Table of Contents

** **

 

** **

**UNITEDSTATES********SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

**FORM 10-K**

 

**(MarkOne)**

 

**x****     ****Annual report pursuant to Section 13 or 15(d) ofthe Securities Exchange Act of 1934 for the fiscal year ended December 31,2009,**

 

**or**

** **

**o****        ****Transition report pursuant to Section 13 or 15(d) ofthe Securities Exchange Act of 1934.**

** **

**MERITMEDICAL SYSTEMS, INC.**

(Exact name of registrant asspecified in its charter)

 

| **Utah**                     | ** ** | **0-18592**           | ** ** | **87-0447695**      |
|------------------------------|------------|-----------------------|------------|---------------------|
| (State or other jurisdiction |       | (Commission File No.) |       | (IRS Employer       |
| of incorporation)            |       |                  |       | Identification No.) |

 

**1600 WestMerit Parkway**

**SouthJordan, Utah 84095**

(Address of principalexecutive offices, including zip code)

 

Registrant’s telephonenumber, including area code: **(801)253-1600**

 

Securities registeredpursuant to Section 12(b) of the Act: **Common Stock, No Par Value**

 

Securities registeredpursuant to Section 12(g) of the Act: **None**

 

Indicate by check mark if the registrant is a well-knownseasoned issuer, as defined in Rule 405 of the SecuritiesAct.  Yes oNo x

 

Indicate by check mark if the registrant is notrequired to file reports pursuant to Section 13 or Section 15(d) ofthe Act.  Yes o No x

 

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 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 90days.  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 (§ 229.405 of this chapter) during the preceding 12 months(or for such shorter period that the registrant was required to submit and postsuch files).  Yes o No o

 

Indicate by check mark if disclosure of delinquent filerspursuant to Item 405 of Regulation S-K is not contained herein, and will not becontained, to the best of the registrant’s knowledge, in definitive proxy orinformation statements incorporated by reference in Part III of this Form 10-Kor any amendment to this Form 10-K. x

** **

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

 

| Large accelerated filer o                                              |   | Accelerated filer x    |
|-----------------------------------------------------------------------------|--------|-----------------------------|
|                                                                        |   |                        |
| Non-accelerated filer o  (Do not check if a smaller reporting company) |   | Smaller reporting company o |

 

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

 

The aggregate market value ofthe registrant’s common stock held by non-affiliates of the registrant, on June 30,2009, which is the last day of the registrant’s most recently completed secondfiscal quarter (based upon the closing sale price of the registrant’s commonstock on the NASDAQ National Market System on June 30, 2009), wasapproximately $425,936,800.  Shares ofcommon stock held by each officer and director of the registrant and by eachperson who may be deemed to be an affiliate have been excluded.

 

As of March 5, 2010, the registrant had 28,180,527shares of theregistrant’s common stock outstanding.

 

**DOCUMENTSINCORPORATED BY REFERENCE**

Portions of the following document are incorporatedby reference in Part III of this Report: the registrant’s definitive proxystatement relating to the Annual Meeting of Shareholders scheduled for May 26,2010.

 

 

 

----

Table of Contents

** **

**TABLE OF CONTENTS**

 
| PART I                   |                                                                                                                | 1      |
|-------------------------------|---------------------------------------------------------------------------------------------------------------------|--------|
|                          |                                                                                                                |   |
| Item 1.                       | Business                                                                                                            | 1      |
|                          |                                                                                                                |   |
| Item 1A.                      | Risk Factors                                                                                                        | 10     |
|                          |                                                                                                                |   |
| Item  1B.                     | Unresolved  Staff Comments                                                                                          | 14     |
|                          |                                                                                                                |   |
| Item 2.                       | Properties                                                                                                          | 14     |
|                          |                                                                                                                |   |
| Item 3.                       | Legal  Proceedings                                                                                                  | 15     |
|                          |                                                                                                                |   |
| Item 4.                       | [Reserved]                                                                                                          |   |
|                          |                                                                                                                |   |
| PART II                  |                                                                                                                | 16     |
|                          |                                                                                                                |   |
| Item  5.                      | Market  for Registrant’s Common Equity, Related Stockholder Matters and Issuer  Purchases of Equity Securities | 16     |
|                          |                                                                                                                |   |
| Item  6.                      | Selected  Financial Data                                                                                            | 19     |
|                          |                                                                                                                |   |
| Item  7.                      | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                         | 20     |
|                          |                                                                                                                |   |
| Item  7A.                     | Quantitative  and Qualitative Disclosures About Market Risk                                                         | 24     |
|                          |                                                                                                                |   |
| Item  8.                      | Financial  Statements and Supplementary Data                                                                        | 25     |
|                          |                                                                                                                |   |
| Item  9.                      | Changes  in and Disagreements With Accountants on Accounting and Financial Disclosure                               | 53     |
|                          |                                                                                                                |   |
| Item  9A.                     | Controls  and Procedures                                                                                            | 53     |
|                          |                                                                                                                |   |
| Item 9B.                      | Other  Information                                                                                                  | 56     |
|                          |                                                                                                                |   |
| PART III                 |                                                                                                                | 56     |
|                          |                                                                                                                |   |
| Items 10, 11, 12, 13 and  14. | 56                                                                                                                  |
|                          |                                                                                                                |   |
| PART IV                  |                                                                                                                | 56     |
|                          |                                                                                                                |   |
| Item  15.                     | Exhibits  and Financial Statement Schedules                                                                         | 56     |
|                          |                                                                                                                |   |
| SIGNATURES                    |                                                                                                                | 60     |

 

----

Table of Contents

** **

**PART I**

** **

*Unless otherwise indicated in this report, “Merit,” “we,” “us,”“our,” and similar terms refer to Merit Medical Systems, Inc. and ourconsolidated subsidiaries.*

 

**DISCLOSUREREGARDING FORWARD-LOOKING STATEMENTS**

 

This report includes “forward-lookingstatements” within the meaning of Section 27A of the Securities Act of1933, as amended (the “Securities Act”), and Section 21E of the SecuritiesExchange Act of 1934, as amended (the “Exchange Act”).  All statementsother than statements of historical fact are “forward-looking statements” forpurposes of these provisions, including any projections of earnings, revenuesor other financial items, any statements of the plans and objectives ofmanagement for future operations, any statements concerning proposed newproducts or services, any statements regarding future economic conditions orperformance, and any statements of assumptions underlying any of the foregoing.  All forward-looking statements included inthis report are made as of the date hereof and are based on informationavailable to us as of such date.  Weassume no obligation to update any forward-looking statement.  In some cases, forward-looking statements canbe identified by the use of terminology such as “may,” “will,” “expects,” “plans,”“anticipates,”  “intends,” “believes,” “estimates,” “potential,” or “continue,”or the negative thereof or other comparable terminology.  Although webelieve that the expectations reflected in the forward-looking statementscontained herein are reasonable, there can be no assurance that suchexpectations or any of the forward-looking statements will prove to be correct,and actual results could differ materially from those projected or assumed inthe forward-looking statements.  Futurefinancial condition and results of operations, as well as any forward-lookingstatements, are subject to inherent risks and uncertainties, including risks relating to the integration of thebusiness, assets and operations we acquired in transactions we completed withAlveolus, Inc. (“Alveolus”) and Biosearch Medical Products, Inc.,a wholly-owned subsidiary of Hydromer, Inc. (“Biosearch”), Hatch Medical, L.L.C. (“Hatch”) and Vysera BioMedicalLimited (“Vysera”);  challenges associated with our efforts to pursue new marketopportunities, including opportunities in the gastroenterology and pulmonarymarkets; infringementof Merit’s technology or the assertion that Merit’s technology infringes therights of other parties; productrecalls and product liability claims; infringement of our technology orthe assertion that our technology infringes the rights of other parties;product recalls and product liability claims; downturn of the national economyand its effect on our revenues, collections and supplier relations; terminationof supplier relationships, or failure of suppliers to perform; inability tosuccessfully manage growth through acquisitions; delays in obtaining regulatoryapprovals, or the failure to maintain such approvals; concentration of ourrevenues among a few products and procedures; development of new products andtechnologies that could render our products obsolete; market acceptance of newproducts; delayed introduction of products; price and product competition;availability of labor and materials; cost increases; fluctuations in andobsolescence of inventory; volatility of the market price of our common stock(the “Common Stock”); foreign currency fluctuations; changes in key personnel;work stoppage or transportation risks; modification or limitation ofgovernmental or private insurance reimbursement; changes in health care marketsrelated to health care reform initiatives; failure to comply with environmentallaws and regulations and other factors referenced in our press releases andreports filed with the Securities and Exchange Commission (the “SEC”). ** **All subsequentforward-looking statements attributable to us or persons acting on our behalfare expressly qualified in their entirety by these cautionary statements.  Additional factors that may have a directbearing on our operating results are described under Item 1A. “Risk Factors”beginning on page 10.

 

**Item 1.****                         ****Business.**

** **

**GENERAL**

 

Merit Medical Systems, Inc.designs, develops, manufactures and markets single-use medical products forinterventional and diagnostic procedures. Our focus is divided into four markets: cardiology, radiology,gastroenterology and pulmonary.  We areable to introduce new products and capture significant market share because ofour expertise in product design, our proprietary technology and our skills ininjection and insert molding.  Ourinnovative products are designed to enable physicians and other healthcareprofessionals perform interventional and diagnostic procedures with enhancedpatient care and efficiency.

 

Our broad offering ofcardiology and radiology medical device products assists in diagnosing andtreating coronary artery disease, peripheral vascular disease and othernon-vascular diseases.  Our innovativeproducts aid in conducting dialysis treatment for kidney failure, performingdrainage procedures and clearing clots, as well as removing foreign objectsfrom the vasculature, providing access into vasculature and recordinghemo-dynamic pressure.  These products,which are distributed through our direct sales force and through distributors,include inflation devices, snares, non-vascular stents, aspiration extractioncatheters, angiographic catheters, dialysis catheters, micro catheters, sheathintroducers and micro access products, standard and hydrophilic coated guidewires, transducers and pressure monitoring accessories, needles, safetyproducts, therapeutic infusion catheters and accessories, drainage catheters,waste 

 

1

----

Table of Contents

 

management systems, highpressure tubing and contrast management systems, pressure infusion bags,syringes, safety scalpels, coagulation probes, kits and procedure trays.

 

Our gastroenterology andpulmonary medical device products assist physicians, nurses and technicians inthe palliative treatment of expanding esophageal, tracheobronchial and biliarystrictures caused by malignant tumors. These products, which are distributed through our direct sales force aswell as through distributors, include esophageal and tracheobronchial stentspre-loaded on a catheter-based delivery system, guide wires and sizingdevices.  Our esophageal stent helpsocclude esophageal tracheal fistula.  Ournewest division, Merit EndotekTM, creates, develops, manufactures anddistributes our new line of gastroenterology and pulmonary medical deviceproducts.

 

Our Original Equipment Manufacturers division (“OEM”)is engaged in efforts to expand the markets in which Merit products aredistributed.  We sell molded components,sub-assembled goods, and bulk non-sterile goods, which are combined withother components and/or goods from other companies and then sold under a Meritor non-Merit label.  Our OEM divisionsells products in international and domestic markets.

 

Duringthe first quarter of 2009, we entered into an asset purchase agreement andsupply agreement with Biosearch, pursuant to which we purchased a bipolarcoagulation probe and grafted biliary stents. During the first quarter of 2009, we also entered into an asset purchaseagreement with Alveolus, pursuant to which, among other things, we purchasedsubstantially all of Alveolus’ assets. The assets acquired relate to Alveolus’ non-vascular interventionalstent business for esophageal, tracheobronchial and biliary stentingprocedures.

 

During the second quarter of 2009,****we entered into an asset purchaseagreement with Hatch, pursuant to which we purchased assets associated with theEN Snare® foreign body retrieval system.

 

Duringthe fourth quarter of 2009, we entered into an exclusive license, developmentand supply agreement with Vysera, pursuant to which Vysera granted to us anexclusive license to use, modify and sell certain valve technology andbiomaterial coating technology for medical devices (the “Vysera Technology”)and other intellectual property associated with the Vysera Technology, and todevelop and market improvements to the Vysera Technology.

 

Merit MedicalSystems, Inc. was organized in July 1987 as a Utah corporation.  We also conduct our operations through anumber of domestic and foreign subsidiaries.** **Our principal offices are locatedat 1600 West Merit Parkway, South Jordan, Utah, 84095, and our telephone numberis (801) 253-1600.  See Item 2. “Properties.”  We maintain an Internet website at *www.merit.com*.

 

**PRODUCTS**

** **

We develop, manufactureand market innovative products that offer a high level of quality, value, andsafety to our customers, as well as the patients they serve.  In response to feedback from health careprofessionals, we have devoted our focus to four primary areas, cardiology,radiology, pulmonary and gastroenterology. We have expanded our product offerings into other parts of radiology,including interventional nephrology, CT and ultrasound labs.  Our products are also used in other clinicalareas such as pain management centers, vein clinics, endovascular surgery, and thoracicsurgery, as well as in other areas of the health care industry.

 

The competitiveadvantages of our products are enhanced by the extensive experience of ourmanagement team in the health care industry; our experienced direct sales forceand distributors; our ability to combine and customize devices, kits, and traysat the request of our customers; and our dedication to offering “stick tostitch” solutions in the markets we serve worldwide.

 

**Cardiologyand Radiology Products**

 

Interventional cardiology is a branch of the medical specialty ofcardiology that deals specifically with the catheter-based diagnosis andtreatment of heart diseases.  A largenumber of procedures can be performed by catheterization, and more commonlyinvolve the insertion of a sheath into the femoral, radial, or brachial artery.Fluoroscopy (real-time moving X-ray images) and computed tomography orthree-dimensional computer generated images are most often used to visualize the vessels andchambers of the heart during these diagnostic and interventionalprocedures.  Percutaneous CoronaryInterventions (“PCI”) are used to treat coronary atherosclerosis and theresulting narrowing of the arteries of the heart.  Interventional Radiology is related to theminimally invasive treatment of disease in other peripheral vessels and organsof the body and Percutaneous Peripheral Intervention (“PPI”) is used to treatsimilar disease conditions outside the heart.

 

2

----

Table ofContents

 

**Inflation Devices. **During PCIand PPI procedures, balloons and/or stents are placed within thevasculature.  The balloons must becarefully placed, inflated, and deflated within the vessel in order to achieveoptimal results without injury to the patient. For almost two decades, we have offered an extensive, innovative line ofinflation devices that accurately measure pressures during balloon and stentdeployment. ** **Productslike our IntelliSystem**®** andMonarch**®** (state of the art digital inflation systems), as well as theBasix**TM** COMPAK inflation device,offer the clinician a wide range of features and prices, along with the qualityand ergonomic superiority for which we are known.

 

**Hemostasis Valves. **We havedeveloped a complete line of technically sophisticated, clinically acclaimedhemostasis valves and angioplasty accessories. Hemostasis valves connect to catheters and allow passage of additionalguide wires, balloon catheters, and other devices into the vasculature whilereducing the amount of blood loss during the procedures.

 

**Vascular Retrieval Devices**. An increase in vascular procedures influenced our acquisition of the ENSnare® endovascular system from Hatch in 2009. Primary target markets for our snare technology are cardiology,interventional radiology and vascular surgery. The EN Snare® is intended for use in the cardiovascular system or hollowviscous to retrieve and manipulate foreign objects.  The EN Snare® is designed with three loops toincrease the probability of foreign body capture and is offered in seven sizesto accommodate a broad range of vessels throughout the body.

 

**Vascular Access Products. **We offer a broad line of devices used to gain andmaintain vascular access while protecting the clinician from accidental cutsand needle-sticks during the procedure. These effective and useful devices and kits include the Futura**®** Safety Scalpel and an improved line ofangiography needles (Merit Advance**®**),as well as the SecureLocTM Angiographic Needle. In addition, we offer an extensive line of sheath introducers (Prelude**®**) and mini access kits (MAKTM and S-MAK**TM**), which are designed to allow the clinician smooth, lesstraumatic, and convenient access to the patient’s vasculature.  In2009, we launched an innovative line extension to the Merit Advance® needleoffering including several sizes of 21 gauge, echo-enhanced needles.  We also added stand-alone Prelude® dilatorsto complement our sheath introducer line.

 

**Diagnostic Catheters, Guide Wires, and TorqueDevices. ** We offerdiagnostic catheters and guide wires for use during both cardiology andradiology angiographic procedures.  Merit’sdiagnostic catheter offering includes our new Impress**®** line of diagnostic radiology catheters as well as thePerforma® and Softouch® brands for both cardiology and peripheralcatheters.  These catheters offerinterventional radiologists and cardiologists superior performance during avariety of angiography procedures. Additionally, our diagnostic guide wires are used to traverse vascularanatomy and aid in placing catheters and other devices.  Our precoated, high performance InQwire**®** guide wires are lubricious and areavailable in a wide range of configurations to meet clinicians’ diagnosticneeds.  The Merit H2O® hydrophilic guidewire provides enhanced maneuverability through tortuous anatomy.  We also offer a line of torque devices (guidewire steering tools) that can be used on both standard and hydrophilic guidewires in both large and small diameters and are often included as a componentin our angioplasty packs.

 

**Angiography and Angioplasty Accessories. **Since the introduction of the CCSTM disposable coronarycontrol syringe line in 1988, we have continued to develop innovative,problem-solving devices, accessories, kits and procedure trays for use duringminimally invasive diagnosis and treatment of coronary artery and peripheraldisease.  In 2009, we complemented thesyringe offering with several new product line extensions and enhancements,including sword-handled Medallions, a new 10ml VacLok® and clear-handledsyringes.  Additionally, we offer anextensive line of kits containing manifolds, syringes, tubing, and disposablepressure transducers (MeriTrans®) for measurement of pressures within thevessels and chambers of the heart.  Wealso provide devices, kits, and procedure trays used to effectively and safelymanage fluids, contrast media, and waste during angiography and interventionalprocedures.  For example, in 2009, weintroduced a new Miser IITM contrast management system to complement ourcomprehensive line of fluid management products used in angiography procedures.

 

**Safety and Waste Management Systems. **We offer a variety of safety-related products andkits.  Our ShortStop® and ShortStopAdvantage® temporary sharps holders address the potential safety issuesassociated with accidental needle sticks. Our extensive line of color-coded Medallion® specialty syringes and thePALTM medication labeling system (which complies with the latest patient safetyinitiatives of the Joint Commission on Accreditation of Healthcare Organization(“JCAHO”)) help minimize mix-ups in administering medication.  We also offer waste management products tohelp avoid accidental exposure to contaminated fluids.  These include our OSHA-compliant wastedisposal basins, including the BackStop®, BackStop PlusTM, MiniStopTM, MiniStop+TMand DugOut®.  In 2009, we added theGrandstand® to the temporary sharps family of products.  These products have been designed tocomplement other Merit devices and are included in many of our kits andprocedure trays in order to make the clinical setting safer for both cliniciansand the patients.

 

3

----

Tableof Contents

 

**Drainage Catheters and Accessories. **We have a broad line of catheters for nephrostomy,abscess, and other drainage procedures. Our ReSolve® non-locking and locking drainage catheter line has beenexpanded every year since the product family was introduced in 2006.  These catheters’ unique, convenient lockingmechanisms are appreciated by clinicians and patients who often comment on theenhanced comfort that the catheter provides them. **** ****Wealso offer a range of catheter fixation devices including the RevolutionTMcatheter fixation device which was designed to be cost-effective, to save time,and to enhance patient comfort.  We alsoprovide a wide selection of accessories that complement our drainage catheters,including tubing sets and drainage bags. For non-vascular applications we offer mini access kits (MAK-NVTM). This popular device was designed for easy visualization and quickaccess into the drainage area.  Forenhanced visibility, the device features an echo-enhanced needle and radiopaquemarker tip on the introducer.

 

**Paracentesis and PericardiocentesisCatheters. **Paracentesis is a procedure to remove fluid that hasaccumulated in the abdominal cavity (peritoneal fluid).  Our One-StepTM centesis catheter and our Safety ParacentesisProcedure Tray are designed to provide clinicians with a safe, convenient, andcost-effective alternative for paracentesis procedures.  In 2009, we expanded and improved theOne-StepTM product line to include a slip-version of the device that we believewill make our products more competitive in the paracentesis market.  Pericardiocentesis is a procedure in whichfluid is aspirated from the pericardium (the sac enveloping the heart).  Our pericardiocentesis kit is designed as anorganized, ready-to-use, convenient tray to assist the clinician in drainingfluid quickly from the pericardial sac.

 

**Therapeutic Infusion Catheters. **We offer an extensive line of therapeutic thrombolyticinfusion systems featuring the Fountain® Infusion Systems and the Mistique®Infusion Catheters.  These technicallyadvanced catheters are used to treat thrombus (blood clot) formation in theperipheral vessels of the body.

** **

**Multipurpose Microcatheters.** In 2009, we introduced a multipurpose microcatheter for the controlledand selected infusion of diagnostic media or the delivery of interventionaldevices or therapeutic pharmaceuticals into selected blood vessels.  These specialty catheters are used to delivervarious embolic agents including alcohol, glue, metalliccoils, poly-vinyl alcohol particles, encapsulated chemo-microsphere, and gelfoam that can block bloodvessels (e.g. for the purpose of stopping bleeding) to tissues or organsincluding uterine artery embolization for percutaneous treatment of uterinefibroids.  These hydrophilic-coated microcatheters areused in both peripheral and coronary vasculature.

 

**Products for Dialysis and InterventionalNephrology. **In 2007, we acquired the ProGuideTM chronicdialysis catheter product line from Datascope Corporation, a New Jerseycorporation (“Datascope”).  The ProGuideTMis considered a “workhorse” catheter for chronic dialysis and provides aplatform for additional Merit products in the dialysis and interventionalnephrology market.  For example, the newPrelude® Short Sheath provides vascular access to dialysis grafts, along withour extensive line of micro access devices such as the MAKTM and S-MAKTM line ofmini access kits.  We also offer a widerange of guide wires, diagnostic catheters, therapeutic infusion systems, andsafety products that can be used during dialysis-related procedures.  In 2009, we launched the OuTakeTM CatheterExtractor.  This novel device is used toremove tunneled chronic dialysis catheters from dialysis patients.  Also in 2009, we continued to add to ouroffering of unique products for the dialysis and interventional nephrologymarket with a curved introducer needle to aid clinicians who choose to place atunneled dialysis catheter over a wire with a single stick.  The Slip-Not® Suture Retention Deviceprovides a unique and effective method for securing a purse-string suture thatcontrols bleeding after an arteriovenous (“AV”) fistula intervention.  In addition, we offer the Impress® 30cmangiographic catheters which can be used by interventional nephrologists.  Our dialysis and interventional nephrologyproducts are designed to provide comprehensive coverage for completing AVfistula interventions.

 

**Obesity-Related Products. **Patient obesity presents an ever-growing challenge toclinicians and patients during vascular access, angiography, and interventionalprocedures.  Our KanguruWeb® abdominalretraction device is designed to address this challenge.  This device allows easier vessel access toclinicians while maintaining patient comfort and dignity during interventionalcardiology and radiology procedures.  Inaddition, we offer longer angiography and anesthesia needles, as well as miniaccess kits for improved vascular access of obese patients.

 

**Gastroenterologyand Pulmonary Products**

** **

**Non-VascularStents.**  Our core pulmonary products include the AERO®and AERO DV® Fully Covered Tracheobronchial Stent and offer our customers apatented, self-expanding metal stent used to improve patency of theairways—both tracheal and bronchial—and to offer palliation to patientssuffering from the effects of cancer. Our gastroenterology products, the Alimaxx-ES® Fully Covered EsophagealStent System and the Alimaxx-B® Biliary Stent System are used to palliatesymptoms associated with malignant tumors affecting the esophagus and thebiliary duct.  Additionally, we sell aplastic biliary stent to restore patency and relieve symptoms associated withstrictures and blockages within the biliary system.  These stents are often used to “stage”treatment of malignant tumors such as pancreatic cancer and other seriousconditions.  We also sell ancillaryproducts, namely, the AEROSIZER® 

 

4

----

Table of Contents

 

tracheobronchial stentsizing device used in interventional pulmonary procedures and the MAXXWIRE®,which is a line of specialty guide wires which have pulmonary applications.

 

**Bi-polar probes.**  Bi-polarprobes are used by physicians as one means of controlling bleeding within avariety of non-vascular systems.  Theseproducts are currently sold on an OEM basis to customers who further sell themto a large number of gastroenterologists and pulmonologists.

 

**SpecialtyProcedure Products**

** **

In addition to the procedures and devices detailed above,interventional radiology (also referred to as the special procedures orspecials lab) performs a variety of additional minimally invasive diagnosticand interventional procedures.  We offera variety of devices and accessories used during these procedures.

 

**Discography Products. **Discography is a technique used to determine whether adisc is the source of pain in patients with back or neck pain.  During discography, contrast medium isinjected into the disc and the patient’s response to the injection isnoted.  Due to their quality andaccuracy, our digital inflation devices (IntelliSystem® and Monarch®) are usedin many pain management clinics.

 

**PressureSensors**.  Our sensor division manufactures and sellsmicroelectromechanical systems sensor components focusing on piezoresistivepressure sensors in various forms, including bare silicon die, die mounted onceramic substrates, and custom assemblies for specific customers.

 

**MARKETINGAND SALES**

** **

**TargetMarket/Industry. **Our target markets include diagnostic andinterventional cardiology, interventional radiology, gastroenterology,pulmonology, vascular surgery, interventional nephrology, cardiothoracicsurgery, pain management, and thoracic surgery.

 

Accordingto government statistics, cardiovascular disease continues to be a leadingcause of death and a significant health problem in the United States.** **Treatment optionsrange from dietary changes to surgery, depending on the nature of the specificdisease or disorder.  Endovasculartechniques, including angioplasty, stenting, and endoluminal stent grafts,continue to represent important therapeutic options for the treatment ofvascular disease.  We derive a largepercentage of our revenues from sales of products used during percutaneous(through the skin) diagnostic and interventional procedures such asangiography, angioplasty, and stent placement, and we intend to pursueadditional sales growth by building on our existing market position in bothcatheter technology and accessory products.

 

Inaddition to products used in the treatment of coronary and peripheral vasculardisease, we continue our efforts to develop and distribute other devices usedin the major markets we serve.  Forexample, we have developed and are distributing products used for percutaneousdrainage.  Prior to the widespread use ofCT or ultrasound imaging, surgery was necessary to drain internal fluid frombody cavities and organs.  Nowpercutaneous drainage is frequently prescribed as the treatment of choice formany types of fluid collections.  Ourfamily of drainage catheters and associated devices are used by physicians inthe interventional radiology, vascular surgery, and the cardiology catheter labfor the percutaneous drainage collection of simple serous fluid to viscousfluid (blood, or infected secretion) within the body.

 

Wealso service the growing interventional nephrology market.  Dialysis, or cleaning of the blood, is necessaryin conditions such as acute renal failure, chronic renal failure and end-stagerenal disease, or ESRD.  The kidneysremove excess water and chemical wastes from blood, permitting clean blood toreturn to the circulatory system.  Whenthe kidneys malfunction, waste substances are not properly excreted, creatingan abnormal buildup of wastes in the bloodstream.  Dialysis machines are used to treat thiscondition.  Dialysis catheters, whichconnect the patient to the dialysis machine, are used at various stages in thetreatment of dialysis patients.  In thepast few years, we have added catheters and other accessories to ourdialysis-related product offering.

 

We believe our move intothe areas of gastroenterology and pulmonology, as well as thoracic surgery,will open new opportunities to provide not only existing Merit products, suchas inflation devices, syringes, centesis catheters, and procedure kits to thosemarkets, but also to provide additional offerings built upon our  non-vascular stent technology.

 

In general, our targetmarkets are characterized by rapid change resulting from technological advancesand scientific discoveries.  We plan tocontinue to develop and launch innovative products to support clinical trendsdesigned to address the demands of those markets.

 

5

----

Table of Contents

** **

**MarketStrategy.**  Our marketing strategy is focused onidentifying and introducing a regular flow of highly profitable differentiatedproducts that meet customer needs.  Inorder to stay abreast of customer needs, we seek suggestions from hospitalpersonnel working with our products in cardiology and radiology applications,as well as gastroenterology, pulmonology, and thoracic surgery.  Suggestions for new products and productimprovements may come from engineers, sales people, physicians and technicianswho perform the clinical procedures.

 

Whenwe determine that a product suggestion demonstrates a sustainable competitiveadvantage, meets customer needs, fits strategically and technologically withour business, and has a good potential financial return, we generally assemblea “project team” comprised of individuals from our sales, marketing,engineering, manufacturing, legal, and quality assurance departments.  This team works to identify the customerrequirements, integrate the design, compile necessary documentation andtesting, and prepare the product for market introduction.  We believe that one of our marketingstrengths is our capacity to rapidly conceive, design, develop, and introducenew products.

 

**U.S. Sales.**  Sales of our products in the United Statesaccounted for 66%, 68% and 68% of our total sales for the years ended December 31,2009, 2008 and 2007, respectively.  Ourdirect sales force currently consists of an Executive Vice President ofMarketing and Sales, a Vice President of U. S. Sales, ten regional salesmanagers and 85 direct sales representatives and clinical specialists locatedin major metropolitan areas throughout the United States.  In addition, we have developed another salesforce in the United States for Merit EndotekTM, consisting of a Vice Presidentof Sales, two regional sales managers and 11 direct sales representatives.  We consider training to be a critical factorin the success of our direct sales force. Our sales people are trained by our personnel at our facilities, by asenior sales person in their respective territories, at regular national andregional sales meetings, by consulting cardiologists, radiologists,endoscopists, and thoracic surgeons and by observation of procedures inlaboratories and operating rooms throughout the U.S.

 

**International Sales.**  Approximately174 independent dealer organizations and packers distribute our productsworldwide, including territories in Europe, Africa, the Middle East, Asia,South and Central America, and Canada. We have a Vice President for International Sales, based in South Jordan,Utah, who oversees Asia, South and Central America, Australia and Canada.  We also have a Vice President of EuropeanSales who oversees Europe, the Middle East and Africa.  Approximately 30 direct sales representativesand country managers presently sell our products in Germany, France, the UnitedKingdom, Belgium, The Netherlands, Denmark, Sweden, Finland, Ireland andAustria.  In 2009, our internationalsales grew approximately 19% over our total sales for the year ended December 31,2008 and accounted for approximately 34% of total sales.  Our new Merit Endotek division, has a small,but growing, presence in international markets. With the recent and planned additions to our product lines, we believethat our international sales will continue to increase.

 

Werequire our international dealers to inventory products and sell directly tocustomers within defined sales territories. Each of our products must be approved for sale under the laws of thecountry in which it is sold. International dealers are responsible for compliance with all applicablelaws and regulations in their respective countries.

 

**OEM Sales. **We currently have a worldwide OEMdivision that sells molded components, sub-assembled goods, and bulknon-sterile goods which may be combined with other components and/or goods fromother companies and then sold under a Merit or non-Merit label.

 

**CUSTOMERS**

 

We provide products tohospitals and clinic-based cardiologists, radiologists, anesthesiologists,physiatrists (pain management physicians), neurologists, nephrologists, vascularsurgeons, interventional gastroenterologists and pulmonologists, thoracicsurgeons, technicians and nurses. Hospitals and acute care facilities in the United States purchase ourproducts through our direct sales forces, distributors, OEM partners, custompackagers and packers who assemble and combine our products in custom kits andpacks.  Outside the United States,hospitals and acute care facilities purchase our products through our directsales force, or in the absence of a sales force, through independentdistributors or OEM partners.

 

In2009, our U.S. domestic sales force completed approximately 43% of our salesdirectly to U.S. hospitals and approximately 13% of our sales through otherchannels such as U.S. custom packagers and distributors.  Approximately 34% of our sales were made by our directEuropean sales force, international distributors, and our OEM sales force.Sales to our single largest customer, an OEM partner, accounted forapproximately 6% of total sales during the year ended December 31,2009.  We generally manufacture productsfor other medical device companies through our OEM division.  During the year ended December 31, 2009,OEM sales represented approximately 14% of our total sales.  Our new Merit Endotek division, which was inexistence for less than the full year, represented approximately 3% of totalsales.

 

6

----

Table of Contents

** **

**RESEARCHAND DEVELOPMENT**

** **

In 2009, we continued toinnovate in the treatment of cardiovascular disease by offering our customers anumber of new products, improvements to existing products and lineextensions.  Additionally, we expandedour product offerings by entering the gastrointestinal and pulmonary marketsthrough the acquisition of Alveolus.  Wesubsequently retained key research and development personnel and have sinceadded new sizes of non-vascular stents to the esophageal product line previouslydeveloped by Alveolus.  Furthermore, wehave initiated multiple projects to expand Merit Endotek’s products scheduledfor release in 2010 through 2012.

 

Our research anddevelopment expenses were approximately $11.2 million, $9.2 million, and $8.7million in 2009, 2008 and 2007, respectively. Our future growth continues to be fueled with multiple product ideasguided by our Chief Executive Officer, our Vice President of Engineering andour sales and marketing teams, as well as by collaboration with physicians withwhom we have long-term relationships.  Wehave research and development facilities in South Jordan, Utah; Angleton andDallas, Texas; Howell, New Jersey; Galway, Ireland; and Venlo, The Netherlands.

 

**MANUFACTURING**

 

Wemanufacture many of our products utilizing our proprietary technology and ourexpertise in plastic injection and insert molding.  We generally contract with third parties forthe tooling of molds, but we design and own all of our molds.  We utilize our experience in injection andinsert molding technologies in the manufacture of most of the custom componentsused in our products.

 

Weeither assemble the electronic monitors and sensors used in our IntelliSystem®and Monarch® inflation devices from standard electronic components or wepurchase them from third-party suppliers. Merit Sensor Systems, Inc., a wholly-owned subsidiary of MeritMedical Systems, Inc. (“Merit Sensor Systems”), develops and marketssilicon sensors.  It is presentlysupplying all of the sensors we utilize in our digital inflation devices.

 

Ourproducts are manufactured at several factories, including facilities located inSouth Jordan and Murray, Utah; Galway, Ireland; Venlo, The Netherlands;Angleton, Texas; and Chester, Virginia. See Item 2. “Properties.”  We alsomanufacture at a contract manufacturing facility in Mexico.

 

Wehave distribution centers located in South Jordan, Utah; Angleton, Texas;Chester, Virginia; and Maastricht, The Netherlands.

 

Webelieve that our variety of suppliers for raw materials and componentsnecessary for the manufacture of our products, as well as our long-termrelationships with such suppliers, promote stability in our manufacturingprocess.  Historically, we have not beenmaterially affected by interruptions with such suppliers.  Furthermore, we seek to develop relationshipswith potential back-up suppliers for materials and components in the event ofsupply interruptions.

 

**COMPETITION**

 

Wecompete in several global markets, including diagnostic and interventionalcardiology, interventional radiology, vascular surgery, interventionalnephrology, cardiothoracic surgery, interventional gastroenterology andpulmonology, anesthesiology and pain management.  These markets encompass a large number ofsuppliers of varying sizes.

 

In the interventionalcardiology and radiology markets, as well as the gastroenterology and pulmonarymarkets, we compete with large international, multi-divisional medical supplycompanies such as Cordis Corporation (Johnson & Johnson), BostonScientific Corporation, Medtronic, C.R. Bard, Abbott, and Terumo.  Medium-size companies we compete with includeCook, Arrow, AngioDynamics, Vascular Solutions, B. Braun, Olympus, Navilyst,Edwards Lifescience, and ICU Medical. Many of our competitors have substantially greater financial, technical,and marketing resources than we do.

 

Theprincipal competitive factors in the markets in which our products are sold arequality, price, value, device feature, customer service, breadth of line, andcustomer relationships.  We believe thatour products have achieved market acceptance due to the quality of materialsand workmanship of our products, innovative design, our willingness tocustomize to fit customer needs, and our prompt attention to customerrequests.  Our products are pricedcompetitively, but generally not below prices for competing products.  One of our primary competitive strengths isour relative stability in the marketplace; a comprehensive, broad line ofancillary products; and our history of introducing a variety of new productsand product line extensions to the market on a regular basis.

 

7

----

Table of Contents

 

Basedon available industry data, with respect to the number of procedures performed,we believe we are the leading provider of digital inflation technology in theworld.  In addition, we believe we arethe world market leader for inflation devices, hemostasis devices and torquedevices.  We believe that we are one oftwo market leaders in the United States for control syringes, waste-disposalsystems, tubing, and manifold kits**.** We anticipate the recent and planned additionsto our product lines will enable us to compete even more effectively in boththe U.S. and international markets. There is no assurance that we will be able to maintain our existingcompetitive advantages or compete successfully in the future.

 

Wederive a substantial majority of our revenues from sales of products used indiagnostic angiography and interventional cardiology and radiology stentprocedures.  Medical professionals arestarting to use new diagnostic methods and interventional procedures anddevices, as well as drugs for the treatment and prevention of cardiovasculardisease.  These new methods, proceduresand devices may render some of our products obsolete or limit the markets forour products.  However, with the adventof vascular stents and other procedures, we have experienced continued growthin sales of our products.

 

**PATENTS,LICENSES, TRADEMARKS AND COPYRIGHTS**

 

Weconsider our proprietary technology to be important in the development andmanufacture of our products.  We seek toprotect our technology through a combination of patents, trademarks, tradesecrets, copyrights, confidentiality agreements and non-competeagreements.  We generally seek patentprotection of our technology in the United States and certain foreign countrieswhere such protection appears to be advantageous.

 

As of December 31,2009, we either owned or had licenses to use more than 100 U.S. patents.  Additionally, we either owned or hadexclusive rights to 66 pending U.S. patent applications.  We owned 66 international patents, and eitherowned or had exclusive rights to 60 pending international patent applications.  We also operate under licenses from otherowners of certain patents, patent applications, technology, trade secrets,know-how, copyrights and trademarks.

 

Webelieve that our patents and pending patent applications are materiallyimportant to our business, but we do not believe that our business is dependentupon securing such patents.  We believethat no single patent, patent application, technology, trade secret, know-how,copyright, trademark, or license is material in relation to our business as awhole.

 

CertainU.S. patents related to the digital display in our inflation devices expired in2009 and other patent rights are scheduled to expire thereafter.  We expect that related patents will continueto be valuable, in part because of proprietary innovations made since theissuance of our first patent.  In 1992,we were granted a license to use patented technology that we incorporated intoour inflation devices.  In return, wepaid a 5.75% ongoing royalty to the licensor, not to exceed $450,000 annually.** **Royaltiespaid for such license in each of 2008 and 2007 were $450,000.  The license agreement terminated in August 2008and we did not pay royalties under that license during 2009.

 

Wehave also registered or applied for registration of several trade names ortrademarks.  See “Products” above.  We have received 154 U.S. and foreigntrademark registrations, and other U.S. and foreign trademark applications arecurrently pending.  We****have registered copyrights relating to certain softwareused in our electronic inflation devices.

 

**REGULATION**

 

We face comprehensive governmental regulation bothwithin and outside the United States relating to the development, manufacture,sale and distribution of our products.  Anumber of factors substantially increase the time, difficulty and costsincurred in obtaining and maintaining the approval to market newly developedand existing products. These include detailed inspection of and controls overresearch and laboratory procedures, clinical investigations, manufacturing,marketing, sampling, distribution, recordkeeping, storage and disposalpractices and various post-market requirements. Governmental regulatory actions can result in the seizure or recall ofproducts, suspension or revocation of the authority necessary for theirproduction and sale, and civil or criminal sanctions.

 

Under the Federal Food, Drug and Cosmetic Act, (the “Food,Drug and Cosmetic Act”) and through its own rules, the U.S. Food and DrugAdministration (“FDA”) regulates the development, testing, packaging, labeling,and marketing of medical devices and manufacturing procedures relating to thesedevices.  In general, the FDA requiresthat manufacturers adhere to certain standards designed to ensure the safetyand effectiveness of medical devices.  Weemploy a Chief Regulatory Officer and a Vice President of Quality Systems whoare responsible to promote our compliance with applicable FDA regulations.

 

8

----

Table of Contents

 

TheFDA’s Quality Systems Regulations define the requirements for our manufacturingprocesses, require the maintenance of certain records, and provide forunscheduled inspections of our facilities. We must also comply with certain requirements of state, local, andforeign governments in the manufacture and marketing of our products.

 

Newmedical devices may also be subject to either the Section 510(k) Pre-MarketNotification regulations or the Pre-Market Approval (“PMA”) regulationspromulgated by the FDA and similar regulatory requirements in foreigncountries.  New products in eithercategory require extensive documentation, careful engineering, andmanufacturing controls to ensure quality. Products needing PMA approval require extensive pre-clinical andclinical testing and approval by the FDA prior to marketing.  Products subject to Section 510(k) ofthe Food Drug and Cosmetic Act require FDA clearance prior to marketing.  To date, our products have required onlycompliance with Section 510(k). Most of our products are subject to foreign regulatory approvals beforethey may be marketed abroad.  We placethe “CE” mark on devices sold in Europe. The CE mark represents that a product has met EU health, safety, andenvironmental requirements.  We havereceived ISO 13485 certification for our facilities in Utah, Texas, Virginiaand Ireland.  We have also received ISO9001:2008 certification for our Merit Sensor Systems facility in South Jordan,Utah.

 

We are subject to variousfederal, state and local laws targeting fraud and abuse in the healthcareindustry.  Healthcare costs continue tobe a subject of study, investigation and regulation by governmental agenciesand legislative bodies around the world. Recently, in the United States, particular attention has been focused onmedical device prices and profits, and on programs that encourage doctors torecommend, use or purchase particular medical devices.  Payers have become more influential in themarketplace and increasingly are focused on medical device pricing and medicaldevice utilization and the quality and costs of healthcare.  Violations ofthese frauds and abuse-related laws are punishable by criminal or civilsanctions, including substantial fines, imprisonment and exclusion fromparticipation in healthcare programs such as Medicare and Medicaid and healthprograms outside the United States.

 

**EMPLOYEES**

 

As of December 31,2009, we employed 1,875 people, including 1,402 in manufacturing; 218 in salesand marketing; 145 in engineering, research and development; and 110 inadministration.

 

Manyof our present employees are highly skilled. Our failure or success will depend, in part, upon our ability to retainsuch employees.  We believe that anadequate supply of skilled employees is available.  We have, from time-to-time, experienced rapidturnover among our entry-level assembly workers, as well as occasionalshortages of such workers, resulting in increased labor costs andadministrative expenses related to hiring and training replacement and newentry-level employees.  Our key employeesare bound by agreements or policies of confidentiality.  None of our employees are represented by aunion or other collective bargaining group. We believe that our relations with our employees are generally good.

 

**AVAILABLEINFORMATION**

 

Wefile annual, quarterly and current reports and other information with theSEC.  These materials can be inspectedand copied at the SEC’s Public Reference Room at 100 F Street, NE, Washington,D.C. 20549.  Copies of these materialsmay also be obtained by mail at prescribed rates from the SEC’s PublicReference Room at the above address. Information about the Public Reference Room can be obtained bycalling the SEC at 1-800-SEC-0330.  TheSEC also maintains an Internet site that contains reports, proxy andinformation statements, and other information regarding issuers that fileelectronically with the SEC.  The addressof the SEC’s Internet website is www.sec.gov.

 

Wemake available, free of charge, on our Internet website, located atwww.merit.com, our most recent Annual Report on Form 10-K, our most recentQuarterly Report on Form 10-Q, any Current Reports on Form 8-K filedsince our most recent Annual Report on Form 10-K, and any amendments tosuch reports as soon as reasonably practicable following the electronic filingof such report with the SEC.  Inaddition, we provide electronic or paper copies of such filings free of chargeupon request.

 

**FINANCIALINFORMATION ABOUT FOREIGN AND DOMESTIC SALES**

 

Forfinancial information relating to our foreign and domestic sales see Note 11 toour consolidated financial statements set forth in Item 8 of this report.

 

9

----

Table of Contents

 

**Item 1A.****                                                 ****Risk Factors.**

** **

Ourbusiness, operations, and financial condition are subject to certain risks anduncertainties.  Should one or more ofthese risks or uncertainties materialize, or should any underlying assumptionsprove incorrect, our actual results will vary, and may vary materially fromthose anticipated, estimated, projected or expected.  Among the key factors that may have a directbearing on our business, operations, or financial condition are the factorsidentified below:

 

**Wemay be unable to protect our proprietary technology or may infringe on theproprietary technology of others.**

 

Wehave obtained U.S. patents and filed additional U.S. and foreign patentapplications; however, there can be no assurance that any patents we hold, orfor which we have applied, will provide us with any significant competitiveadvantages, that third parties will not challenge our patents, or that patentsowned by others will not have an adverse effect on our ability to conductbusiness.  We could incur substantialcosts in preventing patent infringement, in curbing the unauthorized use of ourproprietary technology by others, or in defending against similar claims of others. Since we rely on trade secrets and proprietary know-how to maintain ourcompetitive position, there can be no assurance that others may notindependently develop similar or superior technologies.

 

Weoperate in an increasingly competitive medical technology marketplace.  There has also been substantial litigationregarding patent and other intellectual property rights in the medical deviceindustry.  Our activities may require usto defend against claims and actions alleging infringement of the intellectualrights of others.  If a court rules againstus in any patent litigation, any of several negative outcomes could occur: wecould be subject to significant liabilities, we could be forced to seeklicenses from third parties, or we could be prevented from marketing certainproducts.  Any of these outcomes couldhave a material adverse effect on our financial condition and operatingresults.

 

Ourability to remain competitive is dependent, in part, upon our ability toprevent other companies from using our proprietary technology incorporated intoour products.  We seek to protect ourtechnology through a combination of patents, trademarks, and trade secrets, aswell as licenses, proprietary know-how and confidentiality agreements.  We may be unable, however, to prevent othersfrom using our proprietary information, or continue to use such information ourself, for numerous reasons, including the following, any of which could have amaterial adverse effect on our business, operations, or financial condition:

 

·          Our issued patents may not besufficiently broad to prevent others from copying our proprietary technologies

 

·          Our issued patents may be challenged bythird parties and deemed to be overbroad or unenforceable

 

·          Our products may infringe on the patents orother intellectual property rights of other parties, requiring us to alter ordiscontinue our manufacture or sale of such products

 

·          Costs associated with seeking enforcementof our patents against infringement, or defending our self against allegationsof infringement, may be significant

 

·          Our pending patent applications may notbe granted for various reasons, including over breadth or conflict with anexisting patent

 

·          Other persons may independently develop,or have developed, similar or superior technologies

 

**Economicand industry conditions constantly change, and negative economic conditions inthe United States and other countries could materially and adversely affect ourbusiness and results of operations.**

** **

Ourbusiness and our results of operation are affected by many changing economicand other conditions beyond our control. Actual or potential changes in international, national, regional andlocal economic, business and financial conditions, including recession andinflation, may negatively affect consumer preferences, perceptions, spendingpatterns or demographic trends, any of which could adversely affect ourbusiness and results of operations.  Wemay also experience higher bad-debt rates and slower receivable collectionrates in our dealings with our customers. In addition, recent disruptions in the credit markets have resulted ingreater volatility, less liquidity, widening of credit spreads, and decreasedavailability of financing.  As a resultof these factors, there can be no assurance that financing will be available tous on acceptable terms, if at all.  Aninability to obtain necessary additional financing on acceptable terms may havean adverse impact on us and on our ability to grow our business.

 

10

----

Table of Contents

** **

**Terminationor interruption of relationships with our suppliers, or failure of suchsuppliers to perform, could disrupt our business.**

 

We relyon raw materials, component parts, finished products, and services supplied byoutside third parties in connection with our business.  For example, substantially all of ourproducts are sterilized by only a few different entities.  In addition, some of our products aremanufactured or assembled by third parties. If a supplier of significant raw materials, component parts, finishedgoods, or services were to terminate its relationship with us, or otherwisecease supplying raw materials, component parts, finished goods, or servicesconsistent with past practice, our ability to meet our obligations to our endcustomers may be disrupted.  A disruptionwith respect to numerous products, or with respect to a few significantproducts, could have a material adverse effect on our business, operations orfinancial condition.

 

**Ourproducts may be subject to recall or product liability claims.**

 

Ourproducts are used in connection with invasive procedures and in other medicalcontexts in which it is important that those products function with precisionand accuracy.  If our products do notfunction as designed, or are designed improperly, we may choose to or be forcedby regulatory agencies to withdraw such products from the market.  In addition, if medical personnel or theirpatients suffer injury as a result of any failure of our products to functionas designed, or an inappropriate design, we could be subject to lawsuitsseeking significant compensatory and punitive damages.  Any product recall or lawsuit seeking significantmonetary damages may have a material adverse effect on our business, operationsor financial condition.

 

Wegenerally offer a limited warranty for product returns which are due to defectsin quality and workmanship.  We attemptto estimate our potential liability for future product returns and establishreserves on our financial statements in amounts that we believe will besufficient to address our warranty obligations; however, our actual liabilityfor product returns may significantly exceed the amount of our reserves.  If we underestimate our potential liabilityfor future product returns, or if unanticipated events result in returns thatexceed our historical experience, our financial condition and operating resultscould be materially and adversely affected.

** **

**Wemay be unable to successfully manage growth, particularly if accomplishedthrough acquisitions.**

 

Successfulimplementation of our business strategy will require that we effectively manageany associated growth.  To manage growtheffectively, our management will need to continue to implement changes incertain aspects of our business, to improve our information systems andoperations to respond to increased demand, to attract and retain qualifiedpersonnel, and to develop, train, and manage an increasing number ofmanagement-level and other employees. Growth could place an increasing strain on our management, financial,product design, marketing, distribution and other resources, and we couldexperience operating difficulties.  Anyfailure to manage growth effectively could have a material adverse effect onour business, operations or financial condition.

 

To theextent that we grow through acquisition, we will face the additional challengesof integrating our current operations, culture, information management systemsand other characteristics with that of the acquired entity.  We may incur significant expenses inconnection with negotiating and consummating one or more transactions, and wemay inherit certain liabilities in connection with each acquisition.  In addition, we may not realize competitiveadvantages, synergies or other benefits anticipated in connection with any suchacquisition.  If we do not adequatelyidentify targets for, or manage issues related to, our future acquisitions,such acquisitions may have a negative adverse effect on our business andfinancial results.

 

**Asignificant adverse change in, or failure to comply with, governing regulationscould adversely affect our business.**

 

Substantiallyall of our products are “devices,” as defined in the Federal Food, Drug andCosmetic Act, and the manufacture, distribution, record keeping, labeling andadvertisement of our products are subject to regulation by the FDA in theUnited States and its equivalent regulatory agencies in various foreigncountries in which our products are manufactured, distributed, labeled, offeredor sold.  Further, we are subject toregular review and periodic inspections at our current facilities with respectto the FDA’s Quality System Regulations and similar requirements of foreigncountries.  In addition, we are subjectto certain export control restrictions governed by the U.S. Department of theTreasury and may be governed by other regulatory agencies in various foreigncountries to which our products are exported. Although we believe we are currently in material compliance with theserequirements, any failure on our part to comply with all applicable current andfuture regulations could adversely affect our business, operations, orfinancial condition.

 

11

----

Table of Contents

** **

**Asignificant portion of our revenues are derived from a few products, proceduresand/or customers.**

** **

A significantportion of our revenues are attributable to sales of our inflationdevices.  During the year ended December 31,2009, sales of our inflation devices (including inflation devices sold incustom kits and through OEM channels) accounted for approximately 24% of ourtotal revenues.  Sales of our inflationdevices to a single OEM customer, representing our largest customer, wereapproximately 6% of our total inflation device sales for the year ended December 31,2009.  Any material decline in market demand,or change in OEM supplier preference, for our inflation devices could have anadverse effect on our business, operations or financial condition.

 

Inaddition, the products that have accounted for a majority of our historicalrevenues are designed for use in connection with a few related medicalprocedures, including angioplasty, stent placement procedures, and spinalprocedures.  If subsequent developmentsin medical technology or drug therapy make such procedures obsolete, or alterthe methodology of such procedures so as to eliminate the usefulness of ourproducts, we may experience a material decrease in demand for our products andexperience deteriorating financial performance.

 

**Wemay be unable to compete in our markets, particularly if there is a significantchange in relevant practices or technology.**

 

Themarket for each of our products is highly competitive.  We face competition from many companies whichare larger, better established, have greater financial, technical and otherresources and possess a greater market presence than we do.  Such resources and market presence may enableour competition to more effectively market competing products or to marketcompeting products at reduced prices in order to gain market share.

 

Inaddition, our ability to compete successfully is dependent, in part, upon ourresponse to changes in technology and upon our efforts to develop and marketnew products which achieve significant market acceptance. Competing companieswith substantially greater resources than us are actively engaged in researchand development of new methods, treatments, drugs, and procedures to treat orprevent cardiovascular disease that could limit the market for our products andeventually make some of our products obsolete. A reduction in the demand for a significant number of our products, or afew key products, could have a material adverse effect on our business,operations or financial condition.

 

**Themarket price of our Common Stock has been, and may continue to be, volatile.**

 

The marketprice of our Common Stock has been, and may continue to be, volatile forvarious reasons, including the following, which could have a material adverseeffect on our business, operations or financial condition:

 

·          Our announcement of new products ortechnical innovations, or similar announcements by our competitors

 

·          Development of new procedures that use,or do not use, our technology

 

·          Quarter-to-quarter variances in ourfinancial results

 

·          Claims involving potential infringementof patents and other intellectual property rights

 

·          Analysts’ and other projections orrecommendations regarding our Common Stock specifically or medical technologystocks generally

 

·          Any restatement of our financialstatements or any investigation of us by the SEC, the FDA or another regulatoryauthority

 

·          A decline, or rise, of stock prices inthe capital markets generally

 

**Fluctuationsin Euro and GBP exchange rates may negatively impact our financial results.**

 

Ourmaterial market risk relates primarily to fluctuations in the rate of exchangebetween the Euro and Great Britain Pound (“GBP”) relative to the value of theU.S. Dollar.  Those fluctuations couldhave a negative impact on our margins and financial results.  For example, during 2009, the exchange ratebetween all applicable foreign currencies and the U.S. Dollar resulted in adecrease in our gross revenues of approximately $2.6 million and an increase of0.10% in our gross profit.

 

12

----

Table of Contents

 

Forthe year ended December 31, 2009, approximately $26.3 million, or 10%, ofour sales, were denominated in foreign currencies.  If the rate of exchange between the Euro andthe GBP declines, against the U.S. Dollar, we may not be able to increase theprices we charge our European customers for products whose prices aredenominated in Euros and GBP. Furthermore, we may be unable or elect not to enter into hedgingtransactions which could mitigate the effect of declining exchange rates.  As a result, if the rate of exchange betweenEuros and GBP declines, against the U.S. Dollar, our financial results may benegatively impacted.

 

**Operations at our manufacturingfacilities may be negatively impacted by certain factors, including severeweather conditions and the impact of natural disasters.**

 

Our operations could beaffected by many factors beyond our control, including severe weatherconditions and the impact of natural disasters, including hurricanes andtornados.  These conditions could causesubstantial damage to our facilities, interrupt our production and disrupt ourability to deliver products to our customers.

 

Our operations inAngleton, Texas have been suspended due to hurricanes in recent years.  In September 2008 we shut down ouroperations in Angleton in anticipation of Hurricane Ike and production wasrestored shortly thereafter.  While weincurred minimal damage to our facility, we experienced greater financialdamage as a result of the production disruption.  Although our insurance covered some of thelosses associated with the event, future natural disasters could increase thecost of insurance.  We cannot be certainthat any losses from business interruption or property damages, along with theincreases in insurance costs, will not have a material adverse effect on ourresults of operations or financial condition.

 

**Weare dependent upon key personnel.**

** **

Oursuccess is dependent on key management personnel, including Fred P.Lampropoulos, our Chairman of the Board, President and Chief ExecutiveOfficer.  Mr. Lampropoulos is notsubject to any agreement prohibiting his departure, and we do not maintain keyman life insurance on his life.  The lossof Mr. Lampropoulos, or of certain other key management personnel, couldhave a materially adverse effect our business and operations.  Our success also depends on, among otherfactors, the successful recruitment and retention of key operating, manufacturing,sales and other personnel.

 

**Weare subject to work stoppage, transportation and related risks.**

 

Wemanufacture products at various locations in the United States and foreigncountries and sell our products worldwide. We depend on third-party transportation companies to deliver suppliesnecessary to manufacture our products from vendors to our various facilitiesand to move our products to customers, operating divisions, and othersubsidiaries located worldwide.  Ourmanufacturing operations, and the operations of the transportation companies onwhich we depend, may be adversely affected by natural disasters or significanthuman events, such as a war, terrorist attack, riot, strike, slowdown orsimilar event.  Any disruption in ourmanufacturing or transportation could materially adversely affect our abilityto meet customer demands or our operations.

 

**Limitson reimbursement imposed by governmental and other programs may adverselyaffect our business.**

 

Thecost of a significant portion of medical care is funded by governmental, socialsecurity or other insurance programs. Limits on reimbursement imposed by such programs may adversely affectthe ability of hospitals and others to purchase our products.  In addition, limitations on reimbursement forprocedures which utilize our products could adversely affect sales.

 

**Our failure to comply withapplicable environmental laws and regulations could affect our business andresults of operations.**

 

Merit Sensor Systems, Inc.manufactures and assembles certain products that require the use of hazardousmaterials that are subject to various federal, state and local laws andregulations governing the protection of the environment.  While the cost of compliance with such lawsand regulations has not had a material adverse effect on our results ofoperations historically, compliance with future regulations may requireadditional capital investments in pollution control equipment or changes in theway Merit Sensor Systems makes its products. Additionally, because Merit Sensor Systems uses hazardous and otherregulated materials in its manufacturing processes, we are subject to certainrisks of liabilities and claims resulting from any accidental releases.  While we believe the precautions andinfrastructure Merit Sensor Systems has put in place are sufficient, anyaccidental release may have an adverse affect on our business and results ofoperations.

 

13

----

Table of Contents

** **

**If certain proposed healthcare reformlegislative proposals are enacted into law, our business, financial condition,results of operations and cash flows could be adversely affected.**

** **

In October 2009, both the U.S. Senate and House ofRepresentatives released draft healthcare reform legislation that includesprovisions that would impose a fee or excise tax on certain medicaldevices.  The proposals, as currentlydrafted, may apply to certain of our medical device products.  Many details of the proposals remainuncertain, and any healthcare reform legislation must still be enacted by bothHouses of Congress and signed by the President. If either of these medical device proposals is enacted into law, ourresults of operations could be adversely affected.

 

**If our employees or agents violate the U.S.Foreign Corrupt Practices Act or anti-bribery laws in other jurisdictions, wemay incur fines or penalties, or experiences other adverse consequences.**

** **

We are subject to the U.S. Foreign Corrupt PracticesAct (“FCPA”) and similar anti-bribery laws in non-U.S. jurisdictions whichgenerally prohibit companies and their intermediaries from making improperpayments to non-U.S. officials for the purpose of obtaining or retainingbusiness.  Because of the predominance ofgovernment-sponsored healthcare systems around the world, many of our customerrelationships outside of the United States are with governmental entities andare therefore subject to such anti-bribery laws.  We operate in many parts of the world thathave experienced governmental corruption to some degree, and in certaincircumstances strict compliance with anti-bribery laws may conflict with localcustoms and practices.  Our internalcontrol policies and procedures may not protect us from reckless or criminalacts committed by our employees or agents. If our employees or agents violate the provisions of the FCPA or otheranti-bribery laws, we may incur fines or penalties, we may be unable to marketour products in other countries or we may experience other adverse consequenceswhich could have a material adverse effect on our operating results orfinancial condition.

 

**Wemay be subject to laws targeting fraud and abuse in the healthcare industry, theviolation of which could adversely affect our business or financial results.**

 

Ouroperations are subject to various state and federal laws targeting fraud andabuse in the healthcare industry, including federal anti-kickback laws, whichprohibit any person from knowingly and willfully offering, paying, solicitingor receiving remuneration, directly or indirectly, to induce or reward eitherthe referral of an individual, or the furnishing or arranging for an item orservice, for which payment may be made under federal healthcare programs, suchas the Medicare and Medicaid programs. Violations of these fraud and abuse-related laws are punishable bycriminal or civil sanctions, including substantial fines, imprisonment andexclusion from participation in healthcare programs such as Medicare andMedicaid and health programs outside the United States, any of which couldadversely affect our business or financial results.

 

**Item 1B.****                ****Unresolved StaffComments.**

** **

None.

 

**Item 2.****                         ****Properties.**

** **

We ownapproximately 40 acres of real property in the city of South Jordan, Utah,surrounding an additional ten acres of leased real property on which ourprincipal office and manufacturing facility is located which totalsapproximately 200,000 square feet.  Wesold the ten-acre site to an unrelated developer in order to facilitateconstruction of the facility and entered into a 25-year lease agreement(beginning in 1995) to finance the facility. Monthly lease payments attributable to the ten-acre parcel areapproximately $156,000.  We also hold anoption to purchase the facility, exercisable at market value after 25years.  At the end of 2004, we completedconstruction of an approximately 47,000 square-foot manufacturing facility inSouth Jordan, Utah.  This facility isused for research, development and pilot production clean rooms and forproduction of sensors.  We completed anapproximately 140,000 square-foot manufacturing facility located in SouthJordan, Utah in September 2005 which is used for injection and insertmolding production, as an automated finished goods warehouse, and as the localefor management information systems and accounting employees.  During 2009, we acquired an additional threeand one-half acres of property west of our South Jordan facility.  We believe the acquisition of this additionalproperty will potentially enable us to expand our operations in the future asproperty surrounding our existing facilities is limited due to increaseddevelopment.

 

We owna building of approximately 65,000 square feet, with approximately three acresof land, in Galway, County Galway, Republic of Ireland, which serves as ourprincipal office and manufacturing facility for our European operations.  The facility houses a research anddevelopment team, which developed our diagnostic guide wire, and is working to developother new products.  We also manufactureother products at the Galway facility.

 

14

----

Table of Contents

 

Welease a manufacturing facility of approximately 63,000 square feet located inMurray, Utah.  The Murray facility isused for production of several of our products. We lease the facility on a month-to-month basis.  The aggregate lease payments on our Murrayfacility are approximately $37,000 per month.

 

We ownapproximately 19 acres of land and an approximately 75,000 square-foot buildingin Angleton, Texas.  We use the facilityfor the production of catheter-related products.

 

We ownapproximately 12 acres of land and an approximately 100,000 square-footbuilding in Chester, Virginia.  We usethe facility for production of custom procedure trays used in the medicalindustry.

 

In December 2009,we leased a warehouse of approximately 33,500 square feet located in Chester,Virginia. We intend to use this facility as a warehouse for finished goodsproduced in our existing Chester, Virginia facility.  The lease is scheduled to expire in April 30,2015.  The current monthly lease paymentis approximately $10,000.

 

In July 2009,we leased an office, warehouse and production facility of approximately 40,000square feet located in West Jordan, Utah. We completed approximately $1.1 million in renovations to the buildinglargely related to additional clean rooms completed over the last severalmonths of 2009 and through January of 2010, which will provideapproximately 14,000 square feet of clean rooms.  We intend to use the facility to produceproducts transferred from our other manufacturing sites in the U.S. and believethe facility will also provide capacity for new product releases and additionalproducts we may obtain through prospective acquisitions.  The current lease is scheduled to expire in July 2012and has three, 18-month renewal options. The current monthly lease payment is approximately $16,000

 

Werelocated our MCTec operations to a leased manufacturing facility ofapproximately 10,000 square feet located in Venlo, The Netherlands.  We use the facility for the coating of wiresand tubing for medical devices.  Thelease is scheduled to expire in January 2011.  The current monthly lease payment isapproximately $8,000.

 

In May 2008,we completed construction of a new European headquarters in Beek, TheNetherlands.  The new 31,000 square-footfacility is designed to provide for anticipated growth in our Europeanoperations.

 

Webelieve that our existing and proposed facilities will generally be adequatefor our present and future anticipated levels of operations.

 

**Item 3.****                         ****Legal Proceedings.**

** **

In thecourse of conducting our business operations, we are, from time to time,involved in litigation and other disputes. Our management does not currently anticipate that any pending litigationor dispute against us will have a materially adverse effect on our business,operations or financial condition.

 

15

----

Table of Contents

** **

**PART II**

** **

**Item 5.****                          ****Market for Registrant’sCommon Equity, Related Stockholder Matters and Issuer Purchases of EquitySecurities.**

** **

**MARKETPRICE FOR THE COMMON STOCK**

 

OurCommon Stock is traded on the NASDAQ Global Select Market under the symbol “MMSI.”  The following table sets forth high and lowsale prices for the Common Stock for the periods indicated.

 
| **For the year ended  December 31, 2009** | ** ** | **High** | ** ** | **Low** | ** ** |
|------------------------------------------------|------------|----------|------------|---------|------------|
| First Quarter                                  |       | $        | 18.00      |    | $          | 9.57 |   |
| Second Quarter                                 |       | $        | 16.99      |    | $          | 11.68 |   |
| Third Quarter                                  |       | $        | 19.54      |    | $          | 15.71 |   |
| Fourth Quarter                                 |       | $        | 19.90      |    | $          | 15.65 |   |

 
| **For the year ended  December 31, 2008** | ** ** | **High** | ** ** | **Low** | ** ** |
|------------------------------------------------|------------|----------|------------|---------|------------|
| First Quarter                                  |       | $        | 17.41      |    | $          | 13.71 |   |
| Second Quarter                                 |       | $        | 16.97      |    | $          | 14.00 |   |
| Third Quarter                                  |       | $        | 21.36      |    | $          | 14.18 |   |
| Fourth Quarter                                 |       | $        | 19.99      |    | $          | 12.35 |   |

 

**OUTSTANDINGSHARES AND NUMBER OF SHAREHOLDERS**

 

As of March 5,2010, the number of shares of Common Stock outstanding was 28,180,527, held byapproximately 161 shareholders of record, not including shareholders whoseshares are held in securities position listings.

 

**DIVIDENDS**

 

Wehave never declared or paid cash dividends on the Common Stock.  We presently intend to retain any futureearnings for use in our business and, therefore, do not anticipate paying anydividends on the Common Stock in the foreseeable future.  In addition, our revolving line of creditcontains covenants prohibiting the declaration and distribution of a cash dividendat any time prior to the termination of such line of credit.

 

16

----

Table of Contents

** **

**PERFORMANCEGRAPH**

 

The following graph compares the performance of theCommon Stock with the performance of the NASDAQ Stock Market (U.S. Companies)and NASDAQ Stocks (SIC 3840-3849 U.S. Companies - Surgical, Medical and DentalInstruments and Supplies) for a five-year period by measuring the changes inCommon Stock prices from December 31, 2004 to December 31, 2009.

 

Comparison of 5 YearCumulative Total Return

Among Merit MedicalSystems, Inc., NASDAQ Stock Market (U.S.)

andNASDAQ Stocks (SIC 3840-3849)

 

 
| ** **                                   | ** ** | **12/2004** | ** ** | **12/2005** | ** ** | **12/2006** | ** ** | **12/2007** | ** ** | **12/2008** | ** ** | **12/2009** | ** ** |
|----------------------------------------------|------------|-------------|------------|-------------|------------|-------------|------------|-------------|------------|-------------|------------|-------------|------------|
| Merit Medical System Inc.                    |       | $           | 100        |        | $          | 79          |       | $           | 104        |        | $          | 91          |       | $ | 117 |   | $ | 126 |   |
| NASDAQ Stock Market (U.S. Companies)         |       | 100         |       | 102         |       | 112         |       | 122         |       | 59          |       | 84          |       |
| NASDAQ Stocks (SIC 3840-3849 U.S. Companies) |       | 100         |       | 110         |       | 116         |       | 147         |       | 79          |       | 116         |       |
|                                              |            |             |            |             |            |             |            |             |            |             |            |             |            |  |  |  |  |  |  |

 

The stock performancegraph assumes for comparison that the value of the Common Stock and of eachindex was $100 on December 31, 2004 and that all dividends werereinvested.  Past performance is notnecessarily an indicator of future results.

 
| NOTE: | Performance graph data  is complete through last fiscal year.                                                                                                                                                 |
|-------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| NOTE: | Performance graph with  peer group uses peer group only performance (excludes only Merit).                                                                                                                    |
| NOTE: | Peer group indices use  beginning of period market capitalization weighting.                                                                                                                                  |
| NOTE: | Data  and graph are calculated from CRSP Total Return Index for the NASDAQ Stock  Market (US Companies), Center for Research in Security Prices (CRSP), Booth  School of Business, The University of Chicago. |

 

17

----

Table of Contents

** **

**SECURITIESAUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS**

 

Thefollowing table contains information regarding our equity compensation plans asof December 31, 2009 (in thousands):

 
| ** **                                              | ** ** | **Number  of securities  to be issued upon  exercise of  outstanding options,  warrants and rights** | ** ** | **Weighted-average  exercise price of  outstanding options,  warrants and rights** | ** ** | **Number  of securities  remaining available for  future issuance under equity  compensation plans  (excluding securities  reflected in column (a))** | ** ** |
|---------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| **Plan category**                                       | ** ** | **(a)**                                                                                              | ** ** | **(b)**                                                                            | ** ** | **(c)**                                                                                                                                               | ** ** |
| Equity compensation  Plans approved by security holders |       | 3,631                                                                                                | (1),(3)    | $                                                                                  | 12.76      |                                                                                                                                                  | 2,191      | (2),(3) |
|                                                         |            |                                                                                                      |            |                                                                                    |            |                                                                                                                                                       |            |  |

 

----

(1)          Consists of 3,630,891 shares of Common Stock subjectto the options granted under the Merit Medical Systems, Inc. 2006Long-Term Incentive Plan.

 

(2)          Consists of 337,074 shares available to be issuedunder the Merit Medical Systems, Inc. Qualified and Non-Qualified EmployeeStock Purchase Plan and 1,854,300 shares available to be issued under the MeritMedical Systems, Inc. 2006 Long-Term Incentive Plan**.**

** **

(3)          See Note 10 to our consolidated financial statementsset forth in Item 8 of this report for additional information regarding theseplans.

 

18

----

Table of Contents

** **

**Item 6.****                         ****Selected Financial Data(in thousands).**

 
| ** **                           | ** ** | **Years Ended December 31,** | ** ** |
|--------------------------------------|------------|-----------------------------------|------------|
| ** **                           | ** ** | **2009**                          | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
| OPERATING  DATA:                     |       |                              |       |   |   |   |   |   |   |   |   |
| Net  Sales                           |       | $                                 | 257,462    |   | $ | 227,143 |   | $ | 207,768 |   | $ | 190,674 |   | $ | 166,585 |   |
| Cost  of Sales                       |       | 148,660                           |       | 133,872 |   | 127,977 |   | 117,596 |   | 97,493 |   |
| Gross  Profit                        |       | 108,802                           |       | 93,271 |   | 79,791 |   | 73,078 |   | 69,092 |   |
|                                 |       |                              |       |   |   |   |   |   |   |   |   |
| Operating  Expenses:                 |       |                              |       |   |   |   |   |   |   |   |   |
| Selling,  general and administrative |       | 64,787                            |       | 53,127 |   | 48,133 |   | 45,486 |   | 38,579 |   |
| Research  and development            |       | 11,168                            |       | 9,160 |   | 8,688 |   | 8,582 |   | 6,992 |   |
|                                 |       |                              |       |   |   |   |   |   |   |   |   |
| Total  operating expenses            |       | 75,955                            |       | 62,287 |   | 56,821 |   | 54,068 |   | 45,571 |   |
|                                 |       |                              |       |   |   |   |   |   |   |   |   |
|                                 |       |                              |       |   |   |   |   |   |   |   |   |
| Income  From Operations              |       | 32,847                            |       | 30,984 |   | 22,970 |   | 19,010 |   | 23,521 |   |
|                                 |       |                              |       |   |   |   |   |   |   |   |   |
| Other  Income (Expense):             |       |                              |       |   |   |   |   |   |   |   |   |
| Interest  income                     |       | 178                               |       | 781 |   | 393 |   | 250 |   | 491 |   |
| Interest  expense                    |       | (28                               | )          | (17 | ) | (3 | ) | (12 | ) | (18 | ) |
| Other  income (expense)              |       | 97                                |       | 97 |   | 39 |   | (64 | ) | (94 | ) |
| Other  income—net               |       | 247                               |       | 861 |   | 429 |   | 174 |   | 379 |   |
|                                 |       |                              |       |   |   |   |   |   |   |   |   |
| Income  before income taxes          |       | 33,094                            |       | 31,845 |   | 23,399 |   | 19,184 |   | 23,900 |   |
|                                 |       |                              |       |   |   |   |   |   |   |   |   |
| Income  Tax Expense                  |       | 10,564                            |       | 11,118 |   | 7,811 |   | 6,883 |   | 8,122 |   |
|                                 |       |                              |       |   |   |   |   |   |   |   |   |
| Net  Income                          |       | $                                 | 22,530     |   | $ | 20,727 |   | $ | 15,588 |   | $ | 12,301 |   | $ | 15,778 |   |
|                                 |       |                              |       |   |   |   |   |   |   |   |   |
| Earnings  Per Common Share:          |       |                              |       |   |   |   |   |   |   |   |   |
| Diluted                              |       | $                                 | 0.79       |   | $ | 0.73 |   | $ | 0.55 |   | $ | 0.44 |   | $ | 0.57 |   |
|                                 |       |                              |       |   |   |   |   |   |   |   |   |
| Average  Common Shares:              |       |                              |       |   |   |   |   |   |   |   |   |
| Diluted                              |       | 28,606                            |       | 28,550 |   | 28,204 |   | 28,245 |   | 27,847 |   |
|                                 |       |                              |       |   |   |   |   |   |   |   |   |
| BALANCE  SHEET DATA:                 |       |                              |       |   |   |   |   |   |   |   |   |
| Working  capital                     |       | $                                 | 57,706     |   | $ | 84,283 |   | $ | 60,194 |   | $ | 54,972 |   | $ | 43,693 |   |
| Total  assets                        |       | 271,513                           |       | 231,776 |   | 200,420 |   | 182,668 |   | 162,247 |   |
| Line  of credit                      |       | 7,000                             |       | 0 |   | 0 |   | 0 |   | 0 |   |
| Long-term  debt                      |       | 0                                 |       | 0 |   | 0 |   | 0 |   | 2 |   |
| Stockholders’  equity           |       | $                                 | 218,809    |   | $ | 194,305 |   | $ | 164,368 |   | $ | 151,212 |   | $ | 132,484 |   |

 

Duringthe quarter ended December 31, 2006, we determined it was not likely thatwe would pursue the product associated with the intellectual property andassets acquired from Sub-Q, Inc. (“Sub-Q”) due to other priorities andopportunities.  Therefore, we recorded animpairment charge of approximately $929,000, during the quarter primarilyrelating to intellectual property assets acquired from Sub-Q in March 2005.

 

Duringthe quarter ended December 31, 2005, we adopted new accounting guidancerelated to inventory costs,**and recorded additional expensesto cost of sales of $415,000, research and development expense of $83,000 andselling, general and administrative expense of $37,000.

 

19

----

Table of Contents

** **

**Item 7.****                                  ****Management’s Discussionand Analysis of Financial Condition and Results of Operations.**

** **

**OVERVIEW**

 

We reported recordsales and earnings for the twelve months ended December 31, 2009.  This improvement, compared to our 2008results, was largely the result of a 13% increase in sales, an improvement ingross margins of 120 basis points and a reduction in our effective income taxrate of 300 basis points; all of which offset higher selling, general andadministrative expenses as well as research and development expenses, primarilyassociated with our acquisition and operation of the business and assets weacquired from Alveolus in March of 2009. The net of these factors produced record earnings of $22.5 million for2009, up 9% from the prior year.

 

During 2009, wecompleted two of the largest acquisitions in our history, with the purchase ofthe Alveolus assets and the purchase of the EN Snare® product line fromHatch.  The purchase of the Alveolusassets enabled us to enter into the gastroenterology and pulmonary markets andfurther diversify our product offerings in the medical device industry.  We believe the EN Snare® product line willserve as a foundation for entry into the snare market and will allow us todevelop snares for use in the gastroenterology market.  Products associated with these twotransactions all have gross margins in excess of our existing gross margins.  We intend to continue to explore acquisitionopportunities or product purchases similar to our 2009 transactions, in aneffort to enhance our product offerings, improve our overall gross margins andincrease our net income.

 

For the year endedDecember 31, 2009, we reported net sales of $257.5 million, up $30.3million or 13% over 2008 net sales.  Netsales growth in 2009 was primarily driven by increased sales of our stand-aloneproducts (up $8.1 million or 12%), including EN Snare® royalties, hemostasisvalves, needles and diagnostic wires; custom kit and procedure tray products(up $8.0 million or 12%); sales of products from our asset acquisitions ofAlveolus and Biosearch of $7.7 million; and sales of catheters (up $7.2 millionor 23%), particularly our Prelude® sheath product line, Mini access catheterproduct line and Resolve® locking draining catheter line.

 

Our gross profitas a percentage of sales was 42.3% for the year ended December 31, 2009,compared to 41.1% for year ended December 31, 2008.  This improvement can be attributed primarily to loweraverage fixed overhead unit costs through increased productivity as fixed costsare shared over an increased number of units and a reduction in material costs.

 

Net income increased forthe year ended December 31, 2009 to $22.5 million, compared to $20.7million for the prior year, an increase of 9%.

 

**RESULTSOF OPERATIONS**

 

The followingtable sets forth certain operational data as a percentage of sales for theperiods indicated:

 
| ** **                                    | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** |
|-----------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Sales                                         |       | 100.0    | %          | 100.0    | %          | 100.0    | %          |
| Gross margin                                  |       | 42.3     |       | 41.1     |       | 38.4     |       |
| Selling, general and  administrative expenses |       | 25.2     |       | 23.4     |       | 23.2     |       |
| Research and  development expenses            |       | 4.3      |       | 4.0      |       | 4.2      |       |
| Income from operations                        |       | 12.8     |       | 13.6     |       | 11.1     |       |
| Income before income  tax expense             |       | 12.9     |       | 14.0     |       | 11.3     |       |
| Net income                                    |       | 8.8      |       | 9.1      |       | 7.5      |       |

 

Our net salesincreased by $30.3 million, or 13%, in 2009, compared to an increase of $19.4million, or 9%, in 2008 and an increase of $17.1 million, or 9%, in 2007.  We report sales in five product categories.  Listed below are the sales relating to theseproduct categories for the years ended December 31, 2009, 2008 and 2007:

 

20

----

Table of Contents

 
| ** **                         | ** ** | **Twelve  Months Ended** | ** ** |
|------------------------------------|------------|--------------------------|------------|
| ** **                         | ** ** | **December 31,**    | ** ** |
| ** **                         | ** ** | **%  Change**            | ** ** | **2009** | ** ** | **%  Change** | ** ** | **2008** | ** ** | **%  Change** | ** ** | **2007** | ** ** |
| Stand-alone devices                |       | 12                       | %          |   | $ | 76,075 |   | 9 | % |   | $ | 68,005 |   | 12 | % |   | $ | 62,417 |   |
| Custom kits &  procedure trays |       | 12                       | %          |   | 74,541 |   | 11 | % |   | 66,584 |   | 7 | % |   | 60,013 |   |
| Inflation devices                  |       | (1                       | )%         |   | 61,058 |   | 3 | % |   | 61,656 |   | 5 | % |   | 59,595 |   |
| Catheters                          |       | 23                       | %          |   | 38,126 |   | 20 | % |   | 30,898 |   | 18 | % |   | 25,743 |   |
| Gastroenterology                   |       |                     |       |   | 7,662 |   |   |   |   |   |   |   |   |   |   |   |
| Total                              |       | 13                       | %          |   | $ | 257,462 |   | 9 | % |   | $ | 227,143 |   | 9 | % |   | $ | 207,768 |   |

 

Our salesincreased during 2009, notwithstanding the fact that the markets for many of ourproducts experienced slight pricing declines as our customers tried to reducetheir costs.  Substantially all of theincrease in our revenues was attributable to increased unit sales.  Sales by our European direct sales force aresubject to foreign currency exchange rate fluctuations between the naturalcurrency of a foreign country and the U.S. Dollar.  Foreign currency exchange rate fluctuationsdecreased sales by 1.0% in 2009 compared to 2008; increased sales by 0.6% in2008 compared to 2007; and increased sales by 0.9% in 2007 compared to2006.  Historically, an important part ofour revenue growth came from increases in the number of procedures performedfor patients in a given year.  Startingin April 2007, the growth rate of coronary stents and other relatedprocedures in the U.S. dropped significantly, reducing our historical growthrate for some interventional cardiology products sold by our U.S. direct salesforce.  New products have been anothersource of revenue growth.  In 2009, 2008and 2007, our sales of new products represented 6%, 2% and 6% sales,respectively.  Included in those salesare revenues from recent acquisitions of 3%, 1% and 3% for 2009, 2008 and 2007,respectively.  The third main source ofrevenue increases came from market share gains in our existing product lines.

 

Internationalsales in 2009 were approximately $86.4 million, or 34% of total sales;international sales in 2008 were approximately $72.5 million, or 32% of totalsales; international sales in 2007 were approximately $64.9 million, or 31% oftotal sales.  These increases primarilyresulted from greater acceptance of our products in international markets,ongoing growth in our European direct sales, and to a lesser degree, increasedsales related to improvement in the exchange rate between the Euro and the U.S.Dollar, as discussed above.  Our totaldirect sales in France, Germany, the U.K., Belgium, The Netherlands, Denmark,Sweden, Austria and Ireland were $26.3 million, $27.1 million and$23.8 million in 2009, 2008 and 2007, respectively.

 

Our gross profitas a percentage of sales was 42.3%, 41.1% and 38.4%, in 2009, 2008 and 2007,respectively.  The improved gross marginsin 2009 can be attributed primarily to lower average fixed overhead unit coststhrough increased productivity as fixed costs are shared over an increasednumber of units and a reduction in material costs.  The increase in gross margins in 2008resulted primarily from lower average fixed overhead unit costs resulting fromincreased production (unit costs decreased as fixed costs were shared over anincreased number of units), lower unit costs for products manufactured inMexico, customer price increases and production automation.  These improvements also helped offset rawmaterial and production labor cost increases that occurred during 2008.  The increase in gross margins in 2007 wasprincipally the result of production efficiencies resulting in lower headcount,product mix improvement, the transfer of the manufacturing process of fourproducts to Mexico and certain automation projects.

 

Our selling,general and administrative expenses increased $11.7 million or 22%, in 2009;$5.0 million, or 10%, in 2008 over 2007; $2.6 million, or 6%, in 2007 over2006.  The increases in selling, generaland administrative expenses in 2009 were primarily due to the increased expenseassociated with our acquisition and operation of the business and assetsacquired from Alveolus of $5.7 million and the hiring of additional domesticand international sales representatives. Selling, general and administrative expenses as a percentage of salesincreased slightly in 2008 when compared to the prior year.  This increase was primarily the result ofhigher commissions commensurate with higher sales, management and sales bonusesfor meeting quarterly and annually objectives, increased travel-relatedexpenses andincreased national account administration fees.  Selling, general and administrative expensesfor 2008 were also affected by approximately $415,000 of damages (net of insurancereimbursement of $179,000) sustained by our Angleton, Texas facility duringHurricane Ike in September 2008. The significant (70 basis points) decrease in selling, general andadministrative expenses in 2007 as a percentage of sales was primarily theresult of operating leverage from reducing head count, while increasing sales.

 

Research anddevelopment expenses increased 22% to $11.2 million in 2009, compared to $9.2million in 2008.  The increase inresearch and development expenses in 2009 related, in large part, to researchand development projects for the Alveolus business we acquired of $1.1 millionand growth in our historical research and development projects, 

 

21

----

Table ofContents

 

some of which arenearing completion.  Research anddevelopment expenses increased 5% to $9.2 million in 2008, compared to $8.7million in 2007.  Our research anddevelopment expense for 2007 increased 1% to $8.7 million, compared to $8.6million in 2006.  The increase inresearch and development expenses in 2008 and 2007 was related primarily toresearch and development head count additions and indirect costs to support anincrease in the number of new products we launched.  Our research and development expenses as apercentage of sales were 4.3% for 2009, 4.0% for 2008 and 4.2% for 2007.  We have a full pipeline of new products andmanagement believes that we have an effective level of capabilities andexpertise to continue the flow of new internally-developed products into thefuture.

 

Our effective income taxrates for 2009, 2008 and 2007 were 32%, 35% and 33%, respectively.  The decrease in the effective income tax ratefor 2009 over 2008 was primarily related to the profitability of our Irishoperations, which are taxed at a lower tax rate than our U.S. and other foreignoperations; research and development tax credits generated from our Irishoperations; and investment gains sustained in our deferred compensation thatare not deductible for tax purposes.  Theincrease in the effective income tax rate for 2008 over 2007 was primarily theresult of investment losses sustained in our deferred compensation plan thatare not deductible for tax purposes.  Thedecrease in the effective income tax rate for 2007 over 2006 was primarily theresult of the unrecognized tax benefits**which expiredon our 2002 federal, state and foreign tax returns and a non-taxed gain relatedto corporate-owned variable life insurance contracts for our deferredcompensation plan.

 

Our other incomefor 2009, 2008 and 2007 was approximately $247,000, $861,000 and $429,000,respectively.  The decrease in otherincome for 2009 over 2008 was primarily the result of a decrease in interestincome attributable to lower average cash balances, when compared to thecorresponding periods in 2008.  Theincrease in other income for 2008 over 2007 and 2007 over 2006 was primarilythe result of an increase in interest income attributable to higher averagecash balances and higher interest rates.

 

Our net income for 2009,2008 and 2007 was approximately $22.5, $20.7 million and $15.6 million,respectively.  Net income for 2009 wasfavorably affected by increased sales volumes and higher gross margins, a lowereffective income tax rate all of which offset higher selling, general andadministrative expenses and research and development expenses, primarilyassociated with our acquisition of the Alveolus assets in the first quarter of2009.  Net income for 2008 was positivelyaffected by increased sales volumes and higher gross margins and partiallyoffset by higher effective income tax rates. Net income for 2007 was positively affected by increased sales volumes,higher gross margins, lower operating expenses as a percentage of sales and alower effective income tax rate.

 

**LIQUIDITYAND CAPITAL RESOURCES**

 

**CapitalCommitments and Contractual Obligations**

** **

The followingtable summarizes our capital commitments and contractual obligations as of December 31,2009, including operating lease payments and office lease payments, as well asthe future periods in which such payments are currently anticipated to becomedue:

 
| ** **                       | ** ** | **Payment due by period (in thousands)** | ** ** |
|----------------------------------|------------|-------------------------------------------------------------------|------------|
| **Contractual Obligations** | ** ** | **Total**                                                         | ** ** | **Less than 1 Year** | ** ** | **1-3 Years** | ** ** | **4-5 Years** | ** ** | **After 5 Years** | ** ** |
| Line of credit                   |       | $                                                                 | 7,000      |   | $ | 7,000 |   | $ | — |   | $ | — |   | $ | — |   |
| Operating leases                 |       | 20,685                                                            |       | 2,587 |   | 4,410 |   | 3,572 |   | 10,116 |   |
| Royalty obligations              |       | 208                                                               |       | 50 |   | 100 |   | 58 |   | — |   |
| Total contractual cash           |       | $                                                                 | 27,893     |   | $ | 9,637 |   | $ | 4,510 |   | $ | 3,630 |   | $ | 10,116 |   |

 

We haveapproximately $2.9 million of unrecognized tax positions that have beenrecognized as liabilities in our consolidated financial statements, but are notreflected in the foregoing contractual obligations table due to uncertainty asto when such amounts may be settled.

 

Additionalinformation regarding our capital commitments and contractual obligations,including royalty payments, is contained in notes 7, 8 and 12 of the notes toour consolidated financial statements, set forth in Item 8 below.

 

**CashFlows**

** **

Our cash flow fromoperations was $30.1 million in 2009, an increase of $2.1 million over2008.  This increase in cash flow fromoperations in 2009, when compared to 2008, resulted primarily from an increasein net income.  Our 

 

22

----

Table of Contents

 

working capital for 2009,2008 and 2007, was $57.7 million, $84.3 million and $60.2 million,respectively.  The decrease in workingcapital in 2009 from 2008 was primarily the result of expenditures ofapproximately $40.1 million associated with our acquisition of the Alveolusassets and the EN Snare® product line. The increase in working capital for 2008 over 2007 was primarily theresult of an increase in cash generated from our net income and cash generatedfrom the issuance of shares of Common Stock related to employee stock optionexercises.  The increase in workingcapital for 2007 over 2006 was primarily the result of an increase in cash netof the reduction in inventories of $4.5 million as we focused on improving ourinventory turns.

 

On December 7,2006, we entered into an unsecured loan agreement with Bank of America, N.A. (“Bankof America”), whereby Bank of America agreed to provide us a line of credit inthe amount of $30 million.  Ouroutstanding borrowings on this loan as of December 31, 2009 and 2008 were$7.0 million and $0, respectively.  Ourinterest rate as of December 31, 2009 was set at 1.0%.  Available borrowings under this line ofcredit as of December 31, 2009 and 2008 were $23 million and $30 million,respectively.

 

On December 8,2006, we entered into an unsecured loan agreement with Zions First NationalBank (“Zions”), whereby Zions agreed to provide us a line of credit in theamount of $1 million.  The loan expiredon December 1, 2009; however, was extended for an additional three yearsto December 1, 2012.  We had $0 outstanding and $1.0 millionavailable under this line of credit as of December 31, 2009, 2008 and2007.

 

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

 

**CRITICALACCOUNTING POLICIES AND ESTIMATES**

 

**CriticalAccounting Policies**

** **

The SEC hasrequested that all registrants discuss their most critical accountingpolicies.  The SEC has indicated that a “criticalaccounting policy” is one which is both important to the representation of theregistrant’s financial condition and results and requires management’s mostdifficult, subjective or complex judgments, often as a result of the need tomake estimates about the effect of matters that are inherently uncertain.  We base our estimates on past experience andon various other assumptions our management believes to be reasonable under thecircumstances, the results of which form the basis for making judgments aboutcarrying values of assets and liabilities that are not readily apparent fromother sources.  Actual results willdiffer and may differ materially from these estimates under differentassumptions or conditions.  Additionally,changes in accounting estimates could occur in the future from period toperiod.  Our management has discussed thedevelopment and selection of our most critical financial estimates with theaudit committee of our Board of Directors. The following paragraphs identify our most critical accounting policies:

 

**InventoryObsolescence Reserve****.** Our management reviews on a regular basisinventory quantities on hand for unmarketable and/or slow-moving products thatmay expire prior to being sold.  Thisreview of inventory quantities for unmarketable and/or slow moving products isbased on estimates of forecasted product demand prior to expiration lives.  If market conditions become less favorablethan those projected by our management, additional inventory write-downs may berequired.  We believe that the amountincluded in our obsolescence reserve has been a historically accurate estimateof the unmarketable and/or slow moving products that may expire prior to beingsold.

 

**Allowancefor Doubtful Accounts****.** A majority of our receivables are with hospitalswhich, over our history, have demonstrated favorable collection rates.  Therefore, we have experienced relativelyminimal bad debts from hospital customers. In limited circumstances, we have written off bad debts as the result ofthe termination of our business relationships with foreign distributors.  The most significant write-offs over ourhistory have come from U.S. packers who bundle our products in surgical trays.

 

We maintainallowances for doubtful accounts relating to estimated losses resulting fromthe inability of our customers to make required payments.  The allowance is based upon historicalexperience and a review of individual customer balances.  If the financial condition of our customerswere to deteriorate, resulting in an impairment of their ability to makepayments, then additional allowances may be required.

 

**Stock-BasedCompensation.**** **We measure share-based compensationcost at the grant date based on the value of the award and recognize the costas an expense over the term of the vesting period.  Judgment is required in estimating 

 

23

----

Table of Contents

 

the fair value ofshare-based awards granted and their expected forfeiture rate.  If actual results differ significantly fromthese estimates, stock-based compensation expense and our results of operationscould be materially impacted.

 

**Income Taxes.** Under our accounting policies, we initially recognize a tax position inour financial statements when it becomes likely that the position will besustained upon examination by the tax authorities.  Such tax positions are initially andsubsequently measured as the largest amount of tax benefit that has a greaterthan 50% likelihood of being realized upon ultimate settlement with the taxauthorities assuming full knowledge of the position and all relevantfacts.  Although we believe ourprovisions for unrecognized tax positions are reasonable, we can make noassurance that the final tax outcome of these matters will not be differentfrom that which we have reflected in our income tax provisions andaccruals.  The tax law is subject tovaried interpretations and we have taken positions related to certain matterswhere the law is subject to interpretation. Such differences could have a material impact on our income taxprovisions and operating results in the period(s) in which we make suchdetermination.

 

**Goodwill and Intangible Assets Impairment. **We test our goodwill balances as of July 1 ofeach year for impairment, or whenever impairment indicators arise.  We utilize several reporting units inevaluating goodwill for impairment.  Weassess the estimated fair value of reporting units based on discounted futurecash flows.  If the carrying amount of areporting unit exceeds the fair value of the reporting unit, an impairmentcharge is recognized in an amount equal to the excess of the carrying amount ofthe reporting unit goodwill over implied fair value of that goodwill.  This analysis requires significant judgments,including estimation of future cash flows and the length of time they willoccur, which is based on internal forecasts and a determination of a discountrate based on our weighted average cost of capital.

 

We evaluate the recoverability of intangible assets whenever events orchanges in circumstances indicate that its carrying amount may not berecoverable.* *Thisanalysis requires similar significant judgments as those discussed aboveregarding goodwill, except for cash flows are based on an undiscounted cashflow to determine the fair value of the intangible.  All of our intangible assets are subject toamortization.

 

See Note 1 of the notes to the consolidated financial statementsdescribing accounting policies governing each of these matters, set forth inItem 8 below.

 

**Item 7A.****                ****Quantitative andQualitative Disclosures About Market Risk.**

** **

Our principalmarket risk relates to changes in the value of the Euro and GBP relative to thevalue of the U.S. Dollar.  Ourconsolidated financial statements are denominated in and our principal currencyis, the U.S. Dollar.  A portion of ourrevenues ($26.3 million, representing approximately 10% of our aggregaterevenues) for the year ended December 31, 2009 was attributable to salesthat were denominated in foreign currencies. The balance of our international sales was 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. Because of our Euro and GBP-denominated revenues and expenses, in a yearin which our Euro and GBP-denominated revenues exceed our Euro and GBP-basedexpenses, the value of such Euro and GBP-denominated net income increases ifthe value of the Euro and GBP increase relative to the value of the U.S. Dollarand decreases if the value of the Euro and GBP decrease relative to the valueof the U. S. Dollar.  During the yearended December 31, 2009, the exchange rate between our foreign currenciesagainst the U.S. Dollar resulted in a decrease of our gross revenues ofapproximately $2.6 million and an increase of 0.1% in gross profit.

 

On November 30, 2009, we forecasted a netexposure for December 31, 2009 (representing the difference between Euroand GBP denominated receivables and Euro-denominated payables) of approximately331,000 Euros and 394,000 GBPs.  In orderto partially offset such risks at November 30, 2009, we entered into a30-day forward contract for the Euro and GBP with a notional amount ofapproximately 331,000 Euros and notional amount of 394,000 GBPs.  We enter into similar transactions at varioustimes during the year to partially offset exchange rate risks we bearthroughout the year.  These contracts aremarked to market at each month-end. During the years ended December 31, 2009, 2008 and 2007, werecorded a net gain of approximately $83,000, $52,000 and $29,000,respectively, which is included in other income/(expense), on foreign currencytransactions.  We do not purchase or holdderivative financial instruments for speculative or trading purposes.  The fair value of our open positions at December 31,2009 and 2008 was not material.

 

We are also subjectto market risk related to variable rate debt. As of December 31, 2009, our operating line of credit with Bank ofAmerica has a variable rate which is tied to LIBOR rates.  We do not believe our interest expense wouldbe materially affected by changes in interest rates.

 

24

----

Table of Contents

** **

**Item 8.****                         ****Financial Statements andSupplementary Data.**

** **

REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Stockholders of Merit Medical Systems, Inc.:

 

We have audited the accompanying consolidated balance sheets of MeritMedical Systems, Inc. and subsidiaries (the “Company”) as of December 31,2009 and 2008 and the related consolidated statements of income, stockholders’equity and cash flows for each of the three years in the period ended December 31,2009.  Our audits also included thefinancial statement schedule listed in the Index at Item 15.  These financial statements and financialstatement schedule are the responsibility of the Company’s management.  Our responsibility is to express an opinionon the financial statements and financial statement schedule based on ouraudits.

 

We conducted our audits in accordance with the standards of the PublicCompany Accounting Oversight Board (United States).  Those standards require that we plan andperform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting theamounts and disclosures in the financial statements.  An audit also includes assessing theaccounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation.  We believe that our audits provide areasonable basis for our opinion.

 

In our opinion, such consolidated financial statements present fairly,in all material respects, the financial position of the Company as of December 31,2009 and 2008 and the results of its operations and its cash flows for each ofthe three years in the period ended December 31, 2009, in conformity withaccounting principles generally accepted in the United States of America.  Also, in our opinion, such financialstatement schedule, when considered in relation to the basic consolidatedfinancial statements taken as a whole, presents fairly, in all materialrespects, the information set forth therein.

 

As discussed in Note 1 to the consolidatedfinancial statements in 2009, the Company adopted new accounting guidancerelated to business combinations, and in 2008, the Company adopted newaccounting guidance that defined fair value, established a framework formeasuring fair value, and expanded disclosures about fair value measurements.

 

We have also audited, in accordance with the standards of the PublicCompany Accounting Oversight Board (United States), the Company’s internalcontrol over financial reporting as of December 31, 2009, based on thecriteria established in *Internal Control**— Integrated Framework* issued by the Committee ofSponsoring Organizations of the Treadway Commission and our report dated March 10,2010, expressed an unqualified opinion on the Company’s internal control overfinancial reporting.

 

/s/  DELOITTE & TOUCHE LLP

 

Salt Lake City,UtahMarch 10, 2010

 

25

----

Tableof Contents

 

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

**CONSOLIDATEDBALANCE SHEETS**

**DECEMBER31, 2009 AND 2008**

**(Inthousands)**

 
| ** **                                                                                                          | ** ** | **2009** | ** ** | **2008** | ** ** |
|---------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| **ASSETS**                                                                                                          |       |     |       |     |       |
|                                                                                                                |       |     |       |     |       |
| CURRENT  ASSETS:                                                                                                    |       |     |       |     |       |
| Cash  and cash equivalents                                                                                          |       | $        | 6,133      |     | $          | 34,030 |   |
| Trade receivables — net of allowance for  uncollectible accounts —  2009 — $541 and 2008 — $505 |       | 30,954   |       | 27,749   |       |
| Employee  receivables                                                                                               |       | 145      |       | 126      |       |
| Other  receivables                                                                                                  |       | 827      |       | 818      |       |
| Inventories                                                                                                         |       | 47,170   |       | 38,358   |       |
| Prepaid  expenses and other assets                                                                                  |       | 1,801    |       | 985      |       |
| Deferred  income tax assets                                                                                         |       | 3,289    |       | 2,782    |       |
| Income  tax refund receivable                                                                                       |       | 295      |       | 607      |       |
|                                                                                                                |       |     |       |     |       |
| Total  current assets                                                                                               |       | 90,614   |       | 105,455  |       |
|                                                                                                                |       |     |       |     |       |
| PROPERTY  AND EQUIPMENT:                                                                                            |       |     |       |     |       |
| Land  and land improvements                                                                                         |       | 9,777    |       | 7,992    |       |
| Buildings                                                                                                           |       | 50,040   |       | 49,793   |       |
| Manufacturing  equipment                                                                                            |       | 77,069   |       | 68,184   |       |
| Furniture  and fixtures                                                                                             |       | 15,586   |       | 16,689   |       |
| Leasehold  improvements                                                                                             |       | 10,280   |       | 9,868    |       |
| Construction-in-progress                                                                                            |       | 13,968   |       | 7,599    |       |
|                                                                                                                |       |     |       |     |       |
| Total  property and equipment                                                                                       |       | 176,720  |       | 160,125  |       |
|                                                                                                                |       |     |       |     |       |
| Less  accumulated depreciation                                                                                      |       | (62,074  | )          | (56,186  | )          |
|                                                                                                                |       |     |       |     |       |
| Property  and equipment — net                                                                                  |       | 114,646  |       | 103,939  |       |
|                                                                                                                |       |     |       |     |       |
| OTHER  ASSETS:                                                                                                      |       |     |       |     |       |
| Intangibles — net of accumulated amortization —  2009 — $5,450 and 2008 — $3,122                |       | 26,898   |       | 6,913    |       |
| Goodwill                                                                                                            |       | 33,002   |       | 13,048   |       |
| Other  assets                                                                                                       |       | 6,353    |       | 2,325    |       |
| Deferred  income tax assets                                                                                         |       |     |       | 23       |       |
| Deposits                                                                                                            |       |     |       | 73       |       |
|                                                                                                                |       |     |       |     |       |
| Total  other assets                                                                                                 |       | 66,253   |       | 22,382   |       |
|                                                                                                                |       |     |       |     |       |
| TOTAL                                                                                                               |       | $        | 271,513    |     | $          | 231,776 |   |

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

 

26

----

Table of Contents

 

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

**CONSOLIDATEDBALANCE SHEETS**

**DECEMBER31, 2009 AND 2008**

**(Inthousands)**

 
| ** **                                                                                                                                                              | ** ** | **2009** | ** ** | **2008** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                           |       |     |       |     |       |
|                                                                                                                                                                    |       |     |       |     |       |
| CURRENT  LIABILITIES:                                                                                                                                                   |       |     |       |     |       |
| Trade  payables                                                                                                                                                         |       | $        | 13,352     |     | $          | 10,622 |   |
| Accrued  expenses                                                                                                                                                       |       | 12,196   |       | 9,973    |       |
| Advances  from employees                                                                                                                                                |       | 212      |       | 211      |       |
| Line  of credit                                                                                                                                                         |       | 7,000    |       |     |       |
| Income  taxes payable                                                                                                                                                   |       | 148      |       | 366      |       |
|                                                                                                                                                                    |       |     |       |     |       |
| Total  current liabilities                                                                                                                                              |       | 32,908   |       | 21,172   |       |
|                                                                                                                                                                    |       |     |       |     |       |
| DEFERRED  INCOME TAX LIABILITIES                                                                                                                                        |       | 11,251   |       | 8,771    |       |
|                                                                                                                                                                    |       |     |       |     |       |
| LIABILITIES  RELATED TO UNRECOGNIZED TAX POSITIONS                                                                                                                      |       | 2,945    |       | 2,818    |       |
|                                                                                                                                                                    |       |     |       |     |       |
| DEFERRED  COMPENSATION PAYABLE                                                                                                                                          |       | 3,382    |       | 2,348    |       |
|                                                                                                                                                                    |       |     |       |     |       |
| DEFERRED  CREDITS                                                                                                                                                       |       | 1,874    |       | 1,994    |       |
|                                                                                                                                                                    |       |     |       |     |       |
| OTHER  LONG-TERM OBLIGATIONS                                                                                                                                            |       | 344      |       | 368      |       |
|                                                                                                                                                                    |       |     |       |     |       |
| Total  liabilities                                                                                                                                                      |       | 52,704   |       | 37,471   |       |
|                                                                                                                                                                    |       |     |       |     |       |
| COMMITMENTS  AND CONTINGENCIES (Notes 2, 7, 8 and 12)                                                                                                                   |       |     |       |     |       |
|                                                                                                                                                                    |       |     |       |     |       |
| STOCKHOLDERS’  EQUITY:                                                                                                                                             |       |     |       |     |       |
| Preferred stock — 5,000 shares authorized as of  December 31, 2009 and 2008; no shares issued                                                                 |       |     |       |     |       |
| Common stock, no par value; shares authorized —  2009 and 2008 - 100,000; issued shares as of December 31, 2009 - 28,181 and  December 31, 2008 - 28,093 |       | 63,690   |       | 61,689   |       |
| Retained  earnings                                                                                                                                                      |       | 155,204  |       | 132,674  |       |
| Accumulated  other comprehensive loss                                                                                                                                   |       | (85      | )          | (58      | )          |
|                                                                                                                                                                    |       |     |       |     |       |
| Total  stockholders’ equity                                                                                                                                        |       | 218,809  |       | 194,305  |       |
|                                                                                                                                                                    |       |     |       |     |       |
| TOTAL                                                                                                                                                                   |       | $        | 271,513    |     | $          | 231,776 |   |

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

 

27

----

Table of Contents

 

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

**CONSOLIDATEDSTATEMENTS OF INCOME**

**YEARSENDED DECEMBER 31, 2009, 2008 AND 2007**

**(Inthousands except per share amounts)**

 
| ** **                           | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** |
|--------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                 |       |     |       |     |       |     |       |
| NET  SALES                           |       | $        | 257,462    |     | $          | 227,143  |       | $ | 207,768 |   |
|                                 |       |     |       |     |       |     |       |
| COST  OF SALES                       |       | 148,660  |       | 133,872  |       | 127,977  |       |
|                                 |       |     |       |     |       |     |       |
| GROSS  PROFIT                        |       | 108,802  |       | 93,271   |       | 79,791   |       |
|                                 |       |     |       |     |       |     |       |
| OPERATING  EXPENSES:                 |       |     |       |     |       |     |       |
| Selling,  general and administrative |       | 64,787   |       | 53,127   |       | 48,133   |       |
| Research  and development            |       | 11,168   |       | 9,160    |       | 8,688    |       |
|                                 |       |     |       |     |       |     |       |
| Total  operating expenses            |       | 75,955   |       | 62,287   |       | 56,821   |       |
|                                 |       |     |       |     |       |     |       |
| INCOME  FROM OPERATIONS              |       | 32,847   |       | 30,984   |       | 22,970   |       |
|                                 |       |     |       |     |       |     |       |
| OTHER  INCOME (EXPENSE):             |       |     |       |     |       |     |       |
| Interest  income                     |       | 178      |       | 781      |       | 393      |       |
| Interest  expense                    |       | (28      | )          | (17      | )          | (3       | )          |
| Other  income                        |       | 97       |       | 97       |       | 39       |       |
|                                 |       |     |       |     |       |     |       |
| Other  income — net             |       | 247      |       | 861      |       | 429      |       |
|                                 |       |     |       |     |       |     |       |
| INCOME  BEFORE INCOME TAXES          |       | 33,094   |       | 31,845   |       | 23,399   |       |
|                                 |       |     |       |     |       |     |       |
| INCOME  TAX EXPENSE                  |       | 10,564   |       | 11,118   |       | 7,811    |       |
|                                 |       |     |       |     |       |     |       |
| NET  INCOME                          |       | $        | 22,530     |     | $          | 20,727   |       | $ | 15,588 |   |
|                                 |       |     |       |     |       |     |       |
| EARNINGS  PER COMMON SHARE:          |       |     |       |     |       |     |       |
| Basic                                |       | $        | 0.80       |     | $          | 0.75     |       | $ | 0.57 |   |
|                                 |       |     |       |     |       |     |       |
| Diluted                              |       | $        | 0.79       |     | $          | 0.73     |       | $ | 0.55 |   |
|                                 |       |     |       |     |       |     |       |
| AVERAGE  COMMON SHARES:              |       |     |       |     |       |     |       |
| Basic                                |       | 28,011   |       | 27,769   |       | 27,425   |       |
|                                 |       |     |       |     |       |     |       |
| Diluted                              |       | 28,606   |       | 28,550   |       | 28,204   |       |

 

Seenotes to consolidated financial statements.

 

28

----

Table of Contents

 

**MERIT MEDICAL SYSTEMS, INC. ANDSUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF STOCKHOLDERS’EQUITYYEARS ENDED DECEMBER 31, 2009, 2008 AND 2007**

**(In thousands)**

 
| ** **                                                                                                      | ** ** | ** ** | ** ** | **Common Stock** | ** ** | **Retained** | ** ** | **Accumulated  Other  Comprehensive** | ** ** |
|-----------------------------------------------------------------------------------------------------------------|------------|------------|------------|------------------|------------|--------------|------------|---------------------------------------|------------|
| ** **                                                                                                      | ** ** | **Total**  | ** ** | **Shares**       | ** ** | **Amount**   | ** ** | **Earnings**                          | ** ** | **Loss** | ** ** |
| BALANCE — January 1, 2007                                                                             |       | $          | 151,212    |             | 27,647     |         | $          | 54,394                                |       | $ | 96,969 |   | $ | (151 | ) |
| Comprehensive income:                                                                                           |       |       |       |             |       |         |       |                                  |       |   |   |
| Net income                                                                                                      |       | 15,588     |       |             |       |         |       | 15,588                                |       |   |   |
| Foreign currency translation adjustment                                                                         |       | 95         |       |             |       |         |       |                                  |       | 95 |   |
|                                                                                                            |       |       |       |             |       |         |       |                                  |       |   |   |
| Total comprehensive income                                                                                      |       | 15,683     |       |             |       |         |       |                                  |       |   |   |
|                                                                                                            |       |       |       |             |       |         |       |                                  |       |   |   |
| Cumulative effect of a change in accounting principle  - adoption of accounting for uncertainty in income taxes |       | (610       | )          |             |       |         |       | (610                                  | )          |   |   |
| Tax benefit attributable to appreciation of common  stock options exercised                                     |       | 500        |       |             |       | 500          |       |                                  |       |   |   |
| Stock-based compensation expense                                                                                |       | 1,130      |       |             |       | 1,130        |       |                                  |       |   |   |
| Issuance of common stock under Employee Stock  Purchase Plans                                                   |       | 323        |       | 27               |       | 323          |       |                                  |       |   |   |
| Stock repurchased and retired                                                                                   |       | (5,407     | )          | (464             | )          | (5,407       | )          |                                  |       |   |   |
| Options exercised                                                                                               |       | 1,537      |       | 203              |       | 1,537        |       |                                  |       |   |   |
|                                                                                                            |       |       |       |             |       |         |       |                                  |       |   |   |
| BALANCE — December 31, 2007                                                                           |       | $          | 164,368    |             | 27,413     |         | $          | 52,477                                |       | $ | 111,947 |   | $ | (56 | ) |
|                                                                                                            |       |       |       |             |       |         |       |                                  |       |   |   |
| Comprehensive income:                                                                                           |       |       |       |             |       |         |       |                                  |       |   |   |
| Net income                                                                                                      |       | 20,727     |       |             |       |         |       | 20,727                                |       |   |   |
| Foreign currency translation adjustment                                                                         |       | (2         | )          |             |       |         |       |                                  |       | (2 | ) |
|                                                                                                            |       |       |       |             |       |         |       |                                  |       |   |   |
| Total comprehensive income                                                                                      |       | 20,725     |       |             |       |         |       |                                  |       |   |   |
|                                                                                                            |       |       |       |             |       |         |       |                                  |       |   |   |
| Tax benefit attributable to appreciation of common  stock options exercised                                     |       | 2,044      |       |             |       | 2,044        |       |                                  |       |   |   |
| Stock-based compensation expense                                                                                |       | 962        |       |             |       | 962          |       |                                  |       |   |   |
| Issuance of common stock under Employee Stock  Purchase Plans                                                   |       | 305        |       | 19               |       | 305          |       |                                  |       |   |   |
| Warrants exercised                                                                                              |       | 496        |       | 49               |       | 496          |       |                                  |       |   |   |
| Options exercised                                                                                               |       | 5,405      |       | 612              |       | 5,405        |       |                                  |       |   |   |
|                                                                                                            |       |       |       |             |       |         |       |                                  |       |   |   |
| BALANCE — December 31, 2008                                                                           |       | $          | 194,305    |             | 28,093     |         | $          | 61,689                                |       | $ | 132,674 |   | $ | (58 | ) |
|                                                                                                            |       |       |       |             |       |         |       |                                  |       |   |   |
| Comprehensive income:                                                                                           |       |       |       |             |       |         |       |                                  |       |   |   |
| Net income                                                                                                      |       | 22,530     |       |             |       |         |       | 22,530                                |       |   |   |
| Foreign currency translation adjustment                                                                         |       | (27        | )          |             |       |         |       |                                  |       | (27 | ) |
|                                                                                                            |       |       |       |             |       |         |       |                                  |       |   |   |
| Total comprehensive income                                                                                      |       | 22,503     |       |             |       |         |       |                                  |       |   |   |
|                                                                                                            |       |       |       |             |       |         |       |                                  |       |   |   |
| Tax benefit attributable to appreciation of common  stock options exercised                                     |       | 987        |       |             |       | 987          |       |                                  |       |   |   |
| Stock-based compensation expense                                                                                |       | 1,182      |       |             |       | 1,182        |       |                                  |       |   |   |
| Issuance of common stock under Employee Stock Purchase  Plans                                                   |       | 353        |       | 24               |       | 353          |       |                                  |       |   |   |
| Warrants exercised                                                                                              |       | 517        |       | 51               |       | 517          |       |                                  |       |   |   |
| Options exercised                                                                                               |       | 1,920      |       | 308              |       | 1,920        |       |                                  |       |   |   |
| Stock repurchased and retired                                                                                   |       | (2,474     | )          | (250             | )          | (2,474       | )          |                                  |       |   |   |
| Shares surrendered in exchange for payment of  payroll tax liabilities                                          |       | (254       | )          | (23              | )          | (254         | )          |                                  |       |   |   |
| Shares surrendered in exchange for the exercise of  stock options                                               |       | (230       | )          | (22              | )          | (230         | )          |                                  |       |   |   |
|                                                                                                            |       |       |       |             |       |         |       |                                  |       |   |   |   |   |   |   |
| BALANCE — December 31, 2009                                                                           |       | $          | 218,809    |             | 28,181     |         | $          | 63,690                                |       | $ | 155,204 |   | $ | (85 | ) |

 

Seenotes to consolidated financial statements.

 

29

----

Table of Contents

 

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

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**YEARSENDED DECEMBER 31, 2009, 2008 AND 2007**

**(Inthousands)**

 
| ** **                                                                         | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** |
|------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                                                               |       |     |       |     |       |     |       |
| CASH  FLOWS FROM OPERATING ACTIVITIES:                                             |       |     |       |     |       |     |       |
| Net  income                                                                        |       | $        | 22,530     |     | $          | 20,727   |       | $ | 15,588 |   |
|                                                                               |       |     |       |     |       |     |       |
| Adjustments  to reconcile net income to net cash provided by operating activities: |       |     |       |     |       |     |       |
| Depreciation  and amortization                                                     |       | 12,271   |       | 10,240   |       | 9,444    |       |
| Losses  on sales and/or abandonment of property and equipment                      |       | 271      |       | 526      |       | 317      |       |
| Write-off  of certain patents and license agreement                                |       | 154      |       | 164      |       | 245      |       |
| Amortization  of deferred credits                                                  |       | (120     | )          | (111     | )          | (135     | )          |
| Purchase  of trading investments                                                   |       | (458     | )          | (349     | )          | (267     | )          |
| Proceeds  from sale of trading investments                                         |       |     |       |     |       | 218      |       |
| Unrealized  (gains) losses on trading investments                                  |       | (561     | )          | 987      |       | (259     | )          |
| Deferred  income taxes                                                             |       | 1,791    |       | (183     | )          | 984      |       |
| Tax  benefit attributable to appreciation of common stock options exercised        |       | (987     | )          | (2,044   | )          | (500     | )          |
| Stock-based  compensation expense                                                  |       | 1,182    |       | 962      |       | 1,130    |       |
| Changes  in operating assets and liabilities net of effects from acquisitions:     |       |     |       |     |       |     |       |
| Trade  receivables                                                                 |       | (2,131   | )          | (1,464   | )          | (496     | )          |
| Employee  receivables                                                              |       | (16      | )          | 10       |       | 52       |       |
| Other  receivables                                                                 |       | (13      | )          | 304      |       | (930     | )          |
| Inventories                                                                        |       | (6,882   | )          | (4,036   | )          | 5,056    |       |
| Prepaid  expenses and other assets                                                 |       | (571     | )          | 301      |       | (258     | )          |
| Income  tax refund receivable                                                      |       | 319      |       | (93      | )          | (194     | )          |
| Other  assets                                                                      |       | (568     | )          | 5        |       | 12       |       |
| Trade  payables                                                                    |       | 296      |       | 758      |       | (671     | )          |
| Accrued  expenses                                                                  |       | 1,628    |       | 554      |       | 872      |       |
| Advances  from employees                                                           |       |     |       | (57      | )          | 11       |       |
| Current  liabilities related to unrecognized tax positions                         |       |     |       | (1,023   | )          | 1,023    |       |
| Income  taxes payable                                                              |       | 825      |       | 1,692    |       | 1,595    |       |
| Non-current  liabilities related to unrecognized tax positions                     |       | 114      |       | 864      |       | (1,010   | )          |
| Deferred  compensation payable                                                     |       | 1,034    |       | (715     | )          | 194      |       |
| Other  long-term obligations                                                       |       | (38      | )          | (52      | )          | (16      | )          |
|                                                                               |       |     |       |     |       |     |       |
| Total  adjustments                                                                 |       | 7,540    |       | 7,240    |       | 16,417   |       |
|                                                                               |       |     |       |     |       |     |       |
| Net  cash provided by operating activities                                         |       | 30,070   |       | 27,967   |       | 32,005   |       |
|                                                                               |       |     |       |     |       |     |       |
| CASH  FLOWS FROM INVESTING ACTIVITIES:                                             |       |     |       |     |       |     |       |
| Capital  expenditures for:                                                         |       |     |       |     |       |     |       |
| Property  and equipment                                                            |       | (18,478  | )          | (14,476  | )          | (16,288  | )          |
| Patents  and trademarks                                                            |       | (1,191   | )          | (432     | )          | (450     | )          |
| Proceeds  from the sale of property and equipment                                  |       | 27       |       | 45       |       | 11       |       |
| Cash  paid in acquisitions                                                         |       | (46,150  | )          | (5,112   | )          | (4,726   | )          |
|                                                                               |       |     |       |     |       |     |       |
| Net  cash used in investing activities                                             |       | (65,792  | )          | (19,975  | )          | (21,453  | )          |
|                                                                                    |            |          |            |          |            |          |            |  |  |  |

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

 

30

----

Table of Contents

 

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

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**YEARSENDED DECEMBER 31, 2009, 2008 AND 2007**

**(Inthousands)**

 
| ** **                                                                                 | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** |
|--------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                                                                       |       |     |       |     |       |     |       |
| CASH  FLOWS FROM FINANCING ACTIVITIES:                                                     |       |     |       |     |       |     |       |
| Proceeds  from issuance of common stock                                                    |       | $        | 2,560      |     | $          | 6,206    |       | $ | 1,860 |   |
| Borrowings  on line of credit                                                              |       | 19,000   |       |     |       |     |       |
| Payments  on line of credit                                                                |       | (12,000  | )          |     |       |     |       |
| Excess  tax benefits from stock-based compensation                                         |       | 987      |       | 2,044    |       | 500      |       |
| Payment  of taxes related to an exchange of common stock                                   |       | (254     | )          |     |       |     |       |
| Common  stock repurchased and retired                                                      |       | (2,474   | )          |     |       | (5,407   | )          |
|                                                                                       |       |     |       |     |       |     |       |
| Net  cash provided by (used in) financing activities                                       |       | 7,819    |       | 8,250    |       | (3,047   | )          |
|                                                                                       |       |     |       |     |       |     |       |
| EFFECT  OF EXCHANGE RATES ON CASH                                                          |       | 6        |       | 214      |       | 231      |       |
|                                                                                       |       |     |       |     |       |     |       |
| NET  (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS                                      |       | (27,897  | )          | 16,456   |       | 7,736    |       |
|                                                                                       |       |     |       |     |       |     |       |
| CASH  AND CASH EQUIVALENTS:                                                                |       |     |       |     |       |     |       |
| Beginning  of year                                                                         |       | 34,030   |       | 17,574   |       | 9,838    |       |
|                                                                                       |       |     |       |     |       |     |       |
| End  of year                                                                               |       | $        | 6,133      |     | $          | 34,030   |       | $ | 17,574 |   |
|                                                                                       |       |     |       |     |       |     |       |
| SUPPLEMENTAL  DISCLOSURES OF CASH FLOW                                                     |       |     |       |     |       |     |       |
| INFORMATION  — Cash paid during the year for:                                         |       |     |       |     |       |     |       |
| Interest                                                                                   |       | $        | 26         |     | $          | 17       |       | $ | 5 |   |
|                                                                                       |       |     |       |     |       |     |       |
| Income  taxes                                                                              |       | $        | 8,215      |     | $          | 9,853    |       | $ | 5,354 |   |
|                                                                                       |       |     |       |     |       |     |       |
| SUPPLEMENTAL  DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES                   |       |     |       |     |       |     |       |
| Fixed  asset purchases in accounts payable                                                 |       | $        | 2,724      |     | $          | 847      |       | $ | 1,173 |   |
|                                                                                       |       |     |       |     |       |     |       |
| Adoption  of FIN 48                                                                        |       |     |       |     |       | $        | 610        |   |
|                                                                                       |       |     |       |     |       |     |       |
| Merit  common stock surrendered (21,556 shares) in exchange for exercise of stock  options |       | $        | 230        |     |       |     |       |   |

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

 

31

----

Table of Contents

 

**MERITMEDICAL SYSTEMS, INC. AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**YEARS ENDED DECEMBER 31, 2009, 2008 AND2007**

 

**1.     ORGANIZATION AND SUMMARY OF SIGNIFICANTACCOUNTING POLICIES**

 

**Organization**. Merit Medical Systems, Inc. develops,manufactures and markets disposable medical products primarily used indiagnostic and interventional cardiology and radiology procedures.  We operate primarily as one segment, sales ofdisposable medical devices used for cardiology and radiology procedures (twoother segments do not meet the quantitative thresholds for reporting separateinformation).  We manufacture ourproducts in plants located in the United States, The Netherlands andIreland.  We export sales to dealers andhave direct sales forces in the United States and Western Europe (see Note11).  Our consolidated financialstatements have been prepared in accordance with accounting principlesgenerally accepted in the United States of America.  The following is a summary of the moresignificant of such policies.

 

**Use of Estimates in Preparing Financial Statements**. The preparation of financial statements in conformity with accountingprinciples generally accepted in the United States of America requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities and disclosure of contingent assets and liabilitiesat the date of the financial statements and the reported amounts of revenuesand expenses during the reporting period. Actual results could differ from those estimates.

 

**Principlesof Consolidation**.  The consolidated financial statements includeour wholly-owned subsidiaries. Intercompany balances and transactions have beeneliminated.

 

**Cash andCash Equivalents. **For purposesof the statements of cash flows, we consider interest bearing deposits with anoriginal maturity date of three months or less to be cash equivalents.

 

**Receivables****. **Theallowance for uncollectible accounts receivable is based on our historical baddebt experience and on management’s evaluation of its ability to collectindividual outstanding balances.

 

**Inventories.** We value our inventories at the lower of cost,determined on a first-in, first-out method, or market value. Market value forraw materials is based on replacement costs. Inventory costs include material, labor and manufacturing overhead.  We review inventories on hand at leastquarterly and record provisions for estimated excess, slow moving and obsoleteinventory, as well as inventory with a carrying value in excess of netrealizable value.  The regular andsystematic inventory valuation reviews include a current assessment of futureproduct demand, historical experience and product expiration.

 

**Goodwill and Intangible Assets. **We test goodwill balances as of July 1 forimpairment on an annual basis or whenever impairment indicators arise.  We utilize several reporting units inevaluating goodwill for impairment.  Weassess the estimated fair value of reporting units based on discounted futurecash flows.  If the carrying amount of areporting unit exceeds the fair value of the reporting unit, an impairmentcharge is recognized in an amount equal to the excess of the carrying amount ofthe reporting unit goodwill over the implied fair value of that goodwill.

 

We evaluate the recoverability of intangible assetsperiodically and take into account events or circumstances that warrant revisedestimates of useful lives or that indicate that impairment exists.  All of our intangible assets are subject toamortization.  Intangible assets areamortized over a straight line basis except for customer lists which aregenerally amortized on an accelerated basis over the following useful lives:

 
| Customer  lists and developed technology |   | 5 - 15 years |
|------------------------------------------|--------|--------------|
| Distribution  agreements                 |   | 5 - 11 years |
| License  agreements and trademarks       |   | 5 - 15 years |
| Covenant  not to compete                 |   | 3 - 10 years |
| Patents                                  |   | 17 years     |
| Royalty  income                          |   | 5 years      |

 

32

----

Tableof Contents

 

**Long-LivedAssets**.  We review the carrying amount of ourlong-lived assets for impairment whenever events or change in circumstances indicatethat the carry amount may not be recoverable. An asset is considered impaired when estimated future cash flows areless than the carrying amount of the asset. In the event the carrying amount of such asset is not consideredrecoverable, the asset is adjusted to its fair value.  Fair value is generally determined based ondiscounted future cash flow.  There wereno impairments of long-lived assets during the years ended December 31,2009, 2008 and 2007.

 

**Property and Equipment**. Property and equipment is stated at the historical cost of constructionor purchase. Construction costs include payroll-related costs capitalizedduring construction.  Maintenance andrepairs of property and equipment are charged to operations as incurred.  Leasehold improvements are amortized over thelesser of the base term of the lease or estimated life of the leaseholdimprovements.  Construction-in-processconsists of various production equipment being constructed internally and externally.  Assets in construction-in-process willcommence depreciating once the asset has been placed in service.  Depreciation and amortization are computedusing the straight-line method over estimated useful lives as follows:

 
| Buildings                |   | 40 years      |   |
|--------------------------|--------|---------------|--------|
| Manufacturing  equipment |   | 5 - 20 years  |   |
| Furniture  and fixtures  |   | 3 - 10 years  |   |
| Land  improvements       |   | 10 - 20 years |   |
| Leasehold  improvements  |   | 4 - 25 years  |   |

 

**DeferredCompensation**. Wehave a deferred compensation plan that permits certain management employees todefer a portion of their salary until the future.  We established a Rabbi trust to financeobligations under the plan with corporate-owned variable life insurancecontracts.  The cash surrender valuetotaled approximately $3.3 million and $2.3 million at December 31, 2009and 2008, respectively, which is included in “Other assets” in our consolidatedbalance sheets.  We have recorded a “DeferredCompensation Payable” of approximately $3.4 million and $2.3 million at December 31,2009 and 2008, respectively, to reflect the liability to our employees underthis plan.

 

**Other Assets. **Other assets****consist of our deferred compensation plan cash surrender valuediscussed above, an investment in a privately-held company accounted for atcost, deposits related to various leases, and a long-term income tax refundreceivable.

** **

**DeferredCredits**.  Deferred credits consist of grant moneyreceived from the Irish government. Grant money is received for a percentage of expenditures on eligibleproperty and equipment, specific research and development projects and costs ofhiring and training employees.  Amountsrelated to the acquisition of property and equipment are amortized as areduction of depreciation expense over the lives of the corresponding propertyand equipment.

 

**RevenueRecognition. **We sell our single-use disposable medicalproducts through a direct sales force in the U.S., through OEM relationships,custom packers and a combination of direct sales force and independentdistributors in international markets. Revenues from these customers are recognized when all of the followinghave occurred: (i) persuasive evidence of an arrangement exists, (ii) deliveryhas occurred or services have been rendered, (iii) the price is fixed ordeterminable and (iv) the ability to collect is reasonably assured.  These criteria are generally satisfied at thetime of shipment when risk of loss and title passes to the customer.  We have certain written agreements with grouppurchasing organizations to sell our products to participating hospitals.  Some of these agreements and most of ourdirect European sales have destination shipping terms which require us to deferthe recognition of a sale until the product has arrived at our customers’locations.  We reserve for sales returnsof defective products (i.e. warranty liability) as a reduction in revenue,based on our historical experience.  Wealso offer sales rebates and discounts to purchasing groups.  These reserves are recorded as a reduction inrevenue and are not considered material to our consolidated statements of incomefor the years ended December 31, 2009, 2008 and 2007.  In addition, we invoice our customers fortaxes assessed by governmental authorities such as sales tax and value addedtaxes.  We present these taxes on a netbasis.

 

**Shippingand Handling**.  We bill our customers for shipping andhandling charges, which are included in total revenues for the applicableperiod and the corresponding shipping and handling expense is reported in costof sales.

 

**Cost ofSales**.  We include product costs (i.e. material, directlabor and overhead costs), shipping and handling expense, product royaltyexpense, developed technology expense, production related depreciation expenseand product license agreement expense in cost of sales.

 

**Researchand Development**.  Research and development costs are expensedas incurred.

 

33

----

Tableof Contents

 

**Income Taxes**.  We utilize anasset and liability approach for financial accounting and reporting for incometaxes. Deferred income taxes are provided for temporary differences in thebasis of assets and liabilities as reported for financial statement and incometax purposes.  Deferred income taxesreflect the tax effects of net operating loss and tax credit carryovers andtemporary differences between the carrying amounts of assets and liabilitiesfor financial reporting purposes and the amounts used for income taxpurposes.  Realization of certaindeferred tax assets is dependent upon future earnings, if any.  We make estimates and judgments indetermining the need for a provision for income taxes, including the estimationof our taxable income for each full fiscal year.

 

On January 1, 2007, we adopted a new accounting standard thatclarified the accounting for uncertainty in income taxes recognized in ourfinancial statements.  Under thisstandard, tax positions are initially recognized in the financial statementswhen it is more likely than not the position will be sustained upon examinationby the tax authorities.  Such taxpositions are initially and subsequently measured as the largest amount of taxbenefit that has the greater than 50% likelihood of being realized uponultimate settlement with the tax authority assuming full knowledge of theposition and all relevant facts.

 

**Earningsper Common Share**.  Net income per common share is computed by both thebasic method, which uses the weighted average number of our common sharesoutstanding and the diluted method, which includes the dilutive common sharesfrom stock options and warrants, as calculated using the treasury stock method.

 

**FairValue Measurements. **On January 1,2008, we adopted a new accounting standard that defined fair value, establisheda framework for measuring fair value, and expanded disclosure about fair valuemeasurements.  In February 2008, theFinancial Accounting Standards Board (“FASB”) adopted a one-year deferral ofthe fair value measurement and disclosure requirements for non-financial assetsand liabilities.  We adopted the fairvalue measurement and disclosure requirements for measuring financial assetsand liabilities on January 1, 2008 and the fair value measurement anddisclosure requirements for non-financial assets and liabilities on January 1,2009 and the adoption of each did not have a material impact on ourconsolidated financial statements.

 

The fair value ofa financial instrument is the amount that could be received upon the sale of anasset or paid to transfer a liability in an orderly transaction between marketparticipants at the measurement date. Financial assets are marked to bid prices and financial liabilities aremarked to offer prices.  Fair value measurementsdo not include 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: Unobservable inputsthat are not corroborated by market data.

 

**Stock-BasedCompensation. **We recognize the fair value compensation cost relating to share-basedpayment transactions in accordance with Accounting Standards Codification (“ASC”)718, *Compensation — Stock Compensation*.  Under the provisions of ASC 718, share-basedcompensation cost is measured at the grant date, based on the fair value of theaward and is recognized over the employee’s requisite service period, which isgenerally the vesting period.  The fair valueof our stock options is estimated using a Black-Scholes option valuationmodel.  Stock-based compensation expensefor the years ended December 31, 2009, 2008 and 2007 was $1.2 million,$1.0 million and $1.1 million, respectively.

 

**Concentrationof Credit Risk**.  Financial instruments that potentiallysubject us to concentrations of credit risk consist primarily of cash and cashequivalents and accounts receivable.  Weprovide credit, in the normal course of business, primarily to hospitals andindependent third-party packers and distributors.  We perform ongoing credit evaluations of ourcustomers and maintain allowances for potential credit losses.  Sales to our single largest customerapproximated 6%, 7% and 7% of total sales for the years ended December 31,2009, 2008 and 2007, respectively.

 

**ForeignCurrency**.  The financial statements of our foreignsubsidiaries are measured using local currencies as the functional currency,with the exception of Ireland which uses the U.S. Dollar as its functional currency.  Assets and liabilities are translated intoU.S. Dollars at year-end rates of exchange and results of operations aretranslated at average rates for the year. Gains and losses resulting from these translations are included inaccumulated other comprehensive loss as a separate component of stockholders’equity.  Foreign currency transactions denominated in acurrency other than the entity’s functional currency are included indetermining net income for the period. Such foreign currency transaction gains and losses have not beensignificant for purposes of our financial reporting.

 

34

----

Tableof Contents

 

**ForeignCurrency Forward Contracts**.  On November 30, 2009, we forecasted anet exposure for December 31, 2009 (representing the difference betweenEuro and GBP denominated receivables and Euro-denominated payables) ofapproximately 331,000 Euros and 394,000 GBPs. In order to partially offset such risks at November 30, 2009, weentered into a 30-day forward contract for the Euro and GBP with a notionalamount of approximately 331,000 Euros and notional amount of 394,000 GBPs.  We enter into similar transactions at varioustimes during the year to partially offset exchange rate risks we bearthroughout the year.  These contracts aremarked to market at each month-end. During the years ended December 31, 2009 and 2008, we recorded anet loss on these forward contracts of approximately $9,000 and $1,000,respectively, which is included in other income (expense) on these forwardcontracts.  We do not purchase or holdderivative financial instruments for speculative or trading purposes.  The fair value of our open positions at December 31,2009 and 2008 was not material.

 

**AccumulatedOther Comprehensive Loss**.  Accumulated other comprehensive loss consistsentirely of foreign currency translation adjustments.

 

**RecentlyIssued Financial Accounting Standards. **In October 2009, the FASB issuedAccounting Standards Update (“ASU”), 2009-13, Revenue Recognition (Topic 605): *Multiple Deliverable Revenue Arrangements — AConsensus of the FASB Emerging Issues Task Force.* This update provides application guidance onwhether multiple deliverables exist, how the deliverables should be separatedand how the consideration should be allocated to one or more units ofaccounting.  This update establishes aselling price hierarchy for determining the selling price of adeliverable.  The selling price used foreach deliverable will be based on vendor-specific objective evidence, ifavailable, third-party evidence if vendor-specific objective evidence is notavailable, or estimated selling price if neither vendor-specific or third-partyevidence is available.  We will berequired to apply this guidance prospectively for revenue arrangements enteredinto or materially modified after January 1, 2011; however, earlierapplication is permitted.  We have notdetermined the impact that this update may have on our consolidated financialstatements.

 

In June 2009, the FASB issued ASC 105, *GenerallyAccepted Accounting Principles - Overall* (“ASC 105”).  ASC 105 establishes the FASB ASC as thesource of authoritative accounting principles recognized by the FASB to beapplied by nongovernmental entities in the preparation of financial statementsin conformity with U.S. GAAP.  The FASBwill not issue new standards in the form of Statements, FASB Staff Positions orEmerging Issues Task Force Abstracts. Instead, it will issue ASUs.  Thisstandard reorganizes the thousands of GAAP pronouncements into roughly 90accounting topics and displays them using a consistent structure.  Also included is relevant SEC guidanceorganized using the same topical structure in separate sections.  ASC 105 is effective for interim and annualperiods ending after September 15, 2009. We adopted ASC 105 in the third quarter of 2009.  The adoption does not have an effect on ourfinancial position or results of operations; however, because ASC 105 completelyreplaces existing standards, it will affect the way U.S. GAAP is referencedwithin the consolidated financial statements and accounting policies.

** **

In June 2009, theFASB issued guidance now codified in FASB ASC 810, *Consolidation* (“ASC 810”). ASC 810 amends tests for variableinterest entities to determine whether a variable interest entity must beconsolidated. ASC 810 requires an entity to perform an analysis to determinewhether an entity’s variable interest or interests give it a controlling financialinterest in a variable interest entity. This guidance requires ongoing reassessments of whether an entity is theprimary beneficiary of a variable interest entity and enhanced disclosures thatprovide more transparent information about an entity’s involvement with avariable interest entity.  We will berequired to apply this guidance on January 1, 2010.  We do not expect the adoption of thisguidance to have a material effect on our consolidated financial statements.

 

In May 2009, theFASB issued guidance now codified in FASB ASC 855, *SubsequentEvents*, which provides guidance on the assessment of subsequentevents.  This guidance defines the periodafter the balance sheet date during which we should evaluate events ortransactions that may occur for potential recognition or disclosure in thefinancial statements and the required disclosures for such events.  The guidance is effective for interim orannual reporting periods ending after June 15, 2009.  We adopted this guidance in the secondquarter of 2009, the adoption of which did not have a material effect on ourconsolidated financial statements.

 

In December 2007, the FASB issued guidance now codified in FASBASC 805, *Business Combinations* (“ASC 805”).  ASC 805 requires all business combinations completedafter the effective date to be accounted for by applying the acquisition 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 non-controlling interests in theacquiree.  In the case of a bargainpurchase, the acquirer is required to reevaluate the measurements of therecognized assets and liabilities at the acquisition date and recognize a gainon that date if an excess remains.  Weadopted this guidance on January 1, 2009. We expensed costs related to the Alveolus, Biosearch and Hatchacquisitions of approximately $558,000 during the year ended December 31,2009, which would have been included in Goodwill under previous guidance.  The continued effect 

 

35

----

Table ofContents

 

ofadoption on our consolidated financial statements will depend upon the natureof any acquisitions completed after adoption.

 

**2.**                                      ACQUISITIONS

 

On October 21, 2009,we completed a transaction with Vysera, a medical products developer based inGalway, Ireland.  In the transaction, weentered into an Exclusive License, Development and Supply Agreement, pursuantto which Vysera granted to us an exclusive license to use, modify and sell certainvalve technology and biomaterial coating technology for medical devices (the “LicensedTechnology”) and other intellectual property associated with the LicensedTechnology and to develop and market improvements to the LicensedTechnology.  In the transaction, we alsopurchased 253,047 Class A Ordinary Shares of Vysera, for an aggregateprice of approximately $2.4 million, which is accounted for at cost.  Under the Vysera license agreement, we paidVysera a license fee of $1.5 million and agreed to pay royalties on products wesell which incorporate the Licensed Technology. The license fee for $1.5 million has been allocated to developedtechnology and will be amortized over 15 years.

 

On June 2,2009, we entered into an asset purchase agreement with Hatch, a Georgia limitedliability company to purchase assets associated with the EN Snare® foreign bodyretrieval system.  We paidHatch $21 million as of December 31, 2009.  Ourconsolidated financial statements for the year ended December 31, 2009reflect royalty income (net sales) subsequent to the acquisition date ofapproximately $1.0 million and a net income of approximately $210,000 relatedto our Hatch acquisition.  The purchaseprice was allocated as follows (in thousands):

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

 

With respect tothe assets we acquired from Hatch, we intend to amortize developed technologyover 11 years and a non-compete covenant over seven years.  The acquired trademarks are scheduled torenew in 3.87 years (based on a weighted-average computation, from December 31,2009 until the trademark renewal date). While U.S. trademarks can be renewed indefinitely, we currently estimatethat we will generate cash flow from the acquired trademarks for a period of 15years from the acquisition date.

 

On March 9, 2009, we entered into an asset purchaseagreement with Alveolus, a North Carolina corporation to purchase theirnon-vascular interventional stents used for esophageal, tracheobronchial andbiliary stenting procedures.  We paidAlveolus $19.1 million in March 2009.  The grossamount of trade receivables we acquired from Alveolus was approximately $1.0million, of which $49,000 was expected to be uncollectible.  Our consolidated financial statements for theyear ended December 31, 2009 reflect sales subsequent to the acquisitiondate of approximately $6.1 million and a net loss of approximately $2.3 millionrelated to our acquisition of the Alveolus assets.  The purchase price was allocated as follows(in thousands):

 

36

----

Tableof Contents

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

 

With respect to the assets we acquired from Alveolus, we intend toamortize the developed technology and trademarks over 15 years and customerlists on an accelerated basis over seven years. We intend to amortize the in-process research and development over 15years, which will begin if the resulting product is successfully launched inthe market.  The acquired trademarks arescheduled to renew in 3.52 years (based on a weighted-average calculation, fromDecember 31, 2009 until the trademark renewal date).  While U.S. trademarks can be renewedindefinitely, we currently estimate that we will generate cash flow from theacquired trademarks for a period of 15 years from the acquisition date.

 

Our in-process researchand development (“IPR&D”) represents the value of in-process projectsacquired in 2009 that have not yet reached technological feasibility and haveno alternative future uses as of the date of acquisition.  The primary basis for determining thetechnological feasibility of these projects is obtaining regulatory approval tomarket the underlying products in an applicable geographic region.  At the time of acquisition, we expect allacquired IPR&D will reach technological feasibility, but there can be noassurance that the commercial viability of these products will actually beachieved.  Our IPR&D is currently notsubject to amortization but amortization will commence upon the related productlaunch.

 

On February 19, 2009, we entered into an asset purchase and supplyagreement with Biosearch, a New Jersey corporation, to purchase a bipolarcoagulation probe and grafted biliary stents.  We paid $1.1 million in February 2009and paid an additional $500,000 in June 2009.  Our financialstatements for the year ended December 31, 2009 reflect sales subsequentto the acquisition date of approximately $1.6 million and net income ofapproximately $320,000 related to the Biosearch acquisition.  The purchase price was allocated as follows(in thousands):

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

 

With respect tothe assets we acquired from Biosearch, we intend to amortize developedtechnology over 15 years, customer lists on an accelerated basis over eightyears and a non-compete covenant over seven years.

 

37

----

Table ofContents

 

The goodwill arising from the acquisitions discussed above consistslargely of the synergies and economies of scale we hope to achieve fromcombining the acquired assets and operations with our historicaloperations.  The goodwill recognized fromthese acquisitions is expected to be deductible for income tax purposes.

 

The following tablesummarizes our unaudited consolidated results of operations for the years endedDecember 31, 2009 and 2008, as well as the unaudited pro formaconsolidated results of operations as though the Hatch, Alveolus and Biosearchacquisitions had occurred on January 1, 2008 (in thousands, except pershare data):

 
| ** **                  | ** ** | **Year Ended  December 31, 2009** | ** ** | **Year Ended  December 31, 2008** | ** ** |
|-----------------------------|------------|----------------------------------------|------------|----------------------------------------|------------|
| ** **                  | ** ** | **As Reported**                        | ** ** | **Pro Forma**                          | ** ** | **As Reported** | ** ** | **Pro Forma** | ** ** |
|                        |       |                                   |       |                                   |       |   |   |   |   |
| Sales                       |       | $                                      | 257,462    |                                   | $          | 259,914 |   | $ | 227,143 |   | $ | 238,639 |   |
| Net  income                 |       | 22,530                                 |       | 22,470                                 |       | 20,727 |   | 18,532 |   |
| Earnings  per common share: |       |                                   |       |                                   |       |   |   |   |   |
| Basic                       |       | $                                      | .80        |                                   | $          | .80 |   | $ | .75 |   | $ | .67 |   |
| Diluted                     |       | $                                      | .79        |                                   | $          | .79 |   | $ | .73 |   | $ | .65 |   |

 

The unaudited pro formacondensed consolidated income statement information set forth above is forinformational purposes only and should not be considered indicative of actualresults that would have been achieved if the Hatch, Alveolus and Biosearchtransactions had been completed at the beginning of 2008, or results that maybe obtained in any future period.

 

On December 11,2008, we entered into an asset purchase agreement with Tran PA-C, Inc., aFlorida corporation (“Tran PA-C”), to purchase certain catheter extractionproducts for $1.5 million.  We alsoaccrued $11,000 in acquisition costs associated with the transaction.  Additional payments to Tran PA-C totaling$1.5 million have not been accrued as they are contingent upon reaching futurecertain sales levels.  In addition, weagreed to pay Tran PA-C a running royalty payment of 6% of net sales for thecatheter extractor product for the 10 years subsequent to the date of the assetpurchase agreement.  The purchase price was allocated toinventories for $71,228, property and equipment for $15,436, customer lists for$80,000, developed technology for $85,000, a covenant not to compete for$30,000 and goodwill for $1.2 million. With respect to the assets we acquired from Tran PA-C, we intend toamortize customer lists on an accelerated basis over 14 years and developedtechnology over ten years.  This productcan be used to extract chronic dialysis catheters, similar to our ProGuideTMdialysis catheter purchased from Datascope in 2007.

 

On January 29,2008, we entered into an asset purchase and supply agreement with MicrusEndovascular Corporation, a Delaware corporation (“Micrus”) to purchase threecatheter platforms for $3.0 million dollars. We paid Micrus $1.5million in January 2008 and an additional $1.5 million in December of2008.  We also paid Micrus $12,300 in acquisitioncosts.  The purchase price was allocated toinventories for approximately $144,000, customer lists for approximately$270,000, developed technology for approximately $330,000 and goodwill forapproximately $2.3 million.  We intend toamortize customer lists on an accelerated basis over 14 years and developedtechnology over 15 years.

 

During 2007, we enteredinto a distribution agreement with Milamy, wherein we purchased the exclusive,worldwide right to distribute the KanguruWeb® Abdominal Retraction System invascular lab markets for $350,000. During 2008, we entered into an agreement with Milamy whereby Milamyagreed to terminate their exclusive license rights with McKnight and substituteus as the exclusive licensee of the KanguruWeb® technology in exchange for ourpayment of $100,000.  The purchase pricewas allocated to a distribution agreement for $450,000 and we intend toamortize it over five years.

 

On August 7, 2007, we entered into a distribution agreement withGMA Company, Ltd (“GMA”) for the exclusive distribution rights to sell amicro-catheter.  We paid to GMA aninitial payment of $500,000 in September 2007, another payment of $500,000in November 2007 and $500,000 in September 2008.  We paid $4,000 in acquisition costs.  On March 3, 2009, we paid $500,000 toGMA representing the final payment due on our distribution agreement.  We have allocated the purchase price ofapproximately $2.0 million as a distribution agreement and we intend toamortize it over an estimated life of 11 years.

 

On July 17, 2007, we entered into a patent assignment and royaltyagreement with Lightek Corporation (“Lightek”) to manufacture and sell aradiopaque marker band.  We made aninitial payment of $228,000 to Lightek in 2007 and a payment of $200,000 in May of2008 for reaching certain milestones identified in the patent assignment androyalty agreement.  In addition, weagreed to a running royalty payment of 3% of net sales beginning with theissuance of the patent and continuing through the expiration of thepatent.  We paid Lightek $8,400 in 2007and accrued $1,600 for acquisition costs. A final milestone payment of approximately $90,000 was made in 2009 upontheir achievement of certain sales levels. The purchase price was allocated to developed technology for $78,000,customer lists for $240,000 

 

38

----

Table ofContents

 

andgoodwill for $210,000.  With respect tothe assets we acquired form Lightek, we intend to amortize customer lists on anaccelerated basis over 14 years and developed technology over 15 years.

 

On February 26,2007, we entered into an asset purchase agreement with Datascope to purchasecertain assets for the manufacture and sale of the ProGuideTM catheter forapproximately $3.3 million, including future minimum royalty payments of$279,181.  In connection with thisagreement, we acquired assets, inventories, a customer list, patents and atrademark.  The purchase price was allocatedto property and equipment for $25,971, inventories for $778,659, a customerlist for $300,000, developed technology for $150,000, a trademark for $150,000,a covenant not to compete for $20,000 and goodwill for approximately $1.9million.  In addition, we agreed to arunning royalty payment of 5% of net sales through 2014, with a minimum annualpayment of $50,000.  Based on management’sevaluation of the purchase agreement, we recorded the additional minimumearn-out payment as an assumed liability and an addition to the cost of theacquisition.  The minimum running royaltypayment of $350,000 to be paid through 2014 was discounted using ourincremental borrowing rate of 6% to arrive at an assumed liability of$279,181.  We intend to amortize customerlists on an accelerated basis over 14 years and developed technology andtrademark over 15 years and a covenant not to compete over 3 years.

 

On February 14,2007, we terminated our exclusive sales distributor agreement with Medrad andpurchased the customer list and information we believe will enable us toconduct direct sales in Sweden.  Thepurchase price of $124,036 was allocated to property and equipment and customerlists. We intend to amortize customer lists amortized on an accelerated basisover 14 years.

 

Proforma consolidated financial results for the acquisitions completed related toyears ending December 31, 2008 and 2007 have not been included becausetheir effects would not be material.

 

**3.**                                      INVENTORIES

 

Inventoriesat December 31, 2009 and 2008, consisted of the following (in thousands):

 
| ** **      | ** ** | **2009** | ** ** | **2008** | ** ** |
|-----------------|------------|----------|------------|----------|------------|
|            |       |     |       |     |       |
| Finished  goods |       | $        | 24,502     |     | $          | 17,818 |   |
| Work-in-process |       | 5,542    |       | 4,790    |       |
| Raw  materials  |       | 17,126   |       | 15,750   |       |
|            |       |     |       |     |       |
| Total           |       | $        | 47,170     |     | $          | 38,358 |   |

 

**4.**                                      **GOODWILL AND INTANGIBLE ASSETS**

** **

The changes in thecarrying amount of goodwill for the years ended December 31, 2009 and2008, are as follows (in thousands):

 
| ** **                               | ** ** | **2009**   | ** ** | **2008**   | ** ** |
|------------------------------------------|------------|------------|------------|------------|------------|
| ** **                               | ** ** | ** ** | ** ** | ** ** | ** ** |
| Goodwill  balance at January 1      |       | $          | 13,048     |       | $          | 9,527 |   |
| Additions  as the result of acquisitions |       | 19,954     |       | 3,521      |       |
|                                     |       |       |       |       |       |
| Goodwill  balance at December 31         |       | $          | 33,002     |       | $          | 13,048 |   |

 

39

----

Table of Contents

 

Intangible assets at December 31, 2009 and2008, consisted of the following (in thousands):

 
| ** **                           | ** ** | **2009**                    | ** ** |
|--------------------------------------|------------|-----------------------------|------------|
| ** **                           | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Net  Carrying  Amount** | ** ** |
|                                 |       |                        |       |   |   |   |   |
| Patents                              |       | $                           | 3,757      |   | $ | (1,214 | ) | $ | 2,543 |   |
| Distribution  agreement              |       | 2,400                       |       | (385 | ) | 2,015 |   |
| License  agreements                  |       | 403                         |       | (287 | ) | 116 |   |
| Trademark                            |       | 2,538                       |       | (411 | ) | 2,127 |   |
| Developed  technology                |       | 17,513                      |       | (535 | ) | 16,978 |   |
| In-process  research and development |       | 400                         |       | 0 |   | 400 |   |
| Covenant  not to compete             |       | 315                         |       | (25 | ) | 290 |   |
| Customer  lists                      |       | 4,755                       |       | (2,380 | ) | 2,375 |   |
| Royalty  agreements                  |       | 267                         |       | (213 | ) | 54 |   |
|                                 |       |                        |       |   |   |   |   |
| Total                                |       | $                           | 32,348     |   | $ | (5,450 | ) | $ | 26,898 |   |

 
| ** **               | ** ** | **2008**                    | ** ** |
|--------------------------|------------|-----------------------------|------------|
| ** **               | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Net  Carrying  Amount** | ** ** |
|                     |       |                        |       |   |   |   |   |
| Patents                  |       | $                           | 2,704      |   | $ | (1,019 | ) | $ | 1,685 |   |
| Distribution  agreement  |       | 1,901                       |       | (178 | ) | 1,723 |   |
| License  agreements      |       | 403                         |       | (242 | ) | 161 |   |
| Trademark                |       | 515                         |       | (314 | ) | 201 |   |
| Developed  technology    |       | 1,730                       |       | (119 | ) | 1,611 |   |
| Covenant  not to compete |       | 50                          |       | (18 | ) | 32 |   |
| Customer  lists          |       | 2,465                       |       | (1,073 | ) | 1,392 |   |
| Royalty  agreements      |       | 267                         |       | (159 | ) | 108 |   |
|                     |       |                        |       |   |   |   |   |
| Total                    |       | $                           | 10,035     |   | $ | (3,122 | ) | $ | 6,913 |   |

 

Aggregate amortization expense for the years ended December 31,2009, 2008 and 2007, was approximately $2,342,000, $965,000 and $807,000,respectively.

 

Estimated amortization expense for the intangibleassets for the next five years consisted of the following as of December 31,2009 (in thousands):

 
| **Year Ending  December 31** | ** ** | ** ** | ** ** |
|-----------------------------------|------------|------------|------------|
|                              |       |       |       |
| 2010                              |       | $          | 2,636      |   |
| 2011                              |       | 2,320      |       |
| 2012                              |       | 2,148      |       |
| 2013                              |       | 2,117      |       |
| 2014                              |       | 1,952      |       |
|                                   |            |            |            |  |

 

40

----

Tableof Contents

 

**5.             INCOMETAXES**

 

For the years ended December 31, 2009, 2008 and2007, income before income taxes is broken out between U.S. and foreign-sourcedoperations and consisted of the following (in thousands):

 
| ** ** | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** |
|------------|------------|----------|------------|----------|------------|----------|------------|
|       |       |     |       |     |       |     |       |
| Domestic   |       | $        | 26,918     |     | $          | 28,184   |       | $ | 22,033 |   |
| Foreign    |       | 6,176    |       | 3,661    |       | 1,366    |       |
|       |       |     |       |     |       |     |       |
| Total      |       | $        | 33,094     |     | $          | 31,845   |       | $ | 23,399 |   |

 

The components of the provision for income taxes forthe years ended December 31, 2009, 2008 and 2007 consisted of thefollowing (in thousands):

 
| ** **                  | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** |
|-----------------------------|------------|----------|------------|----------|------------|----------|------------|
|                        |       |     |       |     |       |     |       |
| Current expense:            |       |     |       |     |       |     |       |
| Federal                     |       | $        | 7,846      |     | $          | 9,693    |       | $ | 5,660 |   |
| State                       |       | 689      |       | 1,008    |       | 800      |       |
| Foreign                     |       | 238      |       | 600      |       | 367      |       |
|                        |       |     |       |     |       |     |       |
|                        |       | 8,773    |       | 11,301   |       | 6,827    |       |
|                        |       |     |       |     |       |     |       |
| Deferred (benefit) expense: |       |     |       |     |       |     |       |
| Federal                     |       | 1,264    |       | (133     | )          | 752      |       |
| State                       |       | 227      |       | (44      | )          | 254      |       |
| Foreign                     |       | 300      |       | (6       | )          | (22      | )          |
|                        |       |     |       |     |       |     |       |
|                        |       | 1,791    |       | (183     | )          | 984      |       |
|                        |       |     |       |     |       |     |       |
| Total                       |       | $        | 10,564     |     | $          | 11,118   |       | $ | 7,811 |   |

 

The difference between the income tax expense reportedand amounts computed by applying the statutory federal rate of 35.0% to pretaxincome for the years ended December 31, 2009, 2008 and 2007 consisted ofthe following (in thousands):

 
| ** **                                                    | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** |
|---------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                                          |       |     |       |     |       |     |       |
| Computed federal income tax expense at statutory  rate of 35% |       | $        | 11,583     |     | $          | 11,146   |       | $ | 8,189 |   |
| State income taxes                                            |       | 596      |       | 627      |       | 685      |       |
| Tax credits                                                   |       | (670     | )          | (271     | )          | (195     | )          |
| Production activity deduction                                 |       | (215     | )          | (114     | )          | (118     | )          |
| Income of subsidiaries recorded at foreign tax  rates         |       | (1,062   | )          | (822     | )          | (224     | )          |
| Tax-exempt interest income                                    |       |     |       | (45      | )          | (82      | )          |
| Uncertain tax positions                                       |       | 114      |       | 66       |       | 13       |       |
| Deferred compensation insurance investments                   |       | (196     | )          | 398      |       | (210     | )          |
| Other — including the effect of graduated rates          |       | 414      |       | 133      |       | (247     | )          |
|                                                          |       |     |       |     |       |     |       |
| Total income tax expense                                      |       | $        | 10,564     |     | $          | 11,118   |       | $ | 7,811 |   |

 

41

----

Table of Contents

 

Deferred income tax assets and liabilities at December 31,2009 and 2008, consisted of the following temporary differences andcarry-forward items (in thousands):

 
| ** **                                       | ** ** | **Current** | ** ** | **Long-Term** | ** ** |
|--------------------------------------------------|------------|-------------|------------|---------------|------------|
| ** **                                       | ** ** | **2009**    | ** ** | **2008**      | ** ** | **2009** | ** ** | **2008** | ** ** |
|                                             |       |        |       |          |       |   |   |   |   |
| Deferred  income tax assets:                     |       |        |       |          |       |   |   |   |   |
| Allowance  for uncollectible accounts receivable |       | $           | 221        |          | $          | 205 |   | $ | — |   | $ | — |   |
| Accrued  compensation expense                    |       | 750         |       | 699           |       | 1,436 |   | 966 |   |
| Inventory  capitalization for tax purposes       |       | 696         |       | 531           |       |   |   |   |   |
| Inventory  obsolescence reserve                  |       | 540         |       | 510           |       |   |   |   |   |
| Net  operating loss carry-forwards               |       |        |       |          |       |   |   | 77 |   |
| Deferred  revenue                                |       |        |       |          |       | 152 |   | 173 |   |
| Intangible  assets                               |       |        |       |          |       | 420 |   | 487 |   |
| Stock-based  compensation expense                |       |        |       |          |       | 1,476 |   | 1,083 |   |
| Uncertain  tax positions                         |       | 354         |       | 318           |       | 230 |   | 251 |   |
| Other                                            |       | 1,055       |       | 705           |       |   |   | 6 |   |
|                                             |       |        |       |          |       |   |   |   |   |
| Total  deferred income tax assets                |       | 3,616       |       | 2,968         |       | 3,714 |   | 3,043 |   |
|                                             |       |        |       |          |       |   |   |   |   |
| Deferred  income tax liabilities:                |       |        |       |          |       |   |   |   |   |
| Prepaid  expenses                                |       | (327)       |       | (186          | )          |   |   |   |   |
| Property  and equipment                          |       |        |       |          |       | (13,873) |   | (11,161 | ) |
| Other                                            |       |        |       |          |       | (1,092) |   | (630 | ) |
|                                             |       |        |       |          |       |   |   |   |   |
| Net                                              |       | $           | 3,289      |          | $          | 2,782 |   | $ | (11,251) |   | $ | (8,748 | ) |
|                                             |       |        |       |          |       |   |   |   |   |
| Reported  as:                                    |       |        |       |          |       |   |   |   |   |
| Deferred  income tax assets                      |       | $           | 3,289      |          | $          | 2,782 |   | $ |   |   | $ | 23 |   |
| Deferred  income tax liabilities                 |       |        |       |          |       | (11,251) |   | (8,771 | ) |
|                                             |       |        |       |          |       |   |   |   |   |
| Net                                              |       | $           | 3,289      |          | $          | 2,782 |   | $ | (11,251) |   | $ | (8,748 | ) |

 

The long-term deferredincome tax balances are not netted as they represent deferred amountsapplicable to different taxing jurisdictions. Deferred income tax balances reflect the effects of temporary differencesbetween the carrying amounts of assets and liabilities and their tax bases andare stated at enacted tax rates expected to be in effect when taxes areactually paid or recovered.

 

We have not provided U.S. deferred income taxes or foreign withholdingtaxes on the undistributed earnings of our non-U.S. subsidiaries since theseearnings are intended to be reinvested indefinitely in operations outside theUnited States.  It is not practical toestimate the amount of additional taxes that might be payable on suchundistributed earnings.

 

As of December 31, 2009 and 2008, we had non-U.S. net operatingloss carry-forward of approximately $0 and $273,000, respectively, which had noexpiration date.

 

We are subject toincome taxes in the United States and numerous foreign jurisdictions.  Significant judgment is required indetermining our worldwide provision for income taxes and recording the relatedassets and liabilities.  In the ordinarycourse of our business, there are many transactions and calculations where theultimate tax determination is uncertain. We are regularly under audit by tax authorities.  Our federal and state income tax returns for2006 through 2009 are open tax years. Our returns in several foreign tax jurisdictions have open tax yearsfrom 2004 through 2009.

 

On January 1,2007, we adopted a new accounting standard that clarified the accounting foruncertainty in income taxes recognized in the financial statements.  As a result of this adoption, we recognized acumulative-effect adjustment of approximately $610,000, increasing ourliability for unrecognized tax benefits and reducing the January 1, 2007balance of retained earnings.

 

42

----

Table ofContents

 

The total liability for unrecognized tax benefits at December 31,2009 and 2008, including temporary tax differences, was approximately $2.9million and $2.8 million, respectively, of which approximately $2.4 million and$2.3 million, respectively, would favorably impact our effective tax rate ifrecognized.  As of December 31, 2009and 2008, we accrued approximately $251,000 and $242,000, respectively, ininterest and penalties related to unrecognized tax benefits.  We account for interest expense and penaltiesfor unrecognized tax benefits as part of our income tax provision.  We do not anticipate that unrecognized taxbenefits will significantly increase or decrease within 12 months of thereporting date.

 

During the year ended December 31,2009, we added approximately $127,000 to our liability for unrecognized taxbenefits.  Of our total liability forunrecognized tax benefits, approximately $631,000 would favorably impact our2009 effective tax rate if recognized. Included in this amount is approximately $9,000 for the year ended December 31,2009 related to interest expense.  Inaddition, we recorded an unrecognized tax benefit related to the lapse ofapplicable statutes of limitation of approximately $711,000, of whichapproximately $610,000 favorably impacted our effective tax rate.

 

During the yearended December 31, 2008, we reduced our liability for unrecognized taxbenefits by approximately $793,000.  Thisreduction in our unrecognized tax benefits was due primarily to the settlementof our Internal Revenue Service (“IRS”) audit. Included in this amount is a reduction of approximately $160,000 for theyear ended December 31, 2008 related to interest expense.  In addition, we recorded an unrecognized taxbenefit related to the lapse of applicable statutes of limitation ofapproximately $627,000, of which approximately $543,000 favorably impacted oureffective tax rate.  We also addedapproximately $816,000 to our liability for unrecognized tax benefits, of whichwe believe approximately $449,000 would favorably impact our effective taxrate, if recognized.

 

Although webelieve our estimates are reasonable, we can make no assurance that the finaltax outcome of these matters will not be different from that which we havereflected in our historical income tax provisions and accruals.  Such difference could have a material impacton our income tax provision and operating results in the period in which wemake such determination.

 

A reconciliationof the beginning and ending amount of liabilities associated with uncertain taxpositions for the years ended December 31, 2009, 2008 and 2007 consistedof the following:

 
| **Tabular Rollforward**                                     | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** |
|-------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Unrecognized  tax benefits, opening balance                 |       | $        | 2,668      |     | $          | 3,611    |       | $ | 3,212 |   |
| Gross  increases in tax positions taken in a prior year     |       | 163      |       | 257      |       | 131      |       |
| Gross  decreases in tax positions taken in a prior year     |       | (40      | )          | (278     | )          | (4       | )          |
| Gross  increases in tax positions taken in the current year |       | 710      |       | 547      |       | 554      |       |
| Settlements  with taxing authorities                        |       | —   |       | (842     | )          | —   |       |
| Lapse  of applicable statute of limitations                 |       | (711     | )          | (627     | )          | (542     | )          |
| Unrecognized  tax benefits, ending balance                  |       | $        | 2,790      |     | $          | 2,668    |       | $ | 3,351 |   |

 

The tabularrollforward ending balance does not include interest expense (net of tax effect)and penalties related to unrecognized tax benefits.  During the year ended December 31, 2008,we settled two open audits with the IRS related to certain temporarydeductions.  As a result of thesesettlements, we paid an additional $2.2 million on our 2007 federal and stateextension payments.  The reversal ofthese temporary differences and the payment of the additional taxes did nothave a material impact on our financial statements for the year ended December 31,2008, as the income tax liabilities had already been accrued in our financialstatements.  Of the amounts paid, $1.0million was classified as a current liability related to unrecognized taxpositions on the December 31, 2007 consolidated balance sheet.

 

43

----

Tableof Contents

 

**6.****                                     ****ACCRUEDEXPENSES**

 

Accrued expenses at December 31, 2009 and 2008,consisted of the following (in thousands):

 
| ** **             | ** ** | **2009** | ** ** | **2008** | ** ** |
|------------------------|------------|----------|------------|----------|------------|
|                   |       |     |       |     |       |
| Payroll taxes          |       | $        | 823        |     | $          | 640 |   |
| Payroll                |       | 1,557    |       | 2,377    |       |
| Bonuses                |       | 2,072    |       | 482      |       |
| Commissions            |       | 689      |       | 699      |       |
| Vacation               |       | 2,616    |       | 2,438    |       |
| Other accrued expenses |       | 4,439    |       | 3,337    |       |
|                   |       |     |       |     |       |
| Total                  |       | $        | 12,196     |     | $          | 9,973 |   |

 

**7.****                                     ****REVOLVINGCREDIT FACILITY AND LONG-TERM DEBT**

 

On December 7, 2006, we entered into an unsecured loan agreementwith Bank of America, whereby Bank of America agreed to provide us with a lineof credit in the amount of $30.0 million expiring on December 7,2010.  The loan agreement requires us topay interest at a rate equal to the lesser of (i) the maximum lawful rateof interest permitted under applicable usury laws, or (ii) Bank of America’sprime rate, plus a negative margin, as defined in the loan agreement.  Alternatively, we may elect optional interestrates based on the London Inter-Bank Offered Rate (LIBOR) during interestperiods we have agreed to with Bank of America. Our outstanding borrowings on this loan as of December 31, 2009 and2008 were $7.0 million and $0, respectively. Our interest rate as of December 31, 2009 is set at 1.0%.

 

On December 8,2006, we entered into an unsecured loan agreement with Zions, whereby Zionsagreed to provide us with a line of credit in the amount of $1.0 million.  The Zions loan agreement requires us to payinterest at a rate of prime minus 0.35%. The loan expired on December 1, 2009; however, it was extended foran additional three years to December 1, 2012.  There were no outstanding borrowings on thisloan as of December 31, 2009 and 2008.

 

We believe we are in compliance with the covenants in our loanagreements, which require the maintenance of certain financial ratios andminimum working capital and also include, among other things, limitations onour incurrence of additional indebtedness, restrictions on our pledge or saleof assets and a prohibition against our payment of dividends to shareholders.

 

**8.****                                     ****COMMITMENTSAND CONTINGENCIES**

 

We are obligated under non-cancelable operating leases formanufacturing facilities, finished good distribution, office space andequipment.  Total rental expense on theseoperating leases and on our manufacturing and office building for the yearsended December 31, 2009, 2008 and 2007, approximated $2.8 million, $2.6million and $2.6 million, respectively.

 

The future minimum lease payments for operating leasesas of December 31, 2009, consisted of the following (in thousands):

 
| **Years Ending  December 31** | ** ** | **Operating  Leases** | ** ** |
|------------------------------------|------------|-----------------------|------------|
|                               |       |                  |       |
| 2010                               |       | $                     | 2,587      |   |
| 2011                               |       | 2,308                 |       |
| 2012                               |       | 2,102                 |       |
| 2013                               |       | 1,789                 |       |
| 2014                               |       | 1,783                 |       |
| Thereafter                         |       | 10,116                |       |
|                               |       |                  |       |
| Total minimum lease payments       |       | $                     | 20,685     |   |

 

**IrishGovernment Development Agency Grants**.  As of December 31,2009, we had entered into several grant agreements with the Irish GovernmentDevelopment Agency.  We have recorded thegrants related to research and development projects and costs of hiring andtraining employees as a reduction of operating expenses in 2009 and 2008 in theamounts of approximately $177,000 and $158,000, respectively.  Grants related to the acquisition of propertyand 

 

44

----

Table ofContents

 

equipmentpurchased in Ireland are amortized as a reduction to depreciation expense overlives corresponding to the depreciable lives of such property andequipment.  The balance of deferredcredits related to such grants as of December 31, 2009 and 2008, wasapproximately $1,874,000 and $1,994,000, respectively.  During 2009, 2008 and 2007, approximately$121,000, $111,000 and $135,000, respectively, of the deferred credit wasamortized as a reduction of operating expenses.

 

There is a commitment to repay the Irish government for grants receivedif we were to cease production in Ireland prior to the expiration of the grantliability period.  The grant liabilityperiod is usually between 5-8 years from the last claim made on a grant.  As of December 31, 2009, the totalamount of grants that could be subject to refund was approximately $3.1million.  Management does not believe wewill ever have to repay any of these grant monies, as we have no intention ofceasing operation in Ireland.

 

**Litigation**. In the ordinary course of business, we are involved in litigation andclaims which management believes will not have a materially adverse effect onour financial position or results of operations.

 

**9.****                                     ****EARNINGSPER COMMON SHARE (EPS)**

 

The computation of weighted average shares outstandingand the basic and diluted earnings per common share for the following periodsconsisted of the following (in thousands except per share amounts):

 
| ** **                                    | ** ** | **Net  Income** | ** ** | **Shares** | ** ** | **Per Share  Amount** | ** ** |
|-----------------------------------------------|------------|-----------------|------------|------------|------------|-----------------------|------------|
|                                          |       |            |       |       |       |                  |       |
| Year ended December 31, 2009:            |       |            |       |       |       |                  |       |
| Basic EPS                                     |       | $               | 22,530     |       | 28,011     |                  | $          | 0.80 |   |
| Effect of dilutive stock options and warrants |       |            |       | 595        |       |                  |       |
|                                          |       |            |       |       |       |                  |       |
| Diluted EPS                                   |       | $               | 22,530     |       | 28,606     |                  | $          | 0.79 |   |
|                                          |       |            |       |       |       |                  |       |
| Year ended December 31, 2008:            |       |            |       |       |       |                  |       |
| Basic EPS                                     |       | $               | 20,727     |       | 27,769     |                  | $          | 0.75 |   |
| Effect of dilutive stock options and warrants |       |            |       | 781        |       |                  |       |
|                                          |       |            |       |       |       |                  |       |
| Diluted EPS                                   |       | $               | 20,727     |       | 28,550     |                  | $          | 0.73 |   |
|                                          |       |            |       |       |       |                  |       |
| Year ended December 31, 2007:            |       |            |       |       |       |                  |       |
| Basic EPS                                     |       | $               | 15,588     |       | 27,425     |                  | $          | 0.57 |   |
| Effect of dilutive stock options and warrants |       |            |       | 779        |       |                  |       |
|                                          |       |            |       |       |       |                  |       |
| Diluted EPS                                   |       | $               | 15,588     |       | 28,204     |                  | $          | 0.55 |   |

 

For the years ended December 31, 2009, 2008 and 2007,approximately 681,000, 984,000 and 1,422,000, respectively, of stock optionswere not included in the computation of diluted earnings per share because theywould have been anti-dilutive.

 

**Repurchaseof Our Common Stock. **On February 24, 2007, our Board ofDirectors approved the repurchase of 344,084 shares of our Common Stock in aprivate transaction with a non-institutional private investor for $4.1 million,which occurred during the first quarter of 2007.  On April 30, 2007, our Board ofDirectors approved the repurchase of up to 1.4 million shares of CommonStock.  During the second and thirdquarters of 2007, we repurchased a total of 119,900 shares of Common Stock forapproximately $1.3 million.  During thefirst quarter of 2009 we repurchased a total of 250,158 shares of Common Stockfor approximately $2.5 million.

 

45

----

Tableof Contents

 

**10.****                              ****EMPLOYEESTOCK PURCHASE PLAN AND STOCK OPTIONS AND WARRANTS.**

 

Our stock-based compensation primarily consists of thefollowing plans:

 

**StockIncentive Plan**.  During 1999, we adopted the Merit MedicalSystems, Inc. Stock Incentive Plan (formerly the 1999 Omnibus StockIncentive Plan), which provides for the issuance of incentive stock options,non-statutory stock options and certain corresponding stock appreciation rights(the “Stock Incentive Plan”).  Optionsmay be granted to directors, officers, outside consultants and key employeesand may be granted upon such terms and such conditions as the CompensationCommittee of our Board of Directors determines. Options typically vest 20% per year over either a four and one-half orfive-year life with contractual lives of five, seven and ten years.  The Stock Incentive Plan also provides foroptions that vest 100% upon grant with contractual lives of ten years. In noevent, however, may the exercise price be less than the fair market value onthe date of grant.  Under a provision ofour Stock Incentive Plan, participants are allowed to surrender shares of ourCommon Stock for the payment of the option price and minimum statutory taxesassociated with the exercise of options. The shares surrendered must be shares the participant has held for morethan six months.  The value of the sharessurrendered is based on the closing price of our Common Stock on the date ofexercise by the participant.  During2009, approximately 224,000 of the remaining shares expired under this StockIncentive Plan.

 

**2006 Long-Term Incentive Plan**. In May 2006, our Board of Directors adopted and our shareholdersapproved, the Merit Medical Systems, Inc. 2006 Long-Term Incentive Plan(the “2006 Incentive Plan”).  The 2006Incentive Plan provides for the granting of stock options, stock appreciationrights, restricted stock, stock units (including restricted stock units) andperformance awards.  Options may begranted to directors, officers, outside consultants and key employees and maybe granted upon such terms and such conditions as the Compensation Committee ofour Board of Directors determines. Options will typically vest on an annual basis over a three to five yearlife (or one year if performance based) with contractual lives of seven to tenyears.  As of December 31, 2009, atotal of approximately 1.9 million shares remained available to be issued underthe 2006 Incentive Plan.

 

**Employee Stock Purchase Plan**. We have a qualified and a non-qualified Employee Stock Purchase Plan (“ESPP”),which will expire on June 30, 2016. As of December 31, 2009, the total number of shares that remainedavailable to be issued under our qualified plan was approximately 257,000shares and 80,000 shares for our non-qualified plan. ESPP participants purchaseshares on a quarterly basis at a price equal to 95% of the market price of theCommon Stock at the end of the applicable offering period.

 

**Stock-Based Compensation Expense**. The stock-based compensation expense before income tax expense for theyears ended December 31, 2009, 2008 and 2007 consisted of the following(in thousands):

 
| ** **                                     | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** |
|------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                           |       |     |       |     |       |     |       |
| Cost  of goods sold                            |       | $        | 205        |     | $          | 101      |       | $ | 261 |   |
| Research  and development                      |       | 57       |       | 37       |       | 81       |       |
| Selling,  general, and administrative          |       | 920      |       | 824      |       | 788      |       |
| Stock-based  compensation expense before taxes |       | $        | 1,182      |     | $          | 962      |       | $ | 1,130 |   |

 

We recognize stock-based compensation expense (net of a forfeiturerate) for those awards which are expected to vest on a straight-line basis overthe requisite service period.  Weestimate the forfeiture rate based on our historical experience andexpectations about future forfeitures. As of December 31, 2009, the total remaining unrecognizedcompensation cost related to non-vested stock options, net of forfeitures, wasapproximately $3.9 million and is expected to be recognized over a weightedaverage period of 3.4 years.

 

In applying the Black-Scholes methodology to theoption grants, the fair value of our stock-based awards granted were estimatedusing an expected annual dividend yield of 0% and the following assumptions forthe periods indicated below:

 
| ** **                 | ** ** | **2009**  | ** ** | **2008**      | ** ** | **2007**    | ** ** |
|----------------------------|------------|-----------|------------|---------------|------------|-------------|------------|
|                       |       |      |       |          |       |        |       |
| Risk-free  interest rate   |       | 2.70%     |       | 3.24%-3.55%   |       | 3.64%-5.00% |       |
| Expected  option life      |       | 6.0 years |       | 4.2-6.0 years |       | 6.0 years   |       |
| Expected  price volatility |       | 42.4%     |       | 38.0%-41.7%   |       | 44.3%-47.8% |       |

 

46

----

Table ofContents

 

The average risk-free interest rate is determined using the U.S.Treasury rate in effect as of the date of grant, based on the expected term ofthe stock option.  We determine theexpected term of the stock options using the historical exercise behavior ofemployees.  The expected price volatilitywas determined using a weighted average of daily historical volatility of ourstock price over the corresponding expected option life and implied volatilitybased on recent trends of the daily historical volatility.  For options with a vesting period,compensation expense is recognized on a straight-line basis over the serviceperiod, which corresponds to the vesting period.  Compensation expense is recognized immediatelyfor options that are fully vested on the date of grant.  During the years ended December 31,2009, 2008 and 2007, 140,000, 499,000 and 425,500 stock-based compensationgrants were made for a total fair value of approximately $1.0 million, $2.5million and $2.5 million, net of estimatedforfeitures, respectively.

 

The table below presents information related to stockoption activity for the years ended December 31, 2009, 2008 and 2007 (inthousands):

 
| ** **                                                  | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** |
|-------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                                        |       |     |       |     |       |     |       |
| Total  intrinsic value of stock options exercised           |       | $        | 2,757      |     | $          | 6,150    |       | $ | 1,471 |   |
| Cash  received from stock option exercises                  |       | 1,690    |       | 5,405    |       | 1,537    |       |
| Net  income tax benefit from the exercises of stock options |       | 987      |       | 2,044    |       | 500      |       |
|                                                             |            |          |            |          |            |          |            |  |  |  |

 

47

----

Tableof Contents

 

Changes in stock options for the years ended December 31,2009, 2008 and 2007 consisted of the following (shares and intrinsic value inthousands):

 
| ** **                                                 | ** ** | **Number  of Shares** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Remaining  Contractual  Term  (in years)** | ** ** | **Intrinsic  Value** | ** ** |
|------------------------------------------------------------|------------|-----------------------|------------|----------------------------------------|------------|----------------------------------------------|------------|----------------------|------------|
|                                                       |       |                  |       |                                   |       |                                         |       |                 |       |
| 2007:                                                      |       |                  |       |                                   |       |                                         |       |                 |       |
| Beginning  balance                                         |       | 3,797                 |       |                                   |       |                                         |       |                 |       |
| Granted                                                    |       | 426                   |       | $                                      | 12.14      |                                         |       |                 |       |   |
| Exercised                                                  |       | 203                   |       | 6.40                                   |       |                                         |       |                 |       |
| Forfeited/expired                                          |       | 69                    |       | 14.27                                  |       |                                         |       |                 |       |
| Outstanding  at December 31                           |       | 3,951                 |       | 11.34                                  |       | 5.7                                          |       | $                    | 13,754     |   |
| Exercisable                                                |       | 3,353                 |       | 11.28                                  |       | 5.7                                          |       | 12,405               |       |
| Ending  vested and expected to vest                        |       | 3,908                 |       | 11.33                                  |       | 5.6                                          |       | 13,669               |       |
|                                                       |       |                  |       |                                   |       |                                         |       |                 |       |
| Weighted  average fair value of optionsgranted during year |       |                  |       | $                                      | 6.34       |                                         |       |                 |       |   |
|                                                       |       |                  |       |                                   |       |                                         |       |                 |       |
| 2008:                                                      |       |                  |       |                                   |       |                                         |       |                 |       |
| Beginning  balance                                         |       | 3,951                 |       |                                   |       |                                         |       |                 |       |
| Granted                                                    |       | 499                   |       | $                                      | 14.41      |                                         |       |                 |       |   |
| Exercised                                                  |       | 612                   |       | 8.85                                   |       |                                         |       |                 |       |
| Forfeited/expired                                          |       | 5                     |       | 18.84                                  |       |                                         |       |                 |       |
| Outstanding  at December 31                           |       | 3,833                 |       | 12.12                                  |       | 5.0                                          |       | $                    | 23,579     |   |
| Exercisable                                                |       | 2,964                 |       | 11.74                                  |       | 4.7                                          |       | 19,665               |       |
| Ending  vested and expected to vest                        |       | 3,785                 |       | 12.11                                  |       | 5.0                                          |       | 23,367               |       |
|                                                       |       |                  |       |                                   |       |                                         |       |                 |       |
| Weighted  average fair value of optionsgranted during year |       |                  |       | $                                      | 5.32       |                                         |       |                 |       |   |
|                                                       |       |                  |       |                                   |       |                                         |       |                 |       |
| 2009:                                                      |       |                  |       |                                   |       |                                         |       |                 |       |
| Beginning  balance                                         |       | 3,833                 |       |                                   |       |                                         |       |                 |       |
| Granted                                                    |       | 140                   |       | $                                      | 17.28      |                                         |       |                 |       |   |
| Exercised                                                  |       | 308                   |       | 6.60                                   |       |                                         |       |                 |       |
| Forfeited/expired                                          |       | 34                    |       | 15.39                                  |       |                                         |       |                 |       |
| Outstanding  at December 31                           |       | 3,631                 |       | 12.76                                  |       | 4.2                                          |       | $                    | 24,363     |   |
| Exercisable                                                |       | 2,854                 |       | 12.37                                  |       | 3.9                                          |       | 20,459               |       |
| Ending  vested and expected to vest                        |       | 3,610                 |       | 12.75                                  |       | 4.2                                          |       | 24,261               |       |
|                                                       |       |                  |       |                                   |       |                                         |       |                 |       |
| Weighted  average fair value of optionsgranted during year |       |                  |       | $                                      | 6.86       |                                         |       |                 |       |   |

 

48

----

Tableof Contents

 

On November 17, 2004, we acquired all of theassets and assumed certain liabilities of MedSource Packaging Concepts LLC (“MedSource”).  In connection with this acquisition we issued100,000 warrants to MedSource at a fair value of approximately $323,170.  Changes in these warrants for the years endedDecember 31, 2009, 2008 and 2007, consisted of the following (inthousands):

 
| ** **                       | ** ** | **Number  of  Shares** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Remaining  Contractual  Term  (in Years)** | ** ** | **Intrinsic  Value** | ** ** |
|----------------------------------|------------|------------------------|------------|----------------------------------------|------------|----------------------------------------------|------------|----------------------|------------|
|                             |       |                   |       |                                   |       |                                         |       |                 |       |
| 2007:                            |       |                   |       |                                   |       |                                         |       |                 |       |
| Beginning  balance               |       | 100                    |       |                                   |       |                                         |       |                 |       |   |
| Outstanding  at December 31 |       | 100                    |       |                                   | $          | 10.13                                        |       | 1.9                  |       | $ | 377 |   |
| Exercisable                      |       | 100                    |       |                                   | 10.13      |                                         | 1.9        |                 | 377        |   |
|                             |       |                   |       |                                   |       |                                         |       |                 |       |   |
| 2008:                            |       |                   |       |                                   |       |                                         |       |                 |       |   |
| Beginning  balance               |       | 100                    |       |                                   |       |                                         |       |                 |       |   |
| Exercised                        |       | 49                     |       |                                   | $          | 10.13                                        |       |                 |       |   |   |
| Outstanding  at December 31 |       | 51                     |       |                                   | 10.13      |                                         | 0.9        |                 | $          | 369 |   |
| Exercisable                      |       | 51                     |       |                                   | 10.13      |                                         | 0.9        |                 | 369        |   |
|                             |       |                   |       |                                   |       |                                         |       |                 |       |   |
| 2009:                            |       |                   |       |                                   |       |                                         |       |                 |       |   |
| Beginning  balance               |       | 51                     |       |                                   | $          | 10.13                                        |       |                 |       |   |   |
| Exercised                        |       | 51                     |       |                                   | 10.13      |                                         |       |                 |       |   |
| Outstanding  at December 31 |       | 0                      |       |                                   | 0.00       |                                         | 0.0        |                 | $          | 0 |   |
| Exercisable                      |       | 0                      |       |                                   | 0.00       |                                         | 0.0        |                 | 0          |   |

 

The following table summarizes information about stock optionsoutstanding at December 31, 2009 (shares in thousands):

 
| ** **                     | ** ** | **Options Outstanding** | ** ** | **Options Exercisable**                                         | ** ** |
|--------------------------------|------------|-------------------------|------------|-----------------------------------------------------------------|------------|
| **Range of  Exercise  Prices** | ** ** | **Number  Outstanding** | ** ** | **Weighted  Average  Remaining  Contractual  Life  (in years)** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Number  Exercisable** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
|                           |       |                    |       |                                                            |       |   |   |   |   |   |   |
| $2.07–$9.74               |       | 940                     |       | 2.2                                                             |       | $ | 7.35 |   | 940 |   |   | $ | 7.35 |   |
| $10.47–$12.14             |       | 991                     |       | 4.7                                                             |       | 11.75 |   | 751 |   |   | 11.63 |   |
| $13.22–$15.03             |       | 1,127                   |       | 5.1                                                             |       | 14.49 |   | 731 |   |   | 14.54 |   |
| $15.12–$21.67             |       | 573                     |       | 4.9                                                             |       | 20.01 |   | 432 |   |   | 20.90 |   |
|                           |       |                    |       |                                                            |       |   |   |   |   |   |   |   |
| $2.07–$21.67              |       | 3,631                   |       |                                                            |       |   |   | 2,854 |   |   |   |   |
|                                |            |                         |            |                                                                 |            |  |  |  |  |  |  |  |  |  |

 

49

----

Table of Contents

 

**11.****                              ****SEGMENT REPORTING AND FOREIGNOPERATIONS**

 

We operate primarily as onesegment, sales of disposable medical devices used for cardiology and radiologyprocedures (two other segments do not meet the quantitative thresholds forreporting separate information). We report sales in five product categories.  Sales relating to these product categoriesfor the years ended December 31, 2009, 2008 and 2007 consisted of thefollowing (in thousands):

 
| ** **                              | ** ** | **Year Ended**        | ** ** |
|-----------------------------------------|------------|-----------------------|------------|
| ** **                              | ** ** | **December 31,** | ** ** |
| ** **                              | ** ** | **% Change**          | ** ** | **2009** | ** ** | **% Change** | ** ** | **2008** | ** ** | **% Change** | ** ** | **2007** | ** ** |
| Stand-alone  devices                    |       | 12                    | %          |   | $ | 76,075 |   | 9 | % |   | $ | 68,005 |   | 12 | % |   | $ | 62,417 |   |
| Custom  kits & procedure trays |       | 12                    | %          |   | 74,541 |   | 11 | % |   | 66,584 |   | 7 | % |   | 60,013 |   |
| Inflation  devices                      |       | (1                    | )%         |   | 61,058 |   | 3 | % |   | 61,656 |   | 5 | % |   | 59,595 |   |
| Catheters                               |       | 23                    | %          |   | 38,126 |   | 20 | % |   | 30,898 |   | 18 | % |   | 25,743 |   |
| Gastroenterology  devices               |       |                  |       |   | 7,662 |   |   |   |   |   |   |   |   |   |   |   |
| Total                                   |       | 13                    | %          |   | $ | 257,462 |   | 9 | % |   | $ | 227,143 |   | 9 | % |   | $ | 207,768 |   |

 

During the years ended December 31, 2009, 2008 and 2007, we hadforeign sales of approximately $86.4 million, $72.5 million and $64.9 millionor approximately 34%, 32% and 31%, respectively, of total sales, primarily in China,Japan, Germany, France and the United Kingdom. Foreign sales are attributed based on location of the customer receivingthe product.

 

Our long-lived assets by geographic area consisted ofthe following (in thousands):

 
| ** **               | ** ** | **2009** | ** ** | **2008** | ** ** |
|--------------------------|------------|----------|------------|----------|------------|
|                     |       |     |       |     |       |
| United  States           |       | $        | 89,428     |     | $          | 78,920 |   |
| Ireland                  |       | 17,148   |       | 16,584   |       |
| Other  foreign countries |       | 8,070    |       | 8,435    |       |
|                     |       |     |       |     |       |
| Total                    |       | $        | 114,646    |     | $          | 103,939 |   |

 

50

----

Table ofContents

 

**12.**                               ROYALTY AGREEMENTS

 

Pursuant to a 1992 settlement agreement, we entered into a licenseagreement with another medical product manufacturer (the “Licensor”), wherebythe Licensor granted to us a nonexclusive right and license to manufacture andsell products which are subject to the patents issued to the Licensor.  The license agreement terminated in August 2008upon the expiration of the last related patent. For the rights and license granted under the agreement, we paid theLicensor a nonrefundable prepaid royalty in the amount of $600,000.  In addition to the prepaid royalty, we agreedto pay the Licensor a continuing royalty of 5.75% of sales (which will notexceed $450,000 for any calendar year) made in the United States, of productscovered by the license agreement. Royalties of $450,000 were paid or accrued in each of the years ended December 31,2008 and 2007.

 

During 2006, in connection with the purchase of the Futura® safetyscalpel product line from Hypoguard USA, Inc. we acquired certain rightsunder a license agreement with Innovative Surgical Technology, Inc. (“IST”)whereby IST granted to us an exclusive worldwide license to manufacture andsell products which are subject to the patents issued to IST.  For the rights and license granted under theagreement, we agreed to pay the IST a royalty of 4% of net sales, with annualminimum royalty payments of $144,000 for calendar years 2007 through 2014 and$108,000 for 2015.  During the yearsended December 31, 2008 and 2007, we paid or accrued a royalty of $108,000and $144,000, respectively, under this license agreement.  During January 2009, we negotiated topurchase from IST the patents related to this product for $432,000.  The patent will amortize over the remaininglife of the patents, which is approximately five and one-half years.  In connection with the purchase of thepatents, IST forgave royalties payable for the three months ended December 31,2008 in the amount of $36,000.

 

During 2007, inconnection with the purchase of the ProGuideTM chronic dialysis catheter fromDatacope, we entered into a running royalty agreement as partial considerationof the assignment of acquired intellectual property to us.  Under this agreement, we agreed to payDatascope a royalty of 5% of net sales, with annual minimum royalty payments of$50,000 for calendar years 2008 through 2013. During each of the years ended December 31, 2009, 2008 and 2007, wepaid or accrued a royalty of $50,000 under this agreement.

 

**13.****                              ****EMPLOYEE BENEFIT PLANS**

 

We have a contributory 401(k) savings and profit sharing plan (the“Plan”) covering all U.S. full-time employees who are at least 18 years ofage.  The Plan has a 90-day minimumservice requirement.  We may contribute,at our discretion, matching contributions based on the employees’compensation.  Contributions we made to thePlan for the years ended December 31, 2009, 2008 and 2007, totaledapproximately $833,000, $0 and $510,000, respectively. We have definedcontribution plans covering some of our foreign employees.  We contribute between three and 36% of theemployee’s compensation for certain foreign non-management employees, betweenten and 36% of the employee’s compensation for certain foreign managementemployees and 48% of compensation for a foreign executive employee.  Contributions made to these plans for theyears ended December 31, 2009, 2008 and 2007, totaled approximately$550,000, $541,000 and $635,000, respectively.

 

51

----

Table ofContents

 

**14.**                               QUARTERLY RESULTS OFOPERATIONS (UNAUDITED)

 

Quarterly data for the years ended December 31,2009, 2008 and 2007, consisted of the following (in thousands except per shareamounts):

 
| ** **                         | ** ** | **Quarter Ended** | ** ** |
|------------------------------------|------------|-------------------|------------|
| ** **                         | ** ** | **March 31** | ** ** | **June 30** | ** ** | **September 30** | ** ** | **December 31** | ** ** |
|                               |       |              |       |   |   |   |   |   |   |
| **2009**                           |       |              |       |   |   |   |   |   |   |
|                               |       |              |       |   |   |   |   |   |   |
| Net  sales                         |       | $                 | 58,371     |   | $ | 64,837 |   | $ | 66,759 |   | $ | 67,495 |   |
| Gross  profit                      |       | 24,808            |       | 28,143 |   | 28,535 |   | 27,316 |   |
| Income  from operations            |       | 7,900             |       | 8,963 |   | 8,463 |   | 7,521 |   |
| Income  tax expense                |       | 2,537             |       | 3,144 |   | 2,349 |   | 2,534 |   |
| Net  income                        |       | 5,537             |       | 5,841 |   | 6,085 |   | 5,067 |   |
| Basic  earnings per common share   |       | 0.20              |       | 0.21 |   | 0.22 |   | 0.18 |   |
| Diluted  earnings per common share |       | 0.19              |       | 0.21 |   | 0.21 |   | 0.18 |   |
|                               |       |              |       |   |   |   |   |   |   |
| **2008**                           |       |              |       |   |   |   |   |   |   |
|                               |       |              |       |   |   |   |   |   |   |
| Net  sales                         |       | $                 | 53,553     |   | $ | 57,441 |   | $ | 58,153 |   | $ | 57,996 |   |
| Gross  profit                      |       | 21,592            |       | 24,502 |   | 23,684 |   | 23,493 |   |
| Income  from operations            |       | 6,604             |       | 9,009 |   | 7,169 |   | 8,202 |   |
| Income  tax expense                |       | 2,432             |       | 3,337 |   | 2,198 |   | 3,151 |   |
| Net  income                        |       | 4,317             |       | 5,818 |   | 5,200 |   | 5,392 |   |
| Basic  earnings per common share   |       | 0.16              |       | 0.21 |   | 0.19 |   | 0.19 |   |
| Diluted  earnings per common share |       | 0.15              |       | 0.21 |   | 0.18 |   | 0.19 |   |
|                               |       |              |       |   |   |   |   |   |   |
| **2007**                           |       |              |       |   |   |   |   |   |   |
|                               |       |              |       |   |   |   |   |   |   |
| Net  sales                         |       | $                 | 51,030     |   | $ | 51,811 |   | $ | 50,584 |   | $ | 54,343 |   |
| Gross  profit                      |       | 18,858            |       | 19,536 |   | 19,783 |   | 21,614 |   |
| Income  from operations            |       | 4,479             |       | 5,471 |   | 6,086 |   | 6,934 |   |
| Income  tax expense                |       | 1,598             |       | 1,937 |   | 1,891 |   | 2,385 |   |
| Net  income                        |       | 2,969             |       | 3,596 |   | 4,295 |   | 4,728 |   |
| Basic  earnings per common share   |       | 0.11              |       | 0.13 |   | 0.16 |   | 0.17 |   |
| Diluted  earnings per common share |       | 0.10              |       | 0.13 |   | 0.15 |   | 0.17 |   |

 

**15.****                              ****FAIRVALUE MEASUREMENTS**

 

Our financial assets andliabilities carried at fair value measured on a recurring basis as of December 31,2009 and 2008 consisted of the following (in thousands):

 
| ** **                             | ** ** | ** **                 | ** ** | **Fair Value Measurements Using** | ** ** |
|----------------------------------------|------------|----------------------------|------------|-----------------------------------|------------|
| ** **                             | ** ** | **Total Fair**             | ** ** | **Quoted prices in**              | ** ** | **Significant other** | ** ** | **Significant** | ** ** |
| ** **                             | ** ** | **Value at**               | ** ** | **active markets**                | ** ** | **observable inputs** | ** ** | **Unobservable inputs** | ** ** |
| **Description**                        | ** ** | **December 31, 2009** | ** ** | **(Level 1)**                     | ** ** | **(Level 2)** | ** ** | **(Level 3)** | ** ** |
|                                   |       |                       |       |                              |       |   |   |   |   |
| Deferred  compensation investments (2) |       | $                          | 3,343      |                              | $          | — |   | $ | 3,343 |   | $ | — |   |
|                                        |            |                            |            |                                   |            |  |  |  |  |  |  |  |  |

 
| ** **                             | ** ** | ** **                 | ** ** | **Fair Value Measurements Using** | ** ** |
|----------------------------------------|------------|----------------------------|------------|-----------------------------------|------------|
| ** **                             | ** ** | **Total Fair**             | ** ** | **Quoted prices in**              | ** ** | **Significant other** | ** ** | **Significant** | ** ** |
| ** **                             | ** ** | **Value at**               | ** ** | **active markets**                | ** ** | **observable inputs** | ** ** | **Unobservable inputs** | ** ** |
| **Description**                        | ** ** | **December 31, 2008** | ** ** | **(Level 1)**                     | ** ** | **(Level 2)** | ** ** | **(Level 3)** | ** ** |
|                                   |       |                       |       |                              |       |   |   |   |   |
| Commercial  paper (1)                  |       | $                          | 19,995     |                              | $          | — |   | $ | 19,995 |   | $ | — |   |
| Deferred  compensation investments (2) |       | 2,325                      |       | 274                               |       | 2,051 |   |   |   |
|                                        |            |                            |            |                                   |            |  |  |  |  |  |  |  |  |

 

----

(1)          The fair value of the commercial paper is based on afixed-income approach over a straight-line basis.  In the event a transaction is observed on thesame security in the market place, the price is adjusted to reflect the quotedmarket price.

 

52

----

Table of Contents

 

(2)          The deferred compensation investments are held in aRabbi 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 years ended December 31, 2009, 2008and 2007, we had write-offs of approximately $154,000, $164,000, $245,000,respectively, related to the measurement of non-financial assets at fair valueon a nonrecurring basis subsequent to their initial recognition.

 

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

 

**SUPPLEMENTARY FINANCIAL DATA**

** **

The supplementary financial information required by Item 302 ofRegulation S-K is contained in Note 14 to our consolidated financial statementsset forth above.

 

**Item 9.**                                                    Changesin and Disagreements with Accountants on Accounting and Financial Disclosure.

** **

None.

 

**Item 9A.**                                           Controlsand Procedures.

** **

**DISCLOSURECONTROLS AND PROCEDURES**

** **

**Under the supervision and with the participation ofour management, including our principal executive officer and principalfinancial officer, we conducted an evaluation of our disclosure controls andprocedures, as such term is defined under Rule 13a-15(e) promulgated underthe Securities Exchange Act of 1934 as of December 31, 2009.  Based on this evaluation, our principalexecutive officer and principal financial officer concluded that our disclosurecontrols and procedures are effective in ensuring that information we arerequired to disclose in the reports we file or submit under the Exchange Act isrecorded, processed, summarized and reported, within the time periods specifiedin the SEC’s rules and forms.**

** **

**INTERNALCONTROL OVER FINANCIAL REPORTING**

** **

Our management is responsible for establishing andmaintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and15d-15(f) under the Securities Exchange Act of 1934, as amended.  Our internal control over financial reportingis a process designed to provide reasonable assurance regarding the reliabilityof financial reporting and the preparation of financial statements for externalpurposes in accordance with accounting principles generally accepted in theUnited States of America. Internal control over financial reporting includesthose written policies and procedures that:

 

·                  Pertain to the maintenance of records that, inreasonable detail, accurately and fairly reflect the transactions anddispositions of the assets of Merit

 

·                  Provide reasonable assurance that transactions arerecorded as necessary to permit preparation of financial statements inaccordance with generally accepted accounting principles in the United Statesof America

 

·                  Provide reasonable assurance that our receipts andexpenditures are being made only in accordance with authorization of ourmanagement and directors

 

·                  Provide reasonable assurance regarding prevention ortimely detection of the unauthorized acquisition, use or disposition of assetsthat could have a material effect on the consolidated financial statements

 

Internal control over financial reporting includes the controlsthemselves, monitoring and internal auditing practices and actions taken tocorrect deficiencies as identified. Because of its inherent limitations, internal control over financialreporting may not prevent or detect misstatements.  Also, projections of any evaluation ofeffectiveness to future periods are subject to the risk that controls maybecome inadequate because of changes in conditions, or that the degree ofcompliance with the policies or procedures may deteriorate.

 

Our management assessed the effectiveness of our internal control overfinancial reporting as of December 31, 2009.  In making this assessment, our managementused the criteria set forth by the Committee of Sponsoring Organizations of theTreadway Commission (COSO) in *InternalControl-Integrated Framework*. Based on those criteria 

 

53

----

Table ofContents

 

and management’sassessment, we believe that, as of December 31, 2009, our internal controlover financial reporting is effective.

 

**CHANGESIN INTERNAL CONTROL OVER FINANCIAL REPORTING**

** **

During the fiscal quarterended December 31, 2009, there has been no change in internal control overfinancial reporting that has materially affected, or is reasonably likely tomaterially affect our internal control over financial reporting.

 

Our independent registered public accountants have also issued an auditreport on our internal control over financial reporting.  This report appears below.

 

54

----

Table ofContents

 

**REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

** **

To theBoard of Directors and Shareholders of Merit Medical Systems, Inc.

 

We have audited the internal control over financial reporting of MeritMedical Systems, Inc. and subsidiaries (the “Company”) as of December 31,2009, based on criteria established in *Internal Control —Integrated Framework*issuedby the Committee of Sponsoring Organizations of the Treadway Commission.  The Company’s management is responsible formaintaining effective internal control over financial reporting and for itsassessment of the effectiveness of internal control over financial reporting,included in the accompanying Management’s Report on Internal Control overFinancial Reporting.  Our responsibilityis to express an opinion on the Company’s internal control over financialreporting based on our audit.

 

We conducted our audit in accordance with the standards of the PublicCompany Accounting Oversight Board (United States).  Those standards require that we plan andperform the audit to obtain reasonable assurance about whether effectiveinternal control over financial reporting was maintained in all materialrespects.  Our audit included obtainingan understanding of internal control over financial reporting, assessing therisk that a material weakness exists, testing and evaluating the design andoperating effectiveness of internal control based on the assessed risk andperforming such other procedures as we considered necessary in thecircumstances.  We believe that our auditprovides a reasonable basis for our opinion.

 

A company’s internal control over financial reporting is a processdesigned by, or under the supervision of, the company’s principal executive andprincipal financial officers, or persons performing similar functions and effectedby the company’s board of directors, management and other personnel to providereasonable assurance regarding the reliability of financial reporting and thepreparation of financial statements for external purposes in accordance withgenerally accepted accounting principles. A company’s internal control over financial reporting includes thosepolicies and procedures that (1) pertain to the maintenance of recordsthat, in reasonable detail, accurately and fairly reflect the transactions anddispositions of the assets of the company; (2) provide reasonableassurance that transactions are recorded as necessary to permit preparation offinancial statements in accordance with generally accepted accountingprinciples and that receipts and expenditures of the company are being madeonly in accordance with authorizations of management and directors of thecompany; and (3) provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

 

Because of the inherent limitations of internal control over financialreporting, including the possibility of collusion or improper managementoverride of controls, material misstatements due to error or fraud may not beprevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internalcontrol over financial reporting to future periods are subject to the risk thatthe controls may become inadequate because of changes in conditions, or thatthe degree of compliance with the policies or procedures may deteriorate.

 

In our opinion, the Company maintained, in all material respects,effective internal control over financial reporting as of December 31,2009, based on the criteria established in *Internal Control —Integrated Framework*issuedby the Committee of Sponsoring Organizations of the Treadway Commission.

 

We have also audited, in accordance with the standards of the PublicCompany Accounting Oversight Board (United States), the consolidated financialstatements and financial statement schedule as of and for the year ended December 31,2009, of the Company and our report dated March 10, 2010 expressed anunqualified opinion on those financial statements and financial statementschedule and included an explanatory paragraph regarding the adoption of newaccounting guidance.

 

/s/ DELOITTE &TOUCHE LLP

 

Salt Lake City,UtahMarch 10, 2010

 

55

----

Table of Contents

 

**Item 9B.****                                                 ****OtherInformation.**

 

None.

 

**PART III**

** **

**Items 10, 11, 12, 13 and 14.**

** **

These items areincorporated by reference to our definitive proxy statement relating to ourAnnual Meeting of Shareholders scheduled for May 26, 2010.  We anticipate that our definitive proxystatement will be filed with the SEC not later than 120 days after December 31,2009, pursuant to Regulation 14A of the Securities Exchange Act of 1934, asamended.

 

**PART IV**

** **

**Item15.****                                                   ****Exhibits and FinancialStatement Schedules.**

 

(a)                                       Documents filed as part of this Report:

 

(1)  FinancialStatements.  The followingconsolidated financial statements and the notes thereto, and the Reports ofIndependent Registered Public Accounting Firm are incorporated by reference asprovided in Item 8 and Item 9A of this report:

 
| Report of Independent  Registered Public Accounting Firm — Internal Control                                 |
|------------------------------------------------------------------------------------------------------------------|
|                                                                                                             |
| Report of Independent  Registered Public Accounting Firm — Financial Statements                             |
|                                                                                                             |
| Consolidated Balance  Sheets as of December 31, 2009 and 2008                                               |
|                                                                                                             |
| Consolidated Statements  of Income for the Years Ended December 31, 2009, 2008 and 2007                     |
|                                                                                                             |
| Consolidated Statements  of Stockholders’ Equity for the Years Ended December 31, 2009, 2008 and  2007 |
|                                                                                                             |
| Consolidated Statements  of Cash Flows for the Years Ended December 31, 2009, 2008 and 2007                 |
|                                                                                                             |
| Notes to Consolidated  Financial Statements                                                                      |

 

56

----

Table of Contents

 

(2)  FinancialStatement Schedule.

 

·                                          Schedule II - Valuation and qualifyingaccounts

 
| **YEARS  ENDED DECEMBER 31, 2009, 2008 AND 2007** |
|---------------------------------------------------|
| **(In  Thousands)**                               |
| ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                        | ** ** | ** ** | ** ** | **Additions** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                        | ** ** | **Balance at** | ** ** | **Charged to** | ** ** | ** ** | ** ** | **Balance at** | ** ** |
| ** **                                        | ** ** | **Beginning** | ** ** | **Costs** | ** ** | ** ** | ** ** | **End of** | ** ** |
| **Description**                                   | ** ** | **of Year** | ** ** | **Expenses (a)** | ** ** | **Deduction (b)** | ** ** | **Year** | ** ** |
|                                              |   |   |   |   |   |   |   |   |   |
| **ALLOWANCE FOR UNCOLLECTIBLE ACCOUNTS:**         |   |   |   |   |   |   |   |   |   |
|                                              |   |   |   |   |   |   |   |   |   |
| **2007**                                          |   | $ | (560 | ) | $ | (19 | ) | $ | 82 |   | $ | (497 | ) |
| **2008**                                          |   | (497 | ) | (139 | ) | 131 |   |   | (505 | ) |
| **2009**                                          |   | (505 | ) | (214 | ) | 178 |   |   | (541 | ) |
|                                                   |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

----

| (a) | We record a bad debt  provision based upon historical experience and a review of individual  customer balances.                                          |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------|
| (b) | When an individual  customer balance becomes impaired and is deemed uncollectible a deduction is  made against the allowance for uncollectible accounts. |

 
| ** **                              | ** ** | ** **     | ** ** | **Additions**    | ** ** | ** **         | ** ** | ** **     | ** ** |
|-----------------------------------------|------------|----------------|------------|------------------|------------|--------------------|------------|----------------|------------|
| ** **                              | ** ** | **Balance at** | ** ** | **Charged to**   | ** ** | ** **         | ** ** | **Balance at** | ** ** |
| ** **                              | ** ** | **Beginning**  | ** ** | **Costs**        | ** ** | ** **         | ** ** | **End of**     | ** ** |
| **Description**                         | ** ** | **of Year**    | ** ** | **Expenses (c)** | ** ** | **Deductions (d)** | ** ** | **Year**       | ** ** |
|                                    |       |           |       |             |       |               |       |           |       |
| **RESERVE FOR INVENTORY OBSOLESCENCE:** |       |           |       |             |       |               |       |           |       |
| ** **                              |       |           |       |             |       |               |       |           |       |
| **2007**                                |       | $              | (2,105     | )                | $          | (1,416             | )          | $              | 1,186      |   | $ | (2,335 | ) |
| **2008**                                |       | (2,335         | )          | (1,096           | )          | 1,170              |       |           | (2,261     | ) |
| **2009**                                |       | (2,261         | )          | (1,469           | )          | 1,297              |       |           | (2,433     | ) |
|                                         |            |                |            |                  |            |                    |            |                |            |  |  |  |  |

 

----

| (c) | We write down our  inventory for estimated obsolescence for unmarketable and/or slow moving  products that may expire prior to being sold.    |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------|
| (d) | When a previously reserved for inventory item is either disposed of  or sold we record a deduction to its reserve for obsolescence inventory. |

 

All otherschedules have been omitted because they are not required, not applicable, orthe information is otherwise set forth in the financial statements or notesthereto.

 

(b)                                      None

 

57

----

Table of Contents

 

(b)                                  Exhibits:

 

The followingexhibits required by Item 601 of Regulation S—K are filed herewith or have beenfiled previously with the SEC as indicated below:

 
| ** ** | ** ** | **Description**                                                                                                                  | ** ** | **Exhibit No.**                                                                     |
|------------|------------|----------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------|
|       |       |                                                                                                                             |       |                                                                                     |
| 3.1        |       | Articles of Incorporation as amended and restated*                                                                               |       | [Form 10-Q filed August 14, 1996,  Exhibit No. 1]                    |
|       |       |                                                                                                                             |       |                                                                                     |
| 3.2        |       | Bylaws*                                                                                                                          |       | [Form S—18 filed October 19, 1989,  Exhibit No. 2]              |
|       |       |                                                                                                                             |       |                                                                                     |
| 3.3        |       | Amended and Restated Bylaws                                                                                                      |       | [Form 10-Q filed November 8, 2007,  Exhibit No. 3.3]                 |
|       |       |                                                                                                                             |       |                                                                                     |
| 4          |       | Specimen Certificate of the Common Stock*                                                                                        |       | [Form S—18 filed October 19, 1989,  Exhibit No. 10]             |
|       |       |                                                                                                                             |       |                                                                                     |
| 4.3        |       | Articles of Amendment of the Articles of  Incorporation dated May 14, 1993*                                                 |       | [Form S-3 filed February 14, 2005,  Exhibit 4.3]                          |
|       |       |                                                                                                                             |       |                                                                                     |
| 4.4        |       | Articles of Amendment to Articles of Incorporation  dated June 6, 1996*                                                     |       | [Form S-3 filed February 14, 2005,  Exhibit 4.4]                          |
|       |       |                                                                                                                             |       |                                                                                     |
| 4.5        |       | Articles of Amendment to Articles of Incorporation  dated June 12, 1997*                                                    |       | [Form S-3 filed February 14, 2005,  Exhibit 4.5]                          |
|       |       |                                                                                                                             |       |                                                                                     |
| 4.7        |       | Articles of Amendment to the Articles of Incorporation  dated May 22, 2003*                                                 |       | [Form S-3 filed February 14, 2005,  Exhibit 4.7]                          |
|       |       |                                                                                                                             |       |                                                                                     |
| 4.8        |       | Articles of Amendment  to the Articles of Incorporation dated May 23, 2008*                                                 |       | [Form 8-K filed  May 28, 2008, Exhibit 3.1]                               |
|       |       |                                                                                                                             |       |                                                                                     |
| 10.1       |       | Merit Medical Systems, Inc. Long Term Incentive  Plan (as amended and restated) dated March 25, 1996*†            |       | [Form 10-Q filed August 14, 1996,  Exhibit No. 2]                    |
|       |       |                                                                                                                             |       |                                                                                     |
| 10.2       |       | Merit Medical Systems, Inc. 401(k) Profit  Sharing Plan (as amended effective January 1, 1991*†              |       | [Form S—1 filed February 14, 1992,  Exhibit No. 8]              |
|       |       |                                                                                                                             |       |                                                                                     |
| 10.3       |       | License Agreement, dated April 8, 1992 with  Utah Medical Products, Inc.*                                              |       | [Form S—1 filed February 14, 1992,  Exhibit No. 5]              |
|       |       |                                                                                                                             |       |                                                                                     |
| 10.4       |       | Lease Agreement dated as of June 8, 1993 for  office and manufacturing facility*                                            |       | [Form 10—K for year ended December 31,  1994, Exhibit No. 10.4] |
|       |       |                                                                                                                             |       |                                                                                     |
| 10.12      |       | Amended and Restated  Deferred Compensation Plan*†                                                                          |       | [Form 10-K for  year ended December 31, 2003, Exhibit No. 10.12]          |
|       |       |                                                                                                                             |       |                                                                                     |
| 10.13      |       | Purchase Agreement  dated November 17, 2004 between Merit Medical Systems, Inc. and  MedSource Packaging Concepts LLC* |       | [Form 10-K for  year ended December 31, 2004, Exhibit No. 10.13]          |
|       |       |                                                                                                                             |       |                                                                                     |
| 10.17      |       | Unsecured Loan  Agreement with Bank of America, N.A.*                                                                            |       | [Form 8-K filed  December 7, 2006, Exhibit 10.1]                          |
|       |       |                                                                                                                             |       |                                                                                     |
| 10.18      |       | Seventh Amendment to  the First Restatement of the Merit Medical Systems, Inc.  401(k) Profit Sharing Plan*†      |       | [Form 10-K for  year ended December 31, 2006, Exhibit No. 10.18]          |
|       |       |                                                                                                                             |       |                                                                                     |
| 10.19      |       | Stock Purchase  Agreement by and between Merit Medical Systems, Inc. and Sheen Man Co.  LTD, dated April 1, 2007*      |       | [Form 10-Q filed  May 9, 2007, Exhibit No. 10.19]                    |

 

58

----

Tableof Contents

 
| 10.20  |   | Eighth Amendment to the  First Restatement of the Merit Medical Systems, Inc. 401(k) Profit  Sharing Plan*†              |   | [Form 10-K for  year ended December 31, 2007, Exhibit No. 10.20] |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------|
|   |   |                                                                                                                                    |   |                                                                            |
| 10.21  |   | Ninth Amendment to the  First Restatement of the Merit Medical Systems, Inc. 401(k) Profit  Sharing Plan*†               |   | [Form 10-K for  year ended December 31, 2007, Exhibit No. 10.21] |
|   |   |                                                                                                                                    |   |                                                                            |
| 10.22  |   | Tenth Amendment to the  First Restatement of the Merit Medical Systems, Inc. 401(k) Profit  Sharing Plan*†               |   | [Form 10-K for  year ended December 31, 2007, Exhibit No. 10.22] |
|   |   |                                                                                                                                    |   |                                                                            |
| 10.23  |   | Merit Medical  Systems, Inc. Amended and Restated Deferred Compensation Plan, effective  January 1, 2008*†               |   | [Form 8-K filed  December 18, 2008, Exhibit 10.1]                |
|   |   |                                                                                                                                    |   |                                                                            |
| 10.24  |   | Employment Agreement,  made on December 31, 2008, by and between Merit Medical  Systems, Inc. and Fred P. Lampropoulos*† |   | [Form 8-K filed  January 7, 2009, Exhibit 10.1]                  |
|   |   |                                                                                                                                    |   |                                                                            |
| 10.25  |   | Employment Agreement,  made on December 31, 2008, by and between Merit Medical  Systems, Inc. and Kent W. Stanger*†      |   | [Form 8-K filed January 7,  2009, Exhibit 10.2]                  |
|   |   |                                                                                                                                    |   |                                                                            |
| 10.26  |   | Employment Agreement,  made on December 31, 2008, by and between Merit Medical  Systems, Inc. and Martin R. Stephens*†   |   | [Form 8-K filed  January 7, 2009, Exhibit 10.3]                  |
|   |   |                                                                                                                                    |   |                                                                            |
| 10.27  |   | Employment Agreement,  made on December 31, 2008, by and between Merit Medical  Systems, Inc. and Arlin D. Nelson*†      |   | [Form 8-K filed  January 7, 2009, Exhibit 10.4]                  |
|   |   |                                                                                                                                    |   |                                                                            |
| 10.28  |   | Employment Agreement,  made on December 31, 2008, by and between Merit Medical  Systems, Inc. and Rashelle Perry*†       |   | [Form 8-K filed  January 7, 2009, Exhibit 10.5]                  |
|   |   |                                                                                                                                    |   |                                                                            |
| 10.29  |   | Eleventh Amendment to  the First Restatement of the Merit Medical Systems, Inc.  401(k) Profit Sharing Plan*†            |   | [Form 10-K for  year ended December 31, 2008, Exhibit No. 10.29] |
|   |   |                                                                                                                                    |   |                                                                            |
| 10.30  |   | Twelfth Amendment to  the First Restatement of the Merit Medical Systems, Inc.  401(k) Profit Sharing Plan*†             |   | [Form 10-K for  year ended December 31, 2008, Exhibit No. 10.30] |
|   |   |                                                                                                                                    |   |                                                                            |
| 10.31  |   | Second Amendment to the  Merit Medical Systems, Inc. 2006 Long-Term Incentive Plan*†                                          |   | [Form 8-K filed  May 27, 2009, Exhibit 10.1]                     |
|   |   |                                                                                                                                    |   |                                                                            |
| 10.32  |   | Second Restatement of  the Merit Medical Systems, Inc. 401(k) Profit Sharing Plan*†                                      |   | [Form 8-K filed  January 7, 2010, Exhibit 10.1]                  |
|   |   |                                                                                                                                    |   |                                                                            |
| 21     |   | Subsidiaries of Merit  Medical Systems, Inc                                                                                             |   | Filed herewith                                                                  |
|   |   |                                                                                                                                    |   |                                                                            |
| 23.1   |   | Consent of Independent  Registered Public Accounting Firm                                                                               |   | Filed herewith                                                                  |
|   |   |                                                                                                                                    |   |                                                                            |
| 31.1   |   | Certification of Chief  Executive Officer                                                                                               |   | Filed herewith                                                                  |
|   |   |                                                                                                                                    |   |                                                                            |
| 31.2   |   | Certification of Chief  Financial Officer                                                                                               |   | Filed herewith                                                                  |
|   |   |                                                                                                                                    |   |                                                                            |
| 32.1   |   | Certification of Chief  Executive Officer                                                                                               |   | Filed herewith                                                                  |
|   |   |                                                                                                                                    |   |                                                                            |
| 32.2   |   | Certification of Chief  Financial Officer                                                                                               |   | Filed herewith                                                                  |

 

----

*            These exhibits are incorporated herein by reference.

†    Indicates management contract orcompensatory plan or arrangement.

 

59

----

Table of Contents

 

(c)                                  Schedules:

 

None

** **

**SIGNATURES**

 

Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of1934, the Registrant has duly caused this Annual Report on Form 10-K to besigned on its behalf by the undersigned, thereunto duly authorized, on March 10,2010.

 
|   | MERIT MEDICAL SYSTEMS,  INC. |
|--------|------------------------------|
|   |                         |
|   |                         |
|   | By:                          | /s/ FRED P.  LAMPROPOULOS |
|   |                         | Fred P. Lampropoulos,  President and |
|   |                         | Chief Executive Officer |

 

**ADDITIONALSIGNATURE AND POWER OF ATTORNEY**

** **

Pursuant to therequirements of the Securities Exchange Act of 1934, this report has beensigned below by the following persons on behalf of the registrant and in the capacitiesindicated on March 10, 2010.  Inaddition, each person whose signature to this report appears below herebyconstitutes and appoints Fred P. Lampropoulos and Kent W. Stanger, and each ofthem, as his true and lawful attorney-in-fact and agent, with full power ofsubstitution, to sign on his behalf individually and in the capacity statedbelow and to perform any acts necessary to be done in order to file allamendments and post-effective amendments to this report, and any and allinstruments or documents filed as part of or in connection with this report orthe amendments thereto and each of the undersigned does hereby ratify andconfirm all that said attorney-in-fact and agent, or his substitutes, shall door cause to be done by virtue hereof.

 

| **Signature**                | ** ** | **Capacity  in Which Signed**                                                                             |
|------------------------------|------------|-----------------------------------------------------------------------------------------------------------|
|                         |       |                                                                                                      |
| /s/: FRED P.  LAMPROPOULOS   |       | President, Chief  Executive Officer and Director                                                          |
| Fred P. Lampropoulos         |       | (Principal  executive officer)                                                                            |
|                         |       |                                                                                                      |
| /s/: KENT W. STANGER         |       | Chief Financial  Officer, Secretary, Treasurer and Director (Principal financial and  accounting officer) |
| Kent W. Stanger              |       |
|                         |       |                                                                                                      |
| /s/: RICHARD W. EDELMAN      |       | Director                                                                                                  |
| Richard W. Edelman           |       |                                                                                                      |
|                         |       |                                                                                                      |
| /s/: REX C. BEAN             |       | Director                                                                                                  |
| Rex C. Bean                  |       |                                                                                                      |
|                         |       |                                                                                                      |
| /s/: JAMES J. ELLIS          |       | Director                                                                                                  |
| James J. Ellis               |       |                                                                                                      |
|                         |       |                                                                                                      |
| /s/: MICHAEL E.  STILLABOWER |       | Director                                                                                                  |
| Michael E. Stillabower       |       |                                                                                                      |
|                         |       |                                                                                                      |
| /s/: FRANKLIN J. MILLER      |       | Director                                                                                                  |
| Franklin J. Miller           |       |                                                                                                      |

 

60

----