031 |   | $ | 1,553 |   | $ | 148 |   |

 

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(1)   Represents commitments for minimum inventorypurchases related to our distribution agreement with Invatec S.r.l. We do nothave any other significant purchase obligations for the delivery of goods orservices or other commercial commitments.

 

(2)     The amounts reflected in the table above for operating leases representfuture minimum lease payments under non-cancelable operating leases primarilyfor certain office space, warehouse space, computers and vehicles. Portions ofthese payments are denominated in foreign currencies and were translated in thetables above based on their respective U.S. dollar exchange rates atJuly 3, 2005. These future payments are subject to foreign currencyexchange rate risk. In accordance with U.S. generally accepted accountingprinciples, or GAAP, our operating leases are not recognized in ourconsolidated balance sheet.

 

*Operating activities.    *Cash used in operations during the six monthsended July 3, 2005 was $54.5 million, reflecting primarily the netlosses during the period partially offset by non-cash charges for depreciationand amortization and non-cash interest expense presented as accrued interest onnotes payable.  Our net loss alsoreflected $4.6 million of gain recognized on the sale of investments, asdiscussed below.  The increases inaccounts receivable and inventories during the six months ended July 3, 2005are related to increases in sales volume during the period and buildinginventory in preparation for new product launches.  We expect that operations will continue toconsume cash during the remainder of 2005.

 

*Investing activities.    *Cash used by investing activities during thesix months ended July 3, 2005 was $3.4 million primarily due to$6.1 million in purchases of property and equipment during the period anda $3.7 million milestone payment related to a previous acquisition.  The net use of cash from investing activitieswas reduced by the receipt of $3.7 million from the sale of certain assetsby Genyx Medical, Inc., in which MTI holds a minority interest, the receipt of$2.1 million in a settlement of an acquisition dispute and a $0.9 million milestonepayment related to the 2002 sale of an investment in Enteric MedicalTechnologies, Inc. Historically, our capital expenditures have consistedof purchased manufacturing equipment, research and testing equipment, computersystems and office furniture and equipment. We continue to make investments in property and equipment and expect toincur an additional $8.0 million in capital expenditures during the balance of2005.

 

*Financing activities.    *Cash provided by financing activities was$166.2 million during the six months ended July 3, 2005, consistingof $152.8 million of net proceeds received from our initial public offering inJune 2005 and proceeds of $49.1 million from the issuance of demand notes.  These receipts were partially offset by therepayment of $36.5 million of accrued and unpaid interest on outstanding debtwith a portion of the net proceeds from our initial public offering.

 

*Other liquidity information.*

 

OnJuly 20, 2005, subsequent to the end of our second fiscal quarter, we sold 205,800shares of common stock pursuant to the over-allotment option granted to theunderwriters in connection with our initial public offering.  Net

 

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proceedsto us from this sale totaled $2.5 million, after deducting underwritingdiscounts and commissions and offering expenses.

 

Theacquisition agreements relating to our purchase of MitraLife, Appriva Medical,Inc. and Dendron GmbH require us to make additional payments to the sellers ofthese businesses if certain milestones related to regulatory steps in theproduct commercialization process are achieved. The potential milestonepayments total $25.0 million, $175.0 million and $15.0 millionwith respect to the MitraLife, Appriva and Dendron acquisitions, respectively,during the period of 2003 to 2009. We do not believe it is likely that we willhave obligations with respect to the MitraLife milestones in the future. Wehave determined that the first milestone with respect to the Appriva agreementwas not achieved by the January 1, 2005 milestone date and that the firstmilestone is not payable. It is possible that we will meet one or more of theremaining milestones with respect to the Appriva acquisition and could becomeobligated to make the corresponding milestone payments totaling$125.0 million in periods subsequent to 2005. Under the terms of the stockpurchase agreement we entered into in connection with our acquisition ofDendron, we may be required to make additional payments which are contingentupon Dendron products achieving certain revenue targets between 2003 and 2008.In 2003, the $4.0 million revenue target for sales of Dendron productsduring 2003 was met. Accordingly, an additional payment to the former Dendronstockholders of $3.75 million was made in 2004. In 2004, the$5.0 million revenue target for sales of Dendron products during 2004 wasmet. Accordingly, a payment to the former Dendron stockholders of$3.75 million was accrued in 2004 and was paid during the second quarter of2005. We may be required to make a final payment of $7.5 million, which iscontingent upon Dendron products achieving annual revenues of $25 millionin any year during the period between 2003 and 2008. Any such final paymentwould be due in the year following the year of target achievement.

 

Ourfuture liquidity and capital requirements will be influenced by numerousfactors, including clinical research and product development programs, receiptof and time required to obtain regulatory clearances and approvals, sales andmarketing programs and continuing acceptance of our products in themarketplace. We believe that the resources generated through our initial publicoffering are sufficient to meet our liquidity requirements through the end offiscal 2006; however, if we require additional working capital, but are notable to raise additional funds, we may be required to significantly curtail orcease ongoing operations.

 

OnMay 6, 2005, MTI entered into an asset-based credit agreement with a bankthat, subject to customary covenants, can provide up to $3.0 million of cashfunding based on MTI’s U.S. accounts receivable and inventory balances. Theloan is collateralized by substantially all of MTI’s assets and expires in May2007, as further described below.  MTI isalso in discussions with the bank regarding a loan arrangement that would bebased on balances of international accounts receivable and inventory, althoughthere is no assurance that MTI will enter into a definitive agreement with theproposed lender.  In addition, MTI hasreceived a support letter from Warburg Pincus pursuant to which Warburg Pincushas agreed to provide additional funding, up to $5.0 million, to MTI ifneeded to fund MTI’s operations. The Warburg Pincus commitment is effectivethrough July 4, 2006 and will be reduced to the extent of proceeds, ifany, that become available from a third party lender, including amountsavailable under the credit facility described above, or any amounts raised in athird party financing. We have negotiated an agreement with Warburg Pincuspursuant to which we have the first right to negotiate an investment in MTI tofurther fund MTI’s operations, if necessary, and we may elect to do so in thefuture. Pursuant to this agreement, we have agreed in principle with MTI toprovide MTI with a credit facility of $3.3 million, consisting of a $2.3million term loan and a $1.0 million letter of credit, bearing interest at afloating prime rate plus 2.3%, which will provide financing to support MTI’sfacility expansion needs. We are in negotiations with MTI regarding theadditional terms of this credit facility.

 

Inthe event that we require additional working capital to fund future operations,we may negotiate a financing arrangement with an independent institutionallender, sell notes to public or private investors or sell additional shares ofstock. There is no assurance that any financing transaction will be availableon terms acceptable to us, or at all, or that any financing transaction willnot be dilutive to our stockholders. If we require additional working capital,but are not able to raise additional funds, we may be required to significantlycurtail or cease our ongoing operations. From time to time, we may also sell agiven technology or intellectual property having a development timeline ordevelopment cost that is inconsistent with our investment horizon or which doesnot adequately complement our existing product portfolio.  Our future liquidity and capital requirementswill be influenced by numerous factors, including the extent and duration offuture operating losses, the level and timing of future sales

 

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andexpenditures, market acceptance of new products, the results and scope ofongoing research and development projects, competing technologies, market andregulatory developments, and the future course of intellectual propertylitigation. See Note 5 and Note 14 to our consolidated financialstatements included in this report and Part II, Item II, “Legal Proceedings” inthis report.

 

***MTI Financings and Liquidity***

 

Asof July 3, 2005, we owned 70.3% of the outstanding shares of common stockof MTI and therefore consolidated MTI under generally accepted accountingprinciples. Although all of MTI’s assets are included in our consolidatedbalance sheets, not all of these assets would be available to us or ourstockholders in the event of MTI’s liquidation. Because MTI has historicallyfunded its operations independently from us, the following is a separatediscussion of MTI’s financings and liquidity on a stand-alone basis.Historically, MTI has been funded through equity private placements and theissuance of promissory notes. In three separate transactions since 2002, MTIhas sold 27.5 million shares of its common stock and receivedapproximately $68 million in net proceeds.

 

Inaddition to its operations, MTI has received cash payments from two privatemedical device companies in which it owned a minority equity interest.  In January 2005, MTI received $3.7 million asa result of the consummation of a sale of certain assets by Genyx Medical,Inc.  In May 2004, MTI received $1.7million of the amounts set aside in escrow in connection with Boston Scientific’smerger with Enteric Medical Technologies, Inc. In May 2005, MTI received $878 thousand of the remaining portion ofescrowed amounts under the merger agreement. MTI expects to receive the remaining amount of approximately $850thousand in May 2006, provided that no indemnification claims are made byBoston Scientific against the amounts in escrow.

 

*Cash and cash equivalents.*    As of July 3,2005, MTI had cash and cash equivalents of $5.5 million.

 

*Operating activities.*    Cash used in MTI’soperations during the six months ended July 3, 2005 was $7.0 million, reflectingprimarily the loss from operations, increases in trade receivables fromthird-party customers and inventories, increases in prepaid expenses, andincreases in accounts payable and accrued compensation and decreases in accruedliabilities, which represent payments of bonuses earned during 2004 andemployee termination benefits in connection with MTI’s December 2004 closure ofits German facility, respectively. Partially offsetting such changes was adecrease in the amount receivable from us. We expect that MTI’s operations willcontinue to consume cash during the second half of 2005.

 

*Investing activities.*    Cash provided by MTI’sinvesting activities during the six months ended July 3, 2005 was $259 thousand,primarily resulting from the receipt of $3.7 million from the sale of assets ofGenyx Medical, Inc, receipt of $878 thousand in connection with BostonScientific’s acquisition of Enteric Medical Technologies, Inc., both describedabove, and the restoration to cash of certificates of deposit, aggregating $880thousand, that had been segregated from cash balances during the period thatsuch certificates of deposit served as collateral for bank letters of creditwhich expired in 2005. Cash provided by investing MTI’s activities during thesix months ended July 3, 2005 was offset by a $3.7 million payment to theformer Dendron stockholders and the acquisition of property and equipment andcapitalized patents costs. While continued investments will be made by MTI inproperty and equipment, MTI had no significant capital expenditure commitmentsas of July 3, 2005.

 

*Financing activities.*    Cash provided by MTI’sfinancing activities was immaterial during the three months ended July 3,2005.

 

*Other liquidity information.*

 

OnMay 6, 2005, MTI entered into an asset-based credit agreement with a bankthat, subject to customary covenants, provides up to $3.0 million of cashfunding based on MTI’s U.S. accounts receivable and inventory balances. Theloan is collateralized by substantially all of MTI’s assets and expires in May2007. MTI is also in discussions with the bank regarding a loan arrangementthat would be based on balances of international accounts receivable andinventory, although there is no assurance that MTI will enter into a definitiveagreement with the proposed lender. In addition, MTI has received a supportletter from Warburg Pincus pursuant to which Warburg Pincus has agreed to

 

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provideadditional funding of up to $5.0 million to MTI, if needed, to fund MTI’soperations. The Warburg Pincus commitment is effective through July 4,2006 and will be reduced to the extent of proceeds, if any, that becomeavailable from a third party lender, including amounts available under thecredit facility described above, or any amounts raised in a third partyfinancing. We believe that MTI’s existing cash at July 3, 2005, and theproceeds under the funding commitment of Warburg Pincus, will be sufficient tofund MTI’s operations in 2005. There is no assurance that any additionalfinancing transactions will be available on terms acceptable to MTI or us, orat all, or that any financing transactions will not be dilutive to current MTIstockholders or our stockholders. There is no assurance that MTI will achieve cashflow positive operations or that, if achieved, such cash flow positiveoperations will be sustainable.

 

Inconnection with its acquisition of Dendron, MTI may be required to makeadditional payments which are contingent upon Dendron products achieving certainrevenue targets between 2003 and 2008, as described above under “—Liquidity andCapital Resources—Other Liquidity Information.” In addition, German taxingauthorities have not audited the income tax returns of Dendron since MTI’sacquisition of Dendron in October 2002. While we believe that Dendron hasmade its tax filings in conformity with German tax regulations, we are unableto predict what, if any, areas of inquiry might be pursued by German taxauthorities in connection with an audit in general, or specifically inconnection with either MTI’s acquisition of Dendron or the subsequent closureof MTI’s German manufacturing facility or whether, or to what extent, Dendronwill be subject to additional liability or tax.

 

**Critical Accounting Policies and Estimates**

 

Wehave adopted various accounting policies to prepare our consolidated financialstatements in accordance with U.S. GAAP. Our most significant accountingpolicies are described in Note 3 to our consolidated financial statementsincluded elsewhere in this report. The preparation of our consolidatedfinancial statements in conformity with U.S. GAAP requires us to make estimatesand assumptions that affect the amounts reported in our consolidated financialstatements and accompanying notes. Our estimates and assumptions, includingthose related to bad debts, inventories, intangible assets, sales returns anddiscounts, and income taxes are updated as appropriate.

 

Certainof our more critical accounting policies require the application of significantjudgment by management in selecting the appropriate assumptions for calculatingfinancial estimates. By their nature, these judgments are subject to aninherent degree of uncertainty. These judgments are based on our historicalexperience, terms of existing contracts, our observance of trends in theindustry, information provided by our physician customers, and informationavailable from other outside sources, as appropriate. Different, reasonableestimates could have been used in the current period. Additionally, changes inaccounting estimates are reasonably likely to occur from period to period. Bothof these factors could have a material impact on the presentation of ourfinancial condition, changes in financial condition or results of operations.

 

Webelieve that the following financial estimates are both important to theportrayal of our financial condition and results of operations and requiresubjective or complex judgments. Further, we believe that the items discussedbelow are properly recorded in our consolidated financial statements for allperiods presented. Management has discussed the development, selection, anddisclosure of our most critical financial estimates with the audit committee ofour board of directors and our independent auditors. The judgments about thosefinancial estimates are based on information available as of the date of ourconsolidated financial statements. Those financial estimates include:

 

***Revenue Recognition***

 

Werecognize revenue in accordance with Securities and Exchange Commission StaffAccounting Bulletin No. 101, *RevenueRecognition in Financial Statements*, which requires that four basiccriteria must be met before sales can be recognized: (1) persuasiveevidence of an arrangement exists; (2) delivery has occurred or serviceshave been rendered; (3) the price is fixed or determinable; and(4) collectibility is reasonably assured. These criteria are met at thetime of shipment when risk of loss and title passes to the customer ordistributor, unless a consignment arrangement exists. Sales from consignmentarrangements are recognized upon written acknowledgement that the product hasbeen used by the customer indicating that a sale is complete. Our terms of salefor regular sales are

 

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typicallyFOB shipping point, net 30 days. Regular sales include orders fromcustomers for replacement of customer stock, replenishment of customerconsignment product, orders for a scheduled case/surgery and stocking orders.

 

Weallow customers to return defective or damaged products for credit. Ourestimate for sales returns is based upon contractual commitments and historicalreturn experience which we analyze both by distribution channel and bygeography and is recorded as a reduction of sales. Historically our returnexperience has been low with return rates approximating 3% of sales.

 

***Allowance for Doubtful Accounts***

 

Wemake judgments as to our ability to collect outstanding receivables and provideallowance for a portion of receivables when collection becomes doubtful.Provisions are made based upon a specific review of all significant outstandingaccount balances and the overall quality and age of those balances notspecifically reviewed. In determining the provision for invoices not specificallyreviewed, we analyze historical collection experience and current economictrends. If the historical data used to calculate the allowance provided fordoubtful accounts does not reflect our future ability to collect outstandingreceivables or if the financial condition of customers were to deteriorate,resulting in impairment of their ability to make payments, an increase in theprovision for doubtful accounts may be required. We maintain a large customerbase that mitigates the risk of concentration with one customer. However, ifthe overall condition of the health care industry were to deteriorate,resulting in an impairment of our customers’ ability to make payments,significant additional allowances could be required.

 

Ouraccounts receivable balance was $22.1 million and $19.0 million, netof accounts receivable allowances, comprised of both allowances for doubtfulaccounts and sales returns of $3.2 million and $2.7 million, at July3, 2005 and December 31, 2004, respectively.

 

***Excess and Obsolete Inventory***

 

Wecalculate an inventory reserve for estimated obsolescence or excess inventorybased on historical turnover and assumptions about future demand for ourproducts and market conditions. Our industry is characterized by regular newproduct development, and as such, our inventory is at risk of obsolescencefollowing the introduction and development of new or enhanced products. Ourestimates and assumptions for excess and obsolete inventory are reviewed andupdated on a quarterly basis. The estimates we use for demand are also used fornear-term capacity planning and inventory purchasing and are consistent withour sales forecasts. Future product introductions and related inventories mayrequire additional reserves based upon changes in market demand or introductionof competing technologies. Increases in the reserve for excess and obsoleteinventory result in a corresponding expense to cost of goods sold. Our reservefor excess and obsolete inventory was $3.6 million and $3.7 millionat July 3, 2005 and December 31, 2004, respectively.

 

***Valuation of Acquired In-Process Researchand Development, Goodwill and Other Intangible Assets***

 

Whenwe acquire another company, the purchase price is allocated, as applicable,between acquired in-process research and development (IPR&D), otheridentifiable intangible assets, tangible net assets and goodwill as required byU.S. GAAP. In-process research and development is defined as the value assignedto those projects for which the related products have not received regulatoryapproval and have no alternative future use. Determining the portion of thepurchase price allocated to in-process research and development and otherintangible assets requires us to make significant estimates that may changeover time. During the three months ended July 3, 2005, we recorded anIPR&D charge of $0.9 million related to the May 26, 2005 contribution toev3 LLC by Vertical of certain shares of MTI directly held by Vertical.

 

Theincome approach was used to determine the fair values of the acquiredIPR&D. This approach establishes fair value by estimating the after-taxcash flows attributable to the in-process project over its useful life and thendiscounting these after-tax cash flows back to the present value. Revenue estimateswere based on relative market size, expected market growth rates and marketshare penetration. Gross margin estimates were based on the estimated cost ofthe product at the time of introduction and historical gross margins forsimilar products offered by

 

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usor by competitors in the marketplace. The estimated selling, general andadministrative expenses were based on historical operating expenses of theacquired company as well as long-term expense levels based on industrycomparables. The costs to complete each project were based on estimated directproject expenses as well as the remaining labor hours and related overheadcosts. In arriving at the value of acquired in-process research and developmentprojects, we considered the project’s stage of completion, the complexity ofthe work to be completed, the costs already incurred, the remaining costs tocomplete the project, the contribution of core technologies, the expectedintroduction date and the estimated useful life of the technology. The discountrate used to arrive at the present value of acquired in-process research anddevelopment as of the acquisition date was based on the time value of money andmedical technology investment risk factors. The discount rates used ranged from15% to 34%. We believe that the estimated acquired in-process research anddevelopment amounts determined represent the fair value at the date ofacquisition and do not exceed the amount a third party would pay for the projects.

 

Goodwillrepresents the excess of the aggregate purchase price over the fair value ofnet assets, including IPR&D, of the acquired businesses. Goodwill is testedfor impairment annually, or more frequently if changes in circumstance or theoccurrence of events suggest an impairment exists. The test for impairmentrequires us to make several estimates about fair value, most of which are basedon projected future cash flows. Our estimates associated with the goodwillimpairment tests are considered critical due to the amount of goodwill recordedon our consolidated balance sheets and the judgment required in determiningfair value amounts, including projected future cash flows. Goodwill was$94.5 million at July 3, 2005 and December 31, 2004.

 

 Other intangible assets consist primarily ofpurchased developed technology, patents, customer relationships and trademarksand are amortized over their estimated useful lives, ranging from 5 to8 years. We review these intangible assets for impairment annually duringour fourth fiscal quarter or as changes in circumstance or the occurrence ofevents suggest the remaining value may not be recoverable. Other intangibleassets, net of accumulated amortization, were $30.8 million and$31.9 million at July 3, 2005 and December 31, 2004, respectively.

 

Theevaluation of asset impairments related to goodwill and other intangible assetsrequire us to make assumptions about future cash flows over the life of theassets being evaluated. These assumptions require significant judgment andactual results may differ from assumed or estimated amounts.

 

***Accounting for Income Taxes***

 

Aspart of the process of preparing our consolidated financial statements, we arerequired to determine our income taxes in each of the jurisdictions in which weoperate. This process involves estimating our actual current tax expensetogether with assessing temporary differences resulting from recognition ofitems for income tax and accounting purposes. These differences result indeferred tax assets and liabilities, which are included on our consolidatedbalance sheets. We must then assess the likelihood that our deferred tax assetswill be recovered from future taxable income and, to the extent we believe thatrecovery is not likely, we must establish a valuation allowance. To the extentwe establish a valuation allowance or increase this allowance in a period, wemust reflect this increase as an expense within the tax provision in ourconsolidated statement of operations.

 

Management’sjudgment is required in determining our provision for income taxes, ourdeferred tax assets and liabilities and any valuation allowance recordedagainst our net deferred tax assets. We will continue to monitor therealizability of our deferred tax assets and adjust the valuation allowanceaccordingly.

 

**Seasonality**

 

Ourbusiness is seasonal in nature. Historically, demand for our products has beenthe highest in our fourth fiscal quarter. We traditionally experience lowersales volumes in our third fiscal quarter than throughout the rest of the yearas a result of the European holiday schedule during the summer months.

 

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**Off-Balance Sheet Arrangements**

 

Wedo not have any off-balance sheet arrangements, as defined by the rules andregulations of the Securities and Exchange Commission.  As a result, weare not materially exposed to any financing, liquidity, market or credit riskthat could arise if we had engaged in these arrangements.

 

**Recent Accounting Pronouncements**

 

InNovember 2004, the Financial Accounting Standards Board, or FASB, issuedStatement of Financial Accounting Standards, or SFAS, 151, *Inventory Costs, An Amendment of Accounting ResearchBulletin No. 43, Chapter 4*, which adopts wording from theInternational Accounting Standards Board’s, or IASB, IAS 2 *Inventories* in an effort to improve thecomparability of cross-border financial reporting. The new standard indicatesthat abnormal freight, handling costs and wasted materials (spoilage) arerequired to be treated as current period charges rather than as a portion ofinventory cost. Additionally, the standard clarifies that fixed productionoverhead should be allocated based on the normal capacity of a productionfacility. The statement is effective for us beginning in 2006. Adoption is notexpected to have a material impact on our consolidated earnings, financialposition or cash flows.

 

OnDecember 16, 2004, the FASB issued SFAS 123(R), *Share-Based Payment*, which is a revisionof SFAS 123, *Accounting for Stock-BasedCompensation,* and supersedes APB Opinion 25, *Accounting for Stock Issued to Employees*.SFAS 123(R) requires all share-based payments to employees, includinggrants of employee stock options, to be valued at fair value on the date ofgrant, and to be expensed over the applicable vesting period and is effectivefor us on January 1, 2006. We have not yet determined the impact of theprovisions of SFAS 123(R) on our consolidated earnings, financial positionor cash flows.

 

**Forward-Looking Statements**

 

Thisquarterly report on Form 10-Q contains not only historical information, butalso forward-looking statements within the meaning of Section 27A of theSecurities Act of 1933 and Section 21E of the Securities Exchange Act of 1934and are subject to the safe harbor created by those sections.  In addition, we or others on our behalf maymake forward-looking statements from time to time in oral presentations,including telephone conferences and/or web casts open to the public, in pressreleases or reports, on our Internet web site or otherwise.  All statements other than statements ofhistorical facts included in this report that address activities, events ordevelopments that we expect, believe or anticipate will or may occur in thefuture are forward-looking statements including, in particular, the statementsabout ev3’s plans (including MTI), objectives, strategies and prospectsregarding, among other things, the financial condition, results of operationsand business of ev3 Inc. and its subsidiaries. We have identified some of these forward-looking statements with wordslike “believe,” “may,” “could,” “might,” “forecast,” “possible,” “potential,” “project,”“will,” “should,” “expect,” “intend,” “plan,” “predict,” “anticipate,” “estimate,”“approximate” or “continue” and other words and terms of similar meaning.  These forward-looking statements may becontained in the notes to our consolidated financial statements and elsewherein this report, including under the caption “Management’s Discussion andAnalysis of Financial Condition and Results of Operations”.

 

Wewish to caution readers not to place undue reliance on any forward-lookingstatement that speaks only as of the date made and to recognize thatforward-looking statements are predictions of future results, which may notoccur as anticipated.  Actual resultscould differ materially from those anticipated in the forward-lookingstatements and from historical results, due to the risks and uncertaintiesdescribed under the heading “Risk Factors” below, as well as others that we mayconsider immaterial or do not anticipate at this time. Although we believe thatthe expectations reflected in our forward-looking statements are reasonable, wedo not know whether our expectations will prove correct.  Our expectations reflected in ourforward-looking statements can be affected by inaccurate assumptions we mightmake or by known or unknown risks and uncertainties, including those describedbelow under the heading “Risk Factors”. The risks and uncertainties described under the heading “Risk Factors”below are not exclusive and further information concerning us and our business,including factors that potentially could materially affect our financialresults or condition, may emerge from time to time.  We assume no obligation to updateforward-looking statements to reflect actual results or changes in factors orassumptions affecting such forward-looking statements.  We advise you, however, to consult anyfurther disclosures we make on related subjects in our annual reports on

 

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Form10-K, quarterly reports on Form 10-Q and current reports on Form 8-K we filewith or furnish to the Securities and Exchange Commission.

 

**RiskFactors**

 

***We have a history of operating losses andnegative cash flow.***

 

Ouroperations to date have consumed substantial amounts of cash, and we expectthis condition to continue.  We had anaccumulated deficit of $520.2 million at July 3, 2005.  Our ability to achieve cash flow positiveoperations will be influenced by many factors, including the extent andduration of our future operating losses, the level and timing of future salesand expenditures, market acceptance of new products, the results and scope ofongoing research and development projects, competing technologies, market andregulatory developments and the future course of intellectual propertylitigation.  If adequate cash flow is notavailable to us, our business will be negatively impacted.

 

***Some of our products are emergingtechnologies or have been recently introduced into the market and may notachieve market acceptance once they are introduced into their markets, whichcould adversely affect our business.***

 

Evenif we are successful in developing safe and effective products that receiveregulatory approval, our products may not gain market acceptance.  Our market share for our existing productsmay not grow, and our products that have yet to be introduced may not beaccepted in the market.  We will need toinvest in significant training and education of our physician customers toachieve market acceptance of our products with no assurance of success.  In order for any of our products to beaccepted, we must address the needs of potential customers and our customersmust believe our products are effective and commercially beneficial.  However, even if customers accept ourproducts, this acceptance may not translate into sales if our competitors havedeveloped similar products that our customers prefer.  If our products do not gain market acceptanceor if our customers prefer our competitors’ products, our business could beadversely affected.

 

***Delays in product introductions couldadversely affect our net sales.***

 

Theendovascular device market is highly competitive and designs change often toadjust to patent constraints and to changing market preferences.  Therefore, product life cycles are relativelyshort.  As a result, any delays in ourproduct launches may significantly impede our ability to enter or compete in agiven market and may reduce the sales that we are able to generate from theseproducts.  We may experience delays inany phase of a product launch, including during research and development,clinical trials, manufacturing, marketing and the education process.  In addition, our suppliers of products thatwe do not manufacture can suffer similar delays, which could cause delays inour product introductions.  If we sufferdelays in product introductions, our net sales could be adversely affected.

 

***If third parties claim that we infringeupon their intellectual property rights, we may incur liabilities and costs andmay have to redesign or discontinue selling the affected product.***

 

Themedical device industry is litigious with respect to patents and otherintellectual property rights. Companies operating in our industry routinelyseek patent protection for their product designs, and many of our principalcompetitors have large patent portfolios. Companies in the medical device industry have used intellectual propertylitigation to gain a competitive advantage. Whether a product infringes a patent involves complex legal and factualissues, the determination of which is often uncertain.  We face the risk of claims that we haveinfringed on third parties’ intellectual property rights.  Prior to launching major new products in ourkey markets, we normally evaluate existing intellectual property rights.However, our competitors may also have filed for patent protection which is notas yet a matter of public knowledge or claim trademark rights that have notbeen revealed through our availability searches.  Our efforts to identify and avoid infringingon third parties’ intellectual property rights may not always besuccessful.  Any claims of patent orother intellectual property infringement, even those without merit, could:

 

•              be expensive and time consuming todefend;

 

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•              result in us being required to paysignificant damages to third parties;

 

•              cause us to cease making or sellingproducts that incorporate the challenged intellectual property;

 

•              require us to redesign, reengineer orrebrand our products, if feasible;

 

•              require us to enter into royalty orlicensing agreements in order to obtain the right to use a third party’sintellectual property, which agreements may not be available on termsacceptable to us or at all;

 

•              divert the attention of our management;or

 

•              result in our customers or potentialcustomers deferring or limiting their purchase or use of the affected productsuntil resolution of the litigation.

 

Inaddition, new patents obtained by our competitors could threaten a product’scontinued life in the market even after it has already been introduced.

 

***We are currently a party to a number ofintellectual property claims, the resolution of which could have a materialadverse effect on our business and results of operations.***

 

Wecannot assure you that we do not infringe any patents or other proprietaryrights held by third parties. In that regard, in March 2005, Medtronic,Inc. contacted us to express its view that our Protégé stents infringe on oneor more of its patents.  We informedMedtronic that we disagree with its assertions, and have since had severaldiscussions with Medtronic.  No lawsuitwith respect to this matter has been filed. We also received notice from anindividual regarding our Percutaneous Left Atrial Appendage TranscatheterOcclusion device, or PLAATO®, which is designed to reduce the risk of stroke byoccluding the left atrial appendage, a small pocket attached to the heart’sleft upper chamber that has limited functional use and is the location of amajority of blood clots in the heart. The individual claims that he believes our PLAATO device infringes ontwo of his patents.  We have informedthis individual that we do not believe that our PLAATO device infringes onthese patents.  In March 2005, we wereserved with a complaint by Boston Scientific Corporation and one of itsaffiliates which claims that some of our products, including our SpideRXEmbolic Protection Device, infringe on certain of Boston Scientific’spatents.  Boston Scientific is seekingmonetary damages from us and to enjoin us from the alleged infringement.  We have answered the complaint, and we intendto vigorously defend this action. Because these matters are in early stages, wecannot estimate the possible loss or range of loss, if any, associated withtheir resolution.  However, there can beno assurance that the ultimate resolution of these matters will not result in amaterial adverse effect on our business, financial condition or results ofoperations.  If our products were foundto infringe on any proprietary rights of a third party, we could be required topay significant damages or license fees to the third party or cease production,marketing and distribution of those products, which could in turn have amaterial adverse effect on our business, financial condition and results ofoperations. Litigation may also be necessary to enforce patent rights we holdor to protect trade secrets or techniques we own.

 

We mayalso be subject to disputes as to the ownership of patents that we may developwith other companies.  Such disputescould result in the enjoining of sales of our products or our being required topay commercially unreasonable licensing fees. If this occurs, our net sales or the cost of selling the infringingproduct, and therefore our results of operations, would be negatively affected.

 

MTI isinvolved in several patent disputes. Prior to MTI’s acquisition of Dendron GmbH, Dendron became involved inlitigation in Europe involving patents covering certain of its products, whichlitigation is still active.  Concurrentwith its acquisition of Dendron, MTI initiated a series of legal actions in theNetherlands and the United Kingdom with the primary purpose of asserting bothinvalidity and non-infringement by it of certain patents held by others withrespect to detachable coils and certain delivery systems.  In addition, the patent holders against whomMTI initiated the actions in the Netherlands and the United Kingdom haveinitiated legal actions against MTI in the United States that allegeinfringement by MTI of certain patents held by them.  An adverse determination in a judicial oradministrative proceeding or failure to obtain licenses, if necessary, couldprevent MTI from

 

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manufacturingand selling its products, which would in turn have an adverse effect on ourbusiness and results of operations.

 

***If there is a disruption in the supply ofthe products of Invatec S.r.l. that we distribute or if our relationship withInvatec is impaired, our net sales and results of operations would be adverselyimpacted.***

 

Wehave entered into an agreement with Invatec S.r.l., or Invatec, an Italian manufacturerof endovascular medical devices which prior to our arrangement have not beenmarketed or sold under the Invatec brand in the United States, to distributeInvatec’s branded products throughout the United States.  Although our contract with Invatec gives usthe exclusive right to market Invatec’s products using the Invatec brand in theUnited States, Invatec retained the right to sell its products into the UnitedStates under other brands, which it currently does.  In 2004, we increased our U.S. cardioperipheral sales force by adding 40 new sales representatives partially inreliance on this agreement and have invested significantly in regulatory,intellectual property and clinical activities to support the introduction ofInvatec’s products in the United States. Our success in marketing the Invatec products will depend on these newsales personnel becoming proficient in the product line, building physicianrelationships and executing sales orders. If we are unable to market Invatec’s products successfully or if ouragreement with Invatec is terminated, our net sales and results of operationswould suffer.  If we do not meet ourperformance requirements under the agreement, the agreement may be terminatedby Invatec and we may be obligated to make substantial payments toInvatec.  In addition, even if we marketInvatec’s products successfully, if Invatec is unable to produce enough of itsproducts to meet our demands, including if Invatec sells its inventory to ourcompetitors rather than to us for marketing under their own brands, we may notbe able to meet our customers’ demands and our net sales and results ofoperations may suffer.  We also may notbe successful in managing the larger inventory and greater variety of productofferings that we will experience in connection with the Invatec relationshipand our net sales and results of operations may be adversely impacted.

 

***If our patents and other intellectualproperty rights do not adequately protect our products, we may lose marketshare to our competitors and be unable to operate our business profitably.***

 

Oursuccess depends significantly on our ability to protect our proprietary rightsto the technologies used in our products. We rely on patent protection, as well as a combination of copyright andtrademark laws and nondisclosure, confidentiality and other contractualarrangements to protect our proprietary technology.  However, these legal means afford onlylimited protection and may not adequately protect our rights or permit us togain or keep any competitive advantage. In addition, we cannot be assured that any of our pending patentapplications will result in the issuance of a patent to us.  The United States Patent and TrademarkOffice, or PTO, may deny or require significant narrowing of claims in ourpending patent applications, and patents issued as a result of the pendingpatent applications, if any, may not provide us with significant commercialprotection or be issued in a form that is advantageous to us.  We could also incur substantial costs inproceedings before the PTO.  Theseproceedings could result in adverse decisions as to the priority of ourinventions and the narrowing or invalidation of claims in issued patents.  Our issued patents and those that may beissued in the future may be challenged, invalidated or circumvented, whichcould limit our ability to stop competitors from marketing related products.Although we have taken steps to protect our intellectual property andproprietary technology, there is no assurance that third parties will not beable to design around our patents.  Wealso rely on unpatented proprietary technology. We cannot assure you that we can meaningfully protect all our rights inour unpatented proprietary technology or that others will not independentlydevelop substantially equivalent proprietary products or processes or otherwisegain access to our unpatented proprietary technology. We seek to protect ourknow-how and other unpatented proprietary technology, in part withconfidentiality agreements and intellectual property assignment agreements withour employees, independent distributors and consultants.  However, such agreements may not beenforceable or may not provide meaningful protection for our proprietaryinformation in the event of unauthorized use or disclosure or other breaches ofthe agreements or in the event that our competitors discover or independentlydevelop similar or identical designs or other proprietary information.  In addition, we rely on the use of registeredtrademarks with respect to the brand names of some of our products.  We also rely on common law trademarkprotection for some brand names, which are not protected to the same extent asour rights in the use of our registered trademarks.

 

Furthermore,the laws of foreign countries may not protect our intellectual property rightsto the same extent as the laws of the United States.  For example, foreign countries generally donot allow patents to cover methods for performing surgical procedures.  If we cannot adequately protect ourintellectual property rights in these foreign

 

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countries,our competitors may be able to compete more directly with us, which couldadversely affect our competitive position and our business.

 

We alsohold licenses from third parties that are necessary to utilize certaintechnologies used in the design and manufacturing of some of our products.  The loss of such licenses would prevent usfrom manufacturing, marketing and selling these products, which could harm ourbusiness.

 

***We manufacture our products at singlelocations.  Any disruption in thesemanufacturing facilities or any patent infringement claims with respect to ourmanufacturing process could adversely affect our business and results of operations.***

 

Wehave relied to date principally on our manufacturing facility in Plymouth,Minnesota and our former facility in New Brighton, Minnesota, and MTI’sfacility in Irvine, California.  Weclosed our New Brighton facility in July 2005 and moved its operations to ourPlymouth facility.  The Plymouth andIrvine facilities and the manufacturing equipment we use to produce ourproducts would be difficult to replace and could require substantial lead-timeto repair or replace.  Our facilities maybe affected by natural or man-made disasters. In the event one of our two facilities was affected by a disaster, wewould be forced to rely on third-party manufacturers if we could not shiftproduction to our other manufacturing facility. In the case of a device with a pre-market approval application we may berequired to obtain prior FDA or notified body approval of an alternatemanufacturing facility, which could delay or prevent our marketing of theaffected product until such approval is obtained.  Although we believe we possess adequateinsurance for damage to our property and the disruption of our business fromcasualties, such insurance may not be sufficient to cover all of our potentiallosses and may not continue to be available to us on acceptable terms, or atall.  It is also possible that one of ourcompetitors could claim that our manufacturing process violates an existingpatent.  If we were unsuccessful indefending such a claim, we may be forced to stop production at one or both ofour manufacturing facilities in the United States and to seek alternativefacilities.  Even if we are able toidentify such alternative facilities, we may incur additional costs and we mayexperience a disruption in the supply of our products until those facilitiesare available.  Any disruption in ourmanufacturing capacity could have an adverse impact on our ability to producesufficient inventory of our products or may require us to incur additionalexpenses in order to produce sufficient inventory, and therefore may adverselyaffect our net sales and results of operations. Any disruption or delay at our manufacturing facilities could impair ourability to meet the demand of our customers and our customers may cancel ordersor purchase products from our competitors, which could adversely affect ourbusiness and results of operations.

 

***If we lose the services of our chiefexecutive officer or other key personnel, we may not be able to manage ouroperations and meet our strategic objectives.***

 

Ourfuture success depends, in large part, on the continued service of James M.Corbett, our president and chief executive officer.  Mr. Corbett’s continuation with us isintegral to our future success, based on his significant expertise andknowledge of our business and products. Although we have key person insurance with respect to Mr. Corbett,any loss or interruption of the services of Mr. Corbett couldsignificantly reduce our ability to effectively manage our operations andimplement our strategy.  Also, we dependon the continued service of key managerial, scientific, sales and technicalpersonnel, as well as our ability to continue to attract and retain additionalhighly qualified personnel.  We competefor such personnel with other companies, academic institutions, government entitiesand other organizations.  Any loss orinterruption of the services of our other key personnel, employee slowdowns,strikes or similar actions could also significantly reduce our ability toeffectively manage our operations and meet our strategic objectives because wecannot assure you that we would be able to find an appropriate replacementshould the need arise.

 

Wealso compete for experienced medical device sales personnel.  If we are unable to hire and retain qualifiedsales personnel, our sales could be negatively impacted.

 

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***Our dependence on key suppliers puts us atrisk of interruptions in the availability of our products, which could reduceour net sales and adversely affect our results of operations. In addition,increases in prices for raw material and components used in our products couldadversely affect our results of operations.***

 

Werely on a limited number of suppliers for the raw materials and components usedin our products.  Our raw materials andcomponents are generally acquired through purchase orders placed in theordinary course of business, and we do not have any guaranteed or contractualsupply arrangements with many of our key or single source suppliers.  In addition, we also rely on independentcontract manufacturers for some of our products. Independent manufacturers havepossession of and in some cases hold title to molds for certain manufacturedcomponents of our products.  Our dependenceon third-party suppliers involves several risks, including limited control overpricing, availability, quality and delivery schedules, as well as manufacturingyields and costs.  Suppliers of rawmaterials and components may decide, or be required, for reasons beyond ourcontrol to cease supplying raw materials and components to us. Shortages of rawmaterials, quality control problems, production capacity constraints or delaysby our contract manufacturers could negatively affect our ability to meet ourproduction obligations and result in increased prices for affected parts.  Any such shortage, constraint or delay mayresult in delays in shipments of our products or components, which couldadversely affect our net sales and results of operations.

 

Inaddition, the Food and Drug Administration, or FDA, and foreign regulations mayrequire additional testing of any raw materials or components from newsuppliers prior to our use of these materials or components.  In the case of a device with a pre-marketapproval application, we may be required to obtain prior FDA approval of a newsupplier, which could delay or prevent our access or use of such raw materialsor components or our marketing of affected products until such approval isgranted.  In the case of a device withclearance under Section 510(k) of the Federal Food, Drug and Cosmetic Act,which we refer to as a 510(k), we may be required to submit a new 510(k) if achange in a raw material or component supplier results in a change in amaterial or component supplied that is not within the 510(k) cleared devicespecifications.  If we need to establishadditional or replacement suppliers for some of these components, our access tothe components might be delayed while we qualify such suppliers and obtain anynecessary FDA approvals.  Our suppliersof finished goods are also subject to regulatory inspection and scrutiny.  Any adverse regulatory finding or actionagainst those suppliers could impact their ability to supply us goods fordistribution and sale.

 

***We or MTI may require additional capital inthe future, which may not be available or may be available only on unfavorableterms.***

 

Ourand MTI’s capital requirements depend on many factors, including the amount ofexpenditures on intellectual property and technologies, the number of clinicaltrials which we conduct and new product development.  To the extent that our or MTI’s existingcapital is insufficient to meet these requirements and cover any losses, wewill need to raise additional funds through financings or borrowings or curtailour growth and reduce our assets.  Fromtime to time we may also sell a given technology or intellectual propertyhaving a development timeline or development cost that is inconsistent with ourinvestment horizon or which does not adequately complement our existing productportfolio.  We and MTI have eachhistorically relied on financing from Warburg Pincus and Vertical, but therecan be no assurance that Warburg Pincus, Vertical or other investors willprovide such financing in the future. Any equity or debt financing, if available at all, may be on terms thatare not favorable to us. Equity financings could result in dilution to ourstockholders, and the securities issued in future financings may have rights,preferences and privileges that are senior to those of our common stock.  If our need for capital arises because ofsignificant losses, the occurrence of these losses may make it more difficultfor us to raise the necessary capital. In addition, because MTI is not our wholly owned subsidiary, ourcreditors are limited in their ability to satisfy their claims against us byseeking recourse to MTI’s assets, which could impair our ability to obtainfinancing.

 

***We may experience conflicts of interestwith MTI with respect to business opportunities and other matters.***

 

Ourneurovascular operations are comprised of our interest in and relationshipswith MTI.  MTI is a public company whosestock is traded on the NASDAQ National Market System.  We own 70.3% of the outstanding shares ofcommon stock of MTI based on the number of shares outstanding as of July 3,2005. In addition, our board of directors is comprised of seven persons, fourof whom are also members of the board of directors of MTI.  These directors are James M. Corbett, RichardB. Emmitt, Dale A. Spencer and Elizabeth H. Weatherman.  Our

 

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relationshipswith MTI are significant elements of our business.  Under a number of agreements that we haveentered into with MTI, we:

 

•              are a distributor of certain of MTI’sproducts;

 

•              perform inventory and administrativeservices with respect to finished goods inventory of certain of MTI’sneurovascular products;

 

•              provide MTI with marketing, salessolicitation, inventory management, accounting, invoicing, collection andadministrative services in certain countries other than the United States andCanada; and

 

•              provide MTI distributor managementservices in certain countries other than the United States and Canada where MTIhas an existing third-party distributor for its products.

 

AlthoughMTI is our controlled subsidiary, it is not our wholly owned subsidiary, andconflicts of interest may arise with respect to transactions involving businessdealings between us and MTI, potential acquisitions of businesses or products,development of products and other matters with respect to which our bestinterests and the best interests of our stockholders may conflict with the bestinterests of the public stockholders of MTI. Because a portion of MTI is owned by minority stockholders, we cannottreat MTI as we would a wholly owned subsidiary.  With respect to our transactions with MTI,although we have formed a special committee of our board of directors thatconsists of all of the non-MTI directors to alleviate conflict of interestconcerns, we cannot assure you that we will negotiate terms that are asfavorable to us as if such transactions were with an unaffiliated third partyor that any conflicts of interest will be resolved in our favor.  Further, the fiduciary duties of the membersof MTI’s board of directors may result in actions that are not in ourstockholders’ best interests.  Because ofits importance to our business, we may elect to fund MTI’s operations incircumstances in which we undertake a large amount of risk but which willbenefit all of MTI’s stockholders, including its public stockholders, and fromwhich we may only receive the economic benefit in proportion to our ownershipinterest in MTI.  In addition, we arerequired to share any dividends that are declared by MTI on its common stock orother distributions of its assets with MTI’s public stockholders on a pro ratabasis, which will restrict our ability to access any funds and assets held byMTI.

 

***The value of our interest in MTI maydecline or our interest in MTI could be diluted.***

 

Anydecline in the market price of MTI’s common stock on the NASDAQ National MarketSystem will cause the value of the shares of MTI’s common stock which we own todecline.  MTI has not been profitablesince its founding and may continue to incur significant losses and negativecash flows in the future, which could negatively impact the market price of itscommon stock and the value of the MTI shares that we own.  For example, MTI may engage in equityfinancings or acquisitions of businesses or assets using equity that result inthe dilution of our interest in MTI. Although we have the right to provide financing to MTI before WarburgPincus or Vertical, if we decline to exercise this right, Warburg Pincus orVertical may also elect to provide financing directly to MTI in the future. Inthe event that MTI raises additional capital through equity offerings toWarburg Pincus, Vertical or other investors, our ownership interest in MTIcould be diluted.

 

***Our sales would decline if our customers ortheir patients cannot obtain third party reimbursement for their purchases ofour products.***

 

Salesof our products depend in part on the reimbursement by governmental and privatehealth care payors to our physician customers or their patients for thepurchase and use of our products.  In theUnited States, health care providers that purchase our products generally relyon third-party payors, principally federal Medicare, state Medicaid and privatehealth insurance plans, to pay for all or a portion of the cost of endovascularprocedures.  Reimbursement systems ininternational markets vary significantly by country, and by region within somecountries, and reimbursement approvals must be obtained on a country-by-countrybasis and can take up to 18 months or longer.  Many international markets havegovernment-managed health care systems that govern reimbursement for newdevices and procedures.  In most markets,there are private insurance systems as well as government-managed systems.  Additionally, some foreign reimbursementsystems provide for limited payments in a given period and

 

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thereforeresult in extended payment periods.  Anydelays in obtaining, or an inability to obtain, reimbursement approvals couldhave a material adverse effect on our business. In addition, if the reimbursement policies of domestic or foreigngovernmental or private health care payors were to change, our customers wouldlikely change their purchasing patterns and/or the frequency of their purchasesof the affected products. Additionally, payors continue to review theircoverage policies carefully for existing and new therapies and can, withoutnotice, deny coverage for treatments that include the use of our products.  Our business would be negatively impacted tothe extent any such changes reduce reimbursement for our products.

 

Inaddition, some health care providers in the United States have adopted or areconsidering a managed care system in which the providers contract to providecomprehensive health care for a fixed cost per person.  Health care providers may attempt to controlcosts by authorizing fewer elective surgical procedures or by requiring the useof the least expensive devices possible, which could adversely affect thedemand for our products or the price at which we can sell our products.

 

Wealso sell a number of our products to physician customers who may elect to usethese products in ways that are not within the scope of the approval orclearance given by the FDA, often referred to as “off-label” use.  In the event that governmental or privatehealth care payors limit reimbursement for products used off-label, sales ofour products and our business would be materially adversely affected.

 

***Our products and facilities are subject toextensive regulation with which compliance is costly and which exposes us topenalties for non-compliance.  We may notbe able to obtain required regulatory approvals for our products in a cost-effectivemanner or at all, which could adversely affect our business and results ofoperations.***

 

Theproduction and marketing of our products and our ongoing research anddevelopment, preclinical testing and clinical trial activities are subject toextensive regulation and review by numerous governmental authorities both inthe United States and abroad. U.S. and foreign regulations applicable tomedical devices are wide-ranging and govern, among other things, the testing,marketing and pre-market review of new medical devices, in addition to regulatingmanufacturing practices, reporting, advertising, exporting, labeling and recordkeeping procedures.  We are required toobtain FDA approval or clearance before we can market our products in theUnited States and certain foreign countries. The regulatory process requires significant time, effort andexpenditures to bring our products to market, and we cannot assure that any ofour products will be approved for sale. Any failure to obtain regulatory approvals or clearances could preventus from successfully marketing our products, which could adversely affect ourbusiness and results of operations.  Ourfailure to comply with applicable regulatory requirements could result ingovernmental agencies:

 

•              imposing fines and penalties on us;

 

•              preventing us from manufacturing orselling our products;

 

•              bringing civil or criminal chargesagainst us;

 

•              delaying the introduction of our newproducts into the market;

 

•              recalling or seizing our products; or

 

•              withdrawing or denying approvals orclearances for our products.

 

If anyor all of the foregoing were to occur, we may not be able to meet the demandsof our customers and our customers may cancel orders or purchase products fromour competitors, which could adversely affect our business and results ofoperations.

 

Evenif regulatory approval or clearance of a product is granted, the approval orclearance could limit the uses for which the product may be labeled andpromoted, which may limit the market for our products.  Further, for a marketed product, itsmanufacturer and manufacturing facilities are subject to periodic reviews andinspections by FDA and foreign regulatory authorities.  Subsequent discovery of problems with aproduct, manufacturer or facility

 

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mayresult in restrictions on the product, manufacturer or facility, includingwithdrawal of the product from the market or other enforcement actions.  In addition, regulatory agencies may notagree with the extent or speed of corrective actions relating to product ormanufacturing problems.

 

We arecurrently conducting clinical studies of some of our products under aninvestigational device exemption. Clinical studies must be conducted in compliance with regulations of theFDA and those of regulatory agencies in other countries in which we conductclinical studies.  The data collectedfrom these clinical investigations will ultimately be used to support marketclearance for these products.  There isno assurance that regulatory bodies will accept the data from these clinicalstudies or that they will ultimately allow market clearance for these products.

 

Whenrequired, with respect to the products we market in the United States we haveobtained pre-market notification clearance under Section 510(k), but we donot believe certain modifications we have made to our products require us tosubmit new 510(k) notifications. However, if the FDA disagrees with us and requires us to submit a new510(k) notification for modifications to our existing products, we may besubject to enforcement actions by the FDA and be required to stop marketing theproducts while the FDA reviews the 510(k) notification.  If the FDA requires us to go through alengthier, more rigorous examination than we had expected, our productintroductions or modifications could be delayed or canceled, which could causeour sales to decline.  In addition, theFDA may determine that future products will require the more costly, lengthyand uncertain pre-market approval application process. Products that areapproved through a pre-market approval application generally need FDA approvalbefore they can be modified.  If we failto submit changes to products developed under investigational device exemptionsor pre-market approval applications in a timely or adequate manner, we maybecome subject to regulatory actions.

 

Becausewe are subject to extensive regulation in the countries in which we operate, weare subject to the risk that regulations could change in a way that wouldexpose us to additional costs, penalties or liabilities.  For example, in the United States we sell anumber of our products to physicians who may elect to use these products inways that are not within the scope of the approval or clearance given by theFDA or for other than FDA-approved indications, often referred to as “off-label”use.  There are laws and regulationsprohibiting the promotion of products for such off-label use which restrict ourability to market our products and could affect our growth.  Although we have strict policies against theunlawful promotion of products for off-label use and we train our employees onthese policies, it is possible that one or more of our employees will notfollow the policies, or that regulations would change in a way that may hinderour ability to sell such products or make it more costly to do so, which couldexpose us to financial penalties as well as loss of approval to market and sellthe affected products.  If we want tomarket any of our products for use in ways for which they are not currentlyapproved, we may need to conduct clinical trials and obtain approval fromappropriate regulatory bodies, which could be time-consuming and costly.  In addition, off-label use may not be safe oreffective and may result in unfavorable outcomes to patients, resulting inpotential liability to us.  Penalties orliabilities stemming from off-label use could have a material adverse effect onour results of operations.  In addition,if physicians cease or lessen their use of products for other than FDA-approvedindications, sales of our products could decline, which could materiallyadversely affect our net sales and results of operations.

 

Ifadditional regulatory requirements are implemented in the foreign countries inwhich we sell our products, the cost of developing or selling our products mayincrease.  For example, in Japan, newregulations became effective on April 1, 2005 which increase theregulatory and quality assurance requirements for both our manufacturingfacilities and our offices located in Japan in order to obtain and maintainregulatory approval to market our products there.  While parts of the new regulations are stillbeing defined, we expect that the new regulations will result in higher costsand delays in securing approval to market our products in Japan. In addition,we depend on our distributors outside the United States in seeking regulatoryapproval to market our devices in other countries and we are thereforedependent on persons outside of our direct control to secure suchapprovals.  For example, we are highlydependent on distributors in emerging markets such as China and Brazil forregulatory submissions and approvals and do not have direct access to healthcare agencies in those markets to ensure timely regulatory approvals or promptresolution of regulatory or compliance matters. If our distributors fail to obtain the required approvals or do not doso in a timely manner, our net sales from our international operations and ourresults of operations may be adversely affected.

 

In addition, our business, properties and productsare subject to foreign, federal, state and local laws and regulations relatingto the protection of the environment, natural resources and worker health andsafety and the use,

 

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management, storage, and disposal of hazardous substances,wastes, and other regulated materials. Because we own and operate realproperty, various environmental laws also may impose liability on us for thecosts of cleaning up and responding to hazardous substances that may have beenreleased on our property, including releases unknown to us.  These environmental laws and regulations alsocould require us to pay for environmental remediation and response costs at third-partylocations where we disposed of or recycled hazardous substances.  The costs of complying with these variousenvironmental requirements, as they now exist or may be altered in the future,could adversely affect our financial condition and results of operations.

 

***A number of our products are in clinicaltrials.  If these trials areunsuccessful, or if the FDA or other regulatory agencies do not accept theresults of such trials, these products may not successfully come to market andour business prospects may suffer.***

 

Severalof our products are in the early stages of development.  Some of our products only recently emergedfrom clinical trials and others have not yet reached the clinical trialstage.  We currently have four ongoingclinical trials relating to four products that we expect to contributesignificantly to our net sales in the future. These trials include the CREATE trial designed to evaluate the use ofour SpideRX Embolic Protection Devices and our Protégé Self-Expanding StentSystem in carotid artery stenting procedures in patients who are high riskcandidates for carotid endarterectomy, as well as our PLAATO system designedfor stroke reduction.  We cannot assureyou that we will be successful in reaching the endpoints in these trials or, ifwe do, that the FDA or other regulatory agencies will accept the results andapprove the devices for sale.  Further,we continually evaluate the potential financial benefits and costs of ourclinical trials and the products being evaluated in them.  If we determine that the costs associatedwith attaining regulatory approval of a product exceed the potential financialbenefits of that product or if the projected development timeline isinconsistent with our investment horizon, we may choose to stop a clinicaltrial and/or the development of a product.

 

Ourability to market our products in the United States will depend upon a numberof factors, including our ability to demonstrate the safety and efficacy of ourproducts with valid clinical data.  Ourability to market our products outside of the United States is also subject toregulatory approval, including our ability to demonstrate the safety of ourproducts in the clinical setting.  Ourproducts may not be found to be safe and, where required, effective in clinicaltrials and may not ultimately be approved for marketing by U.S. or foreignregulatory authorities.  Our failure todevelop safe and effective products that are approved for sale on a timelybasis would have a negative impact on our net sales.  In particular, if we do not reach theendpoints or obtain FDA approval with respect to our products, our futuregrowth may be significantly hampered. In addition, some of the products forwhich we are currently conducting trials are already approved for sale outsideof the United States.  As a result, whileour trials are ongoing, unfavorable data may arise in connection with usage ofour products outside the United States which could adversely impact theapproval of such products in the United States. Conversely, unfavorable data from clinical trials in the United Statesmay adversely impact sales of our products outside of the United States.

 

***The risks inherent in operatinginternationally and the risks of selling and shipping our products and ofpurchasing our components and products internationally may adversely impact ournet sales, results of operations and financial condition.***

 

Wederive a significant portion of our net sales from operations in internationalmarkets.  For the the six months endedJuly 3, 2005 and July 4, 2004, 49.2% and 49.7% of our net sales, respectively, were derived from ourinternational operations.  Ourinternational distribution system consists of eight direct sales offices andapproximately 50 stocking distribution partners. In addition, we purchase somecomponents and products on the international market.  The sale and shipping of our products andservices across international borders, as well as the purchase of componentsand products from international sources, subject us to extensive U.S. andforeign governmental trade regulations. Compliance with such regulations iscostly and exposes us to penalties for non-compliance.  We are reviewing our trade control practicesas part of our ongoing commitment to further enhance our compliance policiesand procedures.  As part of this review,we have identified instances in which we may have incorrectly reportedinformation about certain shipments imported into the United States andEurope.  While we believe that no moniesare owed to any government as a result of these potential reporting errorsother than processing fees of a nonmaterial amount, we may incur penalties,additional fees, interest and duty payments if thecustoms regulators disagree with our assessment.  Any failure to comply with applicable legaland regulatory obligations could impact us in a variety of ways that include,but are not limited to, significant criminal, civil and

 

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administrative penalties, including imprisonment of individuals,fines and penalties, denial of export privileges, seizure of shipments,restrictions on certain business activities, and exclusion or debarment fromgovernment contracting.  Also, thefailure to comply with applicable legal and regulatory obligations could resultin the disruption of our shipping and sales activities.

 

Inaddition, most of the countries in which we sell our products are, to somedegree, subject to political, economic and/or social instability.  Our international sales operations expose usand our representatives, agents and distributors to risks inherent in operatingin foreign jurisdictions.  These risksinclude:

 

•              the imposition of additional U.S. andforeign governmental controls or regulations;

 

•              the imposition of costly and lengthy newexport licensing requirements;

 

•              the imposition of U.S. and/orinternational sanctions against a country, company, person or entity with whomthe company does business that would restrict or prohibit continued businesswith the sanctioned country, company, person or entity;

 

•              economic instability;

 

•              a shortage of high-quality sales peopleand distributors;

 

•              loss of any key personnel that possessproprietary knowledge, or who are otherwise important to our success in certaininternational markets;

 

•              changes in third-party reimbursementpolicies that may require some of the patients who receive our products todirectly absorb medical costs or that may necessitate the reduction of theselling prices of our products;

 

•              changes in duties and tariffs, license obligationsand other non-tariff barriers to trade;

 

•              the imposition of new trade restrictions;

 

•              the imposition of restrictions on theactivities of foreign agents, representatives and distributors;

 

•              scrutiny of foreign tax authorities whichcould result in significant fines, penalties and additional taxes being imposedon us;

 

•              pricing pressure that we may experienceinternationally;

 

•              laws and business practices favoringlocal companies;

 

•              longer payment cycles;

 

•              difficulties in enforcing agreements andcollecting receivables through certain foreign legal systems;

 

•              difficulties in enforcing or defendingintellectual property rights; and

 

•              exposure to different legal and politicalstandards due to our conducting business in over 50 countries.

 

Wecannot assure you that one or more of the factors will not harm ourbusiness.  Any material decrease in ourinternational sales would adversely impact our net sales, results of operationsand financial condition.  Ourinternational sales are predominately in Europe.  In Europe, health care regulation andreimbursement for medical

 

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devices vary significantly from country to country.  This changing environment could adverselyaffect our ability to sell our products in some European countries.

 

***Fluctuations in foreign currency exchangerates could result in declines in our reported net sales and earnings.***

 

Becausethe majority of our international sales are denominated in local currencies andnot in U.S. dollars, our reported net sales and earnings are subject tofluctuations in foreign exchange rates. Our international net sales were favorably affected by the impact offoreign currency fluctuations totaling $1.4 million in the six months endedJuly 4, 2004 and $1.0 million in the six months ended July 3, 2005.  However, we cannot assure you that we willbenefit from the impact of foreign currency fluctuations in the future andforeign currency fluctuations in the future may adversely affect our net salesand earnings.  At present, we do notengage in hedging transactions to protect against uncertainly in futureexchange rates between particular foreign currencies and the U.S. dollar.

 

***We may become obligated to make largemilestone payments that are not currently reflected in our financial statementsin certain circumstances, which would negatively impact our cash flows fromoperations.***

 

Pursuantto the acquisition agreements relating to our purchase of MitraLife and ApprivaMedical, Inc. in January 2002 and August 2002, respectively, weagreed to make certain additional payments to the sellers of these businessesin the event that we achieve contractually defined milestones.  Generally, in each case, these milestone paymentsbecome due upon the completion of specific regulatory steps in the productcommercialization process.  With respectto the MitraLife acquisition, the maximum potential milestone payments totaled$25 million, and with respect to the Appriva acquisition, the maximumpotential milestone payments totaled $175 million.

 

OnSeptember 29, 2004, we sold substantially all of the assets constitutingthe MitraLife business to Edwards Lifesciences and we are no longer pursuingcommercialization of the product line acquired in the MitraLife transaction.  As of the date that we sold these assets toEdwards Lifesciences, none of the milestones set forth in our agreement withthe sellers of MitraLife had been met. We have determined that we have no current obligations in respect ofthese milestone payments, and we do not believe that it is likely that we willhave obligations with respect to these milestones in the future.  Although we do not believe it is likely thatthese milestone payment obligations will become due in the future, it ispossible that the former stockholders of MitraLife could disagree and make aclaim for such payments.  Any suchdispute could be costly, result in payments in such amounts being made anddivert our management’s time and attention away from our business.

 

TheAppriva acquisition agreement contains four milestones to which paymentsrelate.  The first milestone was required by its terms to be achieved byJanuary 1, 2005 in order to trigger a payment equal to $50 million. We have determined that the first milestone was not achieved byJanuary 1, 2005 and that the first milestone is not payable, although itis possible that we could meet one or more of the remaining milestones withrespect to the Appriva acquisition and could become obligated to make thecorresponding milestone payments totaling $125 million.  On May 20,2005 Michael Lesh,  as an individual seller of Appriva stockand purporting to represent certain other sellers of Apprivastock, filed a complaint in the Superior Court of the State of Delaware withindividually specified damages aggregating $70 million and otherunspecified damages for several allegations, including that we, along withother defendants,  breached the acquisition agreement and an impliedcovenant of good faith and fair dealing by willfully failing to take the stepsnecessary to meet the first milestone under the agreement,  andthereby also failing to meet certain other milestones, and further that onemilestone was actually met.   The complaint also alleges fraud,negligent misrepresentation and violation of state securities laws inconnection with the negotiation of the acquisition agreement.  We believethese allegations are without merit and intend to vigorously defend thisaction.  However, the defense and resolution of this or any similar disputecould be costly and may divert our management’s time and attention away fromour business. On August 5, 2005, our attorneys received a letter from attorneysrepresenting certain other sellers of Appriva stock (who are not purported tobe represented in the action filed by Lesh), asking our attorneys to enter intoa dialogue regarding their assertions that certain milestone payments shouldhave been made. We believe their assertions are without merit. Failure to reachagreement with these new claimants on a resolution of our differences couldlead to additional litigation on this matter.  In the event any suchmilestone payments become due and/or any other damages become payable, ourcosts would increase correspondingly which would negatively impact our cashflow from operations.

 

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***We rely on our independent salesdistributors and sales associates to market and sell our products outside ofthe United States, Canada, Europe and Japan.***

 

Salesof our products in locations outside of the United States, Canada, Europe andJapan represented 12% and 15% of our net sales in the six months ended July 3,2005 and July 4, 2004, respectively.  Oursuccess outside of the United States, Canada, Europe and Japan depends largelyupon marketing arrangements with independent sales distributors and salesassociates, in particular their sales and service expertise and relationshipswith the customers in the marketplace. Independent distributors and sales associates may terminate theirrelationship with us, or devote insufficient sales efforts to ourproducts.  We do not control ourindependent distributors and they may not be successful in implementing ourmarketing plans. In addition, many of our independent distributors outside ofthe United States, Canada, Europe and Japan initially obtain and maintainforeign regulatory approval for sale of our products in their respectivecountries.  Our failure to maintain ourexisting relationships with our independent distributors and sales associatesoutside of the United States, Canada, Europe and Japan, or our failure torecruit and retain additional skilled independent sales distributors and salesassociates in these locations, could have an adverse effect on our operations.  We have experienced turnover with some of ourindependent distributors in the past that has adversely affected our short-termfinancial results while we transitioned to new independent distributors.  Similar occurrences could happen in thefuture.

 

***If physicians do not recommend and endorseour products, our sales may decline or we may be unable to increase our salesand profits.***

 

Inorder for us to sell our products, physicians must recommend and endorsethem.  We may not obtain the necessaryrecommendations or endorsements from physicians.  Acceptance of our products depends oneducating the medical community as to the distinctive characteristics,perceived benefits, safety, clinical efficacy and cost-effectiveness of ourproducts compared to products of our competitors, and on training physicians inthe proper application of our products. If we are not successful in obtaining the recommendations orendorsements of physicians for our products, our sales may decline or we may beunable to increase our sales and profits.

 

***If we fail to comply with the U.S. FederalAnti-Kickback Statute and similar state laws, we could be subject to criminaland civil penalties and exclusion from the Medicare and Medicaid programs,which could have a material adverse effect on our business and results ofoperations.***

 

Aprovision of the Social Security Act, commonly referred to as the FederalAnti-Kickback Statute, prohibits the offer, payment, solicitation or receipt ofany form of remuneration in return for referring, ordering, leasing, purchasingor arranging for or recommending the ordering, purchasing or leasing of itemsor services payable by Medicare, Medicaid or any other Federal health careprogram.  The Federal Anti-KickbackStatute is very broad in scope and many of its provisions have not beenuniformly or definitively interpreted by existing case law or regulations.  In addition, most of the states in which ourproducts are sold have adopted laws similar to the Federal Anti-Kickback Statute,and some of these laws are even broader than the Federal Anti-Kickback Statutein that their prohibitions are not limited to items or services paid for by aFederal health care program but, instead, apply regardless of the source ofpayment.  Violations of the FederalAnti-Kickback Statute may result in substantial civil or criminal penalties andexclusion from participation in Federal health care programs.

 

All ofour financial relationships with health care providers and others who provideproducts or services to Federal health care program beneficiaries arepotentially governed by the Federal Anti-Kickback Statute and similar statelaws.  We believe our operations are inmaterial compliance with the Federal Anti-Kickback Statute and similar statelaws.  However, we cannot assure you thatwe will not be subject to investigations or litigation alleging violations ofthese laws, which could be time-consuming and costly to us and could divertmanagement’s attention from operating our business, which could have a materialadverse effect on our business.  Inaddition, if our arrangements were found to violate the Federal Anti-KickbackStatute or similar state laws, it could have a material adverse effect on ourbusiness and results of operations.

 

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***Our business strategy relies on assumptionsabout the market for our products, which, if incorrect, would adversely affectour business prospects and profitability.***

 

We arefocused on the market for endovascular devices used to treat vascular diseasesand disorders.  We believe that the agingof the general population and increasingly inactive lifestyles will continueand that these trends will increase the need for our products. However, theprojected demand for our products could materially differ from actual demand ifour assumptions regarding these trends and acceptance of our products by themedical community prove to be incorrect or do not materialize or if drugtherapies gain more widespread acceptance as a viable alternative treatment,which in each case would adversely affect our business prospects andprofitability.

 

***If MTI’s manufacturing facility does nothave sufficient capacity or if MTI experiences a delay in the proposedrelocation of its existing manufacturing facility, the production of ourneurovascular products may be delayed.***

 

Theexpansion of MTI’s manufacturing capacity will be necessary in the future.  MTI is currently in discussion with aprospective landlord for the leasing of a larger facility, which will includesignificantly greater manufacturing capacity. MTI expects to incur approximately $3.0 million for facilities, toolingand equipment, regulatory approvals and leasehold improvements for the newfacility.  We expect to enter intodefinitive agreements with MTI to lend MTI up to $3.3 million for the paymentof the expenses associated with the relocation. If MTI is not able to achieve the expected improved efficiencies fromits new manufacturing facility or if MTI experiences any delay in completingits relocation or regulatory qualification of its new facility, the productionof our neurovascular products may be delayed and our net sales and businesscould be materially adversely affected.

 

***Our business, net sales and results ofoperations may suffer if we do not pass the required regulatory inspections forour new location for manufacturing peripheral stents.***

 

Weclosed our New Brighton, Minnesota manufacturing facility in July 2005 and arecurrently in the process of integrating our manufacturing operations formerlylocated in New Brighton, Minnesota, where we manufactured our peripheral stentproduct line, with our manufacturing operations in Plymouth, Minnesota.  We will be required to pass regulatoryinspections of the FDA, and possibly other regulatory agencies of countries inwhich we sell our products, in connection with the new manufacturing operationsin Plymouth.  If we do not pass theseinspections or do not pass them on our expected schedule, we may not havesufficient inventory of various products, which may result in a backlog oforders, customer dissatisfaction and a reduction in sales. Consequently, ourbusiness, net sales and results of operations may suffer.  In addition, we are required to submit apre-market approval supplement application to the FDA for approval of thechange in manufacturing facilities for any devices marketed under a pre-marketapproval application. If we do not obtain timely approval of any requiredsupplement application, our business, net sales and results of operations mayalso be negatively impacted.

 

***One of our families of products generates alarge portion of our net sales. Our net sales and business prospects would beadversely affected if sales of this product were to decline.***

 

We aredependent on our Protégé GPS family of stents, which generated more than 10% ofour net sales in fiscal 2004 and more than 15% of our net sales in the sixmonths ended July 3, 2005.  If ourProtégé GPS stents were to no longer be available for sale in any key marketbecause of regulatory, intellectual property or any other reason, our net salesfrom these products and from products that typically constitute ancillarypurchases would significantly decline.  Asignificant decline in our net sales could also negatively impact our productdevelopment activities and therefore our business prospects.

 

InMarch 2005, Medtronic, Inc. contacted us to express its view that ourProtégé stents infringe on one or more of its patents, as described above.  We informed Medtronic that we disagree withits assertions, and have since had several discussions with Medtronic.  No lawsuit with respect to this matter hasbeen filed.

 

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***We are exposed to product liability claimsthat could have an adverse effect on our business and results of operations.***

 

Themanufacture and sale of medical devices exposes us to significant risk ofproduct liability claims, some of which may have a negative impact on ourbusiness.  Our existing products weredeveloped relatively recently and defects or risks that we have not yetidentified may give rise to product liability claims. In addition, we haverecently initiated a new quality control system and a new manufacturing modelwhich has not been in effect long enough for us to have the confidence that anyerrors or mistakes in implementation have been corrected.  Our existing product liability insurancecoverage may be inadequate to protect us from any liabilities we may incur orwe may not be able to maintain adequate product liability insurance at acceptablerates.  If a product liability claim orseries of claims is brought against us for uninsured liabilities or in excessof our insurance coverage and it is ultimately determined that we are liable,our business could suffer.  Additionally,we could experience a material design or manufacturing failure in our products,a quality system failure, other safety issues or heightened regulatory scrutinythat would warrant a recall of some of our products.  A recall of some of our products could alsoresult in increased product liability claims. Further, while we train our physician customers on the proper usage ofour products, we cannot ensure that they will implement our instructionsaccurately.  If our products are usedincorrectly by our customers, injury may result and this could give rise toproduct liability claims against us.  Anylosses that we may suffer from any liability claims, and the effect that anyproduct liability litigation may have upon the reputation and marketability ofour products, may divert management’s attention from other matters and may havea negative impact on our business and our results of operations.

 

***Our net sales could decline significantlyif drug-eluting stents become a dominant therapy in the peripheral vascularstent market and we are not able to develop or acquire a drug-eluting stent tomarket and sell.***

 

Theperipheral vascular market is currently comprised exclusively of bare metal, ornon drug-eluting, stents.  However, thereare clinical situations in the periphery in which a drug-eluting stent maydemonstrate clinical superiority over bare metal stents.  To the extent that our peripheral stentcustomers seek stents with drug coatings and we do not market and sell adrug-eluting peripheral stent or one that achieves market acceptance, we maynot be able to compete as effectively with those of our competitors that areable to develop and sell a drug-eluting stent, and our peripheral stent salescould decline.  If our peripheral stentsales were to decline, we could experience a significant decline in sales ofsome of our other products which are routinely purchased in conjunction withstent purchases.

 

***If we are unable to continue to develop andmarket new products and technologies, we may experience a decrease in demandfor our products or our products could become obsolete, and our business wouldsuffer.***

 

We arecontinually engaged in product development and improvement programs, and newproducts represent a significant component of our growth rate.  We may not be able to compete effectivelywith our competitors unless we can keep up with existing or new products andtechnologies in the endovascular device market. If we do not continue tointroduce new products and technologies, or if those products and technologies arenot accepted, we may not be successful and our business would suffer.  Moreover, many of our clinical trials havedurations of several years and it is possible that competing therapies, such asdrug therapies, may be introduced while our products are still undergoingclinical trials.  This could reduce thepotential demand for our products and negatively impact our business prospects.Additionally, our competitors’ new products and technologies may beat ourproducts to market, may be more effective or less expensive than our productsor render our products obsolete.

 

***The marketing of our products requires asignificant amount of time and expense and we may not have the resources tosuccessfully market our products, which would adversely affect our business andresults of operations.***

 

Themarketing of our products requires a significant amount of time and expense inorder to identify the physicians who may use our products, invest in trainingand education, and employ a sales force that is large enough to interact withthe targeted physicians.  In addition,the marketing of our products requires interaction with many subspecialists whoare moving into new practice areas and may require more training and educationfrom our personnel than would be required with physicians who are not expandingtheir practice areas.  We may not haveadequate resources to market our products successfully against largercompetitors which have more resources than

 

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we do. If we cannot market our products successfully,our business and results of operations would be adversely affected.

 

***We face competition from other companies,many of which have substantially greater resources than we do and may be ableto develop more effective products or offer their products at lower prices thanwe can, which could adversely impact our business, net sales and results ofoperations.  Consolidation in the medicaltechnology industry would exacerbate these risks.***

 

Themarkets in which we compete are highly competitive, subject to change andsignificantly affected by new product introductions and other activities ofindustry participants.  The markets forour products are also dominated by a small number of large companies, and weare a much smaller company relative to our primary competitors.  Our products compete with other medicaldevices, including Invatec manufactured products sold in the United Statesunder other brand names, surgical procedures and pharmaceutical products.  A number of the companies in the medicaltechnology industry, including manufacturers of peripheral vascular,cardiovascular and neurovascular products, have substantially greater capitalresources, larger customer bases, broader product lines, larger sales forces,greater marketing and management resources, larger research and developmentstaffs and larger facilities than ours and have established reputations withour target customers, as well as worldwide distribution channels that are moreeffective than ours. In addition, the industry has recently experienced someconsolidation.  Consolidation could makethe competitive environment more difficult for smaller companies.  Because of the size of the vascular diseasemarket opportunity, competitors and potential competitors have historicallydedicated and will continue to dedicate significant resources to aggressivelypromote their products. New product developments that could compete with usmore effectively are likely because the vascular disease market ischaracterized by extensive research efforts and technological progress.  Competitors may develop technologies andproducts that are safer, more effective, easier touse, less expensive or more readily accepted than ours.  Their products could make our technology andproducts obsolete or noncompetitive.  Ourcompetitors may also be able to achieve more efficient manufacturing anddistribution operations than we can and may offer lower prices than we couldoffer profitably.  We expect that as ourproducts mature, we will be able to produce our products in a more costeffective manner and therefore be able to compete more effectively, but it ispossible that we may not achieve such cost reductions.  Any of these competitive factors could adverselyimpact our business, net sales and results of operations.

 

Wealso compete with other manufacturers of medical devices for clinical sites toconduct human trials.  If we are not ableto locate clinical sites on a timely or cost-effective basis, this could impedeour ability to conduct trials of our products and, therefore, our ability toobtain required regulatory clearance or approval.

 

***We rely on our management informationsystems for inventory management, distribution and other functions and tomaintain our research and development and clinical data.  If our information systems fail to adequatelyperform these functions or if we experience an interruption in their operation,our business and results of operations could be adversely affected.***

 

Theefficient operation of our business is dependent on our management informationsystems.  We rely on our managementinformation systems to effectively manage accounting and financial functions;manage order entry, order fulfillment and inventory replenishment processes;and to maintain our research and development and clinical data.  The failure of our management informationsystems to perform as we anticipate could disrupt our business and productdevelopment and could result in decreased sales, increased overhead costs,excess inventory and product shortages, causing our business and results ofoperations to suffer.  In addition, ourmanagement information systems are vulnerable to damage or interruption from:

 

•              earthquake, fire, flood and other naturaldisasters;

 

•              terrorist attacks and attacks by computerviruses or hackers; and

 

•              power loss or computer systems, Internet,telecommunications or data network failure.

 

Anysuch interruption could adversely affect our business and results ofoperations.

 

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***Existing or future acquisitions ofbusinesses could negatively affect our results of operations if we fail tointegrate the acquired businesses successfully into our existing operations orif we discover previously undisclosed liabilities.***

 

Inorder to build our core technology platform, we have acquired severalbusinesses since our inception and we may acquire additional businesses in thefuture.  Our ability to grow throughacquisitions depends upon our ability to identify, negotiate, complete and integratesuitable acquisitions and to obtain any necessary financing.  Even if we complete acquisitions, we mayexperience:

 

•              difficulties in integrating any acquiredcompanies, personnel and products into our existing business;

 

•              delays in realizing projectedefficiencies, cost savings, revenue synergies and other benefits of theacquired company or products;

 

•              inaccurate assessment of undisclosed,contingent or other liabilities or problems;

 

•              diversion of our management’s time andattention from other business concerns;

 

•              limited or no direct prior experience innew markets or countries we may enter;

 

•              higher costs of integration than weanticipated; or

 

•              difficulties in retaining key employees of theacquired business who are necessary to manage these acquisitions.

 

Inaddition, an acquisition could materially impair our operating results andliquidity by causing us to incur debt or reallocate amounts of capital fromother operating initiatives or requiring us to amortize acquisition expensesand acquired assets or incur non-recurring charges as a result of incorrectestimates made in the accounting for acquisitions.  We may also discover deficiencies in internalcontrols, data adequacy and integrity, product quality, regulatory complianceand product liabilities which we did not uncover prior to our acquisition ofsuch businesses, which could result in us becoming subject to penalties orother liabilities.  Any difficulties inthe integration of acquired businesses or unexpected penalties or liabilitiesin connection with such businesses could have a material adverse effect on ourresults of operations and financial condition. These risks could be heightenedif we complete several acquisitions within a relatively short period of time.

 

***If MTI fails to timely report its financialresults or produce its financial statements, we may not be able to timelyreport our financial results or comply with Securities and Exchange Commissionreporting and certification requirements, and ourstock price may decline.***

 

As theowner of a controlling interest in MTI, we consolidate the financial results ofMTI in our consolidated financial statements. MTI accounted for a material portion of our net sales and gross profitin the six months ended July 3, 2005 and July 4, 2004. As a result, our abilityto report our financial results, produce our consolidated financial statementsand file required reports with the Securities and Exchange Commission, or theSEC, in a timely manner will require MTI to provide us with its financialresults and financial statements in a timely manner.  If MTI fails to timely produce its financialresults and financial statements, we may not be able to report our financialresults or comply with SEC reporting requirements.  In addition, if the officers of MTI are notable to make the certifications required under the Sarbanes-Oxley Act of 2002,or the Sarbanes-Oxley Act, and SEC rules, our officers may not be able to maketheir required certifications.  As aresult, we may be subject to SEC enforcement action and civil litigation, andour stock price may decline.

 

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***If we become profitable, we cannot assureyou that our net operating losses will be available to reduce our taxliability.***

 

Ourability to use, or the amount of, our net operating losses, may be limited orreduced.  The businesses purchased by usin 2001 and 2002 experienced “ownership changes” within the meaning ofSection 382 of the Internal Revenue Code. Generally, a change of more than 50 percentage points in theownership of a company’s shares, by value, over the three-year period ending onthe date the shares were acquired constitutes an ownership change, and theseownership changes limit our ability to use the acquired company’s net operatinglosses.  Furthermore, the number ofshares of our common stock issued in our initial public offering may besufficient, taking into account prior or future shifts in our ownership over athree-year period, to cause us to undergo an ownership change.  As a result, our ability to use our existingnet operating losses that are not currently subject to limitation to offsetU.S. federal taxable income if we become profitable may also become subject tosubstantial limitations.  Further, theamount of our net operating losses could be reduced if any tax deductions takenby us are limited or disallowed by the Internal Revenue Service.  All of these limitations could potentiallyresult in increased future tax liability for us.

 

***One of our principal stockholders and itsaffiliates will be able to influence matters requiring stockholder approval andcould discourage the purchase of our outstanding shares at a premium.***

 

As ofAugust 1, 2005, Warburg Pincus beneficially owned approximately 76% of ouroutstanding common stock.  Thisconcentration of ownership may have the effect of delaying, preventing ordeterring a change in control of our company, could deprive our stockholders ofan opportunity to receive a premium for their common stock as part of a sale ormerger of our company and may negatively affect the market price of our commonstock. Transactions that could be affected by this concentration of ownershipinclude proxy contests, tender offers, mergers or other purchases of commonstock that could give you the opportunity to realize a premium over thethen-prevailing market price for shares of our common stock.

 

As aresult of Warburg Pincus’ share ownership and representation on our board ofdirectors, Warburg Pincus will be able to influence all affairs and actions ofour company, including matters requiring stockholder approval, such as theelection of directors and approval of significant corporate transactions.  The interests of our principal stockholdermay differ from the interests of the other stockholders.  For example, Warburg Pincus could oppose athird party offer to acquire us that you might consider attractive, and thethird party may not be able or willing to proceed unless Warburg Pincussupports the offer.  In addition, if ourboard of directors supports a transaction requiring an amendment to ourcertificate of incorporation, Warburg Pincus is currently in a position todefeat any required stockholder approval of the proposed amendment.  If our board of directors supports anacquisition of us by means of a merger or a similar transaction, the vote ofWarburg Pincus alone is currently sufficient to approve or block thetransaction under Delaware law. In each of these cases and in similarsituations, you may disagree with Warburg Pincus as to whether the actionopposed or supported by Warburg Pincus is in the best interest of ourstockholders.

 

***Our equity investors may have conflicts ofinterests with you or us in the future.***

 

Ourequity investors prior to our initial public offering, including WarburgPincus, may make investments in companies and from time to time acquire andhold interests in businesses that compete directly or indirectly with us.  These other investments may:

 

•              create competing financial demands on ourequity investors;

 

•              create potential conflicts of interest;and

 

•              require efforts consistent withapplicable law to keep the other businesses separate from our operations.

 

Theseequity investors may also pursue acquisition opportunities that may becomplementary to our business and, as a result, those acquisition opportunitiesmay not be available to us.  Furthermore,these equity investors may have an interest in our company pursuingacquisitions, divestitures, financings or other transactions that, in theirjudgment, could enhance their equity investment, even though such transactionsmight involve risks to our stockholders. In

 

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addition, these equity investors’ rights to vote or dispose ofequity interests in our company are not subject to restrictions in favor of ourcompany other than as may be required by applicable law.

 

***We are a “controlled company” within themeaning of the NASDAQ National Market System rules and, as a result, are exemptfrom certain corporate governance requirements.***

 

BecauseWarburg Pincus controls more than 50% of the voting power of our common stock,we are considered to a “controlled company” for the purposes of the NASDAQNational Market System quotation requirements. As such, we are permitted, and have elected, to opt out of the NASDAQNational Market System quotation requirements that would otherwise require ourboard of directors to have a majority of independent directors, our boardnominations to be selected, or recommended for the board’s selection either bya nominating committee comprised entirely of independent directors or by amajority of our independent directors and our compensation committee to becomprised entirely of independent directors. Accordingly, you may not have the same protections afforded tostockholders of companies that are subject to all of the NASDAQ National MarketSystem corporate governance requirements.

 

***Our corporate documents and Delaware lawcontain provisions that could discourage, delay or prevent a change in controlof our company.***

 

Provisionsin our amended and restated certificate of incorporation and amended andrestated bylaws may discourage, delay or prevent a merger or acquisitioninvolving us that our stockholders may consider favorable.  For example, our amended and restatedcertificate of incorporation authorizes our board of directors to issue up to100 million shares of “blank check” preferred stock.  Without stockholder approval, the board ofdirectors has the authority to attach special rights, including voting anddividend rights, to this preferred stock. With these rights, preferred stockholders could make it more difficultfor a third party to acquire us.  Inaddition, our amended and restated certificate of incorporation provides for astaggered board of directors, whereby directors serve for three year terms,with approximately one third of the directors coming up for reelection eachyear.  Having a staggered board will makeit more difficult for a third party to obtain control of our board of directorsthrough a proxy contest, which may be a necessary step in an acquisition of usthat is not favored by our board of directors.

 

We arealso subject to the anti-takeover provisions of Section 203 of theDelaware General Corporation Law.  Under theseprovisions, if anyone becomes an “interested stockholder,” we may not enterinto a “business combination” with that person for three years without specialapproval, which could discourage a third party from making a takeover offer andcould delay or prevent a change of control. For purposes of Section 203, “interested stockholder” means,generally, someone owning 15% or more of our outstanding voting stock or anaffiliate of ours that owned 15% or more of our outstanding voting stock duringthe past three years, subject to certain exceptions as described inSection 203.  Underone such exception, Warburg Pincus does not constitute an “interestedstockholder.”

 

***The requirements of being a public companymay strain our resources and distract management.***

 

As apublic company, we are subject to the reporting requirements of the SecuritiesExchange Act of 1934, as amended, or the Exchange Act, and the Sarbanes-OxleyAct.  These requirements may place astrain on our people, systems and resources. The Exchange Act requires that we file annual, quarterly and currentreports with respect to our business and financial condition.  The Sarbanes-Oxley Act requires that wemaintain effective disclosure controls and procedures and internal controlsover financial reporting.  In order tomaintain and improve the effectiveness of our disclosure controls andprocedures and internal controls over financial reporting, significantresources and management oversight will be required.  This may divert management’s attention fromother business concerns, which could have a material adverse effect on ourbusiness, financial condition, results of operations and cash flows.

 

***We will incur increased costs as a resultof being a public company.***

 

As apublic company, we will incur significant legal, accounting and other expensesthat we did not incur as a private company. In addition, the Sarbanes-Oxley Act, as well as new rules subsequentlyimplemented by the SEC and the NASDAQ National Market System, have required changes in corporate governance practices ofpublic

 

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companies.  We expectthese new rules and regulations to increase our legal and financial compliancecosts significantly and to make some activities more time-consuming andcostly.  For example, in anticipation ofbecoming a public company, we created additional board committees and adoptedpolicies regarding internal controls and disclosure controls and procedures.  In addition, we will incur additional costsassociated with our public company reporting requirements.  We may need to hire additional accounting andfinancial staff with appropriate public company experience and technicalaccounting knowledge, and we cannot assure you that we will be able to do so ina timely fashion or without incurring material costs.  We also expect these new rules andregulations to make it more difficult and more expensive for us to obtaindirector and officer liability insurance and we may be required to acceptreduced policy limits and coverage or incur substantially higher costs toobtain the same or similar coverage.  Asa result, it may be more difficult for us to attract and retain qualifiedpersons to serve on our board of directors or as executive officers.  We are currently evaluating and monitoringdevelopments with respect to these new rules, and we cannot predict or estimatethe amount of additional costs we may incur or the timing of such costs.

 

***If we are unable to successfully addressthe material weakness in our internal controls, our ability to report ourfinancial results on a timely and accurate basis may be adversely affected.***

 

Inconnection with their audits of our consolidated financial statements for theyears ended December 31, 2003 and 2004, our independent registered publicaccounting firm reported two conditions, which together constituted a materialweakness in the internal controls over our ability to produce financialstatements free from material misstatements. A material weakness is a control deficiency, or combination of controldeficiencies, that results in more than a remote likelihood that a materialmisstatement of the annual or interim financial statements will not beprevented or detected.  Our independentregistered public accounting firm reported to us that we did not have asufficient number of senior level financial personnel, and our controls overnon-routine transactions did not ensure that accounting considerations wereidentified and appropriately recorded. These two conditions, in combination, constituted a material weakness inour internal controls.

 

Ourmanagement and audit committee agreed that the conditions identified by ourindependent registered public accounting firm constituted a materialweakness.   We developed a plan toaddress this material weakness that included the addition of a new chieffinancial officer, a director of external reporting and additional professionalaccounting personnel.  On an interimbasis, the Company engaged two senior financial consultants in the fourth quarterof 2004 to provide an immediate expansion in our technical finance andaccounting resources.  These individualswere retained through June 2005 to ensure adequate time for transition to ournew full-time employees.  During the sixmonths ended July 3, 2005, we hired a new chief financial officer, effectiveApril 2005, who has 19 years of experience in the medical devicemanufacturing industry working for both public and private companies.  We also hired a new controller in April 2005,who came to us from a Big Four public accounting firm and has significantexperience in both public and private accounting.  The controller oversees external reportingwith assistance from a newly promoted senior analyst. Our prior controller, whohas been with us for approximately four years, has become our Director ofInternational Finance.  In May 2005, weadded an additional senior staff level accounting position.   With the addition of these individuals, webelieve that we have sufficient, skilled personnel to reasonably ensure that wehave the ability to produce financial statements free from materialmisstatements.  We have also engaged aconsulting firm to assist us in assessing our system of internal controls andremediating any control deficiencies. We will continue to assess the adequacyand appropriateness of our financial staff and adjust accordingly as changes inour business warrant.

 

Exceptas described above, there was no change in our internal control over financialreporting that occurred during our quarter ended July 3, 2005 that hasmaterially affected, or is reasonably likely to materially affect our internalcontrol over financial reporting.

 

Wehave had only limited operating experience with the remedial measures we havemade to date and we cannot provide assurance that the measures we have taken todate or any future measures will adequately remediate the material weaknessreported by our independent registered public accounting firm. In addition, wecannot be certain that additional material weaknesses in our internal controlswill not be discovered in the future. Any failure to remediate the material weakness reported by ourindependent registered public accounting firm or to implement required new orimproved controls, or difficulties encountered in their implementation, couldharm our operating results, cause us to fail to meet our reporting obligationsor result in material misstatements in our consolidated

 

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financial statements. Any such failure also could adversely affect the results of the periodicmanagement evaluations and annual auditor attestation reports regarding theeffectiveness of our “internal control over financial reporting” that will berequired when the Securities and Exchange Commission’s rules underSection 404 of the Sarbanes-Oxley Act become applicable to us beginningwith our annual report on Form 10-K for the year ending December 31,2006 to be filed in early 2007. Inadequate internal controls could also cause investors to loseconfidence in our reported financial information, which could cause our stockprice to decline.

 

***We will be exposed to risks relating toevaluations of controls required by Section 404 of the Sarbanes-Oxley Act.***

 

Changinglaws, regulations and standards relating to corporate governance and publicdisclosure, including the Sarbanes-Oxley Act and related regulationsimplemented by the SEC and the NASDAQ National Market System, are creatinguncertainty for public companies, increasing legal and financial compliancecosts and making some activities more time consuming.  We will be evaluating our internal controlssystems to allow management to report on, and our independent auditors toattest to, our internal controls.  Wewill be performing the system and process evaluation and testing (and anynecessary remediation) required to comply with the management certification andauditor attestation requirements of Section 404 of the Sarbanes-OxleyAct.  While we anticipate being able tofully implement the requirements relating to internal controls and all otheraspects of Section 404 by our December 31, 2006 deadline, we cannotbe certain as to the timing of completion of our evaluation, testing andremediation actions or the impact of the same on our operations since there ispresently no precedent available by which to measure compliance adequacy.  If we are not able to implement therequirements of Section 404 in a timely manner or with adequatecompliance, we may be subject to sanctions or investigation by regulatoryauthorities, including the SEC or the NASDAQ National Market System.  This type of action could adversely affectour financial results or investors’ confidence in our company and our abilityto access capital markets, and could cause our stock price to decline.  In addition, the controls and procedures thatwe will implement may not comply with all of the relevant rules and regulationsof the SEC and the NASDAQ National Market System.  If we fail to develop and maintain effectivecontrols and procedures, we may be unable to provide the required financialinformation in a timely and reliable manner.

 

**ITEM 3.**** ****QUANTITATIVE ANDQUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

We areexposed to various market risks, which are potential losses arising fromadverse changes in market rates and prices, such as interest rates and foreignexchange fluctuations.  We do not enterinto derivatives or other financial instruments for trading or speculativepurposes.

 

***Interest Rate Risk***

 

Wecurrently have little exposure to a change in interest rates.  Our borrowings to date have all been at afixed rate of interest.  We have novariable rate debt or lease obligations.

 

***Foreign Currency Exchange Rate Risk***

 

Fluctuationsin the rate of exchange between the U.S. dollar and foreign currencies couldadversely affect our financial results. In the three and six months ended July 3, 2005, approximately 37% and38%, respectively, of our net sales were denominated in foreign currencies.  We expect that foreign currencies willcontinue to represent a similarly significant percentage of our net sales inthe future.  Selling, marketing andadministrative costs related to these sales are largely denominated in the samerespective currency, thereby limiting our transaction risk exposure.  We therefore believe that the risk of asignificant impact on our operating income from foreign currency fluctuationsis minimal.  However, for sales notdenominated in U.S. dollars, if there is an increase in the rate at which aforeign currency is exchanged for U.S. dollars, it will require more of theforeign currency to equal a specified amount of U.S. dollars than before therate increase.  In such cases and if weprice our products in the foreign currency, we will receive less in U.S.dollars than we did before the rate increase went into effect.  If we price our products in U.S. dollars andcompetitors price their products in local currency, an increase in the relativestrength of the U.S. dollar could result in our price not being competitive ina market where business is transacted in the local currency.

 

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Approximately67% and 68% of our net sales denominated in foreign currencies in the three andsix months ended July 3, 2005, respectively, were derived from European Unioncountries and were denominated in the Euro. Additionally, we have significant intercompany receivables from ourforeign subsidiaries, which are denominated in foreign currencies, principallythe Euro.  Our principal exchange raterisk therefore exists between the U.S. dollar and the Euro.  Fluctuations from the beginning to the end ofany given reporting period result in the remeasurement of our foreigncurrency-denominated receivables and payables, generating currency transactiongains or losses that impact our non-operating income/expense levels in therespective period and are reported in other (income) expense, net in ourconsolidated financial statements.  Werecorded a $1.9 million and $3.1 million foreign currency transaction loss inthe three and six months ended July 3, 2005, respectively, related to thetranslation of our foreign denominated net receivables into U.S. dollars.  We do not currently hedge our exposure toforeign currency exchange rate fluctuations. We may, however, hedge such exposure to foreign currency exchange ratesin the future.

 

**ITEM 4.****                 ****CONTROLS AND PROCEDURES**

 

**Evaluation of Disclosure Controls and Procedures**

 

Wemaintain disclosure controls and procedures (as defined in Rules 13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934, as amended) that aredesigned to ensure that information required to be disclosed by us in thereports we file or submit under the Securities Exchange Act of 1934, asamended, is recorded, processed, summarized, and reported, within the timeperiods specified in the Securities and Exchange Commission’s rules and formsand that such information is accumulated and communicated to our management,including our principal executive and principal financial officers, or personsperforming similar functions, as appropriate to allow timely decisionsregarding required disclosure.  Indesigning and evaluating the disclosure controls and procedures, we recognizethat any controls and procedures, no matter how well designed and operated canprovide only reasonable assurance of achieving the desired control objectivesand we necessarily are required to apply our judgment in evaluating thecost-benefit relationship of possible controls and procedures.  Our management evaluated, with theparticipation of our Chief Executive Officer and Chief Financial Officer, theeffectiveness of the design and operation of our disclosure controls andprocedures as of the end of the period covered in this quarterly report on Form10-Q.  Based on that evaluation, ourChief Executive Officer and Chief Financial Officer concluded that ourdisclosure controls and procedures were effective as of the end of such period.

 

**Changes in Internal Control OverFinancial Reporting**

 

Inconnection with their audits of our consolidated financial statements for theyears ended December 31, 2003 and 2004, our independent registered publicaccounting firm reported two conditions, which together constitute a materialweakness in the internal controls over our ability to produce financialstatements free from material misstatements. Our independent registered public accounting firm reported to our boardof directors that we did not have a sufficient number of senior level financialpersonnel, and our controls over non-routine transactions did not ensure thataccounting considerations are identified and appropriately recorded.  These two conditions, in combination,constituted a material weakness in our internal controls.

 

Wedeveloped a plan to address this material weakness that included the additionof a new chief financial officer, a director of external reporting andadditional professional accounting personnel. On an interim basis, we engaged two senior financial consultants in thefourth quarter of 2004 to provide an immediate expansion in our technicalfinance and accounting resources.  Theseindividuals were retained through June 2005 to ensure adequate time fortransition to our new full-time employees. During the six months ended July 3, 2005, we hired a new chief financialofficer, effective April 2005, who has 19 years of experience in themedical device manufacturing industry working for both public and privatecompanies.  We also hired a newcontroller in April 2005, who came to us from a Big Four public accounting firmand has significant experience in both public and private accounting.  The controller oversees external reportingwith assistance from a newly promoted senior analyst.  Our prior controller, who has been with usfor approximately four years, has become our Director of InternationalFinance.  In May 2005, we added anadditional senior staff level accounting position.   With the addition of these individuals, webelieve that we have sufficient, skilled personnel to reasonably ensure that wehave the ability to produce financial statements free from materialmisstatements.  We have also engaged aconsulting firm to assist us in assessing our system of internal controls andremediating any control deficiencies.  We will continue to assess the adequacy and

 

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appropriateness of our financial staff and adjustaccordingly as changes in our business warrant. However, given the lack of tenure of these individuals with our company,we will need additional time in order to demonstrate that we have adequatelyremediated this material weakness.

 

Exceptas described above, there was no change in our internal control over financialreporting that occurred during our quarter ended July 3, 2005 that hasmaterially affected, or is reasonably likely to materially affect, our internalcontrol over financial reporting.

 

**PART II -OTHER INFORMATION**

 

**ITEM 1.****                 ****LEGAL PROCEEDINGS**

 

We arefrom time to time subject to, and are presently involved in, litigation orother legal proceedings.

 

InSeptember 2000, Dendron, which was acquired by MTI in 2002, was named asthe defendant in three patent infringement lawsuits brought by the Regents ofthe University of California, as the plaintiff, in the District Court(Landgericht) in Dusseldorf, Germany. The complaints requested a judgment that Dendron’s EDC I coil deviceinfringed three European patents held by the plaintiff and asked for relief inthe form of an injunction that would prevent Dendron from producing and sellingthe devices within Germany and selling from Germany to customers abroad, aswell as an award of damages caused by Dendron’s alleged infringement, and othercosts, disbursements and attorneys’ fees. In August 2001, the court issued a written decision that EDC I coildevices did infringe the plaintiff’s patents, enjoined Dendron from selling thedevices within Germany and from Germany to customers abroad, and requested thatDendron disclose the individual products’ costs as the basis for awardingdamages.  In September 2001, Dendronappealed the decision.  In addition,Dendron instituted challenges to the validity of each of these patents byfiling opposition proceedings with the European Patent Office, or EPO, againstone of the patents (MTI joined Dendron in this action in connection with itsacquisition of Dendron), and by filing, with MTI, nullity proceedings with theGerman Federal Patents Court against the German component of the other twopatents.  The opposition proceedings withthe EPO on the one patent are complete, and the EPO has rejected the oppositionand has upheld the validity of the one patent.

 

OnJuly 4, 2001, the University of California filed another suit againstDendron alleging that the EDC I coil device infringed another Europeanpatent held by the plaintiff.  Thecomplaint was filed in the District Court of Dusseldorf, Germany seekingadditional monetary and injunctive relief. In April 2002, the Court found that EDC I coil devices did infringethe plaintiff’s patent.  The patentinvolved is the same patent that was involved in the case before the EnglishPatents Court (see below) and that was ruled by a Dutch court to be invalid(see below).  The opposition proceedingson the patent are complete, and the EPO has rejected the opposition and hasupheld the validity of the patent.  Thecase is under appeal and an oral hearing is scheduled to be held in theDusseldorf Court of Appeal on March 9, 2006.

 

Anaccrual for the matters discussed above was included in the balance sheet ofDendron as of the date of its acquisition by MTI. As of July 3, 2005,approximately $800 thousand was recorded in accrued liabilities in ourconsolidated financial statements included in this report.  Dendron ceased all activities with respect tothe EDC I coil device prior to MTI’s October 2002 acquisition of Dendron.

 

Concurrentwith its acquisition of Dendron, MTI initiated a series of legal actionsrelated to its Sapphire coils in the Netherlands and the United Kingdom, whichincluded a cross-border action that was heard by a Dutch court, as furtherdescribed below.  The primary purpose ofthese actions was to assert both invalidity and non-infringement by MTI ofcertain patents held by others.  The rangeof patents at issue are held by the Regents of the University of California,with Boston Scientific Corporation subsidiaries named as exclusive licensees,collectively referred to as the “patent holders,” related to detachable coilsand certain delivery catheters.

 

InOctober 2003, the Dutch court ruled the three patents at issue related todetachable coils are valid and that MTI’s Sapphire coils do infringe suchpatents.  The Dutch court also ruled thatthe patent holders’ patent at issue related to the delivery catheter wasinvalid.  Under the court’s ruling, MTIhas been enjoined from engaging in infringing activities related to theSapphire coils in most countries within the European Union, and may be liablefor then-

 

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unspecified monetary damages for activities engaged in by MTI sinceSeptember 27, 2002.  InFebruary 2005, MTI received an initial claim from the patent holders withrespect to monetary damages, amounting to €3.6 million, or approximately$4.3 million as of July 3, 2005, with which MTI disagrees.  Court hearings will be held regarding theseclaims.  MTI has filed an appeal with theDutch court, and believes that since the date of injunction in each separatecountry it is in compliance with the Dutch court’s injunction and MTI intendsto continue such compliance. Because we believe that MTI has valid legalgrounds for appeal, we have determined that a loss is not probable at this timeas defined by SFAS 5, *Accounting forContingencies.*  However, therecan be no assurance that the ultimate resolution of this matter will not resultin a material adverse effect on our business, financial condition or results ofoperations.

 

InJanuary 2003, MTI initiated a legal action in the English Patents Courtseeking a declaration that a patent held by the patent holders related to deliverycatheters was invalid, and that MTI’s products did not infringe thispatent.  The patent in question was theU.K. designation of the same patent that was found by the Dutch court inOctober 2003 to be invalid, as discussed above.  The patent holders counterclaimed for allegedinfringement by MTI. In February 2005, the court approved an interimsettlement between the parties under which the patent holders are required tosurrender such patent to the U.K. Comptroller of Patents, and to pay MTI’scosts associated with the legal action, including interest.  As a result, MTI received interim paymentsfrom the patent holders aggregating £500 (equivalent to approximately $0.9million based on the dates of receipt), which MTI recorded as a reduction oflitigation expense upon receipt of such funds in February and March 2005.  The parties intend to continue discussionsregarding payment by the patent holders of the remaining costs incurred by MTIin such litigation.  As a result of theinterim settlement, MTI anticipates that it will no longer be involved inlitigation in the United Kingdom, although no assurance can be given that noother litigation involving MTI may arise in the United Kingdom.

 

In theUnited States, concurrent with the FDA’s marketing clearance of the Sapphireline of embolic coils received in July 2003, MTI initiated a declaratoryjudgment action against the patent holders in the United States District Courtfor the Western District of Wisconsin. The action included assertions of non-infringement by MTI and invalidityof a range of patents held by the patent holders related to detachable coilsand certain delivery catheters.  InOctober 2003, the court dismissed MTI’s actions for procedural reasonswithout prejudice and without decision as to the merits of the parties’positions.  In December 2003, theUniversity of California filed an action against MTI in the United StatesDistrict Court for the Northern District of California alleging infringement byMTI with respect to a range of patents held by the University of Californiarelated to detachable coils and certain delivery systems. MTI has filed acounterclaim against the University of California asserting non-infringement byMTI, invalidity of the patents and inequitable conduct in the procurement ofcertain patents.  In addition, MTI fileda claim against the University of California and Boston Scientific Corporationfor violation of federal antitrust laws, with the result that the court hassubsequently decided to add Boston Scientific as a party to thelitigation.  A trial date has not beenset. Because these matters are in early stages, we cannot estimate the possibleloss or range of loss, if any, associated with their resolution.  However, there can be no assurance that theultimate resolution of these matters will not result in a material adverseeffect on our business, financial condition or results of operations.

 

InMarch 2005, Medtronic, Inc. contacted us to express its view that our Protégéstents infringe on one or more of its patents. We informed Medtronic that wedisagree with its assertions, and have since had several discussions withMedtronic.  No lawsuit with respect tothis matter has been filed. We also received notice from an individual claimingthat he believes that our PLAATO device infringes on two of his patents.  We have informed this individual that we donot believe that our PLAATO device infringes on these patents.  On March 30, 2005, we were served with acomplaint by Boston Scientific Corporation and one of its affiliates whichclaims that some of our products, including our SpideRX Embolic ProtectionDevice, infringe certain of Boston Scientific’s patents.  This action was brought in the United StatesDistrict Court for the District of Minnesota. We have answered the complaint and intend to vigorously defend thisaction. Because these matters are in early stages, we cannot estimate thepossible loss or range of loss, if any, associated with their resolution.  However, there can be no assurance that theultimate resolution of these matters will not result in a material adverseeffect on our business, financial condition or results of operations.

 

Theacquisition agreement relating to our acquisition of Appriva Medical, Inc.contains four milestones to which payments relate.  The first milestonewas required by its terms to be achieved by January 1, 2005 in order totrigger a payment equal to $50 million.  We have determined that thefirst milestone was not achieved by January 1, 2005

 

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and that the first milestone is not payable.  On May20, 2005, Michael Lesh,  as an individual seller of Appriva stock andpurporting to represent certain other sellers of Appriva stock, fileda complaint in the Superior Court of the State of Delaware with individuallyspecified damages aggregating $70 million and other unspecified damagesfor several allegations, including that we, along with other defendants,breached the acquisition agreement and an implied covenant of good faith andfair dealing by willfully failing to take the steps necessary to meet the firstmilestone under the agreement, and thereby also failing to meet certain othermilestones, and further that one milestone was actually met.   Thecomplaint also alleges fraud, negligent misrepresentation and violation ofstate securities laws in connection with the negotiation of the acquisitionagreement.  We believe these allegations are without merit and intend tovigorously defend this action.  On August 5, 2005 our attorneys received aletter from attorneys representing certain other sellers of Appriva stock (whoare not purported to be represented in the action filed by Lesh), asking ourattorneys to enter into a dialogue regarding their assertions that certainmilestones should have been paid. We believe their assertions are withoutmerit. Failure to reach agreement with these new claimants on a resolution ofour differences could lead to additional litigation on this matter. Because these matters are in an early stages, we cannotestimate the possible loss or range of loss, if any, associated with theirresolution. However, there can be no assurance that the ultimate resolution ofthese matters will not result in a material adverse effect on our business,financial condition or results of operations.

 

**ITEM 2.****                 ****UNREGISTERED SALES OFEQUITY SECURITIES AND USE OF PROCEEDS**

 

**Recent Sales of Unregistered Equity Securities**

 

Pursuantto a contribution and exchange agreement dated as of April 4, 2005, onMay 26, 2005, ev3 LLC issued 13,808,832 common membership units toWarburg, Pincus Equity Partners, L.P. and certain of its affiliates, VerticalFund I, L.P. and Vertical Fund II, L.P. (collectively, the “Contributors”) inexchange for the contribution to ev3 LLC by the Contributors of an aggregate of9,704,819 shares of the common stock of MTI.

 

Pursuantto a merger agreement dated as of April 4, 2005, in connection with themerger of ev3 LLC with and into us, on June 21, 2005, we issued an aggregate of83,918,016 shares of our common stock to the holders of units of membershipinterests in ev3 LLC.

 

Pursuantto a note contribution and exchange agreement dated as of April 4, 2005,on June 21, 2005, we issued an aggregate of 23,159,304 shares of our commonstock to the Contributors in exchange for the contribution to us by theContributors of $316.0 million aggregate principal amount of demand notesof ev3 Endovascular, Inc., our wholly owned subsidiary, plus $8.2 millionof accrued and unpaid interest thereon.

 

Pursuantto the exercise of options to purchase membership units of ev3 LLC under theev3 LLC 2003 incentive plan, ev3 LLC issued 1,057 membership units to variouscurrent and former employees during the three months ended July 3, 2005. Thesemembership units were subsequently converted into shares of our common stock inconnection with the merger of ev3 LLC with and into us.

 

Exceptas described above, there were no other unregistered sales by us of equitysecurities during the quarter ended July 3, 2005.

 

No underwritingcommissions or discounts were paid with respect to the sales of theunregistered securities described above. In addition, all of the above sales were made in reliance on Rule 701,Regulation D and Section 4(2) under the Securities Act of 1933, as amended (the“Securities Act”).  With regard to ourreliance upon the exemptions under Regulation D and Section 4(2) under theSecurities Act, certain inquiries of the purchasers were made by us toestablish that such sales qualified for such exemptions from the registration requirements.  With regard to our reliance upon the Rule 701exemption, all such issuances were to employees, former employees orindependent consultants.

 

**Use of Proceeds**

 

OnJune 15, 2005,our registration statement on Form S-1 (Registration No. 333-123851) wasdeclared effective.  Pursuant to theregistration statement, we registered (1) 11,765,000 shares of our common stock, parvalue $0.01 per

 

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share, to be sold in our initial public offering and (2) 1,764,750 sharesof our common stock, all or a portion of which were to be sold upon theexercise of the underwriters’ over-allotment option (including up to 35,900shares to be sold by a selling stockholder).  On June 21, 2005, we completed the sale of 11,765,000shares of common stock to the public at an initial public offering price of $14.00 pershare.  Piper Jaffray & Co., Banc ofAmerica Securities LLC, Bear, Stearns & Co. Inc. and Thomas Weisel PartnersLLC acted as underwriters for our initial public offering.  On July 20, 2005, the underwriterspurchased an additional 205,800 shares of common stock from us and4,200 shares of common stock from the selling stockholder pursuant to theexercise of their over-allotment option. As a result, an aggregate of 11,975,000 shares of our common stock weresold before the termination of our initial public offering.  The aggregate public offering price for the11,970,800 shares of common stock sold by us and the 4,200 shares of commonstock sold by the selling stockholder was $167.6 million.  The underwriters received an underwritingdiscount of (1) $0.70 per share for the 11,765,000 shares sold by us on June21, 2005 and (2) $0.98 per share for the 205,800 sold by us and the 4,200shares sold by the selling stockholder on July 20, 2005 pursuant to theunderwriters’ over-allotment option.

 

Ourinitial public offering resulted in gross proceeds to us of $167.6million.  Expenses related to the initialpublic offering were as follows: approximately $8.4 million for underwriting discounts and commissionsand approximately $3.9 million for other expenses, for total expenses ofapproximately $12.3 million.  None of theoffering expenses resulted in direct or indirect payments to any of ourdirectors, officers or their associates, to persons owning 10% or more of ourcommon stock or to any of our affiliates. All of the offering expenses were paid to others.

 

Afterdeduction of offering expenses, we received net proceeds of approximately$155.3 million in our initial public offering, including shares sold by uspursuant to the underwriters’ over-allotment option.  As of July 3, 2005, the proceeds from ourinitial public offering and available cash were used as follows:  $36.5 million of the net proceeds were used torepay a portion of the accrued and unpaid interest on the demand notes and theremaining net proceeds were invested in short-term, investment-grade, interestbearing securities.  We cannot predictwhether the proceeds will yield a favorable return. Other than $36.5 million ofthe net proceeds used to repay a portion of the accrued and unpaid interest ondemand notes held by Warburg Pincus, which is our majority stockholder, andVertical, which is one of our stockholders, none of the net proceeds from ourinitial public offering have resulted in direct or indirect payments todirectors, officers or their associates, to persons who owned 10% or more ofour common stock or to any of our affiliates.

 

Weexpect to use the remaining $119 million in net proceeds from our initialpublic offering for general corporate purposes, which may include funding theoperations of MTI.  We do not currentlyhave any more specific plans with respect to the use of these net proceeds.  Our management has broad discretion as to theuse of the net proceeds.  While we have no present understandings,commitments or agreements to enter into any potential acquisitions, we may usea portion of the net proceeds for the acquisition of, or investment in,technologies or products that complement our business.  As required bySecurities and Exchange Commission regulations, we will provide further detailon our use of the net proceeds from our initial public offering in futureperiodic reports.

 

**Issuer Purchases of Equity Securities**

 

Wedid not purchase any shares of our common stock or other securities registeredpursuant to Sections 12 of the Securities Exchange Act of 1934, as amended,during the quarter ended July 3, 2005, and our board of directors has notauthorized any repurchase plan or program for purchase of our shares of commonstock or other securities on the open market or otherwise.

 

**ITEM 3.****                 ****DEFAULTS UPON SENIORSECURITIES**

 

Notapplicable.

 

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**ITEM 4.****                 ****SUBMISSION OF MATTERS TOA VOTE OF SECURITY HOLDERS**

 

Inconnection with our preparations for our initial public offering, ourstockholders took action by written consent pursuant to Section 228 of theDelaware General Corporation Law on three occasions during our quarter endedJuly 3, 2005.

 

On March1, 2005, ev3 LLC, our sole stockholder at that time, acted by written consentto: (1) approve our initial public offering; (2) approve the merger of ev3 LLCwith and into us and the related merger agreement; (3) approve a stockcontribution and exchange agreement pursuant to which certain of ev3 LLC’smembers agreed to contribute shares of common stock of MTI to ev3 LLC inexchange for membership units of ev3 LLC; (4) approve a note contribution andexchange agreement pursuant to which certain of ev3 LLC’s members agreed tocontribute to us demand notes of ev3 Endovascular, Inc. in exchange for sharesof our common stock; (5) increase the size of our board of directors from five(5) members to seven (7) members; and (6) approve the election of Haywood D.Cochrane and Douglas W. Kohrs to our board of directors, with James M. Corbett,Richard B. Emmitt, Dale A. Spencer, Thomas E. Timbie and Elizabeth H.Weatherman continuing as directors.

 

OnJune 6, 2005, ev3 LLC, our sole stockholder at that time, acted by writtenconsent to: (1) approve an Amended and Restated Certificate of Incorporationpursuant to which, among other things, we are authorized to issue 100,000,000shares of our common stock; (2) approve certain indemnification agreementsbetween us and each of our directors and executive officers and certain of ourother officers and employees; and (3) approve the ev3 Inc. 2005 Incentive StockPlan, a form of option grant notice and the reservation of 2,000,000 shares ofour common stock for issuance pursuant to grants made under the 2005 IncentiveStock Plan.

 

OnJune 21, 2005, stockholders holding 83,039,611outstanding shares of our common stock (on a pre-split basis),representing 99% of ouroutstanding shares of common stock at such time, acted by written consent toapprove a one for six reverse stock split of our common stock prior to theconsummation of our initial public offering and a Certificate of Amendment toour Amended and Restated Certificate of Incorporation effecting such reversestock split.

 

**ITEM 5.****                 ****OTHER INFORMATION**

 

OnJune 16, 2005, we entered into an Underwriting Agreement (the “UnderwritingAgreement”) with Piper Jaffray & Co. (“Piper Jaffray”) and Banc of AmericaSecurities LLC (“BAS” and together with Piper Jaffray, the “Representatives”)as representatives of the several underwriters (the “Underwriters”) named inSchedule A thereto and Dale A. Spencer, one of our directors, as a sellingstockholder (the “Selling Stockholder”). Pursuant to the Underwriting Agreement, among other things, we agreed toissue and sell to the Underwriters an aggregate of 11,765,000 shares of ourcommon stock, par value $0.01 per share, at a purchase price, after deductingunderwriting discounts and commissions, of $13.30 per share, in our initialpublic offering of our common stock.  Wealso granted the Underwriters an option to purchase up to 1,728,850 additionalshares of our common stock and the Selling Stockholder granted the Underwritersan option to purchase up to 35,900 shares of our common stock at a purchaseprice, after deducting underwriting discounts and commissions, of $13.02 pershare, to cover over-allotments, if any. On June 21, 2005, we closed our initial public offering, resulting innet proceeds to us of approximately $152.8 million, after deductingunderwriting discounts and commissions and estimated offering expenses.  Warburg Pincus and Vertical purchased3,196,750 and 168,250 shares of our common stock, respectively, in theoffering.  On July 15, 2005, theUnderwriters exercised a portion of the over-allotment option.  Pursuant to this exercise, on July 20, 2005,we sold an additional 205,800 shares of our common stock and the SellingStockholder sold 4,200 shares of our common stock at a purchase price of $13.02per share, resulting in additional net proceeds to us of approximately $2.5 million, after deductingunderwriting discounts and commissions and estimated offering expenses.

 

Asdescribed in our final prospectus in connection with our initial publicoffering, on June 21, 2005, we entered into a registration rights agreementwith certain of our stockholders, directors, officers and employees, including,among others, Warburg Pincus, The Vertical Group, Dale A. Spencer, James M.Corbett, Stacy Enxing Seng and L. Cecily Hines, who we refer to as the holders,with respect to shares of our common stock held by them. Pursuant to theregistration rights agreement, we agreed to:

 

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•      use our reasonable best efforts to effectup to two registered offerings of at least $10 million each upon thedemand of the holders of not less than a majority of the shares of our commonstock then held by the holders;

 

•      use our best efforts to effect up tothree registrations of at least $1 million each on Form S-3, once webecome eligible to use such form, if any holder so requests; and

 

•      maintain the effectiveness of each suchregistration statement for a period of 120 days or until the distributionof the registrable securities pursuant to the registration statement iscomplete.

 

Pursuantto the registration rights agreement, the holders also have incidental or “piggyback”registration rights with respect to any registrable shares, subject to certainvolume and marketing restrictions imposed by the underwriters of the offeringwith respect to which the rights are exercised. We also agreed to use our best efforts to qualify for the use ofForm S-3 for secondary sales.  Theserights were waived in connection with our initial public offering throughDecember 13, 2005, subject to extension in certain circumstances.  We agreed to bear the expenses, including thefees and disbursements of one legal counsel for the holders, in connection withthe registration of the registrable securities, except for any underwritingcommissions relating to the sale of the registrable securities.

 

OnAugust 16, 2005, our board of directors approved amendments (the “Amendments”)to Sections 3.01 and 3.02 of our amended and restated bylaws for the purpose ofreflecting the classification of our board of directors contained in ouramended and restated certificate of incorporation.  The Amendments were effective as of suchdate.  The Amendments are reflected inthe amended and restated bylaws filed as Exhibit 3.3 to this report, which areincorporated by reference herein.

 

**ITEM6.****                 ****EXHIBITS**

 

Thefollowing exhibits are being filed or furnished with this quarterly report onForm 10-Q:

 
| **Exhibit No.** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                         |
|-----------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2.1             |       | Agreement  and Plan of Merger, dated as of April 4, 2005, by and between ev3 LLC  and ev3 Inc. (Incorporated by reference to Exhibit 2.1 to ev3’s  Registration Statement on Form S-1 (File No. 333-123851), filed with the  Securities and Exchange Commission on April 5, 2005)                                                                                                   |
| 2.2             |       | Contribution  and Exchange Agreement, dated as of April 4, 2005, by and among the  institutional stockholders listed on Schedule I thereto, ev3 LLC,  ev3 Inc. and Micro Therapeutics, Inc. (Incorporated by reference to  Exhibit 2.2 to ev3’s Registration Statement on Form S-1 (File No. 333-123851),  filed with the Securities and Exchange Commission on April 5, 2005) |
| 2.3             |       | Note  Contribution and Exchange Agreement, dated as of April 4, 2005, by and  among the noteholders listed on Schedule I thereto and ev3 Inc.  (Incorporated by reference to Exhibit 2.3 to ev3’s Registration Statement on  Form S-1 (File No. 333-123851), filed with the Securities and Exchange  Commission on April 5, 2005)                                                   |
| 3.1             |       | Amended  and Restated Certificate of Incorporation of ev3 Inc. (Incorporated by  reference to Exhibit 3.1 to ev3’s Amendment No. 5 to Registration Statement  on Form S-1 (File No. 333-123851), filed with the Securities and Exchange  Commission on June 14, 2005)                                                                                                                         |
| 3.2             |       | Amendment  to Amended and Restated Certificate of Incorporation of ev3 Inc.  (Incorporated by reference to Exhibit 99.1 to ev3’s Current Report on Form  8-K (File No. 000-51348), filed with the Securities and Exchange Commission  on June 27, 2005)                                                                                                                                       |
| 3.3             |       | Amended  and Restated Bylaws of ev3 Inc. (Filed herewith)                                                                                                                                                                                                                                                                                                                                          |
| 4.1             |       | Form  of Stock Certificate (Incorporated by reference to Exhibit 4.1 to ev3’s  Amendment No. 4 to Registration Statement on Form S-1 (File No. 333-123851),  filed with the Securities and Exchange Commission on June 2, 2005)                                                                                                                                                                    |
| 4.2             |       | Registration  Rights Agreement, dated as of June 21, 2005, by and among ev3 Inc.,  Warburg, Pincus Equity Partners, L.P., Warburg, Pincus Netherlands  Equity Partners I, C.V., Warburg, Pincus Netherlands Equity  Partners III, C.V., Vertical Fund I, L.P., Vertical Fund II,  L.P. and certain other investors party thereto. (Filed herewith)                        |

 

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| **Exhibit No.** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                        |
|-----------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.1            |       | Underwriting  Agreement, dated as of June 16, 2005, by and among ev3 Inc., Piper Jaffray  & Co., Banc of America Securities LLC and Dale A. Spencer (Filed  herewith)                                                                                                                                                                                                                              |
| 10.2            |       | Corporate  Opportunity Agreement, dated as of April 4, 2005, by and among the  institutional stockholders listed on Schedule I thereto and  ev3 Inc. (Incorporated by reference to Exhibit 10.32 to ev3’s  Registration Statement on Form S-1 (File No. 333-123851), filed with the Securities  and Exchange Commission on April 5, 2005)                                          |
| 10.3            |       | First  Amendment to Amended and Restated Sales Representative Agreement, dated  April 6, 2005, by and between Micro Therapeutics, Inc. and ev3  International, Inc. (Incorporated by reference to Exhibit 10.52 to  Micro Therapeutics’ Current Report on Form 8-K (File  No. 000-06523), filed with the Securities and Exchange Commission on  April 7, 2005) |
| 10.4            |       | ev3  Inc. Amended and Restated 2005 Incentive Stock Plan (Filed herewith)                                                                                                                                                                                                                                                                                                                              |
| 10.5            |       | Loan  and Security Agreement, dated May 6, 2005, by and between Micro Therapeutics,  Inc. and Silicon Valley Bank (Incorporated by reference to Exhibit 10.56 to  Micro Therapeutics’ Current Report on Form 8-K (File No. 000-06523), filed  with the Securities and Exchange Commission on May 10, 2005)                                                                                        |
| 31.1            |       | Certification  of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act  of 2002 and SEC Rule 13a-14(a) (Filed herewith)                                                                                                                                                                                                                                                           |
| 31.2            |       | Certification  of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act  of 2002 and SEC Rule 13a-14(a) (Filed herewith)                                                                                                                                                                                                                                                           |
| 32.1            |       | Certification  of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted  Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Furnished  herewith)                                                                                                                                                                                                                              |
| 32.2            |       | Certification  of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted  Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Furnished  herewith)                                                                                                                                                                                                                              |

 

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**SIGNATURES**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned, hereuntoduly authorized.

 
| August  17, 2005 | **ev3 Inc.** |
|------------------|--------------|
|             |         |
|             | By:          | /s/  James M. Corbett |
|             |         | James  M. Corbett |
|             |         | President  and Chief Executive Officer |
|             |         | (principal  executive officer) |
|             |         |   |
|             | By:          | /s/  Patrick D. Spangler |
|             |         | Patrick  D. Spangler |
|             |         | Chief  Financial Officer and Treasurer |
|             |         | (principal  financial and accounting officer) |

 

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**ev3 Inc.QUARTERLY REPORT ON FORM 10-QEXHIBIT INDEX**

 
| **Exhibit No.** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                 | ** ** | **Method of Filing**                                                                                                                                                                                      |
|-----------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2.1             |       | Agreement  and Plan of Merger, dated as of April 4, 2005, by and between ev3 LLC and ev3  Inc.                                                                                                                                                                                                                                  |       | Incorporated by reference to Exhibit 2.1 to ev3’s Registration Statement  on Form S-1  (File No. 333-123851), filed with the Securities and Exchange Commissionon April 5, 2005                      |
| 2.2             |       | Contribution  and Exchange Agreement, dated as of April 4, 2005, by and among the  institutional stockholders listed on Schedule I thereto, ev3 LLC, ev3 Inc.  and Micro Therapeutics, Inc.                                                                                                                                     |       | Incorporated by reference to Exhibit 2.2 to ev3’s Registration  Statement on Form S-1  (File No. 333-123851), filed with the Securities and Exchange Commissionon April 5, 2005                      |
| 2.3             |       | Note  Contribution and Exchange Agreement, dated as of April 4, 2005, by and among  the noteholders listed on Schedule I thereto and ev3 Inc.                                                                                                                                                                                   |       | Incorporated by reference to Exhibit 2.3 to ev3’s Registration  Statement on Form S-1  (File No. 333-123851), filed with the Securities and Exchange Commissionon April 5, 2005                      |
| 3.1             |       | Amended  and Restated Certificate of Incorporation of ev3 Inc.                                                                                                                                                                                                                                                                  |       | Incorporated by reference to Exhibit 3.1 to ev3’s Amendment No. 5 to  Registration Statement on Form S-1 (File No. 333-123851), filed with the  Securities and Exchange Commission on  June 14, 2005 |
| 3.2             |       | Amendment  to Amended and Restated Certificate of Incorporation of ev3 Inc.                                                                                                                                                                                                                                                     |       | Incorporated by reference to Exhibit 99.1 to ev3’s Current Report on  Form 8-K  (File No. 000-51348), filed with the Securities and Exchange Commissionon June 27, 2005                              |
| 3.3             |       | Amended  and Restated Bylaws of ev3 Inc.                                                                                                                                                                                                                                                                                        |       | Filed herewith.                                                                                                                                                                                           |
| 4.1             |       | Form  of Stock Certificate                                                                                                                                                                                                                                                                                                      |       | Incorporated by reference to Exhibit 4.1 to ev3’s Amendment No. 4 to  Registration Statement on Form S-1 (File No. 333-123851), filed with the  Securities and Exchange Commission on  June 2, 2005  |
| 4.2             |       | Registration  Rights Agreement, dated as of June 21, 2005, by and among ev3 Inc., Warburg,  Pincus Equity Partners, L.P., Warburg, Pincus Netherlands Equity Partners I,  C.V., Warburg, Pincus Netherlands Equity Partners III, C.V., Vertical Fund I,  L.P., Vertical Fund II, L.P. and certain other investors party thereto |       | Filed herewith.                                                                                                                                                                                           |
| 10.1            |       | Underwriting  Agreement, dated as of June 16, 2005, by and among ev3 Inc., Piper Jaffray  & Co., Banc of America Securities LLC and Dale A. Spencer                                                                                                                                                                         |       | Filed herewith.                                                                                                                                                                                           |

 

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| **Exhibit No.** | ** ** | **Description**                                                                                                                                                    | ** ** | **Method of Filing**                                                                                                                                                                                                     |
|-----------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.2            |       | Corporate  Opportunity Agreement, dated as of April 4, 2005, by and among the  institutional stockholders listed on Schedule I thereto and ev3 Inc.                |       | Incorporated by reference to Exhibit 10.32 to ev3’s Registration  Statement on Form S-1  (File No. 333-123851), filed with the Securities and Exchange Commission on  April 5, 2005                                 |
| 10.3            |       | First  Amendment to Amended and Restated Sales Representative Agreement, dated April  6, 2005, by and between Micro Therapeutics, Inc. and ev3 International, Inc. |       | Incorporated by reference to Exhibit 10.52 to Micro Therapeutics’  Current Report on  Form 8-K (File No. 000-06523), filed with the Securities and  Exchange Commission  on  April 7, 2005 |
| 10.4            |       | ev3  Inc. Amended and Restated 2005 Incentive Stock Plan                                                                                                           |       | Filed herewith                                                                                                                                                                                                           |
| 10.5            |       | Loan  and Security Agreement, dated May 6, 2005, by and between Micro Therapeutics,  Inc. and Silicon Valley Bank                                                  |       | Incorporated by reference to Exhibit 10.56 to Micro Therapeutics’  Current Report on  Form 8-K (File No. 000-06523), filed with the Securities and Exchange  Commission  on May 10,  2005                      |
| 31.1            |       | Certification  of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act  of 2002 and SEC Rule 13a-14                                           |       | Filed herewith.                                                                                                                                                                                                          |
| 31.2            |       | Certification  of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act  of 2002 and SEC Rule 13a-14                                           |       | Filed herewith.                                                                                                                                                                                                          |
| 32.1            |       | Certification  of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted  Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                |       | Furnished herewith.                                                                                                                                                                                                      |
| 32.2            |       | Certification  of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted  Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                |       | Furnished herewith.                                                                                                                                                                                                      |

 

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