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| ASPM > SEC Filings for ASPM > Form 10-Q on 6-Nov-2009 | All Recent SEC Filings |
6-Nov-2009
Quarterly Report
Agreement and Plan of Merger
On September 27, 2009, we entered into an Agreement and Plan of Merger, or
Merger Agreement, with United States Surgical Corporation, a Delaware
corporation, which we refer to herein as Parent, and Transformer Delaware Corp.,
a Delaware corporation and a wholly-owned subsidiary of Parent, which we refer
to herein as Purchaser. Parent and Purchaser are wholly-owned subsidiaries of
Covidien plc. Pursuant to the Merger Agreement, Purchaser has completed a cash
tender offer for all of our outstanding common stock at a purchase price of
$12.00 per share. The tender offer expired at 12:00 midnight at the end of
November 5, 2009, after which Purchaser accepted and paid for all shares validly
tendered and not withdrawn at the time, representing approximately 90% of our
outstanding common stock (not including 297,066 shares of common stock tendered
under guaranteed delivery procedures). Pursuant to the terms of the Merger
Agreement, Purchaser exercised its option to purchase newly issued shares from
us at the tender offer price. Following the purchase, Purchaser owned sufficient
shares to effect a short-form merger with and into Aspect, which will then
become an indirect wholly owned subsidiary of Covidien (the "Merger"). We expect
that Purchaser will complete the Merger as soon as practicable . For a further
discussion of the Offer and the Merger, refer to footnote 14 of the notes to our
condensed consolidated financial statements included in this quarterly report on
Form 10-Q.
Overview
We develop, manufacture and market an anesthesia monitoring system that we
call the BISŪsystem. The BIS system is based on our patented core technology,
the Bispectral Index, which we refer to as the BIS index. The BIS system
provides information that allows clinicians to assess and manage a patient's
level of consciousness in the operating room, intensive care and procedural
sedation settings and is intended to assist the clinician in better determining
the amount of anesthesia or sedation needed by each patient. Our proprietary BIS
system includes: our BIS monitor; BIS Module Kit, which includes components of
BIS monitoring technology that are integrated into equipment sold by original
equipment manufacturers, or BISx system, which allows original equipment
manufacturers to incorporate the BIS index into their monitoring products; and
our group of sensor products, which we collectively refer to as BIS Sensors. On
July 28, 2009, we entered into a distribution and technology licensing agreement
with LiDCO Limited, which we refer to as the LiDCO Distribution Agreement. Under
the terms of the agreement, we obtained exclusive rights to market, sell and
distribute the LiDCOrapid monitoring system as well as non-exclusive rights to
market, sell and distribute the LiDCOplus system in the United States. In
addition, the agreement includes an exclusive license to integrate LiDCO and
BISŪ technologies into a combined product for sale in the United States.
We derive our revenue primarily from sales of BIS Sensors and from our
original equipment manufacturer products (including BIS Module Kits and the BISx
system) and related accessories, and BIS monitors, which we collectively refer
to as Equipment. In addition, our domestic revenue also includes sales of LiDCO
Smart Cards as part of the LiDCO Distribution Agreement. We refer to revenue
from sales of the LiDCOrapid monitoring systems and related products as "LiDCO
revenue". To assist management in assessing and managing our business, we
segregate our revenue by sales by region and sales by products, as shown in the
following table:
Three Months Ended Nine Months Ended
October 3, September 27, October 3, September 27,
2009 2008 2009 2008
(dollars in thousands)
Domestic revenue $ 18,418 $ 17,337 $ 52,506 $ 51,747
Percent of total revenue 70 % 70 % 69 % 70 %
International revenue $ 7,817 $ 7,421 $ 23,922 $ 22,624
Percent of total revenue 30 % 30 % 31 % 30 %
Total revenue $ 26,235 $ 24,758 $ 76,428 $ 74,371
BIS Sensor revenue $ 21,814 $ 20,788 $ 64,927 $ 62,819
Percent of total revenue 83 % 84 % 85 % 84 %
Equipment revenue $ 4,345 $ 3,970 $ 11,425 $ 11,552
Percent of total revenue 17 % 16 % 15 % 16 %
LiDCO revenue $ 76 - $ 76 -
Percent of total revenue - - - -
Total revenue $ 26,235 $ 24,758 $ 76,428 $ 74,371
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At October 3, 2009, we had cash, cash equivalents, restricted cash and
investments of approximately $82.7 million and working capital of approximately
$93.4 million.
We follow a system of fiscal quarters as opposed to calendar quarters. Under
this system, the first three quarters of each fiscal year end on the Saturday of
the thirteenth week of each quarter and the last quarter of the fiscal year
always ends on December 31.
We believe our ability to grow our revenue is directly related to whether our
customers continue to purchase and use our BIS Sensors after they purchase our
Equipment. As we seek to continue to achieve this growth, we have expanded our
sales forces and have implemented new sales and marketing programs. We expect
that as we seek to grow our business, revenue from the sale of BIS Sensors will
contribute an increasing percentage of product revenue. Additionally, we believe
that, over time, revenue from the sale of BIS Module Kits and our BISx system
will increase as a percentage of total Equipment revenue as healthcare
organizations purchase our technology as part of an integrated solution offered
by our original equipment manufacturers. We also expect revenue from our LiDCO
Distribution Agreement to contribute to product revenue as we continue to
incorporate LiDCO's advanced hemodynamic monitoring system into our product
portfolio.
In order to sustain profitability, we believe that we need to continue to
maintain our gross profit and control the growth of our operating expenses. To
maintain our gross profit, we believe we must continue to focus on maintaining
our average unit sales prices of our BIS Sensors, increasing revenue from the
sale of BIS Sensors as a percentage of total revenue, as BIS Sensors have a
higher gross profit than Equipment, and continuing to reduce the costs of
manufacturing our products.
For those healthcare organizations desiring to acquire our BIS monitors
directly from us, we offer two primary options. Our customers have the option
either to purchase BIS monitors outright or to acquire BIS monitors pursuant to
a sales-type lease agreement whereby the customer contractually commits to
purchase a minimum number of BIS Sensors per BIS monitor per year. Under our
sales-type leases, customers purchase BIS Sensors and the BIS monitor for the
purchase price of the BIS Sensors plus an additional charge per BIS Sensor to
pay for the purchase price of the BIS monitor and related financing costs over
the term of the agreement. We also grant these customers an option to purchase
the BIS monitors at the end of the term of the agreement, which is typically
three to five years. We recognize Equipment revenue under sales-type lease
agreements either at shipment or delivery in accordance with the agreed upon
contract terms with interest income recognized over the life of the sales-type
lease. The cost of the BIS monitor acquired by the customer is recorded as costs
of revenue in the same period.
We also offer customers the opportunity to use the BIS monitors under our
Equipment Placement program, which we refer to as the EP program. Under the EP
program, the customer is granted the right to use the BIS monitors for a
mutually agreed upon period of time. During this period, the customer purchases
BIS Sensors at a price that may include a premium above the list price of the
BIS Sensors to cover the rental of the equipment, but without any binding
minimum purchase commitments. At the end of the agreed upon period, the customer
has the option of purchasing the BIS monitors, continuing to use them under the
EP program or returning them to us.
We have subsidiaries in The Netherlands, United Kingdom, Germany and France
to facilitate the sale of our products into the international market. We are
continuing to develop our international sales and distribution program through a
combination of distributors and marketing partners, including companies with
which we have entered into original equipment manufacturer relationships.
We are party to a distribution agreement with Nihon Kohden Corporation to
distribute BIS monitors in Japan. Nihon Kohden has received approval from the
Japanese Ministry of Health, Labor and Welfare for marketing in Japan our A-1050
EEG Monitor with BIS, our A-2000 BIS Monitor, our BIS module (our product that
integrates BIS monitoring technology into equipment sold by original equipment
manufacturers), our BIS XP system and, most recently in December 2007, our BISx
and the BIS VISTA monitor. In January 2002, the Japanese Ministry of Health,
Labor and Welfare granted reimbursement approval for use of our BIS monitors.
With this approval, healthcare providers in Japan are eligible to receive
partial reimbursement of 1,000 Yen each time BIS monitoring is used. Sales to
Nihon Kohden represented approximately 16% and 15% of international revenue in
the three and nine months ended October 3, 2009, respectively, and approximately
15% of international revenue in both the three and nine months ended
September 27, 2008.
We account for share-based payments to employees under the Stock Compensation
subtopic of the Accounting Standards Codification of the Financial Accounting
Standards Board, or FASB. For the three and nine months ended October 3, 2009,
we recognized approximately $1.3 million and $4.3 million, respectively, of
stock-based compensation expense in our condensed consolidated statements of
income and in the three and nine months ended September 27, 2008, we recognized
approximately $1.9 million and $5.8 million, respectively, of stock-based
compensation expense. See Note 2 of the Notes to our Condensed Consolidated
Financial Statements contained in Item 1 of this Quarterly Report on Form 10-Q
for further information regarding stock-based compensation.
Various factors may adversely affect our quarterly operating results at least
through the fourth quarter of 2009. For example, a third party study that was
published in March 2008 in the New England Journal of Medicine compared BIS
monitoring with a protocol based on end-tidal gas anesthetic in a patient
population considered to be at high risk of awareness and concluded that, based
upon a similar occurrence of awareness in both groups, no benefit of BIS
monitoring was demonstrated. While the study results were consistent with
earlier studies that showed a low incidence of awareness using BIS, we believe
the conclusions drawn by the authors are not supported by their data and that
there were several flaws in the design and execution of the trial. However, we
believe that the publication of this study has had, and may continue to have an
adverse effect on the rate at which existing or potential new customers purchase
and use our products. We have also expanded our sales force and expect that the
resulting increase in operating expenses would not be offset, at least
initially, by an increase in revenue. Additionally, we face risks beyond our
control presented by the continued challenges of the U.S. and worldwide
economies, the healthcare industry, hospital purchases and our business. On
September 27, 2009, we entered into the Merger Agreement, and sales of our
products may be adversely affected as a result of our agreement to be acquired
by an affiliate of Covidien pursuant to the terms of the Merger Agreement.
Critical Accounting Policies and Estimates
Management's discussion and analysis of financial condition and results of
operations is based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. Note 2 of the Notes to Consolidated Financial Statements included
elsewhere in this Quarterly Report on Form 10-Q includes a summary of our
significant accounting policies and methods used in the preparation of our
financial statements. In preparing these financial statements, we have made
estimates and judgments in determining certain amounts included in the financial
statements. The application of these accounting policies involves the exercise
of judgment and use of assumptions as to future uncertainties and, as a result,
actual results could differ from these estimates. We do not believe there is a
significant likelihood that materially different amounts would be reported under
different conditions or using different assumptions. We believe that our
critical accounting policies and estimates are as follows:
Revenue Recognition
We sell our BIS monitors primarily through a combination of a direct sales
force and distributors. We sell our BIS modules to original equipment
manufacturers who incorporate them into their equipment and sell to the end
user. BIS Sensors are sold through a combination of a direct sales force,
distributors and original equipment manufacturers. Direct product sales are
structured as sales, sales-type lease arrangements or sales under our EP
program. Revenue is recognized when persuasive evidence of an arrangement
exists, product delivery has occurred or services have been rendered, the price
is fixed or determinable and collectibility is reasonably assured. For product
sales, revenue is not recognized until title and risk of loss have transferred
to the customer.
Under our sales-type leases, customers purchase BIS Sensors and the BIS
monitor for the purchase price of the BIS Sensors plus an additional charge per
BIS Sensor to pay for the purchase price of the BIS monitor and related
financing costs over the term of the agreement. The minimum lease payment,
consisting of the additional charge per BIS Sensor, less the unearned interest
income, which is computed at the interest rate implicit in the lease, is
recorded as the net investment in sales-type leases. We recognize Equipment
revenue under sales-type lease agreements either at shipment or delivery in
accordance with the agreed upon contract terms with interest income recognized
over the life of the sales-type lease. The cost of the BIS monitor acquired by
the customer is recorded as costs of revenue in the same period it is acquired.
We review and assess the net realizability of our investment in sales-type
leases at each reporting period. This review includes determining, on a customer
specific basis, if a customer is significantly underperforming relative to the
customer's cumulative level of committed BIS Sensor purchases as required by the
sales-type lease agreement. If a customer is underperforming, we record an
allowance for lease payments as a charge to revenue to reflect the lower
estimate of the net realizable investment in sales-type lease balance. Changes
in the extent of underperformance in the agreements could increase or decrease
the amount of revenue recorded in future periods.
We recognize revenue either at shipment or delivery in accordance with the
agreed upon contract terms with distributors and original equipment
manufacturers. Contracts executed for sales to distributors and original
equipment manufacturers include a clause that indicates that customer acceptance
is limited to confirmation that our products function in accordance with our
applicable product specifications in effect at the time of delivery. Formal
acceptance by the distributor or original equipment manufacturer is not
necessary to recognize revenue provided that we objectively demonstrate that the
criteria specified in the acceptance provisions are satisfied. Each product is
tested prior to shipment to ensure that it meets the applicable product
specifications in effect at the time of delivery. Additionally, we have
historically had a minimal number of defective products shipped to distributors
and original equipment manufacturers, and any defective products are subject to
repair or replacement under warranty as distributors and original equipment
manufacturers do not have a right of return.
We exercise judgment in determining the specific time periods in which we can
recognize revenue in connection with sales of our products. To the extent that
actual facts and circumstances differ from our initial judgments, our revenue
recognition could change accordingly and any such change could affect our
reported results.
Stock-Based Compensation
The Stock Compensation Topic of the FASB Accounting Standards Codification
requires that stock-based compensation expense associated with equity
instruments be recognized in the consolidated statement of income. Determining
the amount of stock-based compensation to be recorded requires us to develop
estimates to be used in calculating the grant-date fair value of stock options.
We calculate the grant-date fair values using the Black-Scholes valuation
methodology. The use of valuation models requires us to make estimates of the
following assumptions:
Risk-free interest rate: the implied yield currently available on U.S. Treasury
zero-coupon issues with a remaining term equal to the expected term used as the
assumption in the model.
Expected term: the expected term of an employee option is the period of time for
which the option is expected to be outstanding. We use a Monte Carlo simulation
model to estimate the assumed expected term for the grant date valuation as we
believe that this information is currently the best estimate of the expected
term of a new option.
Expected volatility: in estimating expected volatility, we consider both trends
in historical volatility and the implied volatility of our publicly traded
stock. We used a combination of our implied volatility and historical volatility
to estimate expected volatility for the three and nine months ended October 3,
2009. We believe that in addition to the relevance of historical volatility,
consideration of implied volatility is appropriate since it represents the
expected volatility that marketplace participants would likely use in
determining an exchange price for an option, and is therefore an appropriate
assumption to use in the calculation of grant date fair value.
Additionally, we are required to make assumptions regarding the forfeiture
rate, which we estimate at the time of grant and revise, if necessary, in
subsequent periods if actual forfeitures differ from those estimates. We used a
forfeiture rate of approximately 7.1% in our calculation at October 3, 2009. We
re-evaluate this forfeiture rate on a quarterly basis and adjust the rate as
necessary.
These assumptions involve significant judgment and estimates. Future
stock-based compensation expense could vary significantly from the amount
recorded in the current period due to changes in assumptions and due to the
extent of stock option activity and restricted stock issued in future periods.
As of October 3, 2009, the total unrecognized compensation cost related to
unvested stock options and unvested restricted stock awards was $4,228,000 and
$3,792,000 respectively, which will be amortized over the weighted average
remaining requisite service of 28 months and 21months, respectively.
Allowance for Doubtful Accounts
We determine our allowance for doubtful accounts by making estimates and
judgments based on our historical collections experience, current trends,
historical write-offs of our receivables, credit policy and a percentage of our
accounts receivable by aging category. We also review the credit quality of our
customer base as well as changes in our credit policies. We continuously monitor
collections and payments from our customers. While credit losses have
historically been within our expectations and the provisions established, our
credit loss rates in the future may not be consistent with our historical
experience. To the extent that we experience a deterioration in our historical
collections experience or increased credit losses, bad debt expense would likely
increase in future periods.
Inventories
We value inventory at the lower of cost or estimated market value, and
determine cost on a first-in, first-out basis. We regularly review inventory
quantities on hand and record a provision for excess or obsolete inventory
primarily based on production history and on our estimated forecast of product
demand. The medical device industry in which we market our products is
characterized by rapid product development and technological advances that could
result in obsolescence of inventory. Additionally, our estimates of future
product demand may prove to be inaccurate, in which case we would need to change
our estimate of the provision required for excess or obsolete inventory. If
revisions are deemed necessary, we would recognize the adjustments in the form
of a charge to costs of revenue at the time of the determination. Therefore,
although we continually update our forecasts of future product demand, any
significant unanticipated declines in demand or technological developments, such
as the introduction of new products by our competitors, could have a significant
negative impact on the value of our inventory, results of operations and cash
flows in future periods.
Warranty
Equipment that we sell is generally covered by a warranty period of twelve
months for direct business and up to twenty four months for distributor or OEM
business. We accrue a warranty reserve for estimated costs to provide warranty
services. Our estimate of costs to service its warranty obligations is based on
historical experience and an expectation of future conditions. While our
warranty costs have historically been within our expectations and the provisions
established, to the extent we experience an increased number of warranty claims
or increased costs associated with servicing those claims, our warranty expenses
will increase, and we may experience decreased gross profit and cash flow.
Income Taxes
Our provision for income taxes is composed of a current and a deferred
portion. The current income tax provision is calculated as the estimated taxes
payable or refundable on tax returns for the current year. The deferred income
tax provision is calculated for the estimated future tax effects attributable to
temporary differences and carryforwards using expected tax rates in effect in
the years during which the differences are expected to reverse.
Effective January 1, 2007, we adopted the FASB guidance related to accounting
for uncertainty in income taxes. The updated guidance clarifies the accounting
for uncertainty in income taxes recognized in an enterprise's financial
statements and prescribes a recognition threshold of more-likely-than-not to be
sustained upon examination. Upon adoption of this update, our policy to include
interest and penalties related to gross unrecognized tax benefits within our
provision for income taxes did not change. We did not accrue interest expense
related to these unrecognized tax benefits due to our historical carryforward
loss position, the uncertain benefits have not yet reduced taxes payable and,
accordingly, no interest expense has been accrued.
Results of Operations
The following tables present, for the periods indicated, financial
information expressed as a percentage of revenue and a summary of our total
revenue. This information has been derived from our condensed consolidated
statements of income included elsewhere in this Quarterly Report on Form 10-Q.
You should not draw any conclusions about our future results from the results of
operations for any period.
Three Months Ended Nine Months Ended
October 3, September 27, October 3, September 27,
2009 2008 2009 2008
Revenue 100 % 100 % 100 % 100 %
Costs of revenue 26 25 25 25
Gross margin 74 75 75 75
Operating expenses:
Research and development 16 17 15 16
Sales and marketing 39 51 41 46
General and administrative 20 16 19 16
Total operating expenses 75 84 75 78
(Loss) income from operations (1 ) (9 ) 0 (3 )
Interest income, net (1 ) - 0 -
Gain on valuation of warrants 4 - 1 -
Impairment loss on investments - (3 ) - (1 )
Gain on repurchase of debt - 24 4 13
Income before income taxes 2 12 5 9
Provision for incomes taxes 3 8 3 5
Net income (1 )% 4 % 2 % 4 %
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Three and Nine Months Ended October 3, 2009 Compared with the Three and Nine
Months Ended September 27, 2008
Three Months Ended Nine Months Ended
Percentage Percentage
October 3, September 27, Increase October 3, September 27, Increase
. . .
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