ACQUISITION OF CORE ONCOLOGY'S PROSTATE BRACHYTHERAPY CUSTOMER BASE

6 Months Ended

Jun. 30, 2012

Asset Acquisition Disclosure [Abstract]

ACQUISITION OF CORE ONCOLOGY'S PROSTATE BRACHYTHERAPY CUSTOMER BASE

NOTE B – ACQUISITION OF CORE ONCOLOGY’S PROSTATE BRACHYTHERAPY CUSTOMER BASE

On February 17, 2012, we acquired Core Oncology’s prostate brachytherapy customer base.  In addition to the customer base, we also acquired certain developed packaging technologies, equipment related to the packaging technologies, and certain existing component inventory. We did not acquire Core’s facilities, manufacturing equipment or processes, or Core’s employees.

The total purchase price for the acquired assets is equal to one times the actual revenue generated from the acquired customers over the twelve-month period from September 2012 to August 2013, in excess of a $2.5 million Threshold Amount.  Through June 30, 2012 we have paid $4.8 million in cash for this transaction, primarily consisting of prepayment of a portion of the earn out at closing in February, the first earn-out payment made in June and transaction costs.   We have five quarterly earn-out payments remaining ending in September 2013.  Each quarterly earn-out payment is based upon that quarter’s revenue from the acquired customers, reduced by a portion of the Threshold Amount and by a portion of the prepayment made at closing. The final earn-out payment is calculated as one times the revenue actually recognized from the acquired customer base over the twelve-month period from September 2012 to August 2013 in excess of the total Threshold Amount, reduced by the prepayment and the cumulative amount of all previous earn-out payments made.  Based on our current estimates, we expect to make aggregate payments of $4.6 million over the next 15 months (through September 2013) for this earn-out based acquisition, representing a total purchase price of $9.3 million, including transaction costs.  However, we estimate that the total purchase price may range from $7.5 million to $10.5 million.

We accounted for this transaction as an asset acquisition and, accordingly, have recorded the assets acquired at estimated total cost, including transaction costs.  Current assets were recorded at fair value.  The remaining total cost was allocated to non-current assets based on their relative fair values. The following preliminary amounts were recorded (in thousands):

	Amount		Estimated Life
Inventory	$	253
Developed technology equipment		325	7 years
Intangibles
Customer relationships		7,898	7 years
Non-compete agreements		669	5 years
Developed technology		192	1.5 years
		8,759	6.7 years
Total estimated cost of assets acquired	$	9,337

We used the income approach to determine the fair value of the customer relationships acquired.  This approach evaluates the present worth of the future economic benefits accruing from this asset over its estimated useful life, discounted to the present at a rate of return commensurate with the asset’s inherent risk.  This approach requires significant judgments including the projected net cash flows and the weighted average cost of capital (“WACC”) used to discount the cash flows. We derive the assumptions related to cash flows primarily from our internal budgets and forecasts.  These budgets and forecasts include information related to revenues, capacity, operating costs, and other information.  The WACC and terminal value assumptions are based on our capital structure, cost of capital, inherent risk profiles, and industry outlook.  The estimated fair value of all other assets acquired (other than the customer relationships) was based on commonly accepted valuation techniques that we believed to be appropriate in the circumstances.

Our estimates of the expected total purchase price of these assets may change based on, among other things, changes in forecasted revenues to be recognized from the acquired customers.  Any changes in these estimates will cause changes in the carrying values of the non-current acquired assets and the resulting expenses charged to our earnings from these assets (primarily amortization of intangible assets).  Such changes may be material to our results of operations and financial position.

At December 31, 2011, we had accounts receivable due from Core totaling $2.2 million (the “Core Accounts Receivable”), for which an allowance had been established (see Note H), and a related current deferred tax asset of approximately $800,000 was recorded. In connection with the acquisition of the Core customer base, we released Core from any claims related to the Core Accounts Receivable.  However, for income tax purposes this amount is accounted for as an increase in the tax basis of the acquired assets, which are primarily long-term intangible assets.  Accordingly, the deferred tax asset associated with the acquired intangible assets has been recorded as a long-term deferred tax asset at June 30, 2012.  In addition, we considered the fair value of the Core Accounts Receivable as of the date of acquisition and, based on our understanding of Core’s financial condition, concluded that such fair value was immaterial.