UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended October 3, 2009
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from ___________ to ___________
Commission file number: 0-24663
ASPECT MEDICAL SYSTEMS, INC.
(Exact Name of Registrant as Specified in Its Charter)
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Delaware
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04-2985553
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(State or Other Jurisdiction of
Incorporation or Organization)
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(I.R.S. Employer Identification No.)
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One Upland Road, Norwood, Massachusetts
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02062
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(Address of Principal Executive Offices)
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(Zip Code)
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(617) 559-7000
(Registrants 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 (§ 232.405 of this chapter) 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 the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
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Large accelerated filer
o
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Accelerated filer
þ
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Non-accelerated filer
o
(Do not check if smaller reporting company)
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Smaller reporting company
o
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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
The
Registrant had 17,447,499 shares of Common Stock, $0.01 par value per share, outstanding as of
November 1, 2009.
ASPECT MEDICAL SYSTEMS, INC.
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
Item 1. Financial Statements.
ASPECT MEDICAL SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data and per share amounts)
(unaudited)
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October 3,
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December 31,
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2009
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2008
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ASSETS
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Current assets:
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Cash and cash equivalents
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$
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26,816
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$
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12,066
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Short-term investments
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51,783
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65,985
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Accounts receivable, net of allowance of $214 at
October 3, 2009 and $121 at December 31, 2008
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14,298
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13,193
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Current portion of investment in sales-type leases
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851
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1,057
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Inventory
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8,911
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7,796
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Deferred tax assets
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4,729
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4,729
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Other current assets
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2,213
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2,905
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Total current assets
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109,601
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107,731
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Property and equipment, net
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7,530
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8,319
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Intangible assets, net
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663
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Restricted cash
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1,103
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839
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Long-term investments
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3,047
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4,561
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Long-term investment in sales-type leases
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993
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1,454
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Deferred financing fees
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1,424
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1,852
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Long-term deferred tax assets
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10,733
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12,090
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Other long-term assets
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1,709
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128
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Total assets
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$
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136,803
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$
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136,974
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LIABILITIES AND STOCKHOLDERS EQUITY
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Current liabilities:
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Accounts payable
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$
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2,468
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$
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2,155
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Accrued liabilities
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13,151
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13,288
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Current portion of obligation under capital lease
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73
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71
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Deferred revenue
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502
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236
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Total current liabilities
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16,194
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15,750
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Long-term portion of obligation under capital lease
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36
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100
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Long-term portion of deferred revenue
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69
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94
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Long-term debt
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57,950
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65,000
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Commitments and contingencies
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Stockholders equity:
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Preferred stock, $.01 par value; 5,000,000 shares
authorized, no shares issued or outstanding
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Common stock, $.01 par value; 60,000,000 shares
authorized, 17,447,499 and 17,352,438 shares issued
and outstanding at October 3, 2009 and December 31,
2008, respectively
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176
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176
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Treasury stock, at cost; 276,493 shares
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(5,008
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)
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(5,008
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)
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Additional paid-in capital
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191,812
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187,374
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Accumulated other comprehensive loss
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(12
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(105
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Accumulated deficit
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(124,414
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)
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(126,407
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Total stockholders equity
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62,554
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56,030
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Total liabilities and stockholders equity
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$
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136,803
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$
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136,974
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The accompanying notes are an integral part of these condensed consolidated financial statements.
1
ASPECT MEDICAL SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
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Three Months Ended
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Nine Months Ended
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October 3,
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September 27,
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October 3,
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September 27,
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2009
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2008
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2009
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2008
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Revenue
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$
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26,235
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$
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24,758
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$
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76,428
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$
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74,371
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Costs of revenue (1)
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6,761
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6,104
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18,884
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18,943
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Gross profit
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19,474
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18,654
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57,544
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55,428
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Operating expenses: (1)
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Research and development
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4,080
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4,183
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11,753
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12,056
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Sales and marketing
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10,318
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12,687
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31,322
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34,561
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General and administrative
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5,376
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3,920
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14,197
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12,034
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Total operating
expenses
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19,774
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20,790
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57,272
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58,651
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(Loss) income from operations
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(300
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)
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(2,136
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)
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272
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(3,223
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)
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Other income (expense):
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Interest income
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217
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867
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997
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3,248
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Interest expense
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(443
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)
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(849
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)
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(1,355
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)
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(2,725
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)
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Gain on valuation of warrants
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1,043
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1,043
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Realized gain on sale of
investments
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30
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Other-than-temporary
impairment of investments
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(840
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)
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(840
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Gain on repurchase of debt
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5,881
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3,049
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9,821
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Income before income taxes
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517
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2,923
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4,036
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6,281
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Provision for income taxes
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685
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1,883
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2,043
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3,577
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Net (loss) income
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$
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(168
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)
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$
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1,040
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$
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1,993
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$
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2,704
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Net (loss) income per share:
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Basic
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$
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(0.01
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$
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0.06
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$
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0.11
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$
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0.16
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Diluted
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$
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(0.01
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$
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0.06
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$
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0.11
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$
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0.16
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Weighted average shares used in
computing net (loss) income per
share:
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Basic
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17,442
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17,317
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17,411
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17,228
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Diluted
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17,442
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23,254
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17,412
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17,373
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(1) Stock-based compensation
included in costs and expenses:
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Costs of revenue
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$
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99
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$
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127
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$
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317
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$
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370
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Research and development
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318
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489
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1,124
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|
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1,445
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Sales and marketing
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335
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627
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1,267
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1,972
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General and administrative
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508
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647
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1,586
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1,975
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The accompanying notes are an integral part of these condensed consolidated financial statements.
2
ASPECT MEDICAL SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
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Nine Months Ended
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October 3,
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September 27,
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2009
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2008
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Cash flows from operating activities:
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Net income
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$
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1,993
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$
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2,704
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Adjustments to reconcile net income to net cash provided
by operating activities
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Depreciation and amortization
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2,344
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2,251
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Gain on repurchase of debt
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(3,049
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)
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(9,821
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)
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Gain on sale of investment
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(30
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)
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Loss on other-than-temporary impairment of investments
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840
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Non-cash gain on valuation of warrants
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(1,043
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)
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Provision for doubtful accounts
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94
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(102
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)
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Stock-based compensation expense
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4,233
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5,688
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Tax benefit for stock option exercises
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70
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90
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Deferred taxes
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|
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1,357
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3,122
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Changes in assets and liabilities
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Increase in accounts receivable
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(1,199
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)
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(606
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)
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Increase in inventory
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(1,115
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)
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(416
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)
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Decrease (increase) in other current assets
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|
692
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(554
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)
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Decrease in investment in sales-type leases
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|
667
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1,219
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Decrease in other long-term assets
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51
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Increase (decrease) in accounts payable
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313
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|
|
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(16
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)
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(Decrease) increase in accrued liabilities
|
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|
(137
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)
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|
2,414
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|
Increase in deferred revenue
|
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|
241
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|
|
|
78
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|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
5,482
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|
|
|
6,891
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Cash flows from investing activities:
|
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|
|
|
|
|
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(Increase) decrease in restricted cash
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(264
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)
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|
155
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|
Acquisitions of property and equipment
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(1,308
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)
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|
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(1,336
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)
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Acquisition of U.S. distribution rights for LiDCO products
|
|
|
(1,266
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)
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|
|
|
|
Purchases of investments
|
|
|
(48,919
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)
|
|
|
(66,072
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)
|
Proceeds from sales and maturities of investments
|
|
|
64,595
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|
|
|
90,275
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|
|
|
|
|
|
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Net cash provided by investing activities
|
|
|
12,838
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|
|
|
23,022
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|
|
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|
|
|
|
|
|
|
|
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Cash flows from financing activities:
|
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|
|
|
|
|
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Proceeds from issuance of common stock
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|
134
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|
846
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Repayment of long-term debt
|
|
|
(3,805
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)
|
|
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(14,413
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)
|
Repayment of capital lease
|
|
|
(62
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)
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|
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(59
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)
|
|
|
|
|
|
|
|
Net cash used for financing activities
|
|
|
(3,733
|
)
|
|
|
(13,626
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash
|
|
|
163
|
|
|
|
(50
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
|
14,750
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|
|
|
16,237
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|
Cash and cash equivalents, beginning of period
|
|
|
12,066
|
|
|
|
19,828
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
26,816
|
|
|
$
|
36,065
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
ASPECT MEDICAL SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(tabular amounts in thousands, except percentages and per share amounts)
(unaudited)
(1) Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of Aspect Medical
Systems, Inc. (the Company) have been prepared in accordance with accounting principles
generally accepted in the United States for interim financial information and with the
instructions to Quarterly Report on Form 10-Q and Regulation S-X promulgated pursuant to the
Securities Exchange Act of 1934, as amended. Accordingly, they do not include all of the
information and footnotes required by accounting principles generally accepted in the United
States for complete financial statements. In the opinion of management, all normal, recurring
adjustments considered necessary for a fair presentation have been included. The unaudited
condensed consolidated financial statements and notes included herein should be read in
conjunction with the audited consolidated financial statements and accompanying notes thereto for
the year ended December 31, 2008 included in the Companys Annual Report on Form 10-K filed with
the Securities and Exchange Commission (the SEC). Interim results of operations are not
necessarily indicative of the results to be expected for the full year or any other interim
period.
The Company follows a system of fiscal quarters as opposed to calendar quarters. Therefore,
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.
(2) Summary of Significant Accounting Policies
A summary of the significant accounting policies used by the Company in the preparation of
its financial statements follows:
Principles of Consolidation
The condensed consolidated financial statements include the accounts of the Company and its
wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated.
Foreign Currency
The functional currency of each of the Companys international subsidiaries is the local
currency of such international subsidiary. Gains and losses resulting from translation
adjustments have been included as part of accumulated other comprehensive (loss) income and have
not been material. Transaction gains and losses and remeasurement of foreign currency
denominated assets and liabilities are included in net (loss) income and are not material.
Cash, Cash Equivalents and Investments
The Company invests its excess cash in money market accounts, certificates of deposit,
high-grade commercial paper, high grade corporate bonds and debt obligations of various
government agencies. The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents.
The Company accounts for its investments in marketable securities in accordance with the
Investments Debt and Equity Securities Topic of the Financial Accounting Standards Board
(FASB) Accounting Standards Codification. The Company has classified all of its investments in
marketable securities as available-for-sale at October 3, 2009 and December 31, 2008. The
investments are reported at fair value, with any unrealized gains or losses excluded from
earnings and reported as a separate component of stockholders equity as accumulated other
comprehensive (loss) income in the accompanying condensed consolidated balance sheets.
Investments that have contractual maturity dates of more than twelve months from the balance
sheet date are included in long-term investments in the accompanying condensed consolidated
balance sheets.
4
ASPECT MEDICAL SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(tabular amounts in thousands, except percentages and per share amounts)
(unaudited)
Revenue Recognition
The Company primarily sells its BIS monitors through a combination of a direct sales force
and distributors. The Company sells its BIS Modules to original equipment manufacturers who
incorporate them into their equipment and then sell to the end user. BIS Sensors are sold
through a combination of a direct sales force, distributors and original equipment manufacturers.
The Company also sells the LiDCO
rapid
monitoring system and related products through its direct
sales force as part of the distribution and technology licensing agreement with LiDCO Limited
(the LiDCO Distribution Agreement) as discussed in footnote 6. Direct product sales are
structured as sales, sales-type lease arrangements or sales under the Companys Equipment
Placement (EP) program. Sales, sales-type lease agreements and sales under the EP program are
subject to the Companys standard terms and conditions of sale and do not include any customer
acceptance criteria, installation or other post shipment obligations (other than warranty) or any
rights of return. The Companys BIS monitor is a standard product and does not require
installation as it can be operated with the instructions included in the operators manual.
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. The Companys revenue arrangements with
multiple elements are divided into separate units of accounting if specified criteria are met,
including whether the delivered element has stand-alone value to the customer and whether there
is objective and reliable evidence of the fair value of the undelivered items. The consideration
received is allocated among the separate units based on their respective fair values, and the
applicable revenue recognition criteria are applied to each of the separate units.
Under the Companys 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 agreement, is
recorded as the net investment in sales-type leases. The Company recognizes 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.
In addition, the Company reviews and assesses the net realizability of its 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 customers
cumulative level of committed BIS Sensor purchases as required by the sales-type lease agreement.
If a customer is underperforming, the Company records 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.
As of October 3, 2009, the Company does not consider any sales-type lease agreement, against
which an allowance for lease payments has been established, an impaired asset.
Under the Companys 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 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 the Company. Under the EP program, no equipment
revenue is recognized as the equipment remains the Companys property and title does not pass to
the customer and the criteria for sales-type leases are not met. The BIS monitors under the EP
program are depreciated over two years and the depreciation is charged to costs of revenue. BIS
Sensor revenue under the EP program is recognized either at shipment or delivery of the BIS
Sensors in accordance with the agreed upon contract terms.
The Companys obligations under warranty are limited to repair or replacement of any product
that the Company reasonably determines to be covered by the warranty. The Company records an
estimate for its total warranty obligation based on historical experience and an expectation of
future conditions.
5
ASPECT MEDICAL SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(tabular amounts in thousands, except percentages and per share amounts)
(unaudited)
Research and Development Costs
The Company charges research and development costs to operations as incurred. Research and
development costs include costs associated with new product business development, product
improvements and extensions, clinical studies and project consulting expenses.
Allowance for Doubtful Accounts
The Company makes estimates and judgments in determining its allowance for doubtful accounts
based on the Companys historical collections experience, historical write-offs of its
receivables, current trends, credit policies and a percentage of the Companys accounts
receivable by aging category. The Company also reviews the credit quality of its customer base as
well as changes in its credit policies. The Company continually monitors collections and payments
from its customers and adjusts the allowance for doubtful accounts as needed.
Inventory
The Company values inventory at the lower of cost or estimated market value, and determines
cost on a first-in, first-out basis. The Company regularly reviews inventory quantities on hand
and records a provision for excess or obsolete inventory primarily based on production history
and on its estimated forecast of product demand. The medical device industry in which the
Company markets its products is characterized by rapid product development and technological
advances that could result in obsolescence of inventory. Additionally, the Companys estimates
of future product demand may prove to be inaccurate, in which case it would need to change its
estimate of the provision required for excess and obsolete inventory. If revisions are deemed
necessary, the Company would recognize the adjustments in the form of a charge to its costs of
revenue at the time of the determination.
Warranty
Equipment that the Company sells is generally covered by a warranty period of twelve months
for direct business and up to twenty four months for distributor or OEM business. The Company
accrues a warranty reserve for estimated costs to provide warranty services. The Companys
estimate of costs to service its warranty obligations is based on historical experience and an
expectation of future conditions. Warranty expense, included in costs of revenue in the
condensed consolidated statements of operations, for the three and nine months ended October 3,
2009 and September 27, 2008, and accrued warranty cost, included in accrued liabilities in the
condensed consolidated balance sheet at October 3, 2009, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
October 3, 2009
|
|
|
September 27, 2008
|
|
|
October 3, 2009
|
|
|
September 27, 2008
|
|
Beginning balance
|
|
$
|
266
|
|
|
$
|
254
|
|
|
$
|
270
|
|
|
$
|
250
|
|
Warranty expense
|
|
|
23
|
|
|
|
12
|
|
|
|
52
|
|
|
|
42
|
|
Deductions and other
|
|
|
(16
|
)
|
|
|
(11
|
)
|
|
|
(49
|
)
|
|
|
(37
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
273
|
|
|
$
|
255
|
|
|
$
|
273
|
|
|
$
|
255
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shipping and Handling Costs
Shipping and handling costs are included in costs of revenue in the condensed consolidated
statements of income.
Advertising Costs
Advertising costs are expensed as incurred. These costs are included in sales and marketing
expense in the condensed consolidated statements of operations.
6
ASPECT MEDICAL SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(tabular amounts in thousands, except percentages and per share amounts)
(unaudited)
Property and Equipment
Property and equipment is recorded at cost and depreciated using the straight-line method
over the estimated useful lives of the related property and equipment. The costs of improvements
to the Companys leased building are capitalized as leasehold improvements and amortized using
the straight-line method over the shorter of the life of the lease or the useful life of the
asset. Repair and maintenance expenditures are charged to expense as incurred. The Company does
not develop software for internal use and the costs of software acquired for internal use are
either capitalized or expensed based on the nature of the costs and the softwares stage of
development.
Income Taxes
Deferred tax assets and liabilities are recognized for the expected future tax consequences,
utilizing currently enacted tax rates of temporary differences between the carrying amounts and
the tax basis of assets and liabilities. Deferred tax assets are recognized, net of any
valuation allowance, for the estimated future tax effects of deductible temporary differences and
tax operating loss and credit carryforwards. See footnote 7 for additional disclosure relating
to income taxes.
Concentration of Credit Risk
Financial instruments that potentially expose the Company to concentrations of credit risk
primarily consist of cash, cash equivalents, investments, accounts receivable and investment in
sales-type lease receivables. The Company does not require collateral or other security to
support financial instruments subject to credit risk. To minimize the financial statement risk
with respect to accounts receivable and investment in sales-type lease receivables, the Company
maintains reserves for potential credit losses and historically such losses, in the aggregate,
have not exceeded the reserves established by management. The Company maintains cash and
investments with various financial institutions. The Company performs periodic evaluations of the
relative credit quality of investments and the Companys policy is designed to limit exposure to
any one institution or type of investment. The primary objective of the Companys investment
strategy is the safety of the principal invested. The Company does not maintain foreign exchange
contracts or other off-balance sheet financial investments.
Single or Limited Source Suppliers
The Company currently obtains certain key components of its products from single or limited
sources. The Company purchases components pursuant to purchase orders, and in select cases,
long-term supply agreements and generally does not maintain large volumes of inventory. The
Company has experienced shortages and delays in obtaining certain components of its products in
the past. The Company may experience similar shortages and delays in the future. The disruption
or termination of the supply of components or a significant increase in the costs of these
components from these sources could have a material adverse effect on the Companys business,
financial position, results of operations and cash flows.
Net (Loss) Income Per Share
Basic net (loss) income per share for the three and nine months ended October 3, 2009 and
September 27, 2008 were computed by dividing net (loss) income by the weighted average number of
common shares outstanding during those periods and diluted net (loss) income per share was
computed using the weighted average number of common shares outstanding and other dilutive
securities, including stock options, unvested restricted stock and convertible debt during those
periods.
For the three and nine months ended October 3, 2009, approximately 3,017,000 and 4,444,000
respectively, of potentially dilutive instruments, consisting of common stock options and
unvested restricted stock, have been excluded from the computation of diluted weighted average shares outstanding as their effect would be antidilutive. For the three and nine months ended
September 27, 2008, approximately 4,602,000 and 10,757,000, respectively, of potentially dilutive
instruments, consisting of common stock options, unvested restricted stock and convertible debt,
have been excluded from the computation of diluted weighted average shares outstanding as their
effect would be antidilutive.
7
ASPECT MEDICAL SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(tabular amounts in thousands, except percentages and per share amounts)
(unaudited)
Basic and diluted net (loss) income per share amounts for the three and nine months ended
October 3, 2009 and September 27, 2008 were determined as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
October 3,
|
|
|
September 27,
|
|
|
October 3,
|
|
|
September 27,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(168
|
)
|
|
$
|
1,040
|
|
|
$
|
1,993
|
|
|
$
|
2,704
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
17,442
|
|
|
|
17,317
|
|
|
|
17,411
|
|
|
|
17,228
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net (loss) income per share
|
|
$
|
(0.01
|
)
|
|
$
|
0.06
|
|
|
$
|
0.11
|
|
|
$
|
0.16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(168
|
)
|
|
$
|
1,040
|
|
|
$
|
1,993
|
|
|
$
|
2,704
|
|
Interest expense on convertible
debt, net
|
|
|
|
|
|
|
306
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income as adjusted
|
|
$
|
(168
|
)
|
|
$
|
1,346
|
|
|
$
|
1,993
|
|
|
$
|
2,704
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
17,442
|
|
|
|
17,317
|
|
|
|
17,411
|
|
|
|
17,228
|
|
Effect of dilutive stock options and
restricted stock
|
|
|
|
|
|
|
36
|
|
|
|
1
|
|
|
|
145
|
|
Conversion of convertible notes
|
|
|
|
|
|
|
5,901
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares assuming
dilution
|
|
|
17,442
|
|
|
|
23,254
|
|
|
|
17,412
|
|
|
|
17,373
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net (loss) income per share
|
|
$
|
(0.01
|
)
|
|
$
|
0.06
|
|
|
$
|
0.11
|
|
|
$
|
0.16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Income
Comprehensive income is defined as the change in equity of a business enterprise during a
period from transactions and other events and circumstances from non-owner sources. Other than
the Companys net (loss) income, the only other element of comprehensive (loss) income impacting
the Company is the unrealized gains (losses) on its investments for all periods presented and
cumulative currency translation adjustments.
Stock-Based Compensation
The Company has three stock incentive plans, one non-employee director stock option plan and
an employee stock purchase plan. Stock options and restricted common stock generally vest over
three to four years and provide, in certain instances, for the acceleration of vesting in
connection with a change of control of the Company. Options under the stock incentive plans
expire ten years from the date of grant. The Companys stock incentive plans provide for the
grant, at the discretion of the Board of Directors, of options for the purchase of up to
12,110,000 shares of common stock to employees, directors, consultants and advisors.
The Company accounts for share-based payments to employees under the fair value recognition
and measurement provisions of the Stock Compensation subtopic of the FASB Accounting Standards
Codification. Compensation expense recognized during the three and nine months ended October 3,
2009 and September 27, 2008 included: (a) compensation expense for all share-based awards granted
prior to, but not yet vested as of, December 31, 2005, based on the grant date fair value
estimated in accordance with the original provisions of SFAS No. 123,
Accounting for Stock-Based
Compensation
(SFAS No. 123) and (b) compensation expense for all share-based awards granted
subsequent to December 31, 2005, based on the grant date fair value estimated in accordance with
the provisions of SFAS No. 123R.
On July 10, 2009, the Companys stock option exchange offer (the Exchange Offer), which
had been initiated in June 2009, expired. In the Exchange Offer, the Company offered eligible
employees who held certain stock options, the right to exchange some or all of such outstanding
eligible options for new stock options to be granted under the Companys 2001
8
ASPECT MEDICAL SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(tabular amounts in thousands, except percentages and per share amounts)
(unaudited)
Plan. Under the terms of the Exchange Offer, eligible options were those granted under the Companys 1998 Stock
Incentive Plan, as amended, or its 2001 Stock Incentive Plan, as amended (the 2001 Plan), to
purchase shares of the Companys common stock, with a per share exercise price (a) equal to or greater than $15.00 and (b)
greater than the closing price of the Companys common stock on the Nasdaq Global Market on the
expiration date of the Exchange Offer. Eligible optionholders tendered, and the Company accepted
for cancellation, eligible options at exercise prices of $15.00 or greater to purchase an
aggregate of 1,051,357 shares of the Companys common stock from 161 participants, representing
82.5% of the total shares underlying options eligible for exchange in the Exchange Offer. The
Company has granted new options to purchase an aggregate of 312,587 shares of the Companys
common stock in exchange for the cancellation of the tendered eligible options. The exercise
price per share of each new option granted in the Exchange Offer is $5.99, which is the closing
price of the Companys common stock as reported by the Nasdaq Global Market on July 10, 2009, the
expiration of the Exchange Offer. The Exchange Offer represents a fair value exchange and,
therefore, no incremental stock-based compensation expense was recorded.
The Company uses the Black-Scholes option pricing methodology to calculate the grant-date
fair value of an award. During the three and nine months ended October 3, 2009 and September 27,
2008, the Company calculated the grant-date fair value using the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
October 3,
|
|
|
September 27,
|
|
|
October 3,
|
|
|
September 27,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Options granted
|
|
|
322
|
|
|
|
157
|
|
|
|
1,013
|
|
|
|
455
|
|
Weighted average exercise price
|
|
$
|
5.99
|
|
|
$
|
5.20
|
|
|
$
|
4.99
|
|
|
$
|
9.18
|
|
Weighted average grant date
fair value
|
|
$
|
3.09
|
|
|
$
|
2.93
|
|
|
$
|
2.82
|
|
|
$
|
4.49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk-free interest rate
|
|
|
2.13
|
%
|
|
|
3.64
|
%
|
|
|
2.46
|
%
|
|
|
3.22
|
%
|
Expected term
|
|
4.33 years
|
|
5.76 years
|
|
5.54 years
|
|
5.76 years
|
Expected volatility
|
|
|
64
|
%
|
|
|
58
|
%
|
|
|
62
|
%
|
|
|
51
|
%
|
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. The Company uses a Monte Carlo simulation model to estimate
the assumed expected term in connection with determining the grant date valuation as it believes
that this information is currently the best estimate of the expected term of a new option.
Expected volatility: in estimating its expected volatility, the Company considers both trends
in historical volatility and the implied volatility of its publicly traded stock. The Company has
used a combination of its implied volatility and historical volatility to estimate expected
volatility for the three and nine months ended October 3, 2009. The Company believes that in
addition to the relevance of historical volatility, consideration of implied volatility is relevant
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.
Expected dividend yield: this assumption is not applicable to the Companys calculation as the
Company has not declared, nor does it expect to declare in the foreseeable future, any dividends.
Expense
:
The Company uses the straight-line attribution method to recognize expense for all option
and restricted stock grants. The amount of stock-based compensation expense recognized during a
period is based on the value of the portion of the awards that is ultimately expected to vest.
Stock-based compensation expense is recorded on a straight-line basis over the requisite service
period, which is generally the vesting period. The Company estimates forfeitures at the time of
grant and revises the estimate, if necessary, in subsequent periods if actual forfeitures differ
from those estimates. The term forfeitures is distinct
9
ASPECT MEDICAL SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(tabular amounts in thousands, except percentages and per share amounts)
(unaudited)
from cancellations or expirations and represents only the unvested portion of the surrendered option. For the three and nine months
ended October 3, 2009, the Company applied a forfeiture rate of approximately 7.1%. The
Companys results for the three and nine months ended October 3, 2009 include stock-based
compensation expense of approximately $1,260,000 and $4,294,000, respectively, and approximately
$1,890,000 and $5,762,000 in the three and nine months ended September 27, 2008, respectively. For the three and nine months ended October 3, 2009, approximately $19,000
and $61,000, respectively, of the stock-based compensation expense relates to tax on deferred
compensation which is included in the condensed consolidated statement of operations within the
applicable operating expense where the Company reports the option holders and restricted stock
holders compensation cost. For the three and nine months ended September 27, 2008,
approximately $23,000 and $74,000, respectively, of the stock-based compensation expense relates
to tax on deferred compensation.
As of October 3, 2009, total compensation cost related to unvested stock options and unvested
restricted stock awards was $4,228,000 and $3,792,000, respectively, which is expected to be
recognized in the statement of operations over a weighted-average period of approximately 28 months
and 21 months, respectively.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Fair Value of Financial Instruments
The estimated fair market values of the Companys financial instruments, which include
investments, accounts receivable, investment in sales-type leases,
long-term debt and accounts payable, approximate
their carrying values. The fair value of warrants issued by LiDCO Group Plc to the Company is
estimated using the Black-Scholes Option Pricing Model.
Recent
Accounting Guidance
In January 2009, the FASB issued updated accounting guidance on the impairment guidance to
achieve a more consistent determination of whether an other-than-temporary impairment has occurred.
This guidance is effective for interim and annual reporting periods ending after December 15,
2008. The adoption of this guidance did not have a material impact on the Companys results of
operations, financial position or cash flow.
In April 2009, the FASB issued updated accounting guidance intended to provide additional
guidance and enhance disclosures regarding fair value measurements and impairments of securities.
The updated accounting guidance relates to determining fair values when no active market exists or
where the price inputs used represent distressed sales, increase the frequency of fair value
disclosures for financial instruments not currently reported on the balance sheet of companies at
fair value from once a year to a quarterly basis and provides additional guidance to create greater
clarity and consistency in accounting for and presenting impairment losses on securities. This
guidance is effective for interim and annual periods ending after June 15, 2009. The adoption of
this guidance did not have a material impact on the Companys results of operations, financial
position or cash flow.
In May 2009, the FASB issued updated accounting guidance to establish general standards of
accounting for disclosure of events that occur after the balance sheet date but before financial
statements are issued or are available to be issued. This guidance is effective for financial
statements issued for fiscal year and interim periods ending after June 15, 2009. The adoption of
this guidance did not have a material impact on the Companys results of operations, financial
position or cash flow.
In August 2009, the FASB issued Accounting Standards Update 2009-05,
Fair Value Measurements
and Disclosures
(the "Update"). The objective of this Update is to provide clarification that in circumstances
where a quoted price in an active market for the identical liability is not available, fair value
is required to be measured using a valuation technique that uses the quoted price of the identical
liability when traded as an asset or for similar liabilities or similar liabilities when traded as
assets or another valuation technique with consistent principles. The Update did not have a
material impact on the Companys results of operations, financial position or cash flow.
10
ASPECT MEDICAL SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(tabular amounts in thousands, except percentages and per share amounts)
(unaudited)
(3) Comprehensive (Loss) Income
The Companys total comprehensive income is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
October 3,
|
|
|
September 27,
|
|
|
October 3,
|
|
|
September 27,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Net (loss) income
|
|
$
|
(168
|
)
|
|
$
|
1,040
|
|
|
$
|
1,993
|
|
|
$
|
2,704
|
|
Other comprehensive (loss) income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation
adjustments
|
|
|
71
|
|
|
|
(50
|
)
|
|
|
163
|
|
|
|
(50
|
)
|
Unrealized loss on investments
|
|
|
(23
|
)
|
|
|
(760
|
)
|
|
|
(70
|
)
|
|
|
(984
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive (loss) income
|
|
$
|
(120
|
)
|
|
$
|
230
|
|
|
$
|
2,086
|
|
|
$
|
1,670
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4) Investment in Sales-Type Leases
The components of the Companys net investment in sales-type leases are as follows:
|
|
|
|
|
|
|
|
|
|
|
October 3,
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2009
|
|
Total minimum lease payments receivable
|
|
$
|
2,679
|
|
|
$
|
3,457
|
|
Less:
|
|
|
|
|
|
|
|
|
Unearned interest income
|
|
|
339
|
|
|
|
459
|
|
Allowance for lease payments
|
|
|
496
|
|
|
|
487
|
|
|
|
|
|
|
|
|
Net investment in sales-type leases
|
|
|
1,844
|
|
|
|
2,511
|
|
Less current portion
|
|
|
851
|
|
|
|
1,057
|
|
|
|
|
|
|
|
|
|
|
$
|
993
|
|
|
$
|
1,454
|
|
|
|
|
|
|
|
|
(5) Inventory
Inventory consists of the following:
|
|
|
|
|
|
|
|
|
|
|
October 3,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
Raw materials
|
|
$
|
4,682
|
|
|
$
|
4,552
|
|
Work-in-progress
|
|
|
49
|
|
|
|
25
|
|
Finished goods
|
|
|
4,180
|
|
|
|
3,219
|
|
|
|
|
|
|
|
|
|
|
$
|
8,911
|
|
|
$
|
7,796
|
|
|
|
|
|
|
|
|
(6) Intangible Assets
On July 28, 2009, the Company signed the LiDCO Distribution Agreement. Under the terms of
the Agreement, the Company will have exclusive rights to market, sell and distribute the
LiDCO
rapid
monitoring system as well as non-exclusive rights to market, sell and distribute the
LiDCO
plus
system in the United States. In addition, the LiDCO Distribution Agreement includes an
exclusive license to integrate LiDCO and BIS
®
technologies into a combined product for sale in
the United States, referred to below as the LiDCO
rapid
and Aspect BIS Combined Product. The
Agreement has an initial term of 10 years and will automatically renew for
successive 3 year renewal terms thereafter unless and until
either party gives the other party notice of its desire not to so
renew at least twelve months prior to the expiration of the initial
term or prior to the end of the then-current renewal term. In consideration for these rights, the Company paid
an upfront license fee of approximately $1,150,000. Additionally, the Company agreed to pay a
royalty to LiDCO for each combined product placed based on a formula set forth in the LiDCO
Distribution Agreement. Concurrently, LiDCO Group Plc granted to the Company a warrant to
purchase 8% of the outstanding shares of LiDCO Group Plc as of July 28, 2009 at an exercise price
equal to a 20% premium over the average trading price of LiDCO Group plc shares
11
ASPECT MEDICAL SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(tabular amounts in thousands, except percentages and per share amounts)
(unaudited)
reported by the London Stock Exchange for the ten days prior to and the ten days after the issuance date of the
warrant. For the first six months of the LiDCO Distribution Agreement, the Companys exclusive
rights under the Agreement in certain U.S. territories are subject to the exclusive rights
granted by LiDCO to a third party. The warrants would become exercisable in installments over the
next three years based upon the Companys achievement of specified purchase minimums. The
warrants are included in other long-term assets on the condensed consolidated balance sheets.
See footnote 8 for additional disclosure. The LiDCO Distribution Agreement was accounted for as
an asset acquisition in accordance with the Business Combinations Topic of the FASB Accounting
Standards Codification.
The Company acquired the following intangible assets:
|
|
|
|
|
|
|
Acquisition
|
|
|
|
Amount
|
|
Exclusive Product Distribution Rights LiDCO
rapid
and Aspect BIS Combined Product
|
|
$
|
562,000
|
|
Customer Relationships
|
|
|
116,000
|
|
|
|
|
|
|
|
$
|
678,000
|
|
|
|
|
|
The costs of the intangible assets are based on fair values at the date of acquisition and
are being amortized on a straight-line basis over their estimated
useful lives, which range from 3.7 to
6.3 years. The Company recorded approximately $14,000 of amortization expense in the three and
nine month period ended October 3, 2009. The Company expects to record approximately $88,000 of
amortization expense in 2010 through 2012 and $67,000 in 2013.
(7) Income Taxes
The
Company is subject to income taxes in numerous jurisdictions and at various rates
worldwide and the use of estimates is required in determining the provision for income taxes.
For the three and nine months ended October 3, 2009, the Company recorded a tax provision of
$685,000 and $2,043,000 on income before taxes of $517,000 and $4,036,000, respectively.
Included in the income tax provision for the three months ended October 3, 2009 is approximately
$570,000 resulting from the cumulative correction of immaterial errors from prior periods related
to international tax matters which were not previously considered in
the income tax provision. The Company does not believe that these
previously unrecorded amounts were material to the results
of operations or the financial position of the Company for any interim period in 2007, 2008 or
year to date 2009. The provision for income taxes was the result of applying an effective income
tax rate of 132% and 51% to income before tax for the three and nine months ended October 3,
2009, respectively. For the three and nine months ended October 3, 2009, the difference between
the effective tax rate and the U.S. federal statutory income tax rate of 34% was due mainly to
the impact of state income taxes, the disallowance for tax purposes of certain stock-based
compensation deductions, a taxable gain on the repurchase of the Companys convertible debt, the
correction of a prior period immaterial error of $570,000, associated with Internal Revenue Code
Section 956 income inclusion and the tax treatment for the gain on warrant valuations. For the
three and nine months ended September 27, 2008, the Company recorded a tax provision of
$1,883,000 and $3,577,000, on income before taxes of $2,923,000 and $6,281,000, resulting in an
effective income tax rate of 64% and 57%, respectively.
In the first quarter of 2008, the Company recorded a valuation allowance of approximately
$257,000 for a portion of its federal research and development credits since these credits are
expected to expire unused based on current projections. In addition, in the third quarter of
2008, the Company recorded a valuation allowance on a capital loss related to its commercial
paper investments since it did not anticipate that it would be able to benefit from this loss in
the near future. In the third quarter of 2009, the Company recorded a valuation allowance of
approximately $251,000 for a portion of the Companys foreign tax credits generated in 2007 and
2008 since it does not expect that it will be able to utilize the credits before expiration. The
Company also released a valuation allowance of approximately $97,000, which was related to
federal research and development credits that expired unutilized. As of October 3, 2009, the
Companys total cumulative valuation allowance was approximately $961,000.
As of January 1, 2009, the Company had gross unrecognized tax benefits of $805,000 (net of
the federal benefit on state issues), which represents the amount of unrecognized tax benefits
that, if recognized, would favorably affect the effective income tax rate in any future periods.
The Company classifies interest and penalties related to unrecognized tax benefits as
12
ASPECT MEDICAL SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(tabular amounts in thousands, except percentages and per share amounts)
(unaudited)
income tax expense. There were no significant changes to any of these amounts during the
third quarter of 2009. The Company does not reasonably estimate that the unrecognized tax benefit
will change significantly within the next twelve months.
The
Company and one of its subsidiaries files income tax returns in the U.S. federal
jurisdiction and various states and foreign jurisdictions. The Company is generally no longer
subject to income tax examinations by U.S. federal, state and local or non-U.S. income tax
examinations by tax authorities for years before 1993.
(8) Fair Value Measurements
Available-for-sale investments at October 3, 2009 and December 31, 2008 consist of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
October 3, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government debt securities
|
|
$
|
48,642
|
|
|
$
|
60
|
|
|
$
|
(4
|
)
|
|
$
|
48,698
|
|
Corporate obligations
|
|
|
5,803
|
|
|
|
37
|
|
|
|
|
|
|
|
5,840
|
|
Certificates of deposit
|
|
|
1,396
|
|
|
|
|
|
|
|
|
|
|
|
1,396
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
55,841
|
|
|
$
|
97
|
|
|
$
|
(4
|
)
|
|
$
|
55,934
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government debt securities
|
|
$
|
50,952
|
|
|
$
|
323
|
|
|
$
|
|
|
|
$
|
51,275
|
|
Corporate obligations
|
|
|
13,200
|
|
|
|
|
|
|
|
(207
|
)
|
|
|
12,993
|
|
Commercial paper
|
|
|
5,953
|
|
|
|
46
|
|
|
|
|
|
|
|
5,999
|
|
Certificates of deposit
|
|
|
279
|
|
|
|
|
|
|
|
|
|
|
|
279
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
70,384
|
|
|
$
|
369
|
|
|
$
|
(207
|
)
|
|
$
|
70,546
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All available-for-sale investments have contractual maturities of one to two years.
The Company evaluates its investments with unrealized losses for other-than-temporary
impairment. When assessing investments for other-than-temporary declines in value, the Company
considers such factors as, among other things, how significant the decline in value is as a
percentage of the original cost, how long the market value of the investment has been less than
its original cost, the Companys ability and intent to hold the investment until a recovery of
fair value and whether it is more likely than not that the Company will be required to sell the
investment before recovery of the investments amortized cost basis and market conditions in
general.
For the nine months ended October 3, 2009, the Company disposed of certain investments,
resulting in gross realized gains of approximately $30,000. The cost of securities sold is
determined based on the specific identification method for purposes of recording realized gains
and losses.
The aggregate fair value of investments with unrealized losses was approximately $6,024,000
at October 3, 2009. At October 3, 2009, three investments were in an unrealized loss position.
All such investments have been in an unrealized loss position for less than a year and these
losses are considered temporary. The Company has the ability and intent to hold these
investments until a recovery of fair value.
The Fair Value and Disclosures Topic of the FASB Accounting Standards Codification defines
and establishes a framework for measuring fair value and expands disclosure about fair value
measurements. The fair value hierarchy prioritizes the inputs to valuation techniques used to
measure fair value into three broad levels as follows: Level 1 inputs are quoted prices
(unadjusted) in active markets for identical assets or liabilities; Level 2 inputs are inputs
other than quoted prices included within Level 1 that are observable for the asset or liability,
either directly or indirectly; and Level 3 inputs are unobservable inputs that reflect the
Companys own assumptions about the assumptions market participants would use in pricing the
asset or liability.
Financial assets and liabilities are classified in their entirety based on the lowest level
of input that is significant to the fair value measurement. The Company has classified its
financial assets and liabilities that are required to be measured at fair value as of October 3,
2009 as follows:
13
ASPECT MEDICAL SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(tabular amounts in thousands, except percentages and per share amounts)
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at October 3, 2009
|
|
|
|
Balance at
|
|
|
|
|
|
|
|
|
|
|
|
|
October 3, 2009
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Money market funds
|
|
$
|
18,683
|
|
|
$
|
18,683
|
|
|
$
|
|
|
|
$
|
|
|
Available for sale securities
|
|
$
|
54,537
|
|
|
$
|
|
|
|
$
|
54,537
|
|
|
$
|
|
|
Warrants
|
|
$
|
1,632
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,632
|
|
In connection with the LiDCO Distribution Agreement (footnote 6), LiDCO Group Plc issued
warrants to the Company to purchase shares of its common stock in an amount equal to 8% of the
outstanding shares of LiDCO Group Plc as of July 28, 2009 at an exercise price equal to a 20%
premium over the average trading price of LiDCO Group plc shares reported by the London Stock
Exchange for the ten days prior to and the ten days after the issuance date of the warrant. The
fair value of these warrants is estimated using the Black-Scholes Option Pricing Model. The
following table summarizes the beginning and ending balance for the warrants:
|
|
|
|
|
|
|
Warrants
|
|
Balance at July 28, 2009
|
|
$
|
589
|
|
Total gains included in other income
|
|
|
1,043
|
|
|
|
|
|
Balance at October 3, 2009
|
|
$
|
1,632
|
|
|
|
|
|
(9) Segment Information and Enterprise Reporting
The Company operates in one reportable segment as it markets and sells anesthesia and
hemodynamic monitoring systems. The Company does not disaggregate financial information by
product or geographically, other than sales by region and sales by product, for management
purposes. Substantially all of the Companys assets are located within the United States. All
of the Companys BIS products are manufactured in the United States.
Revenue by geographic region and as a percentage of total revenue by geographic region is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
October 3,
|
|
|
September 27,
|
|
|
October 3,
|
|
|
September 27,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Geographic Area by Region
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
$
|
18,418
|
|
|
$
|
17,337
|
|
|
$
|
52,506
|
|
|
$
|
51,747
|
|
International
|
|
$
|
7,817
|
|
|
$
|
7,421
|
|
|
$
|
23,922
|
|
|
$
|
22,624
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
26,235
|
|
|
$
|
24,758
|
|
|
$
|
76,428
|
|
|
$
|
74,371
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
October 3,
|
|
|
September 27,
|
|
|
October 3,
|
|
|
September 27,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Geographic Area by Region
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
|
70
|
%
|
|
|
70
|
%
|
|
|
69
|
%
|
|
|
70
|
%
|
International
|
|
|
30
|
|
|
|
30
|
|
|
|
31
|
|
|
|
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14
ASPECT MEDICAL SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(tabular amounts in thousands, except percentages and per share amounts)
(unaudited)
The Company did not have sales in any individual country, other than the United States, or
to any individual customer, that accounted for more than 10% of the Companys total revenue or
accounts receivable for the three and nine months ended October 3, 2009 and September 27, 2008.
(10) Commitments and Contingencies
Leases
In February 2006, the Company entered into a lease agreement pursuant to which the Company
agreed to lease approximately 136,500 square feet of research and development, sales and
marketing, production and general and administrative space in Norwood, Massachusetts. The lease
expires in December 2016, and the Company has been granted the option to extend the term for
three additional five-year periods. In connection with this lease, the Company provided an
original security deposit in the amount of $911,000 to the lessor in accordance with the terms of
the lease agreement. This security deposit was subsequently reduced to $759,000 in 2008. This
lease is classified as an operating lease. The lease contains a rent escalation clause that
requires additional rental amounts in the later years of the term. Rent expense is being
recognized on a straight-line basis over the minimum lease term.
Legal Proceedings
The Company is aware of three putative class action lawsuits related to the Offer and the
Merger discussed in footnote 14 below, as follows:
(i) On October 6, 2009, a putative class action complaint,
Albert Donnay v. Nassib Chamoun,
et al.
, Civil Action No. 09-4249-BLS, was filed in the Massachusetts Superior Court for Suffolk
County, Business Litigation Session. This action purports to be brought on behalf of all public
stockholders of Aspect, and names Aspect, certain of its directors, United States Surgical
Corporation, and Transformer Delaware Corp. as defendants. The complaint alleges, among other
things, that the consideration to be paid to Aspect stockholders in the proposed acquisition is
unfair and undervalues Aspect. In addition, the complaint alleges that the Aspect directors named
in the action violated their fiduciary duties by, among other things, failing to maximize
stockholder value and failing to engage in a fair sale process. The complaint also alleges that
Aspect, United States Surgical Corporation and Transformer Delaware Corp. aided and abetted the
alleged breaches of fiduciary duties by certain of Aspects directors. The complaint seeks, among
other relief, an injunction preventing completion of the Merger or, if the Merger is consummated,
rescission of the Merger. On October 8, 2009, Aspect and the individual defendants filed an
answer in which they have denied the allegations, and they also served a motion to dismiss and/or
for judgment on the pleadings. On October 16, 2009, Aspect and the individual defendants filed a
motion to stay the action. On October 19, 2009, the plaintiff filed a motion to amend the
complaint to add claims asserting that Aspect and the individual defendants failed to disclose in
SEC filings material information regarding the Merger.
(ii) On October 13, 2009, a second putative class action complaint,
Roland A. Cherwek v.
Aspect Medical Systems, Inc., et al.
was filed in Delaware Chancery Court. This action purports
to be brought on behalf of all public stockholders of Aspect, and names Aspect, its directors,
United States Surgical Corporation, Transformer Delaware Corp., and Covidien plc as defendants.
The complaint alleges, among other things, that the consideration to be paid to Aspect
stockholders in the proposed acquisition is unfair and undervalues Aspect. In addition, the
complaint alleges that the Aspect directors named in the action violated their fiduciary duties
by, among other things, failing to maximize stockholder value, failing to engage in a fair sale
process, and failing to disclose in SEC filings material information regarding the Merger. The
complaint also alleges that Aspect, United States Surgical Corporation, Transformer Delaware
Corp., and Covidien plc aided and abetted the alleged breaches of fiduciary duties by Aspects
directors. The complaint seeks, among other relief, an injunction preventing completion of the
Merger or, if the Merger is consummated, rescission of the Merger and damages in an unspecified
amount. On October 26, 2009, plaintiff (on behalf of himself and the members of the putative
class) and all defendants entered into a memorandum of understanding reflecting an agreement in
principle to settle the matter. The agreement in principle is subject to the parties reaching
agreement on the terms of a mutually acceptable definitive settlement agreement. Thereafter, the
settlement agreement will be subject to approval by the court and also conditioned upon
consummation of the Merger.
(iii) On October 14, 2009, a third putative class action complaint,
Milton Pfeiffer v.
Nassib Chamoun, et al.
, Case No. 09-4377-BLS, was filed in the Massachusetts Superior Court for
Suffolk County, Business Litigation Session. This action purports to be brought on behalf of all
public stockholders of Aspect, and names Aspect, certain of its directors, United States Surgical
Corporation, and Transformer Delaware Corp. as defendants. The complaint alleges, among other
things, that the consideration to be paid to Aspect stockholders in the proposed acquisition is
unfair and undervalues Aspect. In addition, the complaint
15
ASPECT MEDICAL SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(tabular amounts in thousands, except percentages and per share amounts)
(unaudited)
alleges that the Aspect directors named in the action violated their fiduciary duties by,
among other things, failing to maximize stockholder value, failing to engage in a fair sale
process, and failing to disclose in SEC filings material information regarding the Merger. The
complaint also alleges that Aspect, United States Surgical Corporation and Transformer Delaware
Corp. aided and abetted the alleged breaches of fiduciary duties by the Aspect directors named in
the action. The complaint seeks, among other relief, an injunction preventing completion of the
Merger or, if the Merger is consummated, rescission of the Merger and damages in an unspecified
amount. On October 16, 2009, Aspect and the individual defendants filed a motion to stay the
action.
On October 10, 2007, a purported holder of the Companys common stock (the plaintiff), filed
suit in the U.S. District Court for the Western District of Washington against Morgan Stanley and
Deutsche Bank AG, the lead underwriters of the Companys 2000 initial public offering, alleging
violations of Section 16(b) of the Securities Exchange Act of 1934 (the Exchange Act). The
complaint alleges that the combined number of shares of the Companys common stock beneficially
owned by the lead underwriters and certain of the Companys unnamed officers, directors, and
principal stockholders exceeded ten percent of the Companys outstanding common stock from the
date of its initial public offering on January 28, 2000, through at least January 27, 2001. The
complaint further alleges that those entities and individuals were subject to the reporting
requirements of Section 16(a) of the Exchange Act and the short-swing trading prohibition of
Section 16(b) of the Exchange Act, and failed to comply with those provisions. The complaint
seeks to recover from the lead underwriters any short-swing profits obtained by them in
violation of Section 16(b) of the Exchange Act. The Company was named as a nominal defendant in
the action, but has no liability for the asserted claims. None of its directors or officers
serving in such capacities at the time of its initial public offering (many of whom still serve
as officers or directors of the Company) was named as defendants in this action. On February 25,
2008, the plaintiff filed an amended complaint asserting substantially similar claims as those
set forth in the initial complaint. On July 25, 2008, the Company joined with 29 other issuers
to file the Issuer Defendants Joint Motion to Dismiss. The plaintiff filed her opposition on
September 8, 2008, and the Company and the other Issuer Defendants filed their Reply in Support
of their Joint Motion to Dismiss on October 23, 2008. Oral argument on the Joint Motion to
Dismiss was held on January 16, 2009.
On March 12, 2009, the Court granted the Issuer Defendants Joint Motion to Dismiss,
dismissing the complaint without prejudice on the grounds that the plaintiff had failed to make
an adequate demand on the Company prior to filing her complaint. In its order, the Court stated
it would not permit the plaintiff to amend her demand letters while pursuing her claims in the
litigation. Because the Court dismissed the case on the grounds that it lacked subject matter
jurisdiction, it did not specifically reach the issue of whether the plaintiffs claims were
barred by the applicable statute of limitations. However, the Court also granted the
Underwriters Joint Motion to Dismiss with respect to cases involving non-moving issuers, holding
that the cases were barred by the applicable statute of limitations because the issuers
shareholders had notice of the potential claims more than five years prior to filing suit.
The plaintiff filed a Notice of Appeal on April 10, 2009, and the underwriters subsequently
filed a Notice of Cross-Appeal, arguing that the dismissal of the claims involving the moving
issuers should have been with prejudice because the claims were untimely under the applicable
statute of limitations. The plaintiffs opening brief in the
appeal was filed on August 26, 2009;
the Company and the underwriters responses and the underwriters brief in support of their
cross-appeal was filed on October 2, 2009; the plaintiffs reply brief and opposition to the
cross-appeal was filed on November 2, 2009; and the underwriters reply brief in support of their
cross-appeals is due on November 17, 2009. The Company currently believes that the outcome of
this litigation will not have a material adverse impact on its consolidated financial position
and results of operations.
(11) Loan Agreements
The Company is entitled to borrow up to $2,000,000 under a revolving line of credit, which
expires in May 2010. The line of credit may be extended on an annual basis at the discretion of
the commercial bank. Interest on any borrowings under the revolving line of credit is, at the
election of the Company, either the prime rate or at the London Inter-Bank Offer Rate, or LIBOR,
plus 2.25%. Up to $1,500,000 of the $2,000,000 revolving line of credit is available for standby
letters of credit. At October 3, 2009, the Company had outstanding standby letters of credit
with the commercial bank of approximately $1,081,000. At October 3, 2009, there was no
outstanding balance under this revolving line of credit.
The revolving line of credit agreement contains restrictive covenants that require the
Company to maintain liquidity and net worth ratios and is secured by certain investments of the
Company, which are shown as restricted cash in the accompanying condensed consolidated balance
sheets. The Company is required to maintain restricted cash in an amount equal to 102% of
16
ASPECT MEDICAL SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(tabular amounts in thousands, except percentages and per share amounts)
(unaudited)
the outstanding amounts under the revolving line of credit agreement. At October 3, 2009,
the Company had $1,103,000 classified as restricted cash on the condensed consolidated balance
sheet relating to standby letters of credit issued in connection with the Companys leased
building in Massachusetts, leased computers and an international service provider. At October 3,
2009, the Company was in compliance with all covenants contained in the revolving line of credit
agreement.
In March 2009, a bank guarantee of approximately $155,000 was given by an international bank
to the State of the Netherlands on the Companys behalf related to tax services for a subsidiary.
(12) Convertible Debt
During the first quarter of 2009, the Company repurchased an aggregate of $7,050,000 of its
2.5% convertible notes for total consideration of $3,805,000, plus accrued interest of
approximately $28,000 through the dates of repurchase. As a result of these transactions, the
Company recorded a gain on debt repurchase of $3,049,000 in the first quarter of 2009, which is
net of the write-off of the ratable portion of unamortized deferred financing fees.
(13) Stock Repurchase Program
On August 3, 2006, the Companys Board of Directors authorized the repurchase of up to
2,000,000 shares of the Companys common stock through the open market or in privately negotiated
transactions. The repurchase program may be suspended or discontinued at any time. There were no
repurchases under this plan in 2008 or during the nine months ended October 3, 2009. As of
October 3, 2009, the Company has repurchased a total of 276,493 shares of common stock under this
repurchase program for $5,008,000. Repurchased shares are held in treasury pending use for
general corporate purposes, including issuances under various employee stock plans. As of
October 3, 2009, the Company is authorized to repurchase an additional 1,723,507 shares of common
stock in the future, provided however that any such repurchase would require the consent of the
Parent and the Purchaser under the Merger Agreement as defined in footnote 14 below.
(14) Merger Agreement
On September 27, 2009, the Company entered into an Agreement and Plan of Merger (the Merger
Agreement) with United States Surgical Corporation, a Delaware corporation (Parent), and
Transformer Delaware Corp., a Delaware corporation and a wholly-owned subsidiary of Parent
(Purchaser). Parent and Purchaser are wholly-owned subsidiaries of Covidien plc. Pursuant to
the Merger Agreement, on October 8, 2009, the Purchaser commenced a tender offer (the Offer) to
acquire all of the outstanding shares of common stock of the Company at a purchase price of
$12.00 per share (the Offer Price) net to the holder in cash, without interest thereon, subject
to any required withholding of taxes, upon the terms and subject to the conditions set forth in
the Offer to Purchase, dated October 8, 2009, and the related Letter of Transmittal, each as
amended or supplemented from time to time.
The initial offering period for the Offer expired at 12:00 midnight, New York City time, at
the end of Thursday, November 5, 2009. According to the depositary for the Offer, as of the
expiration of the initial offering period, 16,195,245 shares of the Companys common stock had been
tendered, representing approximately 90% of the Companys outstanding shares of common stock (not including 297,066 shares of common stock tendered
under guaranteed delivery procedures). Purchaser has accepted for payment all shares of the
Companys common stock that were validly tendered and not withdrawn during the initial offering
period, in accordance with the
terms of the Offer. The Company has been advised that shares validly tendered in satisfaction of
guaranteed delivery procedures will also be accepted for payment and promptly paid for. Pursuant
to the Merger Agreement, promptly upon acceptance for payment of, and payment for, the tendered
shares of the Companys common stock in the Offer, Purchaser has the right to designate a number
of individuals to the Companys board of directors.
Purchaser intends to complete its acquisition of the Company as promptly as practicable
by means of a merger under Delaware law (Merger). As a result of its purchase of shares in the
Offer and its exercise of its option to purchase newly acquired shares from the Company, Purchaser has sufficient voting power to approve the Merger without the affirmative vote
of any other stockholder of the Company. As a result of such merger, the Company will become an
indirect wholly-owned subsidiary of Covidien and each share of the Companys outstanding common
stock will be cancelled and (except for shares held by the Company, Purchaser or Parent, or by
holders who properly exercise their
17
ASPECT MEDICAL SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(tabular amounts in thousands, except percentages and per share amounts)
(unaudited)
appraisal rights under Delaware law) will be converted into the right to receive the same
consideration, without interest, received by holders who tendered shares in the tender offer.
Following the effective time of the Merger, the Companys common stock will cease to be traded on
Nasdaq.
The Merger Agreement provides that all options to purchase common stock that are outstanding
immediately prior to the effective time of the Merger (Effective Time), whether vested or
unvested, will become fully vested and be cancelled immediately prior to the Merger in exchange
for a cash payment to be made by Purchaser as soon as practicable following the Effective Time
(but in no event later than 10 business days thereafter) equal to the excess of the Offer Price
over the exercise price of the option, multiplied by the number of shares of common stock
underlying the option. Options with exercise prices greater than or equal to the Offer Price will
be cancelled without any payment being made in respect thereof. Each share of Company restricted
stock outstanding immediately prior to the Effective Time shall become fully vested and free of
any vesting or other restrictions immediately prior to the Effective Time. As a result, all
restricted stock will be treated in a manner consistent with the other shares of common stock and
will be converted into the right to receive $12.00 in cash in connection with the Merger.
(15) Subsequent Event
The Company has evaluated subsequent events for potential recognition and/or disclosure
through November 6, 2009, the date the consolidated financial statements were issued.
On October 26, 2009, the Company entered into a memorandum of understanding with respect to
the class action complaint,
Roland A. Cherwek v. Aspect Medical Systems, Inc., et al.
Please
refer to footnote 10 for additional information.
The initial offering period for the Offer expired at 12:00 midnight, New York City time, at
the end of Thursday, November 5, 2009. According to the depositary for the Offer, as of the
expiration of the initial offering period, 16,195,245 shares of the Companys common stock had been
tendered, representing approximately 90% of the Companys outstanding shares of common stock (not including 297,066 shares of common stock tendered
under guaranteed delivery procedures). Purchaser has accepted for payment all shares of the
Companys common stock that were validly tendered and not withdrawn during the initial offering
period in accordance with the
terms of the Offer. Please refer to footnote 14 for additional information about the Offer and
the Merger.
18
|
|
|
Item 2.
|
|
Managements Discussion and Analysis of Financial Condition and Results of Operations.
|
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 BIS
®
system. 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 patients 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 LiDCO
rapid
monitoring system as well as non-exclusive rights to
market, sell and distribute the LiDCO
plus
system in the United States
.
In addition, the agreement
includes an exclusive license to integrate LiDCO and BIS
®
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 LiDCO
rapid
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
|
|
19
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 LiDCOs 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.
20
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
Managements 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 customers 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.
21
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.
22
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 enterprises 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
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23
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
|
|
|
|
2009
|
|
|
2008
|
|
|
(Decrease)
|
|
|
2009
|
|
|
2008
|
|
|
(Decrease)
|
|
|
|
(in thousands, except
|
|
|
|
|
|
|
(in thousands, except unit
|
|
|
|
unit amounts)
|
|
|
|
|
|
|
amounts)
|
|
Revenue Worldwide
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BIS Sensor
|
|
$
|
21,814
|
|
|
$
|
20,788
|
|
|
|
5
|
%
|
|
$
|
64,927
|
|
|
$
|
62,819
|
|
|
|
3
|
%
|
BIS monitor
|
|
|
2,446
|
|
|
|
1,847
|
|
|
|
32
|
%
|
|
|
6,307
|
|
|
|
5,888
|
|
|
|
7
|
%
|
Original equipment
manufacturer products
|
|
|
775
|
|
|
|
1,227
|
|
|
|
(37
|
)%
|
|
|
2,483
|
|
|
|
3,194
|
|
|
|
(22
|
)%
|
Other equipment and accessories
|
|
|
1,124
|
|
|
|
896
|
|
|
|
25
|
%
|
|
|
2,635
|
|
|
|
2,470
|
|
|
|
7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Equipment
|
|
|
4,345
|
|
|
|
3,970
|
|
|
|
9
|
%
|
|
|
11,425
|
|
|
|
11,552
|
|
|
|
(1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LiDCO revenue
|
|
|
76
|
|
|
|
|
|
|
|
|
|
|
|
76
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
26,235
|
|
|
$
|
24,758
|
|
|
|
6
|
%
|
|
$
|
76,428
|
|
|
$
|
74,371
|
|
|
|
3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unit Analysis Worldwide
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BIS Sensors
|
|
|
1,564000
|
|
|
|
1,514,000
|
|
|
|
3
|
%
|
|
|
4,770,000
|
|
|
|
4,575,000
|
|
|
|
4
|
%
|
BIS monitors
|
|
|
869
|
|
|
|
599
|
|
|
|
45
|
%
|
|
|
2,344
|
|
|
|
1,986
|
|
|
|
18
|
%
|
Original equipment manufacturer
BIS products
|
|
|
1,415
|
|
|
|
1,510
|
|
|
|
(6
|
)%
|
|
|
3,972
|
|
|
|
4,294
|
|
|
|
(7
|
)%
|
Installed base
|
|
|
62,327
|
|
|
|
53,630
|
|
|
|
16
|
%
|
|
|
62,327
|
|
|
|
53,630
|
|
|
|
16
|
%
|
Revenue.
Revenue from the sale of BIS Sensors increased approximately 5% in the three months
ended October 3, 2009 compared with the three months ended September 27, 2008. During this period,
we experienced an increase of approximately 3% in the number of BIS Sensors sold as a result of
growth in the installed base of BIS monitors. The number of domestic sensors sold was approximately
945,000 during the third quarter of 2008 and increased to approximately 984,000 during the third
quarter of 2009, an increase of approximately 4%, while the number of international sensors sold
increased approximately 2%, from approximately 569,000 during the third quarter of 2008 to
approximately 580,000 during the third quarter of 2009. Our installed base of BIS monitors and
original equipment manufacturer products increased 16% to approximately 62,327 units at October 3,
2009 compared with approximately 53,630 units at September 27, 2008.
In the nine months ended October 3, 2009, revenue from the sale of BIS Sensors increased
approximately 3% compared with the nine months ended September 27, 2008. We believe the increase
in revenue from the sale of BIS Sensors and the number of BIS Sensors sold during this period was
attributable to growth in the installed base of BIS monitors primarily as a result of the
introduction of the Bilateral Vista monitors at the end of 2008. The increase in revenue from the
sale of BIS Sensors was primarily attributable to an increase in the number of BIS Sensors sold,
from approximately 4.6 million BIS Sensors sold during the nine months ended September 27, 2008 to
approximately 4.8 million sold during the nine months ended October 3, 2009. BIS Sensor sales
domestically remained relatively stable with approximately 2.9 million BIS Sensors sold in the nine
months ended September 27, 2008 and in the nine months ended October 3, 2009. The number of BIS
Sensors sold internationally increased approximately 12%, from approximately 1.7 million BIS
Sensors sold during the nine months ended September 27, 2008 to approximately 1.9 million sold
during the nine months ended October 3, 2009.
During the three months ended October 3, 2009 compared with the three months ended September
27, 2008, total Equipment revenue increased by approximately 9%. The increase in Equipment revenue
during this period was a result of an increase of approximately 32% in BIS monitor revenue, an
increase of approximately 25% in other equipment revenue, offset by a decrease of
24
approximately 37% in original equipment manufacturer product revenue. The increase in monitor
revenue was a result of an increase of approximately 45% in the number of monitors sold combined
with a decrease in the average selling price of approximately 9% due primarily to our Bilateral
Vista monitor promotion, which we implemented in the first quarter of 2009 and which involves
trade-ins of A-2000 BIS monitors at a discounted price for Bilateral Vista monitors, implemented
during the first quarter of 2009. The decrease in original equipment manufacturer product revenue
was a result of a decrease of approximately 6% in the number of products sold to our original
equipment manufacturers and a decrease of approximately 33% in average selling prices.
In the nine months ended October 3, 2009, total Equipment revenue decreased approximately 1%
compared with the nine months ended September 27, 2008. The decrease in Equipment revenue during
the 2009 period was primarily driven by a decrease in original equipment manufacturer product
revenue of approximately 22%, offset by an increase in BIS monitor revenue of approximately 7% and
an increase in other equipment revenue of approximately 7%. The decrease in original equipment
manufacturer product revenue was a result of a decrease of approximately 7% in the number of
products sold to our original equipment manufacturers combined with a decrease of approximately 16%
in average selling prices. The increase in monitor revenue was a result of an increase of
approximately 18% in the number of monitors sold combined with a decrease in the average selling
price of approximately 9% due primarily to our Bilateral Vista monitor promotion which involves
trade-ins of A-2000 BIS monitors at a discounted price for Bilateral Vista monitors, implemented
during the first quarter of 2009.
Our gross margin was approximately 74.2% and 75.3% of revenue in the three and nine months
ended October 3, 2009, respectively, compared with a gross margin of approximately 75.3% and 74.5%
of revenue in the three and nine months ended September 27, 2008, respectively. The decrease in
the gross margin in the three months ended October 3, 2009 compared with the same period in the
prior year is primarily the result of a decrease in the average monitor selling price due primarily
to our Bilateral Vista monitor promotion. The increase in gross margin in the nine months ended
October 3, 2009 compared with the same period in the prior year is primarily the result of
favorable manufacturing variances related to material pricing and cost reductions we implemented in
the fourth quarter of 2008 and the first quarter of 2009.
Expense Overview
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage
|
|
|
|
|
|
|
|
|
|
|
Percentage
|
|
|
|
October 3,
|
|
|
September 27,
|
|
|
Increase
|
|
|
October 3,
|
|
|
September 27,
|
|
|
Increase
|
|
|
|
2009
|
|
|
2008
|
|
|
(Decrease)
|
|
|
2009
|
|
|
2008
|
|
|
(Decrease)
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
$
|
4,080
|
|
|
$
|
4,183
|
|
|
|
(2
|
)%
|
|
$
|
11,753
|
|
|
$
|
12,056
|
|
|
|
(3
|
)%
|
Sales and marketing
|
|
|
10,318
|
|
|
|
12,687
|
|
|
|
(19
|
)
|
|
|
31,322
|
|
|
|
34,561
|
|
|
|
(9
|
)
|
General and administrative
|
|
|
5,376
|
|
|
|
3,920
|
|
|
|
37
|
|
|
|
14,197
|
|
|
|
12,034
|
|
|
|
18
|
|
Research and Development.
The decrease in research and development expenses in the three
months ended October 3, 2009 compared with the three months ended September 27, 2008 was primarily
attributable to a decrease of approximately $158,000 in consulting expenses, mainly driven by cost
reduction efforts.
For the nine months ended October 3, 2009 compared with the nine months ended September 27,
2008, the decrease in research and development expenses was due primarily to a decrease of
approximately $129,000 in consulting expenses, a decrease of approximately $86,000 in materials
expenses and a decrease of approximately $79,000 in recruiting expenses. We expect research and
development expenses in the fourth quarter of 2009 to decrease compared to the level of research
and development expenses in the third quarter of 2009 due mainly to decreased product development
expenses.
Sales and Marketing.
The decrease in sales and marketing expenses in the three months ended
October 3, 2009 compared with the three months ended September 27, 2008 was primarily attributable
to a decrease of approximately $494,000 in compensation and benefits, a decrease of approximately
$392,000 in travel and entertainment expenses and a decrease of approximately $1,483,000 in other
operating expenses driven by cost reduction efforts. The decrease in other operating expenses was
primarily attributable to a decrease of approximately $428,000 in recruiting and training expenses
related to the sales force expansion which we initiated during the second quarter of 2008, a
decrease of approximately $237,000 in market research expenses, a decrease of approximately
$221,000 related to foreign exchange fluctuations, a decrease of approximately $167,000 in
temporary help expenses and a decrease of approximately $130,000 in meeting expenses. In addition,
approximately $188,000 of commission expense paid to our original equipment manufacturers are
included in the three months ended September 27, 2008. For the three
25
months ended October 3, 2009, approximately $262,000 of commissions expense has been recorded
as a reduction to sensor revenue as a result of a change in contract terms. The decrease in
compensation and benefits is principally the result of the completion of the sales force retention
program in the first quarter of 2009 which we implemented in April 2008.
For the nine months ended October 3, 2009 compared with the nine months ended September 27,
2008, the decrease in sales and marketing expenses was driven by a decrease of approximately
$613,000 in compensation and benefits, a decrease of approximately $467,000 in travel and
entertainment expenses and a decrease of approximately $2,159,000 in other operating expenses. The
decrease in compensation and benefits is primarily driven by the completion of the sales force
expansion program which we initiated during the second quarter of 2008 and a decrease in
stock-based compensation expense. The decrease in other operating expenses is principally the
result of a decrease of approximately $514,000 in recruiting and training expenses related to the
sales force expansion which we initiated during the second quarter of 2008, a decrease of
approximately $298,000 in market research expenses, a decrease of approximately $298,000 in meeting
expenses, a decrease of approximately $286,000 in temporary employment expenses and a decrease of
approximately $212,000 related to foreign exchange fluctuations. In addition, approximately
$572,000 of commission expense paid to our original equipment manufacturers are included in the
nine months ended September 27, 2008. For the nine months ended October 3, 2009, approximately
$701,000 of commissions expense has been recorded as a reduction to sensor revenue as a result of a
change in contract terms. We expect the level of sales and marketing expenses in the fourth
quarter of 2009 to decrease compared to the level of sales and marketing expenses in the third
quarter of 2009 due mainly to continued cost reduction efforts.
General and Administrative.
The increase in general and administrative expenses in the three
months ended October 3, 2009 compared with the three months ended September 27, 2008 was primarily
attributable to an increase of approximately $309,000 in compensation and benefits to general and
administrative personnel and an increase of approximately $990,000 in professional services fees,
including legal services and accounting and tax related services related primarily to Covidiens
proposed acquisition of our business.
For the nine months ended October 3, 2009 compared with the nine months ended September 27,
2008, the increase in general and administrative expenses was driven by an increase of
approximately $183,000 in compensation and benefits to general and administrative personnel and an
increase of approximately $1,817,000 in professional services fees, including legal services and
accounting and tax related services relating to Covidiens proposed acquisition of our business.
We expect the level of general and administrative expenses in the fourth quarter of 2009 to
decrease compared with the level of general and administrative expenses in the third quarter of
2009 mainly due to decreased professional services expenses.
Interest Income.
Interest income decreased to approximately $217,000 in the three months
ended October 3, 2009 from approximately $867,000 in the three months ended September 27, 2008, a
decrease of approximately 75%. For the nine months ended October 3, 2009 compared with the nine
months ended September 27, 2008, interest income decreased approximately 69% from approximately
$3.2 million to approximately $997,000. The decrease in interest income in the three and nine
months ended October 3, 2009 compared with the three and nine months ended September 27, 2008 was
primarily attributable to a lower cash and investment balance resulting from repurchases of a
portion of our convertible debt in 2008 and the first quarter of 2009 combined with a decrease in
interest and other investment return rates. We expect interest income in the fourth quarter of
2009 to be comparable to the level of interest income in the third quarter of 2009.
Interest Expense.
Interest expense decreased to approximately $443,000 in the three months
ended October 3, 2009 compared with $849,000 in the three months ended September 27, 2008. For the
nine months ended October 3, 2009 compared with the nine months ended September 27, 2008, interest
expense decreased from approximately $2.7 million to approximately $1.4 million. The decrease in
interest expense in the three and nine months ended October 3, 2009 was primarily due to
repurchases of portions of our convertible debt during 2008 and the first quarter of 2009. We
expect interest expense in the fourth quarter of 2009 to be comparable to the level of interest
expense in the third quarter of 2009.
Other Income.
Other income was approximately $1.0 million and $4.1 million in the three months
and nine months ended October 3, 2009, respectively, compared with approximately $5.0 million and
$9.0 million in the three and nine months ended September 27, 2008, respectively. The other income
in the three months ended October 3, 2009 includes a fair value adjustment on the warrants we
acquired in connection with the LiDCO Distribution Agreement. For the nine months ended October 3,
2009, other income also included aggregate gains of approximately $3.0 million resulting from
repurchase of portions of our convertible debt. Other income in the nine months ended September
27, 2008 is primarily due to aggregate gains of approximately $9.8 million resulting from a
repurchase of portions of our convertible debt in September 2008, offset by an other-than-temporary
impairment loss on investment of approximately $840,000 during the third quarter of 2008. We
expect other income in the fourth quarter of 2009 to be below the level of other income in the
third quarter of 2009.
26
Income Taxes.
We are subject to income tax in numerous jurisdictions and at various rates
worldwide and the use of estimates is required in determining the provision for income taxes. For
the three and nine months ended October 3, 2009, we recorded a tax provision of $685,000 and $2.0
million on income before taxes of $517,000 and $4.0 million, respectively. Included in the income
tax provision for the three months ended October 3, 2009 is approximately $570,000 resulting from
the cumulative correction of immaterial errors from prior periods related to international tax
matters which were not previously considered in the income tax provision. We do not believe that
this previously unrecorded amount was material to our results of operations or the financial
position any interim period in 2007, 2008 or year to date 2009. The provision for income taxes was
the result of applying an effective income tax rate of 132% and 51% to income before tax for the
three and nine months ended October 3, 2009, respectively. For the three and nine months ended
October 3, 2009, the difference between the effective tax rate and the U.S. federal statutory
income tax rate of 34% was due mainly to the impact of state income taxes, the disallowance for tax
purposes of certain stock-based compensation deductions, a taxable gain on the repurchase of our
convertible debt, the correction of a prior period error of $570,000 related to Internal Revenue
Code Section 956 income inclusion and the tax treatment for the gain on warrant valuations. For
the three and nine months ended September 27, 2008, we recorded a tax provision of $1,883,000 and
$3,577,000 on income before taxes of $2,923,000 and $6,281,000, resulting in an effective income
tax rate of 64% and 57%, respectively.
In the first quarter of 2008, we recorded a valuation allowance of approximately $257,000 for
a portion of our federal research and development credits since these credits are expected to
expire unused based on current projections. In addition, in the third quarter of 2008, we recorded
a valuation allowance on a capital loss related to our commercial paper investments since we do not
anticipate that we will be able to benefit from this loss in the near future. In the third quarter
of 2009, we recorded a valuation allowance of approximately $251,000 for a portion of our foreign
tax credits generated in 2007 and 2008 since we do not expect that we will be able to utilize the
credits before expiration. We also released a valuation allowance of approximately $97,000, which
was related to federal research and development credits that expired unutilized. As of October 3,
2009, our total cumulative valuation allowance was approximately $961,000.
As of January 1, 2009, we had gross unrecognized tax benefits of $805,000 (net of the federal
benefit on state issues) which represent the amount of unrecognized tax benefits that, if
recognized, would favorably affect the effective income tax rate in any future periods. We
classify interest and penalties related to unrecognized tax benefits as income tax expense. There
were no significant changes to any of these amounts during the third quarter of 2009. We do not
reasonably estimate that the unrecognized tax benefit will change significantly within the next
twelve months.
Liquidity and Capital Resources
In May 2001, we entered into an agreement with Bank of America for a $5.0 million revolving
line of credit which we amended in June 2009 to reduce the available line of credit to $2.0
million. The June 2009 amendment also extended the expiration date of the loan agreement to May
2010. The revolving line of credit contains restrictive covenants that require us to maintain
liquidity and net worth ratios and is secured by certain investments, which are shown as restricted
cash on our consolidated balance sheets. In connection with this revolving line of credit
agreement, we are required to maintain restricted cash in an amount equal to 102% of the
outstanding amounts under the revolving line of credit. At October 3, 2009, we were in compliance
with all covenants contained in the revolving line of credit agreement. Interest on any borrowings
under the revolving line of credit is, at our election, either the prime rate or the London
Inter-Bank Offer Rate, or LIBOR, plus 2.25%. Up to $1.5 million of the $2.0 million revolving line
of credit is available for standby letters of credit. At October 3, 2009, the interest rate on the
line of credit was 3.25%, there was no amount outstanding under this line of credit and we had
standby letters of credit outstanding relating to our leased facility, leased computers and an
international service provider in the amount of approximately $1.1 million which is shown on our
consolidated balance sheet as restricted cash.
In March 2009, a bank guarantee of approximately $155,000 was given by an international bank
to the State of the Netherlands on our behalf related to tax services for a subsidiary.
In June 2007, we completed a private placement of $125.0 million aggregate principal amount of
2.5% convertible notes due 2014. Net proceeds received from the issuance of the notes were $121.0
million, which is net of the initial purchasers discount of $4.0 million. As of October 3, 2009,
we have used approximately $85.0 million of these proceeds to repurchase 5.5 million shares of our
common stock, of which 4.5 million shares were repurchased from Boston Scientific Corporation and
1.0 million shares were repurchased in connection with our 2.5% convertible senior note offering
that we completed in June 2007.
On August 3, 2006, our Board of Directors authorized the repurchase of up to 2,000,000 shares
of our common stock from time to time on the open market or in privately negotiated transactions.
As of October 3, 2009, we had repurchased 276,493 shares of
27
our common stock for approximately $5.0
million under this plan, and we are authorized to repurchase an additional 1,723,507 shares of
common stock in the future, provided that any such repurchase would require the consent of the
Purchaser and Parent under the Merger Agreement.
We expect to meet our near-term liquidity needs through the use of cash and short-term
investments on hand at October 3, 2009 and cash generated from operations. We believe that the
financial resources available to us, including our current working capital, our long-term
investments and available revolving line of credit will be sufficient to finance our planned
operations and capital expenditures for at least the next twelve months. However, our future
liquidity and capital requirements will depend upon numerous factors, including the resources
required to further develop our marketing and sales organization domestically and internationally,
to finance our research and development programs, to implement new marketing programs, to finance
our sales-type lease program, to meet market demand for our products and to repay our convertible
notes.
We expect to fund the growth of our business over the long term through cash flow from
operations and, if the acquisition of our business by the Purchaser pursuant to the Merger
Agreement is not consummated, through issuances of capital stock, promissory notes or other
securities. Any sale of additional equity or debt securities may result in dilution to our
stockholders, and we cannot be certain that additional public or private financing will be
available in amounts or on terms acceptable to us, or at all. If we are unable to obtain this
additional financing, we may be required to delay, reduce the scope of, or eliminate one or more
aspects of our business development activities, which could harm the growth of our business.
Currently, our 2.5% convertible senior notes due 2014 are convertible, under certain
circumstance, solely into shares of our common stock. However, under the terms of the Indenture
and such notes, we have the option to settle potential conversions of these notes with cash and, if
applicable, shares of our common stock, commonly referred to as net share settlement, if we first
obtain stockholder approval of this net share settlement feature, and we irrevocably elect to use
such settlement method. If we obtain stockholder approval of the net share settlement feature in
connection with the potential conversion of such notes and we irrevocably elect to use such
settlement method, then upon conversion of such notes we would (1) pay cash in an amount equal to
the lesser of one-fortieth of the principal amount of the notes being converted and the daily
conversion value (the product of the conversion rate and the current trading price) of the notes
being converted and (2) issue shares of our common stock only to the extent that the daily
conversion value of the notes exceeded one-fortieth of the principal amount of the notes being
converted for each trading day of the relevant 40 trading day observation period. In order to fund
the cash payments due upon conversion, we may be required to use a significant portion or all of
our existing cash or raise the cash for such payments through the sale of shares of our common
stock or additional debt securities or through one or more other financing transactions. We may
not have sufficient cash on hand or be able to acquire the necessary funds via financing on terms
favorable to us or our stockholders, or at all, which would result in an event of default under the
notes. Moreover, the use of a substantial portion of our existing cash may adversely affect our
liquidity and cash available to fund the growth of our business.
Working capital at October 3, 2009 was approximately $93.4 million compared with approximately
$92.0 million at December 31, 2008.
Cash provided by operations.
We received approximately $5.5 million of cash from operations
in the nine months ended October 3, 2009 compared with cash received from operations of
approximately $6.9 million in the nine months ended September 27, 2008. The cash received in the
nine months ended October 3, 2009 was primarily attributable to our net income of approximately
$2.0 million, non-cash stock-based compensation expense of approximately $4.2 million and
depreciation and amortization of approximately $2.3 million. These amounts were offset by a
non-cash gain of approximately $3.0 million resulting from the repurchase of an aggregate of
approximately $7.1 million of our 2.5% convertible notes during the period. The cash received in
the nine months ended September 27, 2008 was primarily attributable to our net income of
approximately $2.7 million, non-cash stock-based compensation expense of approximately $5.7
million, deferred taxes of approximately $3.1 million, an increase in accrued liabilities of
approximately $2.4 million and depreciation and amortization of approximately $2.3 million. These
amounts were offset by non-cash gains of approximately $9.8 million resulting from the repurchase
of an aggregate of $25.0 million of our 2.5% convertible notes during the period.
Cash provided by investing activities.
Approximately $12.8 million of cash was provided by
investing activities in the nine months ended October 3, 2009 compared with cash provided of
approximately $23.0 million in the nine months ended September 27, 2008. The cash provided in the
nine months ended October 3, 2009 was primarily the result of net proceeds from sales of
investments of approximately $15.7 million, offset by approximately $1.3 million in capital
expenditures and approximately $1.3 million of cash paid to LiDCO Limited in connection with our
distribution and licensing agreement. The cash provided in the nine months ended September 27,
2008 was primarily the result of net proceeds from sales and maturities of investments of
approximately $24.2 million, offset by approximately $1.3 million in capital expenditures. We
anticipate the level of capital
28
expenditures in the fourth quarter of 2009 will increase compared
with the level of capital expenditures in the third quarter of 2009 mainly due to purchases related
to our manufacturing equipment.
Cash used for financing activities.
We used approximately $3.7 million of cash from financing
activities in the nine months ended October 3, 2009 compared with the use of approximately $13.6
million of cash in the nine months ended September 27, 2008. The cash used for financing
activities was primarily the result of our repurchase of an aggregate of approximately $7.1 million
of our 2.5% convertible notes during the period for approximately $3.8 million. The cash used in
the nine months ended September 27, 2008 was primarily the result of the repurchase of an aggregate
of $25.0 million of our 2.5% convertible notes during the period for approximately $14.4 million.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements or relationships with unconsolidated
entities or financial partnerships, such as entities often referred to as structured finance or
special purpose entities, which are typically established for the purpose of facilitating
off-balance sheet arrangements or other contractually narrow or limited purposes.
Effects of Inflation
We believe that inflation and changing prices over the past three fiscal years have not had a
significant impact on our net sales and revenues or on our income from continuing operations.
Recent Accounting Pronouncements
In January 2009, the FASB issued updated accounting guidance on the impairment guidance to
achieve a more consistent determination of whether an other-than-temporary impairment has occurred.
This guidance is effective for interim and annual reporting periods ending after December 15,
2008. The adoption of this guidance did not have a material impact on our results of operations,
financial position or cash flow.
In April 2009, the FASB issued updated accounting guidance intended to provide additional
guidance and enhance disclosures regarding fair value measurements and impairments of securities.
The updated accounting guidance relates to determining fair values when no active market exists or
where the price inputs used represent distressed sales, increase the frequency of fair value
disclosures for financial instruments not currently reported on the balance sheet of companies at
fair value from once a year to a quarterly basis and provides additional guidance to create greater
clarity and consistency in accounting for and presenting impairment losses on securities. This
guidance is effective for interim and annual periods ending after June 15, 2009. The adoption of
this guidance did not have a material impact on our results of operations, financial position or
cash flow.
In May 2009, the FASB issued updated accounting guidance to establish general standards of
accounting for disclosure of events that occur after the balance sheet date but before financial
statements are issued or are available to be issued. This guidance is effective for financial
statements issued for fiscal year and interim periods ending after June 15, 2009. The adoption of
this guidance did not have a material impact on our results of operations, financial position or
cash flow.
In August 2009, the FASB issued Accounting Standards Update 2009-05,
Fair Value Measurements
and Disclosures
. The objective of this Update is to provide clarification that in circumstances
where a quoted price in an active market for the identical liability is not available, fair value
is required to be measured using a valuation technique that uses the quoted price of the identical
liability when traded as an asset or for similar liabilities or similar liabilities when traded as
assets or another valuation technique with consistent principles. The Update did not have a
material impact on our results of operations, financial position or cash flow.
Forward-Looking Statements
This Quarterly Report on
Form 10-Q
contains, in addition to historical information,
forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of
1934, including information relating to our ability to maintain profitability, information with
respect to market acceptance of our BIS system, continued growth in sales of our BIS monitors,
original equipment manufacturer products and BIS Sensors, our dependence on the BIS system,
regulatory approvals for our products, our ability to remain competitive and achieve future growth,
information with respect to other plans and strategies for our business, factors that may influence
our revenue for the fiscal quarter ending December 31, 2009 and thereafter and our proposed merger
with Covidien plc. These forward-looking statements involve risks and uncertainties and are not
guarantees of future performance. Words such as expect, anticipate, intend, plan,
believe, seek, estimate and variations of
29
these words and similar expressions are intended to
identify forward-looking statements. Our actual results could differ significantly from the results
discussed in these forward-looking statements. The important factors discussed under Part II Item
1A. Risk Factors below represent some of the current challenges to us that create risk and
uncertainty. In addition, subsequent events and developments may cause our expectations to change.
While we may elect to update these forward-looking statements we specifically disclaim any
obligation to do so, even if our expectations change.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Interest Rate Exposure
Our investment portfolio consists primarily of money market accounts, certificates of deposit,
high-grade commercial paper, high grade corporate bonds and debt obligations of various
governmental agencies. We manage our investment portfolio in accordance with our investment
policy. The primary objectives of our investment policy are to preserve principal, maintain a high
degree of liquidity to meet operating needs, and obtain competitive returns subject to prevailing
market conditions. Investments are made with an average maturity of twelve months or less and a
maximum maturity of 24 months. These investments are subject to risk of default, changes in credit
rating and changes in market value. These investments are also subject to interest rate risk and
will decrease in value if market interest rates increase. Due to the conservative nature of our
investments and relatively short effective maturities of the debt instruments, we believe interest
rate risk is mitigated. Our investment policy specifies the credit quality standards for our
investments and limits the amount of exposure from any single issue, issuer or type of investment.
Our investment in sales-type leases and line of credit agreement are also subject to market
risk. The interest rates implicit in our sales-type leases are fixed and not subject to interest
rate risk. In addition, the interest rate on the 2.5% convertible senior notes due 2014 is fixed
and not subject to interest rate risk. The interest rate on our line of credit agreement is
variable and subject to interest rate risk. The interest rate risk experienced to date related to
the line of credit has been mitigated primarily by the fact that the line of credit is typically
not utilized.
Foreign Currency Exposure
Most of our revenue, expenses and capital spending are transacted in U.S. dollars. The
expenses and capital spending of our international subsidiaries are transacted in the respective
countrys local currency and subject to foreign currency exchange rate risk. Our foreign currency
transactions are translated into U.S. dollars at prevailing currency rates. Gains or losses
resulting from foreign currency transactions are included in current period income as incurred and
translation adjustments have been included as part of accumulated other comprehensive income.
Currently, transactions that are denominated in foreign currencies have not been material.
Item 4. Controls and Procedures.
(a)
Evaluation of Disclosure Controls and Procedures.
Our management, with the participation of our chief executive officer and chief financial
officer evaluated the effectiveness of our disclosure controls and procedures as of October 3,
2009. The term disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e)
under the Exchange Act, means controls and other procedures of an issuer that are designed to
ensure that information required to be disclosed by the issuer in the reports that it files or
submits under the Exchange Act is recorded, processed, summarized and reported, within the time
periods specified in the SECs rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information required to be
disclosed by an issuer in the reports that it files or submits under the Exchange Act is
accumulated and communicated to the issuers management, including its principal executive and
principal financial officers, or persons performing similar functions, as appropriate to allow
timely decisions regarding required disclosure. Management recognizes that any controls and
procedures, no matter how well designed and operated, can provide only reasonable assurance of
achieving their objectives and management necessarily applies its judgment in evaluating the
cost-benefit relationship of possible controls and procedures. Based on the evaluation of our
disclosure controls and procedures as of October 3, 2009, our chief executive officer and chief
financial officer concluded that, as of such date, our disclosure controls and procedures were
effective at the reasonable assurance level.
(b)
Changes in Internal Controls.
No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and
15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended October 3, 2009 that has
materially affected, or is reasonably likely to materially affect, our internal control over
financial reporting.
30
PART II OTHER INFORMATION
Item 1. Legal Proceedings
We are aware of three putative class action lawsuits related to the Offer and the Merger, as
follows:
(i) On October 6, 2009, a putative class action complaint,
Albert Donnay v. Nassib Chamoun, et
al.
, Civil Action No. 09-4249-BLS, was filed in the Massachusetts Superior Court for Suffolk
County, Business Litigation Session. This action purports to be brought on behalf of all public
stockholders of Aspect, and names Aspect, certain of its directors, United States Surgical
Corporation, and Transformer Delaware Corp. as defendants. The complaint alleges, among other
things, that the consideration to be paid to Aspect stockholders in the proposed acquisition is
unfair and undervalues Aspect. In addition, the complaint alleges that the Aspect directors named
in the action violated their fiduciary duties by, among other things, failing to maximize
stockholder value and failing to engage in a fair sale process. The complaint also alleges that
Aspect, United States Surgical Corporation and Transformer Delaware Corp. aided and abetted the
alleged breaches of fiduciary duties by certain of Aspects directors. The complaint seeks, among
other relief, an injunction preventing completion of the Merger or, if the Merger is consummated,
rescission of the Merger. On October 8, 2009, Aspect and the individual defendants filed an answer
in which they have denied the allegations, and they also served a motion to dismiss and/or for
judgment on the pleadings. On October 16, 2009, Aspect and the individual defendants filed a motion
to stay the action. On October 19, 2009, the plaintiff filed a motion to amend the complaint to add
claims asserting that Aspect and the individual defendants failed to disclose in SEC filings
material information regarding the Merger.
(ii) On October 13, 2009, a second putative class action complaint,
Roland A. Cherwek v.
Aspect Medical Systems, Inc., et al.
was filed in Delaware Chancery Court. This action purports to
be brought on behalf of all public stockholders of Aspect, and names Aspect, its directors, United
States Surgical Corporation, Transformer Delaware Corp., and Covidien plc as defendants. The
complaint alleges, among other things, that the consideration to be paid to Aspect stockholders in
the proposed acquisition is unfair and undervalues Aspect. In addition, the complaint alleges that
the Aspect directors named in the action violated their fiduciary duties by, among other things,
failing to maximize stockholder value, failing to engage in a fair sale process, and failing to
disclose in SEC filings material information regarding the Merger. The complaint also alleges that
Aspect, United States Surgical Corporation, Transformer Delaware Corp., and Covidien plc aided and
abetted the alleged breaches of fiduciary duties by Aspects directors. The complaint seeks, among
other relief, an injunction preventing completion of the Merger or, if the Merger is consummated,
rescission of the Merger and damages in an unspecified amount. On October 26, 2009, plaintiff (on
behalf of himself and the members of the putative class) and all defendants entered into a
memorandum of understanding reflecting an agreement in principle to settle the matter. The
agreement in principle is subject to the parties reaching agreement on the terms of a mutually
acceptable definitive settlement agreement. Thereafter, the settlement agreement will be subject to
approval by the court and also conditioned upon consummation of the Merger.
(iii) On October 14, 2009, a third putative class action complaint,
Milton Pfeiffer v. Nassib
Chamoun, et al.
, Case No. 09-4377-BLS, was filed in the Massachusetts Superior Court for Suffolk
County, Business Litigation Session. This action purports to be brought on behalf of all public
stockholders of Aspect, and names Aspect, certain of its directors, United States Surgical
Corporation, and Transformer Delaware Corp. as defendants. The complaint alleges, among other
things, that the consideration to be paid to Aspect stockholders in the proposed acquisition is
unfair and undervalues Aspect. In addition, the complaint alleges that the Aspect directors named
in the action violated their fiduciary duties by, among other things, failing to maximize
stockholder value, failing to engage in a fair sale process, and failing to disclose in SEC filings
material information regarding the Merger. The complaint also alleges that Aspect, United States
Surgical Corporation and Transformer Delaware Corp. aided and abetted the alleged breaches of
fiduciary duties by the Aspect directors named in the action. The complaint seeks, among other
relief, an injunction preventing completion of the Merger or, if the Merger is consummated,
rescission of the Merger and damages in an unspecified amount. On October 16, 2009, Aspect and the
individual defendants filed a motion to stay the action.
On October 10, 2007, a purported holder of our common stock (the plaintiff), filed suit in the
U.S. District Court for the Western District of Washington against Morgan Stanley and Deutsche Bank
AG, the lead underwriters of our 2000 initial public offering, alleging violations of Section 16(b)
of the Securities Exchange Act of 1934 (the Exchange Act). The complaint alleges that the
combined number of shares of our common stock beneficially owned by the lead underwriters and
certain of our unnamed officers, directors and principal stockholders exceeded ten percent of our
outstanding common stock from the date of our initial public offering on January 28, 2000, through
at least January 27, 2001. The complaint further alleges that those entities and individuals were
subject to the reporting requirements of Section 16(a) of the Exchange Act and the short-swing
trading prohibition of Section 16(b) of the Exchange Act, and failed to comply with those
provisions. The complaint seeks to recover from the lead underwriters any short-swing profits
obtained by them in violation of Section 16(b) of the Exchange Act. We
31
were named as a nominal defendant in the action, but have no liability for the asserted claims. None of our directors or
officers serving in such capacities at the time of our initial public offering (many of whom still
serve as officers or directors) was named as defendants in this action. On February 25, 2008, the
plaintiff filed an amended complaint asserting substantially similar claims as those set forth in
the initial complaint. On July 25, 2008, we joined with 29 other issuers to file the Issuer
Defendants Joint Motion to Dismiss. The plaintiff filed her opposition on September 8, 2008, and
we and the other Issuer Defendants filed our Reply in Support of their Joint Motion to Dismiss on
October 23, 2008. Oral argument on the Joint Motion to Dismiss was held on January 16, 2009.
On March 12, 2009, the Court granted the Issuer Defendants Joint Motion to Dismiss,
dismissing the complaint without prejudice on the grounds that the plaintiff had failed to make an
adequate demand on us prior to filing her complaint. In its order, the Court stated it would not
permit the plaintiff to amend her demand letters while pursuing her claims in the litigation.
Because the Court dismissed the case on the grounds that it lacked subject matter jurisdiction, it
did not specifically reach the issue of whether the plaintiffs claims were barred by the
applicable statute of limitations. However, the Court also granted the Underwriters Joint Motion
to Dismiss with respect to cases involving non-moving issuers, holding that the cases were barred
by the applicable statute of limitations because the issuers shareholders had notice of the
potential claims more than five years prior to filing suit.
The plaintiff filed a Notice of Appeal on April 10, 2009, and the underwriters subsequently
filed a Notice of Cross-Appeal, arguing that the dismissal of the claims involving the moving
issuers should have been with prejudice because the claims were untimely under the applicable
statute of limitations. The plaintiffs opening brief in the appeal was filed on August 26, 2009; our
response and the underwriters response and the underwriters brief in support of their
cross-appeal was filed on October 2, 2009; the plaintiffs reply brief and opposition to the
cross-appeal was filed on November 2, 2009; and the underwriters reply brief in support of their
cross-appeals is due on November 17, 2009. We currently believe that the outcome of this
litigation will not have a material adverse impact on our consolidated financial position and
results of operations.
32
Item 1A. Risk Factors
You should carefully consider the following risk factors, in addition to other information
included in this Quarterly Report on Form 10-Q, in evaluating our business. Failure to adequately
overcome or address any of the following challenges could have a material adverse effect on our
results of operations, business or financial condition. The following risk factors supersede the
risk factors previously disclosed in Item 1A. of our 2008 Annual Report on Form 10-K.
If our acquisition by affiliates of Covidien plc is not completed as expected, our stock price,
business and results of operations may suffer.
On September 27, 2009, we entered into the Merger Agreement with Parent and Purchaser, which
we have previously filed with the SEC. Pursuant to the Merger Agreement, Purchaser commenced a
tender offer for all of our outstanding common stock at a purchase price of $12.00 per share, net
to the holder in cash, subject to any required withholding of taxes. The initial offering period
for the Offer expired at 12:00 midnight, New York City time, at the end of Thursday, 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 (excluding shares 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.
Although the Offer was successfully completed, it is possible that the required conditions to
the short-form merger procedures provided by Delaware law or the merger generally under the Merger
Agreement may not be satisfied. The merger might be delayed if the Purchaser cannot use the
short-form merger procedure and is required to obtain stockholder approval, or it could be
prevented if a court or other governmental authority were to block the merger or make it illegal.
If the merger is delayed or otherwise not consummated within the contemplated time periods or at
all, we could suffer a number of consequences that may adversely affect our business, results of
operations and stock price, including:
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activities related to the Offer or the merger and related uncertainties may lead
to a loss of revenue and market position that we may not be able to regain if the
proposed transaction does not occur;
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the market price of our common stock could decline following an announcement
that the proposed transaction had been abandoned or delayed;
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if the merger is delayed or otherwise not consummated within the contemplated
time periods or at all, because the Purchaser would own a substantial majority of our
common stock, there may not be an active trading market for our remaining shares of
common stock and we may not be able to sustain our Nasdaq listing;
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we would remain liable for our costs related to the proposed transaction,
including substantial legal, accounting and investment banking expenses; and
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we may not be able to take advantage of alternative business opportunities or
effectively respond to competitive pressures.
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Lawsuits have been filed against us and the members of our Board of Directors arising out of our
acquisition by affiliates of Covidien plc, which may delay or prevent the proposed transaction.
Three putative class action lawsuits related to the Offer and the Merger have been filed
against us and the members of our board of directors.
On October 6, 2009, a putative class action complaint,
Albert Donnay v. Nassib Chamoun, et
al.
, Civil Action No. 09-4249-BLS, was filed in the Massachusetts Superior Court for Suffolk
County, Business Litigation Session. This action purports to be brought on behalf of all public
stockholders of Aspect, and names Aspect, certain of its directors, United States Surgical
Corporation, and Transformer Delaware Corp. as defendants. The complaint alleges, among other
things, that the consideration to be paid to Aspect stockholders in the proposed acquisition is
unfair and undervalues Aspect. In addition, the complaint alleges that the Aspect directors named
in the action violated their fiduciary duties by, among other things, failing to maximize
stockholder value and failing to engage in a fair sale process. The complaint also alleges that
Aspect, United States Surgical Corporation and Transformer Delaware Corp. aided and abetted the
alleged breaches of fiduciary duties by certain of Aspects directors. The complaint seeks, among
other relief, an injunction preventing completion of the Merger or, if the Merger is consummated,
rescission of the Merger. On October 8, 2009, Aspect and the individual defendants filed an answer
in which they have denied the
33
allegations, and they also served a motion to dismiss and/or for
judgment on the pleadings. On October 16, 2009, Aspect and the individual defendants filed a motion
to stay the action. On October 19, 2009, the plaintiff filed a motion to amend the complaint to add
claims asserting that Aspect and the individual defendants failed to disclose in SEC filings
material information regarding the Merger.
On October 13, 2009, a second putative class action complaint,
Roland A. Cherwek v. Aspect
Medical Systems, Inc., et al.
was filed in Delaware Chancery Court. This action purports to be
brought on behalf of all public stockholders of Aspect, and names Aspect, its directors, United
States Surgical Corporation, Transformer Delaware Corp., and Covidien plc as defendants. The
complaint alleges, among other things, that the consideration to be paid to Aspect stockholders in
the proposed acquisition is unfair and undervalues Aspect. In addition, the complaint alleges that
the Aspect directors named in the action violated their fiduciary duties by, among other things,
failing to maximize stockholder value, failing to engage in a fair sale process, and failing to
disclose in SEC filings material information regarding the Merger. The complaint also alleges that
Aspect, United States Surgical Corporation, Transformer Delaware Corp., and Covidien plc aided and
abetted the alleged breaches of fiduciary duties by Aspects directors. The complaint seeks, among
other relief, an injunction preventing completion of the Merger or, if the Merger is consummated,
rescission of the Merger and damages in an unspecified amount. On October 26, 2009, plaintiff (on
behalf of himself and the members of the putative class) and all defendants entered into a
memorandum of understanding reflecting an agreement in principle to settle the matter. The
agreement in principle is subject to the parties reaching agreement on the terms of a mutually
acceptable definitive settlement agreement. Thereafter, the settlement agreement will be subject to
approval by the court and also conditioned upon consummation of the Merger.
On October 14, 2009, a third putative class action complaint,
Milton Pfeiffer v. Nassib
Chamoun, et al.
, Case No. 09-4377-BLS, was filed in the Massachusetts Superior Court for Suffolk
County, Business Litigation Session. This action purports to be brought on behalf of all public
stockholders of Aspect, and names Aspect, certain of its directors, United States Surgical
Corporation, and Transformer Delaware Corp. as defendants. The complaint alleges, among other
things, that the consideration to be paid to Aspect stockholders in the proposed acquisition is
unfair and undervalues Aspect. In addition, the complaint alleges that the Aspect directors named
in the action violated their fiduciary duties by, among other things, failing to maximize
stockholder value, failing to engage in a fair sale process, and failing to disclose in SEC filings
material information regarding the Merger. The complaint also alleges that Aspect, United States
Surgical Corporation and Transformer Delaware Corp. aided and abetted the alleged breaches of
fiduciary duties by the Aspect directors named in the action. The complaint seeks, among other
relief, an injunction preventing completion of the Merger or, if the Merger is consummated,
rescission of the Merger and damages in an unspecified amount. On October 16, 2009, Aspect and the
individual defendants filed a motion to stay the action.
We intend to vigorously defend against these claims; however, the outcome of all litigation is
uncertain and we may not be successful in defending against these claims. Regardless of the
outcome of this lawsuit, it could delay or prevent our acquisition by Covidien, divert the
attention of our management and employees from our day-to-day business and otherwise adversely
affect us financially.
We will not continue to be profitable if hospitals and anesthesia providers do not buy and use our
BIS system and purchase our BIS Sensors in sufficient quantities.
Although we were profitable for the years ended December 31, 2008 and 2007, we will not
continue to be profitable or increase our level of profitability if hospitals and anesthesia
providers do not buy and use our BIS system in sufficient quantities. Our customers may determine
that the cost of the BIS system exceeds cost savings in drugs, personnel and post-anesthesia care
recovery that may result from use of the BIS system. Also, if third party reimbursement is based on
charges or costs, patient monitoring with the BIS system may have the effect of reducing
reimbursement because the charges or costs for surgical procedures may decline as a result of
monitoring with the BIS system. In addition, hospitals and anesthesia providers may not accept the
BIS system as an accurate or superior means of assessing a patients level of consciousness during
surgery or in the intensive care unit. If extensive or frequent malfunctions occur, healthcare
providers may also conclude that the BIS system is unreliable. If hospitals and anesthesia
providers do not accept the BIS system as cost-effective, accurate and reliable, they will not buy
and use the BIS system in sufficient quantities to enable us to continue to be profitable.
Moreover, additional clinical research we or third parties undertake may fail to support the
benefit of our products, including failing to support evidence of a link between the use of BIS
monitoring and a reduction in the incidence of awareness. For example, a third-party study
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. We believe that the rate of growth of our sensor
revenue has been and may, in future periods continue to be, adversely affected as a result of this
publication. If the patient safety benefits of BIS monitoring are not persuasive enough to lead to
a wider adoption of our BIS technology, our business, financial condition and results of operations
could be adversely affected.
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The success of our business depends in a large part on continued use of the BIS system by our
customers and, accordingly, sales by us of BIS Sensors. Sales of BIS Sensors have increased over
time as a percentage of our revenue as compared to sales of Equipment as we built our installed
base of monitors and modules, and we expect they will continue to increase. If use of our BIS
system, and accordingly, sales of our BIS Sensors, do not increase, our ability to grow our revenue
and maintain profitability could be adversely affected.
We depend on our BIS system for substantially all of our revenue, and if the BIS system does not
gain widespread market acceptance, then our revenue will not grow.
To date, we have not achieved widespread market acceptance of the BIS system for use in the
operating room or in the intensive care unit from healthcare providers or professional anesthesia
organizations. Because we depend on our BIS system for substantially all of our revenue, and we
have no other significant products, if we fail to achieve widespread market acceptance for the BIS
system, we will not be able to sustain or grow our product revenue.
Various factors may adversely affect our quarterly operating results through the fourth fiscal
quarter of 2009.
Various factors may adversely affect our quarterly operating results through the fourth fiscal
quarter of 2009. Among these factors are the following:
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a third party study 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. 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, which could adversely affect our operating results;
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we have 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; as a result our
operating results in such periods could be adversely affected;
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we have repurchased a portion of our 2.5% convertible senior notes due 2014, referred to
as our notes, and we may make additional repurchases in the future. If any such
repurchases are made at a discount to the face value of the note, we expect to record a
gain on such transaction, which could affect our operating results in the quarter in which
any such repurchase is made;
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we face risks beyond our control with respect to the continued challenges of the U.S.
and worldwide economies, including without limitation the effects of domestic inflation,
declines in the value of our investments, the global rise in energy costs and reductions in
hospital spending; and
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we have entered into a Merger Agreement with Parent and Purchaser and activities and
uncertainties related to this transaction may lead to a loss of revenue and market position
that we may not be able to regain.
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If these or any other adverse factors cause a decline in our operating results, or if the
market perceives that any such adverse factors could cause a decline in our operating results, in
the fourth quarter of 2009 or beyond, then the trading price of our common stock may decline and
your investment may lose value.
Fluctuations in our quarterly operating results could cause our stock price to decrease.
Our operating results have fluctuated significantly from quarter to quarter in the past and
are likely to vary in the future. These fluctuations are due to several factors relating to the
sale of our products, including:
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the timing and volume of customer orders for our BIS system;
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market acceptance of our BIS VISTA monitor;
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use of and demand for our BIS Sensors;
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the timing and amount of sales from new products and technologies we may introduce, such
as products we may sell under the LiDCO Distribution Agreement;
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customer cancellations;
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introduction of competitive products;
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regulatory approvals;
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changes in management;
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turnover in our direct sales force;
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expansion of our direct sales force which has increased our operating expenses, and this
increase will not be offset, at least initially, by an increase in revenue;
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effectiveness of new marketing and sales programs;
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communications published by industry organizations or other professional entities in the
anesthesia community that are unfavorable to our business, including publication of the
results of clinical studies;
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trading in our convertible debt instruments;
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repurchases of shares of our common stock or our notes;
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the amount of our outstanding indebtedness and interest payments under debt obligations;
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reductions in orders by our distributors and original equipment manufacturers; and
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the timing and amount of our expenses.
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Because of these factors, it is likely that in some future quarter or quarters our operating
results could fall below the expectations of securities analysts or investors. If our quarterly
operating results are below expectations in the future, the market price of our common stock would
likely decrease. In addition, because we do not have a substantial backlog of customer orders for
our BIS system or our BIS Sensors, revenue in any quarter depends on orders received in that
quarter. Our quarterly results may also be adversely affected because some customers may have
inadequate financial resources to purchase our products or may fail to pay for our products after
receiving them. In particular, hospitals continue to experience financial constraints,
consolidations and reorganizations as a result of cost containment measures and declining
third-party reimbursement for services, which may result in decreased product orders or an increase
in bad debt allowances in any quarter.
The current crisis in global credit and financial markets could materially and adversely affect our
business and results of operations and our investment portfolio may become impaired further by a
continuation of the global economic crisis.
As widely reported, global credit and financial markets have been experiencing extreme
disruptions in recent months, including severely diminished liquidity and credit availability,
declines in consumer confidence, declines in economic growth, increases in unemployment rates and
uncertainty about economic stability. There can be no assurance that there will not be further
deterioration in credit and financial markets and confidence in economic conditions. The current
tightening of credit in financial markets may lead hospitals to postpone spending, which may cause
our customers to cancel, decrease or delay their existing and future orders with us. The
volatility in the credit markets has severely diminished liquidity and capital availability. We are
unable to predict the likely duration and severity of the current disruptions in the credit and
financial markets and adverse global economic conditions, and if the current uncertain economic
conditions continue or further deteriorate, our business and results of operations could be
materially and adversely affected.
Our investment portfolio consists primarily of money market accounts, certificates of deposit,
high-grade commercial paper, high grade corporate bonds and debt obligations of various
governmental agencies. Although the primary objectives of our investment policy are to preserve
principal, maintain a high degree of liquidity to meet operating needs, and obtain competitive
returns subject to prevailing market conditions, these investments are subject to risk of default,
changes in credit rating and changes in market value. The current adverse financial market
conditions have negatively affected investments in many industries,
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including those in which we invest. The current global economic crisis may
continue to have a negative impact on the market values of the investments in our investment
portfolio.
If the estimates we make, and the assumptions on which we rely, in preparing our financial
statements prove inaccurate, our actual results may vary from those reflected in our financial
statements.
Our financial statements have been prepared in accordance with accounting principles generally
accepted in the United States. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of our assets, liabilities, revenues and
expenses, the amounts of charges accrued by us and related disclosure of contingent assets and
liabilities. This includes estimates and judgments regarding revenue recognition, warranty
reserves, inventory valuations, valuation allowances for deferred tax assets, allowances for
doubtful accounts and share-based compensation expense. We base our estimates and judgments on
historical experience and on various other assumptions that we believe to be reasonable under the
circumstances at the time such estimates and judgments were made. There can be no assurance,
however, that our estimates and judgments, or the assumptions underlying them, will be correct.
Compliance with changing regulation of corporate governance and public disclosure as well as
potential new accounting pronouncements are likely to impact our future financial position or
results of operations.
Changing laws, regulations and standards relating to corporate governance and public
disclosure, new regulations of the Securities and Exchange Commission, or SEC, and Nasdaq Global
Market rules are creating uncertainty for companies such as ours. These new or changed laws,
regulations and standards are subject to varying interpretations in many cases due to their lack of
specificity, and as a result, their application in practice may evolve over time as new guidance is
provided by regulatory and governing bodies, which could result in continuing uncertainty regarding
compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance
practices. In addition, future changes in financial accounting standards may cause adverse,
unexpected revenue fluctuations and affect our financial position or results of operations. New
accounting pronouncements and varying interpretations of pronouncements have occurred with
frequency in the past and may occur again in the future and as a result we may be required to make
changes in our accounting policies.
Our efforts to comply with evolving laws, regulations and standards have resulted in, and are
likely to continue to result in, increased general and administrative expenses and management time
related to compliance activities. We expect these efforts to require the continued commitment of
significant resources. If our efforts to comply with new or changed laws, regulations and
standards differ from the activities intended by regulatory or governing bodies due to ambiguities
related to practice, our reputation may be harmed and we might be subject to sanctions or
investigation by regulatory authorities, such as the SEC. Any such action could adversely affect
our financial results and the market price of our common stock.
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Failure to maintain effective internal controls in accordance with section 404 of the
Sarbanes-Oxley act could have a material adverse effect on our business and stock price.
Section 404 of the Sarbanes-Oxley Act of 2002 requires managements annual review and
evaluation of our internal controls, and attestations of the effectiveness of our internal controls
by our independent auditors. Our failure to maintain the effectiveness of our internal controls in
accordance with the requirements of Section 404 of the Sarbanes-Oxley Act, as such standards are
modified, supplemented or amended from time to time, could have an adverse effect on our business,
operating results and stock price.
We may need additional financing for our future capital needs and may not be able to raise
additional funds on terms acceptable to us, or at all.
We believe that the financial resources available to us, including our current working capital
and available revolving line of credit, will be sufficient to finance our planned operations and
capital expenditures through at least the next 12 months. If we are unable to increase our revenue
and continue to maintain positive cash flow, we will need to raise additional funds. We may also
need additional financing if:
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the research and development costs of our products or technology currently under
development increase beyond current estimates;
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we decide to expand faster than currently planned;
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we develop new or enhanced services or products ahead of schedule;
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we decide to undertake new sales and/or marketing initiatives;
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we are required to defend or enforce our intellectual property rights, or respond to
other legal challenges with respect to our products, including product liability claims;
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sales of our products do not meet our expectations domestically or internationally,
including sales of our BIS Sensors;
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we are required or elect to pay the principal under our notes in cash at or prior to
maturity or we determine to repurchase any portion of our notes;
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we experience unexpected losses in our cash investments or are otherwise unable to
liquidate these investments due to unfavorable conditions in the capital markets;
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we need to respond to competitive pressures; or
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we decide to acquire complementary products, businesses or technologies.
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The current economic crisis has severely diminished the availability of capital. While we
have no immediate need to access the equity or credit markets, the current economic crisis may
limit our ability to access these markets to obtain financing in the future. The cost and terms of
such future financing is unclear and we can provide no assurance that we will be able to raise
additional funds on terms acceptable to us, if at all. If future financing is not available or is
not available on acceptable terms, we may not be able to fund our future operations which would
significantly limit our ability to implement our business plan and could result in a default under
our 2.5% convertible senior notes due 2014. In addition, we may have to issue equity securities
that may have rights, preferences and privileges senior to our common stock or issue debt
securities that may contain limitations or restrictions on our ability to engage in certain
transactions in the future.
Cases of awareness with recall during monitoring with the BIS system could limit market acceptance
of the BIS system and could expose us to product liability claims.
Clinicians have reported to us cases of possible awareness with recall during surgical
procedures monitored with the BIS system. In most of the cases that were reported to us, when BIS
index values were recorded at the time of awareness, high BIS index values were noted, indicating
that the BIS index correctly identified the increased risk of awareness with recall in these
patients. However, in a small number of these reported cases, awareness with recall may not have
been detected by monitoring
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with the BIS system. We have not systematically solicited reports of awareness with recall. It
is possible that additional cases of awareness with recall during surgical procedures monitored
with the BIS system have not been reported to us. Anesthesia providers and hospitals may elect not
to purchase and use the BIS system if there is adverse publicity resulting from the report of cases
of awareness with recall that were not detected during procedures monitored with the BIS system. If
anesthesia providers and hospitals do not purchase and use the BIS system, then we may not sustain
or grow our product revenue. Although our multi-center, multinational clinical studies have
demonstrated that the use of BIS monitoring to help guide anesthetic administration may be
associated with the reduction of the incidence of awareness with recall in adults using general
anesthesia and sedation, we may be subject to product liability claims for cases of awareness with
recall during surgical procedures monitored with the BIS system. Any of these claims could require
us to spend significant time and money in litigation or to pay significant damages.
We may not be able to compete with new products or alternative techniques developed by others,
which could impair our ability to remain competitive and achieve future growth.
The medical device industry in which we market our products is characterized by rapid product
development and technological advances. Our competitors have received clearance by the FDA, for,
and have introduced commercially, anesthesia monitoring products. If we do not compete effectively
with these monitoring products, our revenue could be adversely affected. Our current and planned
products are at risk of obsolescence from:
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other new monitoring products, based on new or improved technologies;
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new products or technologies used on patients or in the operating room during surgery in
lieu of monitoring devices;
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electrical or mechanical interference from new or existing products or technologies;
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alternative techniques for evaluating the effects of anesthesia;
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significant changes in the methods of delivering anesthesia; and
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the development of new anesthetic agents.
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We may not be able to improve our products or develop new products or technologies quickly
enough to maintain a competitive position in our markets and to grow our business.
If we do not maintain our relationships with the anesthesia community and if anesthesiologists and
other healthcare providers do not recommend and endorse our products, our sales may decline or we
may be unable to increase our sales and profits.
Physicians typically influence the medical device purchasing decisions of the hospitals and
other healthcare institutions in which they practice. Consequently, our relationships with
anesthesiologists are critical to our growth. We believe that these relationships are based on the
quality of our products, our long-standing commitment to the consciousness monitoring market, our
marketing efforts and our presence at medical society and trade association meetings. Any actual or
perceived diminution in our reputation or the quality of our products, or our failure or inability
to maintain our commitment to the consciousness monitoring market and our other marketing and
product promotion efforts could damage our current relationships, or prevent us from forming new
relationships, with anesthesiologists and other anesthesia professionals and cause our growth to be
limited or decline and our business to be harmed.
In order for us to sell our products, anesthesia professionals must recommend and endorse
them. We may not obtain the necessary recommendations or endorsements from this community.
Acceptance of our products depends on educating the medical community as to the distinctive
characteristics, perceived benefits, safety, clinical efficacy and cost-effectiveness of our
products compared to traditional methods of consciousness monitoring and the products of our
competitors, and on training healthcare professionals in the proper application of our products.
For example, we believe that the publication in March 2008 of a study in the
New England Journal of
Medicine
that concluded that no benefit of BIS monitoring was demonstrated when compared to an
alternative protocol for consciousness monitoring has adversely affected, and could continue to
adversely affect, market perceptions of the benefits of our BIS monitoring products and,
accordingly, the degree to which anesthesia professionals and other healthcare providers endorse
those products. If we are not successful in obtaining and maintaining the recommendations or
endorsements of anesthesiologists and other healthcare professionals for our products, our sales
may decline or we may be unable to increase our sales and profits.
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Negative publicity or unfavorable media coverage could damage our reputation and harm our
operations.
Certain companies that manufacture medical devices have received significant negative
publicity in the past when their products did not perform as the medical community or patients
expected. This publicity, and the perception such products may not have functioned properly, may
result in increased litigation, including large jury awards, legislative activity, increased
regulation and governmental review of company and industry practices. If we were to receive such
negative publicity or unfavorable media attention, whether warranted or unwarranted, our reputation
would suffer, our ability to market our products would be adversely affected, we may be required to
change our products and become subject to increased regulatory burdens and we may be required to
pay large judgments or fines. Any combination of these factors could further increase our cost of
doing business and adversely affect our financial position, results of operations and cash flows.
A third party study 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. 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.
If we do not successfully develop or acquire and introduce enhanced or new products we could lose
revenue opportunities and customers.
Our success in developing or acquiring and commercializing new products and enhancements of
current products is affected by our ability to:
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identify and respond, in a timely manner, to new market trends or opportunities;
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assess customer needs;
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successfully develop or acquire competitive products;
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complete regulatory clearance in a timely manner;
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successfully develop cost effective manufacturing processes;
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introduce such products to our customers in a timely manner; and
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achieve market acceptance of the BIS system.
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If we are unable to continue to develop or acquire and market new products and technologies,
we may experience a decrease in demand for our products, and a loss of market share and our
business would suffer. We depend on our BIS system for substantially all our revenue, and we have
no other significant products. As the market for our BIS system matures, we need to develop or
acquire and introduce new products for anesthesia monitoring or other applications. Additionally,
we have been researching the use of BIS monitoring to diagnose, track and manage neurological
diseases, including Alzheimers disease and depression. We face at least the following two risks
with respect to our planned development of new products and our entrance into potential new
markets:
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we may not successfully adapt the BIS system to function properly for procedural
sedation, when used with anesthetics we have not tested or with patient populations we have
not studied, such as infants; and
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our technology is complex, and we may not be able to develop it further for applications
outside anesthesia monitoring, such as the diagnosis and tracking of neurological diseases.
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We are focused on the market for brain monitoring products. The projected demand for our
products could materially differ from actual demand if our assumptions regarding this market and
its trends and acceptance of our products by the medical community prove to be incorrect or do not
materialize or if other products or technologies gain more widespread acceptance, which in each
case would adversely affect our business prospects and profitability.
If we do not successfully adapt the BIS system for new products and applications both within
and outside the field of anesthesia monitoring, or if such products and applications are developed
but not successfully commercialized, then we could lose revenue opportunities and customers. We
recently entered into an exclusive U.S. distribution and technology licensing agreement
40
with LiDCO Limited pursuant to which we obtained exclusive rights to distribute LiDCOs LiDCO
rapid
monitoring system in the United States, non-exclusive rights to distribute the LiDCO
plus
system and
an exclusive license to integrate LiDCO and BIS
®
technologies into a combined product for sale in
the United States. We may not be able to successfully distribute LiDCOs products, integrate those
products into a combined product, or realize any revenue from the arrangement.
If our clinical trials are delayed or unsuccessful, our business could be adversely affected.
Clinical trials require sufficient patient enrollment, which is a function of many factors,
including the size of the patient population, the nature of the protocol and the eligibility
criteria for the clinical trial. Delays in patient enrollment can result in increased costs and
longer development times.
We cannot predict whether we will encounter problems with respect to any of our completed,
ongoing or planned clinical trials that will cause us or regulatory authorities to delay or suspend
our clinical trials or delay the analysis of data from our completed or ongoing clinical trials.
Moreover, the final results of our clinical trials may not support or confirm any preliminary or
interim results and we may not successfully reach the endpoints in these trials. Even if we
successfully complete our clinical trials, the FDA or other regulatory agencies may not accept the
results.
Any of the following could delay the completion of our ongoing and planned clinical trials, or
result in a failure of these trials to support our business:
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delays or the inability to obtain required approvals from institutional review boards or
other governing entities at clinical sites selected for participation in our clinical
trials;
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delays in enrolling patients and volunteers into clinical trials;
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lower than anticipated retention rates of patients and volunteers in clinical trials; or
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failure of our clinical trials to demonstrate the efficacy or clinical utility of our
potential products.
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If we determine that the costs associated with attaining regulatory approval of a product
exceed the potential financial benefits or if the projected development timeline is inconsistent
with our determination of when we need to get the product to market, we may choose to stop a
clinical trial and/or development of a product.
If we do not develop and implement a successful sales and marketing strategy, we will not expand
our business.
In the past, we have experienced high turnover in our direct sales force. It is possible that
high turnover may occur in the future. If new sales representatives do not acquire the
technological skills to sell our products in a timely and successful manner or we experience high
turnover in our direct sales force, we may not be able to sustain and grow our product revenue. In
addition, in order to increase our sales, we need to continue to strengthen our relationships with
our international distributors and continue to add international distributors. Also, we need to
continue to strengthen our relationships with our original equipment manufacturers and other sales
channels and increase sales through these channels. On an ongoing basis, we need to develop and
introduce new sales and marketing programs and clinical education programs to promote the use of
the BIS system by our customers. If we do not implement new sales and marketing and education
programs in a timely and successful manner, we may not be able to achieve the level of market
awareness and sales required to expand our business. Among other things, we need to:
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provide or assure that distributors and original equipment manufacturers provide the
technical and educational support customers need to use the BIS system successfully;
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promote frequent use of the BIS system so that sales of our disposable BIS Sensors
increase;
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establish and implement successful sales and marketing and education programs that
encourage our customers to purchase our products or the products that are made by original
equipment manufacturers incorporating our technology;
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manage geographically dispersed operations; and
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modify our products and marketing and sales programs for foreign markets.
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41
We encourage our direct sales force, distributors and original equipment manufacturers to maximize
the amount of our products they sell and they may engage in aggressive sales practices that may
harm our reputation.
We sell our products through a combination of a direct sales force, third party distributors
and original equipment manufacturers. As a means to incentivize the sales force, distributors and
original equipment manufacturers, the compensation we pay increases with the amount of our products
they sell. For example, the compensation paid to the members of our direct sales force consists, in
part, of commissions and, the greater the amount of sales, the higher the commission we pay. The
participants in our sales channels may engage in sales practices that are aggressive or considered
to be inappropriate by existing or potential customers. In addition, we do not exercise control
over, and may not be able to provide sufficient oversight of, the sales practices and techniques
used by third party distributors and original equipment manufacturers. Negative public opinion
resulting from these sales practices can adversely affect our ability to keep and attract customers
and could expose us to litigation.
Our third-party distribution and original equipment manufacturer relationships could negatively
affect our profitability, cause sales of our products to decline and be difficult to terminate if
we are dissatisfied.
Sales through distributors could be less profitable than direct sales. Sales of our products
through multiple channels could also confuse customers and cause the sale of our products to
decline. We do not control our original equipment manufacturers and distribution partners. Our
partners could sell competing products, may not incorporate our technology into their products in a
timely manner and may devote insufficient sales efforts to our products. In addition, our partners
are generally not required to purchase minimum quantities. As a result, even if we are dissatisfied
with the performance of our partners, we may be unable to terminate our agreements with these
partners or enter into alternative arrangements.
We may not be able to generate enough additional revenue from our international expansion to offset
the costs associated with establishing and maintaining foreign operations.
A component of our growth strategy is to expand our presence in international markets. We
conduct international business primarily in Europe and Japan, and we are attempting to increase the
number of countries in which we do business. It is costly to establish international facilities and
operations and to promote the BIS system in international markets. We have encountered barriers to
the sale of our BIS system outside the United States, including less acceptance by anesthesia
providers for use of disposable products, such as BIS Sensors, delays in regulatory approvals
outside of the United States, particularly in Japan, and difficulties selling through indirect
sales channels. In addition, we have little experience in marketing and distributing products in
international markets. Revenue from international activities may not offset the expense of
establishing and maintaining these international operations.
We may not be able to meet the unique operational, legal and financial challenges that we will
encounter in our international operations, which may limit the growth of our business.
We are increasingly subject to a number of challenges which specifically relate to our
international business activities. These challenges include:
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failure of local laws to provide adequate protection against infringement of our
intellectual property;
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protectionist laws and business practices that favor local competitors, which could slow
or prohibit our growth in international markets;
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difficulties in terminating or modifying distributor arrangements because of
restrictions in markets outside the United States;
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less acceptance by foreign anesthesia providers of the use of disposable products, such
as BIS Sensors;
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delays in regulatory approval of our products;
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currency conversion issues arising from sales denominated in currencies other than the
United States dollar;
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foreign currency exchange rate fluctuations;
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42
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longer sales cycles to sell products like the BIS system to hospitals and outpatient
surgical centers, which could slow our revenue growth from international sales; and
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longer accounts receivable payment cycles and difficulties in collecting accounts
receivable.
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If we are unable to meet and overcome these challenges, our international operations may not
be successful, which would limit the growth of our business and could adversely impact our results
of operations.
We may experience customer dissatisfaction and our reputation could suffer if we fail to
manufacture enough products to meet our customers demands.
We rely on third-party manufacturers to assemble and manufacture the components of our BIS
monitors, original equipment manufacturer products and a portion of our BIS Sensors. We manufacture
substantially all BIS Sensors in our own manufacturing facility. We have only one manufacturing
facility. If we fail to produce enough products at our own manufacturing facility or at a
third-party manufacturing facility for any reason, including damage or destruction of the facility,
or experience a termination or modification of any manufacturing arrangement with a third party, we
may be unable to deliver products to our customers on a timely basis. Even if we are able to
identify alternative facilities to manufacture our products, if necessary, we may experience
disruption in the supply of our products until such facilities are available. Although we believe
we possess adequate insurance for damage to our property and the disruption of our business from
casualties, such insurance may not be sufficient to cover all of our potential losses and may not
be available to us on acceptable terms or at all. Additionally, failure to deliver products on a
timely basis could lead to customer dissatisfaction and damage our reputation.
Our reliance on sole-source suppliers could adversely affect our ability to meet our customers
demands for our products in a timely manner or within budget.
Some of the components that are necessary for the assembly of our BIS system, including some
of the components used in our BIS Sensors, are currently provided to us by sole-source suppliers or
a limited group of suppliers. We purchase components through purchase orders, and in select cases,
long-term supply agreements, and generally do not maintain large volumes of inventory. We have
experienced shortages and delays in obtaining some of the components of our BIS systems in the
past, and we may experience similar shortages or delays in the future. The disruption or
termination of the supply of components could cause a significant increase in the costs of these
components, which could affect our profitability. A disruption or termination in the supply of
components could also result in our inability to meet demand for our products, which could lead to
customer dissatisfaction and damage our reputation. If a supplier is no longer willing or able to
manufacture components that we purchase and integrate into the BIS system, we may attempt to design
replacement components ourselves that would be compatible with our existing technology. In doing
so, we would incur additional research and development expenses, and there can be no assurance that
we would be successful in designing or manufacturing any replacement components. Furthermore, if we
are required to change the manufacturer of a key component of the BIS system, we may be required to
verify that the new manufacturer maintains facilities and procedures that comply with quality
standards and with all applicable regulations and guidelines. The delays associated with the
verification of a new manufacturer could delay our ability to manufacture BIS system products in a
timely manner or within budget.
We may be required to bring litigation to enforce our intellectual property rights, which may
result in substantial expense and may divert our attention from the implementation of our business
strategy.
We believe that the success of our business depends, in part, on obtaining patent protection
for our products, defending our patents once obtained and preserving our trade secrets. We rely on
a combination of contractual provisions, confidentiality procedures and patent, trademark and trade
secret laws to protect the proprietary aspects of our technology. These legal measures afford only
limited protection, and competitors may gain access to our intellectual property and proprietary
information. Any patents we have obtained or will obtain in the future might also be invalidated or
circumvented by third parties. Our pending patent applications may not issue as patents or, if
issued, may not provide commercially meaningful protection, as competitors may be able to design
around our patents or produce alternative, non-infringing designs. Litigation may be necessary to
enforce our intellectual property rights, to protect our trade secrets and to determine the
validity and scope of our proprietary rights. Any litigation could result in substantial expense
and diversion of our attention from the business and may not be adequate to protect our
intellectual property rights.
43
We may be sued by third parties which claim that our products infringe on their intellectual
property rights, particularly because there is substantial uncertainty about the validity and
breadth of medical device patents.
We may be subject to litigation by third parties based on claims that our products infringe
the intellectual property rights of others. This risk is exacerbated by the fact that the validity
and breadth of claims covered in medical technology patents involve complex legal and factual
questions for which important legal principles are unresolved. Any litigation or claims against us,
whether or not valid, could result in substantial costs, could place a significant strain on our
financial resources and could harm our reputation. In addition, intellectual property litigation or
claims could force us to do one or more of the following:
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cease selling, incorporating or using any of our products that incorporate the
challenged intellectual property, which would adversely affect our revenue;
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obtain a license from the holder of the infringed intellectual property right, which
license may not be available on reasonable terms, if at all; and
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redesign our products, which may be costly, time-consuming and may not be successful.
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We could be exposed to significant product liability claims which could divert management attention
and adversely affect our cash balances, our ability to obtain and maintain insurance coverage at
satisfactory rates or in adequate amounts and our reputation.
The manufacture and sale of our products expose us to product liability claims and product
recalls, including those which may arise from misuse or malfunction of, or design flaws in, our
products or use of our products with components or systems not manufactured or sold by us. There
may be increased risk of misuse of our products if persons not skilled in consciousness monitoring
attempt to use our BIS monitoring products. Product liability claims or product recalls, regardless
of their ultimate outcome, could require us to spend significant time and money in litigation or to
pay significant damages. We currently maintain product liability insurance; however, it may not
cover the costs of any product liability claims made against us. Furthermore, we may not be able to
obtain insurance in the future at satisfactory rates or in adequate amounts. In addition, publicity
pertaining to the misuse or malfunction of, or design flaws in, our products could impair our
ability to successfully market and sell our products and could lead to product recalls.
Several class action lawsuits have been filed against the underwriters of our initial public
offering which may result in negative publicity and potential litigation against us that would be
costly to defend and the outcome of which is uncertain and may harm our business.
The underwriters of our initial public offering are named as defendants in several class
action complaints which have been filed allegedly on behalf of certain persons who purchased shares
of our common stock between January 28, 2000 and December 6, 2000. These complaints allege
violations of the Securities Act and the Securities Exchange Act of 1934, as amended, or the
Securities Exchange Act. Primarily they allege that there was undisclosed compensation received by
our underwriters in connection with our initial public offering. While we and our officers and
directors have not been named as defendants in these suits, based on comparable lawsuits filed
against other companies, there can be no assurance that we and our officers and directors will not
be named in similar complaints in the future. In addition, the underwriters may assert that we are
liable for some or all of any liability that they are found to have to the plaintiffs, pursuant to
the indemnification provisions of the underwriting agreement we entered into as part of the initial
public offering, or otherwise.
We can provide no assurance as to the outcome of these complaints or any potential suit
against us or our officers and directors. Any conclusion of these matters in a manner adverse to us
could have a material adverse affect on our financial position and results of operations. In
addition, the costs to us of defending any litigation or other proceeding, even if resolved in our
favor, could be substantial. Such litigation could also substantially divert the attention of our
management and our resources in general. Even if we are not named as defendants in these lawsuits,
we may also be required to incur significant costs and our management may be distracted by being
required to provide information, documents or testimony in connection with the actions against our
underwriters. Uncertainties resulting from the initiation and continuation of any litigation or
other proceedings and the negative publicity associated with this litigation could harm our ability
to compete in the marketplace.
44
We may not reserve amounts adequate to cover product obsolescence, claims and returns, which could
result in unanticipated expenses and fluctuations in operating results.
Depending on factors such as the timing of our introduction of new products which utilize our
BIS technology, as well as warranty claims and product returns, we may need to reserve amounts in
excess of those currently reserved for product obsolescence, excess inventory, warranty claims and
product returns. These reserves may not be adequate to cover all costs associated with these items.
If these reserves are inadequate, we would be required to incur unanticipated expenses which could
result in unexpected fluctuations in quarterly operating results.
We may not be able to compete effectively, which could result in price reductions and decreased
demand for our products.
We are facing increased competition in the domestic level of consciousness monitoring market
as a result of a number of competitors monitoring systems which have been cleared for marketing by
the FDA. These products are marketed by well-established medical products companies with
significant resources. We may not be able to compete effectively with these and other potential
competitors. We may also face substantial competition from companies which may develop sensor
products that compete with our proprietary BIS Sensors for use with our BIS monitors or with
third-party monitoring systems or anesthesia delivery systems that incorporate the BIS index. We
also expect to face competition from companies currently marketing conventional
electroencephalogram, or EEG, monitors using standard and novel signal-processing techniques. Other
companies may develop anesthesia-monitoring systems that perform better than the BIS system and/or
sell for less. In addition, one or more of our competitors may develop products that are
substantially equivalent to our FDA-approved products, in which case they may be able to use our
products as predicate devices to more quickly obtain FDA approval of their competing products.
Medical device companies developing these and other competitive products may have greater
financial, technical, marketing and other resources than we do. Competition in the sale of
anesthesia-monitoring systems could result in price reductions, fewer orders, reduced gross margins
and loss of market share. If we are not successful in developing new products or technologies, or
if we experience delays in development or release of such products, we may not be able to compete
successfully.
Our ability to market and sell our products and generate revenue depends upon receipt of domestic
and foreign regulatory approval of our products and manufacturing operations.
Our products are classified as medical devices and are subject to extensive regulation in the
United Sates by the FDA and other federal, state, and local authorities. These regulations relate
to the manufacturing, labeling, sale, promotion, distribution, importing, exporting and shipping of
our products. Before we can market new products or a new use of, or claim for, an existing product
in the United States, we must obtain clearance or approval from the FDA. If the FDA concludes that
any of our products do not meet the requirements to obtain clearance of a premarket notification
under Section 510(k) of the Food, Drug and Cosmetic Act, then we would be required to file a
premarket approval application. For example, there can be no guarantee that the FDA will accept
the results from our depression clinical trial as supportive of a 510(k) notification without
requiring additional studies and/or a premarket approval application. Both of these processes can
be lengthy, expensive, may require extensive data from preclinical studies and clinical trials and
may require significant user fees. The premarket approval process typically is more burdensome,
expensive, time-consuming and uncertain than the premarket notification process. We may not obtain
clearance of a 510(k) notification or approval of a premarket approval application with respect to
any of our products on a timely basis, if at all. If we fail to obtain timely clearance or
approval for our products, we will not be able to market and sell our products, which will limit
our ability to generate revenue. We may also be required to obtain clearance of a 510(k)
notification from the FDA before we can market certain previously marketed products which we modify
after they have been cleared. We have made certain enhancements to our currently marketed products
which we have determined do not necessitate the filing of a new 510(k) notification. However, if
the FDA does not agree with our determinations, it will require us to file a new 510(k)
notification for the modification, and we may be prohibited from marketing the modified devices
until we obtain FDA clearance, or be required to recall devices that may be on the market, or be
subject to other sanctions.
Medical devices may be marketed only for the indications for which they are approved or
cleared. The FDA may fail to approve or clear indications that are necessary or desirable for
successful commercialization of our products. The FDA also may refuse our request for 510(k)
clearance or premarket approval of new products, new intended uses, or modification to products
once they are approved or cleared. Our approvals or clearance can be revoked if safety or
effectiveness problems develop.
Our promotional materials and training methods must comply with the FDA and other applicable
laws and regulations. If the FDA determines that our promotional materials or training constitute
promotion of an unapproved use, it could request that we modify our training or promotional
materials or subject us to regulatory or enforcement actions, including the issuance of an untitled
letter, a warning letter, injunction, seizure, civil monetary penalties, or criminal prosecution.
It also is possible that other
45
federal, state, or foreign enforcement authorities might take action if they consider our
promotional or training materials to constitute promotion of an unapproved use, which could result
in significant fines or penalties under other statutory authorities, such as laws prohibiting false
claims for reimbursement. In that event, our reputation could be damaged, adoption of the products
could be impaired, and we might not be able to promote the products for certain uses for which we
had expected to promote them.
The FDA also requires us to adhere to current Good Manufacturing Practices regulations, also
known as the Quality System Regulation, or QSR, in the case of medical devices, which include
production controls, design controls, testing, quality control, documentation procedures,
verification and validation of the design and of the production process, purchasing controls for
materials and components, implementation of corrective and preventive actions, and servicing, among
other requirements. The FDA may at any time inspect our facilities to determine whether adequate
compliance with QSR requirements has been achieved. Compliance with the QSR regulations for medical
devices is difficult and costly. In addition, we may not continue to be compliant as a result of
future changes in, or interpretations of, regulations by the FDA or other regulatory agencies. If
we do not achieve continued compliance, the FDA may issue a warning letter, withdraw marketing
clearance, require product recall, seize products, seek an injunction or consent decree, or seek
criminal prosecution, among other possible remedies. When any change or modification is made to a
device or its intended use, the manufacturer may be required to reassess compliance with the QSR
regulations, which may cause interruptions or delays in the marketing and sale of our products.
Sales of our products outside the United States are subject to foreign regulatory requirements
that vary from country to country. The time required to obtain approvals from foreign countries may
be longer than that required for FDA approval, and requirements for foreign licensing may differ
from FDA requirements.
The federal, state and foreign laws and regulations regarding the manufacture and sale of our
products are subject to future changes, as are administrative interpretations of regulatory
agencies. If we fail to comply with applicable federal, state or foreign laws or regulations, we
could be subject to enforcement actions, including product seizures, recalls, withdrawal of
clearances or approvals and civil and criminal penalties.
All of our manufacturing activities are performed at a single site and any disaster at this site
could disrupt our ability to manufacture our products for a substantial length of time, which could
cause our revenues to decrease.
We assemble all of our BIS hardware and produce all of our BIS Sensors in one facility in
Norwood, Massachusetts. Despite precautions we take, events such as fire, flood, power loss or
other disasters at this facility could significantly impair our ability to manufacture our products
and operate our business. Our facility and certain manufacturing equipment located in that
facility would be difficult to replace and could require substantial replacement lead-time.
Catastrophic events may also destroy any inventory of product or components located in our
facility. While we carry insurance for natural disasters and business interruption, the occurrence
of such an event could result in losses that exceed the amount of this insurance coverage, which
would impair our financial results.
Even if we obtain the necessary FDA clearances or approvals, if we or our suppliers fail to comply
with ongoing regulatory requirements our products could be subject to restrictions or withdrawal
from the market.
We are subject to the Medical Device Reporting, or MDR, regulations that require us to report
to the FDA if our products may have caused or contributed to patient death or serious injury, or if
our device malfunctions and a recurrence of the malfunction would likely result in a death or
serious injury. We must also file reports of device corrections and removals and adhere to the
FDAs rules on labeling and promotion. Our failure to comply with these or other applicable
regulatory requirements could result in enforcement action by the FDA, which may include any of the
following:
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untitled letters, warning letters, fines, injunctions and civil penalties;
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administrative detention, which is the detention by the FDA of medical devices believed
to be adulterated or misbranded;
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customer notification, or orders for repair, replacement or refund;
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voluntary or mandatory recall or seizure of our products;
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operating restrictions, partial suspension or total shutdown of production;
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refusal to review pre-market notification or pre-market approval submissions;
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46
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rescission of a substantial equivalence order or suspension or withdrawal of a
pre-market approval; and
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criminal prosecution.
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Any of the foregoing actions by the FDA could have a material adverse effect on our business
and results of operations.
We may be subject, directly or indirectly, to federal and state healthcare fraud and abuse laws and
regulations and, if we are unable to fully comply with such laws, could face substantial penalties.
Our operations may be directly or indirectly affected by various state and federal healthcare
fraud and abuse laws, including the federal Anti-Kickback Statute, which prohibits any person from
knowingly and willfully offering, paying, soliciting or receiving remuneration, directly or
indirectly, to induce or reward either the referral of an individual, or the furnishing or
arranging for an item or service, for which payment may be made under federal healthcare programs,
such as the Medicare and Medicaid programs. If our past or present operations are found to be in
violation of these laws, we or our officers may be subject to civil or criminal penalties,
including large monetary penalties, damages, fines, imprisonment and exclusion from Medicare and
Medicaid program participation. If enforcement action were to occur, our business and financial
condition would be harmed.
If we do not retain our senior management and other key employees, we may not be able to
successfully implement our business strategy.
Our president and chief executive officer, Nassib Chamoun, joined us at our inception in 1987.
Our Founder Chairman, J. Breckenridge Eagle, began serving as a director in 1988. Many other
members of our management and key employees have extensive experience with us and other companies
in the medical device industry. Our success is substantially dependent on the ability, experience
and performance of these members of our senior management and other key employees. Because of their
ability and experience, if we lose one or more of the members of our senior management or other key
employees, our ability to successfully implement our business strategy could be seriously harmed.
We compensate our executive officers in part with equity incentives, including stock options. A
significant portion of the stock options held by our senior management and employees have exercise
prices below the fair market value of our common stock.
If we do not attract and retain skilled personnel, or if we do not maintain good relationships with
our employees, we will not be able to expand our business.
Our products are based on complex signal-processing technology. Accordingly, we require
skilled personnel to develop, manufacture, sell and support our products. Our future success will
depend largely on our ability to continue to hire, train, retain and motivate additional skilled
personnel, particularly sales representatives who are responsible for customer education and
training and post-installation customer support. In order to hire and train skilled personnel, we
believe that we will need to provide compensation arrangements, including incentive-based programs,
that are competitive with programs offered by comparable medical device companies. Various factors
may prevent us from implementing or maintaining such programs, including business and general
market conditions and fluctuations in our stock price. If we are not able to attract and retain
skilled personnel, we will not be able to manage and expand our business.
In addition, we may be subject to claims that we engage in discriminatory or other unlawful
practices with respect to our hiring, termination, promotion and compensation processes for our
employees. Such claims, with or without merit, could be time consuming, distracting and expensive
to defend, could divert attention of our management from other tasks important to the success of
our business and could adversely affect our reputation as an employer.
If we make any acquisitions, we will incur a variety of costs and may never successfully integrate
the acquired business into ours.
We may attempt to acquire businesses, technologies, services or products that we believe are a
strategic complement to our business whether by purchase, exclusive license, assignment or
comparable arrangements. For example, we recently entered into the LiDCO Distribution Agreement,
pursuant to which we obtained exclusive rights to distribute LiDCOs LiDCO
rapid
monitoring system
in the United States, non-exclusive rights to distribute the LiDCO
plus
system and an exclusive
license to integrate LiDCO and BIS
®
technologies into a combined product for sale in the United
States. For the first six months of the distribution agreement, our exclusive rights under the
agreement in certain U.S. territories are subject to the exclusive rights granted by LiDCO to a
third party. We may encounter operating difficulties and expenditures relating to integrating an
acquired business, technology, service or product, such as the product license and distribution
rights we gained under our agreement with LiDCO. These acquisitions may also absorb significant
management attention that would otherwise be available for ongoing
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development of our business. Moreover, we may never realize the anticipated benefits of any acquisition. For example, we may
not be able to successfully distribute LiDCOs products, integrate those products into a combined
product, or realize any revenue from the arrangement. We may also make dilutive issuances of equity securities, incur debt or
experience a decrease in the cash available for our operations, or incur contingent liabilities in
connection with any future acquisitions, all of which could have a material adverse affect on our
business, financial condition and results of operations.
Our employees may engage in misconduct or other improper activities, including insider trading.
We are exposed to the risk that employee fraud or other misconduct could occur. Misconduct by
employees could include failures to comply with FDA regulations, to provide accurate information to
the FDA, to comply with manufacturing standards we have established, to comply with federal and
state healthcare fraud and abuse laws and regulations, to accurately report financial information
or data or to disclose unauthorized activities to us. Employee misconduct could also involve
improper sales tactics or use of customer information or information obtained in the course of
clinical trials, which could result in regulatory sanctions and serious harm to our reputation. We
have adopted a written code of business conduct and ethics, but it is not always possible to
identify and deter employee misconduct, and the precautions we take to detect and prevent this
activity may not be effective in controlling unknown or unmanaged risks or losses.
In addition, during the course of our operations, our directors, executives and employees may
have access to material, non-public information regarding our business, our results of operations
or potential transactions we are considering. Despite our adoption of an Insider Trading Policy, we
may not be able to prevent a director or employee from trading in our common stock on the basis of,
or while in possession of, material, non-public information. If a director or employee was to be
investigated, or an action was to be brought against a director or employee, for insider trading,
it could have a negative impact on our reputation and our stock price. Such a claim, with or
without merit, could also result in substantial expenditures of time and money, and divert
attention of our management team from other tasks important to the success of our business.
Failure of users of the BIS system, or users of future products we may develop, to obtain adequate
reimbursement from third-party payors could limit market acceptance of the BIS system and other
products, which could prevent us from sustaining profitability.
Anesthesia providers are generally not reimbursed separately for patient monitoring activities
utilizing the BIS system. For hospitals and outpatient surgical centers, when reimbursement is
based on charges or costs, patient monitoring with the BIS system may reduce reimbursements for
surgical procedures, because charges or costs may decline as a result of monitoring with the BIS
system. Failure by hospitals and other users of the BIS system to obtain adequate reimbursement
from third-party payors, or any reduction in the reimbursement by third-party payors to hospitals
and other users as a result of using the BIS system, could limit market acceptance of the BIS
system, which could prevent us from sustaining profitability.
In addition, market acceptance of future products serving the depression and Alzheimers
disease markets could depend upon adequate reimbursement from third-party payors. The ability and
willingness of third-party payors to authorize coverage and sufficient reimbursement to compensate
and encourage physicians to use such products is uncertain.
The market price of our stock is highly volatile, and this volatility could cause your investment
in our stock to suffer a decline in value and cause us to incur significant costs from class action
litigation.
The market price of our stock is highly volatile. For example, from January 1, 2009 through
November 1, 2009, the price of our common stock has ranged from a high of $12.14 to a low of $2.86.
As a result of this volatility, your investment in our stock could rapidly lose its value. Our
stock price could fluctuate for many reasons, including without limitation:
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variations in our quarterly operating results or those of companies that are perceived
to be similar to us;
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third-party sales of large blocks of our common stock;
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rumors relating to us or our competitors;
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changes to our research and development plans and/or announcements regarding new
technologies by us or our competitors;
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adverse results in clinical trials of our BIS monitoring system products and products
under development;
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negative publicity or unfavorable media coverage;
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lawsuits involving us;
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sales by us of equity or debt to fund our operations;
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the loss of any of our key scientific or management personnel;
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information relating to the proposed acquisition of all of our outstanding shares of
common stock pursuant to the Merger Agreement;
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FDA or international regulatory actions or lawsuits concerning the safety of our
products; and
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market conditions, both in the medical device sector and generally.
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In addition, the stock markets in general have been extremely volatile, and have experienced
fluctuations that have often been unrelated or disproportionate to the operating performance of the
companies whose stock is trading. These broad market fluctuations could result in extreme
fluctuations in the price of our common stock, which could cause a decline in the value of our
shares.
Transactions engaged in by our largest stockholders, our directors or executives involving our
common stock may have an adverse effect on the price of our stock.
Sales of our shares by our largest stockholders could have the effect of lowering our stock
price. The perceived risk associated with the possible sale of a large number of shares by these
stockholders, or the adoption of significant short positions by hedge funds or other significant
investors, could cause some of our stockholders to sell their stock, thus causing the price of our
stock to decline. In addition, actual or anticipated downward pressure on our stock price due to
actual or anticipated sales of stock by directors or officers of Aspect could cause other
institutions or individuals to engage in short sales of our common stock, which may further cause
the price of our stock to decline.
From time to time our directors and executive officers sell shares of our common stock on the
open market. These sales are publicly disclosed in filings made with the SEC. In the future, our
directors and executive officers may sell a significant number of shares for a variety of reasons
unrelated to the performance of our business. Our stockholders may perceive these sales as a
reflection on managements view of the business and result in some stockholders selling their
shares of our common stock. These sales could cause the price of our stock to drop.
We have various mechanisms in place to discourage takeover attempts, which may reduce or eliminate
our stockholders ability to sell their shares for a premium in a change of control transaction.
Various provisions of our certificate of incorporation and by-laws and of Delaware corporate
law may discourage, delay or prevent a change in control or takeover attempt of our company by a
third party that is opposed by our management and board of directors. Public stockholders who might
desire to participate in such a transaction may not have the opportunity to do so. These
anti-takeover provisions could substantially impede the ability of public stockholders to benefit
from a change of control or change in our management and board of directors. These provisions
include:
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the terms of the Merger Agreement;
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preferred stock that could be issued by our board of directors to make it more difficult
for a third party to acquire, or to discourage a third party from acquiring, a majority of
our outstanding voting stock;
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classification of our directors into three classes with respect to the time for which
they hold office;
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non-cumulative voting for directors;
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control by our board of directors of the size of our board of directors;
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limitations on the ability of stockholders to call special meetings of stockholders;
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inability of our stockholders to take any action by written consent; and
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advance notice requirements for nominations of candidates for election to our board of
directors or for proposing matters that can be acted upon by our stockholders at
stockholder meetings.
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Risks Related to our Issuance of $125 Million Principal Amount of
2.5% Convertible Senior Notes due 2014
Our indebtedness as a result of the issuance of $125 million principal amount of 2.5% convertible
senior notes, or the notes, may harm our financial condition and results of operations.
In June 2007, we issued $125.0 million principal amount of 2.5% convertible senior notes due
2014. At October 3, 2009, $58.0 million principal amount remained outstanding. As a result of our
proposed acquisition by affiliates of Covidien plc, following the Offer and the Merger holders of
our convertible debt may elect to convert such debt into shares of our common stock or deliver
their notes to the surviving corporation of the Merger for repayment, until the end of a repurchase
period that will be specified in our notice to the note holders. Our level of indebtedness could
have important consequences to investors, because:
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it could adversely affect our ability to satisfy our obligations under the notes;
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a substantial portion of our cash flows from operations will have to be dedicated to
interest payments, principal payments and, if we irrevocably elect to net share settle the
notes, conversion payments and may not be available for operations, working capital,
capital expenditures, expansion, acquisitions or general corporate or other purposes;
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it may impair our ability to obtain additional financing in the future;
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it may limit our flexibility in planning for, or reacting to, changes in our business
and industry; and
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it may make us more vulnerable to downturns in our business, our industry or the economy
in general.
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Our operations may not generate sufficient cash to enable us to service our debt. If we fail
to make a payment on the notes, we could be in default on the notes, and this default could cause
us to be in default on our other indebtedness outstanding at that time. Conversely, a default on
our other outstanding indebtedness may cause a default under the notes.
We may not have the cash necessary to pay interest on the notes, to settle conversions of the notes
(if we have obtained stockholder approval to elect net share settlement of the notes, and we
irrevocably elect such settlement method) or to repurchase the notes upon a fundamental change.
The notes bear interest semi-annually at a rate of 2.5% per annum. In addition, we may in
certain circumstances be obligated to pay additional interest. If at any time on or prior to the
45th scheduled trading day preceding the maturity date of the notes we obtain stockholder approval
of the net share settlement feature in connection with the potential conversion of the notes, and
if we irrevocably elect to use such feature, then upon conversion of the notes we would:
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pay cash in an amount equal to the lesser of one-fortieth of the principal amount of the
notes being converted and the daily conversion value (the product of the conversion rate
and the current trading price) of the notes being converted; and
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issue shares of our common stock only to the extent that the daily conversion value of
the notes exceeded one-fortieth of the principal amount of the notes being converted for
each trading day of the relevant 40 trading day observation period.
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Holders of notes also have the right to require us to repurchase all or a portion of their
notes for cash upon the occurrence of a fundamental change. Any of our future debt agreements or
securities may contain similar provisions. We may not have sufficient funds to pay interest, pay
any such cash amounts to the note holders upon conversion or make the required repurchase of the
notes at the applicable time and, in such circumstances, may not be able to arrange the necessary
financing on favorable terms, if at all. In addition, our ability to pay interest, pay cash to the
note holders upon conversion or make the required repurchase, as the case may be, may be limited by
law or the terms of other debt agreements or securities. Our failure to pay such cash amounts to
holders of notes or make the required repurchase, as the case may be, however, would constitute an
event of default under the indenture governing the notes which, in turn, could constitute an event
of default under other debt agreements or securities, thereby resulting in their acceleration and
required prepayment and further restrict our ability to make such payments and repurchases.
The net share settlement feature of the notes, if available, may have adverse consequences.
Under the terms of the indenture for the notes, if we obtain stockholder approval, we could
elect net share settlement of the notes. To date, we have not sought such approval. The net share
settlement feature of the notes may:
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result in holders receiving no shares of our common stock upon conversion or fewer shares of our common stock relative to the conversion value of the notes;
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reduce our liquidity because we will be required to pay the principal portion in cash;
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delay holders receipt of the proceeds upon conversion; and
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subject holders to market risk before receiving any shares upon conversion.
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If we obtain stockholder approval of the net share settlement feature in connection with the
potential conversion of the notes, and if we irrevocably elect to use such feature, then upon
conversion of the notes we would (1) pay cash in an amount equal to the lesser of one-fortieth of
the principal amount of the notes being converted and the daily conversion value (the product of
the conversion rate and the current trading price) of the notes being converted and (2) issue
shares of our common stock only to the extent that the daily conversion value of the notes exceeded
one-fortieth of the principal amount of the notes being converted for each trading day of the
relevant 40 trading day observation period.
Because the consideration due upon conversion of notes is based in part on the trading prices
of our common stock, any decrease in the price of our common stock after notes are tendered for
conversion may significantly decrease the value of the consideration received upon conversion.
Furthermore, because under net share settlement we must settle at least a portion of our conversion
obligation in cash, the conversion of notes may significantly reduce our liquidity.
If we repurchase any portion of our notes, such repurchases could adversely affect the holders of
both our notes and our common stock and could also adversely affect our financial condition and
operating results.
We may, from time to time, depending on market conditions, including without limitation
whether our notes are then trading at discounts to their respective face amounts, repurchase
additional outstanding notes for cash and/or in exchange for shares of our common stock, warrants,
preferred stock, debt, or other consideration, in each case in open market purchases and/or
privately negotiated transactions. The amounts involved in any such transactions, individually or
in the aggregate, may be material. In addition, if we exchange shares of our capital stock, or
securities convertible into or exercisable for our capital stock, such exchanges could result in
material dilution to holders of our common stock. Moreover, any such repurchase could result in a
tax liability if made at a discount to the face amount of the notes, and/or could otherwise
adversely affect our financial condition or results of operations. Repurchases of the notes could
also adversely affect the trading market for such notes if, for example, the public float on such
notes is materially reduced. There can be no assurance that we will repurchase or exchange any
additional outstanding notes and even if, in the future, we elect to repurchase a portion of the
outstanding notes, any such repurchase may not be successfully completed or, if completed, may not
be on terms that are favorable to us or that result in expected benefits for us.
Future sales of our common stock in the public market or the issuance of securities senior to our
common stock could adversely affect the trading price of our common stock and the value of the
notes and our ability to raise funds in new securities offerings.
Future sales of our common stock, the perception that such sales could occur or the
availability for future sale of shares of our common stock or securities convertible into or
exercisable for our common stock could adversely affect the market prices of our common stock and
the value of the notes prevailing from time to time and could impair our ability to raise capital
through future offerings of equity or equity-related securities. In addition, we may issue common
stock or equity securities senior to our common stock in the future for a number of reasons,
including to finance our operations and business strategy, to adjust our ratio of debt to equity,
to satisfy our obligations upon the exercise of options or for other reasons.
As of October 3, 2009, we had outstanding options to purchase approximately 3,859,561 shares
of our common stock at a weighted average exercise price of $14.98 per share (approximately
1,251,701 of which have not yet vested) issued to employees, directors and consultants pursuant to
our 1991 Amended and Restated Stock Option Plan, 1998 Stock Incentive Plan, Amended and Restated
1998 Director Equity Incentive Plan and 2001 Stock Incentive Plan, as amended. In order to attract
and retain key personnel, we may issue additional securities, including stock options, restricted
stock grants and shares of common stock, in connection with our employee benefit plans, or may
lower the price of existing stock options. No prediction can be made as to the effect, if any, that
the sale, or the availability for sale, of substantial amounts of common stock by our existing
stockholders pursuant to an effective registration statement or under Rule 144, through the
exercise of registration rights or the issuance of shares of common stock upon the exercise of
stock options, or the perception that such sales or issuances could occur, could adversely affect
the prevailing market prices for our common stock and the value of the notes.
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Conversion of the notes will dilute the ownership interest of existing stockholders, including
holders who had previously converted their notes.
To the extent we issue any shares of our common stock upon conversion of the notes, the
conversion of some or all of the notes will dilute the ownership interests of existing
stockholders, including holders who have received shares of our common stock upon prior conversion
of the notes. Any sales in the public market of the common stock issuable upon such conversion
could adversely affect prevailing market prices of our common stock. In addition, the existence of
the notes may encourage short selling by market participants because the conversion of the notes
could depress the price or our common stock.
Provisions in the indenture for the notes may deter or prevent a business combination that may be
favorable to note holders.
If a fundamental change occurs prior to the maturity date of the notes, holders of the notes
will, have the right, at their option, to require us to repurchase all or a portion of their notes.
In addition, if a make-whole fundamental change occurs prior to the maturity date of the notes, we
will in some cases increase the conversion rate for a holder that elects to convert its notes in
connection with such make-whole fundamental change. In addition, the indenture governing the notes
prohibits us from engaging in certain mergers or acquisitions unless, among other things, the
surviving entity assumes our obligations under the notes. These and other provisions could prevent
or deter a third party from acquiring us.
The notes may not be rated or may receive a lower rating than anticipated.
We do not intend to seek a rating on the notes. However, if one or more rating agencies rates
the notes and assigns the notes a rating lower than the rating expected by investors, or reduces or
indicates that they may reduce their rating in the future, the market price of the notes and our
common stock could be harmed.
The effective subordination of the notes to our secured indebtedness to the extent of the
collateral securing such indebtedness may limit our ability to satisfy our obligations under the
notes.
The notes will be our senior unsecured obligations and rank equally with any senior debt and
senior to any subordinated debt. However, the notes will be effectively subordinated to our secured
indebtedness to the extent of the value of the collateral securing such indebtedness. As of October
3, 2009, we did not have any secured indebtedness outstanding. The provisions of the indenture
governing the notes do not prohibit us from incurring secured indebtedness in the future.
Consequently, in the event of a bankruptcy, liquidation, dissolution, reorganization or similar
proceeding with respect to us, the holders of any secured indebtedness will be entitled to proceed
directly against the collateral that secures such secured indebtedness. Therefore, such collateral
will not be available for satisfaction of any amounts owed under our unsecured indebtedness,
including the notes, until such secured indebtedness is satisfied in full.
The structural subordination of the notes to our secured liabilities and all liabilities and
preferred equity of our subsidiaries may limit our ability to satisfy our obligations under the
notes.
The notes will be effectively subordinated to all unsecured and secured liabilities and
preferred equity of our subsidiaries. In the event of a bankruptcy, liquidation, dissolution,
reorganization or similar proceeding with respect to any such subsidiary, we, as a common equity
owner of such subsidiary, and, therefore, holders of our debt, including holders of the notes, will
be subject to the prior claims of such subsidiarys creditors, including trade and other payables,
but excluding intercompany indebtedness. As of October 3, 2009, our subsidiaries had an accounts
payable and accrued liabilities balance of approximately $1.3 million. The provisions of the
indenture governing the notes do not prohibit our subsidiaries from incurring additional
liabilities or issuing preferred equity in the future.
Item 5. Other Information.
Amendment 1 to BISx Development, Purchase and License Agreement with Draeger Medical Systems, Inc.
On October 22, 2009, we and Draeger Medical Systems, Inc. entered into amendment no. 1
effective as of August 28, 2009 to the BISx development, purchase and license agreement dated
January 28, 2004 by and between Aspect and Draeger. Unless otherwise defined, all capitalized
terms below are defined in the amendment which is filed as exhibit 10.5 to this Quarterly Report on
Form 10-Q.
The amendment, among other things:
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modifies the global distribution rights of Draeger with respect to our BIS Sensors;
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modifies the calculation of commissions to be paid to Draeger on sales of our BIS
Sensors;
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revises specified prices and product specifications under the agreement;
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expands the list of products covered under the agreement; and
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extends the initial term of the agreement through December 31, 2012, renewable
automatically for successive twelve-month periods unless either party provides notice of
termination to the other party at least sixty days prior to expiration of the agreement.
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The foregoing description of the amendment is qualified in its entirety by the full text and
the amendment which is filed herewith as exhibit 10.5 and incorporated herein by reference thereto.
Amendment 2 to OEM Development and Purchase Agreement with Mindray DS USA, Inc. (formerly Datascope Corp)
On November 5, 2009, we and Mindray DS USA, Inc. entered into amendment no. 2 effective as of October 3, 2009 to the OEM development and purchase agreement dated July 24, 2003 by and between Aspect and Mindray DS USA, Inc. (formerly Datascope Corp.). Unless otherwise defined, all capitalized terms below are defined in the amendment which is filed as exhibit 10.6 to this Quarterly Report on Form 10-Q.
The amendment, among other things:
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modifies the global distribution rights of Mindray DS with respect to our BIS Sensors;
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eliminates commissions to be paid to Mindray DS on sales of our BIS Sensors;
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modifies the warranty period for Aspect Products;
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revises specified prices and product specifications under the agreement;
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expands the list of products covered under the agreement; and
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revises the initial term of the agreement through October 25, 2009, renewable automatically for successive twelve-month periods unless either party provides notice of termination to the other party at least ninety days prior to expiration of the agreement.
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The foregoing description of the amendment is qualified in its entirety by the full text and the amendment which is filed herewith as exhibit 10.6 and incorporated herein by reference thereto.
Item 6. Exhibits.
The exhibits listed in the Exhibit Index immediately preceding the exhibits are filed as part
of this Quarterly Report on Form 10-Q.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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ASPECT MEDICAL SYSTEMS, INC.
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Date: November 6, 2009
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By:
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/s/ J. Neal Armstrong
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J. Neal Armstrong
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Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
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EXHIBIT INDEX
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EXHIBIT
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NUMBER
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EXHIBIT
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2.1
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Agreement and Plan of Merger, dated September 27, 2009, by and
between United States Surgical Corporation, Transformer Delaware
Corp. and the Registrant is incorporated herein by reference to
Exhibit 2.1 to the Registrants Current Report on Form 8-K filed
on September 28, 2009.
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4.1
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Amendment No. 4 to Rights Agreement, dated September 27, 2009, by
and between Computershare Trust Company, N.A. (formerly Equiserve
Trust Company) and the Registrant is incorporated herein by
reference to Exhibit 4.1 to the Registrants Current Report on
Form 8-K filed on September 28, 2009.
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10.1
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Restated Key Employee Change in Control Severance Benefits Plan is
incorporated herein by reference to Exhibit 10.1 to the
Registrants Current Report on Form 8-K filed on September 28,
2009.
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10.2
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Form of Indemnification Agreement dated September 23, 2009 is
incorporated herein by reference to Exhibit 10.2 to the
Registrants Current Report on Form 8-K filed on September 28,
2009.
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10.3
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Amended and Restated 1991 Stock Option Plan is incorporated herein
by reference to Exhibit 10.3 to the Registrants Current Report on
Form 8-K filed on September 28, 2009.
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10.4
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Restated 1999 Employee Stock Purchase Plan is incorporated herein
by reference to Exhibit 10.4 to the Registrants Current Report on
Form 8-K filed on September 28, 2009.
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10.5
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Amendment 1 to BISx Development, Purchase and License Agreement,
dated October 22, 2009, by and between the Registrant and Draeger
Medical Systems, Inc.
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10.6
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Amendment 2 to OEM Development and
Purchase Agreement, dated November 5, 2009, by and between the
Registrant and Mindray DS USA, Inc. (formerly Datascope Corp).
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31.1
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Certification by Chief Executive Officer Pursuant to Rule
13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as
amended.
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31.2
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Certification by Chief Financial Officer Pursuant to Rule
13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as
amended.
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32.1
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Certification by Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
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32.2
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Certification by Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
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Confidential treatment has been requested as to certain portions of this exhibit. Such portions have been omitted and filed separately with the Securities and Exchange Commission.
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