Table of Contents

 

 

 

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

**x****      QUARTERLY REPORT PURSUANT TO SECTION 13 OR15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

** **

**FOR THEQUARTERLY PERIOD ENDED SEPTEMBER 30, 2010.**

 

**OR**

 

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

 

**FOR THE TRANSITION PERIOD FROM             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, a non-accelerated filer or a smaller reporting company. Seethe definition of “large accelerated filer,” “accelerated filer” and “smallerreporting company” in Rule 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** |   | **28,315,201**                       |
|------------------|--------|--------------------------------------|
| Title or class   |   | Number of Shares                     |
|             |   | Outstanding at November 2, 2010 |

 

 

 

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**MERIT MEDICAL SYSTEMS, INC.**

 

**INDEX TO FORM 10-Q**

 
| ** **        | ** **                                                                                                   | ** ** | **PAGE** |
|-------------------|--------------------------------------------------------------------------------------------------------------|------------|----------|
| **PART I.**  | **FINANCIAL  INFORMATION**                                                                                   |       |     |
|              |                                                                                                         |       |     |
| Item 1.           | Financial  Statements (Unaudited)                                                                            |       |     |
|              |                                                                                                         |       |     |
|              | Consolidated  Balance Sheets as of September 30, 2010 and December 31, 2009                        |       | 1        |
|              |                                                                                                         |       |     |
|              | Consolidated  Statements of Operations for the three and nine months ended  September 30, 2010 and 2009 |       | 3        |
|              |                                                                                                         |       |     |
|              | Consolidated  Statements of Cash Flows for the nine months ended September 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                  |       | 17       |
|              |                                                                                                         |       |     |
| Item 3.           | Quantitative and  Qualitative Disclosures About Market Risk                                                  |       | 23       |
|              |                                                                                                         |       |     |
| Item 4.           | Controls and Procedures                                                                                      |       | 23       |
|              |                                                                                                         |       |     |
| **PART II.** | **OTHER INFORMATION**                                                                                        |       |     |
|              |                                                                                                         |       |     |
| Item 1.           | Legal Proceedings                                                                                            |       | 24       |
|              |                                                                                                         |       |     |
| Item 1A.          | Risk Factors                                                                                                 |       | 24       |
|              |                                                                                                         |       |     |
| Item 6.           | Exhibits                                                                                                     |       | 24       |
|              |                                                                                                         |       |     |
| SIGNATURES        |                                                                                                         | 25         |

 

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**Part I- FINANCIAL INFORMATION**

 

**ITEM 1. FINANCIAL STATEMENTS**

 

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

CONSOLIDATED BALANCE SHEETS

SEPTEMBER 30, 2010 AND DECEMBER 31, 2009

(In thousands - unaudited)

 
| ** **                                                                               | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                               | ** ** | **2010**               | ** ** | **2009**              | ** ** |
| ASSETS                                                                                   |       |                   |       |                  |       |
|                                                                                     |       |                   |       |                  |       |
| CURRENT  ASSETS:                                                                         |       |                   |       |                  |       |
| Cash  and cash equivalents                                                               |       | $                      | 5,298      |                  | $          | 6,133 |   |
| Trade  receivables - net of allowances of $660 and $541, respectively                    |       | 38,644                 |       | 30,954                |       |
| Employee  receivables                                                                    |       | 133                    |       | 145                   |       |
| Other  receivables                                                                       |       | 1,641                  |       | 827                   |       |
| Inventories                                                                              |       | 58,356                 |       | 47,170                |       |
| Prepaid  expenses and other assets                                                       |       | 2,946                  |       | 1,801                 |       |
| Deferred  income tax assets                                                              |       | 5,005                  |       | 3,289                 |       |
| Income  tax refunds receivable                                                           |       | 428                    |       | 295                   |       |
|                                                                                     |       |                   |       |                  |       |
| Total  current assets                                                                    |       | 112,451                |       | 90,614                |       |
|                                                                                     |       |                   |       |                  |       |
| PROPERTY  AND EQUIPMENT:                                                                 |       |                   |       |                  |       |
| Land  and land improvements                                                              |       | 10,931                 |       | 9,777                 |       |
| Building                                                                                 |       | 50,137                 |       | 50,040                |       |
| Manufacturing  equipment                                                                 |       | 85,572                 |       | 77,069                |       |
| Furniture  and fixtures                                                                  |       | 17,979                 |       | 15,586                |       |
| Leasehold  improvements                                                                  |       | 12,034                 |       | 10,280                |       |
| Construction-in-progress                                                                 |       | 15,964                 |       | 13,968                |       |
|                                                                                     |       |                   |       |                  |       |
| Total                                                                                    |       | 192,617                |       | 176,720               |       |
| Less  accumulated depreciation                                                           |       | (70,143                | )          | (62,074               | )          |
|                                                                                     |       |                   |       |                  |       |
| Property  and equipment—net                                                         |       | 122,474                |       | 114,646               |       |
|                                                                                     |       |                   |       |                  |       |
| OTHER  ASSETS:                                                                           |       |                   |       |                  |       |
| Other  intangibles - net of accumulated amortization of $7,754 and $5,450,  respectively |       | 59,796                 |       | 26,898                |       |
| Goodwill                                                                                 |       | 54,738                 |       | 33,002                |       |
| Deferred  income tax assets                                                              |       | 7,318                  |       |                  |       |
| Other  assets                                                                            |       | 7,265                  |       | 6,353                 |       |
|                                                                                     |       |                   |       |                  |       |
| Total  other assets                                                                      |       | 129,117                |       | 66,253                |       |
|                                                                                     |       |                   |       |                  |       |
| TOTAL  ASSETS                                                                            |       | $                      | 364,042    |                  | $          | 271,513 |   |

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

 

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

CONSOLIDATEDBALANCE SHEETS

SEPTEMBER30, 2010 AND DECEMBER 31, 2009

(Inthousands - unaudited)

 
| ** **                                                                                                                                                      | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                      | ** ** | **2010**               | ** ** | **2009**              | ** ** |
| LIABILITIES  AND STOCKHOLDERS’ EQUITY                                                                                                                      |       |                   |       |                  |       |
|                                                                                                                                                            |       |                   |       |                  |       |
| CURRENT  LIABILITIES:                                                                                                                                           |       |                   |       |                  |       |
| Trade  payables                                                                                                                                                 |       | $                      | 14,146     |                  | $          | 13,352 |   |
| Accrued  expenses                                                                                                                                               |       | 18,391                 |       | 12,196                |       |
| Line  of credit                                                                                                                                                 |       |                   |       | 7,000                 |       |
| Advances  from employees                                                                                                                                        |       | 422                    |       | 212                   |       |
| Income  taxes payable                                                                                                                                           |       | 2,539                  |       | 148                   |       |
|                                                                                                                                                            |       |                   |       |                  |       |
| Total  current liabilities                                                                                                                                      |       | 35,498                 |       | 32,908                |       |
|                                                                                                                                                            |       |                   |       |                  |       |
| DEFERRED  INCOME TAX LIABILITIES                                                                                                                                |       | 1,545                  |       | 11,251                |       |
|                                                                                                                                                            |       |                   |       |                  |       |
| LIABILITIES  RELATED TO UNRECOGNIZED TAX BENEFITS                                                                                                               |       | 2,826                  |       | 2,945                 |       |
|                                                                                                                                                            |       |                   |       |                  |       |
| DEFERRED  COMPENSATION PAYABLE                                                                                                                                  |       | 3,501                  |       | 3,382                 |       |
|                                                                                                                                                            |       |                   |       |                  |       |
| DEFERRED  CREDITS                                                                                                                                               |       | 1,790                  |       | 1,874                 |       |
|                                                                                                                                                            |       |                   |       |                  |       |
| LONG-TERM  DEBT                                                                                                                                                 |       | 87,989                 |       |                  |       |
|                                                                                                                                                            |       |                   |       |                  |       |
| OTHER  LONG-TERM OBLIGATIONS                                                                                                                                    |       | 1,047                  |       | 344                   |       |
|                                                                                                                                                            |       |                   |       |                  |       |
| Total  liabilities                                                                                                                                              |       | 134,196                |       | 52,704                |       |
|                                                                                                                                                            |       |                   |       |                  |       |
| STOCKHOLDERS’  EQUITY:                                                                                                                                     |       |                   |       |                  |       |
| Preferred  stock—5,000 shares authorized as of September 30, 2010 and December 31,  2009; no shares issued                                       |       |                   |       |                  |       |
| Common  stock—no par value; 100,000 shares authorized; 28,315 and 28,181 shares  issued at September 30, 2010 and December 31 2009, respectively |       | 66,104                 |       | 63,690                |       |
| Retained  earnings                                                                                                                                              |       | 163,454                |       | 155,204               |       |
| Accumulated  other comprehensive income (loss)                                                                                                                  |       | 288                    |       | (85                   | )          |
|                                                                                                                                                            |       |                   |       |                  |       |
| Total  stockholders’ equity                                                                                                                                |       | 229,846                |       | 218,809               |       |
|                                                                                                                                                            |       |                   |       |                  |       |
| TOTAL  LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                                                |       | $                      | 364,042    |                  | $          | 271,513 |   |

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

 

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**MERITMEDICAL SYSTEMS, INC. AND SUBSIDIARIES**

CONSOLIDATEDSTATEMENTS OF OPERATIONS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009

(In thousands, except percommon share - unaudited)

 
| ** **                            | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|---------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                            | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                            | ** ** | **2010**                         | ** ** | **2009**                        | ** ** | **2010** | ** ** | **2009** | ** ** |
|                                  |       |                             |       |                            |       |   |   |   |   |
| NET  SALES                            |       | $                                | 73,172     |                            | $          | 66,759 |   | $ | 215,552 |   | $ | 189,967 |   |
|                                  |       |                             |       |                            |       |   |   |   |   |
| COST  OF SALES                        |       | 41,925                           |       | 38,224                          |       | 123,412 |   | 108,481 |   |
|                                  |       |                             |       |                            |       |   |   |   |   |
| GROSS  PROFIT                         |       | 31,247                           |       | 28,535                          |       | 92,140 |   | 81,486 |   |
|                                  |       |                             |       |                            |       |   |   |   |   |
| OPERATING  EXPENSES:                  |       |                             |       |                            |       |   |   |   |   |
| Selling,  general, and administrative |       | 22,480                           |       | 16,780                          |       | 61,451 |   | 47,896 |   |
| Research  and development             |       | 3,865                            |       | 3,292                           |       | 10,664 |   | 8,264 |   |
| Goodwill  impairment charge           |       | 8,344                            |       |                            |       | 8,344 |   |   |   |
|                                  |       |                             |       |                            |       |   |   |   |   |
| Total  operating expenses             |       | 34,689                           |       | 20,072                          |       | 80,459 |   | 56,160 |   |
|                                  |       |                             |       |                            |       |   |   |   |   |
| INCOME  (LOSS) FROM OPERATIONS        |       | (3,442                           | )          | 8,463                           |       | 11,681 |   | 25,326 |   |
|                                  |       |                             |       |                            |       |   |   |   |   |
| OTHER  INCOME (EXPENSE):              |       |                             |       |                            |       |   |   |   |   |
| Interest  income                      |       | 7                                |       | 14                              |       | 27 |   | 164 |   |
| Interest  expense                     |       | (95                              | )          | (3                              | )          | (145 | ) | (40 | ) |
| Other  income (expense) - net         |       | 18                               |       | (40                             | )          | 94 |   | 43 |   |
|                                  |       |                             |       |                            |       |   |   |   |   |
| Other  income (expense) - net         |       | (70                              | )          | (29                             | )          | (24 | ) | 167 |   |
|                                  |       |                             |       |                            |       |   |   |   |   |
| INCOME  (LOSS) BEFORE INCOME TAXES    |       | (3,512                           | )          | 8,434                           |       | 11,657 |   | 25,493 |   |
|                                  |       |                             |       |                            |       |   |   |   |   |
| INCOME  TAX EXPENSE (BENEFIT)         |       | (1,539                           | )          | 2,349                           |       | 3,407 |   | 8,030 |   |
|                                  |       |                             |       |                            |       |   |   |   |   |
| NET  INCOME (LOSS)                    |       | $                                | (1,973     | )                               | $          | 6,085 |   | $ | 8,250 |   | $ | 17,463 |   |
|                                  |       |                             |       |                            |       |   |   |   |   |
| EARNINGS  (LOSS) PER COMMON SHARE:    |       |                             |       |                            |       |   |   |   |   |
| Basic                                 |       | $                                | (0.07      | )                               | $          | .22 |   | $ | .29 |   | $ | .62 |   |
| Diluted                               |       | $                                | (0.07      | )                               | $          | .21 |   | $ | .29 |   | $ | .61 |   |
|                                  |       |                             |       |                            |       |   |   |   |   |
| AVERAGE  COMMON SHARES:               |       |                             |       |                            |       |   |   |   |   |
| Basic                                 |       | 28,234                           |       | 27,970                          |       | 28,199 |   | 27,983 |   |
| Diluted                               |       | 28,234                           |       | 28,690                          |       | 28,763 |   | 28,555 |   |

 

Seenotes to consolidated financial statements.

 

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

CONSOLIDATED STATEMENTS OFCASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2010 AND2009

(In thousands - unaudited)

 
| ** **                                                                         | ** ** | **Nine Months Ended** | ** ** |
|------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                         | ** ** | **September 30,**          | ** ** |
| ** **                                                                         | ** ** | **2010**                        | ** ** | **2009** | ** ** |
|                                                                               |       |                            |       |   |   |
| CASH  FLOWS FROM OPERATING ACTIVITIES:                                             |       |                            |       |   |   |
| Net  income                                                                        |       | $                               | 8,250      |   | $ | 17,463 |   |
| Adjustments  to reconcile net income to net cash provided by operating activities: |       |                            |       |   |   |
| Depreciation  and amortization                                                     |       | 10,565                          |       | 8,980 |   |
| Losses  on sales and/or abandonment of property and equipment                      |       | 449                             |       | 217 |   |
| Write-off  of certain patents and trademarks                                       |       | 108                             |       | 158 |   |
| Impairment  of goodwill                                                            |       | 8,344                           |       |   |   |
| Amortization  of deferred credits                                                  |       | (84                             | )          | (92 | ) |
| Purchase  of trading investments                                                   |       | (452                            | )          | (339 | ) |
| Net  unrealized losses (gains) on trading investments                              |       | 146                             |       | (365 | ) |
| Deferred  income taxes                                                             |       | (3,075                          | )          | (21 | ) |
| Stock-based  compensation                                                          |       | 950                             |       | 880 |   |
| Tax  benefit attributable to appreciation of common stock options exercised        |       | (113                            | )          | (761 | ) |
| Changes  in operating assets and liabilities net of effects from acquisitions:     |       |                            |       |   |   |
| Trade  receivables                                                                 |       | (3,242                          | )          | (2,910 | ) |
| Employee  receivables                                                              |       | 7                               |       | (39 | ) |
| Other  receivables                                                                 |       | (116                            | )          | 352 |   |
| Inventories                                                                        |       | (5,313                          | )          | (7,736 | ) |
| Prepaid  expenses and other assets                                                 |       | (693                            | )          | (596 | ) |
| Income  tax refunds receivable                                                     |       | 71                              |       | (59 | ) |
| Deposits                                                                           |       |                            |       | (19 | ) |
| Trade  payables                                                                    |       | 317                             |       | 3,102 |   |
| Accrued  expenses                                                                  |       | 2,541                           |       | 2,605 |   |
| Advances  from employees                                                           |       | 111                             |       | 187 |   |
| Income  taxes payable                                                              |       | 2,499                           |       | 1,859 |   |
| Liabilities  related to unrecognized tax positions                                 |       | (590                            | )          | (137 | ) |
| Deferred  compensation payable                                                     |       | 119                             |       | 700 |   |
| Other  long-term assets                                                            |       | (63                             | )          |   |   |
| Other  long-term obligations                                                       |       | (115                            | )          | 75 |   |
|                                                                               |       |                            |       |   |   |
| Total  adjustments                                                                 |       | 12,371                          |       | 6,041 |   |
|                                                                               |       |                            |       |   |   |
| Net  cash provided by operating activities                                         |       | 20,621                          |       | 23,504 |   |
|                                                                               |       |                            |       |   |   |
| CASH  FLOWS FROM INVESTING ACTIVITIES:                                             |       |                            |       |   |   |
| Capital  expenditures for:                                                         |       |                            |       |   |   |
| Property  and equipment                                                            |       | (15,592                         | )          | (15,059 | ) |
| Patents  and trademarks                                                            |       | (718                            | )          | (1,005 | ) |
| Proceeds  from the sale of property and equipment                                  |       | 16                              |       | 23 |   |
| Proceeds  from the sale of marketable securities                                   |       | 9,673                           |       |   |   |
| Cash  paid in acquisitions, net of cash acquired                                   |       | (96,226                         | )          | (35,242 | ) |
|                                                                               |       |                            |       |   |   |
| Net  cash used in investing activities                                             |       | (102,847                        | )          | (51,283 | ) |
|                                                                                    |            |                                 |            |  |  |  |  |

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

 

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

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2010 AND 2009

(In thousands - unaudited)

 
| ** **                                                                               | ** ** | **Nine Months Ended** | ** ** |
|------------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                               | ** ** | **September 30,**          | ** ** |
| ** **                                                                               | ** ** | **2010**                        | ** ** | **2009** | ** ** |
|                                                                                     |       |                            |       |   |   |
| CASH  FLOWS FROM FINANCING ACTIVITIES:                                                   |       |                            |       |   |   |
| Proceeds  from issuance of common stock                                                  |       | $                               | 1,351      |   | $ | 1,410 |   |
| Proceeds  from issuance of long-term debt                                                |       | 97,278                          |       |   |   |
| Payments  on long-term debt                                                              |       | (9,289                          | )          |   |   |
| Borrowings  on line of credit                                                            |       | 1,500                           |       | 10,000 |   |
| Payments  on line of credit                                                              |       | (8,500                          | )          | (10,000 | ) |
| Long-term  debt issuance costs                                                           |       | (522                            | )          |   |   |
| 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                                       |       | 113                             |       | 761 |   |
|                                                                                     |       |                            |       |   |   |
| Net  cash provided by (used in) financing activities                                     |       | 81,931                          |       | (557 | ) |
|                                                                                     |       |                            |       |   |   |
| EFFECT  OF EXCHANGE RATES ON CASH                                                        |       | (540                            | )          | 69 |   |
|                                                                                     |       |                            |       |   |   |
| NET  DECREASE IN CASH AND CASH EQUIVALENTS                                               |       | (835                            | )          | (28,267 | ) |
|                                                                                     |       |                            |       |   |   |
| CASH  AND CASH EQUIVALENTS:                                                              |       |                            |       |   |   |
| Beginning  of period                                                                     |       | 6,133                           |       | 34,030 |   |
|                                                                                     |       |                            |       |   |   |
| End  of period                                                                           |       | $                               | 5,298      |   | $ | 5,763 |   |
|                                                                                     |       |                            |       |   |   |
| SUPPLEMENTAL  DISCLOSURES OF CASH FLOW INFORMATION—Cash paid during the period for: |       |                            |       |   |   |
| Interest                                                                                 |       | $                               | 71         |   | $ | 40 |   |
|                                                                                     |       |                            |       |   |   |
| Income  taxes                                                                            |       | $                               | 4,447      |   | $ | 6,380 |   |
|                                                                                     |       |                            |       |   |   |
| SUPPLEMENTAL  DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES                 |       |                            |       |   |   |
| Property  and equipment purchases in accounts payable                                    |       | $                               | 2,077      |   | $ | 1,694 |   |
|                                                                                     |       |                            |       |   |   |
| Accrued  purchase price related to acquisitions                                          |       | $                               | 500        |   | $ | 7,000 |   |

 

During the nine months endedSeptember 30, 2009, 23,829 shares of the Company’s common stock weresurrendered in exchange for the Company’s recording of payroll tax liabilitiesin the amount of approximately $254,000, related to the exercise of stockoptions.  The shares were valued basedupon the closing price of the Company’s common stock on the surrender date.

 

During the nine months endedSeptember 30, 2009, 21,556 shares of the Company’s common stock, with avalue of approximately $230,000 were surrendered in exchange for the exerciseof 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 nine-month periods ended September 30,2010 and 2009 are not audited. Our consolidated financial statements areprepared in accordance 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 financialstatements contain all adjustments, consisting of normal recurring accruals,necessary for a fair presentation of our financial position as of September 30,2010, and our results of operations and cash flows for the three and nine-monthperiods ended September 30, 2010 and 2009. The results of operations forthe three and nine-month periods ended September 30, 2010 are notnecessarily indicative of the results for a full year.  These interim consolidated financialstatements should be read in conjunction with the financial statements includedin 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 September 30, 2010 and December 31, 2009consisted of the following (in thousands):

 
| ** **      | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|-----------------|------------|------------------------|------------|-----------------------|------------|
| ** **      | ** ** | **2010**               | ** ** | **2009**              | ** ** |
| Finished  goods |       | $                      | 24,409     |                  | $          | 24,502 |   |
| Work-in-process |       | 9,365                  |       | 5,542                 |       |
| Raw  materials  |       | 24,582                 |       | 17,126                |       |
|            |       |                   |       |                  |       |
| Total           |       | $                      | 58,356     |                  | $          | 47,170 |   |

 

**3.  ****ReportingComprehensive Income (Loss). **Comprehensiveincome (loss) for the three and nine-month periods ended September 30,2010 and 2009 consisted of net income (loss) and foreign currency translationadjustments.  As of September 30,2010 and December 31, 2009, the cumulative effect of such adjustmentsincreased (decreased) stockholders’ equity by approximately $288,000 andapproximately ($85,000), respectively. Comprehensive income (loss) for the three and nine-month periods ended September 30,2010 and 2009 has been computed as follows (in thousands):

 
| ** **                    | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                    | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                    | ** ** | **2010**                         | ** ** | **2009**                        | ** ** | **2010** | ** ** | **2009** | ** ** |
| Net  income (loss)            |       | $                                | (1,973     | )                               | $          | 6,085 |   | $ | 8,250 |   | $ | 17,463 |   |
| Foreign  currency translation |       | 393                              |       | (6                              | )          | 373 |   | 1 |   |
| Comprehensive  income (loss)  |       | $                                | (1,580     | )                               | $          | 6,079 |   | $ | 8,623 |   | $ | 17,464 |   |

 

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

 
| ** **                           | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|--------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                           | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                           | ** ** | **2010**                         | ** ** | **2009**                        | ** ** | **2010** | ** ** | **2009** | ** ** |
| Cost  of sales                       |       | $                                | 53         |                            | $          | 61 |   | $ | 149 |   | $ | 154 |   |
| Research  and development            |       | 13                               |       | 16                              |       | 42 |   | 43 |   |
| Selling,  general and administrative |       | 278                              |       | 228                             |       | 759 |   | 683 |   |
| Stock-based  compensation            |       | $                                | 344        |                            | $          | 305 |   | $ | 950 |   | $ | 880 |   |

 

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Theexcess income tax benefit created from the exercises of stock options was$64,000 and $113,000 for the three and nine-month periods ended September 30,2010, respectively, when compared to $339,000 and $761,000 for the three andnine-month periods ended September 30, 2009, respectively.  Asof September 30, 2010, the total remaining unrecognized compensation costrelated to non-vested stock options, net of expected forfeitures, wasapproximately $3.6 million and is expected to be recognized over a weightedaverage period of 2.97 years. During the nine-month period ended September 30,2010 and 2009, there were 100,000 and 140,000 stock awards granted,respectively.  We use the Black-Scholesmethodology to value the stock-based compensation expense for options.  In applying the Black-Scholes methodology tothe option grants, we used the following assumptions:

 
| ** **                 | ** ** | **Nine Months**              | ** ** |
|----------------------------|------------|-----------------------------------|------------|
| ** **                 | ** ** | **Ended September 30,** | ** ** |
| ** **                 | ** ** | **2010**                          | ** ** | **2009** | ** ** |
| Risk-free  interest rate   |       | 2.24                              | %          | 2.70 | % |
| Expected  option life      |       | 6.0                               |       | 6.0 |   |
| Expected  price volatility |       | 41.40                             | %          | 42.40 | % |

 

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 stock optionsusing 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.

 

**5. SharesUsed in Computing Net Income Per Share.**The following table setsforth the computation of the number of shares used in calculating basic anddiluted net income per share (in thousands, except per share amounts):

 
| ** **                                                                                               | ** ** | **Three Months** | ** ** | **Nine Months** | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|----------------------|------------|
| ** **                                                                                               | ** ** | **Net**               | ** ** | ** **           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                                               | ** ** | **Income**            | ** ** | ** **           | ** ** | **Per Share** | ** ** | **Net** | ** ** | ** ** | ** ** | **Per Share** | ** ** |
| ** **                                                                                               | ** ** | **(Loss)**            | ** ** | **Shares**           | ** ** | **Amount** | ** ** | **Income** | ** ** | **Shares** | ** ** | **Amount** | ** ** |
| Period  ended September 30, 2010:                                                                   |       |                  |       |                 |       |   |   |   |   |   |   |   |   |
| Basic  EPS                                                                                               |       | $                     | (1,973     | )                    | 28,234     |   | $ | (0.07 | ) | $ | 8,250 |   | 28,199 |   | $ | 0.29 |   |
| Effect  of dilutive stock options and warrants                                                           |       |                  |       |                 |       |   |   |   |   | 564 |   |   |   |
|                                                                                                     |       |                  |       |                 |       |   |   |   |   |   |   |   |   |
| Diluted  EPS                                                                                             |       | $                     | (1,973     | )                    | 28,234     |   | $ | (0.07 | ) | $ | 8,250 |   | 28,763 |   | $ | 0.29 |   |
|                                                                                                     |       |                  |       |                 |       |   |   |   |   |   |   |   |   |
| Stock  options excluded from the calculation of common stock equivalents as the  impact was antidilutive |       |                  |       | 695                  |       |   |   |   |   | 936 |   |   |   |
|                                                                                                     |       |                  |       |                 |       |   |   |   |   |   |   |   |   |
| Period  ended September 30, 2010:                                                                   |       |                  |       |                 |       |   |   |   |   |   |   |   |   |
| Basic  EPS                                                                                               |       | $                     | 6,085      |                 | 27,970     |   | $ | 0.22 |   | $ | 17,463 |   | 27,983 |   | $ | 0.62 |   |
| Effect  of dilutive stock options and warrants                                                           |       |                  |       | 720                  |       |   |   |   |   | 572 |   |   |   |
|                                                                                                     |       |                  |       |                 |       |   |   |   |   |   |   |   |   |
| Diluted  EPS                                                                                             |       | $                     | 6,085      |                 | 28,690     |   | $ | 0.21 |   | $ | 17,463 |   | 28,555 |   | $ | 0.61 |   |
|                                                                                                     |       |                  |       |                 |       |   |   |   |   |   |   |   |   |
| Stock  options excluded from the calculation of common stock equivalents as the  impact was antidilutive |       |                  |       | 529                  |       |   |   |   |   | 1,305 |   |   |   |

 

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**6. Acquisitions.****  **On September 10,2010, we completed our acquisition of BioSphere Medical, Inc. (“BioSphere”)in an all cash transaction valued at approximately $96 million, inclusive ofall 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 acquisition ofBioSphere will give us a platform technology applicable to multiple therapeuticareas with significant market potential while leveraging existinginterventional radiology call points. Two immediate applications for the embolotherapy are uterine fibroidsand primary liver cancer.  The grossamount of trade receivables we acquired from BioSphere is approximately $4.6million, of which $51,000 is expected to be uncollectible.  Our consolidated financial statements for thethree and nine-month periods ended September 30, 2010 reflect salessubsequent to the acquisition date of approximately $1.5 million related to ourBioSphere acquisition. We report sales and operating expenses related to thisacquisition in our cardiovascular business segment.  Computation of the earnings related to thisacquisition is impracticable, as we cannot split out sales costs related toBiosphere’s products as our sales representatives are selling multiple productsin the cardiovascular business segment. We are in the process of finalizing ourvaluation of certain tangible and intangible assets and residual goodwillacquired in the transaction.  We intendto complete the purchase price allocation associated with the BioSphere acquisition,no later than one year from the date of acquisition. That purchase priceallocation may change as more defined analyses are completed and additionalinformation about fair value of assets and liabilities becomes available.  The purchase price was preliminarilyallocated as follows (in thousands):

 
| **Assets Acquired**                                |   |    |   |
|----------------------------------------------------|--------|---------|--------|
| Marketable  securities                             |   | $       | 9,673  |   |
| Inventories                                        |   | 5,669   |   |
| Trade  receivables                                 |   | 4,529   |   |
| Other  assets                                      |   | 1,340   |   |
| Property  and equipment                            |   | 546     |   |
| Deferred  income tax assets                        |   | 16,522  |   |
| **Intangibles**                                    |   |    |   |
| Developed  technology                              |   | 26,000  |   |
| Customer  list                                     |   | 4,600   |   |
| License  agreement                                 |   | 350     |   |
| Trademark                                          |   | 2,500   |   |
| Goodwill                                           |   | 30,080  |   |
| Total  assets acquired                             |   | 101,809 |   |
|                                               |   |    |   |
| **Liabilities Assumed**                            |   |    |   |
| Accounts  payable                                  |   | 322     |   |
| Accrued  expenses                                  |   | 3,383   |   |
| Other  liabilities                                 |   | 818     |   |
| Deferred  income tax liabilities                   |   | 1,089   |   |
| Liabilities  related to unrecognized tax benefits  |   | 471     |   |
| Total  liabilities assumed                         |   | 6,083   |   |
|                                               |   |    |   |
| Net  assets acquired, net of cash acquired of $274 |   | $       | 95,726 |   |

 

Withrespect to the assets we acquired from BioSphere, we intend to amortizedeveloped technology and a license agreement over 10 years and customer listson an accelerated basis over 10 years. 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. The total weighted-average amortization periodfor these acquired intangible assets is 10.4 years.

 

Thenet deferred income tax asset of approximately $16.5 million ($1.5 millioncurrent and $15.0 million long-term) is comprised of $28.4 million in deferredtax assets primarily related to U.S. federal net operating loss carryforwardsof BioSphere and approximately $11.9 million in deferred tax liabilitiesprimarily related to differences between the book basis and tax basis of identifiableintangible assets.  The U.S. federal net operating loss carryforwards ofapproximately $79.8 million are subject to an annual limitation under InternalRevenue Code Section 382.  We anticipate that we will utilize the netoperating loss carryforwards over a period of sixteen years.  Our non-U.S. net operating loss from the BioSphere’sFrench subsidiary of approximately $1.6 million has no expiration date.

 

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Thenet deferred tax liability of approximately $1.1 million is related todifferences between the book basis and tax basis of the identifiable intangibleassets of BioSphere’s French subsidiary.

 

Asof June 30, 2010, prior to the BioSphere acquisition, we had net long-termdeferred tax liabilities of approximately $11.1 million, of which approximately$10.7 million related to the U.S. taxing jurisdiction.  As a result of theacquisition of BioSphere, we recorded net long-term deferred tax asset ofapproximately $15 million, which was primarily related to U.S. federal netoperating loss carryforwards and differences between the book basis and taxbasis of identifiable intangible asset discussed above.  We recorded anadditional long-term deferred tax asset of approximately $3.2 million due to animpairment charge to goodwill.  Accordingly, the existing $10.7 milliondeferred tax liabilities were offset against the long-term deferred tax assetsrelated to the U.S. taxing jurisdiction recorded during the third quarter.  The remaining net long-term deferred taxliabilities of approximately $1.5 million consists of approximately $400,000related to our foreign filing jurisdictions and an increase of approximately$1.1 million for the net deferred tax liabilities related to BioSphere’s Frenchsubsidiary as discussed above.

 

Inconnection with our BioSphere acquisition, we paid approximately $522,000 inlong-term debt issuance costs to Wells Fargo Bank for our long-term debt (seeNote 10).  These costs consist of loan originationfees and legal costs that we intend to amortize over five years, which is thecontract term of the Credit Agreement. We also incurred approximately $1.2 million and $2.3 million ofacquisition-related costs during the three and nine-month periods ended September 30,2010, respectively, which are included in selling, general and administrativeexpense in the accompanying consolidated statements of operations.

 

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 company (“Hatch”), to purchaseassets associated with the EN Snare® foreign body retrieval system.  Wepaid Hatch $14 million in June 2009 and an additional $7 million onDecember 31, 2009.  Our consolidated financial statements for thethree and nine-month periods ended September 30, 2009 reflect royaltyincome subsequent to the acquisition date of approximately $431,000 and$574,000, respectively, and a net income of approximately $115,000 and$158,000, respectively,  related to our Hatch acquisition.  Thepurchase price was allocated as follows (in thousands):

 
| **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 a non-compete covenant over seven years. While U.S. trademarks can be renewed indefinitely, we currently estimate thatwe will generate cash flow from the acquired trademarks for a period of 15years from the acquisition date.

 

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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 inMarch 2009.  The gross amount of trade receivables we acquired fromAlveolus is approximately $1.0 million, of which $49,000 is expected to beuncollectible.  Our consolidated financial statements for the three andnine-month periods ended September 30, 2009 reflect sales subsequent to theacquisition date of approximately $2.1 million and $4.4 million, respectively,and a net loss of approximately $709,000 and $1.8 million, respectively, related to our acquisition of the Alveolus assets.  The purchase price wasallocated 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 acquried               |   | 20,131 |   |
|                                 |   |   |   |
| **Liabilities Assumed**              |   |   |   |
| Accounts  payable                    |   | 467    |   |
| Other  liabilities                   |   | 572    |   |
| Total  liabilities assumed           |   | 1,039  |   |
|                                 |   |   |   |
| Net  assets acquired                 |   | $      | 19,092 |   |

 

Withrespect to the assets we acquired from Alveolus, we intend to amortize thedeveloped technology and trademarks over 15 years and customer lists on anaccelerated basis over seven years.  We intend to amortize the in-processresearch and development over 15 years, which will begin if the resultingproduct is successfully launched in the market.  The acquired trademarksare scheduled to renew in 3.77 years (based on a weighted-average calculation),from September 30, 2009 until the trademark renewal date).  WhileU.S. trademarks can be renewed indefinitely, we currently estimate that we willgenerate cash flow from the acquired trademarks for a period of 15 years fromthe acquisition date.

 

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 thedistribution agreement will be amortized over an estimated life of 11 years.

 

OnFebruary 19, 2009, we entered into an asset purchase and supply agreementwith Biosearch Medical Products, Inc., a New Jersey corporation (“Biosearch”),to purchase a bipolar coagulation probe and grafted biliary stents.  Wepaid $1.1 million in February 2009 and paid an additional $500,000 inJune 2009.  Our consolidated financial statements for the three andnine-month periods ended September 30, 2009 reflect sales subsequent tothe acquisition date of approximately $596,000 and $1.1 million, respectively,and net income of approximately $127,000 and $218,000, respectively, related to the Biosearch acquisition.  The purchase price was allocated asfollows (in thousands):

 

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** **
| **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 (see Note 12).  The goodwill recognized from theseacquisitions is expected to be deductible for income tax purposes, except forthe goodwill recognized in connection with our stock acquisition of BioSphere.

 

The following tablesummarizes our unaudited consolidated results of operations for the three andnine-month periods ended September 30, 2010 and 2009, as well as theunaudited pro forma consolidated results of operations as though the BioSphereacquisition had occurred on January 1, 2009 (in thousands, except pershare amounts):

 
| ** **                         | ** ** | **Three Months Ended** | ** ** | **Three Months Ended** | ** ** |
|------------------------------------|------------|----------------------------------|------------|----------------------------------|------------|
| ** **                         | ** ** | **September 30, 2010** | ** ** | **September 30, 2009** | ** ** |
| ** **                         | ** ** | **As Reported**             | ** ** | **Pro Forma**               | ** ** | **As Reported** | ** ** | **Pro Forma** | ** ** |
|                               |       |                             |       |                             |       |   |   |   |   |
| Sales                              |       | $                                | 73,172     |                             | $          | 78,966 |   | $ | 66,759 |   | $ | 74,445 |   |
| Net  income (loss)                 |       | (1,973                           | )          | (4,744                           | )          | 6,085 |   | 5,087 |   |
| Earnings  (loss) per common share: |       |                             |       |                             |       |   |   |   |   |
| Basic                              |       | $                                | (0.07      | )                                | $          | (0.17 | ) | $ | .22 |   | $ | .18 |   |
| Diluted                            |       | $                                | (0.07      | )                                | $          | (0.17 | ) | $ | .21 |   | $ | .18 |   |

 
| ** **                  | ** ** | **Nine Months Ended**  | ** ** | **Nine Months Ended**  | ** ** |
|-----------------------------|------------|----------------------------------|------------|----------------------------------|------------|
| ** **                  | ** ** | **September 30, 2010** | ** ** | **September 30, 2009** | ** ** |
| ** **                  | ** ** | **As Reported**             | ** ** | **Pro Forma**               | ** ** | **As Reported** | ** ** | **Pro Forma** | ** ** |
|                        |       |                             |       |                             |       |   |   |   |   |
| Sales                       |       | $                                | 215,552    |                             | $          | 236,179 |   | $ | 189,967 |   | $ | 212,818 |   |
| Net  income                 |       | 8,250                            |       | 2,586                            |       | 17,463 |   | 12,625 |   |
| Earnings  per common share: |       |                             |       |                             |       |   |   |   |   |
| Basic                       |       | $                                | .29        |                             | $          | .09 |   | $ | .62 |   | $ | .45 |   |
| Diluted                     |       | $                                | .29        |                             | $          | .09 |   | $ | .61 |   | $ | .44 |   |

 

The unaudited pro formainformation set forth above is for informational purposes only and should notbe considered indicative of actual results that would have been achieved ifBioSphere had been acquired the beginning of 2009, or results that may beobtained in any future period.

 

The following tablesummarizes our unaudited consolidated results of operations for the three andnine-month periods ended September 30, 2009, as well as the unaudited proforma consolidated results of operations as though the Hatch, Alveolus andBiosearch acquisitions had occurred on January 1, 2009 (in thousands,except per share amounts):

 

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| ** **                  | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended**  | ** ** |
|-----------------------------|------------|----------------------------------|------------|----------------------------------|------------|
| ** **                  | ** ** | **September 30, 2009** | ** ** | **September 30, 2009** | ** ** |
| ** **                  | ** ** | **As Reported**             | ** ** | **Pro Forma**               | ** ** | **As Reported** | ** ** | **Pro Forma** | ** ** |
|                        |       |                             |       |                             |       |   |   |   |   |
| Sales                       |       | $                                | 66,759     |                             | $          | 66,759 |   | $ | 189,967 |   | $ | 192,419 |   |
| Net  income                 |       | 6,085                            |       | 6,085                            |       | 17,463 |   | 17,403 |   |
| Earnings  per common share: |       |                             |       |                             |       |   |   |   |   |
| Basic                       |       | $                                | .22        |                             | $          | .22 |   | $ | .62 |   | $ | .62 |   |
| Diluted                     |       | $                                | .21        |                             | $          | .21 |   | $ | .61 |   | $ | .61 |   |

 

The unaudited pro formainformation set forth above is for informational purposes only and should notbe considered indicative of actual results that would have been achieved ifAlveolus, Biosearch and Hatch had been acquired the beginning of 2009, orresults that may be obtained in any future period.

 

**7. Segment Reporting.** We report ouroperations in two operating segments: cardiovascular and endoscopy.  Our cardiovascular segment consists ofcardiology and radiology medical device products which assist in diagnosing andtreating coronary artery disease, peripheral vascular disease and othernon-vascular diseases.  Our endoscopy segmentconsists of gastroenterology and pulmonary medical device products which assistin the palliative treatment of expanding esophageal, tracheobronchial andbiliary strictures caused by malignant tumors. During the three months ended September 30,2010, we determined our endoscopy segment met the quantitative thresholds forseparate reporting.  Prior period segmentdata has been presented to reflect this newly reportable segment.  We evaluate the performance of our operatingsegments based on operating income (loss). Financial information relating to our reportable operating segments andreconciliations to the condensed consolidated totals is as follows (inthousands):

 
| ** **                     | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|--------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                     | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                     | ** ** | **2010**                         | ** ** | **2009**                        | ** ** | **2010** | ** ** | **2009** | ** ** |
| **Revenues**                   |       |                             |       |                            |       |   |   |   |   |
| Cardiovascular                 |       | $                                | 71,043     |                            | $          | 64,032 |   | $ | 208,540 |   | $ | 184,428 |   |
| Endoscopy                      |       | 2,129                            |       | 2,727                           |       | 7,012 |   | 5,539 |   |
| Total  revenues                |       | $                                | 73,172     |                            | $          | 66,759 |   | $ | 215,552 |   | $ | 189,967 |   |
|                           |       |                             |       |                            |       |   |   |   |   |
| **Operating Income (Loss)**    |       |                             |       |                            |       |   |   |   |   |
| Cardiovascular                 |       | $                                | 6,032      |                            | $          | 9,329 |   | $ | 23,210 |   | $ | 27,763 |   |
| Endoscopy                      |       | (9,474                           | )          | (866                            | )          | (11,529 | ) | (2,437 | ) |
| Total  operating income (loss) |       | $                                | (3,442     | )                               | $          | 8,463 |   | $ | 11,681 |   | $ | 25,326 |   |

 

The operating income (loss)for the endoscopy segment for the three and nine-month periods ended September 30,2010 includes a goodwill impairment charge of approximately $8.3 million (seeNote 12).

 

**8. 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; and(2) detailed disclosures about the transfers in and out of Level 1 and 2measurements. This guidance is effective for the first interim or annualreporting period beginning after December 15, 2009, except for the grosspresentation of the Level 3 rollforward information, which is required forannual reporting periods beginning after December 15, 2010, and forinterim reporting periods within those years. We adopted the fair valuedisclosure guidance on January 1, 2010, except for the gross presentationof the Level 3 rollforward 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 nine-month periods ended September 30, 2010.

 

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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, earlierapplication is permitted.  We do notexpect the adoption of this guidance to have a material effect on ourconsolidated financial statements.

 

**9.  Income Taxes.**  Our effective tax rate forthe three months ended September 30, 2010 was 43.8%, compared to 27.8% forthe corresponding period of 2009.  For the nine months ended September 30,2010, our effective tax rate was 29.2%, compared to 31.5% for the comparableperiod of 2009.  The increase in the effective tax rate for the three monthsended September 30, 2010, when compared to the corresponding period of2009, was primarily related to a pretax loss benefit for the third quarter of2010 and benefits from the expiration of statute of limitations on ourliabilities related to unrecognized tax benefits.  The decrease in theeffective tax rate for the nine months ended September 30, 2010, whencompared to the corresponding period of 2009, was primarily related to theprofitability of our Irish operations which are taxed at a lower rate than ourU.S. and other foreign operations.

 

**10.  Long-Term Debt.**We entered into an unsecured Credit Agreement, dated September 10,2010 (the “Credit Agreement”), with the lenders who are or may become partythereto (collectively, the “Lenders”) and Wells Fargo Bank, NationalAssociation (“Wells Fargo”), as administrative agent for the Lenders. Pursuant to the terms of the Credit Agreement, the Lenders have agreed to makerevolving credit loans up to an aggregate amount of $125 million.  WellsFargo has also agreed to make swingline loans from time to time through thematurity date of September 10, 2015 in amounts equal to the differencebetween the amounts actually loaned by the Lenders and the aggregate creditcommitment.

 

On September 10, 2015,all principal, interest and other amounts outstanding under the CreditAgreement are payable in full.  At any time prior to the maturity date, wemay repay any amounts owing under all revolving credit loans and all swinglineloans in whole or in part, without premium or penalty.

 

Revolving credit loans madeunder the Credit Agreement bear interest, at our election, at either(i) the base rate (described below) plus 0.25%, (ii) the LIBOR MarketIndex Rate (as defined in the Credit Agreement) plus 1.25%, or (iii) the LIBOR Rate (as defined in the CreditAgreement) plus 1.25%.  Swingline loans bear interest at the LIBOR MarketIndex Rate plus 1.25%.  Interest on each loan featuring the base rate orthe LIBOR Market Index Rate is due and payable on the last business day of eachcalendar month; interest on each loan featuring the LIBOR Rate is due andpayable on the last day of each interest period selected by us when selectingthe LIBOR Rate as the benchmark for interest calculation.  For purposes ofthe Credit Agreement, the base rate means the highest of (i) the primerate (as announced by Wells Fargo), (ii) the federal funds rate plus0.50%, and (iii) LIBOR for an interest period of one month plus 1.0%.

 

The Credit Agreement containscovenants, representations and warranties and other terms, that are customaryfor revolving credit loans of this nature.  In this regard, the CreditAgreement requires us to not, among other things, (a) permit theConsolidated Total Leverage Ratio (as defined in the Credit Agreement) to begreater than 2.5 to 1 through June 30, 2012, no more than 2.25 to 1 fromJuly 1, 2012 through June 30, 2014, and no more than 2 to 1 fromJuly 1, 2014 and thereafter; (b) for any period of four consecutivefiscal quarters, permit the ratio of Consolidated EBITDA (as defined in theCredit Agreement) (adjusted for certain expenditures) to Consolidated FixedCharges (as defined in the Credit Agreement) to be less than 1.75 to 1;(c) permit Consolidated Net Income (as defined in the Credit Agreement)for certain periods, and subject to certain adjustments, to be less than $0; or(d) subject to certain conditions and adjustments, permit the aggregateamount of all Facility Capital Expenditures (as defined in the CreditAgreement) in any fiscal year to exceed $30 million.  Additionally, theCredit Agreement contains various negative covenants with which we must comply,including, but not limited to, limitations respecting: the incurrence ofindebtedness, the creation of liens on its property, mergers or similar combinationsor liquidations, asset dispositions, investments in subsidiaries, and otherprovisions customary in similar types of agreements. As of September 30,2010, we were in compliance with all financial debt covenants set forth in theCredit Agreement.

 

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As of September 30,2010, we had outstanding borrowings of approximately $88 million under theCredit Agreement.  Our principal purposesfor entering into the Credit Agreement were to allow us to finance theacquisition of BioSphere and for general 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 line of credit as of September 10,2010 and December 31, 2009 were $0 and $7.0 million, respectively.  Our interest rate as of September 10,2010 and December 31, 2009 was set at approximately 1.0%. In connectionwith obtaining our Wells Fargo revolving credit facility, we terminated ourunsecured loan agreement with Bank of America on September 10, 2010.

 

**11.  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.  Financialassets are marked to bid prices and financial liabilities are marked to offerprices.  Fair value measurements do notinclude transaction costs.  A fair value hierarchy is used toprioritize the quality and reliability of the information used to determine fairvalues.  Categorization within the fairvalue hierarchy is based on the lowest level of input that is significant tothe fair value measurement.  The fairvalue 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 September 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**                   | ** ** | **September 30, 2010** | ** ** | **(Level 1)**                               | ** ** | **(Level 2)** | ** ** | **(Level 3)** | ** ** |
|                              |       |                             |       |                                             |       |   |   |   |   |
| Deferred  compensation assets (1) |       | $                                | 3,649      |                                             |       |   | $ | 3,649 |   |   |   |
|                                   |            |                                  |            |                                                  |            |  |  |  |  |  |  |

 

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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. These assets are reflected as other assets in the accompanyingconsolidated balance sheets.

 

Duringthe nine months ended September 30, 2010, we had total write-offs ofapproximately $8.4 million related to the measurement of non-financial assetsat fair value on a nonrecurring basis subsequent to their initialrecognition.  Of this total amount,approximately $8.3 million related to the impairment of our goodwill balancerelated to our endoscopy reporting unit. The fair value of goodwill was measured using Level 3 inputs.  As of September 30, 2010, there is nogoodwill remaining related to the endoscopy reporting unit.

 

The carrying amount of cash and equivalents,receivables, trade payables and long-term debt approximates fair value.

 

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**12.  Goodwill and Intangible Assets.  **The changes in the carryingamount of goodwill for the nine months ended September 30, 2010, are asfollows:

 
| ** **                                         | ** ** | **2010** | ** ** |
|----------------------------------------------------|------------|----------|------------|
| Goodwill  balance at January 1                |       | $        | 33,002     |   |
| Addition  as the result of acquistion (see Note 6) |       | 30,080   |       |
| Deletion  as the result of impairment              |       | (8,344   | )          |
| Goodwill  balance at September 30             |       | $        | 54,738     |   |

 

Intangible assets at September 30,2010 and December 31, 2009, consisted of the following (in thousands):

 
| ** **                            | ** ** | **September 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        |                            | $          | (57 | ) | $ | 258 |   | $ | 315 |   | $ | (25 | ) | $ | 290 |   |
| Customer  lists                       |       | 9,391                            |       | (2,940                          | )          | 6,451 |   | 4,755 |   | (2,380 | ) | 2,375 |   |
| Developed  technology                 |       | 43,596                           |       | (1,683                          | )          | 41,913 |   | 17,513 |   | (535 | ) | 16,978 |   |
| Distribution  agreement               |       | 2,426                            |       | (577                            | )          | 1,849 |   | 2,400 |   | (385 | ) | 2,015 |   |
| In-process  research and development* |       | 400                              |       |                            |       | 400 |   | 400 |   |   |   | 400 |   |
| License  agreements                   |       | 1,778                            |       | (326                            | )          | 1,452 |   | 403 |   | (287 | ) | 116 |   |
| Patents                               |       | 4,317                            |       | (1,370                          | )          | 2,947 |   | 3,757 |   | (1,214 | ) | 2,543 |   |
| Royalty  agreements                   |       | 267                              |       | (254                            | )          | 13 |   | 267 |   | (213 | ) | 54 |   |
| Trademarks                            |       | 5,060                            |       | (547                            | )          | 4,513 |   | 2,538 |   | (411 | ) | 2,127 |   |
| Total                                 |       | $                                | 67,550     |                            | $          | (7,754 | ) | $ | 59,796 |   | $ | 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 but we intendto commence amortization upon the related product launch.

 

The aggregate amortizationexpense was approximately $1.0 million and $2.3 million for the three and nine-monthperiods ended September 30, 2010, respectively, and approximately $742,000and $1.6 million for the three and nine-month periods ended September 30,2009, respectively.

 

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

 
| **Year Ending** | ** ** | ** ** | ** ** |
|----------------------|------------|------------|------------|
| **December 31** | ** ** | ** ** | ** ** |
|                 |       |       |       |
| Remaining  2010      |       | $          | 1,473      |   |
| 2011                 |       | 5,976      |       |
| 2012                 |       | 5,635      |       |
| 2013                 |       | 5,480      |       |
| 2014                 |       | 5,233      |       |
|                      |            |            |            |  |

 

Duringour annual test of goodwill balances, which is completed during the thirdquarter of each year, we determined that our goodwill related to our endoscopyreporting unit was impaired.  Wedetermined that, based on estimated future cash flows for this reporting unit,discounted back to their present value using a discount rate that reflects therisk profiles of the underlying activities, the carry value amount of thisreporting unit was less than its estimated fair value. Some of the factors thatinfluence our estimated cash flows were slower sales growth in the productsacquired from our Alveolus acquisition in March of 2009, uncertaintyregarding acceptance of new products and continued operating losses. During thethree months ended September 30, 2010, we recorded an impairment charge ofapproximately $8.3 million, which was offset by approximately $3.2 million ofdeferred tax asset.

 

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**13. ****SubsequentEvent — Swap Transaction.**  Asdiscussed in Note 10, as of September 30, 2010, we had outstandingborrowings of approximately $88 million under the Credit Agreement. As part ofour efforts to mitigate interest rate risk, on October 25, 2010, weentered into a LIBOR-based interest rate swap agreement that effectively fixedthe interest rate on $55 million of our current floating rate bankborrowings for a five-year period. The interest rate swap locked in ourinterest rate on a notional amount of $55 million at 2.73%.  This instrument is intended to reduce ourexposure to interest rate fluctuations and was not entered into for speculativepurposes.

 

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**ITEM 2.  MANAGEMENT’SDISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF 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 results of operations, as well as anyforward-looking statements, are subject to inherent risks and uncertainties,including, unanticipated consequencesof Merit’s recent, proposed or future acquisitions (including, but limited toour recent BioSphere acquisition) ; challenges associated with Merit’s effortsto pursue new market opportunities, including opportunities in thegastroenterology and pulmonary markets; infringement of Merit’stechnology or the assertion that Merit’s technology infringes the rights ofother parties; product recalls and product liability claims; downturn of thenational economy and its effect on Merit’s revenues, collections and supplierrelations; termination of supplier relationships, or failure of suppliers toperform; inability to successfully manage growth through acquisitions; delaysin obtaining regulatory approvals, or the failure to maintain such approvals;concentration of Merit’s revenues among a few products and procedures;development of new products and technology that could render Merit’s productsobsolete; lack of market acceptance of new products; failures to introduceproducts 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 expressly qualifiedin 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 September 30,2010, we reported record revenues of $73.2 million, up 10% from the threemonths ended September 30, 2009 of $66.8 million.  Revenues for the nine months ended September 30,2010 were a record $215.6 million, compared with $190.0 million for the firstnine months of 2009, a gain of 13%.

 

Gross margins were 42.7% ofsales for both the three and nine-month periods ended September 30, 2010,respectively, compared to 42.7% and 42.9% of sales for the three and nine-monthperiods ended September 30, 2009, respectively.  The slight decrease in gross margins for thenine months ended September 30, 2010, compared to the nine months ended September 30,2009, can be attributed primarily to higher average fixed overhead unit costsas the result of higher production costs, all of which were partially offset byan increase of approximately 1.0% in gross margin improvement related primarilyto the launch of our EN Snare® device in January 2010 and our sale ofembolization devices we obtained through our acquisition of BioSphere in September 2010.

 

The loss for the quarterended September 30, 2010 was ($2.0) million, or ($0.07) per share,compared to net income of $6.1 million, or $0.21 per share, for the comparablequarter of 2009.  Net income for thenine-month period ended September 30, 2010 was $8.3 million, or $0.29 pershare, down 53% compared to $17.5 million, or 

 

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$0.61 per share, for thecomparable period of 2009. When compared to the prior year periods, net incomefor the three and nine-month periods ended September 30, 2010 wasnegatively affected by the goodwill impairment of approximately $8.3 million orapproximately $5.2 million net of tax related to our endoscopy reportingunit.  In addition, net income wasnegatively affected by the BioSphere acquisition costs of approximately $1.2million or approximately $723,000 net of tax and $2.3 million or approximately $1.4million net of tax, for the three and nine months ended September 30,2010, respectively, and BioSphere severance costs of approximately $1.6 millionor approximately $1.0 million net of tax.

 

On September 10, 2010,we completed our acquisition of BioSphere in an all-cash transaction valued atapproximately $96 million, inclusive of all common equity and Series APreferred preferences.  BioSpheredevelops and markets embolotherapeutic products for the treatment of uterinefibroids, hypervascularized tumors and arteriovenous malformations.  We anticipate this acquisition will give us aplatform technology applicable to multiple therapeutic areas with significantmarket potential while leveraging existing interventional radiology callpoints.  Two immediate applications forthe embolotherapy are treatment of uterine fibroids and primary liver cancer.

 

In September 2010 webegan our first direct shipments in China to sub-distributors.  Because we will now be able to sell ourproducts directly to sub-distributors, which enabled us to terminate ourexisting Chinese distribution agreement, we expect to increase our sales, grossmargins and net income from our Chinese product sales.   In addition, we are making significantinvestments in obtaining additional regulatory licenses from the Chinese StateFood and Drug Administration (“SFDA”) in an effort to expand our productofferings in the Chinese market.

 

**Results of Operations**

 

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

 
| ** **                                    | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|-----------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                    | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                                    | ** ** | **2010**                         | ** ** | **2009**                        | ** ** | **2010** | ** ** | **2009** | ** ** |
| Sales                                         |       | 100.0                            | %          | 100.0                           | %          | 100.0 | % | 100.0 | % |
| Gross  profit                                 |       | 42.7                             |       | 42.7                            |       | 42.7 |   | 42.9 |   |
| Selling,  general and administrative expenses |       | 30.7                             |       | 25.1                            |       | 28.5 |   | 25.2 |   |
| Research  and development expenses            |       | 5.3                              |       | 4.9                             |       | 4.9 |   | 4.4 |   |
| Goodwill  impairment charge                   |       | 11.4                             |       |                            |       | 3.9 |   |   |   |
| Income  (loss) from operations                |       | (4.7                             | )          | 12.7                            |       | 5.4 |   | 13.3 |   |
| Other  income (expense)                       |       | (0.1                             | )          | 0.0                             |       | 0.0 |   | 0.1 |   |
| Net  income (loss)                            |       | (2.7                             | )          | 9.1                             |       | 3.8 |   | 9.2 |   |

 

Sales.  Sales for the three months ended September 30,2010 increased by 10%, or approximately $6.4 million, compared to the correspondingperiod of 2009.   Sales for the ninemonths ended September 30, 2010 increased by 13%, or approximately $25.6million, compared to the corresponding period of 2009.   Listed below are the sales by businesssegment for the three and nine-month periods ended September 30, 2010 and2009 (in thousands):

 

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| ** **                       | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|----------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                       | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                       | ** ** | **% Change**                | ** ** | **2010**                        | ** ** | **2009** | ** ** | **% Change** | ** ** | **2010** | ** ** | **2009** | ** ** |
| **Cardiovascular**               |       |                             |       |                            |       |   |   |   |   |   |   |   |   |
| Stand-alone  devices             |       | 10                               | %          | $                               | 21,391     |   | $ | 19,494 |   | 15 | % | $ | 65,138 |   | $ | 56,515 |   |
| Custom  kits and procedure trays |       | 13                               | %          | 21,675                          |       | 19,226 |   | 16 | % | 62,054 |   | 55,903 |   |
| Inflation  devices               |       | 1                                | %          | 15,367                          |       | 15,205 |   | 5 | % | 46,489 |   | 44,199 |   |
| Catheters                        |       | 10                               | %          | 11,115                          |       | 10,107 |   | 20 | % | 33,364 |   | 27,811 |   |
| Embolization  devices            |       |                             |       | 1,495                           |       |   |   |   |   | 1,495 |   |   |   |
| Total                            |       | 11                               | %          | 71,043                          |       | 64,032 |   | 13 | % | 208,540 |   | 184,428 |   |
|                             |       |                             |       |                            |       |   |   |   |   |   |   |   |   |
| **Endoscopy**                    |       |                             |       |                            |       |   |   |   |   |   |   |   |   |
| Endoscopy  devices               |       | -22                              | %          | 2,129                           |       | 2,727 |   | 27 | % | 7,012 |   | 5,539 |   |
|                             |       |                             |       |                            |       |   |   |   |   |   |   |   |   |
| Total                            |       | 10                               | %          | $                               | 73,172     |   | $ | 66,759 |   | 13 | % | $ | 215,552 |   | $ | 189,967 |   |

 

CardiovascularSales.  The cardiovascular sales growthof 11% for the third quarter of 2010, and the cardiovascular sales growth of 13%for the nine months ended September 30, 2010, when compared to thecomparable periods of 2009, was primarily due to stand-alone sales primarilyrelated to the EN Snare® device sales of $1.7 million and $5.7 million, for thethree and nine-month periods ended September 30, 2010, respectively, andembolization device sales of $1.5 million which were attributable to ouracquisition of BioSphere on September 10, 2010.  Sales were also favorably affected byincreased sales of custom kits and procedure trays and catheters (particularlyour Prelude® sheath product line and mini access catheter product line).

 

EndoscopySales.  The decrease of 22% of endoscopysales for the third quarter of 2010, when compared to the comparable period of2009, was primarily due to the elimination of sales of certain procedures andsales force turnover.  Sales of $7.0million for the nine months ended September 30, 2010, when compared to thecomparable period of 2009 of $5.5 million (which includes only six and one-halfmonths) was also effected by the items discussed above.

 

Gross Profit.** **Gross margins were 42.7% ofsales for both the three and nine-month periods ended September 30, 2010,respectively, compared to 42.7% and 42.9% of sales for the three and nine-monthperiods ended September 30, 2009, respectively.  The slight decrease in gross margins for thenine months ended September 30, 2010, compared to the nine month ended September 30,2009, can be attributed primarily to higher average fixed overhead unit costsas the result of higher production costs, all of which were partially offset byan increase of approximately 1.0% in gross margin improvement related primarilyto the launch of our EN Snare® device in January 2010 and our sale ofembolization devices we obtained through our acquisition of BioSphere in September 2010.

 

OperatingExpenses.****Selling, general andadministrative expenses increased to 30.9% of sales for the three months ended September 30,2010, compared with 25.1% of sales for the three months ended September 30,2009.  Selling, general andadministrative expenses increased 35% to $22.6 million for the three monthsended September 30, 2010 from $16.8 million for the three months ended September 30,2009.  These increased expenses wereprimarily attributable to the BioSphere acquisition costs and severanceexpenses of approximately $1.2 million and $1.6 million, respectively, and thecost of hiring additional sales and marketing people in the U.S. and Europe.For the nine months ended September 30, 2010, selling, general andadministrative expenses increased to 28.6% compared with 25.2% of sales for thenine months ended September 30, 2009. Selling, general and administrative expenses increased 29% to $61.6million for the nine months ended September 30, 2010 from $47.9 millionfor the nine months ended September 30, 2009.  These increased expenses were primarilyattributable to the BioSphere acquisition costs and severance expenses ofapproximately $2.3 million and $1.6 million, respectively, and the cost ofhiring additional sales and marketing people in the U.S. and Europe.

 

Operating expenses for thethree and nine-month periods ended September 30, 2010 were also affectedby a goodwill impairment charge of $8.3 million related to our endoscopyreporting unit.  During our annual testof goodwill balances, which is completed during the third quarter of each year,we determined that our goodwill related to our endoscopy reporting unit wasimpaired.  Based on our determination ofestimated future cash flows

 

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for this reporting unit,discounted back to their present value using a discount rate that reflects therisk profiles of the underlying activities, we concluded that the carryingvalue amount of this reporting unit was less than its estimated fair value.Some of the factors that influenced our estimated cash flows were slower salesgrowth in the products acquired from our Alveolus acquisition in March of2009, uncertainty regarding acceptance of new products and continued operatinglosses.   During the third quarter of2010, we also performed the annual impairment test of all of our otherreporting units.  The performance of thestep 1 impairment test for all of these other reporting units indicated thatthe fair value of each was substantially in excess of its carrying value.

 

Researchand development expenses increased to 5.3% of sales for the three months ended September 30,2010, compared with 4.9% of sales for the three months ended September 30,2009.  Research and development expensesincreased to 4.9% of sales for the nine months ended September 30, 2010,compared to 4.4% of sales for the nine months ended September 30,2009.  Research and development expensesincreased by 17% to $3.9 million for the three months ended September 30,2010 from $3.3 million for the three months ended September 30, 2009.  For the nine months ended September 30,2010 research and development expenses increased by 29% to $10.7 million from$8.3 million during the nine months ended September 30, 2009.  The increase in research and developmentexpenses related primarily to additional regulatory costs associated with ourefforts to obtain product approval from the U.S. Food and Drug Administrationas well as other international regulatory agencies, and the development ofseveral new products for our endoscopy product line.

 

Cardiovascular OperatingIncome.  During the third quarter of 2010, we reportednet income from operations of approximately 6.0 million from our cardiovascularbusiness segment, compared to net income of approximately $9.3 million for thecomparable period of 2009.  For the ninemonths ended September 30, 2010, we reported net income from operations ofapproximately $23.2 million from our cardiovascular business segment, comparedto net income of approximately $27.8 million for the comparable period in 2009.When compared to the corresponding period of 2009, income from operations forthe three and nine-month periods ended September 30, 2010, was negativelyaffected by the BioSphere acquisition costs of approximately $1.2 million and$2.3 million, for the three and nine-month periods ended September 30,2010, respectively, and BioSphere severance expenses of approximately $1.6million during the three months ended September 30, 2010.  Absent these one-time BioSphere acquisitioncosts, net income from operations would have been approximately $7.8 millionand approximately $25.7 million, for the three and nine-month periods ended September30, 2010, respectively.

 

EndoscopyOperating (Loss).  During the third quarter of 2010, we reporteda net loss from operations of approximately $9.5 million from our endoscopybusiness segment, compared to a net loss of approximately $866,000 for thecomparable period of 2009.  For the ninemonths ended September 30, 2010, we reported a net loss from operations ofapproximately $11.5 million from our endoscopy business segment, compared to anet loss of approximately $2.4 million for the comparable period of 2009. Whencompared to the corresponding period of 2009, the increase in loss fromoperations for the three and nine-month periods ended September 30, 2010,was negatively affected by a goodwill impairment charge of approximately $8.3million and the decrease in sales as discussed above.  Absent the goodwill impairment charge, netloss from operations would have been approximately $1.1 million andapproximately $3.2 million, for the three and nine-month periods ended September30, 2010, respectively.

 

OtherIncome (Expense).  Otherexpense for the third quarter of 2010 was approximately ($70,000), compared to approximately($29,000) for the comparable period in 2009. The net increase in the three month period ended September 30,2010, when compared to the comparable period in 2009, was primarily the resultof interest expense associated with the debt we incurred to finance ouracquisition of BioSphere during the third quarter of 2010. Other expense forthe nine months ended September 30, 2010 was approximately ($24,000),compared to other income of approximately $167,000 for the corresponding periodin 2009.  The net change in other incomefor the nine-month period ended September 30, 2010, when compared to thecomparable period of 2009, was primarily the result of additional interestexpense as described above and a decrease in interest income attributable tolower average cash balances.

 

Income Taxes.  Our effective tax rate for the three monthsended September 30, 2010 was 43.8%, compared to 27.8% for thecorresponding period of 2009.  For the nine months ended September 30,2010, our effective tax rate was 29.2%, compared to 31.5% for the comparableperiod of 2009.  The increase in the effective tax rate for the threemonths ended September 30, 2010, when compared to the corresponding periodof 2009, was primarily related to a pretax loss benefit for the third quarterof 2010 and benefits from the expiration of statute of limitations on ourliabilities related to unrecognized tax benefits.  The decrease in theeffective tax rate for the nine months ended September 30, 2010, whencompared to the corresponding period of 2009, was primarily related to theprofitability of our Irish operations which are taxed at a lower rate than ourU.S. and other foreign operations.

 

NetIncome (Loss).   During thethird quarter of 2010, we reported a net loss of approximately $2.0 million,compared to net income of approximately $6.1 million for the comparable periodof 2009.  For the nine months 

 

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endedSeptember 30, 2010, we reported net income of approximately $8.3 million,compared to net income of approximately $17.5 million for the comparable periodof 2009.  The factors discussed above inoperating net income (loss) decreased our net income for the three andnine-month periods ended September 30, 2010.

 

**Liquidity and Capital Resources**

 

Ourworking capital as of September 30, 2010 and December 31, 2009 was$76.0 million and $57.7 million, respectively. The increase in working capital was primarily the result of increases incurrent assets, primarily inventories and trade receivables, from ouracquisition of BioSphere.  As of September 30,2010, we had a current ratio of 3.3 to 1.

 

We entered into an unsecured Credit Agreement,dated September 10, 2010 (the “Credit Agreement”), with the lenders whoare or may become party thereto (collectively, the “Lenders”) and Wells FargoBank, National Association (“Wells Fargo”), as administrative agent for theLenders.  As of September 30, 2010, WellsFargo is the only bank involved in the Credit Agreement.  Pursuant to theterms of the Credit Agreement, the Lenders have agreed to make revolving creditloans up to an aggregate amount of $125 million.  Wells Fargo has alsoagreed to make swingline loans from time to time through the maturity date ofSeptember 10, 2015 in amounts equal to the difference between the amountsactually loaned by the Lenders and the aggregate credit commitment.  Our interest rate as of September 30, 2010was a one month fixed rate of 1.51% on $82 million and a variable floating rateof 1.54% on approximately $6 million.

 

As of September 30,2010, we had outstanding borrowings of approximately $88 million under theCredit Agreement.   The principalpurposes of the Credit Agreement were to allow us to finance the acquisition ofBioSphere and for general 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 September 10, 2010and December 31, 2009 were $0 and $7.0 million, respectively.  Our interest rate as of September 10,2010 and December 31, 2009 was set at approximately 1.0%.  In connection with obtaining our Wells Fargorevolving credit facility, our unsecured loan agreement with Bank of Americawas terminated on September 10, 2010.

 

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 September 30, 2010 and December 31,2009.

 

Historically,we have incurred significant expenses in connection with new facilities,production automation, product development and the introduction of newproducts.  Over the last two years, wespent a substantial amount of cash ($96 million to acquire BioSphere in September of2010 and $46.2 million during 2009), in connection with our acquisition ofcertain assets and product lines.  Weplan to construct two new production facilities over the next two years, inSouth Jordan, Utah and Galway, Ireland, with an anticipated cost of $52million.  In the event we pursue andcomplete similar transactions or acquisitions in the future, additional fundswill likely be required to meet our strategic needs, which may require us toconsider raising additional funds in the debt or equity markets.  We currently believe that our existing cashbalances, anticipated future cash flows from operations, sales of equity, andexisting lines of credit and committed debt financing will be adequate to fundour current and future planned operations for the next twelve months and theforeseeable 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 thedevelopment and selection of 

 

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ourmost critical financial estimates with the audit committee of our Board ofDirectors.  The following paragraphs identify our most critical accountingpolicies:

 

**InventoryObsolescence Reserve****. ** Our management reviews on aquarterly basis inventory quantities on hand for unmarketable and/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 and/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, additional inventorywrite-downs may be required.  During theyears ended December 31, 2009, 2008 and 2007, we provided on an annualbasis an obsolescence reserve expense of between $1.1 million to $1.5 millionand have written off against such reserves between $1.2 million and $1.3million on an annual basis.  Based onthis historical trend, we believe that the amount included in our obsolescencereserve represents an accurate estimate of the unmarketable and/or slow movingproducts 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 insurgical trays.

 

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 to deteriorate,resulting in an impairment of their ability to make payments, additionalallowances 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 compensation expenseand 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 morelikely than not that the position will be sustained upon examination by the taxauthorities.  Such tax positions areinitially and subsequently measured as the largest amount of tax positions thathas a greater than 50% likelihood of being realized upon ultimate settlementwith the tax authorities assuming full knowledge of the position and allrelevant facts.  Although we believe our provisions for unrecognized taxpositions are reasonable, we can make no assurance that the final tax outcomeof these matters will not be different from that which we have reflected in ourincome tax provisions and accruals.  Thetax law is subject to varied interpretations, and we have taken positionsrelated to certain matters where the law is subject to interpretation. Such differences could have a material impact on our income taxprovisions and operating results in the period(s) in which we make suchdetermination.

 

**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.  During our annual test of goodwill balances,which is completed during the third quarter of each year, we determined thatour goodwill related to our endoscopy reporting unit was impaired.  We determined that based on estimated futurecash flows for this reporting unit, discounted back to their present value usinga discount rate that reflects the risk profiles of the underlying activities,the carry value amount of this reporting unit was less than its estimated fairvalue. Some of the factors that influence our estimated cash flows 

 

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were slower sales growth inthe products acquired from our Alveolus acquisition in March of 2009,uncertainty regarding acceptance of new products and continued operatinglosses.

 

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 DISCLOSURES ABOUT MARKETRISK**

 

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 Chinese Yuan, Swedish and DanishKroner.  Our consolidated financialstatements are denominated in, and our principal currency is, the U.S.Dollar.  For the three months ended September 30, 2010, a portion ofour revenues ($7.1 million, representing approximately 9.7% of aggregaterevenues), was attributable to sales that were denominated in foreigncurrencies.  All other internationalsales were denominated in U.S. Dollars.  Certain of our expenses for thequarter ended September 30, 2010 were also denominated in foreigncurrencies, which partially offset risks associated with fluctuations ofexchanges rates between foreign currencies on the one hand, and the U.S. Dollaron the other hand.   During the three months ended September 30,2010, the exchange rate between our foreign currencies against the U.S. Dollarresulted in a decrease of our gross revenues of approximately $817,000 and anincrease of 0.46% in gross profit.  Thisimprovement in gross profits was the result of a decrease in our Irishmanufacturing expenses which are primarily denominated in Euros.

 

On August 31, 2010, weforecasted a net exposure for September 30, 2010 representing the differencebetween the Euro- and GBP-denominated receivables and Euro and GBP-denominatedpayables of approximately 355,000 Euros and 299,000 GBPs, respectively. In order to partially offset such risks, on August 31, 2010 we enteredinto a 30-day forward contract for Euros and GBPs.  We generally enterinto similar economic transactions at various times during the year topartially offset exchange rate risks we bear throughout the year.  Duringthe quarter ended September 30, 2010, we recorded a net gain ofapproximately $10,000 on foreign currency transactions.  We do not purchase or hold derivativefinancial instruments for speculative or trading purposes.  The fair valueof our open positions at September 30, 2010 was not material to ourconsolidated financial statements.

 

As discussed in Note 10 toour consolidated financial statements as of September 30, 2010, we hadoutstanding borrowings of approximately $88 million under the Credit Agreement.Accordingly, our earnings and after-tax cash flow are affected by changes ininterest rates. As part of our efforts to mitigate interest rate risk, on October 25,2010, we entered into a LIBOR-based interest rate swap agreement thateffectively fixed the interest rate on $55 million of our current floatingrate bank borrowings for a five-year period. The interest rate swap locked inthe Company’s interest rate on the expected outstanding balance of $55 millionat 2.73%.  This instrument is intended toreduce our exposure to interest rate fluctuations and was not entered into forspeculative purposes. Assuming the current level of borrowings remained thesame if we segregated the $33 million of borrowings that was not subjectto the interest rate swap and assuming a one percentage point change in theaverage interest rate under these borrowings, it is estimated that our interestexpense and net income would change by $153,000 for the nine months endingSeptember 30, 2011.

 

In the event of an adversechange in interest rates, our management would likely take actions, in additionto the interest rate swap agreement discussed above, to mitigate our exposure.However, due to the uncertainty of the actions that would be taken and their possibleeffects, additional analysis is not possible at this time. Further, suchanalysis would not consider the effects of the change in the level of overalleconomic activity that could exist in such an environment.

 

**ITEM4.  CONTROLS AND PROCEDURES**

 

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

 

Underthe supervision and with the participation of our management, including ourChief Executive Officer and Chief Financial Officer, we evaluated the designand operation of our disclosure controls and procedures (as defined inRules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of1934, as amended the “Exchange Act”), as of September 30, 2010. On thebasis of this review, our management, including our Chief Executive Officer andChief Financial Officer, concluded that our disclosure controls and proceduresare designed, and are 

 

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effective,to give reasonable assurance that the information required to be disclosed byus in reports that we file under the Exchange Act is recorded, processed,summarized and reported within the time periods specified in the rules andforms of the SEC and to ensure that information required to be disclosed in thereports filed or submitted under the Exchange Act is accumulated andcommunicated to our management, including our Chief Executive Officer and ChiefFinancial Officer, in a manner that allows timely decisions regarding requireddisclosure.

 

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

 

Therewas no change in our internal control over financial reporting during thequarter ended September 30, 2010 that materially affected, or that webelieve is reasonably likely to materially affect, our internal control overfinancial reporting.

 

**PART II- OTHER INFORMATION**

 

**ITEM 1.   LEGALPROCEEDINGS**

 

Weare subject to certain legal actions which we consider routine to our businessactivities.  As of September 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/oroperating results.

 

**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.

 

 
| MERIT MEDICAL  SYSTEMS, INC. |                   |                                   |
|-----------------------------------|------------------------|----------------------------------------|
| REGISTRANT                        |                   |                                   |
|                              |                   |                                   |
|                              |                   |                                   |
| Date:                             | November 8, 2010  |                                   | /s/ Fred P. Lampropoulos |
|                              |                   | FRED P. LAMPROPOULOS                   |
|                              |                   | PRESIDENT AND CHIEF  EXECUTIVE OFFICER |
|                              |                   |                                   |
|                              |                   |                                   |
|                              |                   |                                   |
| Date:                             | November 8,  2010 |                                   | /s/ Kent W. Stanger |
|                              |                   | KENT W. STANGER                        |
|                              |                   | CHIEF FINANCIAL OFFICER                |

 

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