Table of Contents

** **

 

** **

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

** **

**FORM 10-Q**

** **

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

** **

**FOR THEQUARTERLY PERIOD ENDED SEPTEMBER 30, 2009.**

** **

**OR**

** **

**o  TRANSITION REPORT PURSUANT TO SECTION 13OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**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 WestMerit Parkway, South Jordan, UT, 84095**

(Address of Principal Executive Offices,including Zip Code)

 

**(801)253-1600**

(Registrant’s telephone number, including areacode)

 

Indicate by check mark whether the Registrant: (1) hasfiled all reports required to be filed by Sections 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the Registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days.  Yes  x  No  o

 

Indicate by check mark whether the Registrant hassubmitted electronically and posted on its corporate web site, if any, everyInteractive Data File required to be submitted and posted pursuant to Rule 405of Regulation S-T during the preceding 12 months (or for such shorter periodthat the Registrant was required to submit and post such files).  Yes  o  No  o

 

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, or a non-accelerated filer, or asmaller public company. . See the definitions of “large accelerated filer,” “acceleratedfiler” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

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

 

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  o  No  x

 

Indicate the number of shares outstanding of each ofthe Registrant’s classes of common stock, as of the latest practicable date.

 
| **Common  Stock** |   | **28,087,311**                         |
|-------------------|--------|----------------------------------------|
| Title or class    |   | Number of Shares                       |
|              |   | Outstanding at November   2, 2009 |

 

 

 

----

Table of Contents

 

**MERITMEDICAL SYSTEMS, INC.**

** **

**INDEXTO FORM 10-Q**

 
| ** **        | ** ** | ** **                                                                                                   |       | **PAGE**   |
|-------------------|------------|--------------------------------------------------------------------------------------------------------------|------------|------------|
| **PART I.**  | ** ** | **FINANCIAL INFORMATION**                                                                                    |       |       |
|              |       |                                                                                                         |       |       |
| Item 1.           |       | Financial Statements                                                                                         |       |       |
|              |       |                                                                                                         |       |       |
|              |       | Consolidated Balance Sheets as of  September 30, 2009 and December 31, 2008                        |       | 3          |
|              |       |                                                                                                         |       |       |
|              |       | Consolidated  Statements of Operations for the three and nine months ended  September 30, 2009 and 2008 |       | 5          |
|              |       |                                                                                                         |       |       |
|              |       | Consolidated  Statements of Cash Flows for the nine months ended September 30, 2009  and 2008           |       | 6          |
|              |       |                                                                                                         |       |       |
|              |       | Notes to  Consolidated Financial Statements                                                                  |       | 8          |
|              |       |                                                                                                         |       |       |
| Item 2.           |       | Management’s Discussion and Analysis  of Financial Condition and Results of Operations                  |       | 16         |
|              |       |                                                                                                         |       |       |
| Item 3.           |       | Quantitative and Qualitative  Disclosures About Market Risk                                                  |       | 20         |
|              |       |                                                                                                         |       |       |
| Item 4.           |       | Controls and Procedures                                                                                      |       | 20         |
|              |       |                                                                                                         |       |       |
| **PART II.** | ** ** | **OTHER  INFORMATION**                                                                                       | ** ** | ** ** |
|              |       |                                                                                                         |       |       |
| Item  1.          |       | Legal  Proceedings                                                                                           |       | 21         |
|              |       |                                                                                                         |       |       |
| Item  1A.         |       | Risk  Factors                                                                                                |       | 21         |
|              |       |                                                                                                         |       |       |
| Item  6.          |       | Exhibits                                                                                                     |       | 21         |
|              |       |                                                                                                         |       |       |
| SIGNATURES        |       | 22                                                                                                           |

 

2

----

Table of Contents

** **

**Part I - FINANCIAL INFORMATION**

 

**ITEM1.  FINANCIAL STATEMENTS**

 

**MERITMEDICAL SYSTEMS, INC. AND SUBSIDIARIES**

CONSOLIDATED BALANCESHEETS

SEPTEMBER 30, 2009 AND DECEMBER 31, 2008

(In thousands - unaudited)

 
| ** **                                                                               | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                               | ** ** | **2009**               | ** ** | **2008**              | ** ** |
| ASSETS                                                                                   |       |                   |       |                  |       |
|                                                                                     |       |                   |       |                  |       |
| CURRENT  ASSETS:                                                                         |       |                   |       |                  |       |
| Cash  and cash equivalents                                                               |       | $                      | 5,763      |                  | $          | 34,030 |   |
| Trade  receivables - net of allowances of $650 and $505, respectively                    |       | 31,812                 |       | 27,749                |       |
| Employee  receivables                                                                    |       | 171                    |       | 126                   |       |
| Other  receivables                                                                       |       | 465                    |       | 818                   |       |
| Inventories                                                                              |       | 48,036                 |       | 38,358                |       |
| Prepaid  expenses and other assets                                                       |       | 1,832                  |       | 985                   |       |
| Deferred  income tax assets                                                              |       | 2,783                  |       | 2,782                 |       |
| Income  tax refunds receivable                                                           |       | 667                    |       | 607                   |       |
|                                                                                     |       |                   |       |                  |       |
| Total  current assets                                                                    |       | 91,529                 |       | 105,455               |       |
|                                                                                     |       |                   |       |                  |       |
| PROPERTY  AND EQUIPMENT:                                                                 |       |                   |       |                  |       |
| Land  and land improvements                                                              |       | 9,776                  |       | 7,992                 |       |
| Building                                                                                 |       | 50,000                 |       | 49,793                |       |
| Manufacturing  equipment                                                                 |       | 75,019                 |       | 68,184                |       |
| Furniture  and fixtures                                                                  |       | 15,550                 |       | 16,689                |       |
| Leasehold  improvements                                                                  |       | 10,122                 |       | 9,868                 |       |
| Construction-in-progress                                                                 |       | 11,476                 |       | 7,599                 |       |
|                                                                                     |       |                   |       |                  |       |
| Total                                                                                    |       | 171,943                |       | 160,125               |       |
| Less  accumulated depreciation                                                           |       | (60,749                | )          | (56,186               | )          |
|                                                                                     |       |                   |       |                  |       |
| Property  and equipment—net                                                         |       | 111,194                |       | 103,939               |       |
|                                                                                     |       |                   |       |                  |       |
| OTHER  ASSETS:                                                                           |       |                   |       |                  |       |
| Other  intangibles - net of accumulated amortization of $4,720 and $3,122,  respectively |       | 25,899                 |       | 6,913                 |       |
| Goodwill                                                                                 |       | 32,849                 |       | 13,048                |       |
| Other  assets                                                                            |       | 3,030                  |       | 2,325                 |       |
| Deferred  income tax assets                                                              |       | 38                     |       | 23                    |       |
| Deposits                                                                                 |       | 92                     |       | 73                    |       |
|                                                                                     |       |                   |       |                  |       |
| Total  other assets                                                                      |       | 61,908                 |       | 22,382                |       |
|                                                                                     |       |                   |       |                  |       |
| TOTAL  ASSETS                                                                            |       | $                      | 264,631    |                  | $          | 231,776 |   |

 

See notes toconsolidated financial statements.

 

3

----

Tableof Contents

 

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

CONSOLIDATED BALANCESHEETS

SEPTEMBER 30, 2009 ANDDECEMBER 31, 2008

(In thousands -unaudited)

 
| ** **                                                                                                                                                      | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                      | ** ** | **2009**               | ** ** | **2008**              | ** ** |
| LIABILITIES  AND STOCKHOLDERS’ EQUITY                                                                                                                      |       |                   |       |                  |       |
|                                                                                                                                                            |       |                   |       |                  |       |
| CURRENT  LIABILITIES:                                                                                                                                           |       |                   |       |                  |       |
| Trade  payables                                                                                                                                                 |       | $                      | 13,570     |                  | $          | 10,622 |   |
| Other  payables                                                                                                                                                 |       | 7,000                  |       |                  |       |
| Accrued  expenses                                                                                                                                               |       | 13,213                 |       | 9,973                 |       |
| Advances  from employees                                                                                                                                        |       | 405                    |       | 211                   |       |
| Income  taxes payable                                                                                                                                           |       | 1,472                  |       | 366                   |       |
|                                                                                                                                                            |       |                   |       |                  |       |
| Total  current liabilities                                                                                                                                      |       | 35,660                 |       | 21,172                |       |
|                                                                                                                                                            |       |                   |       |                  |       |
| DEFERRED  INCOME TAX LIABILITIES                                                                                                                                |       | 8,788                  |       | 8,771                 |       |
|                                                                                                                                                            |       |                   |       |                  |       |
| LIABILITIES  RELATED TO UNRECOGNIZED TAX POSITIONS                                                                                                              |       | 2,681                  |       | 2,818                 |       |
|                                                                                                                                                            |       |                   |       |                  |       |
| DEFERRED  COMPENSATION PAYABLE                                                                                                                                  |       | 3,048                  |       | 2,348                 |       |
|                                                                                                                                                            |       |                   |       |                  |       |
| DEFERRED  CREDITS                                                                                                                                               |       | 1,903                  |       | 1,994                 |       |
|                                                                                                                                                            |       |                   |       |                  |       |
| OTHER  LONG-TERM OBLIGATIONS                                                                                                                                    |       | 461                    |       | 368                   |       |
|                                                                                                                                                            |       |                   |       |                  |       |
| Total  liabilities                                                                                                                                              |       | 52,541                 |       | 37,471                |       |
|                                                                                                                                                            |       |                   |       |                  |       |
| STOCKHOLDERS’  EQUITY:                                                                                                                                     |       |                   |       |                  |       |
| Preferred  stock—5,000 shares authorized as ofSeptember  30, 2009 and  December 31, 2008; no shares issued                                       |       |                   |       |                  |       |
| Common  stock—no par value; 100,000 sharesauthorized; 28,059 and 28,093 shares  issued at September 30, 2009 and December 31, 2008, respectively |       | 62,012                 |       | 61,689                |       |
| Retained  earnings                                                                                                                                              |       | 150,137                |       | 132,674               |       |
| Accumulated  other comprehensive loss                                                                                                                           |       | (59                    | )          | (58                   | )          |
|                                                                                                                                                            |       |                   |       |                  |       |
| Total  stockholders’ equity                                                                                                                                |       | 212,090                |       | 194,305               |       |
|                                                                                                                                                            |       |                   |       |                  |       |
| TOTAL  LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                                                |       | $                      | 264,631    |                  | $          | 231,776 |   |

 

See notes to consolidatedfinancial statements.

 

4

----

Tableof Contents

 

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

CONSOLIDATEDSTATEMENTS OF OPERATIONS

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2009AND 2008

(In thousands, except earnings per common share -unaudited)

 
| ** **                            | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended**  | ** ** |
|---------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                            | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| ** **                            | ** ** | **2009**               | ** ** | **2008**               | ** ** | **2009** | ** ** | **2008** | ** ** |
|                                  |       |                   |       |                   |       |   |   |   |   |
| NET  SALES                            |       | $                      | 66,759     |                   | $          | 58,153 |   | $ | 189,967 |   | $ | 169,147 |   |
|                                  |       |                   |       |                   |       |   |   |   |   |
| COST  OF SALES                        |       | 38,224                 |       | 34,469                 |       | 108,481 |   | 99,369 |   |
|                                  |       |                   |       |                   |       |   |   |   |   |
| GROSS  PROFIT                         |       | 28,535                 |       | 23,684                 |       | 81,486 |   | 69,778 |   |
|                                  |       |                   |       |                   |       |   |   |   |   |
| OPERATING  EXPENSES:                  |       |                   |       |                   |       |   |   |   |   |
| Selling,  general, and administrative |       | 16,780                 |       | 14,329                 |       | 47,896 |   | 40,240 |   |
| Research  and development             |       | 3,292                  |       | 2,186                  |       | 8,264 |   | 6,756 |   |
|                                  |       |                   |       |                   |       |   |   |   |   |
| Total  operating expenses             |       | 20,072                 |       | 16,515                 |       | 56,160 |   | 46,996 |   |
|                                  |       |                   |       |                   |       |   |   |   |   |
| INCOME  FROM OPERATIONS               |       | 8,463                  |       | 7,169                  |       | 25,326 |   | 22,782 |   |
|                                  |       |                   |       |                   |       |   |   |   |   |
| OTHER  INCOME (EXPENSE):              |       |                   |       |                   |       |   |   |   |   |
| Interest  income                      |       | 14                     |       | 183                    |       | 164 |   | 495 |   |
| Other  income (expense) - net         |       | (43                    | )          | 46                     |       | 3 |   | 25 |   |
|                                  |       |                   |       |                   |       |   |   |   |   |
| Other  income (expense) - net         |       | (29                    | )          | 229                    |       | 167 |   | 520 |   |
|                                  |       |                   |       |                   |       |   |   |   |   |
| INCOME  BEFORE INCOME TAXES           |       | 8,434                  |       | 7,398                  |       | 25,493 |   | 23,302 |   |
|                                  |       |                   |       |                   |       |   |   |   |   |
| INCOME  TAX EXPENSE                   |       | 2,349                  |       | 2,198                  |       | 8,030 |   | 7,967 |   |
|                                  |       |                   |       |                   |       |   |   |   |   |
| NET  INCOME                           |       | $                      | 6,085      |                   | $          | 5,200 |   | $ | 17,463 |   | $ | 15,335 |   |
|                                  |       |                   |       |                   |       |   |   |   |   |
| EARNINGS  PER COMMON SHARE:           |       |                   |       |                   |       |   |   |   |   |
| Basic                                 |       | $                      | .22        |                   | $          | .19 |   | $ | .62 |   | $ | .55 |   |
| Diluted                               |       | $                      | .21        |                   | $          | .18 |   | $ | .61 |   | $ | .54 |   |
|                                  |       |                   |       |                   |       |   |   |   |   |
| AVERAGE  COMMON SHARES:               |       |                   |       |                   |       |   |   |   |   |
| Basic                                 |       | 27,970                 |       | 27,900                 |       | 27,983 |   | 27,669 |   |
| Diluted                               |       | 28,690                 |       | 28,812                 |       | 28,555 |   | 28,482 |   |

 

See notes toconsolidated financial statements.

 

5

----

Tableof Contents

 

**MERITMEDICAL SYSTEMS, INC. AND SUBSIDIARIES**

CONSOLIDATED STATEMENTSOF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008

(In thousands - unaudited)

 
| ** **                                                                         | ** ** | **Nine Months Ended**  | ** ** |
|------------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                         | ** ** | **September 30,** | ** ** |
| ** **                                                                         | ** ** | **2009**               | ** ** | **2008** | ** ** |
|                                                                               | ** ** | ** **             | ** ** |   | ** ** |
| CASH  FLOWS FROM OPERATING ACTIVITIES:                                             |       |                   |       |   |   |
| Net  income                                                                        |       | $                      | 17,463     |   | $ | 15,335 |   |
| Adjustments  to reconcile net income to net cash provided by operating activities: |       |                   |       |   |   |
| Depreciation  and amortization                                                     |       | 8,980                  |       | 7,680 |   |
| Losses  on sales and/or abandonment of property and equipment                      |       | 217                    |       | 541 |   |
| Write-off  of a certain patent and trademarks                                      |       | 158                    |       | 76 |   |
| Amortization  of deferred credits                                                  |       | (92                    | )          | (82 | ) |
| Purchase  of trading investments                                                   |       | (339                   | )          | (290 | ) |
| Net  unrealized (gains)/losses on trading investments                              |       | (365                   | )          | 343 |   |
| Deferred  income taxes                                                             |       | (21                    | )          | (1,272 | ) |
| Stock-based  compensation                                                          |       | 880                    |       | 630 |   |
| Excess  tax benefit attributable to appreciation of common stock options exercised |       | (761                   | )          | (2,147 | ) |
| Changes  in operating assets and liabilities, net of effects from acquisitions:    |       |                   |       |   |   |
| Trade  receivables                                                                 |       | (2,910                 | )          | 119 |   |
| Employee  receivables                                                              |       | (39                    | )          | 21 |   |
| Other  receivables                                                                 |       | 352                    |       | 431 |   |
| Inventories                                                                        |       | (7,736                 | )          | (4,131 | ) |
| Prepaid  expenses and other assets                                                 |       | (596                   | )          | (196 | ) |
| Income  tax refund receivable                                                      |       | (59                    | )          | (813 | ) |
| Deposits                                                                           |       | (19                    | )          | 5 |   |
| Trade  payables                                                                    |       | 3,102                  |       | 472 |   |
| Accrued  expenses                                                                  |       | 2,605                  |       | 1,795 |   |
| Advances  from employees                                                           |       | 187                    |       | 137 |   |
| Income  taxes payable                                                              |       | 1,859                  |       | 1,690 |   |
| Liabilities  related to unrecognized tax positions                                 |       | (137                   | )          | (1,227 | ) |
| Deferred  compensation payable                                                     |       | 700                    |       | (55 | ) |
| Other  long-term obligations                                                       |       | 75                     |       | (53 | ) |
|                                                                               |       |                   |       |   |   |
| Total  adjustments                                                                 |       | 6,041                  |       | 3,674 |   |
|                                                                               |       |                   |       |   |   |
| Net  cash provided by operating activities                                         |       | 23,504                 |       | 19,009 |   |
|                                                                               |       |                   |       |   |   |
| CASH  FLOWS FROM INVESTING ACTIVITIES:                                             |       |                   |       |   |   |
| Capital  expenditures for:                                                         |       |                   |       |   |   |
| Purchase  of marketable securities available for sale                              |       |                   |       | (1,030 | ) |
| Property  and equipment                                                            |       | (15,059                | )          | (10,126 | ) |
| Patents  and trademarks                                                            |       | (1,005                 | )          | (329 | ) |
| Proceeds  from the sale of property and equipment                                  |       | 23                     |       | 25 |   |
| Cash  paid in acquisitions                                                         |       | (35,242                | )          | (2,113 | ) |
|                                                                               |       |                   |       |   |   |
| Net  cash used in investing activities                                             |       | (51,283                | )          | (13,573 | ) |
|                                                                                    |            |                        |            |  |  |  |  |

 

See notes toconsolidated financial statements.

 

6

----

Tableof Contents

 

**MERITMEDICAL SYSTEMS, INC. AND SUBSIDIARIES**

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008

(In thousands - unaudited)

 
| ** **                                                                               | ** ** | **Nine Months Ended**  | ** ** |
|------------------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                               | ** ** | **September 30,** | ** ** |
| ** **                                                                               | ** ** | **2009**               | ** ** | **2008** | ** ** |
|                                                                                     |       |                   |       |   |   |
| CASH  FLOWS FROM FINANCING ACTIVITIES:                                                   |       |                   |       |   |   |
| Proceeds  from issuance of common stock                                                  |       | $                      | 1,410      |   | $ | 5,782 |   |
| Additions  to long-term debt                                                             |       | 10,000                 |       |   |   |
| Payment  on long-term debt                                                               |       | (10,000                | )          |   |   |
| Payment  of taxes related to an exchange of common stock                                 |       | (254                   | )          |   |   |
| Common  stock repurchased and retired                                                    |       | (2,474                 | )          |   |   |
| Excess  tax benefits from stock-based compensation                                       |       | 761                    |       | 2,147 |   |
|                                                                                     |       |                   |       |   |   |
| Net  cash (used in) provided by financing activities                                     |       | (557                   | )          | 7,929 |   |
|                                                                                     |       |                   |       |   |   |
| EFFECT  OF EXCHANGE RATES ON CASH                                                        |       | 69                     |       | 142 |   |
|                                                                                     |       |                   |       |   |   |
| NET  (DECREASE)INCREASE IN CASH AND CASH EQUIVALENTS                                     |       | (28,267                | )          | 13,507 |   |
|                                                                                     |       |                   |       |   |   |
| CASH  AND CASH EQUIVALENTS:                                                              |       |                   |       |   |   |
| Beginning  of period                                                                     |       | 34,030                 |       | 17,574 |   |
|                                                                                     |       |                   |       |   |   |
| End  of period                                                                           |       | $                      | 5,763      |   | $ | 31,081 |   |
|                                                                                     |       |                   |       |   |   |
| SUPPLEMENTAL  DISCLOSURES OF CASH FLOW INFORMATION—Cash paid during the period for: |       |                   |       |   |   |
| Interest                                                                                 |       | $                      | 40         |   | $ | 14 |   |
|                                                                                     |       |                   |       |   |   |
| Income  taxes                                                                            |       | $                      | 6,380      |   | $ | 9,613 |   |
|                                                                                     |       |                   |       |   |   |
| SUPPLEMENTAL  DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES                 |       |                   |       |   |   |
| Property  and equipment purchases in accounts payable                                    |       | $                      | 1,694      |   | $ | 2,463 |   |
|                                                                                     |       |                   |       |   |   |
| Accrued  purchase price                                                                  |       | $                      | 7,000      |   | $ | 1,500 |   |

 

Duringthe nine months ended September 30, 2009, 23,829 shares of Merit’s commonstock were surrendered in exchange for Merit’s recording of payroll taxliabilities in the amount of approximately $254,000, related to the exercise ofstock options.  The shares were valuedbased upon the closing price of the Merit’s common stock on the surrender date.

 

Duringthe nine months ended September 30, 2009, 21,556 shares of the Merit’scommon stock, with a value of approximately $230,000 were surrendered inexchange for the exercise of stock options.

 

See notes to consolidatedfinancial statements.

 

7

----

Table of Contents

 

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

NOTES TOCONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

**1**.  **Basis of Presentation**. The interim consolidated financialstatements of Merit Medical Systems, Inc. (“Merit,” “we” or “us”) for thethree and nine-month periods ended September 30, 2009 and 2008 are notaudited. Our consolidated financial statements are prepared in accordance withthe requirements for unaudited interim periods, and consequently, do notinclude all disclosures required to be made in conformity with accountingprinciples generally accepted in the United States of America. In the opinionof management, the accompanying consolidated financial statements contain alladjustments, consisting of normal recurring accruals, necessary for a fairpresentation of our financial position as of September 30, 2009, and ourresults of operations and cash flows for the three and nine-month periods endedSeptember 30, 2009 and 2008. The results of operations for the three andnine-month periods ended September 30, 2009 are not necessarily indicativeof the results for a full-year period. These interim consolidated financial statements should be read inconjunction with the financial statements included in our Annual Report on Form 10-Kfor the year ended December 31, 2008 filed with the Securities andExchange Commission (the “SEC”).

 

**2.   Inventories**. Inventories are stated at the lower ofcost or market.  Inventories at September 30,2009 and December 31, 2008 consisted of the following (in thousands):

 
| ** **      | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|-----------------|------------|------------------------|------------|-----------------------|------------|
| ** **      | ** ** | **2009**               | ** ** | **2008**              | ** ** |
| Finished  goods |       | $                      | 20,173     |                  | $          | 17,818 |   |
| Work-in-process |       | 8,570                  |       | 4,790                 |       |
| Raw  materials  |       | 19,293                 |       | 15,750                |       |
|            |       |                   |       |                  |       |
| Total           |       | $                      | 48,036     |                  | $          | 38,358 |   |

 

**3.   ****Reporting ComprehensiveIncome. **Comprehensive income for the three and nine-monthperiods ended September 30, 2009 and 2008 consisted of net income andforeign currency translation adjustments. As of September 30, 2009 and December 31, 2008, the cumulativeeffect of such adjustments decreased stockholders’ equity by approximately$59,000 and approximately $58,000, respectively.  Comprehensive income for the three andnine-month periods ended September 30, 2009 and 2008 has been computed asfollows (in thousands):

 
| ** **                                                           | ** ** | **Three Months Ended**  | ** ** | **Nine Months Ended**  | ** ** |
|----------------------------------------------------------------------|------------|-------------------------|------------|------------------------|------------|
| ** **                                                           | ** ** | **September  30,** | ** ** | **September 30,** | ** ** |
| ** **                                                           | ** ** | **2009**                | ** ** | **2008**               | ** ** | **2009** | ** ** | **2008** | ** ** |
| Net  income                                                          |       | $                       | 6,085      |                   | $          | 5,200 |   | $ | 17,463 |   | $ | 15,335 |   |
| Foreign  currency translation gains(losses)                          |       | (6                      | )          | (83                    | )          | 1 |   | 74 |   |
| Unrealized  depreciation on marketable securities available for sale |       |                    |       | (83                    | )          |   |   | (83 | ) |
| Comprehensive  income                                                |       | $                       | 6,079      |                   | $          | 5,034 |   | $ | 17,464 |   | $ | 15,326 |   |

 

8

----

Table of Contents

 

**4.Stock-based****Compensation.**  Stock-based compensation expense for thethree and nine-month periods ended September 30, 2009 and 2008 has beencategorized as follows (in thousands):

 
| ** **                           | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended**  | ** ** |
|--------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                           | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| ** **                           | ** ** | **2009**               | ** ** | **2008**               | ** ** | **2009** | ** ** | **2008** | ** ** |
| Cost  of sales                       |       | $                      | 61         |                   | $          | 48 |   | $ | 154 |   | $ | 45 |   |
| Research  and development            |       | 16                     |       | 13                     |       | 43 |   | 23 |   |
| Selling,  general and administrative |       | 228                    |       | 232                    |       | 683 |   | 562 |   |
| Stock-based  compensation            |       | $                      | 305        |                   | $          | 293 |   | $ | 880 |   | $ | 630 |   |

 

The excess incometax benefit created from the exercises of stock options was approximately$339,000 and $761,000 for the three and nine-month periods ended September 30,2009, respectively, and approximately $1.8 million and $2.1 million for thethree and nine-month periods ended September 30, 2008, respectively.  Asof September 30, 2009, the total remaining unrecognized compensation costrelated to non-vested stock options, net of expected forfeitures, wasapproximately $4.3 million and is expected to be recognized over a weightedaverage period of 3.6 years. During the nine months ended September 30,2009 and 2008, we granted 140,000 and 499,000 stock awards, respectively.  We use the Black-Scholes methodology to valuethe stock compensation expense for options. In applying the Black-Scholes methodology to the option grants, we usedthe following assumptions:

 
| ** **                 | ** ** | **Nine Months Ended**  | ** ** |
|----------------------------|------------|------------------------|------------|
| ** **                 | ** ** | **September 30,** | ** ** |
| ** **                 | ** ** | **2009**               | ** ** | **2008** | ** ** |
| Risk-free  interest rate   |       | 2.70%                  |       | 3.24-3.55% |   |
| Expected  option life      |       | 6.0 years              |       | 4.2-6 years |   |
| Expected  price volatility |       | 42.40%                 |       | 38-41.66% |   |

 

We estimate theaverage risk-free interest rate using the U.S. Treasury rate in effect as ofthe date of grant, based on the expected term of the stock option.  We estimate the expected term of the stockoptions using the historical exercise behavior of 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.

 

9

----

Table of Contents

 

**5. Shares Used in Computing Net Income Per Share.**The following table sets forth thecomputation of the number of shares used in calculating basic and diluted netincome  per share  (in thousands, except earnings per commonshare):

** **
| ** **                                                                                                                             | ** ** | **Three Months** | ** ** | **Nine Months** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------|------------|------------------|------------|-----------------|------------|
| ** **                                                                                                                             | ** ** | **Net**          | ** ** | ** **      | ** ** | **Per Share** | ** ** | **Net** | ** ** | ** ** | ** ** | **Per Share** | ** ** |
| ** **                                                                                                                             | ** ** | **Income**       | ** ** | **Shares**      | ** ** | **Amount** | ** ** | **Income** | ** ** | **Shares** | ** ** | **Amount** | ** ** |
| Ended  September 30, 2009:                                                                                                        |       |             |       |            |       |   |   |   |   |   |   |   |   |
| 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 |   |
|                                                                                                                                   |       |             |       |            |       |   |   |   |   |   |   |   |   |
| Weighted-average  shares under stock options excluded from the calculation of common stock equivalents  as the impact was antidilutive |       |             |       | 529             |       |   |   |   |   | 1,305 |   |   |   |
|                                                                                                                                   |       |             |       |            |       |   |   |   |   |   |   |   |   |
| Ended  September 30, 2008:                                                                                                        |       |             |       |            |       |   |   |   |   |   |   |   |   |
| Basic  EPS                                                                                                                             |       | $                | 5,200      |            | 27,900     |   | $ | 0.19 |   | $ | 15,335 |   | 27,669 |   | $ | 0.55 |   |
| Effect  of dilutive stock options and warrants                                                                                         |       |             |       | 912             |       |   |   |   |   | 813 |   |   |   |
|                                                                                                                                   |       |             |       |            |       |   |   |   |   |   |   |   |   |
| Diluted  EPS                                                                                                                           |       | $                | 5,200      |            | 28,812     |   | $ | 0.18 |   | $ | 15,335 |   | 28,482 |   | $ | 0.54 |   |
|                                                                                                                                   |       |             |       |            |       |   |   |   |   |   |   |   |   |
| Weighted-average  shares under stock options excluded from the calculation of common stock equivalents  as the impact was antidilutive |       |             |       | 449             |       |   |   |   |   | 797 |   |   |   |

** **

**6.Acquisitions.**** **On June 2,2009, we entered into an asset purchase agreement with Hatch Medical, L.L.C., aGeorgia limited liability company (“Hatch”), to purchase assets associated withthe EN Snare® foreign body retrieval system. We paid Hatch $14 million in June 2009 and have accrued anadditional $7 million in other payables, which is payable on December 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 ourHatch acquisition.  We are in the processof finalizing our valuation of tangible and intangible assets, and residualgoodwill acquired in the transaction. The purchase price allocation will be completed no later than one yearfrom the date of acquisition, and may change as more detailed analyses arecompleted and additional information about fair value of assets and liabilitiesbecomes available.  The purchase pricewas preliminarily allocated as follows (in thousands):

 

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

 

10

----

Table of Contents

 

We intend toamortize the developed technology over 11 years, customer lists on an acceleratedbasis over seven months, a non-compete covenant over seven years and atrademark over 15 years.

 

On March 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 paidAlveolus $19.1 million in March 2009.  The grossamount of trade receivables we acquired from Alveolus is approximately $1.0million, of which $49,000 was expected to be uncollectible.  Our consolidated financial statements for thethree and nine-month periods ended September 30, 2009 reflect salessubsequent to the acquisition date of approximately $2.1 million and $4.4million, respectively, and a net loss of approximately ($709,000) and ($1.8million), respectively,  related to ouracquisition of the Alveolus assets.  Weare in the process of finalizing our valuation of certain tangible andintangible assets, and residual goodwill associated with the acquisition.  Slight changes have been made to the assetsacquired and liabilities assumed during the six-month period ended September 30,2009, but we do not believe those changes are material to our financialstatements.   We intend to complete thepurchase price allocation no later than one year from the date of acquisition,and that allocation may change as more detailed analyses are completed andadditional information about fair value of the acquired assets and liabilitiesbecomes available.  The purchase pricewas preliminarily allocated as follows (in thousands):

 

| **Assets Acquired**                  |   |   |   |
|--------------------------------------|--------|--------|--------|
| Inventories                          |   | $      | 1,728  |   |
| Trade  receivable                    |   | 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                             |   | 8,041  |   |
| Total  assets acquired               |   | 20,131 |   |
|                                 |   |   |   |
| **Liabilities Assumed**              |   |   |   |
| Accounts  payable                    |   | 467    |   |
| Other  liabilities                   |   | 572    |   |
| Total  liabilities assumed           |   | 1,039  |   |
|                                 |   |   |   |
| Net  assets acquired                 |   | $      | 19,092 |   |

 

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 resulting productis successfully launched in the market.   The acquired trademarks arescheduled to renew in 3.77 years (based on a weighted-average, from September 30,2009 until the trademark renewal date). While U.S. trademarks can be renewed indefinitely, we currently estimatethat we will generate cash flow from the acquired trademarks for a periodof  15 years from the acquisition date.

 

On March 3,2009, we paid $500,000 to GMA Company, Ltd (“GMA”) representing the finalpayment due on our distribution agreement. The total amount paid to GMA under this agreement was approximately $2.0million and was allocated as a distribution agreement and we anticipate that itwill be amortized over an estimated life of 11 years.

 

On February 19,2009, we entered into an asset purchase and supply agreement with BiosearchMedical Products, Inc., a New Jersey corporation (“Biosearch”), to purchase a bipolar coagulation probe andgrafted biliary stents.  We paid$1.1 million in February 2009 and paid an additional $500,000 in June 2009. Our 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 $127,000and $218,000, respectively,  related tothe Biosearch acquisition.

 

11

----

Table of Contents

 

We arein the process of finalizing our valuation of tangible and intangible assets,and residual goodwill.  We intend tocomplete the purchase price allocation no later than one year from the date ofacquisition, and may change that allocation as more detailed analyses arecompleted and additional information about fair value of assets and liabilitiesbecomes available.  The purchase pricewas preliminarily allocated as follows (in thousands):

 

| **Assets Acquired**     |   |   |   |
|-------------------------|--------|--------|--------|
| Inventories             |   | $      | 214    |   |
| Propery  and equipment  |   | 31     |   |
| **Intangibles**         |   |   |   |
| Developed  technology   |   | 380    |   |
| Customer  lists         |   | 660    |   |
| Non-compete             |   | 25     |   |
| Goodwill                |   | 290    |   |
| Total  assets acquried  |   | 1,600  |   |
|                    |   |   |   |
| **Liabilities Assumed** |   | None   |   |
|                    |   |   |   |
| Net  assets acquired    |   | $      | 1,600  |   |

 

We intend toamortize developed technology over 15 years, customer lists on an acceleratedbasis over eight years, and a non-compete covenant over seven years.

 

Thegoodwill arising from the acquisitions discussed above consists largely of thesynergies and economies of scale we hope to achieve from combining the acquiredoperations with our historical operations. The goodwill recognized from these acquisitions is expected to bedeductible for income tax purposes.

 

The following tablesummarizes our unaudited consolidated result of operations for the three andnine-month periods ended September 30, 2009 and 2008, as well as theunaudited pro forma consolidated results of operations as though the Hatch,Alveolus and Biosearch acquisitions had occurred on January 1, 2008:

 
| ** **                  | ** ** | **Three Months Ended**      | ** ** | **Three Months Ended**      | ** ** |
|-----------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                  | ** ** | **September 30, 2009** | ** ** | **September 30, 2008** | ** ** |
| ** **                  | ** ** | **As Reported**             | ** ** | **Pro Forma**               | ** ** | **As Reported** | ** ** | **Pro Forma** | ** ** |
|                        |       |                        |       |                        |       |   |   |   |   |
| Sales                       |       | $                           | 66,759     |                        | $          | 66,759 |   | $ | 58,153 |   | $ | 60,962 |   |
| Net  income                 |       | 6,085                       |       | 6,085                       |       | 5,200 |   | 4,601 |   |
| Earnings  per common share: |       |                        |       |                        |       |   |   |   |   |
| Basic                       |       | $                           | .22        |                        | $          | .22 |   | $ | .19 |   | $ | .16 |   |
| Diluted                     |       | $                           | .21        |                        | $          | .21 |   | $ | .18 |   | $ | .16 |   |

 
|   |   |   |   |   |   |   |   |   |   |
|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|

 
| ** **                  | ** ** | **Nine Months Ended**       | ** ** | **Nine Months Ended**       | ** ** |
|-----------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                  | ** ** | **September 30, 2009** | ** ** | **September 30, 2008** | ** ** |
| ** **                  | ** ** | **As Reported**             | ** ** | **Pro Forma**               | ** ** | **As Reported** | ** ** | **Pro Forma** | ** ** |
|                        |       |                        |       |                        |       |   |   |   |   |
| Sales                       |       | $                           | 189,967    |                        | $          | 192,419 |   | $ | 169,147 |   | $ | 177,837 |   |
| Net  income                 |       | 17,463                      |       | 17,403                      |       | 15,335 |   | 13,579 |   |
| Earnings  per common share: |       |                        |       |                        |       |   |   |   |   |
| Basic                       |       | $                           | .62        |                        | $          | .62 |   | $ | .55 |   | $ | .49 |   |
| Diluted                     |       | $                           | .61        |                        | $          | .61 |   | $ | .54 |   | $ | .48 |   |

 

The unaudited pro formacondensed consolidated income statements set forth above are for informationalpurposes only and should not be considered indicative of actual results thatwould have been achieved if Alveolus, Biosearch and Hatch had been acquired thebeginning of 2008, or results that may be obtained in any future period.

 

12

----

Table of Contents

 

On January 29,2008, we entered into an asset purchase and supply agreement with MicrusEndovascular Corporation, a Delaware corporation, to purchase threecatheter platforms for $3.0 million dollars. We paid $1.5 million in January 2008 and an additional $1.5 millionin December of 2008.   We also paid$12,300 in acquisition costs.  The purchaseprice was allocated to inventories for approximately $144,000, customer listsfor approximately $270,000, developed technology for approximately $330,000,and goodwill for approximately $2.3 million. We are currently amortizing customer lists on an accelerated basis over14 years, and developed technology over 15 years. Unaudited pro formaconsolidated result of operations were not provided for the 2008 assetacquisitions, as their effects were not material.

 

**7. Recent AccountingPronouncements.**InOctober 2009, the Financial Accounting Standards Board (“FASB”) issuedAccounting Standards Update (“ASU”), 2009-13, Revenue Recognition (Topic 605): *Multiple Deliverable Revenue Arrangements — AConsensus of the FASB Emerging Issues Task Force.* This updateprovides application guidance on whether multiple deliverables exist, how thedeliverables should be separated and how the consideration should be allocatedto one or more units of accounting. This update establishes a selling pricehierarchy for determining the selling price of a deliverable. The selling priceused for each deliverable will be based on vendor-specific objective evidence,if available, 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 be required to apply this guidance prospectivelyfor revenue arrangements entered into or materially modified after January 1,2011; however, earlier application is permitted. We have not determined theimpact that this update may have on our consolidated financial statements.

 

In June 2009,the FASB Accounting Standards Codification (“ASC”) issued ASC 105-10 *Generally Accepted Accounting Principles - Overall* (“ASC 105”). ASC 105 establishes the FASB ASC as the source of authoritative accountingprinciples recognized by the FASB to be applied by nongovernmental entities inthe preparation of financial statements in conformity with U.S. GAAP.  The FASB will not issue new standards in theform of Statements, FASB Staff Positions or Emerging Issues Task ForceAbstracts.  Instead, it will issue ASUs.This standard reorganizes the thousands of GAAP pronouncements into roughly 90accounting topics and displays them using a consistent structure. Also includedis relevant SEC guidance organized using the same topical structure in separatesections.  ASC 105 is effective for interim and annual periods endingafter September 15, 2009.  We adopted ASC 105 in the third quarter of fiscal 2009.  The adoptiondoes not have an effect on our financial position or results of operations.However, because ASC 105 completely replaces existing standards, it will affectthe way U.S. GAAP is referenced within the consolidated financial statementsand accounting policies.

 

In June 2009, the FASB issued guidance now codified as FASB ASC 810-10,*Consolidation* ("ASC 810"). ASC810 amends tests for variable interest entities to determine whether a variableinterest entity must be consolidated. ASC 810 requires an entity to perform ananalysis to determine whether an entity's variable interest or interests giveit a controlling financial interest in a variable interest entity. Thisguidance requires ongoing reassessments of whether an entity is the primarybeneficiary of a variable interest entity and enhanced disclosures that providemore transparent information about an entity's involvement with a variableinterest entity. We will be required to apply this guidance on January 1, 2010.We have not determined the impact that this guidance may have on ourconsolidated financial statements.

 

In May 2009, theFASB issued guidance now codified as FASB ASC 855-10, *SubsequentEvents*, which provides guidance on the assessment of subsequentevents.  This guidance defines the period after the balance sheet dateduring which we should evaluate events or transactions that may occur forpotential recognition or disclosure in the financial statements, and therequired disclosures for such events.  The guidance is effective for interim or annualreporting periods ending after June 15, 2009. We adopted this guidance in the second quarter of 2009.  Wehave performed an evaluation of subsequent events through November 5,2009, which is the date our consolidated financial statements for the ninemonths ended September 30, 2009 were issued.

 

In April 2009,the FASB staff issued guidance now codified as FASB ASC 825-10, *Interim Disclosures about Fair Value of FinancialInstruments*(“ASC 825”). ASC 825 amends FASB Statement No. 107,*Disclosures about Fair Value of FinancialInstruments*, to require disclosures about fair value of financialinstruments in interim financial statements as well as in annual financialstatements. ASC 825 also amends APB Opinion No. 28*, Interim Financial Reporting*, to requirethese disclosures in all interim financial statements. The adoption of this guidancedid not have a material impact on our consolidated financial statements for thenine months ended September 30, 2009.

 

In December 2007,the FASB issued guidance now codified as FASB ASC 805-10, *BusinessCombinations* (“ASC 805”). ASC 805 requires all business combinationscompleted after the effective date to be accounted for by applying theacquisition method (previously referred to as the purchase method).  Companies applying this method will have toidentify the acquirer, determine the acquisition date and purchase price andrecognize at their acquisition-date fair values of the identifiable assetsacquired, liabilities assumed, and any noncontrolling interests in theacquiree.  In the case of a bargain purchase,the acquirer is required to reevaluate the measurements of the recognizedassets and liabilities at the acquisition date and recognize a gain on thatdate if an excess remains. We adopted the provisions of ASC 805 on January 1,2009. We expensed costs related to the Alveolus, Biosearch and Hatchacquisitions of approximately $374,000 during the nine months ended September 30,2009, which would

 

13

----

Table of Contents

 

havebeen included in goodwill under previous guidance. The continued effect ofadoption on our consolidated financial statements will depend upon the natureof any acquisitions completed after adoption.

 

**8.  IncomeTaxes.**  Our overall effective tax rate for the three months endedSeptember 30, 2009 and 2008 was 27.8% and 29.7%, respectively.  Our overall effective tax rate for the ninemonths ended September 30, 2009 and 2008 was 31.5% and 34.2%,respectively.  The decrease in theeffective income tax rate for the three and nine months ended September 30,2009, when compared to the prior year period, was primarily related to theprofitability of our Irish operations which are taxed at a lower tax rate thanour U.S. and other foreign operations and research and development tax creditsgenerated from our Irish operations.

 

**9.   FairValue Measurements**.  The fair value of a financial instrumentis the amount that could be received upon the sale of an asset or paid totransfer a liability in an orderly transaction between market participants atthe measurement date.  Financial assetsare 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 determinefair values.  Categorization within thefair value hierarchy is based on the lowest level of input that is significantto the 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: Observablemarket based inputs or unobservable inputs that are corroborated by marketdata.

Level 3: Unobservableinputs that are not corroborated by market

 

The following tableidentifies our financial assets and liabilities carried at fair value measuredon a recurring basis as of September 30, 2009 (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, 2009** | ** ** | **(Level 1)** | ** ** | **(Level 2)** | ** ** | **(Level 3)** | ** ** |
|                             |       |                        |       |   |   |   |   |   |   |
| Deferred compensation assets (1) |       | $                           | 3,030      |   |   |   | $ | 3,030 |   |   |   |
|                                  |            |                             |            |  |  |  |  |  |  |  |  |

 

----

(1)          The deferred compensation investments areheld in a Rabbi trust under an insurance-based deferred compensation plan.  The investments of the Rabbi trust are valuedbased upon unit values multiplied by the number of units held.  The unit value is based upon the investment’snet asset value adjusted for some administrative fees.

 

During the three andnine-month periods ended September 30, 2009, we had a write-off ofapproximately $86,000 and approximately $158,000, respectively, related to themeasurement of non-financial assets at fair value on a nonrecurring basissubsequent to their initial recognition.

 

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

** **

**10.   ****Goodwill and IntangibleAssets. **The changes in the carrying amount of goodwill for thenine months ended September 30, 2009 are as follows (in thousands):

 
| Goodwill  balance at December 31, 2008   |   | $      | 13,048 |   |
|-----------------------------------------------|--------|--------|--------|--------|
| Additions  as the result of acquistions       |   | 19,801 |   |
| Goodwill  balance at September  30, 2009 |   | $      | 32,849 |   |

 

14

----

Table of Contents

 

During the nine months ended September 30, 2009,we paid $50,000 to Lightek Corporation related to their achieving certain saleslevel in our agreement dated July 17, 2007.   This amount was included as part ofgoodwill.

 

Intangible assets at September 30, 2009 and December 31,2008, consisted of the following (in thousands):

 
| ** **                            | ** ** | **September 30, 2009** | ** ** | **December 31, 2008** | ** ** |
|---------------------------------------|------------|-----------------------------|------------|----------------------------|------------|
| ** **                            | ** ** | **Gross**                   | ** ** | ** **                 | ** ** | **Net** | ** ** | **Gross** | ** ** | ** ** | ** ** | **Net** | ** ** |
| ** **                            | ** ** | **Carrying**                | ** ** | **Accumulated**            | ** ** | **Carrying** | ** ** | **Carrying** | ** ** | **Accumulated** | ** ** | **Carrying** | ** ** |
| ** **                            | ** ** | **Amount**                  | ** ** | **Amortization**           | ** ** | **Amount** | ** ** | **Amount** | ** ** | **Amortization** | ** ** | **Amount** | ** ** |
|                                  |       |                        |       |                       |       |   |   |   |   |   |   |   |   |
| Covenant not to compete               |       | $                           | 315        |                       | $          | (22 | ) | $ | 293 |   | $ | 50 |   | $ | (18 | ) | $ | 32 |   |
| Customer lists                        |       | 4,755                       |       | (1,935                     | )          | 2,820 |   | 2,465 |   | (1,073 | ) | 1,392 |   |
| Developed technology                  |       | 15,969                      |       | (415                       | )          | 15,554 |   | 1,730 |   | (119 | ) | 1,611 |   |
| Distribution agreement                |       | 2,401                       |       | (322                       | )          | 2,079 |   | 1,901 |   | (178 | ) | 1,723 |   |
| In-process research and development * |       | 400                         |       |                       |       | 400 |   |   |   |   |   |   |   |
| License agreements                    |       | 403                         |       | (276                       | )          | 127 |   | 403 |   | (242 | ) | 161 |   |
| Patents                               |       | 3,571                       |       | (1,169                     | )          | 2,402 |   | 2,704 |   | (1,019 | ) | 1,685 |   |
| Royalty agreements                    |       | 267                         |       | (200                       | )          | 67 |   | 267 |   | (159 | ) | 108 |   |
| Trademark                             |       | 2,538                       |       | (381                       | )          | 2,157 |   | 515 |   | (314 | ) | 201 |   |
|                                  |       |                        |       |                       |       |   |   |   |   |   |   |   |   |
| Total                                 |       | $                           | 30,619     |                       | $          | (4,720 | ) | $ | 25,899 |   | $ | 10,035 |   | $ | (3,122 | ) | $ | 6,913 |   |

 

----

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

 

The aggregateamortization expense for the nine months ended September 30, 2009 wasapproximately $1.6 million.

 

Estimated amortization expense for the intangibleassets for the next five years consisted of the following (in thousands):

 
| Remaining  2009 |   | $     |  796 |   |
|-----------------|--------|-------|-----------|--------|
| 2010            |   | 2,596 |      |
| 2011            |   | 2,233 |      |
| 2012            |   | 2,037 |      |
| 2013            |   | 1,984 |      |

 

**11.  SubsequentEvent****. **On October 21, 2009, we completed atransaction with Vysera Biomedical Limited, a medical products developer basedin Galway, Ireland (“Vysera”).  In thetransaction, Merit and Vysera entered into an Exclusive License, Developmentand Supply Agreement, pursuant to which Vysera granted to us an exclusivelicense to use, modify and sell certain valve technology and biomaterialcoating technology for medical devices (the “Licensed Technology”) and otherintellectual property associated with the Licensed Technology, and to developand market improvements to the Licensed Technology.  In thetransaction, we also purchased 253,047 A Ordinary Shares of Vysera, for anaggregate price of €1,600,000.

 

Under the LicenseAgreement, we paid Vysera a license fee of $1.5 million, and agreed to payroyalties on products sold by Merit that incorporate the LicensedTechnology.  Vysera has agreed to supplyvalve products to us to be sold to our end users, to be incorporatedinto other Merit products, and to be further developed by us for othercommercial uses.  The parties alsogranted to each other perpetual, royalty-free licenses to use crossover improvementsthey develop based upon the Licensed Technology.  Vysera has also agreed that, for the term ofthe License Agreement, it will not compete with us in the market for valveproducts.

 

15

----

Tableof Contents

 

**ITEM2.  MANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIAL 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 theintegration, development or commercialization of the business or assetsacquired from other parties, any statements regarding future economicconditions or performance, and any statements of assumptions underlying any ofthe foregoing.  All forward-lookingstatements included in this Report are made as of the date hereof and are basedon information available to us as of such date. We assume no obligation to update any forward-looking statement.   In some cases, forward-looking statementscan be identified by the use of terminology such as “may,” “will,” “expects,” “plans,”“anticipates,”  “intends,” “believes,” “estimates,”“potential,” or “continue,” or the negative thereof or other comparableterminology.  Although we believe thatthe expectations reflected in the forward-looking statements contained hereinare reasonable, there can be no assurance that any such expectation or anyforward-looking statement will prove to be correct.  Our actual results will vary, and may varymaterially, from those projected or assumed in the forward-lookingstatements.  Our financial condition andresults of operations, as well as any forward-looking statements, are subjectto inherent risks and uncertainties, including, unanticipated consequences of Merit’s recent or future acquisitions;challenges associated with Merit’s efforts to pursue new market opportunities,including opportunities in the gastroenterology and pulmonary markets; infringement of Merit’s technology or theassertion that Merit’s technology infringes the rights of other parties; productrecalls and product liability claims; downturnof the national economy and its effect on Merit’s revenues, collections andsupplier relations; termination of supplier relationships,or failure of suppliers to perform; inability to successfully manage growththrough acquisitions; delays in obtaining regulatory approvals, or the failureto maintain such approvals; concentration of Merit’s revenues among a fewproducts and procedures; development of new products and technology that couldrender Merit’s products obsolete; market acceptance of new products;introduction of products in a timely fashion; price and product competition;availability of labor and materials; cost increases; and fluctuations in andobsolescence of inventory; volatility of the market price of Merit’s commonstock; foreign currency 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, 2008. All subsequent forward-lookingstatements attributable to us or persons acting on our behalf are expresslyqualified in their entirety by these cautionary statements.  Additional factors that may have a direct bearingon our operating results are discussed in Part I, Item 1A “Risk Factors”in our Annual Report on Form 10-K for the year ended December 31,2008.

 

**Overview**

 

For the quarter ended September 30,2009, we reported record revenues of $66.8 million, up 15% from the threemonths ended September 30, 2008 of $58.2 million.  Revenues for the nine months ended September 30,2009 were a record $190.0 million, compared with $169.1 million for the firstnine months of 2008, a gain of 12%.

 

Gross margins were 42.7%and 42.9% of sales for the three and nine-month periods ended September 30,2009, respectively, compared to 40.7% and 41.3% of sales for the three andnine-month periods ended September 30, 2008, respectively.  This improvement can be attributed primarilyto lower average fixed overhead unit costs through increased productivity asfixed costs are shared over an increased number of units, reduction in materialcosts and a favorable Euro to U.S. dollar exchange rate which reduced our unitcosts in our Irish operations.

 

Net income for thethree-month period ended September 30, 2009 was a record $6.1 million, up17% to $0.21 per share, compared to $5.2 million, or $0.18 per share, for thecomparable period of 2008.  Net incomefor the nine-month period ended September 30, 2009 was a record $17.5million, up 14% to $0.61 per share, compared to $15.3 million, or $0.54 pershare, for the comparable period of 2008. When compared to the correspondingperiods of the prior year, net income for the three and nine-month periodsended September 30, 2009 was primarily affected by higher sales and grossmargins, and a lower effective income tax rate, all of which offset

 

16

----

Table of Contents

 

higher selling, generaland administrative expenses and research and development expenses, primarilyassociated with our acquisitions of the Alveolus assets in the first quarter of2009, and our acquisition of the Hatch assets in the second quarter of 2009.

 

**Resultsof Operations**

 

The followingtable sets forth certain operational data as a percentage of sales for thethree and nine-month periods ended September 30, 2009 and 2008:

 
| ** **                                    | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended**  | ** ** |
|-----------------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                    | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| ** **                                    | ** ** | **2009**               | ** ** | **2008**               | ** ** | **2009** | ** ** | **2008** | ** ** |
| Sales                                         |       | 100.0                  | %          | 100.0                  | %          | 100.0 | % | 100.0 | % |
| Gross  profit                                 |       | 42.7                   |       | 40.7                   |       | 42.9 |   | 41.3 |   |
| Selling,  general and administrative expenses |       | 25.1                   |       | 24.6                   |       | 25.2 |   | 23.8 |   |
| Research  and development expenses            |       | 4.9                    |       | 3.8                    |       | 4.4 |   | 4.0 |   |
| Income  from operations                       |       | 12.7                   |       | 12.3                   |       | 13.3 |   | 13.5 |   |
| Other  income                                 |       | 0.0                    |       | 0.4                    |       | 0.1 |   | 0.3 |   |
| Net  income                                   |       | 9.1                    |       | 8.9                    |       | 9.2 |   | 9.1 |   |

 

Sales. Sales for the three months ended September 30, 2009 increased by15%, or approximately $8.6 million, compared to the same period of 2008.   Sales for the nine months ended September 30,2009 increased by 12%, or approximately $20.8 million, compared to the sameperiod of 2008.   We report sales in fiveproduct categories.  Listed below are thesales relating to these product categories for the three and nine-month periodsended September 30, 2009 and 2008 (in thousands):

 
| ** **                       | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended**  | ** ** |
|----------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                       | ** ** | **September 30,** | ** ** | **September 30,** | ** ** |
| ** **                       | ** ** | **% Change**           | ** ** | **2009**               | ** ** | **2008** | ** ** | **% Change** | ** ** | **2009** | ** ** | **2008** | ** ** |
| Stand-alone  devices             |       | 13%                    |       | $                      | 19,494     |   | $ | 17,286 |   | 11% |   | $ | 56,515 |   | $ | 50,809 |   |
| Custom  kits and procedure trays |       | 12%                    |       | 19,226                 |       | 17,096 |   | 13% |   | 55,903 |   | 49,472 |   |
| Inflation  devices               |       | (2)%                   |       | 15,205                 |       | 15,564 |   | (4)% |   | 44,199 |   | 46,211 |   |
| Catheters                        |       | 23%                    |       | 10,107                 |       | 8,207 |   | 23% |   | 27,811 |   | 22,655 |   |
| Gastroenterology  devices        |       |                   |       | 2,727                  |       |   |   |   |   | 5,539 |   |   |   |
| Total                            |       | 15%                    |       | $                      | 66,759     |   | $ | 58,153 |   | 12% |   | $ | 189,967 |   | $ | 169,147 |   |

 

The sales growthof 15% for the third quarter of 2009, and the sales growth of 12% for the ninemonth-period ended September 30, 2009, when compared to the comparableperiods of 2008, was favorably affected by increased sales of custom kits andprocedure trays, stand-alone devices (maps, needles and stopcocks),gastroenterology devices related to our recent acquisition of the Alveolusassets during the first quarter of 2009, and catheters (particularly ourPrelude® sheath product line, Mini access catheter product line, and Resolve®locking draining catheter line).  Thesesales increases helped offset a decrease in sales related to the exchange ratebetween our foreign currencies (primarily the Euro) and the U.S. Dollar of .9%and 1.5%, respectively, for the three month and nine-month periods ended September 30,2009 and a decrease in inflation device sales to an OEM customer of 1.2% and1.6% of total sales, respectively, for the three and nine months ended September 30,2009, when compared to the corresponding periods of 2008.  Excluding sales to an OEM customer, inflationdevice sales were up 3% and 2% for the three and nine-month periods ended September 30,2009, respectively, when compared to the comparable periods in 2008.

 

Gross Profit.** **Gross margins were 42.7% and 42.9% of sales for thethree and nine-month periods ended September 30, 2009, respectively,compared to 40.7% and 41.3% of sales for the three and nine-month periods endedSeptember 30, 2008, respectively. This improvement can be attributed primarily to lower average fixedoverhead unit costs through increased productivity as fixed costs are sharedover an increased number of units, reduction in material costs and a favorableEuro to U.S. Dollar exchange rate which reduced our unit costs in our Irishoperations.

 

17

----

Table of Contents

 

OperatingExpenses.** **Selling, general and administrativeexpenses increased to 25.1% of sales for the three months ended September 30,2009, compared with 24.6% of sales for the three months ended September 30,2008.   For the nine months ended September 30,2009, selling, general and administrative expenses increased to 25.2% of salescompared with 23.8% of sales for the nine months ended September 30,2008.  Selling, general andadministrative expenses increased 17% to $16.8 million for the three monthsended September 30, 2009 from $14.3 million for the three months ended September 30,2008.  Selling, general andadministrative expenses increased 19% to $47.9 million for the nine monthsended September 30, 2009 from $40.2 million for the nine months ended September 30,2008.  These expense increases wereprimarily due to the increased expense associated with our acquistion andoperation of the business and assets acquired from Alveolus, and the hiring ofadditional domestic and international sales representatives. Research anddevelopment expenses increased to 4.9% of sales for the three months ended September 30,2009, compared with 3.8% of sales for the three months ended September 30,2008.      Research and developmentexpenses increased to 4.4% of sales for the nine months ended September 30,2009, compared to 4.0% of sales for the nine months ended September 30,2008.  Research and development expensesincreased 51% to $3.3 million for the three months ended September 30,2009 from $2.2 million for the three months ended September 30, 2008.  For the nine months ended September 30,2009 research and development expenses increased 22% to $8.3 million from $6.8million during the nine months ended September 30, 2008.  The increase in research and developmentexpenses related, in large part, to research and development projects for theAlveolus business we acquired and additional research and development projectsthat are nearing completion.

 

Other Income(Expense).  Other expense for the third quarter of 2009was approximately $29,000, compared to other income of approximately $229,000for the comparable period in 2008.  Otherincome for the nine months ended September 30, 2009 was approximately$167,000, compared to other income of approximately $520,000 for thecorresponding period in 2008.  The netchange in other income for the three and nine-month periods ended September 30,2009, when compared to the comparable periods in 2008, was primarily the resultof a decrease in interest income attributable to lower average cash balances,when compared to the corresponding periods in 2008.

 

Income Taxes.  Our overall effective tax rate for thethree months ended September 30, 2009 and 2008 was 27.8% and 29.7%,respectively.  Our overall effective taxrate for the nine months ended September 30, 2009 and 2008 was 31.5% and34.2%.  The decrease in the effectiveincome tax rate for the three and nine months ended September 30, 2009,when compared to the corresponding periods of the prior year, was primarilyrelated to the profitability of our Irish operations which are taxed at a lowertax rate than our U.S. and other foreign operations and research anddevelopment tax credits generated from our Irish operations.

 

Income.  During thethird quarter of 2009, we reported income from operations of approximately $8.5million, an increase of 18% from approximately $7.2 million for the comparableperiod in 2008. For the nine months ended September 30, 2009, we reportedincome from operations of approximately $25.3 million, an increase of 11% fromapproximately $22.8 million for the comparable period in 2008. When compared tothe prior year period, net income for the three and nine-month periods ended September 30,2009 was primarily affected by higher sales and gross margins, and a lowereffective income tax rate, all of which offset higher selling, general andadministrative expenses and research and development expenses, primarilyassociated with our acquisitions of the Alveolus and Biosearch assets in thefirst quarter of 2009, and the acquisition of the Hatch assets in the secondquarter of 2009. These factors, contributed to record income of $6.1 and $17.5million for the three and nine-month periods ended September 30, 2009,respectively, compared to net income of $5.2 million and $15.3 million,respectively, for the same periods of 2008.

 

**Liquidityand Capital Resources**

** **

Our workingcapital as of September 30, 2009 and December 31, 2008 was $55.9million and $84.3 million, respectively. The decrease in working capital was primarily the result of a decreasein cash resulting from our purchases of the Alveolus, Biosearch and Hatchassets, for a total of $34.7 million and the repurchase of common stock for$2.5 million, partially offset by an increase in inventory of $9.7 million.  As of September 30, 2009, we had acurrent ratio of 2.6 to 1.

 

On December 7,2007, we entered into an unsecured loan agreement with Bank of America, wherebythey agreed to provide us a line of credit in the amount of $30 million,expiring on December 7, 2010. During the quarter ended June 30, 2009,we borrowed $10.0 million on a temporary basis to close our acquisition of theHatch assets.  In addition, on December 8,2007, we entered into an unsecured loan agreement with Zion’s First National Bank,whereby they agreed to provide us with a line of credit in the amount of $1.0million, expiring on December 1,

 

18

----

Table of Contents

 

2009.  We had $0 outstanding under our lines ofcredit at September 30, 2009.  Wegenerated cash from operations of $23.5 million for the nine months ended September 30,2009.

 

Historically, wehave incurred significant expenses in connection with product development andintroduction of new products. Substantial capital has also been required to finance the increase inour receivables and inventories associated with our increased sales. During thenine month period ended September 30, 2009, we used cash to purchase $15.0million in property and equipment.  Ourprincipal source of funding for these and other expenses has been cashgenerated from operations, sales of equity, cash from loans on equipment, andbank lines of credit.  We currentlybelieve that our present sources of liquidity and capital are adequate to fundour current operations and for the foreseeable future.  We continue to make significant investments inproperty and equipment to increase production capacity, automate productionequipment and launch new products.

** **

**CriticalAccounting Policies**

 

The SEC has requestedthat all registrants address their most critical accounting policies.  TheSEC has indicated that a “critical accounting policy” is one which is bothimportant to the representation of the registrant’s financial condition andresults and requires management’s most difficult, subjective or complexjudgments, often as a result of the need to make estimates about the effect ofmatters that are inherently uncertain.  We base our estimates on pastexperience 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 our most critical financial estimates with theaudit committee of our Board of Directors.  The following paragraphsidentify our most critical accounting policies:

** **

**InventoryObsolescence Reserve****. **Our management reviews on a regular basis inventory quantities on hand forunmarketable and/or slow-moving products that may expire prior to beingsold.  This review of inventory quantities for unmarketable and/or slowmoving products is based on estimates of forecasted product demand prior toexpiration lives.  If market conditions become less favorable than thoseprojected by our management, additional inventory write-downs may berequired.  We believe that the amount included in our obsolescence reservehas been a historically accurate estimate of the unmarketable and/or slowmoving products that may expire prior to being sold.

** **

**Allowancefor Doubtful Accounts****. ** Amajority of our receivables are with hospitals which, over our history, havedemonstrated favorable collection rates.  Therefore, we have experiencedrelatively minimal bad debts from hospital customers.  In limitedcircumstances, we have written off bad debts as the result of the terminationof our business relationships with foreign distributors.  The mostsignificant write-offs over our history have come from U.S. packers who bundleour products in surgical trays.

 

We maintain allowancesfor doubtful accounts relating to estimated losses resulting from the inabilityof our customers to make required payments.  The allowance is based uponhistorical experience and a review of individual customer balances.  Ifthe financial condition of our customers were to deteriorate, resulting in animpairment of their ability to make payments, additional allowances may berequired.

** **

**Stock-BasedCompensation.** ****Under the fair value recognitionprovisions, we measure share-based compensation cost at the grant date based onthe value of the award and recognize the cost as an expense over the termof the vesting period.  Judgment is required in estimating theamount of share-based awards that are expected to be forfeited.  If actualresults differ significantly from these estimates, stock-based compensationexpense and our results of operations could be materially impacted.

** **

**IncomeTaxes.**  Tax positions shall initially be recognizedin the financial statements when it is more likely than not the position willbe sustained upon examination by the tax authorities.  Such tax positions shall initially andsubsequently be measured as the largest amount of tax benefit that has agreater than 50% likelihood of being realized upon ultimate settlement with thetax authorities assuming full knowledge of the position and all relevantfacts.  Although we believe our provisions for unrecognized tax positionsare reasonable, we can make no assurance that the final tax outcome of thesematters will not be different from that which we have reflected in our incometax provisions and accruals.  The tax lawis subject to varied interpretations, and we have taken positions related tocertain matters where the law is subject to interpretation.  Suchdifferences could have a material impact on our income tax provisions andoperating results in the period(s) in which we make such determination.

 

19

----

Table of Contents

 

**Goodwilland Intangible Assets Impairment. **We test our goodwill balances as of July 1of each year, during the third quarter of each year for impairment, 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.

 

We evaluate therecoverability of intangible assets whenever events or changes in circumstancesindicate that its carrying amount may not be recoverable.* *This analysis requires similarsignificant judgments as those discussed above regarding goodwill, except forcash flows are based on an undiscounted cash flow to determine the fair valueof the intangible.  All of our intangibleassets are subject to amortization.

 

**ITEM 3**.**  QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

Our principal market riskrelates to changes in the value of the Euro and Great Britain Pound (“GBP”)relative to the value of the U.S. Dollar.  We also have a limited marketrisk relating to the Swiss and Danish Kroner.   Our consolidated financial statements are denominated in, and our principalcurrency is, the U.S. Dollar.  A portion of our revenues ($6.6 million,representing approximately 9.8% of aggregate revenues), for the quarter ended September 30,2009 was attributable to sales that were denominated in foreigncurrencies.  All other internationalsales were denominated in U.S. Dollars.  Certain expenses are alsodenominated in foreign currencies, which partially offset risks associated withfluctuations of exchanges rates between foreign currencies on the one hand, andthe U.S. Dollar on the other hand.   During the quarter ended September 30,2009, the exchange rate between our foreign currencies against the U.S. Dollarresulted in a decrease of our gross revenues of approximately $628,000 and anincrease of 0.33% in gross profit.

 

On August 31, 2009,we forecasted a net exposure for September 30, 2009 representing thedifference between Euro- and GBP-denominated receivables and Euro and GBPdenominated payables of approximately 175,000 Euros and 301,000 GBPs,respectively.  In order to partially offset such risks, on August 31,2009, we entered into a 30-day forward contract for Euros and GBPs.  Wegenerally enter into similar economic transactions at various times during theyear to partially offset exchange rate risks we bear throughout the year. During the quarter ended September 30, 2009, we recorded a net loss ofapproximately $39,000 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, 2009 was not material to ourfinancial condition.

 

As of September 30, 2009, we had no variable rate debt. As long as we do not have variable rate debt, our interest expense would not be affected by changes in interest rates.

** **

**ITEM 4.  CONTROLS ANDPROCEDURES**

 

**(a) Evaluationof Disclosure Controls and Procedures**

 

An evaluation of the effectiveness of our disclosure controls and procedures as of September 30, 2009 was performed under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer.  Based on that evaluation, our management, including our Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported as specified in the SEC’s rules and forms.

 

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

 

There was no change in our internal control over financial reporting during the quarter ended June 30, 2009 that materially affected, or that we believe is reasonably likely to materially affect, our internal control over financial reporting.

 

20

----

Table of Contents

 

**PART II - OTHER INFORMATION**

 

**ITEM 1.   LEGAL PROCEEDINGS**

 

We are subject tocertain legal actions which we consider routine to our businessactivities.  As of September 30,2009, 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**

 

Part I,Item 1A, “Risk Factors,” of our Annual Report on Form 10-K for the YearEnded December 31, 2008 (the “Annual Report”) includes a detailed discussionof risks and uncertainties which could adversely affect our futureresults. In addition to the risk factors set forth in our Annual Report,the following risk factor modifies and supplements, and should be read inconjunction with, the risk factors disclosed in the Annual Report.

** **

**Healthcarepolicy changes may have a material adverse effect on us.**

 

Rising healthcare costsand interest in universal healthcare coverage in the United States continue tobe topics of great interest domestically and internationally.  The U.S. Senate, the U.S. House ofRepresentatives and the executive branch of our government are currentlyworking on healthcare reform initiatives. One proposed initiative, if passed, would require medical devicecompanies to pay tax on certain U.S. sales. This initiative, if passed, could have a material adverse effect on ourfinancial position and results of operations.

 

Given the currentpolitical environment, we cannot predict what healthcare initiatives, if any,will be implemented at the federal or state level, or the effect any futurelegislation or regulation will have on us. However, an expansion in government’srole in the U.S. healthcare industry could lower reimbursements on ourproducts, which could adversely affect our business.

 

In addition toother information set forth in this Report, you should carefully consider theRisk Factors discussed in the Annual Report, which could materially affect ourbusiness, financial condition or future results.  The risks described in the Annual Report arenot the only risks we face.  Additionalrisks and uncertainties not currently known to us or that we currently deem tobe immaterial also may materially and adversely affect our business, financialcondition and/or operating 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 |

 

21

----

Table of Contents

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, asamended, the Registrant has duly caused this report to be signed on its behalfby the undersigned thereunto duly authorized.

 

 

MERIT MEDICAL SYSTEMS, INC.

REGISTRANT

 

 
| Date:  |   November 5, 2009 |   | /s/ Fred P. Lampropoulos               |
|--------|-----------------------------------|--------|----------------------------------------|
|   |                              |   | FRED P. LAMPROPOULOS                   |
|   |                              |   | PRESIDENT AND CHIEF EXECUTIVE  OFFICER |
|   |                              |   |                                   |
|   |                              |   |                                   |
| Date:  |   November 5, 2009 |   | /s/ Kent W. Stanger                    |
|   |                              |   | KENT W. STANGER                        |
|   |                              |   | CHIEF FINANCIAL OFFICER                |

 

22

----