NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.
|
Description of Business
|
Conceptus Inc., together with its wholly owned subsidiaries (we, our,
us, or the Company), is a medical device company that designs, develops and markets the
Essure
®
permanent birth control system. The
Essure
system delivers a soft and flexible insert into
a womans fallopian tubes, causing a benign tissue in-growth which blocks the fallopian tubes. We obtained approval to market
Essure
in the European Union in February 2001 and obtained the U.S. Food and Drug Administration
(FDA), approval for
Essure
in November 2002.
The accompanying interim unaudited condensed consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America (U.S. GAAP) for interim financial information and pursuant to the instructions to Form 10-Q and Article 10-01 of Regulation S-X of the Securities and
Exchange Commission (SEC). 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 adjustments, consisting only of normal recurring adjustments, considered necessary for a fair statement have been included.
The condensed consolidated balance sheet as of December 31, 2012 has been derived from the audited consolidated financial statements at that date, but does not include all of the information and
footnotes required by accounting principles generally accepted in the United States for complete financial statements. This financial data should be read in conjunction with the audited consolidated financial statements and related notes included in
our Annual Report on Form 10-K for the year ended December 31, 2012. The results of operations for the three months ended March 31, 2013 may not necessarily be indicative of the operating results for the full 2013 fiscal year or
any other future interim periods.
Recent Accounting Pronouncements
In December 2011, the FASB issued ASU 2011-11,
Disclosures about Offsetting Assets and Liabilities
. ASU 2011-11 requires disclosure
of gross and net information about instruments and transactions that are eligible for offset in the statement of financial position or that are subject to an enforceable master netting arrangement or similar agreement, such as derivatives, sale and
repurchase agreements and securities borrowing and lending arrangements. ASU-2011-11 is effective for annual reporting periods and interim periods within those years, beginning on or after January 1, 2013, with retrospective application for all
comparative periods presented. We have adopted this guidance in the current period, and there is no impact to our financial statements.
In February 2013, the FASB issued ASU 2013-02,
Reporting of Amounts Reclassified out of Accumulated Other Comprehensive Income
(ASU 2013-02). ASU 2013-02 requires an entity to provide information about amounts reclassified out of accumulated other comprehensive income. An
entity is also required to present either on the face of the financial statements or in the footnotes, significant items reclassified out of accumulated other comprehensive income by the respective line items of net income, but only if the item
reclassified is required under U.S. GAAP to be reclassified to net income in its entirety. For other items that are not required under U.S. GAAP to be reclassified to net income in their entirety, an entity is required to cross-reference to other
disclosures required under U.S. GAAP that provide additional detail about those amounts. This standard is effective for public entities prospectively for reporting periods beginning after December 15, 2012. The adoption of ASU 2013-02 did not
have a material impact on our financial position or results of operations.
3.
|
Summary of Significant Accounting Policies
|
Use of Estimates
The preparation of condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States requires us 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 net sales and expenses during the reporting period. The primary estimates
underlying our financial statements include the allowance for doubtful accounts receivable, product warranty, the fair value of our investment portfolio, assumptions regarding variables used in calculating the fair value of our equity awards,
impairment of goodwill, intangibles and other long-lived assets, income taxes and contingent liabilities. Actual results could differ from those estimates.
Principles of Consolidation
These unaudited condensed consolidated financial statements include the accounts of Conceptus, Inc. and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated.
7
Functional Currency
In January 2008, we acquired Conceptus SAS (SAS), which sells to customers throughout Europe. In December 2008, we
incorporated Conceptus Medical Limited (CML) as our United Kingdom subsidiary. In October 2011, we purchased certain assets of Sigma Medical and incorporated Conceptus B.V. (BV) as our subsidiary in the Netherlands. Sales by
CML are denominated in British Pounds; SAS and BV sales are denominated in Euros. In preparing our consolidated financial statements, we are required to translate the financial statements of SAS, BV and CML from the currency in which they keep their
accounting records into U.S. Dollars. SAS, BV and CML all maintain their accounting records in the functional currency which is also their local currency. The functional currency of CML is the British Pound and the functional currency of SAS and BV
is the Euro. The functional currency is determined based on managements judgment and involves consideration of all relevant economic facts and circumstances affecting the subsidiary. Generally, the currency in which the subsidiary transacts a
majority of its transactions, including billing, financing, payroll and other expenditures would be considered the functional currency, but any dependency upon the parent and the nature of the subsidiarys operations must also be considered.
Since the functional currency of SAS, BV and CML has been determined to be their local currency, any gain or loss associated with the translation of SASs, BVs and CMLs financial statements into U.S. Dollars is included as a
component of stockholders equity, in accumulated other comprehensive (income) loss. If in the future we determine that there has been a change in the functional currency of SAS, BV or CML from its local currency to the U.S. Dollar, any
translation gains or losses arising after the date of change would be included within our statement of operations.
Goodwill
We account for goodwill and other intangibles not subject to amortization in accordance with ASC 350,
Intangibles Goodwill and Other
. Goodwill represents the excess of the purchase price
paid over the fair value of tangible and identifiable intangible net assets acquired in business combinations. Under ASC 350, goodwill and other intangible assets with indefinite lives are not amortized, but are assigned to reporting units and
tested for impairment annually, or whenever there is an impairment indicator. We perform an annual assessment during the fourth quarter of each year of our goodwill at the reporting unit level or earlier if an event occurs or circumstances change
that would reduce the fair value of the reporting unit below its carrying amount. At March 31, 2013, no indicators of impairment were identified that will reduce the carrying value of goodwill.
Impairment of Long-Lived Assets (excluding goodwill)
We account for any impairment of our long-lived tangible assets and definite-lived intangible assets in accordance with ASC 360,
Property, Plant and Equipment
. Our long-lived assets, excluding goodwill, consist primarily of our property and equipment and intangible assets. We evaluate the carrying value of our long-lived assets whenever events or changes in
circumstances indicate that the carrying amount of the assets may not be recoverable. Such events or circumstances may include a prolonged industry downturn, a significant decline in our market value or significant reductions in projected future
cash flows, among others. At March 31, 2013, no indicators of impairment of our long-lived assets were identified.
Intangible assets are amortized over their estimated useful lives and include patents, customer relationships, re-acquired rights, and
license agreements.
As of March 31, 2013, we had short-term and long-term investments of $65.2 million recorded at
fair value. Our investments consist of corporate bonds, commercial paper, U.S. treasury bills, U.S. government bonds and time deposits. We sell investments as needed to meet the cash flow needs of our business. Accordingly, our investments are
classified as available-for-sale securities in accordance with ASC 320,
Investments Debt and Equity Securities
. Investments are classified as short-term or long-term based on the underlying investments maturity date.
8
The following table summarizes our amortized cost, unrealized gains and losses and the
fair value of our available-for-sale investments as of March 31, 2013 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gain
|
|
|
Gross
Unrealized
Loss
|
|
|
Estimated
Fair Value
|
|
Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
|
$
|
34,416
|
|
|
$
|
5
|
|
|
$
|
(51
|
)
|
|
$
|
34,370
|
|
U.S. treasury bills
|
|
|
17,988
|
|
|
|
3
|
|
|
|
|
|
|
|
17,991
|
|
Commercial paper
|
|
|
8,990
|
|
|
|
|
|
|
|
|
|
|
|
8,990
|
|
U.S. government bonds
|
|
|
3,317
|
|
|
|
3
|
|
|
|
(2
|
)
|
|
|
3,318
|
|
Time deposits
|
|
|
498
|
|
|
|
|
|
|
|
|
|
|
|
498
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
65,209
|
|
|
$
|
11
|
|
|
$
|
(53
|
)
|
|
$
|
65,167
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported as:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments
|
|
$
|
53,914
|
|
|
$
|
4
|
|
|
$
|
(28
|
)
|
|
$
|
53,890
|
|
Long-term investments
|
|
|
11,295
|
|
|
|
7
|
|
|
|
(25
|
)
|
|
|
11,277
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
65,209
|
|
|
$
|
11
|
|
|
$
|
(53
|
)
|
|
$
|
65,167
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes our amortized cost, unrealized gains and losses and the fair value of our
available-for-sales investments as of December 31, 2012 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
Cost
|
|
|
Gross
Unrealized
Gain
|
|
|
Gross
Unrealized
Loss
|
|
|
Estimated
Fair Value
|
|
Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
|
$
|
27,857
|
|
|
$
|
2
|
|
|
$
|
(61
|
)
|
|
$
|
27,798
|
|
Commercial paper
|
|
|
11,997
|
|
|
|
1
|
|
|
|
|
|
|
|
11,998
|
|
U.S. treasury bills
|
|
|
9,992
|
|
|
|
3
|
|
|
|
|
|
|
|
9,995
|
|
U.S. & international government bonds
|
|
|
3,355
|
|
|
|
|
|
|
|
(6
|
)
|
|
|
3,349
|
|
Time deposits
|
|
|
498
|
|
|
|
|
|
|
|
|
|
|
|
498
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
53,699
|
|
|
$
|
6
|
|
|
$
|
(67
|
)
|
|
$
|
53,638
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported as:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments
|
|
$
|
40,516
|
|
|
$
|
5
|
|
|
$
|
(25
|
)
|
|
$
|
40,496
|
|
Long-term investments
|
|
|
13,183
|
|
|
|
1
|
|
|
|
(42
|
)
|
|
|
13,142
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
53,699
|
|
|
$
|
6
|
|
|
$
|
(67
|
)
|
|
$
|
53,638
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We had investments that were in an unrealized loss position as of March 31, 2013. We have determined that
(i) we do not have the intent to sell any of these investments and (ii) it is not likely we will be required to sell any of these investments before recovery of the entire amortized cost basis. We review our investments to identify and
evaluate investments that have an indication of possible impairment. As of March 31, 2013, we anticipate that we will recover the entire carrying value of such investments and have determined that no other-than-temporary impairments associated
with credit losses were required to be recognized during the three months ended March 31, 2013.
As of March 31,
2013, the weighted-average number of days to maturity for our available-for-sale securities was 239 days, with the longest maturity date occurring in July 2015.
9
The following table presents our
available-for-sale investments that were in an unrealized loss position as of March 31, 2013 and December 31, 2012 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2013
|
|
|
|
Less than 12 Months
|
|
|
12 Months or Greater
|
|
|
Total
|
|
|
|
Fair
Value
|
|
|
Unrealized
Loss
|
|
|
Fair
Value
|
|
|
Unrealized
Loss
|
|
|
Fair
Value
|
|
|
Unrealized
Loss
|
|
Corporate bonds
|
|
$
|
25,473
|
|
|
$
|
(51
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
25,473
|
|
|
$
|
(51
|
)
|
U.S. & international government bonds
|
|
|
1,539
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
1,539
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
27,012
|
|
|
$
|
(53
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
27,012
|
|
|
$
|
(53
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2012
|
|
|
|
Less than 12 Months
|
|
|
12 Months or Greater
|
|
|
Total
|
|
|
|
Fair
Value
|
|
|
Gross
Unrealized
Loss
|
|
|
Fair
Value
|
|
|
Gross
Unrealized
Loss
|
|
|
Fair
Value
|
|
|
Gross
Unrealized
Loss
|
|
Corporate bonds
|
|
$
|
23,406
|
|
|
$
|
(61
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
23,406
|
|
|
$
|
(61
|
)
|
U.S. & international government bonds
|
|
|
3,349
|
|
|
|
(6
|
)
|
|
|
|
|
|
|
|
|
|
|
3,349
|
|
|
|
(6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
26,755
|
|
|
$
|
(67
|
)
|
|
$
|
|
|
|
$
|
|
|
|
$
|
26,755
|
|
|
$
|
(67
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5.
|
Fair Value Measurements
|
We value our financial assets and liabilities using the methods of fair value as
described in ASC 820,
Fair Value Measurement and Disclosure
. As defined in ASC 820, fair value is based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants
at the measurement date. In order to increase consistency and comparability in fair value measurements, ASC 820 establishes a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three broad
levels, which are described below:
|
|
|
Level 1:
|
|
Quoted prices in active markets that are accessible at the measurement date for identical assets or liabilities. The fair value hierarchy gives the highest priority to Level 1
inputs.
|
|
|
Level 2:
|
|
Observable prices that are based on inputs not quoted on active markets, but corroborated by market data.
|
|
|
Level 3:
|
|
Unobservable inputs are used when little or no market data is available. The fair value hierarchy gives the lowest priority to Level 3 inputs.
|
Fair Value of Assets
Our cash equivalents and investments are classified within Level 1 or Level 2 of the fair value hierarchy because they are valued using quoted market prices, broker or dealer quotations, or alternative
pricing sources with reasonable levels of price transparency. The Level 1 items are valued based on quoted market prices in active markets. As of March 31, 2013, Level 1 items include corporate bonds, U.S. treasury bills, U.S. government bonds,
time deposits and money market funds.
We hold available-for-sale short-term commercial paper with highly rated financial
institutions. There is no active market for such commercial paper; it is traded directly from the issuer or on an over-the-counter market. We value our commercial paper using quoted prices for securities with similar characteristics and other
observable inputs (such as interest rates that are observable at commonly quoted intervals), and accordingly, we classify the valuation techniques that use these inputs as Level 2.
10
Assets measured at fair value on a recurring basis at March 31, 2013
are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date
|
|
|
|
March 31,
2013
|
|
|
Quoted Price in
Active
Markets
for Identical
Instruments
Level 1
|
|
|
Significant
Other
Observable
Inputs
Level 2
|
|
|
Significant
Unobservable
Inputs
Level
3
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial paper
|
|
$
|
4,000
|
|
|
$
|
|
|
|
$
|
4,000
|
|
|
$
|
|
|
Money market funds
|
|
|
2,557
|
|
|
|
2,557
|
|
|
|
|
|
|
|
|
|
U.S. treasury bills
|
|
|
2,000
|
|
|
|
2,000
|
|
|
|
|
|
|
|
|
|
Available-for-sale investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
|
|
34,370
|
|
|
|
34,370
|
|
|
|
|
|
|
|
|
|
U.S. treasury bills
|
|
|
17,991
|
|
|
|
17,991
|
|
|
|
|
|
|
|
|
|
Commercial paper
|
|
|
8,990
|
|
|
|
|
|
|
|
8,990
|
|
|
|
|
|
U.S. & international government bonds
|
|
|
3,318
|
|
|
|
3,318
|
|
|
|
|
|
|
|
|
|
Time deposits
|
|
|
498
|
|
|
|
498
|
|
|
|
|
|
|
|
|
|
Foreign currency forward contract
|
|
|
82
|
|
|
|
|
|
|
|
82
|
|
|
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
73,826
|
|
|
$
|
60,754
|
|
|
$
|
13,072
|
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets measured at fair value on a recurring basis at December 31, 2012 are as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at Reporting Date
|
|
|
|
December 31,
2012
|
|
|
Quoted Price in
Active
Markets
for Identical
Instruments
Level 1
|
|
|
Significant
Other
Observable
Inputs
Level 2
|
|
|
Significant
Unobservable
Inputs
Level
3
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
|
$
|
6,040
|
|
|
$
|
6,040
|
|
|
$
|
|
|
|
$
|
|
|
Commercial paper
|
|
|
2,999
|
|
|
|
|
|
|
|
2,999
|
|
|
|
|
|
Available-for-sale investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate bonds
|
|
|
27,798
|
|
|
|
27,798
|
|
|
|
|
|
|
|
|
|
Commercial paper
|
|
|
11,998
|
|
|
|
|
|
|
|
11,998
|
|
|
|
|
|
U.S. treasury bills
|
|
|
9,995
|
|
|
|
9,995
|
|
|
|
|
|
|
|
|
|
U.S. and international government bonds
|
|
|
3,349
|
|
|
|
3,349
|
|
|
|
|
|
|
|
|
|
Time deposits
|
|
|
498
|
|
|
|
498
|
|
|
|
|
|
|
|
|
|
Foreign currency forward contract
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
62,677
|
|
|
$
|
47,680
|
|
|
$
|
14,997
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Periodically, we enter into forward contracts to buy U.S. Dollars at fixed intervals in the retail market in an
over-the-counter environment. As of March 31, 2013, we had foreign currency forward contracts to sell 3.1 million Euros in exchange for $4.0 million with maturity dates from April 2013 through June 2013. In addition, as of March 31,
2013, we had foreign currency forward contracts to sell 0.2 million British Pounds in exchange for $0.4 million with maturity dates from April 2013 through June 2013. We had outstanding short-term intercompany receivables of $4.7 million as of
March 31, 2013. We expect changes in the fair value of the intercompany receivables arising from fluctuations in foreign currency exchange rates to be materially offset by the changes in the fair value of the forward contracts.
The purpose of these forward contracts is to minimize the risk associated with foreign exchange rate fluctuations. We have developed a
foreign currency exchange policy to govern our forward contracts. These foreign currency forward contracts do not qualify as cash flow hedges and all changes in fair value are reported in earnings as part of other income and expenses. We have not
entered into any other types of derivative financial instruments for trading or speculative purpose. Our foreign currency forward contract valuation inputs are based on quoted prices and quoted pricing intervals from public data and do not involve
management judgment. Accordingly, we have classified our outstanding foreign currency forward contracts within Level 2 of the fair value hierarchy and have recorded the fair value of $0.1 million in other current assets on our condensed consolidated
balance sheet as of March 31, 2013.
11
Fair Value of Liabilities
The fair value of the 5.00% Convertible Senior Notes due 2031 (the 2031 Notes) were estimated using the (i) terms of the 2031 Notes; (ii) rights, preferences, privileges, and
restrictions of the underlying security; (iii) time until any restriction(s) are released; (iv) fundamental financial and other characteristics of the Company; (v) trading characteristics of the underlying security (exchange, volume,
price, and volatility); and (vi) precedent sale transactions. The 2031 Notes are classified within Level 2 of the hierarchy of fair value measurements.
The following table summarizes the principal
outstanding and estimated fair values of our debt (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2013
|
|
|
December 31, 2012
|
|
|
|
Carrying Value
|
|
|
Fair Value
|
|
|
Carrying Value
|
|
|
Fair Value
|
|
2031 Notes
|
|
$
|
47,830
|
|
|
$
|
77,812
|
|
|
$
|
47,518
|
|
|
$
|
66,803
|
|
The holders of our 2031 Notes may require us to repurchase for cash all or part of their 2031 Notes on each of
December 20, 2014, 2018, 2021 and 2026 at a repurchase price of 100% of the principal amount of 2031 Notes to be purchased, plus accrued and unpaid interest up to the repurchase date. In addition, if we undergo a fundamental change (as defined
in the 2031 Notes indenture), holders may require us to repurchase for cash all or part of their 2031 Notes at a repurchase price of 100% of the principal amount of the 2031 Notes to be repurchased plus any accrued and unpaid interest. The carrying
value of the 2031 Notes are classified as long-term liabilities as of March 31, 2013. See Note 10 Convertible Senior Notes. The closing of the tender offer pursuant to the Merger Agreement with Bayer resulting in Bayer owning a majority
of the voting stock of the Company will be a fundamental change under the Indenture. For more information, see Note 16 Subsequent Events.
6.
|
Goodwill and Intangible Assets
|
We recorded goodwill in connection with the acquisition of the outstanding shares of SAS in January 2008 and in
connection with the business combination where we purchased of certain assets of Sigma Medical in October 2011.
The changes in carrying amount of goodwill for the three months ended March 31, 2013 are as
follows (in thousands):
|
|
|
|
|
|
|
Three months ended
March 31, 2013
|
|
Goodwill, beginning of period
|
|
$
|
16,911
|
|
Effect of currency translation
|
|
|
(511
|
)
|
|
|
|
|
|
Goodwill, end of period
|
|
$
|
16,400
|
|
|
|
|
|
|
Intangible assets are amortized over straight-line periods ranging from 3 to 9 years.
The following table provides additional information concerning
intangible assets (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2013
|
|
|
December 31,
2012
|
|
|
|
Weighted avg
remaining life
(years)
|
|
|
Gross carrying
amount
|
|
|
Accumulated
amortization
|
|
|
Effect of currency
translation
|
|
|
Net book
value
|
|
|
Net book
value
|
|
Patents and Licenses
|
|
|
5.5
|
|
|
$
|
25,750
|
|
|
$
|
(10,759
|
)
|
|
$
|
|
|
|
$
|
14,991
|
|
|
$
|
15,672
|
|
Customer relationships
|
|
|
5.4
|
|
|
|
6,763
|
|
|
|
(3,008
|
)
|
|
|
(539
|
)
|
|
|
3,216
|
|
|
|
3,489
|
|
Re-acquired rights
|
|
|
1.8
|
|
|
|
669
|
|
|
|
(302
|
)
|
|
|
(22
|
)
|
|
|
345
|
|
|
|
407
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangibles
|
|
|
$
|
33,182
|
|
|
$
|
(14,069
|
)
|
|
$
|
(561
|
)
|
|
$
|
18,552
|
|
|
$
|
19,568
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12
Inventories are stated at the lower of cost or market. Cost is based on actual costs computed on a first-in,
first-out basis.
The components of inventories consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2013
|
|
|
2012
|
|
Raw materials
|
|
$
|
7
|
|
|
$
|
11
|
|
Work-in-progress
|
|
|
1,951
|
|
|
|
1,023
|
|
Finished goods
|
|
|
4,287
|
|
|
|
4,132
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
6,245
|
|
|
$
|
5,166
|
|
|
|
|
|
|
|
|
|
|
We offer warranties on our product and record a liability for the estimated future costs associated with warranty
claims, which is based upon our historical experience and our estimate of the level of future costs. Warranty costs are reflected in the statement of operations as a cost of goods sold.
A reconciliation of the changes in warranty liability for the three months ended March 31, 2013 and 2012 are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31,
|
|
|
|
2013
|
|
|
2012
|
|
Balance at the beginning of the period
|
|
$
|
212
|
|
|
$
|
183
|
|
Accruals for warranties issued during the period
|
|
|
156
|
|
|
|
72
|
|
Settlements made in kind during the period
|
|
|
(162
|
)
|
|
|
(92
|
)
|
|
|
|
|
|
|
|
|
|
Balance at the end of the period
|
|
$
|
206
|
|
|
$
|
163
|
|
|
|
|
|
|
|
|
|
|
9.
|
Stock-Based Compensation
|
The following table sets
forth the total stock-based compensation expense resulting from stock options, stock awards, non-employee stock options, stock appreciation rights and the Employee Stock Purchase Plan (ESPP) included in the Condensed Consolidated
Statements of Operations (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2013
|
|
|
2012
|
|
Cost of goods sold
|
|
$
|
47
|
|
|
$
|
28
|
|
Research and development
|
|
|
224
|
|
|
|
143
|
|
Selling, general and administrative
|
|
|
1,347
|
|
|
|
1,525
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense
|
|
$
|
1,618
|
|
|
$
|
1,696
|
|
|
|
|
|
|
|
|
|
|
Approximately $0.9 million and $1.1 million for the three months ended
March 31, 2013 and 2012, respectively, of stock-based compensation expense under ASC 718,
Compensation Stock Compensation
relates to employee stock options, ESPP and stock appreciation rights. In addition, approximately $0.7
million and $0.6 million for the three months ended March 31, 2013 and 2012, respectively, of stock-based compensation expense relates to employee restricted stock units. Stock-based compensation expense is measured at grant date, based on the
fair value of the award, and is recognized on a straight line basis as expense over the employee requisite service period, which is generally the vesting period.
Stock-based compensation arrangements to non-employees
are accounted for in accordance with ASC 505-50,
Equity Based Payments to Non-Employees
, which requires that these equity instruments are recorded at their fair value on the measurement date. The measurement of stock-based compensation is
subject to adjustment as the underlying equity instruments vest. Stock-based compensation expense relating to non-employees was immaterial for the three month periods ended March 31, 2013 and 2012, respectively.
Stock Options and Appreciation Rights
: During the three months ended March 31, 2013, we granted options
for 268,000 shares of common stock, with an estimated total grant date fair value of approximately $2.0 million, and a grant date weighted-average fair value of $7.29 per share. During the three months ended March 31, 2012, we granted stock
appreciation rights for 339,500 shares of common stock, with an estimated total grant date fair value of approximately $1.9 million and a grant date weighted-average fair value of $5.59 per share.
13
For the three months ended
March 31, 2013 and 2012, we calculated the fair value of stock options and stock appreciation rights on the date of grant using the Black-Scholes model with the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2013
|
|
|
2012
|
|
Expected term (in years)
|
|
|
3.91
|
|
|
|
4.05
|
|
Average risk-free interest rate
|
|
|
0.59
|
%
|
|
|
0.66
|
%
|
Average volatility factor
|
|
|
41.3
|
%
|
|
|
50.7
|
%
|
Dividend yield
|
|
|
|
|
|
|
|
|
Restricted Stock Units
: We record stock-based compensation expense for restricted stock units using the fair
market value of our common stock on the grant date. Compensation expense is recorded on a straight-line basis over the vesting periods of the underlying stock awards. During the three months ended March 31, 2013, we granted 308,950 restricted
stock units with a grant-date fair value of approximately $7.0 million and a grant-date weighted-average fair value of $22.52 per share. During the three months ended March 31, 2012, we granted 99,500 restricted stock units with a grant-date
fair value of approximately $1.4 million and a grant-date weighted-average fair value of $13.65 per share.
10.
|
Convertible Senior Notes
|
2027 Notes
In February 2007, we issued and sold an aggregate principal amount of $86.3 million of our 2.25% convertible senior notes due 2027 (2027 Notes). The 2027 Notes bore a 2.25% interest per annum
on the principal amount, payable semiannually in arrears on February 15 and August 15 of each year.
In December
2011, we exchanged $50.0 million aggregate principal amount of our 2027 Notes in exchange for $50.0 million aggregate principal amount of the 2031 Notes. As a result of the exchange, $36.2 million principal amount of the 2027 Notes remained
outstanding as of December 31, 2011. On February 15, 2012, we used $36.6 million of existing cash to redeem all of the remaining 2027 Notes at a redemption price of 100% of par plus accrued and unpaid interest.
2031 Notes
We account for our 2031 Notes in accordance with ASC 470-20,
Debt Debt with Conversions and other Options
. ASC 470-20 clarifies the accounting for convertible debt instruments that may be
settled in cash upon conversion, including partial cash settlement at our election. ASC 470-20 specifies that an issuer of such instruments should separately account for the liability and equity components of the instrument. The amount recorded as
debt is based on the fair value of the debt component as a standalone instrument, determined using an average interest rate for similar nonconvertible debt issued by entities with credit ratings comparable to ours at the time of issuance. The
difference between the debt recorded at inception and its principal amount is to be accreted to principal through interest expense through the estimated life of the note, which is three years.
In December 2011, we issued $50.0 million aggregate principal amount of 2031 Notes in connection with the debt
exchange described above. The 2031 Notes are our senior unsecured obligations and rank senior in right of payment to any of our indebtedness that is expressly subordinated in right of payment to the 2031 Notes, equal in right of payment to any of
our unsecured indebtedness that is not so subordinated, effectively junior in right of payment to any of our secured indebtedness to the extent of the value of the assets securing such indebtedness and structurally junior to all indebtedness and
other liabilities of our subsidiaries.
The 2031 Notes bear interest at a rate of 5.00% per annum. Interest is payable on
June 15 and December 15 of each year until the maturity date of December 15, 2031, unless redeemed earlier, repurchased or converted.
Holders may convert 2031 Notes at their option at any time prior to September 15, 2031, other than during the period from September 15, 2014 to the close of business on the business day
immediately preceding December 20, 2014, only under the following circumstances: (1) if the closing sales price of our common stock exceeds 130% of the conversion price then in effect during a period specified in the indenture governing
the 2031 Notes (2) if the average trading price per $1,000 principal amount of the 2031 Note is less than 98% of the average conversion value of the notes during a period specified in the 2031 Notes indenture; (3) if we call any or all of
the 2031 Notes for redemption, at any time prior to the close of business on the scheduled trading day immediately preceding the redemption date; or (4) upon the occurrence of specified corporate events, including a fundamental change (as
defined in the 2031 Notes indenture). During the period from September 15, 2014 to December 20, 2014, and on or after September 15, 2031 until the maturity date, holders, at their option, may convert their 2031 Notes at any time,
regardless of the foregoing circumstances.
14
As a result of the Merger Agreement (see Note 16 Subsequent Events), on
April 29, 2013, we delivered to the holders of the 2031 Notes a Notice of Convertibility and Anticipated Make-Whole Fundamental Change in accordance with the terms of the 2031 Notes indenture. Accordingly, the 2031 Notes may be surrendered for
conversion at any time from and after the date that is 40 scheduled trading days prior to the anticipated effective date of the Make-Whole Fundamental Change (as defined in the 2031 Notes indenture) (currently anticipated to be June 5, 2013)
until the business day immediately preceding the Fundamental Change Purchase Date (as defined in the 2031 Notes indenture) corresponding to such Make-Whole Fundamental Change. The Fundamental Change Purchase Date will be a date specified by the
Company by a separate notice that is not less than 20 business days and not more than 35 business days after the date we deliver the Fundamental Change Company Notice (as defined in the 2031 Notes indenture) to the holders of the 2031 Notes, which
delivery will be no later than 20 calendar days after the effective date of the Make-Whole Fundamental Change. In accordance with the 2031 Notes indenture, if the Make-Whole Fundamental Change does
not
occur, the 2031 Notes will cease
to be convertible on account of such transaction immediately prior to the open of business on the business day immediately following the date on which we announce that such transaction will not occur.
Upon conversion, we will pay or deliver, as the case may be, cash, shares of our common stock or a combination of cash and shares of our
common stock, at our election. The initial conversion rate is 60.8365 shares of common stock per $1,000 principal amount of 2031 Notes, which is equivalent to an initial conversion price of approximately $16.44 per share of common stock. The
conversion rate will be subject to adjustment in some events but will not be adjusted for any accrued and unpaid interest. In addition, following a Make-Whole Fundamental Change that occurs prior to December 20, 2014, the conversion rate will
be increased for a holder who elects to convert its 2031 Notes in connection with such event in certain circumstances.
The
holders of the 2031 Notes may require us to repurchase for cash all or part of their 2031 Notes on each of December 20, 2014, 2018, 2021 and 2026 at a repurchase price of 100% of the principal amount of 2031 Notes to be purchased, plus accrued
and unpaid interest up to the relevant repurchase date. In addition, if we undergo a Fundamental Change or Make-Whole Fundamental Change (as defined in the 2031 Notes indenture), holders may require us to repurchase for cash all or part of their
2031 Notes at a repurchase price of 100% of the principal amount of the 2031 Notes to be repurchased plus any accrued and unpaid interest.
In addition, we may redeem the 2031 Notes, at our option, in whole or in part on or after December 20, 2014 at a redemption price equal to 100% of the principal amount of the 2031 Notes to be
redeemed plus any accrued and unpaid interest. We may not have sufficient funds to pay the interest, redemption price or repurchase price of the 2031 Notes when the notes become payable in accordance with its terms.
We incurred approximately $2.1 million in issuance costs in connection with the issuance of 2031 Notes. Of this, $1.1 million are
included in other assets in the condensed consolidated balance sheet as of March 31, 2013 and are being amortized over the estimated life of the 2031 Notes.
We have allocated the principal balance of the 2031 Notes between the fair value of the debt component and the fair value of the common stock conversion feature. Using an income approach, we discounted
the value of the 2031 Notes at a rate of 7.0%, which represents the estimated market interest rate for a similar nonconvertible instrument as of the date of the exchange. The resulting debt discount of $3.8 million for the 2031 Notes is being
accreted to interest expense over a period of three years, which represents the number of years until the first repurchase date in December 2014. The fair value of the common stock conversion feature is recorded as a component of stockholders
equity. The 2031 Notes are classified as long-term liabilities as of March 31, 2013.
For the fair value related to the
2031 Notes, see Note 5 Fair Value Measurement.
Interest expense associated with the 2027 Notes and 2031
Notes consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
|
2013
|
|
|
2012
|
|
Contractual coupon rate of interest
|
|
$
|
618
|
|
|
$
|
720
|
|
Accretion of notes payable - 2031 Notes
|
|
|
312
|
|
|
|
313
|
|
Accretion of notes payable - 2027 Notes
|
|
|
|
|
|
|
254
|
|
Amortization of debt issuance costs - 2031 Notes
|
|
|
164
|
|
|
|
155
|
|
Amortization of debt issuance costs - 2027 Notes
|
|
|
|
|
|
|
24
|
|
|
|
|
|
|
|
|
|
|
Interest expense - convertible senior notes
|
|
$
|
1,094
|
|
|
$
|
1,466
|
|
|
|
|
|
|
|
|
|
|
Amounts comprising the carrying amounts of the 2031 Notes are as follows (in thousands):
|
|
|
|
|
|
|
2031 Notes
|
|
Carrying Amount December 31, 2012
|
|
$
|
47,518
|
|
Accretion on notes payable
|
|
|
312
|
|
|
|
|
|
|
Carrying Amount March 31, 2013
|
|
$
|
47, 830
|
|
|
|
|
|
|
15
For the three months ended March 31, 2013 and March 31, 2012 we recorded approximately $1.1 million in income
tax expense and $(2.5) million of income tax benefit, respectively. Our effective tax rate for the three months ended March 31, 2013 and March 31, 2012 was 38% and 47%, respectively.
The change in the effective tax rate in the current period versus the prior period is primarily a result of the extension of the Federal
research and development credit that occurred in the three months ended March 31, 2013. On January 2, 2013, the American Taxpayer Relief Act of 2012 (ATRA) was enacted. Under prior law, a taxpayer was entitled to a research tax credit
for qualifying amounts incurred through December 31, 2011. The ATRA extended the research credit for two years for qualified research expenditures incurred through the end of 2013. The extension of the research credit is retroactive and
includes amounts incurred after 2011. As such we were able to record a benefit for the three months ended March 31, 2013, including a discrete benefit for the 2012 credit. Our effective tax rate for the three months ended March 31, 2013
and 2012 differs from the federal statutory tax rate as a result of the research credit and permanent book-tax differences including stock-based compensation, state taxes and earnings taxed in foreign jurisdictions.
As of March 31, 2013, we did not have any valuation allowance on our U.S. federal deferred tax assets and had a total valuation
allowance of $2.0 million against certain state deferred tax assets. The valuation allowance against the state deferred tax assets is attributable to a portion of California net operating losses that are projected to expire prior to utilization. We
evaluate the likelihood of the realization of our deferred tax assets on a quarterly basis, and reduce the carrying amount of these deferred tax assets by a valuation allowance to the extent we believe they will not more likely than not be realized.
We consider many factors when assessing the likelihood of future realization of deferred tax assets, including our recent cumulative earnings by jurisdiction, expectations of future taxable income, the carryforward periods available to utilize tax
attributes and other relevant factors. We believe that the U.S. federal and state tax attributes that have been recognized will be more likely than not realized within their available carry forward periods.
We have not been audited by the Internal Revenue Service or any state income or franchise tax agency. As of March 31, 2013, our
federal returns for the years ended 2008 through the current period and most state returns for the years ended 2008 through the current period are still open to examination. In addition, all of the net operating losses and research and development
credit carryforwards that may be used in future years are still subject to adjustment by taxing authorities. The amount of unrecognized tax benefits at March 31, 2013 was approximately $3.0 million, of which, if ultimately recognized,
approximately $2.6 million would decrease the effective tax rate in the period in which the benefit is recognized. Our policy is to include interest and penalties related to unrecognized tax benefits within the provision for taxes on the
consolidated statements of operations. The total amount of penalties and interest is not significant as of March 31, 2013.
We estimate that approximately $0.4 million of unrecognized tax benefits will lapse within the next twelve months, due to the lapse of
statute of limitations.
12.
|
Computation of Net Income (Loss) Per Share
|
Basic net income (loss) per share excludes any potential dilutive effects of options, warrants, unvested restricted
stock units and shares underlying our convertible notes. Diluted net income (loss) per share includes the impact of potentially dilutive securities. In the periods presented, basic and diluted net income (loss) per share are computed using
the weighted-average number of common shares outstanding.
The following table provides a reconciliation of
weighted-average number of common shares outstanding to the weighted-average number of common shares outstanding used in computing basic and diluted net income (loss) per common share (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
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2013
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2012
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Numerator:
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Income (loss) available to common stockholders
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$
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1,857
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$
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(2,838
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)
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Denominator:
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Denominator for basic earnings (loss) per share:
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Weighted-average number common shares outstanding used in computing basic net income (loss) per common share
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32,522
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31,305
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Effect of dilutive securities:
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Options & stock appreciation rights
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1,091
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Stock awards
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220
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Convertible debt
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802
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Weighted-average number of common shares outstanding used in computing diluted net income (loss) per common share
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34,635
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31,305
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16
The following units were excluded
from the computation of diluted net income (loss) per share, as their effect would have been anti-dilutive (in thousands):
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Three Months Ended
March 31,
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2013
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2012
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Outstanding options and stock appreciation rights
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245
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4,055
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Restricted stock units
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761
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555
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Warrants issued in connection with our 2027 notes
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3,093
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Total
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1,006
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7,703
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As of March 31, 2013, there were no 2027 Notes outstanding, and the warrants issued in connection with the 2027
Notes were fully expired.
We operate in one business segment, which encompass all geographical regions. We use one measurement of profitability
and do not segregate our business for internal reporting.
Net sales by geographic region, based on the shipping location of our
customers, are as follows (in thousands, except percentages):
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Three Months Ended
March 31,
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2013
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2012
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Net sales
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$
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34,108
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$
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29,029
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United States of America
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78
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%
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75
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%
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France
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15
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%
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16
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%
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Rest of Europe
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6
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%
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8
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%
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Other
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1
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%
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1
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%
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No customer accounted for more than 10% of total revenue for the three months ended March 31, 2013 and 2012. No
customer accounted for more than 10% of total gross accounts receivable at March 31, 2013 and December 31, 2012.
14.
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Commitments and Contingencies
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Build-to-Suit Lease Commitments
In November 2012, we entered into a build-to-suit lease agreement for a production facility in Heredia, Costa Rica. The lease is for 15,446 square feet of manufacturing space. The lease commenced in
February 2013, after the initial preparation of the building was complete and will terminate in February 2020. We have entered into an agreement with a construction management company to make significant changes to the leased property and under
these agreements we have retained all construction risk and therefore, for accounting purposes, are considered the owner of the building during the construction period. Under this build-to-suit lease arrangement, we recognize construction in
progress based on all construction costs incurred by both us and the landlord, which includes the fair value of the existing building. We also recognize a financing obligation equal to all costs funded by the landlord, including the fair value of
the existing building.
In November 2012, we signed a new lease in Milpitas, California that will serve as our new
headquarters at the expiration of the current Mountain View, California lease. The new lease is for a building of approximately 72,580 square feet of office, research and development and manufacturing space. This lease commences in July 2013 and
will terminate in July 2023. We are currently performing construction activities to get this facility ready for occupancy. As we will be retaining all the construction risk, we are, for accounting purposes, the owner of the building during the
construction period. As such, this lease is also being accounted for under build-to-suit guidance.
17
As the accounting owner of these buildings during the construction period, we have recorded
approximately $15.4 million in construction in progress and $12.6 million in the related facility financing obligation liability on our consolidated balance sheet as of March 31, 2013.
We have determined that, upon occupancy of these facilities we will have continued involvement in the facilities after the construction
periods are complete, which will preclude us from achieving sale-leaseback accounting. As such, we anticipate we will not be able to derecognize either facility or the related liability and will continue to account for these arrangements as an owned
assets and related financing obligations. Therefore, when construction is completed and the facilities are placed into service, we will keep the assets and corresponding financing obligations on our consolidated balance sheet. The assets will be
depreciated over the estimated useful life of 30 years. The financing obligations will be amortized through the effective interest method in which a portion of the lease payments will decrease the financing obligations and the remaining portion will
be recognized as interest expense.
Contingencies
From time to time, we may have certain contingent liabilities that arise in the ordinary course of our business activities. We account for
contingent liabilities when it is probable that future expenditures will be made and such expenditures can be reasonably estimated. At March 31, 2013, we had no material outstanding contingent liabilities.
On May 1, 2013, a putative class action complaint captioned
Strauss v. Conceptus, Inc., et al.
, No.
1-13-CV-245627 was filed in the Superior Court of the State of California, County of Santa Clara. The complaint names as defendants the Company, the members of our board of directors, Bayer HealthCare LLC (Parent) and Evelyn Acquisition
Company (Purchaser) and alleges that our directors breached their fiduciary duties by entering into an Agreement and Plan of Merger, dated as of April 28, 2013, by and among the Company, Parent and Purchaser (the Merger
Agreement) at an unfair price and through a flawed process and that Parent and Purchaser aided and abetted those breaches of fiduciary duty. The complaint seeks a declaration that the case is maintainable as a class action, an injunction
against Purchasers cash tender offer to purchase all of the outstanding shares of common stock of the Company (the Offer) and Purchasers merger with and into the Company following the consummation of the Offer and subject to
the satisfaction or written waiver of certain conditions set forth in the Merger Agreement (the Merger), or rescission in the event the Offer or the Merger are consummated, unspecified damages and an award of attorneys and
experts fees and costs and other relief.
In addition, we are involved in various other lawsuits and claims arising in
the ordinary course of business. We believe there is no ordinary course litigation pending that could have, individually or in the aggregate, a material adverse effect on our financial position, results of operations or cash flows. However, in view
of the unpredictable nature of such matters, we cannot provide any assurances regarding the outcome of any litigation, investigation, inquiry or claim to which we are a party or the impact on us of an adverse ruling in such matters.
Bayer HealthCare Agreement and Plan of Merger
On April 28, 2013, we entered into the Merger Agreement with Parent, a Delaware limited liability company, and Purchaser, a Delaware
corporation and a wholly owned subsidiary of Parent. Pursuant to the Merger Agreement and upon the terms and subject to the conditions thereof, on May 7, 2013, Purchaser commenced the Offer to acquire all of the issued and outstanding shares of
common stock of the Company, par value $0.003 per share (the Shares), at a price per Share of $31.00 (the Offer Price), payable net to the holder thereof in cash, without interest, subject to any withholding of taxes required
by applicable law, upon the terms and subject to the conditions set forth in the Offer to Purchase and in the related Letter of Transmittal, each of which were filed by Parent and Purchaser on a Schedule TO on May 7, 2013. In the Offer, each Share
validly tendered and not withdrawn will be accepted for payment by Purchaser in accordance with the terms of the Offer (but in no event sooner than 20 business days after the commencement of the Offer).
Pursuant to the Merger Agreement, following the consummation of the Offer, the Merger Agreement provides that, upon its terms and subject
to the satisfaction or waiver of each of the applicable conditions set forth in the Merger Agreement, Purchaser will be merged with and into the Company, and the Company will continue as the surviving corporation and a wholly-owned subsidiary of
Parent. In the event Bayer AG and its direct and indirect subsidiaries (collectively, the Bayer Entities) acquire at least 90% of the outstanding Shares, including through exercise of the Top Up Option (defined below), the Merger shall
be effected as a short-form merger under and in accordance with Section 253 of the General Corporation Law of the State of Delaware (DGCL) without additional approval by the Companys stockholders.
At the effective time of the Merger (the Effective Time), all remaining outstanding Shares not tendered in the Offer (other
than Shares held by Parent, Purchaser or any other wholly owned subsidiary of Parent or in the treasury of the Company, or Shares held by stockholders who are entitled to exercise, and properly exercise, appraisal rights with respect to such Shares
pursuant to, and who comply in all respects with, the provisions of Section 262 of the DGCL in order to perfect such rights) will be converted into the right to receive the Offer Price, payable to the holder thereof, without interest, subject to any
withholding taxes required by applicable law.
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Purchasers obligation to accept for payment and pay for all Shares tendered into the
Offer and not withdrawn is subject to (i) the termination or expiration of any waiting period applicable to the consummation of the Offer and the Merger under the Hart-Scott Rodino Antitrust Improvements Act of 1976, as amended, (ii) a number of
Shares that, together with the Shares owned by Parent, Purchaser or the other Bayer Entities, represents at least a majority of the Shares outstanding on a fully-diluted basis (including any Shares issuable upon conversion of the 2031 Notes in
accordance with the terms of the indenture governing the Notes, after giving effect to any Make-Whole Fundamental Change (as defined in the Indenture)) having been tendered and not withdrawn at the scheduled expiration time of the Offer and (iii)
other customary closing conditions. Neither the consummation of the Offer nor the Merger is subject to a financing condition.
Pursuant to the terms of the Merger Agreement, the Company has granted Purchaser an irrevocable option (the Top Up Option),
exercisable on one or more occasions at any time following the initial acceptance for payment by Purchaser of Shares tendered pursuant to the Offer (the Acceptance Time) and upon the terms and conditions set forth in the Merger
Agreement, to purchase from the Company newly issued Shares at a price per Share equal to the Offer Price up to the number of Shares that, when added to the Shares already owned by Parent and each of the other Bayer Entities at the time of the
exercise of the Top Up Option, would constitute one Share more than 90% of the total Shares then outstanding determined on a fully-diluted basis (including any Shares issuable upon conversion of the Notes, after giving effect to any Make-Whole
Fundamental Change), after giving effect to the issuance of Shares pursuant to the exercise of the Top-Up.
The Merger
Agreement contains representations, warranties and covenants of the parties customary for transactions of this type. The Company has also agreed to customary covenants governing the conduct of its business, including an obligation to conduct its
business in the ordinary course consistent with past practices until the Effective Time. Subject to certain limited exceptions in the Merger Agreement, the Company has agreed not to initiate, solicit or participate in discussions with third parties
regarding other proposals to acquire the Company and it has agreed to certain restrictions on its ability to respond to such proposals, subject to certain fiduciary duties of the Companys Board of Directors (the Board). The Merger
Agreement also contains customary termination provisions for the Company and Parent and provides that, in connection with the termination of the Merger Agreement in connection with a competing acquisition proposal under certain specified
circumstances, the Company may be required to pay Parent a termination fee of $37.3 million.
The Merger Agreement provides
that each outstanding option to purchase Shares (each, a Company Option) and each outstanding stock appreciation right with respect to Shares (each, a Company SAR), whether vested or unvested, will be cancelled and, in
exchange therefor, each former holder of any such Company Option and Company SAR will receive a cash payment in an amount equal to the product of (i) the Offer Price, less any applicable exercise price per Share, and (ii) the number of Shares
covered by such Company Option or Company SAR, subject to reduction for any applicable withholding tax. In addition, at the Effective Time, each outstanding award of restricted stock units of the Company representing the right to vest in and be
issued Shares (each, a Company RSU), whether or not then vested, will be cancelled and, in exchange therefor, each former holder of any such Company RSU will receive a cash payment in an amount equal to the product of (i) the Offer Price
and (ii) the number of Shares subject to such Company RSU, subject to reduction for any applicable withholding tax. Further, at the Effective Time, the Company will terminate the Companys Deferred Fee Plan for Directors (the Director
Deferred Fee Plan) and, following such termination, each outstanding phantom unit held under the Director Deferred Fee Plan that represents the right to receive the value of a Share shall be paid out in cash
Anticipated Make-Whole Fundamental Change under 2031 Notes Indenture
Pursuant to the 2031 Notes indenture (the Indenture), the filing of a Schedule TO under the Exchange Act disclosing that
Parent has become the direct or indirect ultimate beneficial owner, as defined in Rule 13d-3 under the Securities Exchange Act of 1934, as amended, of the Companys Common Equity (as defined in the Indenture) representing more than
50% of the voting power of the Companys Common Equity (the Majority Ownership Schedule TO) or, if the Merger were to occur on the same day as the filing of the Majority Ownership Schedule TO, the Merger (in each case, a
Make-Whole Fundamental Change Event) would constitute a Make-Whole Fundamental Change (as defined in the Indenture) and the date of the filing of the Majority Ownership Schedule TO would constitute the Effective Date (as defined in the
Indenture) of the Make-Whole Fundamental Change.
As a result of the Make-Whole Fundamental Change, the 2031 Notes may be
surrendered for conversion at any time from and after the date that is 40 Scheduled Trading Days (as defined in the Indenture) prior to the anticipated Effective Date of the Make-Whole Fundamental Change (currently anticipated to be June 5,
2013) until the business day immediately preceding the Fundamental Change Purchase Date (as defined in the Indenture) corresponding to such Make-Whole Fundamental Change. The Fundamental Change Purchase Date will be a date specified by the Company
by separate notice that is not less than 20 business days and not more than 35 business days after the date the Company delivers the Fundamental Change Company Notice (as defined in the Indenture) to the holders of the 2031 Notes, which delivery
will be no later than 20 calendar days after the Effective Date of the Make-Whole Fundamental Change pursuant to the terms of the Indenture. If, however, the Make-Whole Fundamental Change Event does not occur, the 2031 Notes will cease to be
convertible on account of such transaction immediately prior to the open of business on the business day immediately following the date on which the Company announces that such transaction will not occur.
19
The Conversion Rate (as defined in the Indenture) applicable to the 2031 Notes that are
surrendered for conversion during the period following the Effective Date of the Make-Whole Fundamental Change and ending at 5:00 p.m., New York City time, on the business day immediately preceding the Fundamental Change Purchase Date (the
Make-Whole Fundamental Change Period), will be increased pursuant to Section 14.03 of the Indenture. Upon termination of the Make-Whole Fundamental Change Period, the Conversion Rate will decrease to the Conversion Rate in effect
immediately prior to the Make-Whole Fundamental Change Period.
The closing of the Offer pursuant to the Merger Agreement
resulting in the Bayer Entities owning a majority of the voting stock of the Company will be a fundamental change under the Indenture.