UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark one)

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

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

Commission file number: 000-51348

ev3 Inc.

(Exact name of registrant as specified in its charter)

Delaware		32-0138874
(State or other jurisdiction of		(I.R.S. Employer Identification No.)
incorporation or organization)

9600 54^th Avenue North, Suite 100
Plymouth, Minnesota 55442
(Address of principal executive offices)

(763) 398-7000
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 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 þ     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, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act). (Check one):

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

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

As of October 29, 2009, there were 112,254,796 shares of common stock, par value $0.01 per share, of the registrant outstanding.

 

 

ev3 Inc.
FORM 10-Q
For the Quarterly Period Ended October 4, 2009

TABLE OF CONTENTS

Description				Page
PART I.		FINANCIAL INFORMATION
ITEM 1.		Financial Statements
		Consolidated Balance Sheets as of October 4, 2009 and December 31, 2008 (unaudited)			1
		Consolidated Statements of Operations for the three and nine months ended October 4, 2009 and September 28, 2008 (unaudited)			2
		Consolidated Statements of Cash Flows for the nine months ended October 4, 2009 and September 28, 2008 (unaudited)			3
		Notes to the Consolidated Financial Statements			4
ITEM 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			19
ITEM 3.		Quantitative and Qualitative Disclosures About Market Risk			35
ITEM 4.		Controls and Procedures			36
PART II.		OTHER INFORMATION
ITEM 1.		Legal Proceedings			37
ITEM 1A.		Risk Factors			37
ITEM 2.		Unregistered Sales of Equity Securities and Use of Proceeds			38
ITEM 3.		Defaults Upon Senior Securities			38
ITEM 4.		Submission of Matters to a Vote of Security Holders			38
ITEM 5.		Other Information			38
ITEM 6.		Exhibits			39
SIGNATURE PAGE					40
Exhibit Index					41
EX-10.1
EX-31.1
EX-31.2
EX-32.1
EX-32.2

This report contains not only historical information, but also 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, and are subject to the safe harbor created by those sections. We refer you to the information under the heading “Part I. Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Forward-Looking Statements.”

In this report, references to “ev3,” the “company,” “we,” “our” or “us” in this report, unless the context otherwise requires, refer to ev3 Inc. and its subsidiaries.

All trademarks or trade names referred to in this report are the property of their respective owners.

PART I. FINANCIAL INFORMATION

ITEM I. FINANCIAL STATEMENTS

ev3 Inc.

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except per share amounts)

(unaudited)

		October 4,				December 31,
		2009				2008
Assets
Current assets
Cash and cash equivalents		$	80,504			$	59,652
Accounts receivable, less allowances of $8,585 and $8,098, respectively			79,320				72,814
Inventories, net			45,834				47,687
Prepaid expenses and other current assets			6,630				6,970
Total current assets			212,288				187,123
Restricted cash			3,581				1,531
Property and equipment, net			26,439				30,681
Goodwill			367,311				315,654
Intangible assets, net			261,710				185,292
Other assets			581				383
Total assets		$	871,910			$	720,664
Liabilities and stockholders’ equity
Current liabilities
Current portion of long-term debt		$	2,500			$	2,500
Accounts payable			18,590				15,657
Accrued compensation and benefits			28,657				29,547
Accrued liabilities			22,295				19,744
Total current liabilities			72,042				67,448
Long-term debt			4,583				6,458
Other long-term liabilities			58,083				6,217
Total liabilities			134,708				80,123
Stockholders’ equity
Preferred stock, $0.01 par value, 100,000,000 shares authorized, none issued and outstanding as of October 4, 2009 and December 31, 2008			—				—
Common stock, $0.01 par value, 300,000,000 shares authorized, shares issued and outstanding: 112,182,735 shares at October 4, 2009 and 105,822,444 at December 31, 2008			1,122				1,058
Additional paid-in capital			1,824,406				1,756,832
Accumulated deficit			(1,087,745	)			(1,116,661	)
Accumulated other comprehensive loss			(581	)			(688	)
Total stockholders’ equity			737,202				640,541
Total liabilities and stockholders’ equity		$	871,910			$	720,664

The accompanying notes are an integral part of these consolidated financial statements.

ev3 Inc.

CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
(unaudited)

		Three Months Ended								Nine Months Ended
		October 4, 2009				September 28, 2008				October 4, 2009				September 28, 2008
Sales:
Net product sales		$	112,838			$	100,018			$	322,319			$	296,577
Research collaboration			—				7,011				—				19,426
Net sales			112,838				107,029				322,319				316,003
Operating expenses:
Product cost of goods sold			28,608				36,182				90,074				102,442
Research collaboration			—				2,100				—				5,647
Sales, general and administrative			55,030				53,121				165,639				178,885
Research and development			12,545				12,133				36,433				37,913
Amortization of intangible assets			6,802				8,101				18,444				24,285
Contingent consideration			2,271				—				2,467				—
Intangible asset impairment			—				—				—				10,459
Total operating expenses			105,256				111,637				313,057				359,631
Income (loss) from operations			7,582				(4,608	)			9,262				(43,628	)
Other expense (income):
Gain on investments, net			—				(142	)			(4,072	)			(542	)
Interest expense (income), net			140				49				575				(307	)
Other (income) expense, net			(143	)			2,279				1,354				192
Income (loss) before income taxes			7,585				(6,794	)			11,405				(42,971	)
Income tax expense (benefit)			849				516				(17,511	)			1,531
Net income (loss)		$	6,736			$	(7,310	)		$	28,916			$	(44,502	)
Earnings per share:
Net income (loss) per common share:
Basic		$	0.06			$	(0.07	)		$	0.27			$	(0.43	)
Diluted		$	0.06			$	(0.07	)		$	0.27			$	(0.43	)
Weighted average shares outstanding:
Basic			110,507,687				104,474,600				107,080,500				104,276,029
Diluted			112,277,954				104,474,600				107,719,897				104,276,029

The accompanying notes are an integral part of these consolidated financial statements.

ev3 Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(unaudited)

		Nine Months Ended
		October 4, 2009				September 28, 2008
Operating activities
Net income (loss)		$	28,916			$	(44,502	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization			26,873				33,016
Contingent consideration			2,467				—
Provision for bad debts and sales returns			268				1,840
Provision for inventory obsolescence			7,731				7,304
Gain on sale or disposal of investments and assets, net			(4,045	)			(426	)
Stock-based compensation expense			10,949				11,682
Intangible asset impairment			—				10,459
Deferred income taxes			(18,998	)			—
Change in operating assets and liabilities, net of acquired:
Accounts receivable			(5,852	)			(8,550	)
Inventories			(5,326	)			(832	)
Prepaid expenses and other assets			633				(194	)
Accounts payable			812				(3,431	)
Accrued expenses and other liabilities			2,939				(27,822	)
Deferred revenue			—				(9,043	)
Net cash provided by (used in) operating activities			47,367				(30,499	)
Investing activities
Proceeds from investments			4,118				9,744
Purchase of investments			(300	)			—
Purchase of property and equipment			(3,766	)			(9,032	)
Purchase of patents and licenses			(1,792	)			(2,250	)
Proceeds from sale of assets			—				1,061
Acquisitions, net of cash acquired			(24,735	)			(7,627	)
Change in restricted cash			(1,969	)			771
Net cash used in investing activities			(28,444	)			(7,333	)
Financing activities
Proceeds from issuance of debt			—				10,000
Payments on long-term debt and capital lease obligations			(2,008	)			(10,534	)
Debt issuance costs			—				180
Proceeds from exercise of stock options			1,470				1,272
Proceeds from employee stock purchase plan			2,099				1,903
Other			(9	)			(341	)
Net cash provided by financing activities			1,552				2,480
Effect of exchange rate changes on cash			377				239
Net increase (decrease) in cash and cash equivalents			20,852				(35,113	)
Cash and cash equivalents, beginning of period			59,652				81,060
Cash and cash equivalents, end of period		$	80,504			$	45,947

The accompanying notes are an integral part of these consolidated financial statements.

ev3 Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Description of Business

ev3 Inc. (the “Company,” “we,” “our” or “us”) is a global endovascular company focused on identifying and treating peripheral vascular disease, including, in particular, lower extremity arterial disease and neurovascular disease. We develop, manufacture and market a wide range of products that include stents, atherectomy plaque excision products, thrombectomy and embolic protection devices, percutaneous transluminal angioplasty (“PTA”) balloons and other procedural support products for the peripheral vascular market and embolic coils, liquid embolics, flow diversion devices, flow directed and other micro catheters, occlusion balloon systems and neuro stents for the neurovascular market. We market our products in the United States, Europe, Canada and other countries through a direct sales force and through distributors in certain other international markets.

2. Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared by us in accordance with accounting principles generally accepted in the United States of America (“U.S.”) for interim financial information and pursuant to the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal, recurring adjustments) considered necessary for a fair presentation have been included. The results of operations for any interim period may not be indicative of results for the full year. These unaudited consolidated financial statements and notes should be read in conjunction with the audited consolidated financial statements and the notes thereto included in our annual report on Form 10-K for the year ended December 31, 2008.

Certain amounts reported in our consolidated financial statements for the previous reporting periods have been reclassified to conform to the current period presentation.

Our consolidated financial statements include the financial results of Chestnut Medical Technologies, Inc. (“Chestnut”) subsequent to the acquisition date of June 23, 2009.

We operate on a manufacturing calendar with our fiscal year ending on December 31. Each quarter is 13 weeks, consisting of one five-week and two four-week periods. Accordingly, the third quarters of 2009 and 2008 ended on October 4 and September 28, respectively.

We have evaluated all subsequent events through November 3, 2009, the date the financial statements were issued.

Critical Accounting Policies and Estimates

Except for the contingent consideration and forward foreign currency contracts policies as noted below, there have been no material changes to our critical accounting policies and estimates as described in Note 2 to our consolidated financial statements included in our annual report on Form 10-K for the year ended December 31, 2008.

Contingent Consideration

Contingent consideration is recorded at the acquisition-date estimated fair value of the contingent milestone payment for all acquisitions subsequent to January 1, 2009. The fair value of the contingent milestone consideration is remeasured at the estimated fair value at each reporting period with the change in fair value included in our consolidated statements of operations.

Forward Foreign Currency Contracts

We use forward foreign currency contracts to hedge the volatility of foreign currency rates for foreign cash balances and accounts receivable for which payment is settled in a currency other than our local operations’ functional currency. We did not have any forward foreign currency contracts outstanding at the end of the third quarter of 2009 or at the end of fiscal year 2008. During the three and nine months ended October 4, 2009, we recorded $1.5 million and $3.1 million of losses, respectively, as “Other (income) expense, net” in our consolidated statements of operations associated with the settlement of our foreign currency contracts.

New Accounting Pronouncements

In the third quarter of 2009, we adopted the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) Topic 105 as the single official source of authoritative, nongovernmental generally accepted accounting principles in the United States. On the effective date, all then-existing non-SEC accounting literature and reporting standards were superseded and deemed nonauthoritative. The adoption of this pronouncement did not have a material impact on our consolidated financial statements; however, the ASC affected the way we reference authoritative guidance in our consolidated financial statements.

In December 2007, the FASB issued additional guidance on business combinations contained in ASC Topic 805 (“ASC Topic 805”) and additional guidance on noncontrolling interests in consolidated financial statements contained in ASC Topic 810, which are effective for fiscal years beginning after December 15, 2008. These new standards represent the completion of the FASB’s first major joint project with the International Accounting Standards Board and are intended to improve, simplify and converge internationally the accounting for business combinations and the reporting of noncontrolling interests (formerly minority interests) in consolidated financial statements.

ASC Topic 805 changes the method for applying the acquisition method in a number of significant respects, including the requirement to expense transaction fees and expected restructuring costs as incurred, rather than including these amounts in the allocated purchase price; the requirement to recognize the fair value of contingent consideration at the acquisition date, rather than the expected amount when the contingency is resolved; the requirement to recognize the fair value of acquired in-process research and development assets at the acquisition date, rather than immediately expensing; and the requirement to recognize a gain in relation to a bargain purchase price, rather than reducing the allocated basis of long-lived assets. We adopted these standards at the beginning of our 2009 fiscal year. The new presentation and disclosure requirements for pre-existing non-controlling interests are retrospectively applied to all prior period financial information presented. See Note 5 for further discussion of the impact the adoption of ASC Topic 805 had on our results of operations and financial conditions as a result of our Chestnut acquisition in the second quarter 2009.

In May 2009, the FASB issued additional guidance on management’s assessment of subsequent events. This guidance is contained in ASC Topic 855 (“ASC Topic 855”) and clarifies that management must evaluate, as of each reporting period, events or transactions that occur for potential recognition or disclosure in the financial statements and the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date through the date that the financial statements are issued or are available to be issued. ASC Topic 855 requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date. This disclosure alerts all users of financial statements that an entity has not evaluated subsequent events after that date in the set of financial statements being presented. We adopted ASC Topic 855 for the three months ended July 5, 2009. The implementation of ASC Topic 855 did not have a material impact on our consolidated financial statements.

In April 2008, the FASB issued guidance on the determination of the useful life of intangible assets, (“ASC Topic 350-30-35-1”), which amended the factors considered in developing renewal or extension assumptions used to determine the useful life of recognized intangible assets. ASC Topic 350-30-35-1 requires a consistent approach between the useful life of a recognized intangible asset and the period of expected cash flows used to measure the fair value of an asset. The ASC Topic 350-30-35-1 also requires enhanced disclosure when an intangible asset’s expected future cash flows are affected by an entity’s intent and/or ability to renew or extend the arrangement. We adopted ASC Topic 350-30-35-1 as of January 1, 2009. The adoption did not have a significant impact on our consolidated financial statements.

3. Fair Value Measurements

The fair value of assets and liabilities is determined on the exchange price which would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants. The determination of fair value is based upon a three-tier fair value hierarchy, which prioritizes the inputs used in fair value measurements. The three-tier hierarchy for inputs used in measuring fair value is as follows:

	•		Level 1. Observable inputs such as quoted prices in active markets;
	•		Level 2. Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and
	•		Level 3. Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

As of October 4, 2009 and December 31, 2008, we held approximately $51.9 million and $45.6 million, respectively, in money market accounts measured at fair value on a recurring basis using Level 1 inputs. Our money market accounts are reflected as “Cash and cash equivalents” in our consolidated balance sheets.

In the second quarter of 2009, in connection with our acquisition of Chestnut, we entered into an agreement to pay a contingent milestone-based payment of cash and equity upon the U.S. Food and Drug Administration (“FDA”) pre-market approval of the Pipeline Embolization Device (“Pipeline”). We have recorded the acquisition-date estimated fair value of the contingent milestone payment of $37.3 million as a component of the consideration transferred in exchange for the equity interests of Chestnut using Level 3 inputs. The acquisition-date fair value was measured based on the probability-adjusted present value of the amount expected to be paid. The probability adjusted contingent consideration amounts were discounted at 26%, the weighted average cost of capital for the Chestnut transaction. We remeasure the fair value of the contingent milestone payment at each reporting period using Level 3 inputs. The fair value of the contingent milestone payment was $39.7 million as of October 4, 2009 and is reflected in “Other long-term liabilities” in our consolidated balance sheets. The change in fair value of the contingent milestone payment for the three and nine months ended October 4, 2009 was $2.3 million and $2.5 million, respectively, and is reflected as “Contingent consideration” in our consolidated statements of operations.

The following table presents a summary of the contingent consideration long-term liability and activity (in thousands) for the periods presented:

		Three Months Ended				Nine Months Ended
Contingent Consideration:		October 4, 2009				October 4, 2009
Balance at Beginning of Period		$	37,471			$	—
Purchase price contingent consideration			—				37,275
Change in fair value of contingent consideration			2,271				2,467
Balance as of October 4, 2009		$	39,742			$	39,742

4. Stock-Based Compensation

The following table presents the stock-based compensation expense (in thousands) recorded in our consolidated statements of operations for the periods presented:

Stock-Based Compensation Expense:		Three Months Ended								Nine Months Ended
		October 4, 2009				September 28, 2008				October 4, 2009				September 28, 2008
Product cost of goods sold		$	251			$	121			$	732			$	596
Sales, general and administrative			2,975				2,572				9,089				9,608
Research and development			400				366				1,128				1,478
Total stock-based compensation expense		$	3,626			$	3,059			$	10,949			$	11,682

In the nine months ended October 4, 2009, we granted options to purchase an aggregate of 1.9 million shares of our common stock, 756,000 shares of restricted stock and 91,000 restricted stock units at a weighted average fair value of $2.76, $6.73 and $5.93 per share, respectively, to be recognized on a straight-line basis over the requisite service period, which, for the substantial majority of these grants, is four years. As of October 4, 2009, we had outstanding options to purchase an aggregate of 9.7 million shares of our common stock, of which options to purchase an aggregate of 5.7 million shares were exercisable. In addition, we have 1.6 million shares of restricted stock and 292,000 restricted stock units outstanding as of October 4, 2009.

We had $31.2 million of total unrecognized compensation cost related to unvested stock-based compensation arrangements granted to employees as of October 4, 2009. That cost is expected to be recognized over a weighted-average period of 2.52 years.

In the nine months ended October 4, 2009, we issued 205,000 shares of common stock upon exercise of options, 695,000 shares from restricted stock grants, net of cancellations and repurchases, and 401,000 shares under our employee stock purchase plan.

5. Chestnut Medical Acquisition

On June 23, 2009, we acquired Chestnut Medical Technologies, Inc., a privately held, California-based company focused on developing minimally invasive therapies for interventional neuroradiology. The transaction broadens our neurovascular product portfolio by adding the Pipeline Embolization Device for the treatment of cerebral aneurysms and the Alligator Retrieval Device for foreign body retrieval to our existing neurovascular embolic products and neuro access technologies.

We acquired 100 percent of the equity interests of Chestnut for total consideration valued at $116.7 million, consisting of upfront consideration of common stock and cash, as well as an additional milestone-based contingent payment of up to $75.0 million, payable in a combination of common stock and equity, upon FDA pre-market approval of the Pipeline device.

The transaction has been accounted for under the acquisition method. Our consolidated financial statements include the financial results of Chestnut subsequent to the acquisition date of June 23, 2009.

The following table presents the purchase price (in thousands) for the acquisition:

		Purchase Price Consideration
Equity consideration		$	53,186
Cash consideration			26,240
Total cash and equity		$	79,426
Contingent consideration			37,275
Total purchase price consideration		$	116,701

We issued 5,060,510 shares of our common stock, with an estimated fair value of $53.2 million. The estimated fair value per share of common stock of $10.51 was based on the closing price of our common stock on June 23, 2009, the date of the acquisition. The cash consideration, net of cash acquired, was approximately $24.7 million. We have also incurred $1.0 million in direct acquisition costs, all of which were expensed as incurred.

In addition, we have agreed to pay an additional milestone-based payment of cash and equity upon the FDA pre-market approval of the Pipeline device. This milestone-based contingent payment could range from: (1) $75 million upon FDA approval prior to October 1, 2011, (2) $75 million less $3.75 million per month upon FDA approval from October 1, 2011 through December 31, 2012 and (3) no payment required if FDA approval is not obtained by December 31, 2012. The milestone-based payment of up to $75.0 million will consist of cash and equity paid in the form of shares of our common stock ranging from 30% cash and 70% equity to 85% cash and 15% equity, of the total required payment. We have recorded the acquisition-date estimated fair value of the contingent milestone payment of $37.3 million as a component of the consideration transferred in exchange for the equity interests of Chestnut. The acquisition-date fair value was measured based on the probability-adjusted present value of the consideration expected to be transferred. The fair value of the contingent milestone payment was remeasured as of October 4, 2009 at $39.7 million and is reflected in “Other long-term liabilities” in our consolidated balance sheets. The change in fair value for the three and nine months ended October 4, 2009 of $2.3 million and $2.5 million, respectively, is reflected as “Contingent consideration” in our consolidated statements of operations.

The assets acquired and liabilities assumed in the Chestnut acquisition were measured and recognized at their fair values, with limited exceptions, at the date of the acquisition. The excess of purchase price consideration over the net identifiable assets acquired and liabilities assumed was recognized as goodwill, and reflect the future cost benefit we expect from leveraging our commercial operations to market the acquired products. None of the goodwill or intangible assets resulting from our acquisition of Chestnut are deductible for tax purposes. The following table summarizes the preliminary value (in thousands) recognized related to the identifiable intangible assets; tangible assets, net of liabilities assumed; net deferred tax liabilities and the residual goodwill that were acquired as part of the acquisition of Chestnut:

		June 23,
		2009
Intangible assets		$	93,070
Tangible assets acquired, net of liabilities assumed			821
Deferred tax liabilities acquired, net			(29,147	)
Goodwill			51,957
Estimated value of identifiable tangible and intangible assets, net deferred tax liabilities and goodwill		$	116,701

In connection with the Chestnut acquisition, we recorded deferred tax liabilities of $29.1 million, which includes $19.0 million related to amortizable intangible assets and $10.1 million related to indefinite-lived acquired in-process research and development. For additional discussion regarding deferred tax liabilities, see Note 14.

The following table presents the preliminary allocation of the purchase consideration to identifiable intangible assets acquired, excluding goodwill and the weighted average amortization period in total and by major intangible asset class (in thousands):

						Weighted Average
		Fair Value				Amortization
Intangible Asset Description		Assigned				Period (in years)
Developed and core technology		$	64,130			12
Customer and distributor relationships			220			3
Trademarks and tradenames			960			5
Non-compete agreements			360			3
Total amortizable intangible assets acquired		$	65,670			11
Acquired in-process research and development			27,400			Indefinite
Total intangible assets acquired (excluding goodwill)		$	93,070

The acquired in-process research and development asset relates to the Pipeline Embolization Device, which is a new class of embolization device that is designed to divert blood flow away from an aneurysm in order to provide a complete and durable aneurysm embolization while maintaining patency of the parent vessel. This asset is recognized and measured at the estimated fair value at the date of acquisition. As of the date of the acquisition, the in-process project had not yet reached technological feasibility in the United States and had no alternative use. The primary basis for determining technological feasibility of the project in the United States is obtaining FDA regulatory approval to market the device.

The income approach was used to determine the fair value of the acquired in-process research and development asset. This approach establishes fair value by estimating the after-tax cash flows attributable to the in-process project over its useful life and then discounting these after-tax cash flows back to the present value. The costs to complete each project were based on estimated direct project expenses as well as the remaining labor hours and related overhead costs. In arriving at the value of the acquired in-process research and development project, we considered the project’s stage of completion, the complexity of the work to be completed, the costs already incurred, the remaining costs to complete the project, the contribution of core technologies, the expected introduction date and the estimated useful life of the technology. We expect to incur approximately $8.0 million of development expense to obtain the regulatory approval required to commercialize the Pipeline device in the United States. The discount rate used to arrive at the present value of acquired in-process research and development as of the date of the acquisition was approximately 27% and was based on the time value of money and medical technology investment risk factors.

The value attributable to this project, which had not yet obtained regulatory approval in the United States, has been capitalized as an indefinite lived intangible asset. Development costs incurred on this project after the acquisition are charged to expense as incurred. If the project is not successful, or completed in a timely manner, we may not realize the financial benefit expected from this project. Upon completion of development and the obtaining of regulatory approval in the United States, this asset will be an amortizable intangible asset.

Tangible assets acquired, net of liabilities assumed, were stated at fair value at the date of the acquisition based on management’s assessment and include an inventory step-up.

6. Restructuring

On October 4, 2007, we acquired FoxHollow Technologies, Inc. (“FoxHollow”), a medical device company that designs, develops, manufactures and sells medical devices primarily for the treatment of peripheral artery disease. In conjunction with the acquisition of FoxHollow, our management began to assess and formulate a plan to restructure certain activities of FoxHollow and to terminate certain contractual agreements assumed in the acquisition. A significant portion of these costs related to management’s plan to reduce the workforce and included costs for severance and change of control provisions provided for under certain FoxHollow employment contracts. The workforce reductions began during the fourth quarter of 2007 and were completed as of the end of the third quarter of 2008. The unpaid portion of the workforce reductions represents salary continuance, which was paid over subsequent periods. We finalized our restructuring costs in conjunction with our plans to consolidate our manufacturing and other operations including the closure of our facilities located in Redwood City, California, which we acquired in connection with our acquisition of FoxHollow. We have completed the relocation of the sales, manufacturing and research and development activities performed in FoxHollow’s former Redwood City facilities to our existing facilities located in Irvine, California and Plymouth, Minnesota. During the first quarter of 2009, it was determined the estimated salary continuance costs to be incurred were $300,000 less than the amount previously estimated. An adjustment to the purchase price allocation was made to reduce the restructuring accrual and the amount allocated to goodwill. In addition, in the first quarter of 2009, in light of the current economic environment and continued downward pressures in the California real estate markets, we revised certain sub-lease rental assumptions related to our vacated leased FoxHollow facilities, which resulted in an increased liability related to future lease payments of $3.4 million. The changes in assumptions relate to the additional time it will likely take to find a sub-lessor and the rental rate of the sub-lessor. Since this adjustment was made as a result of changes in market conditions subsequent to the acquisition and was made outside of the purchase price allocation period, the adjustment was included in the determination of net income (loss) for the nine months ended October 4, 2009 and is reflected in “Sales, general, and administrative” expenses on the consolidated statement of operations.

The following table represents a summary of activity (in thousands) associated with the FoxHollow restructuring accruals that occurred during the nine months ended October 4, 2009. The unpaid portion of these costs are included in “Accrued compensation and benefits,” “Accrued liabilities,” and “Other long-term liabilities” on the consolidated balance sheets for the periods presented:

										Adjustments
										Reflected in
		Balance at				Adjustments to				Consolidated								Balance at
		December 31,				Purchase Price				Statements of								October 4,
		2008				Allocation				Operations				Amounts Paid				2009
Workforce reductions		$	670			$	(300	)		$	(49	)		$	(321	)		$	—
Termination of contractual commitments			7,495				—				3,421				(2,563	)			8,353
Total		$	8,165			$	(300	)		$	3,372			$	(2,884	)		$	8,353

7. Inventories, Net

Inventories, net consist of the following (in thousands):

		October 4, 2009				December 31, 2008
Raw materials		$	11,376			$	10,472
Work in-progress			5,358				4,144
Finished goods			39,385				43,408
			56,119				58,024
Inventory reserve			(10,285	)			(10,337	)
Inventory, net		$	45,834			$	47,687

Our consigned inventory balance was $21.0 million and $20.9 million as of October 4, 2009 and December 31, 2008, respectively.

8. Property and Equipment, Net

Property and equipment, net consist of the following (in thousands):

		October 4, 2009				December 31, 2008
Machinery and equipment		$	31,191			$	29,550
Office furniture and equipment			19,649				18,466
Leasehold improvements			14,902				14,131
Construction in progress			4,290				5,670
			70,032				67,817
Less:
Accumulated depreciation			(43,593	)			(37,136	)
Property and equipment, net		$	26,439			$	30,681

Total depreciation expense for property and equipment was $2.8 million and $8.5 million for the three and nine months ended October 4, 2009, respectively, and $2.8 million and $8.7 million for the three and nine months ended September 28, 2008, respectively.

9. Goodwill and Intangible Assets

The changes in the carrying amount of goodwill by operating segment for the nine months ended October 4, 2009 are as follows (in thousands):

		Peripheral
		Vascular				Neurovascular				Total
Balance as of December 31, 2008		$	230,400			$	85,254			$	315,654
Adjustment to goodwill related to acquisition of FoxHollow (Note 6)			(300	)			—				(300	)
Goodwill related to acquisition of Chestnut (Note 5)			—				51,957				51,957
Balance as of October 4, 2009		$	230,100			$	137,211			$	367,311

Intangible assets, net consist of the following (in thousands):

		Weighted				October 4, 2009												December 31, 2008
		Average				Gross								Net				Gross								Net
		Useful Life				Carrying				Accumulated				Carrying				Carrying				Accumulated				Carrying
		(in years)				Amount				Amortization				Amount				Amount				Amortization				Amount
Patents and licenses			5.0			$	16,945			$	(7,409	)		$	9,536			$	15,413			$	(6,264	)		$	9,149
Developed technology			11.0				260,147				(78,559	)			181,588				196,016				(66,312	)			129,704
Trademarks and tradenames			8.0				13,182				(5,263	)			7,919				12,222				(4,457	)			7,765
Customer relationships			10.0				56,314				(21,373	)			34,941				56,094				(17,967	)			38,127
Acquired in-process research and development			—				27,400				—				27,400				—				—				—
Distribution rights			2.5				—				—				—				7,966				(7,419	)			547
Other intangible assets			3.0				360				(34	)			326				—				—				—
Intangible assets, net						$	374,348			$	(112,638	)		$	261,710			$	287,711			$	(102,419	)		$	185,292

Intangible assets are amortized using methods which approximate the benefit provided by the utilization of the assets. Patents and licenses, developed technology and trademarks and tradenames are amortized on a straight-line basis. Customer relationships are amortized using both straight-line and accelerated methods that approximate the pattern of economic benefit. Acquired in-process research and development is an indefinite-lived intangible asset until it reaches technological feasibility, at which time it would become a finite-lived asset and be amortized over its estimated useful life.

Total amortization of other intangible assets was $6.8 million and $18.4 million for the three and nine months ended October 4, 2009, respectively, and $8.1 million and $24.3 million for the three and nine months ended September 28, 2008, respectively.

The estimated amortization expense, inclusive of amortization expense already recorded for the nine months ended October 4, 2009 and excluding any possible future amortization associated with acquired in-process research and development which has not reached technological feasibility, for the next five years ending December 31 is as follows (in thousands):

2009		$	24,714
2010			25,400
2011			23,841
2012			23,623
2013			23,278

10. Intangible Asset Impairment

In the second quarter of 2008, Merck & Co., Inc. (“Merck”) notified us that it was exercising its right to terminate the amended and restated collaboration and license agreement, dated September 26, 2006, between Merck and FoxHollow, effective July 22, 2008. Under the terms of the agreement, which was amended in July 2007 in connection with our acquisition of FoxHollow, Merck had the right to terminate the agreement if FoxHollow’s founder and former chief executive officer was no longer a director of our company other than in the event of his death or disability. As a result of

this individual’s resignation from our board of directors in February 2008, Merck had the right to terminate the agreement at any time during the six-month period thereafter. Based upon the status of the ongoing negotiations with Merck, an impairment indicator existed at June 29, 2008. As a result of the termination of the Merck collaboration and license agreement, we recorded an asset impairment charge of $10.5 million during the second quarter of 2008 to write-off the remaining carrying value of the related Merck intangible asset that was established at the time of our acquisition of FoxHollow.

11. Long-Term Debt

Long-term debt consists of the following (in thousands):

		October 4, 2009				December 31, 2008
Term loan		$	7,083			$	8,958
Less: current portion			(2,500	)			(2,500	)
Total long-term debt		$	4,583			$	6,458

Our operating subsidiaries, ev3 Endovascular, Inc., ev3 International, Inc., Micro Therapeutics, Inc. and FoxHollow Technologies, Inc. which we collectively refer to as the “borrowers,” are parties to a loan and security agreement with Silicon Valley Bank, which was amended most recently in December 2008. The amended facility consists of a $50.0 million revolving line of credit and $10.0 million term loan. The revolving line of credit expires June 25, 2010 and the term loan matures on June 23, 2012. Pursuant to the terms of the loan agreement, and subject to specified reserves, we may borrow under the revolving line of credit up to $12.0 million without any borrowing base limitations. Aggregate borrowings under the revolving line of credit that exceed $12.0 million will subject the revolving line to borrowing base limitations. These limitations allow us to borrow, subject to specified reserves, up to 80% of eligible domestic and foreign accounts receivables plus up to 30% of eligible inventory. Additionally, borrowings against the eligible inventory may not exceed the lesser of 33% of the amount advanced against accounts receivable or $10.0 million. As of October 4, 2009, we had $7.1 million in outstanding borrowings under the term loan and no outstanding borrowings under the revolving line of credit; however, we had $1.1 million of outstanding letters of credit issued by Silicon Valley Bank, which reduced the maximum amount available under our revolving line of credit as of October 4, 2009 to $48.9 million.

Borrowings under the revolving line of credit bear interest at a variable annual rate equal to Silicon Valley Bank’s prime rate plus 0.5%. Borrowings under the term loan bear interest at a variable annual rate equal to Silicon Valley Bank’s prime rate plus 1.0%. Silicon Valley Bank’s prime rate at October 4, 2009 was 4.0%. Accrued interest on any outstanding balance under the revolving line and the term loan is payable monthly in arrears. Principal amounts outstanding under the term loan are payable in 48 consecutive equal monthly installments on the last day of each month. We incurred $150,000 of debt issuance costs which are being amortized over the term of the revolving line of credit.

Both the revolving line of credit and term loan are secured by a first priority security interest in substantially all of our assets, excluding intellectual property, which is subject to a negative pledge, and are guaranteed by ev3 Inc. and all of our domestic direct and indirect subsidiaries that are not borrowers. The loan agreement requires ev3 Inc. to maintain on a consolidated basis a minimum adjusted quick ratio of at least 0.75 to 1.00, measured as of the last day of each month, and to maintain minimum consolidated earnings before interest, taxes, depreciation and amortization, or EBITDA, as adjusted for certain non-cash items, of at least $7.5 million for the third quarter of 2009 and at least $10.0 million for the fourth quarter of 2009 and each fiscal quarter thereafter, each measured as of the last calendar day of each such fiscal quarter.

The loan agreement also imposes certain limitations on the borrowers, their subsidiaries and us, including without limitation, limitations on their ability to: (i) transfer all or any part of their business or properties; (ii) permit or suffer a change in control; (iii) merge or consolidate, or acquire any entity; (iv) engage in any material new line of business; (v) incur additional indebtedness or liens with respect to any of their properties; (vi) pay dividends or make any other distribution on or purchase of any of their capital stock; (vii) make investments in other companies; or (viii) engage in related party transactions, subject in each case to certain exceptions and limitations. The loan agreement requires us to maintain certain operating and investment accounts with Silicon Valley Bank or its affiliates. The borrowers are required to pay customary fees with respect to the facility, including a fee on the average unused portion of the revolving line.

The loan agreement contains customary events of default, including the failure to make required payment, the failure to comply with certain covenants or other agreements, the occurrence of a material adverse change, failure to pay certain other indebtedness and certain events of bankruptcy or insolvency. Upon the occurrence and during the continuation of an

event of default, amounts due under the loan agreement may be accelerated. We were in compliance with required covenants at October 4, 2009 and expect to remain in compliance for the foreseeable future.

Annual maturities of our long-term debt are as follows (in thousands):

Remaining 2009		$	625
2010			2,500
2011			2,500
2012			1,458
Total		$	7,083

12. Other Long-term Liabilities

Other long-term liabilities consist of the following (in thousands):

		October 4, 2009				December 31, 2008
Contingent consideration (see Note 5)		$	39,742			$	—
Deferred tax liability (see Note 5 and 14)			10,149				—
Other long-term liabilities			8,192				6,217
Total other long-term liabilities		$	58,083			$	6,217

13. Gain on Investments, Net

Gain on investments, net of $4.1 million for the nine months ended October 4, 2009 was attributed to the divestiture of non-strategic investments.

14. Income Taxes

We use an estimated annual effective tax rate in determining our quarterly provision for income taxes. We have recorded income tax expense of $849,000 and an income tax benefit of $17.5 million for the three and nine months ended October 4, 2009, respectively. The income tax benefit for the nine months ended October 4, 2009 reflects a reduction in the valuation allowance of $19.0 million, which offsets anticipated foreign income taxes and U.S. alternative minimum tax.

In connection with the Chestnut acquisition, we recorded deferred tax liabilities of $29.1 million, which includes $19.0 million related to amortizable intangible assets and $10.1 million related to indefinite-lived acquired in-process research and development. The deferred tax liabilities of $19.0 million related to the amortizable intangibles reduces our net deferred tax assets by a similar amount and in a manner that will provide predictable future taxable income over the asset amortization period. As a result, we reduced our pre-acquisition valuation allowance against deferred tax assets by $19.0 million, which has been reflected as an income tax benefit in our consolidated statements of operations. Although the deferred tax liability of $10.1 million related to acquired in-process research and development also reduces our net deferred tax assets by a comparable amount, it does so in a manner that does not provide predictable future taxable income because the related asset is indefinite-lived. Therefore, the valuation allowance against deferred tax assets was not reduced as a result of this item, and we have reported the net $10.1 million deferred tax liability under the caption “Other long-term liabilities” in our consolidated balance sheet.

We have assessed all available evidence to determine the necessity of maintaining a valuation allowance for our deferred tax assets. A full valuation allowance has been recorded against our remaining net deferred tax assets as we have concluded that it is more likely than not that the deferred tax assets will not be utilized. If it is determined in a future period that it is more likely than not that the deferred tax assets will be utilized, we will reverse all or part of the valuation allowance for our deferred tax assets.

For the three and nine months ended September 28, 2008, we recorded income tax expense of $516,000 and $1.5 million, respectively, related to operations in certain foreign jurisdictions.

15. Other Comprehensive Income (Loss)

The following table provides a reconciliation of net income (loss) to comprehensive income (loss) (in thousands):

		Three Months Ended								Nine Months Ended
		October 4, 2009				September 28, 2008				October 4, 2009				September 28, 2008
Net income (loss)		$	6,736			$	(7,310	)		$	28,916			$	(44,502	)
Changes in foreign currency translation			(161	)			137				107				115
Total comprehensive income (loss)		$	6,575			$	(7,173	)		$	29,023			$	(44,387	)

16. Commitments and Contingencies

Operating Leases

We lease various manufacturing and office facilities and certain equipment under operating leases, which include standard terms of renewal and rent escalation clauses that we account for on a straight-line basis over the term of the operating lease.

On April 2, 2009, we entered into a lease agreement to rent approximately 75,000 square feet of space in Plymouth, Minnesota, for an initial term of 80 months beginning on November 1, 2009. Subject to certain conditions, we may extend the term of the lease for up to two additional terms of five years at the then market rate for rent. Pursuant to the lease agreement, the monthly rental payment will be approximately $95,000, subject to annual increases. In addition to base rent, we will pay a certain percentage of the annual real estate taxes and operating expenses of the building. We intend to use the new location for our corporate and U.S. peripheral vascular business headquarters. Our current corporate and U.S. peripheral vascular business headquarters are located in a 50,000 square foot building in Plymouth, Minnesota and are subject to a lease that extends to February 28, 2010.

Total non-cancelable minimum lease commitments, including rent expense related to operating leases for the nine months ended October 4, 2009, are as follows (in thousands):

Years ending December 31:
2009		$	7,762
2010			6,955
2011			4,716
2012			3,317
2013			2,912
Thereafter			8,423
		$	34,085

Rent expense related to non-cancelable operating leases was $1.5 million and $4.1 million for the three and nine months ended October 4, 2009, respectively, and $1.6 million and $4.8 million for the three and nine months ended September 28, 2008, respectively.

During the first quarter of 2009, we recorded an adjustment to our lease termination reserve associated with three FoxHollow leased facilities located in California which we effectively abandoned during fiscal year 2008 as part of our consolidation strategy. Future rental expense for these facilities will be offset by the amortization of the lease termination reserve and sublease payments received. For additional discussion regarding the termination of these contractual commitments see Note 6.

Portions of our payments for operating leases are denominated in foreign currencies and were translated in the table above based on their respective U.S. dollar exchange rates at October 4, 2009. These future payments are subject to foreign currency exchange rate risk.

Letters of Credit

As of October 4, 2009, we had outstanding commitments of $4.7 million which are supported by irrevocable standby letters of credit and restricted cash. The letters of credit and restricted cash support various obligations, such as operating leases, tender arrangements with customers and automobile leases.

Contingent Consideration

Under the terms of the acquisition agreement relating to our acquisition of Chestnut, we may be obligated to make an additional milestone-based payment of cash and equity totaling up to $75 million upon the FDA pre-market approval of the Pipeline device. For additional discussion regarding the contingent consideration, see Note 5.

Other Contingencies

We are from time to time subject to, and are presently involved in, various pending or threatened legal actions and proceedings, including those that arise in the ordinary course of our business. Such matters are subject to many uncertainties and to outcomes that are not predictable with assurance and that may not be known for extended periods of time. We record a liability in our consolidated financial statements for costs related to claims, including future legal costs, settlements and judgments, where we have assessed that a loss is probable and an amount can be reasonably estimated. Our significant legal proceedings are discussed below. While it is not possible to predict the outcome for most of the legal proceedings discussed below, the costs associated with such proceedings could have a material adverse effect on our consolidated results of operations, financial position or cash flows of a future period.

The acquisition agreement relating to our acquisition of Appriva Medical, Inc. contains four milestones to which payments relate. The first milestone was required by its terms to be achieved by January 1, 2005 in order to trigger a payment equal to $50 million. The other milestones were required by their terms to be achieved by either January 1, 2008 or January 1, 2009, and, if achieved, triggered payments totaling $125 million. We believe that the milestones were not achieved by the applicable dates and that none of the milestones are payable. On May 20, 2005, Michael Lesh, as an individual seller of Appriva stock and purporting to represent certain other sellers of Appriva stock, filed a complaint in the Superior Court of the State of Delaware with individually specified damages aggregating $70 million and other unspecified damages for several claims, including breach of the acquisition agreement and the implied covenant of good faith and fair dealing, fraud, negligent misrepresentation and violation of state securities laws in connection with the negotiation of the acquisition agreement. On or about November 21, 2005, a second lawsuit was filed in Delaware Superior Court relating to the acquisition of Appriva Medical, Inc. The named plaintiff of that action was Appriva Shareholder Litigation Company, LLC, which according to the complaint was formed for the purpose of pursuing claims against us. That complaint alleged specified damages in the form of the second milestone payment ($25 million), which was claimed to be due and payable, and further alleged unspecified damages for several claims, including misrepresentation, breach of contract, breach of the implied covenant of good faith and fair dealing and declaratory relief. On November 26, 2008, in a consolidated proceeding, the trial court granted our motion for summary judgment on the issue of standing and dismissed both complaints without prejudice. On April 7, 2009, Michael Lesh and Erik Van Der Burg, acting jointly as the Shareholder Representatives for the former shareholders of Appriva Medical, Inc., filed a motion to amend their complaints in Superior Court of the State of Delaware. The proposed amended complaint seeks the recovery of all of the milestone payments and punitive damages. The plaintiffs assert several claims, including breach of contract, fraudulent inducement and violation of California securities law. We filed a motion to dismiss the entire amended complaint, but the trial court has yet to rule on the motion. Because this matter is in the early stages, we cannot estimate the possible loss or range of loss, if any, associated with its resolution. However, there can be no assurance that the ultimate resolution of this matter will not result in a material adverse effect on our business, financial condition, results of operations or cash flows of a future period.

In July 2006, August 2006 and February 2007, three separate shareholder class action complaints were filed against FoxHollow and two of its officers in the U.S. District Court for the Northern District of California. These cases were subsequently consolidated into a single matter. The plaintiffs are seeking to represent a class of purchasers of FoxHollow’s common stock from May 13, 2005 to January 26, 2006. The complaints generally allege that false or misleading statements were made concerning FoxHollow’s management and seek unspecified monetary damages. On May 27, 2008, the U.S. District Court dismissed the consolidated case without leave to amend the complaint and judgment was enforced that day against the plaintiffs. The plaintiffs subsequently filed a notice of appeal to the United States Court of Appeals for the Ninth Circuit on June 20, 2008. The appeal is still pending. Because these matters are in early stages and because of the complexity of the cases, we cannot estimate the possible loss or range of loss, if any, associated with

their resolution. However, there can be no assurance that the ultimate resolution of these matters will not result in a material adverse effect on our business, financial condition, results of operations or cash flows of a future period.

In February 2007, David Martin, FoxHollow’s former chief operating officer, filed a wrongful termination and defamation suit against FoxHollow and one of its officers in the Superior Court of the State of California, San Mateo County. In March 2007, the Superior Court granted Martin’s petition to compel arbitration of his claims and arbitration is currently in its initial stages. The complaint is based on substantially similar facts and circumstances as the class action complaints and derivative actions described above. Martin generally alleges that he was terminated from his employment in violation of the covenant of good faith and fair dealing and in retaliation for actions he had the legal right to take. Martin seeks economic damages in excess of $10 million, plus non-economic and exemplary damages. On May 1, 2007, the Court granted Martin’s petition to compel arbitration. In the third quarter of 2009, the parties have agreed in principle to settle this dispute and are currently documenting that settlement. Based on such settlement agreement, the amount of the settlement is probable and estimable and we have made the appropriate provision in our consolidated financial statements during the third quarter of 2009, which did not have a material adverse effect on our business, financial condition, results of operations or cash flows.

17. Segment and Geographic Information

Our management, including our chief executive officer who is our chief operating decision maker, report and manage our operations in two reportable business segments based on similarities in the products sold, customer base and distribution system. Our peripheral vascular operating segment contains products that are used primarily in peripheral vascular procedures by radiologists, vascular surgeons and cardiologists. Our neurovascular operating segment contains products that are used primarily by neuroradiologists, interventional neurosurgeons and neurosurgeons.

Management measures segment profitability on the basis of gross profit calculated as net sales less cost of goods sold excluding amortization of intangible assets. Other operating expenses are not allocated to individual operating segments for internal decision making activities.

We sell our products through a direct sales force in the United States, Europe, Canada and other countries as well as through distributors in certain other international markets. Our customers include a broad physician base consisting of vascular surgeons, neurosurgeons, other endovascular specialists, radiologists, neuroradiologists and cardiologists.

Certain prior year assets have been reclassified to conform to the current year presentation. The following table presents segment information (in thousands):

		Three Months Ended								Nine Months Ended
		October 4,				September 28,				October 4,				September 28,
		2009				2008				2009				2008
Net sales
Net product sales:
Peripheral vascular:
Atherectomy		$	19,607			$	20,992			$	60,024			$	68,624
Stents			28,787				26,772				86,620				77,932
Thrombectomy and embolic protection			7,319				6,938				23,280				19,990
Procedural support and other			11,898				12,184				35,902				35,243
Total peripheral vascular			67,611				66,886				205,826				201,789
Neurovascular:
Embolic products			28,408				18,174				69,599				53,469
Neuro access and delivery products and other			16,819				14,958				46,894				41,319
Total neurovascular			45,227				33,132				116,493				94,788
Total net product sales			112,838				100,018				322,319				296,577
Research collaboration			—				7,011				—				19,426
Total net sales		$	112,838			$	107,029			$	322,319			$	316,003
Gross profit:
Peripheral vascular		$	49,830			$	39,480			$	143,961			$	124,442
Neurovascular			34,400				24,356				88,284				69,693
Research collaboration			—				4,911				—				13,779
Total gross profit (1)		$	84,230			$	68,747			$	232,245			$	207,914
Operating expense			76,648				73,355				222,983				251,542
Income (loss) from operations		$	7,582			$	(4,608	)		$	9,262			$	(43,628	)

		October 4,				December 31,
		2009				2008
Total assets:
Peripheral vascular		$	539,618			$	545,588
Neurovascular			332,292				175,076
Total		$	871,910			$	720,664

The following table presents net sales and long-lived assets by geographic area (in thousands):

		Three Months Ended								Nine Months Ended
		October 4,				September 28,				October 4,				September 28,
		2009				2008				2009				2008
Geographic Data
Net Sales:
United States		$	68,430			$	70,452			$	197,779			$	208,773
International			44,408				36,577				124,540				107,230
Total net sales		$	112,838			$	107,029			$	322,319			$	316,003

		October 4,				December 31,
		2009				2008
Long-lived Assets:
United States		$	25,229			$	29,603
International			1,210				1,078
Total long-lived assets		$	26,439			$	30,681

18. Related Party Transaction

During the second quarter 2007, we entered into a distribution agreement with Beijing Lepu Medical Device, Inc. (“Lepu”), a Chinese domiciled manufacturer and distributor of interventional cardiology and peripheral products. The two-year agreement allows Lepu to sell certain of our embolic protection devices and stents in China. We believe that having access to Lepu and its sub-distributor network is a strategic way for us to quickly gain access and market share in these strategic markets. Warburg Pincus Equity Partners, L.P. and certain of its affiliates (“Warburg Pincus”), who collectively owned over 50% of our outstanding common stock at the time we entered into the distribution agreement with Lepu, and together with Vertical Group, L.P. (“Vertical”), have two designees on our board of directors, owns an approximate 20% ownership interest in Lepu and has a designee on Lepu’s board of directors. Lepu purchased peripheral vascular products from us that we recognized as net product sales totaling approximately $160,000 and $2.6 million for the three and nine months ended October 4, 2009, respectively, and $260,000 and $1.7 million for three and nine months ended September 28, 2008, respectively. As of October 4, 2009 and December 31, 2008, Lepu owed us approximately $77,000 and $364,000, respectively, recorded as “Accounts receivable” on the consolidated balance sheets.

19. Net Income (Loss) Per Common Share

Basic net earnings (loss) per share is computed based on the weighted average number of common shares outstanding. Diluted net earnings (loss) per share is computed based on the weighted average number of common shares outstanding adjusted, to the extent dilutive, by the number of additional shares that would have been outstanding had the potentially dilutive common shares been issued and reduced by the number of shares we could have repurchased with the proceeds from the potentially dilutive shares. Potentially dilutive shares include options to purchase shares of our common stock and other share-based awards granted under our share-based compensation plans.

The weighted average number of common shares outstanding for basic and diluted earnings per share purposes is as follows:

		Three Months Ended								Nine Months Ended
		October 4,				September 28,				October 4,				September 28,
		2009				2008				2009				2008
Weighted average number of shares outstanding, basic			110,507,687				104,474,600				107,080,500				104,276,029
Common stock equivalents:
Stock options			1,024,527				—				257,253				—
Stock awards			745,740				—				382,144				—
Weighted average number of shares outstanding, diluted			112,277,954				104,474,600				107,719,897				104,276,029

In connection with our Chestnut acquisition, we may be obligated to make an additional milestone-based payment of cash and equity totaling up to $75 million upon the FDA pre-market approval of the Pipeline device. The contingently issuable shares of common stock associated with the equity portion of the milestone-based contingent payment are not included in our basic or diluted shares outstanding. For additional discussion regarding our potential milestone-based contingent payment, see Note 5.

The following potential common shares were excluded from common stock equivalents as their effect would have been anti-dilutive:

		Three Months Ended								Nine Months Ended
		October 4,				September 28,				October 4,				September 28,
		2009				2008				2009				2008
Stock options			5,633,569				9,255,611				7,267,777				9,543,725
Restricted stock awards and restricted stock units			167,618				1,011,779				495,285				1,093,897

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

This Management’s Discussion and Analysis provides material historical and prospective disclosures intended to enable investors and other users to assess our financial condition and results of operations. Statements that are not historical are forward-looking and involve risks and uncertainties discussed under the heading “Forward-Looking Statements” below. The following discussion of our results of operations and financial condition should be read in conjunction with our consolidated financial statements and the related notes thereto included elsewhere in this report.

Business Overview

We are a leading global endovascular company focused on identifying and treating peripheral vascular disease, including, in particular, lower extremity arterial disease, and neurovascular disease. Since our founding in 2000, we have been dedicated to developing innovative, breakthrough and clinically proven technologies and solutions for the treatment of peripheral vascular and neurovascular diseases, a strategy that we believe is uncommon in the medical device industry. We believe our unique approach of focusing on emerging and under-innovated opportunities, which treat peripheral vascular and neurovascular disease, allows us to compete with smaller companies that have narrow product lines and lack an international sales force and infrastructure, yet also compete with larger companies that do not have our focus and agility.

We believe the overall market for endovascular devices will grow as the demand for minimally invasive treatment of vascular diseases and disorders continues to increase. We intend to capitalize on this market opportunity by the continued sales execution and introduction of new products. We expect to originate new products primarily through our internal research and development and clinical efforts, but we may supplement them with targeted acquisitions or other external collaborations. Most recently, in June 2009, we acquired Chestnut Medical Technologies, Inc., a then privately held, California-based company focused on developing minimally invasive therapies for interventional neuroradiology. This transaction broadened our neurovascular product portfolio by adding the Pipeline Embolization Device for the treatment of cerebral aneurysms and the Alligator Retrieval Device for foreign body retrieval to our existing embolic product and neuro access technologies. In October 2007, we acquired FoxHollow Technologies, Inc. FoxHollow’s principal product is the SilverHawk Plaque Excision System, which is a minimally invasive catheter system that treats peripheral artery disease by removing plaque in order to reopen narrowed or blocked arteries. Additionally, our growth has been, and will continue to be, impacted by our expansion and penetration into new geographic markets, the expansion and penetration of our direct sales organization in existing geographic markets, and our continuing focus to increase the efficiency of our existing direct sales organization.

Our product portfolio includes a broad spectrum of approximately 100 products consisting of over 1,500 SKUs, including stents, atherectomy plaque excision products, embolic protection and thrombectomy products, percutaneous transluminal angioplasty, or PTA balloons, and other procedural support products for the peripheral vascular market and embolic coils, liquid embolics, flow diversion devices, flow directed and other micro catheters, occlusion balloon systems and neuro stents for the neurovascular market. As a result of our FoxHollow acquisition, we were engaged in research collaboration with Merck & Co., Inc. for the analysis of atherosclerotic plaque removed from patient arteries with the goal of identifying new biomarkers for atherosclerotic disease progression and new therapies for atherosclerotic disease. Merck terminated our collaboration and license agreement effective July 22, 2008. We subsequently reached an arrangement with Merck to accomplish an orderly wind-down of our research collaboration activities during the remainder of 2008.

Our management, including our chief executive officer, who is our chief operating decision maker, report and manage our operations in two reportable business segments based on similarities in the products sold, customer base and distribution system. Our peripheral vascular segment contains products that are used primarily in peripheral vascular procedures by interventional radiologists, vascular surgeons and interventional cardiologists. Our neurovascular segment contains products that are used primarily by neuroradiologists, interventional neurologists and neurosurgeons. Our sales activities and operations are aligned closely with our business segments. We generally have dedicated peripheral vascular sales teams in the United States, Europe, Canada and other international countries that target customers who perform primarily peripheral vascular procedures and separate, dedicated neurovascular sales teams in such countries that are specifically focused on our neurovascular business customer base.

We have direct sales capabilities in the U.S., Europe, Canada and other countries and have established distribution relationships in selected international markets. We sell our products through a direct sales force and independent distributors in over 65 countries. Our sales and marketing infrastructure included 349 professionals as of October 4, 2009 which consisted of 294 sales professionals in the U.S., Europe, Canada and other countries. Our direct sales

representatives accounted for approximately 85% and 86% of our net product sales during the third fiscal quarter and first nine months of 2009, respectively, with the balance generated by independent distributors. In the third fiscal quarter of 2009, we began to sell our neurovascular products in Australia through our direct sales force instead of through a distributor.

Our corporate headquarters is located in Plymouth, Minnesota and the sales, manufacturing, and research and development activities of our peripheral vascular business are primarily located in Plymouth and to a lesser extent, in Irvine, California. The sales, manufacturing and research and development activities of our neurovascular business are primarily located in Irvine, although as a result of our recent acquisition of Chestnut, we now have a facility in Menlo Park, California for a portion of our neurovascular business. Outside of the U.S., our primary office is in Paris, France and we have sales offices in most countries in which we have a direct sales force.

In order to drive sales growth, we have invested heavily throughout our history in not only the expansion of our global distribution system, but also new product development and clinical trials to obtain regulatory approvals. A significant portion of our net sales historically has been, and we expect to continue to be, attributable to new and enhanced products.

During the third quarter of 2009, we launched new products in our neurovascular and peripheral vascular businesses. In neurovascular, we initiated a controlled launch of our new Pipeline Embolization Device in Europe and other international markets. Building on the success we have experienced to date with our Axium coils, we began conducting physician preference testing for two new versions of the Axium coil, the Axium PGLA and Axium Nylon microfilament coil. We launched our new Marksman delivery catheter and Alligator Retrieval Device in the U.S. and Europe. We also introduced access product line extensions, including the HyperGlide 5.0 balloon in the U.S. and Europe and the HyperGlide 3.0 balloon in the U.S. Since receiving the CE Mark for our Solitaire FR, or flow restoration, device to treat ischemic stroke in July 2009, we have completed the first cases in our European physician preference testing. We expect to launch this product in the first quarter of 2010. In our peripheral vascular business, we launched our new TurboHawk atherectomy system, which contains a SuperCutter blade designed to treat moderately to severely calcified lesions in various vessel diameters. We are planning to expand availability for the TurboHawk Super Cutter to international markets and pursue regulatory clearance in the U.S. for an endovascular indication. We also plan to launch a Smooth Cutter version of the TurboHawk for above-the-knee use in treating soft plaque in the first half of 2010. During the third quarter of 2009, we conducted physician preference testing for our TrailBlazer Support Catheters and plan to launch a full release of the TrailBlazer during the fourth quarter of 2009. We are also preparing for the launch of our PowerCross 0.018 PTA balloon platform, which we expect to release in the first quarter of 2010.

We expect to continue to further validate the clinical and competitive benefits of our technology platforms to drive utilization of our current products and the development of new and enhanced products. To accomplish this, we have a number of clinical trials underway and others that are currently in development, including our DURABILITY II trial in the U.S. with the objective of expanding our EverFlex stent’s U.S. indication to include treatment of peripheral artery disease; and our DEFINITIVE trial series designed to expand the clinical evidence supporting the value of our plaque excision systems to drive increased procedure adoption, expand clinical indications and support the use of atherectomy as a front-line therapy. In our neurovascular business, we are planning our Solitaire with Immediate Flow Restoration, or SWIFT, study under a U.S. investigational device exemption, or IDE, to obtain FDA clearance for our Solitaire neuro stent.

It is our understanding that certain biliary stent manufacturers have received subpoenas from the U.S. Department of Justice. Based on publicly available information, we believe that these subpoenas requested information regarding the sales and marketing activities of these manufacturers’ biliary stent products and that the Department of Justice is seeking to determine whether any of these activities violated civil and/or criminal laws, including the Federal False Claims Act, the Food and Drug Cosmetic Act and the Anti-Kickback Statute in connection with Medicare and/or Medicaid reimbursement paid to third parties. As of the date of this report, we have not received a subpoena from the U.S. Department of Justice relating to this investigation. No assurance can be provided, however, that we will not receive such a subpoena or become the subject of such an investigation, which could adversely affect our business and stock price.

Summary of Third Fiscal Quarter 2009 Financial Results and Outlook

During our third fiscal quarter 2009, we achieved another quarter of profitability and cash generation. Our operating results reflect sales growth in both our peripheral vascular and neurovascular segments, continued expansion of our international business, improvement in our gross margins and continued expense control. During the remainder of 2009, we intend to remain focused on attaining our goals of achieving revenue growth equal to or slightly above the growth in

the markets we compete, sustaining profitability, generating cash and expanding our global position in the peripheral vascular and neurovascular markets.

Our third fiscal quarter 2009 results and financial condition included the following items of significance, some of which we expect also may affect our results and financial condition during the remainder of 2009:

•

Net sales of our peripheral vascular products increased 1% to $67.6 million in the third fiscal quarter 2009 compared to the third fiscal quarter 2008 primarily as a result of increased market penetration of our EverFlex family of stents, embolic protection devices and balloon expandable stents, partially offset by a decline in sales of our atherectomy products and sales declines in older generation products. We expect continued penetration with our EverFlex family of stents during the remainder of 2009, although we remain cautious of the current regulatory environment regarding the off-label utilization of devices and increased competition we may experience. During the third fiscal quarter 2009, although our atherectomy sales decreased compared to the third fiscal quarter 2008, we expect the recent launch of our new TurboHawk atherectomy system to have a positive impact on our atherectomy sales going forward.

•

Net sales of our neurovascular products increased 37% to $45.2 million in the third fiscal quarter 2009 compared to the third fiscal quarter 2008 primarily as a result of continued market penetration of our Axium coil and Onyx Liquid Embolic System and the launch of our Pipeline Embolization Device in Europe and other international markets. We began conducting physician preference testing for our Axium PGLA and Nylon microfilament coils. We also launched our Marksman delivery catheter and Alligator Retrieval Device in the U.S. and Europe during the third fiscal quarter 2009. We believe our neurovascular business should benefit from the continued market penetration of the Axium coil and Onyx Liquid Embolic System during the remainder of 2009 and from new product introductions, including our Pipeline and Alligator devices, expanded geographic presence and improved pricing.

•

On a geographic basis, 61% of our net sales for the third fiscal quarter 2009 were generated in the U.S. and 39% were generated outside the U.S. Our international net sales increased 21% to $44.4 million in the third fiscal quarter 2009 compared to the third fiscal quarter 2008 driven by market penetration of the Axium coil and neuro stents, as well as the launch of our Pipeline device. We expect our international business to continue to benefit from our ability to sell our EverCross and NanoCross PTA balloon catheters outside the United States, the recent launch of our Pipeline Embolization Device in Europe and other international markets, and the launch of our Axium PGLA and Nylon microfilament coils, Marksman delivery catheter and Alligator Retrieval Device in Europe. Changes in foreign currency exchange rates had a negative impact on our net sales for the third fiscal quarter 2009 of approximately $1.7 million compared to the third fiscal quarter 2008, principally resulting from the relationship of the U.S. dollar as compared to the euro. We expect foreign currency exchange rates to have a positive impact on our net sales during the fourth fiscal quarter 2009 compared to our net sales during the same period during 2008.

•

Product gross margin increased to 75% in the third fiscal quarter 2009 compared to 64% in the third fiscal quarter 2008 primarily attributable to manufacturing efficiencies, including synergies related to the consolidation of our FoxHollow manufacturing operations, margin improvement associated with selling our own line of PTA balloons, product mix and volume growth. We expect to continue to increase our product gross margins through our focus on manufacturing efficiencies. Product gross margin for internal measurement purposes is defined as net product sales less product cost of goods sold, excluding amortization of intangible assets, divided by net product sales.

•

Sales, general and administrative expenses declined to 49% of net product sales in the third fiscal quarter 2009 compared to 53% in the third fiscal quarter 2008 primarily due to continued expense leverage. We expect our sales, general and administrative expenses as a percentage of net product sales to continue to decline during the remainder of 2009 compared to 2008 primarily as a result of our anticipated continued leverage of our cost structure. We expect to continue to focus on our vital few programs and implement systems and processes to improve our sales execution.

•

Our net income for the third fiscal quarter 2009 was $6.7 million, or $0.06 per basic and diluted common share, compared to a net loss of $7.3 million, or $0.07 per share, in the third fiscal quarter of 2008.

•

Our cash and cash equivalents were $80.5 million at October 4, 2009, an increase of $20.1 million compared to the end of the second fiscal quarter 2009. This increase was primarily a result of cash provided by operating activities, totaling $20.9 million in the third fiscal quarter 2009. We plan to continue to focus on generating positive cash flow from operations during the remainder of 2009.

Results of Operations

The following table sets forth, for the periods indicated, our results of operations expressed as dollar amounts (dollars in thousands, except per share amounts), and the changes between the specified periods expressed as percent increases or decreases or “NM” if such increases or decreases are not material or applicable:

		Three Months Ended												Nine Months Ended
		October 4,				September 28,				Percent				October 4,				September 28,				Percent
		2009				2008				Change				2009				2008				Change
Results of Operations:
Sales:
Net product sales		$	112,838			$	100,018				12.8	%		$	322,319			$	296,577				8.7	%
Research collaboration			—				7,011				(100.0	)%			—				19,426				(100.0	)%
Net sales			112,838				107,029				5.4	%			322,319				316,003				2.0	%
Operating expenses:
Product cost of goods sold (a)			28,608				36,182				(20.9	)%			90,074				102,442				(12.1	)%
Research collaboration			—				2,100				(100.0	)%			—				5,647				(100.0	)%
Sales, general and administrative (a)			55,030				53,121				3.6	%			165,639				178,885				(7.4	)%
Research and development (a)			12,545				12,133				3.4	%			36,433				37,913				(3.9	)%
Amortization of intangible assets			6,802				8,101				(16.0	)%			18,444				24,285				(24.1	)%
Contingent consideration			2,271				—				100.0	%			2,467				—				100.0	%
Intangible asset impairment			—				—			NM					—				10,459				(100.0	)%
Total operating expenses			105,256				111,637				(5.7	)%			313,057				359,631				(13.0	)%
Income (loss) from operations			7,582				(4,608	)		NM					9,262				(43,628	)		NM
Other expense (income):
Gain on investments, net			—				(142	)		NM					(4,072	)			(542	)		NM
Interest expense (income), net			140				49			NM					575				(307	)		NM
Other (income) expense, net			(143	)			2,279			NM					1,354				192			NM
Income (loss) before income taxes			7,585				(6,794	)		NM					11,405				(42,971	)		NM
Income tax expense (benefit)			849				516				64.5	%			(17,511	)			1,531			NM
Net income (loss)		$	6,736			$	(7,310	)		NM				$	28,916			$	(44,502	)		NM
Earnings per share:
Net income (loss) per common share:
Basic		$	0.06			$	(0.07	)						$	0.27			$	(0.43	)
Diluted		$	0.06			$	(0.07	)						$	0.27			$	(0.43	)
Weighted average shares outstanding:
Basic			110,507,687				104,474,600								107,080,500				104,276,029
Diluted			112,277,954				104,474,600								107,719,897				104,276,029

		Three Months Ended								Nine Months Ended
		October 4,				September 28,				October 4,				September 28,
		2009				2008				2009				2008
Product cost of goods sold		$	251			$	121			$	732			$	596
Sales, general and administrative			2,975				2,572				9,089				9,608
Research and development			400				366				1,128				1,478
		$	3,626			$	3,059			$	10,949			$	11,682

The following tables set forth, for the periods indicated, our net sales by segment and geography expressed as dollar amounts (in thousands) and the changes in net sales between the specified periods expressed as percentages:

		Three Months Ended												Nine Months Ended
		October 4,				September 28,				Percent				October 4,				September 28,				Percent
		2009				2008				Change				2009				2008				Change
NET SALES BY SEGMENT:
Net product sales:
Peripheral vascular:
Atherectomy		$	19,607			$	20,992				(6.6	)%		$	60,024			$	68,624				(12.5	)%
Stents			28,787				26,772				7.5	%			86,620				77,932				11.1	%
Thrombectomy and embolic protection			7,319				6,938				5.5	%			23,280				19,990				16.5	%
Procedural support and other			11,898				12,184				(2.3	)%			35,902				35,243				1.9	%
Total peripheral vascular			67,611				66,886				1.1	%			205,826				201,789				2.0	%
Neurovascular:
Embolic products			28,408				18,174				56.3	%			69,599				53,469				30.2	%
Neuro access and delivery products and other			16,819				14,958				12.4	%			46,894				41,319				13.5	%
Total neurovascular			45,227				33,132				36.5	%			116,493				94,788				22.9	%
Total net product sales			112,838				100,018				12.8	%			322,319				296,577				8.7	%
Research collaboration			—				7,011				(100.0	)%			—				19,426				(100.0	)%
Total net sales		$	112,838			$	107,029				5.4	%		$	322,319			$	316,003				2.0	%