Table of Contents

 

 

 

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

**x****      QUARTERLY REPORT PURSUANT TOSECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**FOR THE QUARTERLY PERIODENDED JUNE 30, 2010.**

 

**OR**

 

**o****         TRANSITION REPORTPURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934**

 

**FOR THE TRANSITION PERIODFROM              TO             .**

 

**Commission File Number   0-18592**

 

**MERIT MEDICAL SYSTEMS, INC.**

(Exact name of Registrant as specified in its charter)

 

| **Utah**                                                       | ** ** | **87-0447695**              |
|----------------------------------------------------------------|------------|-----------------------------|
| (State or other jurisdiction of incorporation or organization) |       | (I.R.S. Identification No.) |

 

**1600 West Merit Parkway, South Jordan, UT, 84095**

(Address of Principal Executive Offices, including Zip Code)

 

**(801) 253-1600**

(Registrant’s telephone number, including area code)

 

Indicateby check mark whether the Registrant: (1) has filed all reports requiredto be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934during the preceding 12 months (or for such shorter period that the Registrantwas required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.  Yes x No o

 

Indicateby check mark whether the Registrant has submitted electronically and posted onits corporate web site, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T during thepreceding 12 months (or for such shorter period that the Registrant wasrequired to submit and post such files). Yes o No o

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. See definition of “largeaccelerated filer,” “accelerated filer” and “smaller reporting company” inRule 12b-2 of the Exchange Act.

 

| Large Accelerated Filer o |   | Accelerated Filer x         |
|--------------------------------|--------|----------------------------------|
|                           |   |                             |
| Non-Accelerated Filer o   |   | Smaller Reporting Company o |

 

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

 

Indicatethe number of shares outstanding of each of the Registrant’s classes of commonstock, as of the latest practicable date.

 

| **Common Stock** | ** ** | **28,217,846**                     |
|------------------|------------|------------------------------------|
| Title or class   |       | Number of Shares                   |
|             |       | Outstanding at August 3, 2010 |

 

 

 

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**MERIT MEDICAL SYSTEMS, INC.**

 

**INDEX TO FORM 10-Q**

 
| ** **                 | ** **                                                                                            | ** ** | **PAGE** |
|----------------------------|-------------------------------------------------------------------------------------------------------|------------|----------|
| **PART I.**           | **FINANCIAL INFORMATION**                                                                             |       |     |
| ** **                 | ** **                                                                                            |       |     |
| Item 1.                    | Financial Statements                                                                                  |       |     |
|                       |                                                                                                  |       |     |
|                       | Consolidated Balance Sheets as of  June 30, 2010 and December 31, 2009                      |       | 1        |
|                       |                                                                                                  |       |     |
|                       | Consolidated Statements of  Operations for the three and six months ended June 30, 2010 and 2009 |       | 3        |
|                       |                                                                                                  |       |     |
|                       | Consolidated Statements of  Cash Flows for the six months ended June 30, 2010 and 2009           |       | 4        |
|                       |                                                                                                  |       |     |
|                       | Condensed  Notes to Consolidated Financial Statements                                                 |       | 6        |
|                       |                                                                                                  |       |     |
| Item 2.                    | Management’s  Discussion and Analysis of Financial Condition and Results of Operations           |       | 12       |
|                       |                                                                                                  |       |     |
| Item 3.                    | Quantitative  and Qualitative Disclosures About Market Risk                                           |       | 17       |
|                       |                                                                                                  |       |     |
| Item 4.                    | Controls and  Procedures                                                                              |       | 17       |
|                       |                                                                                                  |       |     |
| **PART II.**          | **OTHER INFORMATION**                                                                                 |       |     |
| ** **                 | ** **                                                                                            |       |     |
| Item 1. Legal  Proceedings |                                                                                                  | 18         |
|                       |                                                                                                  |       |
| Item 1A. Risk Factors      |                                                                                                  | 18         |
|                       |                                                                                                  |       |
| Item 6. Exhibits           |                                                                                                  | 18         |
|                       |                                                                                                  |       |
| SIGNATURES                 |                                                                                                  | 19         |

 

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**Part I- FINANCIAL INFORMATION**

 

**ITEM 1. FINANCIAL STATEMENTS**

 

**MERIT MEDICAL SYSTEMS, INC.AND SUBSIDIARIES**

CONSOLIDATED BALANCE SHEETS

JUNE 30, 2010 AND DECEMBER 31, 2009

(In thousands - unaudited)

 
| ** **                                                                               | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                               | ** ** | **2010**          | ** ** | **2009**              | ** ** |
| ASSETS                                                                                   |       |              |       |                  |       |
|                                                                                     |       |              |       |                  |       |
| CURRENT  ASSETS:                                                                         |       |              |       |                  |       |
| Cash  and cash equivalents                                                               |       | $                 | 4,254      |                  | $          | 6,133 |   |
| Trade  receivables - net of allowances of $599 and $541, respectively                    |       | 37,010            |       | 30,954                |       |
| Employee  receivables                                                                    |       | 145               |       | 145                   |       |
| Other  receivables                                                                       |       | 447               |       | 827                   |       |
| Inventories                                                                              |       | 47,219            |       | 47,170                |       |
| Prepaid  expenses and other assets                                                       |       | 3,047             |       | 1,801                 |       |
| Deferred  income tax assets                                                              |       | 3,289             |       | 3,289                 |       |
| Income  tax refunds receivable                                                           |       | 177               |       | 295                   |       |
|                                                                                     |       |              |       |                  |       |
| Total  current assets                                                                    |       | 95,588            |       | 90,614                |       |
|                                                                                     |       |              |       |                  |       |
| PROPERTY  AND EQUIPMENT:                                                                 |       |              |       |                  |       |
| Land  and land improvements                                                              |       | 10,932            |       | 9,777                 |       |
| Building                                                                                 |       | 49,768            |       | 50,040                |       |
| Manufacturing  equipment                                                                 |       | 83,997            |       | 77,069                |       |
| Furniture  and fixtures                                                                  |       | 17,215            |       | 15,586                |       |
| Leasehold  improvements                                                                  |       | 11,870            |       | 10,280                |       |
| Construction-in-progress                                                                 |       | 11,609            |       | 13,968                |       |
|                                                                                     |       |              |       |                  |       |
| Total                                                                                    |       | 185,391           |       | 176,720               |       |
| Less  accumulated depreciation                                                           |       | (67,319           | )          | (62,074               | )          |
|                                                                                     |       |              |       |                  |       |
| Property  and equipment—net                                                         |       | 118,072           |       | 114,646               |       |
|                                                                                     |       |              |       |                  |       |
| OTHER  ASSETS:                                                                           |       |              |       |                  |       |
| Other  intangibles - net of accumulated amortization of $6,782 and $5,450,  respectively |       | 26,958            |       | 26,898                |       |
| Goodwill                                                                                 |       | 33,002            |       | 33,002                |       |
| Other  assets                                                                            |       | 6,592             |       | 6,353                 |       |
|                                                                                     |       |              |       |                  |       |
| Total  other assets                                                                      |       | 66,552            |       | 66,253                |       |
|                                                                                     |       |              |       |                  |       |
| TOTAL  ASSETS                                                                            |       | $                 | 280,212    |                  | $          | 271,513 |   |

 
| See notes to consolidated  financial statements. |   | (Continued) |
|--------------------------------------------------|--------|-------------|

 

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**MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES**

CONSOLIDATED BALANCE SHEETS

JUNE 30, 2010 AND DECEMBER 31, 2009

(In thousands - unaudited)

 
| ** **                                                                                                                                                 | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                 | ** ** | **2010**          | ** ** | **2009**              | ** ** |
| LIABILITIES  AND STOCKHOLDERS’ EQUITY                                                                                                                 |       |              |       |                  |       |
|                                                                                                                                                       |       |              |       |                  |       |
| CURRENT  LIABILITIES:                                                                                                                                      |       |              |       |                  |       |
| Trade  payables                                                                                                                                            |       | $                 | 13,456     |                  | $          | 13,352 |   |
| Accrued  expenses                                                                                                                                          |       | 14,309            |       | 12,196                |       |
| Line  of credit                                                                                                                                            |       |              |       | 7,000                 |       |
| Advances  from employees                                                                                                                                   |       | 645               |       | 212                   |       |
| Income  taxes payable                                                                                                                                      |       | 2,246             |       | 148                   |       |
|                                                                                                                                                       |       |              |       |                  |       |
| Total  current liabilities                                                                                                                                 |       | 30,656            |       | 32,908                |       |
|                                                                                                                                                       |       |              |       |                  |       |
| DEFERRED  INCOME TAX LIABILITIES                                                                                                                           |       | 11,068            |       | 11,251                |       |
|                                                                                                                                                       |       |              |       |                  |       |
| LIABILITIES  RELATED TO UNRECOGNIZED TAX BENEFITS                                                                                                          |       | 2,945             |       | 2,945                 |       |
|                                                                                                                                                       |       |              |       |                  |       |
| DEFERRED  COMPENSATION PAYABLE                                                                                                                             |       | 3,417             |       | 3,382                 |       |
|                                                                                                                                                       |       |              |       |                  |       |
| DEFERRED  CREDITS                                                                                                                                          |       | 1,817             |       | 1,874                 |       |
|                                                                                                                                                       |       |              |       |                  |       |
| OTHER  LONG-TERM OBLIGATIONS                                                                                                                               |       | 263               |       | 344                   |       |
|                                                                                                                                                       |       |              |       |                  |       |
| Total  liabilities                                                                                                                                         |       | 50,166            |       | 52,704                |       |
|                                                                                                                                                       |       |              |       |                  |       |
| STOCKHOLDERS’  EQUITY:                                                                                                                                |       |              |       |                  |       |
| Preferred  stock—5,000 shares authorized as of June 30, 2010 and December 31,  2009; no shares issued                                       |       |              |       |                  |       |
| Common  stock—no par value; 100,000 shares authorized; 28,205 and 28,181 shares  issued at June 30, 2010 and December 31 2009, respectively |       | 64,724            |       | 63,690                |       |
| Retained  earnings                                                                                                                                         |       | 165,427           |       | 155,204               |       |
| Accumulated  other comprehensive loss                                                                                                                      |       | (105              | )          | (85                   | )          |
|                                                                                                                                                       |       |              |       |                  |       |
| Total  stockholders’ equity                                                                                                                           |       | 230,046           |       | 218,809               |       |
|                                                                                                                                                       |       |              |       |                  |       |
| TOTAL  LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                                           |       | $                 | 280,212    |                  | $          | 271,513 |   |

 
| See notes to consolidated  financial statements. |   | (Concluded) |
|--------------------------------------------------|--------|-------------|

 

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**MERIT MEDICAL SYSTEMS, INC.AND SUBSIDIARIES**

CONSOLIDATED STATEMENTS OFOPERATIONS

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2010 AND 2009

(In thousands, except percommon share - unaudited)

 
| ** **                            | ** ** | **Three  Months Ended** | ** ** | **Six  Months Ended** | ** ** |
|---------------------------------------|------------|-------------------------|------------|-----------------------|------------|
| ** **                            | ** ** | **June 30,**       | ** ** | **June 30,**     | ** ** |
| ** **                            | ** ** | **2010**                | ** ** | **2009**              | ** ** | **2010** | ** ** | **2009** | ** ** |
|                                  |       |                    |       |                  |       |   |   |   |   |
| NET  SALES                            |       | $                       | 74,948     |                  | $          | 64,837 |   | $ | 142,380 |   | $ | 123,208 |   |
|                                  |       |                    |       |                  |       |   |   |   |   |
| COST  OF SALES                        |       | 42,490                  |       | 36,694                |       | 81,487 |   | 70,257 |   |
|                                  |       |                    |       |                  |       |   |   |   |   |
| GROSS  PROFIT                         |       | 32,458                  |       | 28,143                |       | 60,893 |   | 52,951 |   |
|                                  |       |                    |       |                  |       |   |   |   |   |
| OPERATING  EXPENSES:                  |       |                    |       |                  |       |   |   |   |   |
| Selling,  general, and administrative |       | 19,939                  |       | 16,287                |       | 38,971 |   | 31,116 |   |
| Research  and development             |       | 3,742                   |       | 2,893                 |       | 6,799 |   | 4,972 |   |
|                                  |       |                    |       |                  |       |   |   |   |   |
| Total  operating expenses             |       | 23,681                  |       | 19,180                |       | 45,770 |   | 36,088 |   |
|                                  |       |                    |       |                  |       |   |   |   |   |
| INCOME  FROM OPERATIONS               |       | 8,777                   |       | 8,963                 |       | 15,123 |   | 16,863 |   |
|                                  |       |                    |       |                  |       |   |   |   |   |
| OTHER  INCOME (EXPENSE):              |       |                    |       |                  |       |   |   |   |   |
| Interest  income                      |       | 12                      |       | 28                    |       | 20 |   | 150 |   |
| Other  income (expense)               |       | 50                      |       | (6                    | )          | 26 |   | 46 |   |
|                                  |       |                    |       |                  |       |   |   |   |   |
| Other  income - net                   |       | 62                      |       | 22                    |       | 46 |   | 196 |   |
|                                  |       |                    |       |                  |       |   |   |   |   |
| INCOME  BEFORE INCOME TAXES           |       | 8,839                   |       | 8,985                 |       | 15,169 |   | 17,059 |   |
|                                  |       |                    |       |                  |       |   |   |   |   |
| INCOME  TAX EXPENSE                   |       | 3,124                   |       | 3,144                 |       | 4,946 |   | 5,681 |   |
|                                  |       |                    |       |                  |       |   |   |   |   |
| NET  INCOME                           |       | $                       | 5,715      |                  | $          | 5,841 |   | $ | 10,223 |   | $ | 11,378 |   |
|                                  |       |                    |       |                  |       |   |   |   |   |
| EARNINGS  PER COMMON SHARE:           |       |                    |       |                  |       |   |   |   |   |
| Basic                                 |       | $                       | .20        |                  | $          | .21 |   | $ | .36 |   | $ | .41 |   |
| Diluted                               |       | $                       | .20        |                  | $          | .21 |   | $ | .36 |   | $ | .40 |   |
|                                  |       |                    |       |                  |       |   |   |   |   |
| AVERAGE  COMMON SHARES:               |       |                    |       |                  |       |   |   |   |   |
| Basic                                 |       | 28,194                  |       | 27,924                |       | 28,184 |   | 27,990 |   |
| Diluted                               |       | 28,729                  |       | 28,427                |       | 28,740 |   | 28,487 |   |

 

Seenotes to consolidated financial statements.

 

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**MERIT MEDICAL SYSTEMS, INC.AND SUBSIDIARIES**

CONSOLIDATED STATEMENTS OFCASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30, 2010 AND 2009

(In thousands - unaudited)

 
| ** **                                                                         | ** ** | **Six  Months Ended** | ** ** |
|------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                         | ** ** | **June 30,**     | ** ** |
| ** **                                                                         | ** ** | **2010**              | ** ** | **2009** | ** ** |
|                                                                               |       |                  |       |   |   |
| CASH  FLOWS FROM OPERATING ACTIVITIES:                                             |       |                  |       |   |   |
| Net  income                                                                        |       | $                     | 10,223     |   | $ | 11,378 |   |
| Adjustments  to reconcile net income to net cash provided by operating activities: |       |                  |       |   |   |
| Depreciation  and amortization                                                     |       | 6,673                 |       | 5,710 |   |
| Losses  on sales and/or abandonment of property and equipment                      |       | 280                   |       | 201 |   |
| Write-off  of certain patents and trademarks                                       |       | 24                    |       | 72 |   |
| Amortization  of deferred credits                                                  |       | (57                   | )          | (63 | ) |
| Purchase  of trading investments                                                   |       | (291                  | )          | (221 | ) |
| Net  unrealized (gains)/losses on trading investments                              |       | 76                    |       | (185 | ) |
| Deferred  income taxes                                                             |       | (17                   | )          |   |   |
| Stock-based  compensation                                                          |       | 606                   |       | 575 |   |
| Tax  benefit attritutable to appreciation of common stock options exercised        |       | (49                   | )          | (422 | ) |
| Changes  in operating assets and liabilities net of effects from acquisitions:     |       |                  |       |   |   |
| Trade  receivables                                                                 |       | (6,618                | )          | (1,662 | ) |
| Employee  receivables                                                              |       | (11                   | )          | (11 | ) |
| Other  receivables                                                                 |       | 344                   |       | 344 |   |
| Inventories                                                                        |       | (49                   | )          | (5,725 | ) |
| Prepaid  expenses and other assets                                                 |       | (1,282                | )          | (731 | ) |
| Income  tax refund receivable                                                      |       | 119                   |       | (41 | ) |
| Deposits                                                                           |       |                  |       | (18 | ) |
| Trade  payables                                                                    |       | 345                   |       | 3,509 |   |
| Accrued  expenses                                                                  |       | 1,968                 |       | 1,656 |   |
| Advances  from employees                                                           |       | 454                   |       | 210 |   |
| Income  taxes payable                                                              |       | 2,190                 |       | 2,212 |   |
| Deferred  compensation payable                                                     |       | 36                    |       | 388 |   |
| Other  long-term assets                                                            |       | (25                   | )          |   |   |
| Other  long-term obligations                                                       |       | (78                   | )          | (1 | ) |
|                                                                               |       |                  |       |   |   |
| Total  adjustments                                                                 |       | 4,638                 |       | 5,797 |   |
|                                                                               |       |                  |       |   |   |
| Net  cash provided by operating activities                                         |       | 14,861                |       | 17,175 |   |
|                                                                               |       |                  |       |   |   |
| CASH  FLOWS FROM INVESTING ACTIVITIES:                                             |       |                  |       |   |   |
| Capital  expenditures for:                                                         |       |                  |       |   |   |
| Property  and equipment                                                            |       | (8,764                | )          | (8,358 | ) |
| Patents  and trademarks                                                            |       | (545                  | )          | (782 | ) |
| Proceeds  from the sale of property and equipment                                  |       | 10                    |       | 15 |   |
| Cash  paid in acquisitions                                                         |       | (500                  | )          | (35,241 | ) |
|                                                                               |       |                  |       |   |   |
| Net  cash used in investing activities                                             |       | (9,799                | )          | (44,366 | ) |
|                                                                                    |            |                       |            |  |  |  |  |

 
| See notes to consolidated  financial statements. |   | (Continued) |
|--------------------------------------------------|--------|-------------|

 

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**MERIT MEDICAL SYSTEMS, INC.AND SUBSIDIARIES**

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30, 2010 AND 2009

(In thousands - unaudited)

 
| ** **                                                                               | ** ** | **Six  Months Ended** | ** ** |
|------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                               | ** ** | **June 30,**     | ** ** |
| ** **                                                                               | ** ** | **2010**              | ** ** | **2009** | ** ** |
|                                                                                     |       |                  |       |   |   |
| CASH  FLOWS FROM FINANCING ACTIVITIES:                                                   |       |                  |       |   |   |
| Proceeds  from issuance of common stock                                                  |       | $                     | 379        |   | $ | 385 |   |
| Additions  to long-term debt                                                             |       | 1,500                 |       | 10,000 |   |
| Payments  on long-term debt                                                              |       | (8,500                | )          | (10,000 | ) |
| Payment  of taxes related to an exchange of common stock                                 |       |                  |       | (254 | ) |
| Common  stock repurchased and retired                                                    |       |                  |       | (2,474 | ) |
| Excess  tax benefits from stock-based compensation                                       |       | 49                    |       | 422 |   |
|                                                                                     |       |                  |       |   |   |
| Net  cash used in financing activities                                                   |       | (6,572                | )          | (1,921 | ) |
|                                                                                     |       |                  |       |   |   |
| EFFECT  OF EXCHANGE RATES ON CASH                                                        |       | (369                  | )          | (45 | ) |
|                                                                                     |       |                  |       |   |   |
| NET  DECREASE IN CASH AND CASH EQUIVALENTS                                               |       | (1,879                | )          | (29,157 | ) |
|                                                                                     |       |                  |       |   |   |
| CASH  AND CASH EQUIVALENTS:                                                              |       |                  |       |   |   |
| Beginning  of period                                                                     |       | 6,133                 |       | 34,030 |   |
|                                                                                     |       |                  |       |   |   |
| End  of period                                                                           |       | $                     | 4,254      |   | $ | 4,873 |   |
|                                                                                     |       |                  |       |   |   |
| SUPPLEMENTAL  DISCLOSURES OF CASH FLOW INFORMATION—Cash paid during the period for: |       |                  |       |   |   |
| Interest                                                                                 |       | $                     | 47         |   | $ | 11 |   |
|                                                                                     |       |                  |       |   |   |
| Income  taxes                                                                            |       | $                     | 2,848      |   | $ | 3,526 |   |
|                                                                                     |       |                  |       |   |   |
| SUPPLEMENTAL  DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES                 |       |                  |       |   |   |
| Property  and equipment purchases in accounts payable                                    |       | $                     | 1,869      |   | $ | 1,576 |   |

 

During the six months ended June 30,2009, 23,829 shares of the Company’s common stock were surrendered in exchangefor the Company’s recording of payroll tax liabilities in the amount ofapproximately $254,000, related to the exercise of stock options.  The shares were valued based upon the closingprice of the Company’s common stock on the surrender date.

 

During the six months ended June 30,2009, 21,556 shares of the Company’s common stock, with a  value of approximately $230,000 weresurrendered in exchange for the exercise of stock options.

 
| See  notes to consolidated financial statements. |   | (Concluded) |
|--------------------------------------------------|--------|-------------|

 

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**MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES**

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

**1**.  **Basis of Presentation**. The interimconsolidated financial statements of Merit Medical Systems, Inc. (“Merit,”“we” or “us”) for the three and six-month periods ended June 30, 2010 and2009 are not audited. Our consolidated financial statements are prepared inaccordance with the requirements for unaudited interim periods, andconsequently, do not include all disclosures required to be made in conformitywith accounting principles generally accepted in the United States of America.In the opinion of management, the accompanying consolidated financial statementscontain all adjustments, consisting of normal recurring accruals, necessary fora fair presentation of our financial position as of June 30, 2010, and ourresults of operations and cash flows for the three and six-month periods ended June 30,2010 and 2009. The results of operations for the three and six-month periodsended June 30, 2010 are not necessarily indicative of the results for afull-year period.  These interimconsolidated financial statements should be read in conjunction with the financialstatements included in our Annual Report on Form 10-K for the year ended December 31,2009 filed with the Securities and Exchange Commission (the “SEC”).

 

**2.   Inventories**. Inventoriesare stated at the lower of cost or market. Inventories at June 30, 2010 and December 31, 2009 consistedof the following (in thousands):

 
| ** **      | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|-----------------|------------|-------------------|------------|-----------------------|------------|
| ** **      | ** ** | **2010**          | ** ** | **2009**              | ** ** |
| Finished  goods |       | $                 | 20,962     |                  | $          | 24,502 |   |
| Work-in-process |       | 8,449             |       | 5,542                 |       |
| Raw  materials  |       | 17,808            |       | 17,126                |       |
|            |       |              |       |                  |       |
| Total           |       | $                 | 47,219     |                  | $          | 47,170 |   |

 

 

**3.  ****ReportingComprehensive Income. **Comprehensiveincome for the three and six-month periods ended June 30, 2010 and 2009 consistedof net income and foreign currency translation adjustments.  As of  June 30,2010 and December 31, 2009, the cumulative effect of such adjustmentsdecreased stockholders’ equity by approximately $105,000 and approximately$85,000, respectively.  Comprehensiveincome for the three and six-month periods ended June 30, 2010 and 2009has been computed as follows (in thousands):

 
| ** **                    | ** ** | **Three  Months Ended** | ** ** | **Six  Months Ended** | ** ** |
|-------------------------------|------------|-------------------------|------------|-----------------------|------------|
| ** **                    | ** ** | **June 30,**       | ** ** | **June 30,**     | ** ** |
| ** **                    | ** ** | **2010**                | ** ** | **2009**              | ** ** | **2010** | ** ** | **2009** | ** ** |
| Net  income                   |       | $                       | 5,715      |                  | $          | 5,841 |   | $ | 10,223 |   | $ | 11,378 |   |
| Foreign  currency translation |       | 8                       |       | 62                    |       | (20 | ) | (7 | ) |
| Comprehensive  income         |       | $                       | 5,723      |                  | $          | 5,903 |   | $ | 10,203 |   | $ | 11,371 |   |

 

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**4.Stock-based****Compensation.**  Stock-basedcompensation expense for the three and six-month periods ended June 30,2010 and 2009 has been categorized as follows (in thousands):

 
| ** **                           | ** ** | **Three  Months Ended** | ** ** | **Six  Months Ended** | ** ** |
|--------------------------------------|------------|-------------------------|------------|-----------------------|------------|
| ** **                           | ** ** | **June 30,**       | ** ** | **June 30,**     | ** ** |
| ** **                           | ** ** | **2010**                | ** ** | **2009**              | ** ** | **2010** | ** ** | **2009** | ** ** |
| Cost  of sales                       |       | $                       | 45         |                  | $          | 43 |   | $ | 96 |   | $ | 93 |   |
| Research  and development            |       | 15                      |       | 14                    |       | 29 |   | 27 |   |
| Selling,  general and administrative |       | 242                     |       | 220                   |       | 481 |   | 455 |   |
| Stock-based  compensation            |       | $                       | 302        |                  | $          | 277 |   | $ | 606 |   | $ | 575 |   |

 

Theexcess income tax benefit created from the exercises of stock options was  $49,000 and $49,000 for the three andsix-month periods ended June 30, 2010, respectively, when compared to$50,000 and $422,000 for the three and six-month periods ended June 30,2009, respectively.  As of June 30, 2010, the totalremaining unrecognized compensation cost related to non-vested stock options,net of forfeitures, was approximately $4.0 million and is expected to berecognized over a weighted average period of 3.25 years. During the six monthperiod ended June 30, 2010, there were 100,000 stock award grants andduring the six months ended June 30, 2009, there were no stock awards.  We use the Black-Scholes methodology to valuethe stock-based compensation expense for options.  In applying the Black-Scholes methodology tothe option grants, we used the following assumptions:

 
| ** **                 | ** ** | **Six  Months**          | ** ** |
|----------------------------|------------|--------------------------|------------|
| ** **                 | ** ** | **Ended  June 30,** | ** ** |
| ** **                 | ** ** | **2010**                 | ** ** | **2009** | ** ** |
| Risk-free  interest rate   |       | 2.24                     | %          | N/A |   |
| Expected  option life      |       | 6.0                      |       | N/A |   |
| Expected  price volatility |       | 41.40                    | %          | N/A |   |

 

Forthe purpose of determining stock compensation for options, we estimate theaverage risk-free interest rate using the U.S. Treasury rate in effect as ofthe date of grant, based on the expected term of the stock option.  We estimate the expected term of the stockoptions using the historical exercise behavior of our employees.  We estimate the expected price volatilityusing a weighted average of daily historical volatility of our stock price overthe corresponding expected option life and implied volatility based on recenttrends of the daily historical volatility.

 

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**5. Shares Used in Computing NetIncome Per Share.**The following table sets forth the computation ofthe number of shares used in calculating basic and diluted net income  per share (in thousands, except per share amounts):

 
| ** **                                                                                                                             | ** ** | **Three  Months** | ** ** | **Six  Months** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------|------------|
| ** **                                                                                                                             | ** ** | **Net**           | ** ** | ** **      | ** ** | **Per  Share** | ** ** | **Net** | ** ** | ** ** | ** ** | **Per  Share** | ** ** |
| ** **                                                                                                                             | ** ** | **Income**        | ** ** | **Shares**      | ** ** | **Amount** | ** ** | **Income** | ** ** | **Shares** | ** ** | **Amount** | ** ** |
| Period  ended June 30, 2010:                                                                                                      |       |              |       |            |       |   |   |   |   |   |   |   |   |
| Basic  EPS                                                                                                                             |       | $                 | 5,715      |            | 28,194     |   | $ | 0.20 |   | $ | 10,223 |   | 28,184 |   | $ | 0.36 |   |
| Effect  of dilutive stock options and warrants                                                                                         |       |              |       | 535             |       |   |   |   |   | 556 |   |   |   |
|                                                                                                                                   |       |              |       |            |       |   |   |   |   |   |   |   |   |
| Diluted  EPS                                                                                                                           |       | $                 | 5,715      |            | 28,729     |   | $ | 0.20 |   | $ | 10,223 |   | 28,740 |   | $ | 0.36 |   |
|                                                                                                                                   |       |              |       |            |       |   |   |   |   |   |   |   |   |
| Weighted-average  shares under stock options excluded from the calculation of common stock equivalents  as the impact was antidilutive |       |              |       | 1,063           |       |   |   |   |   | 1,056 |   |   |   |
|                                                                                                                                   |       |              |       |            |       |   |   |   |   |   |   |   |   |
| Period  ended June 30, 2009:                                                                                                      |       |              |       |            |       |   |   |   |   |   |   |   |   |
| Basic  EPS                                                                                                                             |       | $                 | 5,841      |            | 27,924     |   | $ | 0.21 |   | $ | 11,378 |   | 27,990 |   | $ | 0.41 |   |
| Effect  of dilutive stock options and warrants                                                                                         |       |              |       | 503             |       |   |   |   |   | 497 |   |   |   |
|                                                                                                                                   |       |              |       |            |       |   |   |   |   |   |   |   |   |
| Diluted  EPS                                                                                                                           |       | $                 | 5,841      |            | 28,427     |   | $ | 0.21 |   | $ | 11,378 |   | 28,487 |   | $ | 0.40 |   |
|                                                                                                                                   |       |              |       |            |       |   |   |   |   |   |   |   |   |
| Weighted-average  shares under stock options excluded from the calculation of common stock equivalents  as the impact was antidilutive |       |              |       | 1,360           |       |   |   |   |   | 1,692 |   |   |   |

 

**6.Acquisitions.****  **On May 13, 2010, we signed adefinitive merger agreement to acquire all of the outstanding shares of  BioSphere Medical, Inc. (“Biosphere”)  in an all cash transaction valued atapproximately $96 million, inclusive of all common equity and Series A Preferredpreferences.  BioSphere develops andmarkets embolotherapeutic products for the treatment of uterine fibroids,hypervascularized tumors and arteriovenous malformations.  We anticipate that the proposed acquisitionof BioSphere, if completed, will give us a platform technology applicable tomultiple therapeutic areas with significant market potential while leveragingexisting interventional radiology call points. Two immediate applications for the embolotherapy are uterine fibroidsand primary liver cancer.  OnMay 12, 2010, we secured a commitment for a five-year senior unsecuredrevolving credit facility of up to $125 million.  The commitment of theprospective lenders to provide the credit facility is subject to a number ofcustomary conditions, including the negotiation and execution of definitivetransaction documents.  The proposedmerger remains subject to other customary closing conditions, including theapproval of BioSphere’s stockholders.  Itis anticipated that the transaction will close during the third calendarquarter of 2010.

 

On February 19, 2010, we entered into amanufacturing and technology license agreement with a medical devicemanufacturer for certain medical products. We made an initial payment of $250,000 in February of 2010, asecond payment of $250,000 in May of 2010 and have accrued an additional$500,000 in accrued expenses.  Theadditional payments are payable upon reaching certain milestones set forth inthe agreement.  We believe there is areasonable likelihood that we will be required to make those payments.  We have included the $1.0 million intangibleasset in license agreements and intend to amortize the asset over an estimatedlife of 10 years.

 

OnJune 2, 2009, we entered into an asset purchase agreement with HatchMedical, L.L.C., a Georgia limited liability corporation (“Hatch”), to purchasethe EN Snare® foreign body retrieval system. We paid $14 million in June 2009and an additional $7 million on December 31, 2009.  Our financial statements for the three and six-monthperiods ended June 30, 2009 reflect royalty income subsequent to theacquisition date of approximately $143,000 and net income of approximately $43,000, related to the Hatch  acquisition. The purchase price was allocated as follows (in thousands):

 

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| **Assets Acquired**     |   |   |   |
|-------------------------|--------|--------|--------|
| **Intangibles**         |   |   |   |
| Developed  technology   |   | $      | 8,100  |   |
| Customer  list          |   | 590    |   |
| Non-compete             |   | 240    |   |
| Trademark               |   | 650    |   |
| Goodwill                |   | 11,420 |   |
| Total  assets acquried  |   | 21,000 |   |
|                    |   |   |   |
| **Liabilities Assumed** |   | None   |   |
|                    |   |   |   |
| Net  assets acquired    |   | $      | 21,000 |   |

 

Withrespect to the assets we acquired from Hatch, we intend to amortize developedtechnology over 11 years and non-compete covenant over seven years.  While U.S. trademarks can be renewedindefinitely, we currently estimate that we will generate cash flow from theacquired trademarks for a period of 15 years from the acquisition date.

 

OnMarch 9, 2009, we entered into an asset purchase agreement withAlveolus, Inc., a North Carolina corporation (“Alveolus”), to purchasetheir non-vascular interventional stents used for esophageal, tracheobronchial,and biliary stenting procedures.  We paid Alveolus $19.1 million in March 2009.  The gross amount of trade receivables weacquired from Alveolus was approximately $1.0 million, of which $49,000 isexpected to be uncollectible.  Ourconsolidated financial statements for the three and six-month periods ended June 30,2009 reflect sales subsequent to the acquisition date of approximately $1.8million and $2.3 million, respectively, and a net loss of approximately$780,000 and $1.0 million (includes approximately $220,000 net of tax in legaland accounting costs incurred in the first quarter of 2009), respectively,related to our Alveolus acquisition.  Thepurchase price was allocated as follows (in thousands):

 
| **Assets Acquired**                  |   |   |   |
|--------------------------------------|--------|--------|--------|
| Inventories                          |   | $      | 1,741  |   |
| Trade  receivables                   |   | 974    |   |
| Other  assets                        |   | 241    |   |
| Property  and equipment              |   | 547    |   |
| **Intangibles**                      |   |   |   |
| Developed  technology                |   | 5,700  |   |
| Trademarks                           |   | 1,400  |   |
| Customer  lists                      |   | 1,100  |   |
| In-process  research and development |   | 400    |   |
| Goodwill                             |   | 8,028  |   |
| Total  assets acquired               |   | 20,131 |   |
|                                 |   |   |   |
| **Liabilities Assumed**              |   |   |   |
| Accounts  payable                    |   | 467    |   |
| Other  liabilities                   |   | 572    |   |
| Total  liabilities assumed           |   | 1,039  |   |
|                                 |   |   |   |
| Net  assets acquired                 |   | $      | 19,092 |   |

 

With respect to the assetswe acquired from Alveolus, we intend to amortize the developed technology andtrademarks over 15 years and customer lists on an accelerated basis over sevenyears.  We intend to amortize thein-process research and development over 15 years, which will begin if theresulting product is successfully launched in the market.  The acquired trademarks are scheduled forrenewal in 4.03 years (based on a weighted-average calculation, from June 30,2009 until the trademark renewal date). While U.S. trademarks can be renewed indefinitely, we currently estimatethat we will generate cash flow from the acquired trademarks for a period of 15years from the acquisition date.

 

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OnMarch 3, 2009, we paid $500,000 to GMA Company, Ltd (“GMA”) representingthe final payment due on our distribution agreement.  The total amount paid to GMA under thisagreement was approximately $2.0 million and was allocated as a distributionagreement.  We anticipate that the distributionagreement will be amortized over an estimated life of 11 years.

 

On February 19, 2009,we entered into an asset purchase and supply agreement with Biosearch MedicalProducts, Inc., a wholly-owned subsidiary of Hydromer, Inc., a NewJersey corporation (“Biosearch”), to purchase a bipolar coagulation probe andgrafted biliary stents.  We paid $1.1 million in February 2009and paid an additional $500,000 in June 2009.  Our consolidated financial statements for thethree and six-month periods ended June 30, 2009 reflect sales subsequentto the acquisition date of approximately $366,000 and $499,000, respectively,and net income of approximately $60,000 and $90,000, respectively, related tothe Biosearch acquisition.  The purchaseprice was allocated as follows (in thousands):

 
| **Assets Acquired**     |   |   |   |
|-------------------------|--------|--------|--------|
| Inventories             |   | $      | 188    |   |
| Property  and equipment |   | 31     |   |
| **Intangibles**         |   |   |   |
| Developed  technology   |   | 380    |   |
| Customer  lists         |   | 660    |   |
| Non-compete             |   | 25     |   |
| Goodwill                |   | 316    |   |
| Total  assets acquired  |   | 1,600  |   |
|                    |   |   |   |
| **Liabilities Assumed** |   | None   |   |
|                    |   |   |   |
| Net  assets acquired    |   | $      | 1,600  |   |

 

Withrespect to the assets we acquired from Biosearch, we intend to amortizedeveloped technology over 15 years, customer lists on an accelerated basis overeight years and a non-compete covenant over seven years.

 

The goodwill arising fromthe acquisitions discussed above consists largely of the synergies andeconomies of scale we hope to achieve from combining the acquired assets andoperations with our historical operations. The goodwill recognized from these acquisitions is expected to bedeductible for income tax purposes.

 

The following tablesummarizes our unaudited consolidated result of operations for the three andsix-month periods ended June 30, 2009, as well as the unaudited pro formaconsolidated results of operations as though the Hatch, Alveolus and Biosearchacquisitions had occurred on January 1, 2009:

 
| ** **                  | ** ** | **Three  Months Ended** | ** ** | **Six  Months Ended**   | ** ** |
|-----------------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **                  | ** ** | **June 30,  2009** | ** ** | **June 30,  2009** | ** ** |
| ** **                  | ** ** | **As  Reported**        | ** ** | **Pro  Forma**          | ** ** | **As  Reported** | ** ** | **Pro  Forma** | ** ** |
|                        |       |                    |       |                    |       |   |   |   |   |
| Sales                       |       | $                       | 64,837     |                    | $          | 65,091 |   | $ | 123,208 |   | $ | 125,660 |   |
| Net  income                 |       | 5,841                   |       | 5,912                   |       | 11,378 |   | 11,318 |   |
| Earnings  per common share: |       |                    |       |                    |       |   |   |   |   |
| Basic                       |       | $                       | .21        |                    | $          | .21 |   | $ | .41 |   | $ | .40 |   |
| Diluted                     |       | $                       | .21        |                    | $          | .21 |   | $ | .40 |   | $ | .40 |   |

 

The unaudited pro formacondensed consolidated income statements are for informational purposes onlyand should not be considered indicative of actual results that would have beenachieved if the Hatch, Alveolus and Biosearch acquisitions had been completedat the beginning of 2009, or results that may be obtained in any future period.

 

**7. Recent AccountingPronouncements.**In January 2010, the Financial AccountingStandards Board (“FASB”) issued additional guidance on fair value disclosures.The new guidance clarifies two existing disclosure requirements and requirestwo new disclosures as follows: (1) a “gross” presentation of activities(purchases, sales, and settlements) within the Level 3 rollforwardreconciliation, which will replace the “net” presentation format;

 

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and (2) detaileddisclosures about the transfers in and out of Level 1 and 2 measurements. Thisguidance is effective for the first interim or annual reporting periodbeginning after December 15, 2009, except for the gross presentation of theLevel 3 rollforward information, which is required for annual reporting periodsbeginning after December 15, 2010, and for interim reporting periodswithin those years. We adopted the fair value disclosure guidance onJanuary 1, 2010, except for the gross presentation of the Level 3rollforward information which we are not required to adopt untilJanuary 1, 2011.  The adoption ofthis guidance did not have a material effect on our consolidated financialstatements for the three and six-month periods ended June 30, 2010.

 

In October 2009, theFASB issued Accounting Standards Update (“ASU”) 2009-13, Revenue Recognition(Topic 605): *Multiple Deliverable RevenueArrangements — A Consensus of the FASB Emerging Issues Task Force.* This update provides application guidance onwhether multiple deliverables exist, how the deliverables should be separatedand how the consideration should be allocated to one or more units ofaccounting.  This update establishes aselling price hierarchy for determining the selling price of adeliverable.  The selling price used foreach deliverable will be based on vendor-specific objective evidence, ifavailable, third-party evidence if vendor-specific objective evidence is notavailable, or estimated selling price if neither vendor-specific or third-partyevidence is available.  We will berequired to apply this guidance prospectively for revenue arrangements enteredinto or materially modified after January 1, 2011; however, earlier applicationis permitted.  We do not expect the adoptionof this guidance to have a material effect on our consolidated financialstatements.

 

**8.  Income Taxes.**  Our effective tax rate forthe three months ended June 30, 2010 was 35.3%, relatively unchangedcompared to 35.0% for the corresponding period of 2009.  For the six months ended June 30, 2010,our effective tax rate was 32.6%, compared to 33.3% for the comparable periodof 2009.  The decrease in the effectivetax rate for the six-month period ended June 30, 2010, when compared tothe corresponding period of 2009, was primarily related to the profitability ofour Irish operations which are taxed at a lower tax rate than our U.S. andother foreign operations.

 

**9.   Fair Value Measurements**.  The fair value of afinancial instrument is the amount that could be received upon the sale of anasset or paid to transfer a liability in an orderly transaction between marketparticipants at the measurement date. Financial assets are marked to bid prices and financial liabilities aremarked to offer prices.  Fair valuemeasurements do not include transaction costs.  A fair value hierarchy isused to prioritize the quality and reliability of the information used todetermine fair values.  Categorizationwithin the fair value hierarchy is based on the lowest level of input that issignificant to the fair value measurement. The fair value hierarchy is defined into the following three categories:

 

Level 1: Quoted marketprices in active markets for identical assets or liabilities.

Level 2: Observable marketbased inputs or unobservable inputs that are corroborated by market data.

Level 3: Unobservable inputsthat are not corroborated by market

 

The following table providesour financial assets and liabilities carried at fair value measured on arecurring basis as of June 30, 2010 (in thousands):

 
| ** **                        | ** ** | ** **              | ** ** | **Fair  Value Measurements Using** | ** ** |
|-----------------------------------|------------|-------------------------|------------|------------------------------------|------------|
| ** **                        | ** ** | **Total  Fair**         | ** ** | **Quoted  prices in**              | ** ** | **Significant  other** | ** ** | **Significant** | ** ** |
| ** **                        | ** ** | **Value  at**           | ** ** | **active  markets**                | ** ** | **observable  inputs** | ** ** | **Unobservable  inputs** | ** ** |
| **Description**                   | ** ** | **June 30,  2010** | ** ** | **(Level  1)**                     | ** ** | **(Level  2)** | ** ** | **(Level  3)** | ** ** |
|                              |       |                    |       |                               |       |   |   |   |   |
| Deferred  compensation assets (1) |       | $                       | 3,559      |                               |       |   | $ | 3,559 |   |   |   |
|                                   |            |                         |            |                                    |            |  |  |  |  |  |  |

 

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(1)          The deferredcompensation investments are held in a Rabbi trust under an insurance-baseddeferred compensation plan.  Theinvestments of the Rabbi trust are valued based upon unit values multiplied bythe number of units held.  The unit valueis based upon the investment’s net asset value adjusted for some administrativefees.

 

Duringthe six months ended June 30, 2010, we had a write-off of approximately$24,000 related to the measurement of non-financial assets at fair value on anonrecurring basis subsequent to their initial recognition.

 

The carrying amount of cash and equivalents,receivables and trade payables approximates fair value.

 

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**10.  ****Goodwill and IntangibleAssets. ** There were no changes in the carrying amountof goodwill for the six months ended June 30, 2010.  Intangible assets at June 30, 2010 and December 31,2009, consisted of the following (in thousands):

 
| ** **                             | ** ** | **Jun 30, 2010** | ** ** | **December 31, 2009** | ** ** |
|----------------------------------------|------------|-----------------------|------------|----------------------------|------------|
| ** **                             | ** ** | **Gross**             | ** ** | ** **                 | ** ** | **Net** | ** ** | **Gross** | ** ** | ** ** | ** ** | **Net** | ** ** |
| ** **                             | ** ** | **Carrying**          | ** ** | **Accumulated**            | ** ** | **Carrying** | ** ** | **Carrying** | ** ** | **Accumulated** | ** ** | **Carrying** | ** ** |
| ** **                             | ** ** | **Amount**            | ** ** | **Amortization**           | ** ** | **Amount** | ** ** | **Amount** | ** ** | **Amortization** | ** ** | **Amount** | ** ** |
|                                   |       |                  |       |                       |       |   |   |   |   |   |   |   |   |
| Covenant  not to compete               |       | $                     | 315        |                       | $          | (47 | ) | $ | 268 |   | $ | 315 |   | $ | (25 | ) | $ | 290 |   |
| Customer  lists                        |       | 4,755                 |       | (2,725                     | )          | 2,030 |   | 4,755 |   | (2,380 | ) | 2,375 |   |
| Developed  technology                  |       | 17,384                |       | (1,145                     | )          | 16,239 |   | 17,513 |   | (535 | ) | 16,978 |   |
| Distribution  agreement                |       | 2,426                 |       | (512                       | )          | 1,914 |   | 2,400 |   | (385 | ) | 2,015 |   |
| In-process  research and development * |       | 400                   |       |                       |       | 400 |   | 400 |   |   |   | 400 |   |
| License  agreements                    |       | 1,428                 |       | (309                       | )          | 1,119 |   | 403 |   | (287 | ) | 116 |   |
| Patents                                |       | 4,227                 |       | (1,314                     | )          | 2,913 |   | 3,757 |   | (1,214 | ) | 2,543 |   |
| Royalty  agreements                    |       | 267                   |       | (240                       | )          | 27 |   | 267 |   | (213 | ) | 54 |   |
| Trademark                              |       | 2,538                 |       | (490                       | )          | 2,048 |   | 2,538 |   | (411 | ) | 2,127 |   |
|                                   |       |                  |       |                       |       |   |   |   |   |   |   |   |   |
| Total                                  |       | $                     | 33,740     |                       | $          | (6,782 | ) | $ | 26,958 |   | $ | 32,348 |   | $ | (5,450 | ) | $ | 26,898 |   |

 

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* In-process research anddevelopment was capitalized in connection with our acquisition ofAlveolus.  Our in-process research anddevelopment intangible is currently not subject to amortization butamortization will commence upon the related product launch.

 

The aggregate amortizationexpense for the six months ended June 30, 2010 was approximately $1.3million.

 

Estimated amortizationexpense for the intangible assets for the next five years consists of thefollowing (in thousands):

 
| Remaining  2010 |   | $     |       1,336 |   |
|-----------------|--------|-------|--------------------------------------|--------|
| 2011            |   | 2,387 |                                 |
| 2012            |   | 2,213 |                                 |
| 2013            |   | 2,183 |                                 |
| 2014            |   | 2,017 |                                 |

 

**ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTSOF OPERATIONS**

 

**Disclosure Regarding Forward-Looking Statements**

 

This Report includes “forward-lookingstatements” within the meaning of Section 27A of the Securities Act of1933, as amended, and Section 21E of the Securities Exchange Act of 1934,as amended (the “Exchange Act”).  Allstatements in this Report, other than statements of historical fact, areforward-looking statements for purposes of these provisions, including anyprojections of earnings, revenues or other financial items, any statements ofthe plans and objectives of management for future operations, any statementsconcerning proposed new products or services, any statements regarding futureeconomic conditions or performance, and any statements of assumptionsunderlying any of the foregoing.  Allforward-looking statements included in this Report are made as of the datehereof and are based on information available to us as of such date.  We assume no obligation to update any forward-lookingstatement.   In some cases,forward-looking statements can be identified by the use of terminology such as “may,”“will,” “expects,” “plans,” “anticipates,” “intends,” “believes,” “estimates,” “potential,” or “continue,” or thenegative thereof or other comparable terminology.  Although we believe that the expectationsreflected in the forward-looking statements contained herein are reasonable,there can be no assurance that any such expectations or any forward-lookingstatement will prove to be correct.  Ouractual results will vary, and may vary materially, from those projected orassumed in the forward-looking statements. Our financial condition and

 

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results of operations, aswell as any forward-looking statements, are subject to inherent risks anduncertainties, including, unanticipatedconsequences of Merit’s recent, proposed or future acquisitions; challengesassociated with Merit’s efforts to pursue new market opportunities, includingopportunities in the gastroenterology and pulmonary markets; infringementof Merit’s technology or the assertion that Merit’s technology infringes therights of other parties; product recalls and product liability claims; downturnof the national economy and its effect on Merit’s revenues, collections andsupplier relations; termination of supplier relationships, or failure ofsuppliers to perform; inability to successfully manage growth throughacquisitions; delays in obtaining regulatory approvals, or the failure tomaintain such approvals; concentration of Merit’s revenues among a few productsand procedures; development of new products and technology that could renderMerit’s products obsolete; market acceptance of new products; introduction ofproducts in a timely fashion; price and product competition; availability oflabor and materials; cost increases; and fluctuations in and obsolescence ofinventory; volatility of the market price of Merit’s common stock; foreigncurrency fluctuations; changes in key personnel; work stoppage ortransportation risks; modification or limitation of governmental or privateinsurance reimbursement procedures; changes in health care markets related tohealth care reform initiatives; and other factors referred to in our pressreleases and reports filed with the SEC, including our Annual Report on Form 10-Kfor the year ended December 31, 2009. All subsequent forward-lookingstatements attributable to us or persons acting on our behalf are expresslyqualified in their entirety by these cautionary statements.  Additional factors that may have a directbearing on our operating results are discussed in Part I, Item 1A “RiskFactors” in our Annual Report on Form 10-K for the year ended December 31,2009.

 

**Overview**

 

For the quarter ended June 30,2010, we reported record revenues of $74.9 million, up 16% from the quarterended June 30, 2009 of $64.8 million. Revenues for the six months ended June 30, 2010 were a record$142.4 million, compared with $123.2 million for the first six months of 2009,a gain of 16%.

 

Gross margins were 43.3% and42.8% of sales for the three and six-month periods ended June 30, 2010,respectively, compared to 43.4% and 43.0% of sales for the three and six-monthperiods ended June 30, 2009, respectively. The slight decrease in gross margins can be attributed primarily tohigher average fixed overhead unit costs as the result of higher productioncosts and a decrease in productivity as fixed costs are shared over a decreasednumber of units produced and an increase in material costs, all of which werepartially offset by an increase of approximately 1.0% in gross marginimprovement related primarily to the launch of our En Snare® device in January 2010.

 

Net income for the quarterended June 30, 2010 was $5.7 million, or $0.20 per share, compared to $5.8million, or $0.21 per share, for the comparable quarter of 2009.  Net income for the six-month period ended June 30,2010 was $10.2 million, down 10% to $0.36 per share, compared to $11.4 million,or $0.40 per share, for the comparable period of 2009. When compared to theprior year period, net income for the three and six month periods ended June 30,2010 was primarily affected by the cost of hiring additional sales andmarketing people in the U.S. and Europe, acquisition costs of approximately$1.1 million related to our proposed acquisition of BioSphere, increasedresearch and development expenses for the Endotek product line and a legalsettlement of approximately $477,000.

 

On May 13, 2010, wesigned a definitive merger agreement to acquire all of the outstanding sharesof BioSphere in an all cash transaction valued at approximately $96 million,inclusive of all common equity and Series A Preferred preferences.  BioSphere develops and marketsembolotherapeutic products for the treatment of uterine fibroids,hypervascularized tumors and arteriovenous malformations.  We anticipate that the proposed acquisitionof BioSphere will give us a platform technology applicable to multipletherapeutic areas with significant market potential while leveraging existinginterventional radiology call points. Two immediate applications for the embolotherapy are uterine fibroidsand primary liver cancer.  OnMay 12, 2010, we secured a commitment for a five-year senior unsecuredrevolving credit facility of up to $125 million.  The commitment of theprospective lenders to provide the credit facility is subject to a number ofcustomary conditions, including the negotiation and execution of definitivetransaction documents.  We anticipatethat the transaction will close during the third calendar quarter of 2010.

 

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**Results of Operations**

 

Thefollowing table sets forth certain operational data as a percentage of salesfor the three and six-month periods ended June 30, 2010 and 2009:

 
| ** **                                    | ** ** | **Three  Months Ended** | ** ** | **Six  Months Ended** | ** ** |
|-----------------------------------------------|------------|-------------------------|------------|-----------------------|------------|
| ** **                                    | ** ** | **June 30,**       | ** ** | **June 30,**     | ** ** |
| ** **                                    | ** ** | **2010**                | ** ** | **2009**              | ** ** | **2010** | ** ** | **2009** | ** ** |
| Sales                                         |       | 100.0                   | %          | 100.0                 | %          | 100.0 | % | 100.0 | % |
| Gross  profit                                 |       | 43.3                    |       | 43.4                  |       | 42.8 |   | 43.0 |   |
| Selling,  general and administrative expenses |       | 26.6                    |       | 25.1                  |       | 27.4 |   | 25.3 |   |
| Research  and development expenses            |       | 5.0                     |       | 4.5                   |       | 4.8 |   | 4.0 |   |
| Income  from operations                       |       | 11.7                    |       | 13.8                  |       | 10.6 |   | 13.7 |   |
| Other  income                                 |       | 0.1                     |       | 0.0                   |       | 0.0 |   | 0.2 |   |
| Net  income                                   |       | 7.6                     |       | 9.0                   |       | 7.2 |   | 9.2 |   |

 

Sales.  Sales for the three months ended June 30,2010 increased by 16%, or approximately $10.1 million, compared to thecorresponding period of 2009.   Sales forthe six months ended June 30, 2010 increased by 16%, or approximately$19.2 million, compared to the corresponding period of 2009.   We report sales in five productcategories.  Listed below are the salesrelating to these product categories for the three and six-month periods ended June 30,2010 and 2009 (in thousands):

 
| ** **                       | ** ** | **Three  Months Ended** | ** ** | **Six  Months Ended** | ** **    |
|----------------------------------|------------|-------------------------|------------|-----------------------|---------------|
| ** **                       | ** ** | **June 30,**       | ** ** | **June 30,**     | ** **    |
| ** **                       | ** ** | **%  Change**           | ** ** | **2010**              | ** **    | **2009** | ** ** | **%  Change** | ** ** | **2010** | ** ** | **2009** | ** ** |
| Stand-alone  devices             |       | 17                      | %          | $                     |   22,981 |   | $ |   19,587 |   | 18 | % | $ |     43,747 |   | $ |     37,021 |   |
| Custom  kits and procedure trays |       | 8                       | %          | 20,869                |          | 19,280 |   | 10 | % | 40,379 |   | 36,677 |   |
| Inflation  devices               |       | 15                      | %          | 16,897                |          | 14,707 |   | 7 | % | 31,121 |   | 28,994 |   |
| Catheters                        |       | 30                      | %          | 11,791                |          | 9,070 |   | 26 | % | 22,251 |   | 17,704 |   |
| Gastroenterology  devices        |       | 10                      | %          | 2,410                 |          | 2,193 |   | 74 | % | 4,882 |   | 2,812 |   |
| Total                            |       | 16                      | %          | $                     |   74,948 |   | $ |   64,837 |   | 16 | % | $ |   142,380 |   | $ |   123,208 |   |

 

Thesales growth of 16% for the three and six-month periods ended June 30,2010, when compared to the comparable periods of 2009, was primarily due tostand-alone sales of the En Snare® device sales of $1.9 million and $4.0million, respectively, for the three and six-month periods ended June 30,2010.  Sales were also favorably affectedby increased sales of catheters (particularly our Prelude® sheath product line,cardiology diagnostic catheters and mini access catheter product line), customkits and procedure trays, and inflation devices sold to an OEM customer.

 

Gross Profit.** **Gross margins were 43.3% and42.8% of sales for the three and six-month periods ended June 30, 2010,respectively, compared to 43.4% and 43.0% of sales for the three and six-monthperiods ended June 30, 2009, respectively. The slight decrease in gross margins can be attributed primarily tohigher average fixed overhead unit costs as the result of higher productioncosts, a decrease in productivity as fixed costs are shared over a decreasednumber of units produced and an increase in material costs, all of which werepartially offset by an increase of approximately 1.0% in gross marginimprovement related primarily to the launch of our En Snare® device in January 2010.

 

OperatingExpenses.** **Selling, general and administrative expenses increased to 26.6% ofsales for the three months ended June 30, 2010, compared with 25.1% ofsales for the three months ended June 30, 2009.   For the six months ended June 30, 2010,selling, general and administrative expenses increased to 27.4% compared with25.3% of sales for the six months ended June 30, 2009.  Selling, general and administrative expensesincreased 22% to $19.9 million for the three months ended June 30, 2010from $16.3 million for the three months ended June 30, 2009.  These increased expenses were primarilyattributable to acquisition costs of approximately $1.1 million related to ourproposed acquisition of BioSphere.  Selling, general and administrative expenses increased 25% to $39.0million for the six months ended June 30, 2010 from $31.1 million for thesix months ended June 30, 2009. These expense increases primarily related to the cost of hiringadditional sales and marketing people in the U.S. and Europe, acquisition costsof approximately $1.1 million related to our proposed acquisition of BioSphereand a legal settlement of approximately $477,000. Research and developmentexpenses increased to 5.0% of sales for the three months ended June 30, 2010,compared with 4.5% of sales for the three months ended June 30, 2009.

 

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Researchand development expenses increased to 4.8% of sales for the six months ended June 30,2010, compared to 4.0% of sales for the six months ended June 30, 2009.  Research and development expenses increased29% to $3.7 million for the three months ended June 30, 2010 from $2.9million for the three months ended June 30, 2009.  For the six months ended June 30, 2010research and development expenses increased 37% to $6.8 million from $5.0million during the six months ended June 30, 2009.  The increase in research and developmentexpenses related primarily to the development of several new products for theEndotek product line.

 

OtherIncome (Expense).  Other incomefor the second quarter of 2010 was approximately $62,000, compared to otherincome of approximately $22,000 for the comparable period in 2009.  The net increase in the three month periodended June 30, 2010, when compared to the comparable period in 2009, wasprimarily the result of foreign exchange transaction gains. Other income forthe six months ended June 30, 2010 was approximately $46,000, compared toother income of approximately $196,000 for the corresponding period in2009.  The net change in other income forthe six-month period ended June 30, 2010, when compared to the comparableperiod of 2009, was primarily the result of a decrease in interest incomeattributable to lower average cash balances.

 

IncomeTaxes.  Our effective tax rate for thethree months ended June 30, 2010 was 35.3%, relatively unchanged comparedto 35.0% for the corresponding period of 2009. For the six months ended June 30, 2010, our effective tax rate was32.6%, compared to 33.3% for the comparable period in 2009.  The decrease in the effective tax rate forthe six-month period ended June 30, 2010, when compared to thecorresponding period of 2009, was primarily related to the profitability of ourIrish operations which are taxed at a lower tax rate than our U.S. and otherforeign operations.

 

Income.  During the second quarter of 2010, wereported income from operations of approximately $8.8 million, compared toapproximately $9.0 million for the comparable period of 2009.  For the six months ended June 30, 2010,we reported income from operations of $15.1 million, a decrease of 9% from$16.9 million for the comparable period in 2009. When compared to thecorresponding period of 2010, income from operations for the six-month periodended June 30, 2009, was negatively affected by costs attributable tohiring additional sales and marketing people in the U.S. and Europe,acquisition costs of approximately $1.1 million related to our proposedacquisition of BioSphere, increased research and development expenses for theEndotek product line and a legal settlement of approximately $477,000.  These factors contributed to a decrease innet income to $5.7 and $10.2 million for the three and six-month periods ended June 30,2010, respectively, compared to net income of $5.8 million and $11.4 millionfor the same periods of 2009.

 

**Liquidity and Capital Resources**

 

Ourworking capital as of June 30, 2010 and December 31, 2009 was $64.9million and $57.7 million, respectively. The increase in working capital was primarily the result of an increasein accounts receivable related to record quarterly sales.   As of June 30, 2010, we had a currentratio of 3.1 to 1.

 

OnMay 12, 2010, we entered into a commitment letter agreement pursuant towhich Wells Fargo Bank, National Association and Wells Fargo Securities, LLCcommitted to provide to us with a five-year senior unsecured revolving creditfacility of up to $125 million.  Thecommitment of the prospective lenders to provide the credit facility describedin the commitment letter is subject to a number of customary conditions,including the negotiation and execution of definitive transactiondocuments.  The principal purpose of thecredit facility, if obtained, is to allow us to finance, in part, thetransactions contemplated by the merger agreement with BioSphere.  We also intend to use the credit facility forgeneral corporate purposes.

 

OnDecember 7, 2006, we entered into an unsecured loan agreement with Bank ofAmerica, N.A. (“Bank of America”), whereby Bank of America agreed to provide usa line of credit in the amount of $30 million. Our outstanding borrowings on this loan as of June 30, 2010 and December 31,2009 were $0 and $7.0 million, respectively. Our interest rate as of June 30, 2010 and December 31, 2009was set at approximately 1.0%.  Availableborrowings under this line of credit as of June 30, 2010 and December 31,2009 were $30 million and $23 million, respectively.

 

OnDecember 8, 2006, we entered into an unsecured loan agreement with ZionsFirst National Bank (“Zions”), whereby Zions agreed to provide us a line ofcredit in the amount of $1 million.  Theloan originally expired on December 1, 2009; but was extended for anadditional three years to December 1, 2012.  We had $0 outstanding and $1.0 millionavailable under this line of credit as of June 30, 2010 and December 31,2009.

 

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Historically,we have incurred significant expenses in connection with new facilities,production automation, product development and the introduction of newproducts.  During 2009, we spent asubstantial amount of cash, $46.2 million, in connection with our acquisitionof certain assets and product lines.  Inthe event we pursue and complete similar transactions or acquisitions in thefuture, additional funds will likely be required to meet our strategic needs,which may require us to consider raising additional funds in the debt or equitymarkets.  We currently believe that ourexisting cash balances, anticipated future cash flows from operations, sales ofequity and existing lines of credit and committed debt financing will beadequate to fund our current and future planned operations for the next twelvemonths and the foreseeable future.

 

**CriticalAccounting Policies**

 

TheSEC has requested that all registrants address their most critical accountingpolicies.  The SEC has indicated that a “critical accounting policy” isone which is both important to the representation of the registrant’s financialcondition and results and requires management’s most difficult, subjective orcomplex judgments, often as a result of the need to make estimates about theeffect of matters that are inherently uncertain.  We base our estimates onpast experience and on various other assumptions our management believes to bereasonable under the circumstances, the results of which form the basis formaking judgments about carrying values of assets and liabilities that are notreadily apparent from other sources.  Actual results will differ, and maydiffer materially from these estimates under different assumptions orconditions.  Additionally, changes in accounting estimates could occur inthe future from period to period.  Our management has discussed the developmentand selection of our most critical financial estimates with the audit committeeof our Board of Directors.  The following paragraphs identify our mostcritical accounting policies:

 

**InventoryObsolescence Reserve****. ** Our management reviews on aquarterly basis inventory quantities on hand for unmarketable or slow-movingproducts that may expire prior to being sold. This review includes quantities on hand for both raw materials andfinished goods.  Based on this review, weprovide a reserve for any slow-moving finished good products or raw materialsthat we believe will expire prior to being sold or used to produce a finishedgood and any products that are unmarketable. This review of inventoryquantities for unmarketable or slow moving products is based on forecastedproduct demand prior to expiration lives.

 

Forecasted unit demand isderived from our historical experience of product sales and production rawmaterial usage.  If market conditionsbecome less favorable than those projected by our management, additionalinventory write-downs may be required. During the years ended December 31, 2009, 2008 and 2007, weprovided on an annual basis an obsolescence reserve expense of between $1.1million to $1.5 million and have written off against such reserves between $1.2million and $1.3 million on an annual basis. Based on this historical trend, we believe that the amount included inour obsolescence reserve represents an accurate estimate of the unmarketable orslow moving products that may expire prior to being sold.

 

**Allowance for Doubtful Accounts****. ** A majority ofour receivables are with hospitals which, over our history, have demonstratedfavorable collection rates.  Therefore, we have experienced relativelyminimal bad debts from hospital customers.  In limited circumstances, wehave written off bad debts as the result of the termination of our businessrelationships with foreign distributors.  The most significant write-offsover our history have come from U.S. packers who bundle our products in surgicaltrays.

 

Wemaintain allowances for doubtful accounts relating to estimated lossesresulting from the inability of our customers to make required payments. The allowance is based upon historical experience and a review of individualcustomer balances.  If the financial condition of our customers were todeteriorate, resulting in an impairment of their ability to make payments,additional allowances may be required.

 

**Stock-Based Compensation.** ****Wemeasure share-based compensation cost at the grant date based on the value ofthe award and recognize the cost as an expense over the term of thevesting period.  Judgment is required in estimating the fair value ofshare-based awards granted and their expected forfeiture rate.  If actualresults differ significantly from these estimates, stock-based compensationexpense and our results of operations could be materially impacted.

 

**Income Taxes.**  Under our accounting policies, we initiallyrecognize a tax position in our financial statements when it becomes more likelythan not that the position will be sustained upon examination by the taxauthorities.

 

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Suchtax positions are initially and subsequently measured as the largest amount oftax positions that has a greater than 50% likelihood of being realized uponultimate settlement with the tax authorities assuming full knowledge of theposition and all relevant facts.  Although we believe our provisions forunrecognized tax positions are reasonable, we can make no assurance that thefinal tax outcome of these matters will not be different from that which wehave reflected in our income tax provisions and accruals.  The tax law is subject to variedinterpretations, and we have taken positions related to certain matters wherethe law is subject to interpretation.  Such differences could have amaterial impact on our income tax provisions and operating results in the period(s) inwhich we make such determination.

 

**Goodwill and Intangible AssetsImpairment. **We test ourgoodwill balances for impairment as of July 1 of each year, or wheneverimpairment indicators arise.  We utilizeseveral reporting units in evaluating goodwill for impairment.  We assess the estimated fair value ofreporting units based on discounted future cash flows.  If the carrying amount of a reporting unitexceeds the fair value of the reporting unit, an impairment charge isrecognized in an amount equal to the excess of the carrying amount of thereporting unit goodwill over implied fair value of that goodwill.  This analysis requires significant judgments,including estimation of future cash flows and the length of time they willoccur, which is based on internal forecasts, and a determination of a discountrate based on our weighted average cost of capital.

 

Weevaluate the recoverability of intangible assets whenever events or changes incircumstances indicate that its carrying amount may not be recoverable.* *This analysisrequires similar significant judgments as those discussed above regardinggoodwill, except that undiscounted cash flows are compared to the carryingamount of intangible assets to determine if impairment exists.  All of our intangible assets are subject toamortization.

 

**ITEM 3**.**  QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKET RISK**

 

Ourprincipal market risk relates to changes in the value of the Euro and GreatBritain Pound (“GBP”) relative to the value of the U.S. Dollar.  We alsohave a limited market risk relating to the Swedish and Danish Kroner.    Our consolidated financial statements aredenominated in, and our principal currency is, the U.S. Dollar.  A portionof our revenues ($7.2 million, representing approximately 9.6% of aggregaterevenues), for the three months ended June 30, 2010 was attributable tosales that were denominated in foreign currencies.  All other international sales weredenominated in U.S. Dollars.  Certain of our expenses for the quarterended June 30, 2010 were also denominated in foreign currencies, whichpartially offset risks associated with fluctuations of exchanges rates betweenforeign currencies on the one hand, and the U.S. Dollar on the otherhand.   During the three months ended June 30, 2010, theexchange rate between our foreign currencies against the U.S. Dollar resultedin a decrease of our gross revenues of approximately $411,000 and an increaseof 0.12% in gross profit.  Thisimprovement in gross profits was the result of a decrease in our Irishmanufacturing expenses which are primarily denominated in Euros.

 

On May 31, 2010, weforecasted a net exposure for June 30, 2010 representing the differencebetween the Euro- and GBP-denominated receivables and Euro and GBP-denominatedpayables of approximately 48,000 Euros 278,000 GBPs, respectively.  Inorder to partially offset such risks, on May 31, 2010 we entered into a30-day forward contract for Euros and GBPs.  We generally enter intosimilar economic transactions at various times during the year to partiallyoffset exchange rate risks we bear throughout the year.  During thequarter ended June 30, 2010, we recorded a net gain of approximately$58,000 on foreign currency transactions. We do not purchase or hold derivative financial instruments forspeculative or trading purposes.  The fair value of our open positions at June 30,2010 was not material to our consolidated financial statements.

 

Asof June 30, 2010, we had no variable rate debt. As long as we do not havevariable rate debt, our interest expense would not be affected by changes ininterest rates.

 

**ITEM4.  CONTROLS AND PROCEDURES**

 

**(a) Evaluationof disclosure controls and procedures**

 

Anevaluation of the effectiveness of our disclosure controls and procedures as ofJune 30, 2010 was performed under the supervision and with theparticipation of our management, including our Chief Executive Officer and ourChief Financial Officer.  Based on thatevaluation, our management, including our Chief Executive Officer and ChiefFinancial Officer, concluded that our disclosure controls and procedures areeffective to ensure that

 

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informationrequired to be disclosed in our reports filed or submitted under the SecuritiesExchange Act of 1934, as amended, is recorded, processed, summarized andreported as specified in the SEC’s rules and forms.

 

**(b) Changesin Internal Control Over Financial Reporting**

 

Therewas no change in our internal control over financial reporting during thequarter ended June 30, 2010 that materially affected, or that we believeis reasonably likely to materially affect, our internal control over financialreporting.

 

**PART II - OTHER INFORMATION**

 

**ITEM 1.   LEGALPROCEEDINGS**

 

Weare subject to certain legal actions which we consider routine to our businessactivities.  As of June 30, 2010,our management concluded, after consultation with legal counsel, that theultimate outcome of such legal matters is not likely to have a material adverseeffect on our financial position, liquidity or results of operations.

 

**ITEM 1A.   RISK FACTORS**

 

Inaddition to other information set forth in this Report, you should carefullyconsider the factors discussed in Part I, “Item 1A. Risk Factors” in ourAnnual Report on Form 10-K for the year ended December 31, 2009,which could materially affect our business, financial condition or futureresults.  The risks described in ourAnnual Report on Form 10-K are not the only risks we face.  Additional risks and uncertainties notcurrently known to us or that we currently deem to be immaterial also maymaterially and adversely affect our business, financial condition and/or operatingresults.

 

**ITEM  6. EXHIBITS**

 
| **Exhibit No.** | ** ** | **Description**                                                                                           |
|----------------------|------------|-----------------------------------------------------------------------------------------------------------|
| 31.1                 |       | Certification of Chief  Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of  2002 |
|                 |       |                                                                                                      |
| 31.2                 |       | Certification of Chief  Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of  2002 |
|                 |       |                                                                                                      |
| 32.1                 |       | Certification of Chief  Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of  2002 |
|                 |       |                                                                                                      |
| 32.2                 |       | Certification of Chief  Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of  2002 |

 

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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 thereuntoduly authorized.

 

 

MERITMEDICAL SYSTEMS, INC.

REGISTRANT

 

 
| Date:  | August 6, 2010 |                                   | /s/ Fred P. Lampropoulos |
|--------|---------------------|----------------------------------------|--------------------------|
|   |                | FRED P. LAMPROPOULOS                   |
|   |                | PRESIDENT AND CHIEF  EXECUTIVE OFFICER |
|   |                |                                   |
|   |                |                                   |
| Date:  | August 6, 2010 |                                   | /s/ Kent W. Stanger      |
|   |                | KENT W. STANGER                        |
|   |                | CHIEF FINANCIAL OFFICER                |

 

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