BUSINESS ACQUISITIONS

3 Months Ended

Mar. 31, 2014

Business Combinations [Abstract]

BUSINESS ACQUISITIONS

BUSINESS ACQUISITIONS

Confluent Surgical, Inc.

On January 15, 2014, the Company acquired all outstanding shares of Confluent Surgical, Inc., ("Confluent Surgical") - including its surgical sealant and adhesion barrier product lines - from Covidien Group S.a.r.l, ("Covidien") for an aggregate purchase price of $255.9 million. The purchase price is comprised of an initial cash payment to Covidien of $231.0 million upon the closing of the transaction, a separate prepayment of $4.0 million made under a transitional supply agreement with an affiliate of Covidien, and contingent consideration with an acquisition date fair value of $20.9 million. The potential maximum undiscounted contingent consideration of $30.0 million consists of: $25.0 million upon obtaining certain U.S. governmental approvals and $5.0 million upon obtaining certain European governmental approvals, both related to the completion of the transition of the Confluent Surgical business.

The transitional supply agreement secures the supply of the acquired products from an affiliate of Covidien until the earlier of (i) the time that the transition of the Confluent Surgical business as discussed above is compete, or (ii) the fifth anniversary of the effective date of the agreement; the agreement also contains an option to extend for another two years by providing written notice at least 180 days prior to the end of the initial five-year period. This agreement contains financial incentives to the affiliate of Covidien for the timely supply of products each fiscal quarter through the third anniversary of the agreement. The prices paid under the supply agreement are essentially flat through the third anniversary of the agreement, and then increase significantly each of the following three years. The Company also entered into a transition services agreement with an affiliate of Covidien at the closing for services such as: customer service, accounting and information technology management; clinical and regulatory affairs; manufacturing transition services; and other functions.

This acquisition complements the Company's global neurosurgery growth strategy aimed at providing a broader set of solutions for surgical procedures in the head.

The following summarizes the preliminary allocation of the purchase price based on the fair value of the assets acquired and liabilities assumed, the allocation of goodwill to the Company's reporting units has not yet been completed:

	Preliminary Purchase Price Allocation
	(Dollars in thousands)
Inventory deposit	$	4,000
Fixed assets	438
Intangible assets:			Wtd. Avg. Life
Technology product rights	239,800		20 years
Other	400		Less than 1 year
Deferred tax asset - long term	14
Goodwill	117,715
Total assets acquired	362,367
Contingent supply liability	5,891
Other	731
Deferred tax liability - long term	99,850
Net assets acquired	$	255,895

Subsequent to the acquisition date, a regulatory event occurred that resulted in the full-impairment of one of the acquired technology product rights for $0.6 million. This event was not known, or knowable, at the time of the acquisition and therefore the impairment has been included in the Company's March 31, 2014 cost of sales.

The Company accounted for the contingent supply liability by recording its fair value as a liability on the date of the acquisition based on a discounted cash-flow model. This contingent supply liability relates to contractual quarterly incentive payments that will be made to an affiliate of Covidien if certain supply minimums under the transitional supply agreement are met.

The Company accounted for the contingent consideration by recording its fair value as a liability on the date of the acquisition. The contingent consideration relates to the Company obtaining certain U.S. and European regulatory approvals. At the date of the acquisition, both of these milestones were valued using a discount rate of 2.2%, which is equivalent to the cost of debt for the estimated time horizon, and an overall probability of occurring of 95%. Accordingly, on January 15, 2014 the Company recorded a $20.9 million liability representing the initial fair value estimate of the probability weighted contingent consideration that management believes will be paid between early 2017 and late 2018. Depending on the expected timing of the estimated payments, the acquisition date fair value of the probability adjusted payments could have been $0.3 million higher or $0.4 million lower. These fair value measurements were based on significant inputs not observed in the market and thus represented a Level 3 measurement. The contingent consideration is re-measured to fair value at each reporting date until the contingency is resolved, and those changes in fair value are recognized in earnings.

The goodwill recorded in connection with this acquisition is based on (i) expected cost savings, operating synergies and other benefits expected to result from the combined operations, (ii) the value of the going-concern element of Confluent Surgical's existing business (that is, the higher rate of return on the assembled net assets versus if the Company had acquired all of the net assets separately), and (iii) intangible assets that do not qualify for separate recognition such as Confluent Surgical's assembled workforce. The goodwill acquired will not be deductible for tax purposes.

Contingent consideration

The carrying value of contingent consideration was increased during the three-months ended March 31, 2014 to reflect current period acquisitions and the change in the time value of money during the period. A reconciliation of the opening balances to the closing balances of these Level 3 measurements are as follows (dollars in thousands):

			Location in Statement of Operations
Balance as of January 1, 2014	$	1,227
Contingent consideration from Confluent Surgical acquisition	20,895
Loss from increase in fair value of contingent consideration liability	128		Selling, general and administrative
Fair value at March 31, 2014	$	22,250

Pro Forma Results

The following unaudited pro forma financial information summarizes the results of operations for the three months ended March 31, 2013 as if the Confluent Surgical acquisition completed by the Company during 2014 had been completed as of January 1, 2013. The pro forma results are based upon certain assumptions and estimates, and they give effect to actual operating results prior to the acquisition and adjustments to reflect (i) the change in interest expense, depreciation expense, and intangible asset amortization, (ii) certain external expenses related to the acquisition as if they were incurred on January 1, 2013 that will not be recurring in the post-acquisition periods, (iii) income taxes on the aforementioned adjustments at the Company’s statutory rate, and (iv) the earnings per share impact of the increase in the number of weighted average shares outstanding from the sale of registered common shares during November 2013 in anticipation of the Confluent Surgical acquisition. No effect has been given to other cost reductions or operating synergies. As a result, these pro forma results do not necessarily represent results that would have occurred if the acquisitions had taken place on the basis assumed above, nor are they indicative of the results of future combined operations.

The pro forma impact of the Confluent Surgical acquisition was not material to the 2014 consolidated operating results of the Company; therefore the pro forma impact on that period has not been included below. The pro forma results below also incorporate the impact of the change in accounting for the MDET on the 2013 results which is discussed in Note 1.

	Three Months Ended March 31, 2013
	(Dollars in thousands)
Total revenue	$	213,051
Net income (loss)	$	(5,469	)
Net income (loss) per share:
Basic	$	(0.17	)
Diluted	$	(0.17	)