Acquisitions

12 Months Ended

Dec. 31, 2011

7. Acquisitions

VisualSonics, Inc.

On June 30, 2010, we acquired all of the outstanding stock of VisualSonics, Inc. ("VisualSonics"), a leader in the development, manufacturing, and marketing of ultra high-resolution, ultrasound-based imaging technology ("micro-ultrasound") designed to enable discovery research, medical diagnosis and imaging small physiological structures in humans and animals. VisualSonics' micro-ultrasound product platform currently serves the pre-clinical research market. We intend to integrate VisualSonics' micro-ultrasound technology with our miniaturization competency and user design to deliver ultra high-frequency micro-ultrasound into clinical medicine.

Cash consideration of $64.5 million was transferred for the shares of VisualSonics. During 2010, the results of VisualSonics' operations are included in our consolidated financial statements since the date of acquisition.

Operating expenses include acquisition related charges of $4.2 million for the year ended December 31, 2010.

The following table summarizes the acquisition-date fair value of the assets acquired and the liabilities assumed in connection with the business combination as revised (in thousands):


	June 30, 2010
Assets
Current assets:
Cash and cash equivalents	$	3,322
Accounts receivable		4,538
Inventories		5,002
Deferred income taxes		1,224
Prepaid expenses and other current assets		1,160

Total current assets		15,246
Property and equipment, net		1,312
Identifiable intangible assets		32,910
Goodwill		32,703

Total assets	$	82,171

Liabilities
Current liabilities:
Accounts payable	$	1,988
Accrued expenses and other current liabilities		3,409
Deferred revenue		410

Total current liabilities		5,807
Long-term debt		8,828
Deferred tax liabilities		2,403
Other non-current liabilities		371

Total liabilities		17,409

Net assets acquired	$	64,762

During the measurement period for the year ended December 31, 2011 we obtained information related to the tax effects of the acquisition and the ability to utilize pre-acquisition tax credits to offset tax liabilities arising on the distribution of certain assets acquired. This resulted in an increase to deferred tax liabilities of $1.2 million and an increase to goodwill of $1.2 million, which is reflected in the table above. The measurement period ended on June 30, 2011.

These assets and liabilities were recorded at the acquisition-date fair value. We used an "income" approach, which is a measurement of the present value of the net economic benefit or cost expected to be derived from an asset or liability, to measure the acquired assets and liabilities excluding inventory, and property and equipment. Inventory was measured using a cost approach. Property and equipment were valued using a combination of the market and cost approaches.

We used the following methods to measure fair value of intangible assets:

•

Developed technology and customer relations were valued using the multi-period excess earnings method

•

Trademarks were valued using the relief from royalty method

The fair value of the identified intangible assets was estimated by performing a discounted cash flow analysis using the "income" approach. This method includes a forecast of direct revenues and costs associated with the respective intangible assets and charges for economic returns on tangible and intangible assets utilized in cash flow generation. Net cash flows attributable to the identified intangible assets were discounted to their present value at a rate commensurate with the perceived risk. The projected cash flow assumptions considered contractual relationships, customer attrition and the tax amortization benefit.

Intangibles assets acquired consisted of the following (in thousands):


	Amount		Amortization Period (in years)
Trademarks	$	3,060		25
Developed technology		22,620		3 to 10
Customer relationships		7,230		5 to 7

Total intangibles	$	32,910

The total fair value of trade receivables acquired amounted to $4.5 million which equated the amount due on these receivables.

We recognized a warranty liability of $0.1 million related to VisualSonics' products, representing potential undiscounted amount of all future payments that we could be required to make under the warranty arrangements. We incurred the majority of these costs by the end of 2011.

We recognized a deferred tax asset of $8.3 million, which includes foreign net operating loss carryforward of $1.0 million, foreign research and experimentation expense carryforward of $5.1 million, and foreign research and experimentation tax credit carryforward of $1.8 million. Additionally, deferred tax liabilities of $8.3 million were recorded relating to acquired intangible assets. A valuation allowance was established of $0.4 million on the net deferred tax assets of VisualSonics. The net operating loss was generated in 2010 and will expire in 2030. The research and experimentation expense carryforward has an indefinite life and the research and experimentation tax credit carryforwards expire from 2025 through 2030.

The results of VisualSonics' operations has been included in our consolidated financial statements since the date of acquisition. For comparability purposes, the following table presents our pro forma revenue and net income (loss) for the twelve months ended December 31, 2010 and 2009, had the VisualSonics' acquisition date been January 1, 2009 (in thousands):


	Unaudited
	Revenue		Net income (loss)
VisualSonics:
Actual from June 30, 2010 to December 31, 2010	$	17,626	$	(958	)
Supplemental pro forma from the combined entity for the period:
January 1, 2010 to December 31, 2010 (1)	$	291,010	$	8,379
January 1, 2009 to December 31, 2009	$	266,520	$	(2,191	)

(1)	Pro forma net income (loss) excluded acquisition and integration charges of $4.2 million.

Because VisualSonics fiscal year end was September, three months prior to our year-end, revenue and net income (loss) in the pro forma disclosures have been adjusted to reflect our fiscal year. Additionally, VisualSonics' earnings were adjusted to reflect the statutory tax rate utilized by VisualSonics in the pro forma periods presented. Pro forma net income (loss) excludes non-recurring charges including acquisition costs and expenses-related to long-term debt and liability classified equity instruments, but includes amortization of intangible assets and stock based compensation resulting from this acquisition.

CardioDynamics International Corporation

In August 2009, we acquired all of the outstanding stock of CardioDynamics International Corporation ("CDIC"), a leader in impedance cardiography ("ICG") for noninvasive hemodynamic assessment that develops, manufactures, and markets ICG devices and sensors. The ICG product line provides non-invasive assessment of cardiac output and other hemodynamic parameters. The business combination enables us to expand our distribution platform and product offerings into primary care.

Concurrently with this acquisition, we obtained full control of Medis Medizinische Messtechnik GmbH ("Medis"), which develops, manufactures, and markets ICG diagnostic and monitoring devices. CDIC had previously owned 80% of Medis, based in Germany.

Cash consideration of $10.7 million was transferred for the shares of CDIC and Medis. The results of CDIC's operations have been included in our consolidated financial statements since the date of acquisition.

The following table summarizes the acquisition-date fair value of the assets acquired and the liabilities assumed in connection with the business combination (in thousands):


	August 14, 2009
Assets
Current assets:
Cash and cash equivalents	$	2,511
Accounts receivable		2,627
Inventories		2,885
Deferred income taxes		5,376
Prepaid expenses and other current assets		95

Total current assets		13,494
Property and equipment, net		1,001
Identifiable intangible assets		12,400
Other assets		158

Total assets	$	27,053

Liabilities
Current liabilities:
Accounts payable	$	2,459
Accrued expenses and other current liabilities		2,191

Total current liabilities		4,650
Long-term debt		5,608
Deferred tax liability		4,562
Other non-current liabilities		437

Total liabilities		15,257

Net assets acquired		11,796
Acquisition consideration		10,697

Gain on bargain purchase	$	1,099

These assets and liabilities were recorded at the acquisition-date fair value. We used an income approach, which is a measurement of the present value of the net economic benefit or cost expected to be derived from an asset or liability, to measure the acquired assets and liabilities excluding inventory, internally developed software, and property and equipment. Inventory and internally developed software were measured using a cost approach. Property and equipment were valued using a combination of the market and cost approaches.

Intangible assets acquired consisted of the following (in thousands):


	Amount		Amortization Period ( in years)
Developed technology	$	1,500		5.0
Customer relationships		9,300		4.8
Trademarks		800		2
Internally developed software		800		3

Total intangibles	$	12,400		4.5

We used the following methods to measure fair value of intangible assets:

•

Developed technology and customer relations were valued using the multi-period excess earnings method

•

Trademarks were valued using the relief from royalty method

•

Internally developed software was valued using the cost approach

The total fair value of short-term and long-term receivables acquired amounted to $2.7 million. The contractual amount due on these receivables was $3.8 million, of which a reduction of $1.1 million was taken for credit risk.

We recognized a warranty liability of $0.3 million related to CDIC's products. As of December 31, 2011, the remaining liability was $0.15 million.

We recognized a deferred tax asset of $5.4 million, which includes $3.9 million related to CDIC's federal net operating loss ("NOL") carryforward. CDIC had federal NOL carryforwards of $52.6 million based on tax returns filed through November 30, 2008 which expire between 2010 and 2028. The NOL carryforward that will be available for utilization during this period is limited to $11.5 million, resulting from change in ownership limitations under Section 382 of the Internal Revenue Code. We recognized an additional $1.5 million deferred tax asset and a $4.6 million deferred tax liability related to differences in the book and tax bases of acquired assets and liabilities.

We assumed $5.6 million in long-term debt, of which $5.3 million was repaid immediately. As of December 31, 2011, we had no long-term debt as the $0.3 million was repaid during the year.

LumenVu, Inc.

In July 2007, we acquired all of the outstanding stock of LumenVu, Inc. ("LumenVu"), a private development stage company that developed, in conjunction with a leading academic research institution, a patented technology to improve the accuracy of catheter placement. The technology was exclusively licensed to LumenVu by a leading academic research institution. We intend to integrate this technology in a new product line that can be sold along with existing product lines in certain clinical markets.

The results of LumenVu's operations were included in our consolidated financial statements since the date of the acquisition. The acquisition, which was an asset purchase, had a purchase price that consisted of cash consideration of $2.9 million, note receivable forgiveness of $0.1 million, assumed liabilities of $0.6 million, which were paid at closing, and contingent future cash payments up to $10.0 million, which had an estimated fair value of $4.0 million at the date of acquisition. The future cash payments are contingent upon the continued development of the product and recognizing revenue from the sale of products incorporating this technology. The liability for contingent consideration is accreted to other expense over the expected payment period.

During the fourth quarter of 2010, we determined that, based upon our projected product development and release dates, maximum liability for future contingent consideration would not be required. We determined the fair value of future contingent consideration was $2.2 million. Accordingly, we reduced the liability for contingent consideration by $4.0 million as well reduced the deferred tax liability by $2.3 million and intangible assets by $6.3 million.

During 2011, 2010 and 2009, we recorded $0.2 million, $0.5 million and $1.0 million, respectively, of accretion expense. The fair value of assets acquired determined as of July 2007 was $11.8 million. Based upon the revised fair value of future contingent consideration determined in fourth quarter of 2010, the fair value of the assets acquired was $5.5 million. This amount was allocated to an intangible technology asset, which will be amortized over ten years commencing with sales of products incorporating this technology. No amortization expense has been recorded as no products using this technology are available for sale as of December 31, 2011. The amortization of this intangible technology asset is not deductible for tax purposes accordingly we have recorded a deferred tax liability of $2.0 million. Additionally, we recorded a deferred tax asset associated with net operating losses of LumenVu of $0.2 million.

SonoMetric Health, Inc.

In May 2004, we acquired 100% of the outstanding common shares of SonoMetric Health, Inc. ("SonoMetric"). The results of SonoMetric's operations have been included in our consolidated financial statements since that date. We purchased all of SonoMetric's outstanding common shares for an immediate cash payment of $1.5 million, plus future cash payments of up to $4.5 million contingent upon the amount of revenue recognized from the sale of the purchased software over the five-year period following the closing date of the acquisition. We accrued contingent payments of $0.1 million as of December 31, 2009 as a result of revenue recognized on the sale of the software. These contingent payments, which were measured and required through April 2009, were recorded as goodwill. We made the final contingent payment in the first quarter of 2010.

- Definition

The entire disclosure for a business combination (or series of individually immaterial business combinations) completed during the period, including background, timing, and recognized assets and liabilities. The disclosure may include leverage buyout transactions (as applicable).

+ References

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+ Details

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