MERIT MEDICAL SYSTEMS INC - Quarter Report: 2010 June (Form 10-Q)

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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

 

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2010.

 

OR

 

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

 

FOR THE TRANSITION PERIOD FROM              TO             .

 

Commission File Number   0-18592

 

MERIT MEDICAL SYSTEMS, INC.

(Exact name of Registrant as specified in its charter)

 

 

1600 West Merit Parkway, South Jordan, UT, 84095

(Address of Principal Executive Offices, including Zip Code)

 

(801) 253-1600

(Registrant’s telephone number, including area code)

 

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

 

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

 

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

 

 

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

 

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

 

 

 

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MERIT MEDICAL SYSTEMS, INC.

 

INDEX TO FORM 10-Q

 

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

 

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Part I - FINANCIAL INFORMATION

 

ITEM 1.  FINANCIAL STATEMENTS

 

MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

JUNE 30, 2010 AND DECEMBER 31, 2009

(In thousands - unaudited)

 

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

 

See notes to consolidated financial statements.

(Continued)

 

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MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

JUNE 30, 2010 AND DECEMBER 31, 2009

(In thousands - unaudited)

 

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

 

See notes to consolidated financial statements.

(Concluded)

 

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MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

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

(In thousands, except per common share - unaudited)

 

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

 

See notes to consolidated financial statements.

 

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MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30, 2010 AND 2009

(In thousands - unaudited)

 

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

 

See notes to consolidated financial statements.

(Continued)

 

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MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30, 2010 AND 2009

(In thousands - unaudited)

 

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

 

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

 

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

 

See notes to consolidated financial statements.

(Concluded)

 

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MERIT MEDICAL SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

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

 

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

 

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

 

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

6. Acquisitions.   On May 13, 2010, we signed a definitive merger agreement to acquire all of the outstanding shares of  BioSphere Medical, Inc. (“Biosphere”)  in an all cash transaction valued at approximately $96 million, inclusive of all common equity and Series A Preferred preferences.  BioSphere develops and markets embolotherapeutic products for the treatment of uterine fibroids, hypervascularized tumors and arteriovenous malformations.  We anticipate that the proposed acquisition of BioSphere, if completed, will give us a platform technology applicable to multiple therapeutic areas with significant market potential while leveraging existing interventional radiology call points.  Two immediate applications for the embolotherapy are uterine fibroids and primary liver cancer.  On May 12, 2010, we secured a commitment for a five-year senior unsecured revolving credit facility of up to $125 million.  The commitment of the prospective lenders to provide the credit facility is subject to a number of customary conditions, including the negotiation and execution of definitive transaction documents.  The proposed merger remains subject to other customary closing conditions, including the approval of BioSphere’s stockholders.  It is anticipated that the transaction will close during the third calendar quarter of 2010.

 

On February 19, 2010, we entered into a manufacturing and technology license agreement with a medical device manufacturer for certain medical products.  We made an initial payment of $250,000 in February of 2010, a second payment of $250,000 in May of 2010 and have accrued an additional $500,000 in accrued expenses.  The additional payments are payable upon reaching certain milestones set forth in the agreement.  We believe there is a reasonable likelihood that we will be required to make those payments.  We have included the $1.0 million intangible asset in license agreements and intend to amortize the asset over an estimated life of 10 years.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

On February 19, 2009, we entered into an asset purchase and supply agreement with Biosearch Medical Products, Inc., a wholly-owned subsidiary of Hydromer, Inc., a New Jersey corporation (“Biosearch”), to purchase a bipolar coagulation probe and grafted biliary stents.  We paid $1.1 million in February 2009 and paid an additional $500,000 in June 2009.  Our consolidated financial statements for the three and six-month periods ended June 30, 2009 reflect sales subsequent to the acquisition date of approximately $366,000 and $499,000, respectively, and net income of approximately $60,000 and $90,000, respectively, 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 to the assets we acquired from Biosearch, we intend to amortize developed technology over 15 years, customer lists on an accelerated basis over eight years and a non-compete covenant over seven years.

 

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

 

The following table summarizes our unaudited consolidated result of operations for the three and six-month periods ended June 30, 2009, as well as the unaudited pro forma consolidated results of operations as though the Hatch, Alveolus and Biosearch acquisitions had occurred on January 1, 2009:

 

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

 

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

 

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

 

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and (2) detailed disclosures about the transfers in and out of Level 1 and 2 measurements. This guidance is effective for the first interim or annual reporting period beginning after December 15, 2009, except for the gross presentation of the Level 3 rollforward information, which is required for annual reporting periods beginning after December 15, 2010, and for interim reporting periods within those years. We adopted the fair value disclosure guidance on January 1, 2010, except for the gross presentation of the Level 3 rollforward information which we are not required to adopt until January 1, 2011.  The adoption of this guidance did not have a material effect on our consolidated financial statements for the three and six-month periods ended June 30, 2010.

 

In October 2009, the FASB issued Accounting Standards Update (“ASU”) 2009-13, Revenue Recognition (Topic 605): Multiple Deliverable Revenue Arrangements — A Consensus of the FASB Emerging Issues Task Force.  This update provides application guidance on whether multiple deliverables exist, how the deliverables should be separated and how the consideration should be allocated to one or more units of accounting.  This update establishes a selling price hierarchy for determining the selling price of a deliverable.  The selling price used for each deliverable will be based on vendor-specific objective evidence, if available, third-party evidence if vendor-specific objective evidence is not available, or estimated selling price if neither vendor-specific or third-party evidence is available.  We will be required to apply this guidance prospectively for revenue arrangements entered into or materially modified after January 1, 2011; however, earlier application is permitted.  We do not expect the adoption of this guidance to have a material effect on our consolidated financial statements.

 

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

 

9.   Fair Value Measurements.  The fair value of a financial instrument is the amount that could be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  Financial assets are marked to bid prices and financial liabilities are marked to offer prices.  Fair value measurements do not include transaction costs.  A fair value hierarchy is used to prioritize the quality and reliability of the information used to determine fair values.  Categorization within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.  The fair value hierarchy is defined into the following three categories:

 

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

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

Level 3: Unobservable inputs that are not corroborated by market

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Estimated amortization expense for the intangible assets for the next five years consists of the following (in thousands):

 

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

 

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

 

Disclosure Regarding Forward-Looking Statements

 

This Report includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).  All statements in this Report, other than statements of historical fact, are forward-looking statements for purposes of these provisions, including any projections of earnings, revenues or other financial items, any statements of the plans and objectives of management for future operations, any statements concerning proposed new products or services, any statements regarding future economic conditions or performance, and any statements of assumptions underlying any of the foregoing.  All forward-looking statements included in this Report are made as of the date hereof and are based on information available to us as of such date.  We assume no obligation to update any forward-looking statement.   In some cases, forward-looking statements can be identified by the use of terminology such as “may,” “will,” “expects,” “plans,” “anticipates,”  “intends,” “believes,” “estimates,” “potential,” or “continue,” or the negative thereof or other comparable terminology.  Although we believe that the expectations reflected in the forward-looking statements contained herein are reasonable, there can be no assurance that any such expectations or any forward-looking statement will prove to be correct.  Our actual results will vary, and may vary materially, from those projected or assumed in the forward-looking statements.  Our financial condition and

 

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