Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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x
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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
September 30, 2010
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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 001-34494
AGA MEDICAL HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Delaware
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20-4757212
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(State
or other jurisdiction of
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(I.R.S.
Employer
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incorporation
or organization)
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Identification
Nos.)
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5050 Nathan Lane North, Plymouth, MN
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55442
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(Address
of principal executive offices)
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(Zip
Code)
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(763) 513-9227
(Telephone number)
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.
x
Yes
o
No
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 registrants were required to submit and post such files).
o
Yes
o
No
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or smaller reporting company. See
the definitions of large accelerated filer, accelerated filer and smaller
reporting company in Rule 12b-2 of the Exchange Act.
Large
accelerated filer
o
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|
Accelerated
filer
o
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Non-accelerated
filer
x
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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).
o
Yes
x
No
There
were 50,273,398 shares of AGA Medical Holdings, Inc. common stock with a
par value of $0.01 outstanding as of the close of business on November 5,
2010.
Table of Contents
AGA MEDICAL HOLDINGS, INC.
INDEX TO QUARTERLY REPORT ON FORM 10-Q
For the quarterly period ended September 30, 2010
TABLE OF CONTENTS
Table of
Contents
PART I. FINANCIAL
INFORMATION
ITEM 1. Financial Statements
AGA MEDICAL HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
|
|
September 30,
2010
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December 31,
2009
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|
|
|
(Unaudited)
|
|
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Assets
|
|
|
|
|
|
Current assets:
|
|
|
|
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Cash and cash equivalents
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$
|
19,338
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|
$
|
24,470
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|
Accounts receivable, less allowance for doubtful
accounts of $809 and $481 and discounts of $225 and $395 at
September 30, 2010 and December 31, 2009, respectively
|
|
48,888
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|
48,730
|
|
Inventory
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|
11,893
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|
12,408
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|
Prepaid expenses
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|
1,806
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|
1,408
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|
Income tax receivable
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|
7,815
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|
2,762
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Other tax receivable
|
|
|
|
799
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Deferred tax assets, net
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7,670
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|
8,339
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|
Total current assets
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97,410
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98,916
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Property and equipment, net
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36,581
|
|
38,669
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Goodwill
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84,246
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85,381
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Intangible assets, net
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95,237
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|
111,655
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|
Restricted cash
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|
8,278
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|
3,304
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Other assets, net
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|
403
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|
379
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Deferred tax assets, net
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|
504
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|
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Deferred financing costs, net
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|
2,167
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2,276
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|
|
|
|
|
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Total assets
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$
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324,826
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|
$
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340,580
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|
See notes to unaudited consolidated financial statements.
1
Table of
Contents
AGA MEDICAL HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
|
|
September 30,
2010
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|
December 31,
2009
|
|
|
|
(Unaudited)
|
|
|
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Liabilities and stockholders equity
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|
|
|
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Current liabilities:
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|
|
|
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Reserve for customer returns
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$
|
8,814
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$
|
9,335
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Trade accounts payable
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|
8,625
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|
8,643
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|
Accrued royalties
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|
2,292
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|
2,299
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|
Accrued interest
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|
1,137
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|
1,462
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|
Accrued wages
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11,789
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|
10,549
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|
Short-term obligations to former distributors,
less discount
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3,341
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|
7,880
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|
Accrued expenses
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|
4,481
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5,391
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Income taxes payable
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297
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2,913
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Total current liabilities
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40,776
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48,472
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Long-term debt, less current portion
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196,963
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196,963
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Senior subordinated note payable, less discount of
$663 and $1,383 at September 30, 2010 and December 31, 2009,
respectively
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9,337
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13,617
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|
Long-term obligations to former distributors, less
discount
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4,738
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9,382
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Long-term litigation settlement, less discount
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24,914
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Deferred gain contingency
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2,879
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Deferred tax liabilities
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19,152
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32,984
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Accrued income taxes
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2,915
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2,705
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Stockholders equity:
|
|
|
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Common stock, $0.01 par value:
|
|
|
|
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Authorized shares400,000
|
|
|
|
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Issued and outstanding shares50,268 at
September 30, 2010 and 50,094 at December 31, 2009
|
|
503
|
|
501
|
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Additional paid-in capital
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|
278,654
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|
273,309
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|
Excess purchase price over predecessor basis
|
|
(63,500
|
)
|
(63,500
|
)
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Accumulated other comprehensive loss
|
|
(3,057
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)
|
(489
|
)
|
Accumulated deficit
|
|
(189,448
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)
|
(173,364
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)
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Total stockholders equity
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|
$
|
23,152
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|
$
|
36,457
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|
Total liabilities and stockholders equity
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|
$
|
324,826
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|
$
|
340,580
|
|
See notes to unaudited consolidated financial statements.
2
Table of Contents
AGA MEDICAL HOLDINGS, INC.
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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September 30,
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September 30,
|
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September 30,
|
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September 30,
|
|
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2010
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2009
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2010
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|
2009
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|
|
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|
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|
|
|
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Net sales
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$
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50,481
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$
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50,158
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$
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155,507
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$
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144,540
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|
Cost of goods sold
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6,776
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6,599
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21,763
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|
23,603
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Gross profit
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43,705
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|
43,559
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|
133,744
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120,937
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|
|
|
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Operating expenses:
|
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|
|
|
|
|
|
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Selling, general and administrative
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23,527
|
|
25,441
|
|
73,370
|
|
71,897
|
|
Research and development
|
|
12,028
|
|
8,428
|
|
33,648
|
|
24,905
|
|
Litigation settlement
|
|
|
|
|
|
31,859
|
|
|
|
Amortization of intangible assets
|
|
4,954
|
|
5,077
|
|
14,925
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|
14,972
|
|
Change in purchase consideration
|
|
(937
|
)
|
(353
|
)
|
(1,090
|
)
|
(1,051
|
)
|
Gain on disposal of assets
|
|
1
|
|
2
|
|
|
|
(23
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)
|
Total operating expenses
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|
39,573
|
|
38,595
|
|
152,712
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|
110,700
|
|
Operating income (loss)
|
|
4,132
|
|
4,964
|
|
(18,968
|
)
|
10,237
|
|
|
|
|
|
|
|
|
|
|
|
Investment loss
|
|
|
|
|
|
|
|
(2,352
|
)
|
Interest income
|
|
17
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|
20
|
|
77
|
|
80
|
|
Interest expense
|
|
(2,768
|
)
|
(3,994
|
)
|
(7,219
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)
|
(12,143
|
)
|
Other income (expense), net
|
|
(450
|
)
|
320
|
|
(713
|
)
|
1,595
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|
Income (loss) before income taxes
|
|
931
|
|
1,310
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|
(26,823
|
)
|
(2,583
|
)
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit
|
|
(571
|
)
|
(879
|
)
|
(10,739
|
)
|
(573
|
)
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
1,502
|
|
2,189
|
|
(16,084
|
)
|
(2,010
|
)
|
|
|
|
|
|
|
|
|
|
|
Less Series A and B preferred stock and
Class A common stock dividends
|
|
|
|
(4,569
|
)
|
|
|
(13,040
|
)
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) applicable to common
stockholders
|
|
$
|
1,502
|
|
$
|
(2,380
|
)
|
$
|
(16,084
|
)
|
$
|
(15,050
|
)
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share-basic
|
|
$
|
0.03
|
|
$
|
(0.11
|
)
|
$
|
(0.32
|
)
|
$
|
(0.70
|
)
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share-diluted
|
|
$
|
0.03
|
|
$
|
(0.11
|
)
|
$
|
(0.32
|
)
|
$
|
(0.70
|
)
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares-basic
|
|
50,244
|
|
21,483
|
|
50,168
|
|
21,483
|
|
Weighted average common shares-diluted
|
|
51,189
|
|
21,483
|
|
50,168
|
|
21,483
|
|
See notes to unaudited consolidated financial statements.
3
Table of
Contents
AGA MEDICAL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH
FLOWS
(in thousands)
(Unaudited)
|
|
Nine Months Ended
|
|
|
|
September 30,
2010
|
|
September 30,
2009
|
|
Operating activities
|
|
|
|
|
|
Net loss
|
|
$
|
(16,084
|
)
|
$
|
(2,010
|
)
|
Adjustments to reconcile net loss to net cash used
in operating activities:
|
|
|
|
|
|
Depreciation and amortization
|
|
19,280
|
|
18,685
|
|
Debt discount accretion and deferred financing
cost amortization
|
|
2,275
|
|
2,079
|
|
Provision for litigation settlement
|
|
24,359
|
|
|
|
Loss on equity investment
|
|
|
|
2,352
|
|
Change in deferred taxes
|
|
(13,252
|
)
|
(3,136
|
)
|
Change in purchase accounting consideration
|
|
(1,090
|
)
|
(1,051
|
)
|
Stock-based compensation
|
|
3,923
|
|
2,538
|
|
Excess tax benefits from stock-based compensation
|
|
(136
|
)
|
|
|
Gain on disposal of property and equipment
|
|
|
|
(23
|
)
|
Changes in operating assets and liabilities, net
of acquisition:
|
|
|
|
|
|
Accounts receivable
|
|
(1,410
|
)
|
(17,934
|
)
|
Inventory
|
|
516
|
|
2,108
|
|
Prepaid expenses and other assets
|
|
296
|
|
(1,440
|
)
|
Income tax receivable
|
|
(4,862
|
)
|
(65
|
)
|
Reserve for customer returns
|
|
(448
|
)
|
1,214
|
|
Trade accounts payable
|
|
57
|
|
186
|
|
Income tax payable
|
|
(2,552
|
)
|
1,137
|
|
Accrued income taxes
|
|
210
|
|
(680
|
)
|
Accrued expenses
|
|
988
|
|
2,864
|
|
Net cash provided by operating activities
|
|
12,070
|
|
6,824
|
|
|
|
|
|
|
|
Investing activities
|
|
|
|
|
|
Acquisitions
|
|
(8,003
|
)
|
(36,555
|
)
|
Purchases of property and equipment
|
|
(2,428
|
)
|
(7,511
|
)
|
Proceeds from litigation settlement
|
|
2,759
|
|
|
|
Increase in restricted cash
|
|
(4,974
|
)
|
(914
|
)
|
Net cash used in investing activities
|
|
(12,646
|
)
|
(44,980
|
)
|
|
|
|
|
|
|
Financing activities
|
|
|
|
|
|
Proceeds from long-term debt
|
|
|
|
15,000
|
|
Proceeds from revolving line of credit
|
|
5,000
|
|
15,080
|
|
Payments on revolving line of credit
|
|
(5,000
|
)
|
|
|
Payments on long-term debt
|
|
(5,000
|
)
|
|
|
Payment of deferred financing fees
|
|
(666
|
)
|
(1,625
|
)
|
Additional expenses related to initial public
offering of common stock
|
|
(89
|
)
|
|
|
Issuance of common stock under employee stock
purchase plan
|
|
273
|
|
|
|
Proceeds from exercise of stock options
|
|
1,105
|
|
84
|
|
Excess tax benefits from stock-based compensation
|
|
136
|
|
|
|
Purchase of Class B common stock
|
|
|
|
(333
|
)
|
Net cash provided by (used in) financing
activities
|
|
(4,241
|
)
|
28,206
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash
|
|
(315
|
)
|
1,043
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents
|
|
(5,132
|
)
|
(8,907
|
)
|
Cash and cash equivalents at beginning of period
|
|
24,470
|
|
22,867
|
|
Cash and cash equivalents at end of period
|
|
$
|
19,338
|
|
$
|
13,960
|
|
Supplemental disclosures of
cash flow information:
|
|
|
|
|
|
Interest paid
|
|
$
|
5,123
|
|
$
|
7,760
|
|
Taxes paid
|
|
$
|
8,755
|
|
$
|
3,033
|
|
See notes to unaudited consolidated financial statements.
4
Table of
Contents
AGA MEDICAL HOLDINGS, INC.
NOTES TO UNAUDITED CONSOLIDATED
FINANCIAL
STATEMENTS
1.
Description
of Business
AGA
Medical Holdings, Inc., a Delaware corporation (AGA Medical or the
Company), is a leading innovator and manufacturer of minimally invasive,
transcatheter devices to treat structural heart defects and vascular
abnormalities, which the Company markets under the
AMPLATZER
brand. The Companys occlusion devices are used to
occlude, or close, defects, or holes, and have been shown to be highly
effective in defect closure. AGA Medical sells its devices to interventional
cardiologists, electrophysiologists, interventional radiologists and vascular
surgeons in 112 countries through a combination of direct sales and the use of
distributors. The Company is investing in research and development, which
includes clinical trials, to develop new products and new indications for
existing products where there is a significant unmet medical need and a desire
to improve the standard of care for patients. All research and development
programs take advantage of AGA Medicals core competencies in braiding thin
wires using a shape memory metal alloy, nitinol, which is commonly used in
medical devices. The Company has a portfolio of patents to protect its
intellectual property rights.
2.
Basis
of Presentation
The
accompanying unaudited financial statements of AGA Medical have been prepared
in accordance with accounting principles generally accepted in the United
States for interim financial information and with the instructions to
Form 10-Q and Rule 10-01 of Regulation S-X. 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, these
statements include all adjustments (consisting of normal recurring adjustments)
considered necessary to present a fair statement of the Companys consolidated
results of operations, financial position and cash flows. Operating results for any interim period are
not necessarily indicative of the results that may be expected for the full
year. Preparation of the Companys
financial statements in conformity with accounting principles generally
accepted in the United States requires management to make estimates and
assumptions that affect the reported amounts in the financial statements and
footnotes. Actual results may differ from
those estimates. This Quarterly Report
on Form 10-Q should be read in conjunction with the Companys most recent
Annual Report on Form 10-K for the fiscal year ended December 31,
2009 filed with the Securities and Exchange Commission on March 4, 2010.
The
Companys common stock, basic and diluted net income (loss) per common share
and basic and diluted weighted average shares give effect for all periods to
the 1.00 for 7.15 reverse stock split of the Companys common stock, which
occurred immediately prior to the Companys October 21, 2009 initial
public offering of stock.
Reclassification
The
balance sheet and cash flow statement reflect the reclassification of certain
prior period amounts to conform to the current period presentation.
Critical Accounting Policies and Estimates
There
have been no material changes to the Companys critical accounting policies and
estimates as described in Note 2 to the Companys consolidated financial
statements included in the Companys Form 10-K for the fiscal year ended
December 31, 2009 filed with the Securities and Exchange Commission on
March 4, 2010.
Foreign Currency Transaction Gain and Losses
Sales
originating in the United States denominated in a currency other than the U.S.
dollar are generally fixed in terms of the amount of foreign currency that will
be received or paid. A change in exchange rates between the U.S. dollar and the
currency in which a transaction is denominated increases or decreases the
expected amount of functional currency cash flows upon settlement of the
transaction. That increase or decrease in expected functional currency cash
flows is a foreign currency transaction gain or loss and is included in
determining net income for the period in which the exchange rate changes. In
the first quarter of 2009, the Company initiated a foreign currency hedging
program. The objectives of the program are to reduce earnings volatility due to
movements in foreign currency markets, limit loss in foreign
currency-denominated cash flows, and preserve the operating margins of our
foreign subsidiaries. The Company generally uses foreign currency forward
contracts to hedge transactions related to projected inter-company sales and
inter-company debt on a monthly basis. The Company also may hedge firm
commitments. These contracts generally relate to obligations associated with
our European operations and are denominated primarily in Euros and sterling.
All of the Companys foreign exchange contracts are recognized on the balance
sheet at their fair value. The Company does not enter into foreign exchange
contracts for speculative purposes. We recorded losses from foreign currency
forward contracts of $2.3 million and $0.5 million for the three and nine
months ended September 30, 2010, respectively and we recorded gains from
foreign currency forward contracts of
5
Table of
Contents
$0.3
million and $0.2 million for the three and nine months ended September 30,
2009, respectively. These are reflected
on the consolidated statement of operations in the other income (expense), net
line. Amounts on the balance sheet at
September 30, 2010 and December 31, 2009 are immaterial.
3.
Recent
Accounting Pronouncements
In
January 2010, the Financial Accounting Standards Board, or FASB, issued
ASU 2010-06 which amends the fair value measurements disclosure requirements to
require additional disclosures about transfers into and out of Levels 1 and 2
in the fair value hierarchy and additional disclosures about purchases, sales,
issuances and settlements relating to Level 3 fair value measurements.
Additionally, it clarifies existing fair value disclosures about the level of
disaggregation of inputs and valuation techniques used to measure fair value.
We have adopted the new disclosure requirements in ASU 2010-06 for the period
ended March 31, 2010. The adoption of this statement did not have a
material effect on the Companys consolidated financial statements.
In
June 2009, the FASB issued ASC Topic 860 which defines accounting
standards for transfers and servicing of financial assets and extinguishments
of liabilities. This standard eliminates
the concept of a qualifying special-purpose entity, changes the requirements
for derecognizing financial assets, and requires additional disclosures. The standard became effective in the first
quarter of 2010. The Company adopted ASC
Topic 860 effective January 1, 2010.
The adoption of this statement did not have a material effect on the
Companys consolidated financial statements.
In
June 2009, the FASB issued ASC Topic 810, which defines accounting
standards on variable interest entities to address the elimination of the
concept of a qualifying special purpose entity.
This standard also replaces the quantitative-based risks and rewards
calculation for determining which enterprise has a controlling financial
interest in a variable interest entity with an approach focused on identifying
which enterprise has the power to direct the activities of a variable interest
entity and the obligation to absorb losses of the entity or the right to
receive benefits from the entity.
Additionally, it provides more timely and useful information about an
enterprises involvement with a variable interest entity. This standard became effective in the first
quarter of 2010. The Company adopted ASC
Topic 810 effective January 1, 2010.
The adoption of this statement did not have a material effect on the
Companys consolidated financial statements.
4.
Recent
Acquisitions
Effective January 1, 2009, the Company purchased the distribution
rights, inventory and intangible assets from its distributor in France. The
Company established a wholly-owned subsidiary in France called Amplatzer
Medical France SAS. The $3.5 million aggregate purchase price included
(i) a payment on April 1, 2009, which, as of the acquisition date,
had a net present value of $1.4 million, (ii) $0.8 million for
inventory, and (iii) a contingent payment in January 2010, which, as
of the acquisition date, had a net present value of $1.3 million payable
if certain revenue goals were achieved during this period. On April 1,
2009, the Company made a payment in the amount of $1.4 million. During the quarter ended March 31, 2010,
the Company paid the contingent payment due in January 2010, which had a
fair value of $1.5 million, the contingent payable amount as of
December 31, 2009.
The acquired intangible assets, all of which are being amortized, have
a weighted average useful life of approximately eight years. The intangible assets include a customer list
valued at $2.7 million. The fair value
of the identifiable intangible assets and inventory were determined by
management.
On January 1, 2009, the Company purchased the distribution rights,
inventory and intangible assets from its two distributors in Portugal. The
Company established a wholly-owned subsidiary in Portugal called Amplatzer
Medical Portugal, Unipessoal LDA. The $3.5 million aggregate purchase
price included payments of $2.5 million in January 2009,
$0.2 million for inventory, and a contingent payment in January 2010,
which, as of the acquisition date, had a net present value of $0.8 million
payable if certain revenue goals were achieved during this period. During the quarter ended March 31, 2010,
the Company paid the contingent payments due in January 2010, which had a
fair value of $0.8 million, the contingent payable amounts as of
December 31, 2009.
The acquired intangible assets, all of which are being amortized, have
a weighted average useful life of approximately eight years. The intangible assets include a customer list
valued at $3.3 million. The fair value
of the identifiable intangible assets and inventory were determined by
management.
On January 1, 2009, the Company purchased the distribution rights,
inventory and intangible assets from its distributor in the Netherlands. The
$1.0 million aggregate purchase price included payments of
$0.4 million in January 2009, $0.3 million for inventory, and a
contingent payment in January 2010, which, as of the acquisition date, had
a net present value of $0.3 million payable if certain revenue goals were
achieved during this period. During the
quarter ended March 31, 2010, the Company paid the contingent payment due
in January 2010, which had a fair value of $0.3 million, the contingent
payable amount as of December 31, 2009.
The acquired intangible assets, all of which are being amortized, have
a weighted average useful life of approximately eight years. The intangible assets include a customer list
valued at $0.7 million. The fair value
of the identifiable intangible assets and inventory were determined by
management.
6
Table of Contents
On
January 1, 2009, the Company purchased the structural heart product
distribution rights, inventory and intangible assets from its distributor in
Canada. The Company established a wholly-owned subsidiary in Canada called AGA
Medical Canada Inc. The $2.8 million aggregate purchase price
included payments of $1.1 million in January 2009, $0.8 million
for inventory, and a contingent payment in January 2010 which, as of the
acquisition date, had a net present value of $0.9 million payable if
certain revenue goals were achieved during this period. During the quarter ended March 31, 2010,
the Company paid the contingent payment due in January 2010, which had a
fair value of $0.8 million, the contingent payable amount as of
December 31, 2009.
The acquired intangible assets, all of which are being amortized, have
a weighted average useful life of approximately eight years. The intangible assets include a customer list
valued at $2.0 million. The fair value
of the identifiable intangible assets and inventory were determined by
management.
On January 8, 2009 (and effective as of January 1, 2009), the
Company purchased the distribution rights, inventory, equipment, intangible
assets and goodwill from its distributor located in Italy, which under ASC
Topic 805 constitutes an acquired business. The Company established a
wholly-owned subsidiary in Italy called AGA Medical Italia S.R.L. The aggregate purchase price was
$41.0 million.
The excess purchase price over the fair value of underlying assets
acquired and liabilities assumed was allocated to goodwill. The goodwill
recorded as a result of the acquisition is not deductible for income tax
purposes. The goodwill represents the strategic benefit of growing the Companys
business and the expected revenue growth from increased market penetration from
future products and customers. The following tables summarize the consideration
paid and the estimated fair value of the assets acquired at the date of
acquisition.
(in thousands)
|
|
|
|
Consideration:
|
|
|
|
Cash
payment
|
|
$
|
26,600
|
|
Discounted
guaranteed and contingent debt obligations
|
|
14,400
|
|
Total
consideration
|
|
$
|
41,000
|
|
Purchase
Price Allocation:
|
|
|
|
Inventory
|
|
$
|
1,900
|
|
Goodwill
|
|
21,606
|
|
Other
intangible assets
|
|
26,398
|
|
Total
assets acquired
|
|
$
|
49,904
|
|
Current
liabilities
|
|
615
|
|
Deferred
income taxes, net
|
|
8,289
|
|
Net
assets acquired
|
|
$
|
41,000
|
|
In addition, the Company has agreed to pay the former owners up to
$6.7 million of contingent payments if certain revenue goals are achieved
during the first three years following the date of the agreement. The
achievements are defined as follows:
Year 2009$3.1 million guaranteed payment to be paid in
January 2010 and a $2.5 million contingent payment payable in
January 2010 if gross revenues of AB Medica-AGA Division S.R.L. exceed
20.0 million Euro.
Year 2010$3.4 million guaranteed payment to be paid in
January 2011 and a $2.2 million contingent payment payable in
January 2011 if gross revenues of AB Medica-AGA Division S.R.L. exceed
22.0 million Euro.
Year 2011$3.7 million guaranteed payment to be paid in
January 2012 and a $2.0 million contingent payment payable in
January 2012 if gross revenues of AB Medica-AGA Division S.R.L. exceed
24.0 million Euro.
On April 1, 2009, the Company made a $2.0 million contingent
payment as a result of certain goals that were achieved.
During the quarter ended March 31, 2010, the Company paid $1.3
million relating to the fiscal year 2009 contingent payment and $3.1 million
was paid relating to the January 2010 guaranteed payment.
The
acquired intangible assets, all of which are being amortized, have a weighted
average useful life of approximately eight years. The intangible assets include
a customer list valued at $24.8 million and a noncompete agreement valued
at $1.6 million. The fair value of the identifiable intangible assets and
inventory were determined by management.
On January 1, 2010, the Company purchased the vascular product
distribution rights, inventory and intangible assets from its distributor in
Canada. The $0.3 million aggregate
purchase price included payments of $0.1 million in January 2010,
$0.1 million for
7
Table of Contents
inventory,
and a contingent payment in January 2011 which, as of the acquisition
date, had a net present value of $0.1 million payable if certain revenue
goals are achieved during this period.
The acquired intangible assets, all of which are being amortized, have
a weighted average useful life of approximately eight years. The intangible assets include a customer list
valued at $0.2 million. The fair value
of the identifiable intangible assets and inventory were determined by
management.
See
note 13 (Fair Value Measurements) for the Companys evaluation of the fair
value of all of the Companys outstanding contingent payments as of
September 30, 2010.
5.
Goodwill
and Intangible Assets
The
following table provides a reconciliation of goodwill (in thousands):
Balance as of December 31, 2009
|
|
$
|
85,381
|
|
Currency translation effect
|
|
(1,135
|
)
|
Balance as of September 30, 2010 (unaudited)
|
|
$
|
84,246
|
|
Intangible assets consist of the following:
|
|
Weighted
Average
|
|
As of September 30, 2010 (unaudited)
|
|
As of December 31, 2009
|
|
(in thousands)
|
|
Useful
Life
(in Years)
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
|
Trade name
|
|
Indefinite
|
|
$
|
10,650
|
|
$
|
|
|
$
|
10,650
|
|
$
|
10,650
|
|
$
|
|
|
$
|
10,650
|
|
Developed technology
|
|
6.0
|
|
86,650
|
|
(51,258
|
)
|
35,392
|
|
86,650
|
|
(43,817
|
)
|
42,833
|
|
Customer relationships
|
|
4.9
|
|
63,153
|
|
(22,887
|
)
|
40,266
|
|
64,694
|
|
(17,431
|
)
|
47,263
|
|
Patent rights
|
|
7.5
|
|
14,500
|
|
(7,250
|
)
|
7,250
|
|
14,500
|
|
(5,800
|
)
|
8,700
|
|
Licensed patent
|
|
2.3
|
|
1,000
|
|
(915
|
)
|
85
|
|
1,000
|
|
(763
|
)
|
237
|
|
Noncompete agreement
|
|
11.8
|
|
2,618
|
|
(1,024
|
)
|
1,594
|
|
2,710
|
|
(738
|
)
|
1,972
|
|
|
|
|
|
$
|
178,571
|
|
$
|
(83,334
|
)
|
$
|
95,237
|
|
$
|
180,204
|
|
$
|
(68,549
|
)
|
$
|
111,655
|
|
Intangible
assets are amortized using methods that approximate the benefit provided by the
utilization of the assets. Total amortization expense of intangible assets was
$5.0 million and $14.9 million for the three and nine months ended
September 30, 2010, respectively, and $5.1 million and $15.0 million for
the three and nine months ended September 30, 2009, respectively.
6.
Inventories
Inventory
is valued at the lower of cost or market with cost determined using the
first-in, first-out method. Inventory consists of the following (in thousands):
|
|
September 30,
2010
|
|
December 31, 2009
|
|
|
|
(unaudited)
|
|
|
|
Raw materials
|
|
$
|
5,567
|
|
$
|
7,030
|
|
Work-in-process
|
|
521
|
|
360
|
|
Finished goods-warehouses
|
|
5,474
|
|
5,614
|
|
Finished goods-consignment
|
|
2,059
|
|
1,306
|
|
Inventory reserve
|
|
(1,728
|
)
|
(1,902
|
)
|
|
|
$
|
11,893
|
|
$
|
12,408
|
|
The
Company makes adjustments to the value of inventory based on estimates of
potentially excess and obsolete inventory after considering forecasted demand
and forecasted average selling prices.
7.
Property,
and Equipment, Net
Property
and equipment, net consist of the following (in thousands):
8
Table of
Contents
|
|
September 30,
2010
|
|
December 31,
2009
|
|
|
|
(Unaudited)
|
|
|
|
Manufacturing equipment
|
|
$
|
6,402
|
|
$
|
5,566
|
|
Land
|
|
5,103
|
|
5,103
|
|
Office furniture and equipment
|
|
4,777
|
|
4,762
|
|
Computer hardware and software
|
|
14,466
|
|
12,891
|
|
Building
|
|
16,123
|
|
16,123
|
|
Building improvements
|
|
1,957
|
|
1,651
|
|
Leasehold improvements
|
|
3,293
|
|
3,951
|
|
Land improvements
|
|
1,493
|
|
1,493
|
|
Assets not in service
|
|
983
|
|
1,490
|
|
|
|
54,597
|
|
53,030
|
|
Accumulated depreciation
|
|
(18,016
|
)
|
(14,361
|
)
|
Property and equipment, net
|
|
$
|
36,581
|
|
$
|
38,669
|
|
Total depreciation expense for property and equipment was $1.5 million
and $4.4 million for the three and nine months ended September 30, 2010,
respectively, and $1.4 million and $3.7 million for the three and nine months
ended September 30, 2009, respectively.
8.
Debt
At December 31, 2008, there was a borrowing of $9.9 million
under the Companys revolving credit facility, with subsequent borrowings of
$5.6 million and $9.5 million on January 2, 2009 and
March 20, 2009, respectively.
Borrowings under the Companys revolving credit facility bear interest
at the alternate base rate or the Eurodollar rate. In March 2009, Bank of America, N.A.
assumed the participation of this credit agreement previously held by Lehman
Commercial Paper, Inc. The Company
fully repaid on October 26, 2009 the amounts outstanding under the Companys
revolving credit facility with net proceeds from its initial public offering
and subsequently had $25.0 million of availability under this facility.
On August 3, 2010, the Companys revolving credit facility was
increased from $25.0 million to $40.0 million, with a new maturity date of
January 28, 2013. The maturity date
will be January 28, 2012 if the senior subordinated notes due 2012 have
not been retired in full by January 28, 2012. No change was made to the guarantors,
collateral, the representations and warranties or the covenants. The Company recorded deferred financing fees
of approximately $0.7 million that will be recorded to interest expense over
the term of the revolving credit facility.
At September 30, 2010 and December 31, 2009, there were no
borrowings under the Companys revolving credit facility.
On
July 28, 2005, the Company entered into a $50.0 million, 10% senior
subordinated note agreement with a stockholder. As part of the agreement, the
Company issued 6,524 shares of Series A preferred stock valued at
$6.5 million, which shares were converted to 912,447 shares of the
Companys common stock immediately prior to completion of our initial public
offering. The discounted issue value of the subordinated note was
$43.5 million. The senior
subordinated notes were fully repaid on October 26, 2009, with proceeds of
the Companys initial public offering.
In conjunction with the repayment of the senior subordinated notes the
Company recorded a non-cash charge of $2.7 million as interest expense
representing the write-off of the unamortized debt discount that remained upon
extinguishment.
On
January 5, 2009, the Company entered into a $15.0 million, 10% senior
subordinated note agreement with a stockholder. As part of the agreement, the
Company issued 1,879 shares of Series B preferred stock valued at
$1.9 million to the stockholder, which shares were converted to
95,562 shares of the Companys common stock immediately prior to
completion of our initial public offering. The discounted issue value of the
subordinated note is $13.1 million. Interest on the senior subordinated
note is payable on a semiannual basis.
The senior subordinated note has financial and restrictive covenants
similar to the Companys term loan facility covenants. The subordinated note
agreement matures on July 28, 2012. The $1.9 million of value assigned
to the Series B preferred stock represents a discount from the face value
of the note, which will be accreted to its repayment amount utilizing the
effective interest method. The Company
made a voluntary prepayment of $5.0 million in September 2010, reducing
the outstanding principal balance to $10.0 million. In conjunction with the voluntary prepayment
the Company recorded a non-cash charge of $0.4 million representing the related
portion of the unamortized debt discount.
The
term loan facility, revolving credit facility and subordinated note agreements
have financial covenants and include various restrictions with respect to the
Company. In addition, there are restrictions on indebtedness, liens,
guarantees, redemptions, mergers, acquisitions and sales of assets over certain
amounts. In addition, the covenants include maximum interest expense coverage,
debt and leverage ratios and restrictive covenants, including limitations on
new debt, advances to subsidiaries and employees, capital expenditures and transactions
with stockholders and affiliates. The Company was in compliance with all
covenants at December 31, 2009 and September 30, 2010.
9
Table of Contents
9.
Commitments
and Contingencies
Litigation
In
August 2006, the Company filed an initial patent infringement suit against
Occlutech GmbH (Occlutech), based in Jena Germany. In June 2010 the Regional Court in
Dusseldorf entered judgment awarding AGA Medical 2.1 million Euros as damages
resulting from Occlutechs infringement of AGA Medicals patent. Occlutech has appealed the judgment. In July 2010, as a condition of
Occlutechs appeal, Occlutech paid the Company the damages awarded in the
amount of 2.1 million Euros. The Company
did not record a gain in its financial results as the appeal process is not yet
complete.
On
January 29, 2007, Medtronic, Inc. filed a patent infringement action
against the Company in the U.S. District Court for the Northern District of
California, alleging that substantially all of the Companys AMPLATZER occluder
and vascular plug devices, which have historically accounted for substantially
all of the Companys net sales, infringe three of Medtronics method and
apparatus patents on shape memory alloy stents (U.S. Patent
Nos. 5,190,546, 6,306,141 and 5,067,957, collectively known as the Jervis
patents). On March 26, 2010, Medtronic and the Company entered into a
Settlement and License Agreement in which the parties agreed to settle all
issues in the pending litigation. The
Company agreed to pay Medtronic the total amount of $35.0 million according to
the following schedule: The first payment of $7.5 million was paid in
April 2010; the second payment of $7.5 million will be paid in
January 2012; and the third and fourth payments of $10.0 million each will
be paid in January 2013 and January 2014. Medtronic also granted the
Company a royalty-free, paid-up license to the patents at issue for any and all
existing Company products, as well as any future Company products that use
nitinol for the entire term of the Jervis patents. On March 30, 2010, an order was entered
by the court dismissing the litigation with prejudice. The settlement resulted in a charge for the
period ended March 31, 2010 of $31.9 million, representing the discounted
value of the $35.0 million settlement amount to be paid out over the four-year
period.
On
November 30, 2007, the University of Minnesota filed a patent infringement
action alleging that the Companys AMPLATZER occlusion devices infringe their
method and apparatus patents on septal devices. One of the two patents expired
in 2004. The Company believes that it has significant defenses to the
litigation, including unenforceability, invalidity and non-infringement. The
Company believes this claim is without merit and will continue to vigorously
defend its position. As the outcome is uncertain, the Company did not accrue
any costs resulting from the claim at September 30, 2010 or
December 31, 2009.
On
August 24, 2010, the Company filed a patent infringement action against W.
L. Gore (Gore) alleging that Gores HELEX Septal Occluder infringes the
Companys apparatus patent No. 5,944,738 on certain collapsible medical devices. The Company is seeking damages and a
permanent injunction. Gore has
counterclaimed for invalidity of the patent at issue.
The
Company is subject to other various litigation claims in the normal course of
business. Management does not believe that any of these claims will have a
material impact on the financial statements.
10.
Stock-based compensation
Stock-based
compensation expense was $1.3 million and $3.9 million for the three and nine
months ended September 30, 2010, respectively, and $0.8 million and $2.5
million for the three and nine months ended September 30, 2009,
respectively.
11.
Income Taxes
The
Company uses an estimated annual effective tax rate to determine its quarterly
provision for income taxes. The Company has recorded an income tax
benefit of $0.6 million and $10.7 million for the three and nine months ended
September 30, 2010, respectively, and income tax benefit of $0.9 million
and $0.6 million for the three and nine months ended September 30, 2009,
respectively. The income tax benefit was
subject to an annual loss limitation during the current quarter.
At
September 30, 2010 and 2009, the Company had capital loss carryforwards of
$5.6 million and $5.7 million, respectively, which expire at various times
beginning in 2010 through 2014. The Company has established a valuation
allowance against these capital loss carryforwards, as it does not believe they
will be realizable in future years.
Additionally, the Company has foreign net operating losses from prior
years. The Company has released the
related valuation allowances based upon its expectations that the net operating
loss carryforwards will be utilized.
The
Company records all income tax contingency accruals in accordance with ASC
Topic 740. At December 31, 2009 and September 30, 2010, the Company
had $1.8 million and $2.1 million of unrecognized tax benefits, respectively,
including interest and penalties, that, if recognized would result in a
reduction of the Companys effective tax rate. As of December 31, 2009 and
September 30, 2010, the Company had approximately $1.2 million and
$1.3 million accrued for interest and penalties, respectively. The Company
recognizes interest and penalties related to income tax matters in income tax
expense and reports the liability in current or long-term income taxes payable,
as appropriate.
The
Companys income tax returns are subject to examination for 2006 and subsequent
years. The Companys federal income tax returns that were under examination
were concluded by June 30, 2010 with the resulting expense recorded as a
discrete item in the second quarter. State and foreign income tax returns are
generally subject to examination for a period of three to four years
10
Table of Contents
after
filing of the respective return. The state impact of any federal changes
remains subject to examination by various states for a period up to one year
after formal notification to the states.
12.
Earnings Per Common Share
Basic
net income or loss per share is calculated in accordance with ASC Topic 260.
Basic earnings per share (EPS) is calculated using the weighted-average common
shares outstanding in each period under the two-class method. The two-class
method requires that the Company include in its basic EPS calculation when
dilutive, the effect of the Companys convertible preferred stock as if that
stock were converted into common shares. The convertible preferred shares are
not included in the Companys basic EPS calculation when the effect of
inclusion would be anti-dilutive.
Diluted
EPS assumes the conversion, exercise or issuance of all potential common stock
equivalents, unless the effect of inclusion would result in the reduction of a
loss or the increase in income per share. For purposes of this calculation, the
Companys stock options are considered to be potential common shares and are
only included in the calculation of diluted EPS when the effect is dilutive. The
shares used to calculate basic and diluted EPS represent the weighted-average
common shares outstanding. The terms of the Companys preferred stock, all of
which converted to common stock in connection with the Companys initial public
offering, included the right to participate with common stockholders in the
dividends and unallocated income. Net losses were not allocated to the
preferred stockholders. Therefore, when applicable, basic and diluted EPS are
calculated using the two-class method as the Companys convertible preferred
stockholders had the right to participate or share in the undistributed
earnings with common stockholders. Diluted net loss per common share was the
same as basic net loss per share for the nine months ended September 30, 2010
and the three and nine months ended September 30, 2009, since the effect
of any potentially dilutive securities was excluded as they were anti-dilutive
due to the net loss attributable to common stockholders.
The
effect of the Companys participating convertible Series A and
Series B preferred stock is excluded in basic EPS under the two-class
method in accordance with ASC Topic 260, for the three and nine months ended
September 30, 2009 because the effect is anti-dilutive as a result of the
net loss attributable to common stockholders.
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
September 30,
|
|
(in thousands, except per share amounts)
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
Numerator
:
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
1,502
|
|
$
|
2,189
|
|
$
|
(16,084
|
)
|
$
|
(2,010
|
)
|
Series A and Series B preferred stock
and Class A common stock dividends
|
|
|
|
(4,569
|
)
|
|
|
(13,040
|
)
|
Net income (loss) applicable to common
stockholders
|
|
$
|
1,502
|
|
$
|
(2,380
|
)
|
$
|
(16,084
|
)
|
$
|
(15,050
|
)
|
Denominator
:
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
50,244
|
|
20,560
|
|
50,168
|
|
20,560
|
|
Weighted average effect of the assumed conversion
of Class A common stock from the date of issuance
|
|
|
|
923
|
|
|
|
923
|
|
Weighted average effect of the assumed conversion
of Series A and B preferred stock from the date of issuance
|
|
|
|
|
|
|
|
|
|
Weighted average shares of common stock
outstanding, basic
|
|
50,244
|
|
21,483
|
|
50,168
|
|
21,483
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock Equivalents:
|
|
|
|
|
|
|
|
|
|
Stock Options
|
|
685
|
|
|
|
|
|
|
|
Restricted Stock Units
|
|
243
|
|
|
|
|
|
|
|
Employee Stock Purchase Plan
|
|
17
|
|
|
|
|
|
|
|
Weighted average shares of common stock
outstanding, diluted
|
|
51,189
|
|
21,483
|
|
50,168
|
|
21,483
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share-basic
|
|
$
|
0.03
|
|
$
|
(0.11
|
)
|
$
|
(0.32
|
)
|
$
|
(0.70
|
)
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share-diluted
|
|
$
|
0.03
|
|
$
|
(0.11
|
)
|
$
|
(0.32
|
)
|
$
|
(0.70
|
)
|
|
|
|
|
|
|
|
|
|
|
Shares excluded because effect would be
anti-dilutive
|
|
|
|
|
|
|
|
|
|
Common Stock Equivalents:
|
|
|
|
|
|
|
|
|
|
Conversion of Series A Preferred
|
|
|
|
17,975
|
|
|
|
17,975
|
|
Conversion of Series B Preferred
|
|
|
|
96
|
|
|
|
96
|
|
Stock Options
|
|
931
|
|
1,402
|
|
1,432
|
|
1,410
|
|
Restricted Stock Units
|
|
|
|
|
|
239
|
|
|
|
Employee Stock Purchase Plan
|
|
|
|
|
|
17
|
|
|
|
11
Table of
Contents
13.
Fair Value Measurements
The
fair value of assets and liabilities is determined on the exchange price which
would be received for an asset or paid to transfer a liability (an exit price)
in the principal or most advantageous market for the asset or liability in an
orderly transaction between market participants. The determination of fair value is based upon
a three-tier fair value hierarchy, which prioritizes the inputs used in fair
value measurements. The three-tier
hierarchy for inputs used in measuring fair value is as follows:
·
Level 1Unadjusted quoted prices in
active markets for identical assets or liability
·
Level 2Unadjusted quoted prices in
active markets for similar assets or liabilities, or unadjusted quoted prices
for identical or similar assets
·
Level 3Unobservable inputs for the
asset or liability for which there is little to no market data which requires
the entity to develop its own assumption.
The Company recognizes
transfers between tiers of the three-tier hierarchy at the end of the period.
Assets
and Liabilities Measured at Fair Value on a Recurring Basis
The
carrying value of cash, cash equivalents and restricted cash approximates fair
value at September 30, 2010 and December 31, 2009. Cash, cash equivalents and restricted cash
are classified as Level 1 in the fair value hierarchy.
The
Company measures the fair value of contingent consideration at each reporting
period using Level 3 inputs. The Company
has recorded the acquisition date estimated fair value of the contingent
payment milestones as a component of consideration transferred using Level 3
inputs. The acquisition date fair values
were measured based on the probability and adjusted present value of amounts
expected to be paid. The probability
adjusted contingent considerations were discounted at the weighted average cost
of capital for each acquisition. See
note 4 (Recent Acquisitions) and the following paragraphs for specific
amounts recorded for each acquisition with remaining amounts due in future
periods.
On
January 8, 2009 (and effective as of January 1, 2009), the Company
purchased the distribution rights, inventory, equipment, intangible assets and
goodwill from its distributor located in Italy, which under ASC Topic
805 constitutes an acquired business.
The Company has agreed to pay the former owners up to $6.7 million
of contingent payments if certain revenue goals are achieved during the first
three years following the date of the agreement. The achievements are defined
as follows:
Year
2009$3.1 million guaranteed payment to be paid in January 2010 and a
$2.5 million contingent payment payable in January 2010 if gross
revenues of AB Medica-AGA Division S.R.L. exceed 20.0 million Euro.
Year
2010$3.4 million guaranteed payment to be paid in January 2011 and a
$2.2 million contingent payment payable in January 2011 if gross
revenues of AB Medica-AGA Division S.R.L. exceed 22.0 million Euro.
Year
2011$3.7 million guaranteed payment to be paid in January 2012 and a
$2.0 million contingent payment payable in January 2012 if gross
revenues of AB Medica-AGA Division S.R.L. exceed 24.0 million Euro.
On
April 1, 2009, the Company made a $2.0 million contingent payment as
a result of certain goals that were achieved.
As
of December 31, 2009, the balance of the contingent obligation recorded
was $4.0 million and the discounted value of the guaranteed payment was
$9.8 million. In January 2010, $1.3 million was paid relating to the
fiscal year 2009 contingent payment and $3.1 million was paid relating to the
January 2010 guaranteed payment.
For the three and nine month periods ending September 30, 2010, the
Company recorded as a reduction to operating expense approximately $0.9 million
and $1.1 million, respectively. As of
September 30, 2010, the balance of the contingent obligation recorded was
$1.4 million.
12
Table of Contents
In
conjunction with the January 1, 2010 purchase of the vascular distribution
rights, inventory and intangible assets from the Companys distributor in
Canada, a contingent payment payable in January 2011, which as of the
acquisition date had a net present value of $0.1 million payable if
certain revenue goals are achieved during this period, was recorded. As of September 30, 2010, the balance of
the contingent obligation recorded was $0.1 million.
The
following table represents a summary of the contingent consideration liability
and activity (in thousands) for the periods presented:
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
September 30,
|
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
Contingent Consideration:
|
|
|
|
|
|
|
|
|
|
Balance at Beginning of Period
|
|
$
|
2,258
|
|
$
|
8,144
|
|
$
|
7,457
|
|
$
|
|
|
Purchase price contingent consideration
|
|
|
|
|
|
100
|
|
10,558
|
|
Payments
|
|
|
|
|
|
(4,727
|
)
|
(2,000
|
)
|
Change in fair value of contingent consideration
(included in the statement of operations)
|
|
(937
|
)
|
(353
|
)
|
(1,090
|
)
|
(1,051
|
)
|
Currency translation effect
|
|
207
|
|
(94
|
)
|
(212
|
)
|
190
|
|
Balance at End of Period
|
|
$
|
1,528
|
|
$
|
7,697
|
|
$
|
1,528
|
|
$
|
7,697
|
|
Assets
and Liabilities Measured at Fair Value on a Non-Recurring Basis
During
the three and nine month periods ended September 30, 2010 and
September 30, 2009 we had no significant fair value measurements of assets
or liabilities at fair value subsequent to their initial recognition, except as
disclosed in Note 14.
Fair
Value of Financial Instruments
The
carrying value of the Companys debt instruments approximates fair value for
all periods presented.
14.
Equity Method Investment
During
the first quarter of 2009, the Company determined that its equity method
investment in Ample Medical, Inc. was other-than-temporarily impaired and
wrote-off the remaining investment balance to its fair value of $0.0
million. The loss on impairment of $2.3
million is recorded in the investment loss line item on the statement of
operations for the nine months ended September 30, 2009.
15.
Comprehensive
Income
Comprehensive
income consists of net income and the effects of foreign currency
translation. The following table
provides a reconciliation of net income (loss) to comprehensive income (in
thousands):
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
September 30,
|
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
1,502
|
|
$
|
2,189
|
|
$
|
(16,084
|
)
|
$
|
(2,010
|
)
|
Changes in foreign currency translation
|
|
5,871
|
|
1,654
|
|
(2,568
|
)
|
2,085
|
|
Total comprehensive income (loss)
|
|
$
|
7,373
|
|
$
|
3,843
|
|
$
|
(18,652
|
)
|
$
|
75
|
|
16.
Segment Information
We
review our operations and manage our business as one reportable segment where
we develop, manufacture and market our products which are sold in 112 countries
through a combination of direct sales and the use of distributors. Factors used to identify our single operating
segment include the financial information available for evaluation by our chief
operating decision maker in making decisions about how to allocate resources
and assess performance.
Net
sales to external customers and long-lived assets by geography are as follows
(in thousands):
13
Table of Contents
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
September 30,
|
|
|
|
2010
|
|
2009
|
|
2010
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
Net sales:
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
19,920
|
|
$
|
19,268
|
|
$
|
58,500
|
|
$
|
56,018
|
|
International:
|
|
|
|
|
|
|
|
|
|
Europe (exclusive of Italy)
|
|
14,594
|
|
15,970
|
|
46,278
|
|
44,723
|
|
Italy
|
|
4,924
|
|
5,483
|
|
16,981
|
|
16,862
|
|
Other
|
|
11,043
|
|
9,437
|
|
33,748
|
|
26,937
|
|
Total International
|
|
30,561
|
|
30,890
|
|
97,007
|
|
88,522
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales
|
|
$
|
50,481
|
|
$
|
50,158
|
|
$
|
155,507
|
|
$
|
144,540
|
|
|
|
September 30,
2010
|
|
December 31,
2009
|
|
|
|
(Unaudited)
|
|
|
|
Long-lived assets:
|
|
|
|
|
|
United States
|
|
$
|
165,132
|
|
$
|
172,328
|
|
Italy
|
|
40,517
|
|
45,394
|
|
International (exclusive of Italy)
|
|
21,767
|
|
23,942
|
|
Total long-lived assets
|
|
$
|
227,416
|
|
$
|
241,664
|
|
We
are not dependent on any single customer, and no single customer (including
distributors) accounted for more than 10% of our net sales for the three and
nine months ended September 30, 2010 and 2009.
17.
Subsequent Events
On
October 15, 2010, we entered into an Agreement and Plan of Merger and
Reorganization (the Merger Agreement) with St. Jude Medical, Inc., a
Minnesota company (St. Jude), and its indirect wholly owned subsidiary,
Asteroid Subsidiary Corporation, a Delaware corporation. Pursuant to the Merger
Agreement, on October 20, 2010, Asteroid Subsidiary Corporation commenced
an exchange offer to purchase all of our outstanding shares of our common stock
at a purchase price of $20.80 per share, payable in cash and/or St. Jude common
stock, at the tendering stockholders election, subject to proration and
adjustment as provided in the Merger Agreement, in order for 50% of the total
consideration payable in the exchange offer consist of cash and 50% to consist
of St. Jude common stock. The exchange offer will remain open for at least 20
business days and will expire, unless extended or terminated in accordance with
its terms, at 12:00 midnight (one minute after 11:59 p.m.), New York City
time, on the evening of November 17, 2010. As soon as practicable after
the consummation of the exchange offer and satisfaction or waiver of certain
conditions set forth in the Merger Agreement, Asteroid Subsidiary Corporation
will merge with and into AGA Medical Holdings, Inc., and AGA Medical
Holdings, Inc. will become a direct wholly-owned subsidiary of St. Jude
Medical, which is expected to be followed by a second merger of AGA Medical
Holdings, Inc. into another wholly-owned subsidiary of St. Jude.
The
Merger Agreement provides that completion of the exchange offer will be subject
to certain conditions, including (i) stockholders holding a majority of
our outstanding common shares tendering in the exchange offer, calculated on a
fully-diluted basis, (ii) the expiration or termination of any applicable
waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976,
as amended, and under any non-U.S. antitrust, competition or similar
notification or clearance laws, (iii) St. Judes registration statement on
Form S-4, relating to the St. Jude common stock to be issued in the
exchange offer, being declared effective by the Securities and Exchange
Commission, and (iv) the absence of a Material Adverse Effect (as defined
in the Merger Agreement) since the date of the Merger Agreement. The exchange
offer is not conditioned on the ability of St. Jude or Asteroid Subsidiary
Corporation to obtain third party financing.
The Merger Agreement also includes customary covenants governing the
conduct of our business prior to completion of the merger, including the use of
commercially reasonable efforts to operate our business in the ordinary course
until the effective time of the merger. We have agreed not to solicit or
initiate discussions with third parties regarding other proposals to acquire
the Company and to certain restrictions on its ability to respond to any such
proposal, subject to fulfillment of certain fiduciary requirements of our board
of directors. The Merger Agreement contains termination rights for both the
Company and St. Jude upon various customary circumstances, including if the
exchange offer is not completed on or before March 1, 2011, and provides,
among other things, that if termination of the Merger Agreement relates to us
entering into an acquisition agreement with another party, we will be required
to pay St. Jude a termination fee. In such instances, if the alternative
transaction is with a party who submitted a proposal received by us prior to
11:59 p.m. Central Time on November 2, 2010 and we notified St. Jude
prior to 11:59 p.m. Central Time on November 3,
14
Table of Contents
2010
of our Boards determination that such proposal was or was reasonably likely to
result in a superior proposal to the transaction described in the Merger Agreement,
the termination fee will be equal to $21,650,000 (approximately 2% of the
equity value for the transaction). In other circumstances when a termination
fee is payable under the Merger Agreement, the termination fee payable will be
equal to $32,475,000 (approximately 3% of the equity value for the
transaction). Under certain circumstances, termination of the Merger Agreement
does not preclude St. Jude and Asteroid Subsidiary Corporation from amending
and continuing the Offer and promptly disclosing that such Offer is no longer
pursuant to the Merger Agreement with AGA.
A
copy of the Merger Agreement was attached as Exhibit 2.1 to our Current
Report on Form 8-K filed October 18, 2010 and is incorporated herein
by reference.
As
previously disclosed in Note 17 to our unaudited consolidated financial
statements included in Part I, Item 1 of the Form 10-Q for the
quarter ended June 30, 2010, in June 2010, the Regional Court in
Dusseldorf entered a judgment in our favor relating to our August 2006 patent
infringement suit against Occlutech GmbH (Occlutech), based in Jena,
Germany. The Regional Court in Dusseldorf awarded us 2.1
million Euros as damages. Occlutech has appealed the judgment. In July 2010, as a condition of
Occlutechs appeal, Occlutech paid the Company the damages awarded in the
amount of 2.1 million Euros; we did not, however, record a gain in our
financial results as the appeal process is not yet complete. Further, in
conjunction with this judgment award, we were required to post a $2.5 million letter
of credit with the Regional Court in Dusseldorf. In addition, subsequent
to the end of our third fiscal quarter, and relating to our appeal of a
2008 non-infringement declaration in favor of Occlutech in the
Patent Court in the Netherlands, on October 19, 2010, the Hague Court
of Appeal affirmed the lower courts ruling.
On
October 29, 2010, a putative stockholder class action complaint was filed
in Hennepin County District Court, Fourth Judicial District Court, State of
Minnesota. The complaint, captioned Michael Rubin v. AGA Medical Holdings, Inc.,
et al., names as defendants the members of the Companys Board of Directors, as
well as the Company, Parent, Purchaser, Welsh, Carson, Anderson &
Stowe IX, L.P., WCAS Capital Partners IV, L.P., Gougeon Shares, LLC and The
Franck L. Gougeon Revocable Trust. The plaintiff alleges that the Companys
directors breached their fiduciary duties to the Companys stockholders. The
complaint also alleges that the Companys purported controlling stockholders
owed fiduciary duties to the Companys minority stockholders in connection with
the transaction and breached such duties. The plaintiff further claims that
Parent and its subsidiaries aided and abetted the purported breaches of
fiduciary duty. The complaint alleges, inter alia, that in approving the
proposed transaction between the Company and Parent, Company Board members
accepted an inadequate price, failed to make full disclosure, and utilized
unreasonable deal protection devices and that the Company Board members acted
to put their personal interests ahead of the interests of Company stockholders.
The complaint seeks injunctive relief, including to enjoin the transaction, in
addition to unspecified compensatory damages, attorneys fees, other fees and
costs and other relief. The Company believes the plaintiffs allegations lack
merit. The foregoing description is qualified in its entirety by reference to
the complaint, which is filed as Exhibit 99.1 hereto and is
incorporated herein by reference.
On
October 28, 2010, a putative stockholder class action complaint was filed
in the Delaware Court of Chancery. The complaint, captioned Jennifer Walling v.
AGA Medical Holdings, Inc., et al., names as defendants the members of the
Companys Board of Directors, as well as the Company, Parent and Purchaser. The
plaintiff alleges that the Companys directors breached their fiduciary duties
to the Companys stockholders and further alleges that the Company and Parent
aided and abetted the purported breaches of fiduciary duty. The complaint
alleges, inter alia, that in approving the proposed transaction between the
Company and Parent, Company Board members accepted an inadequate price, failed
to make full disclosure, and utilized unreasonable deal protection devices and
that the Company Board members acted to put their personal interests ahead of
the interests of Company stockholders. The complaint seeks injunctive relief,
including to enjoin the transaction, in addition to unspecified compensatory
damages, attorneys fees, other fees and costs and other relief. The Company
believes the plaintiffs allegations lack merit. The foregoing description is
qualified in its entirety by reference to the complaint, which is filed as Exhibit 99.2 hereto
and is incorporated herein by reference.
15
Table of
Contents
Cautionary
Statement Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q
includes forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, or the Exchange Act, including, in
particular, statements related to the following: (i) pending litigation,
(ii) regulatory approval of our products and the results of clinical
trials; (iii) our market position; (iv) our anticipated future cash
flows, liquidity requirements, and sources of liquidity; (v) our expected
merger with St. Jude Medical, Inc.; and (vi) any statements about our
plans, strategies and prospects.
These
statements are based on the beliefs of management as well as assumptions made
by, and information currently available to, us. These statements reflect our
current views with respect to future events, are not guarantees of future
performance and involve risks and uncertainties that could cause actual
performance or results to differ materially from those expressed in or
suggested by the forward-looking statements. These factors include, among other
things:
·
failure to implement our
business strategy;
·
failure to capitalize on our
expected market opportunities;
·
lack of regulatory approval
and market acceptance of our new products, product enhancements or new
applications for existing products;
·
regulatory developments in
key markets for our AMPLATZER
occlusion devices;
·
failure to complete our
clinical trials or failure to achieve the desired results in our clinical
trials;
·
inability to successfully
commercialize our existing and future research and development programs;
·
failure to protect our
intellectual property;
·
intellectual property claims
exposure, related litigation expense, and any resultant damages, awarded
royalties or other remedies, in particular resulting from our Medtronic and Occlutech
litigations;
·
competition;
·
decreased demand for our
products;
·
product liability claims
exposure;
·
failure to comply with laws
and regulations;
·
changes in general economic
and business conditions;
·
changes in
currency exchange rates and interest rates;
·
the delay or termination of our expected merger with St. Jude Medical, Inc.,
and the likelihood of additional costs and diversion of management attention
associated with completing the transaction and defending lawsuits related thereto;
and
·
other risks and uncertainties, disclosed in our filings with the
Securities and Exchange Commission, including those detailed
in our Annual
Report on Form 10-K for the year ended December 31, 2009 filed on March 4, 2010.
You should not put undue reliance on any
forward-looking statements. You should understand that many important factors,
including those discussed herein, could cause our results to differ materially
from those expressed or suggested in any forward-looking statement. Except as required
by law, we do not undertake any obligation to update or revise these
forward-looking statements to reflect new information or events or
circumstances that occur after the date of this news release or to reflect the
occurrence of unanticipated events or otherwise. Readers are advised to review
our filings with the Securities and Exchange Commission (which are available
from the SECs EDGAR database at www.sec.gov, at various SEC reference
facilities in the United States and via our website at www.amplatzer.com).
16
Table of Contents
PART I
FINANCIAL INFORMATION
Explanatory note
:
Unless
the context otherwise requires, references in this Quarterly Report on
Form 10-Q to (1) we, us, our and the Company refer
collectively to AGA Medical Holdings, Inc. and its consolidated
subsidiaries and (2) AGA Medical refers to AGA Medical Corporation, a
wholly-owned subsidiary of the Company.
ITEM 2.
Managements
Discussion and Analysis of Financial Condition and Results of Operations
Overview
We are a leading innovator and manufacturer of medical devices for the
minimally invasive treatment of structural heart defects and vascular abnormalities. Our
AMPLATZER
occlusion devices offer
transcatheter treatments that have been clinically shown to be highly effective
in defect closure. Our devices and
delivery systems use relatively small catheters and can be retrieved and repositioned
prior to release from the delivery cable, enabling optimal placement without
the need to repeat the procedure or use multiple devices. We are the only manufacturer with occlusion
devices approved to close seven different structural heart defects, and we believe
we have the leading market positions in the United States and Europe for each
of our devices. We sell our devices to
interventional cardiologists, interventional radiologists, vascular surgeons
and electrophysiologists in 112 countries through a combination of direct sales
and the use of distributors, with international markets representing 60.5% and
62.4% of our net sales for the three and nine months ended September 30,
2010, respectively, and 61.6% and 61.2% of our net sales for the three and nine
months ended September 30, 2009, respectively. Included in the percentage for international
markets is Italy, which represented 9.8% and 10.9% of our net sales for the
three and nine months ended September 30, 2010, respectively, and 10.9%
and 11.7% of our net sales for the three and nine months ended
September 30, 2009, respectively.
We received a CE Mark in Europe for our initial occlusion devices and
related delivery systems in 1998. In 2001, we received U.S. regulatory approval
to commercialize our
AMPLATZER
Septal Occluder, which addresses one of the largest treatment areas of the
structural heart defect market. We received U.S. regulatory approval to
commercialize our
AMPLATZER
Duct
Occluder device in 2003 and our
AMPLATZER
Muscular VSD Occluder device in 2007.
In
addition, we have leveraged our core competencies in braiding nitinol and
designing transcatheter delivery systems to develop products for the treatment
of certain vascular abnormalities. Our
first products in this area, which we launched in the United States in
September 2003 and in Europe in January 2004, are vascular plugs for
the closure of abnormal blood vessels that develop outside the heart. A second version of our vascular plug was
approved and launched in the United States and Europe in August 2007, and
a third version was approved in Europe in May 2008. A third and fourth version of our vascular
plugs were approved in Europe in May 2008 and July 2009,
respectively.
Recent Developments
On
October 15, 2010, we entered into an Agreement and Plan of Merger and
Reorganization (the Merger Agreement) with St. Jude Medical, Inc., a
Minnesota company (St. Jude), and its indirect wholly owned subsidiary,
Asteroid Subsidiary Corporation, a Delaware corporation. Pursuant to the Merger
Agreement, on October 20, 2010, Asteroid Subsidiary Corporation commenced
an exchange offer to purchase all of our outstanding shares of our common stock
at a purchase price of $20.80 per share, payable in cash and/or St. Jude common
stock, at the tendering stockholders election, subject to proration and
adjustment as provided in the Merger Agreement, in order for 50% of the total
consideration payable in the exchange offer consist of cash and 50% to consist
of St. Jude common stock. The exchange offer will remain open for at least 20
business days and will expire, unless extended or terminated in accordance with
its terms, at 12:00 midnight (one minute after 11:59 p.m.), New York City
time, on the evening of November 17, 2010. As soon as practicable after
the consummation of the exchange offer and satisfaction or waiver of certain
conditions set forth in the Merger Agreement, Asteroid Subsidiary Corporation
will merge with and into AGA Medical Holdings, Inc., and AGA Medical
Holdings, Inc. will become a direct wholly-owned subsidiary of St. Jude
Medical, which is expected to be followed by a second merger of AGA Medical
Holdings, Inc. into another wholly-owned subsidiary of St. Jude.
The
Merger Agreement provides that completion of the exchange offer will be subject
to certain conditions, including (i) stockholders holding a majority of
our outstanding common shares tendering in the exchange offer, calculated on a
fully-diluted basis, (ii) the expiration or termination of any applicable
waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976,
as amended, and under any non-U.S. antitrust, competition or similar
notification or clearance laws, (iii) St. Judes registration statement on
Form S-4, relating to the St. Jude common stock to be issued in the
exchange offer, being declared effective by the Securities and Exchange
Commission, and (iv) the absence of a Material Adverse Effect (as defined
in the Merger Agreement) since the date of the Merger Agreement. The exchange
offer is not conditioned on the ability of St. Jude or Asteroid Subsidiary
Corporation to obtain third party financing.
The Merger Agreement also includes customary covenants governing the
conduct of our business prior to completion of the merger, including the use of
commercially reasonable efforts to operate our business in the ordinary course
until the effective time of
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the
merger. We have agreed not to solicit or initiate discussions with third
parties regarding other proposals to acquire the Company and to certain
restrictions on its ability to respond to any such proposal, subject to
fulfillment of certain fiduciary requirements of our board of directors. The
Merger Agreement contains termination rights for both the Company and St. Jude
upon various customary circumstances, including if the exchange offer is not
completed on or before March 1, 2011, and provides, among other things,
that if termination of the Merger Agreement relates to us entering into an
acquisition agreement with another party, we will be required to pay St. Jude a
termination fee. In such instances, if the alternative transaction is with a
party who submitted a proposal received by us prior to 11:59 p.m. Central
Time on November 2, 2010 and we notified St. Jude prior to 11:59 p.m.
Central Time on November 3, 2010 of our Boards determination that such
proposal was or was reasonably likely to result in a superior proposal to the
transaction described in the Merger Agreement, the termination fee will be
equal to $21,650,000 (approximately 2% of the equity value for the
transaction). In other circumstances when a termination fee is payable under
the Merger Agreement, the termination fee payable will be equal to $32,475,000
(approximately 3% of the equity value for the transaction). Under certain
circumstances, termination of the Merger Agreement does not preclude St. Jude
and Asteroid Subsidiary Corporation from amending and continuing the Offer and
promptly disclosing that such Offer is no longer pursuant to the Merger
Agreement with AGA.
If
our expected merger with St. Jude Medical, Inc. (St. Jude) is completed,
we expect St. Jude to prepay approximately $207 million of our currently
outstanding debt.
A
copy of the Merger Agreement was attached as Exhibit 2.1 to our Current
Report on Form 8-K filed October 18, 2010 and is incorporated herein
by reference.
Recent Acquisitions
Effective January 1, 2009, we began direct distribution in Canada,
Portugal, France, and the Netherlands as we purchased on such date the
distribution rights, inventory and intangible assets from our distributors in
these countries. The aggregate purchase price of these acquisitions totaled
$10.8 million, consisting of cash payments of $6.1 million, the
discounted value of $1.4 million in additional guaranteed payments and the
discounted value of up to $3.3 million in additional contingent payments
if certain revenue goals were achieved in fiscal year 2009. On April 1,
2009, we paid our former French distributor $1.4 million in such
additional guaranteed payments. During
the quarter ended March 31, 2010, we paid all of the contingent payments
due in January 2010, which had a fair value of $3.4 million, the
contingent payable amounts as of December 31, 2009.
Effective
January 1, 2009, we began direct distribution in Italy as a result of our
purchase on January 8, 2009 of certain distribution rights, inventory,
equipment, intangible assets and goodwill from our former Italian distributor.
The aggregate purchase price was $41.0 million, consisting of cash
payments of $26.6 million, the discounted value of $9.2 million in
additional guaranteed payments and the discounted value of up to $5.2 million
in additional contingent payments if certain revenue goals are achieved during
the first three years following completion of the acquisition. In addition, on
April 1, 2009, we paid our former Italian distributor $2.0 million in
other contingent payments for non-revenue based performance. In January 2010, we paid $1.3 million
relating to the fiscal year 2009 contingent payment and $3.1 million relating
to the January 2010 guaranteed payment.
On
January 5, 2009, in order to finance, in part, the acquisition of the
assets of our former Italian distributor, AGA Medical issued to an affiliate of
Welsh, Carson, Anderson & Stowe IX, L.P., our controlling stockholder,
(1) $15.0 million in aggregate principal amount of our 10% senior subordinated
notes due 2012 issued in 2009 (the 2009 notes), and (2) 1,879 shares of
Series B preferred stock, which shares of Series B preferred stock
were converted to 95,562 shares of our common stock immediately prior to
completion of our initial public offering in October 2009. As a result,
the discounted issue value of the 2009 notes was $13.1 million.
Effective
January 1, 2010, we extended our direct distribution in Canada by
purchasing the vascular product distribution rights, inventory, and intangible
assets from our former Canadian distributor.
The aggregate purchase price was $0.3 million, consisting of cash
payments of $0.2 million and the discounted value of up to $0.1 million in
additional contingent payment if certain revenue goals are achieved during our
2010 fiscal year.
Use of Constant Currency
As
exchange rates are an important factor in understanding period-to-period
comparisons, we believe the presentation of results on a constant currency
basis in addition to reported results helps improve investors ability to
understand our operating results and evaluate our performance in comparison to
prior periods. Constant currency information compares results between periods
as if exchange rates had remained constant period-over-period. We use results
on a constant currency basis as one measure to evaluate our performance. In
this Quarterly Report on Form 10-Q, we calculate constant currency by
calculating current-year results using prior-year foreign currency exchange
rates. We generally refer to such amounts calculated on a constant currency
basis as excluding or adjusting for the impact of foreign currency. These
results should be considered in addition to, not as a substitute for, results
reported in accordance with GAAP. Results on a constant currency basis, as we
present them, may not be comparable to similarly titled measures used by other
companies and are not measures of performance presented in accordance with
GAAP.
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Critical
Accounting Policies
A
detailed description of our significant accounting policies can be found in our
Annual Report on Form 10-K for the year ended December 31, 2009 filed
with the Securities and Exchange Commission on March 4, 2010.
Results of Operations
Three Months Ended September 30, 2010 Compared to Three Months
Ended September 30, 2009
Net sales
. Net sales
for the quarter ended September 30, 2010 increased 0.6% to
$50.5 million from $50.2 million for the same period in 2009. Our
family of
AMPLATZER
Septal
Occluder devices represented 51.1% of net product sales for the quarter ended September 30,
2010 and 54.8% of net product sales for the quarter ended September 30,
2009.
AMPLATZER
PFO Occluder
devices represented 13.4% and 14.5% of net sales for the quarters ended September 30,
2010 and 2009, respectively. Vascular plugs represented 10.1% of net product
sales for the quarter ended September 30, 2010 and 7.2% of net product
sales for the quarter ended September 30, 2009. All other devices
represented 13.0% and 11.9% of net product sales for the quarters ended September 30,
2010 and 2009, respectively. Accessories, including delivery systems,
represented 12.4% and 11.6% of net product sales for the quarters ended September 30,
2010 and 2009, respectively. Of the total $0.3 million increase in net
sales, $0.6 million was derived from U.S. net sales, which represented an
increase of 3.4% compared to U.S. net sales for the same period in 2009, offset
by a decrease of $0.3 million derived from international net sales, which
represented a decrease of 1.1% compared to international net sales for the same
period in 2009. The $0.3 million
increase in international and U.S. net sales was primarily due to $2.0 million
derived from higher volume of units sold, an increase of $0.6 million in
freight revenue, restocking fees and adjustments to sales return reserves,
offset by a decrease of $1.8 million due to the effects of the appreciation of
the U.S. dollar against foreign currencies, and by a decrease of $0.5 million
derived from changes in product and geography mix on our international product
sales. Sales growth from the prior year quarter was negatively impacted by
several items including the significant impact of currency, the delay in
receiving FDA clearance for our Amplatzer Vascular Plug 4 and the temporary
inability to import and sell products into India. This was resolved in early October and
the company has since resumed shipments.
The company also experienced a continued delay in the issuance of a
significant government tender in a Latin American country. U.S. net sales and international net sales
represented 39.5% and 60.5%, respectively, of our total net sales for the
quarter ended September 30, 2010, compared to 38.4% and 61.6%,
respectively, for the same period in 2009.
International direct net sales represented 66.0% and 66.8% of total
international net sales for the quarters ended September 30, 2010 and
2009, respectively.
Cost of goods sold.
Cost of goods sold for the quarter ended September 30,
2010 increased 2.7% to $6.8 million from $6.6 million for the same
period in 2009. The increase was primarily due to higher volume of units sold
and product and geography sales mix. Gross margins decreased to 86.6% for the
quarter ended September 30, 2010 from 86.8% for the quarter ended September 30,
2009. Excluding the impact of the
stronger dollar currency and holding everything else constant, gross margins
would have been 86.9% for the quarter ended September 30, 2010.
Selling, general and administrative
. Selling, general and administrative expenses
for the quarter ended September 30, 2010 decreased 7.5% to
$23.5 million from $25.4 million for the same period in 2009. This
decrease of $1.9 million primarily resulted from a decrease in legal expenses
and the effects of the appreciation of the U.S. dollar against foreign
currencies. These decreases were offset by increased costs related to expanding
our direct sales force in several European countries and North America
associated with the growth of our business.
As a percentage of net sales, our selling, general and administrative
expenses for the quarter ended September 30, 2010 decreased to 46.6%
compared to 50.7% for the same period in 2009.
Research and development
. Research and development expenses for the
quarter ended September 30, 2010 increased 42.7% to $12.0 million
from $8.4 million for the same period in 2009. This increase was primarily
attributable to spending increases for new clinical trials and strong patient
enrollment for existing trials during the quarter ended September 30,
2010, and partially attributable to increased headcount and outside testing to
support both our pre-clinical and development efforts compared with the same
period in 2009. As a percentage of net sales, our research and development
expenses for the quarter ended September 30, 2010 increased to 23.8% from
16.8% for the same period in 2009.
Amortization of intangible assets
. Amortization expenses for the quarter ended September 30,
2010 decreased 2.4% to $5.0 million compared to $5.1 million for the
same period in 2009. As a percentage of net sales, amortization of intangible
assets for the quarter ended September 30, 2010 decreased to 9.8% from
10.1% for the same period in 2009.
Change in purchase consideration.
Change in purchase consideration for the
quarter ended September 30, 2010 included a benefit of $0.9 million
compared with a benefit of $0.4 million for the same period in 2009. The benefit recorded in the quarter ended September 30,
2010 was derived from the reduction in fair value of the contingent payment
obligation resulting from the acquisition of distribution rights from our
former distributor in Italy. The benefit recorded in the quarter ended September 30,
2009 was derived from a $0.6 million reduction in fair value of the contingent
payment obligations resulting from the acquisition of distribution rights from
former distributors in Italy, Canada, and the Netherlands, offset by a $0.2
million increase in fair value of the contingent payment obligations resulting
from the acquisitions of distributor rights from former distributors in
Portugal and France.
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Interest income
.
Interest income for the quarter ended September 30, 2010 decreased
to $17,000 from $20,000 for the same period in 2009.
Interest expense
.
Interest expense for the quarter ended September 30, 2010 decreased
30.7% to $2.8 million from $4.0 million for the same period in 2009.
The $2.8 million includes a $0.4 million non-cash charge representing a portion
of the unamortized debt discount associated with the $15.0 million senior
subordinated notes which we prepaid to
the extent of $5.0 million during the quarter.
The decrease in interest expense reflects the reduction in overall debt,
which was directly attributable to the use of the proceeds from the initial
public offering in 2009 and lower average interest rates for the quarter ended September 30,
2010. This was partially offset due to
the on-going accretion of the discount associated with the Medtronic litigation
settlement charge.
Other income (expense), net
. Other income (expense),
net for the quarter ended September 30, 2010 was an expense of
$0.5 million, as compared to income of $0.3 million for the same
period in 2009, mainly as a result of foreign exchange losses in the quarter
ended September 30, 2010 compared to foreign exchange gains in the quarter
ended September 30, 2009.
Income tax benefit
.
Income tax benefit for the quarter ended September 30, 2010 was
$0.6 million as compared to a $0.9 million benefit for the same
period in 2009, primarily due to foreign and federal tax return true-ups and
the release of valuation allowances against foreign subsidiaries net operating
losses and other tax assets.
Net income
. Net income for the quarter ended September 30,
2010 was $1.5 million as compared to net income of $2.2 million for the same
period in 2009. The decrease in net income was primarily attributable to higher
research and development expense during the quarter ended September 30,
2010, as discussed above.
Nine Months Ended September 30, 2010 Compared to Nine Months Ended
September 30, 2009
Net sales
. Net sales for the
nine months ended September 30, 2010 increased 7.6% to $155.5 million
from $144.5 million for the same period in 2009. Our family of
AMPLATZER
Septal Occluder devices
represented 50.9% of net product sales for the nine months ended September 30,
2010 and 55.1% of net product sales for the nine months ended September 30,
2009.
AMPLATZER
PFO
Occluder devices represented 13.9% and 15.0% of net sales for the nine months
ended September 30, 2010 and 2009, respectively. Vascular plugs
represented 10.0% of net product sales for the nine months ended September 30,
2010 and 7.0% of net product sales for the nine months ended September 30,
2009. All other devices represented 13.2% and 11.1% of net product sales
for the nine months ended September 30, 2010 and 2009, respectively.
Accessories, including delivery systems, represented 12.0% and 11.8% of net
product sales for the nine months ended September 30, 2010 and 2009,
respectively. Of the total $11.0 million increase in net sales,
$8.5 million was derived from international net sales, which represented
an increase of 9.6% compared to international net sales for the same period in
2009, and $2.5 million was derived from increased U.S. net sales, which
represented an increase of 4.4% compared to U.S. net sales for the same period
in 2009. The $11.0 million increase in
international and U.S. net sales was primarily due to $14.6 million derived
from higher volume of units sold and a $0.9 million increase in freight
revenue, restocking fees and adjustments to sales return reserves. These increases were offset by a decrease of
$3.1 million relating to changes in product and geography mix and a $1.4
million decrease due to changes in currency compared to the same period in
2009. Sales growth from the year ago
period was negatively impacted by several items including the significant
impact of currency, the delay in receiving FDA clearance for our Amplatzer
Vascular Plug 4 and the temporary inability to import and sell products into
India. This was resolved in early October and
the company has since resumed shipments.
The company also experienced a continued delay in the issuance of a
significant government tender in a Latin American country. U.S. net sales and international net sales
represented 37.6% and 62.4%, respectively, of our total net sales for the nine
months ended September 30, 2010, compared to 38.8% and 61.2%,
respectively, for the same period in 2009.
International direct net sales represented 67.5% and 68.2% of total
international net sales for the nine months ended September 30, 2010 and
2009, respectively.
Cost of goods sold.
Cost of goods sold
for the nine months ended September 30, 2010 decreased 7.8% to
$21.8 million from $23.6 million for the same period in 2009. This
decrease in cost of goods sold was mainly attributable to $3.7 million of prior
year expenses associated with the repurchase of inventory from former
distributors whose distribution rights were acquired in January 2009, partially
offset by higher volume of units sold and product and geography sales mix.
Gross margins increased to 86.0% for the nine months ended September 30,
2010 from 83.7% for the nine months ended September 30, 2009. Excluding
the $3.7 million of repurchased inventory charges in 2009, gross margins for
the nine months ended September 30, 2009 were 86.3%. Gross margin for the nine months ended September 30,
2010 was 86.4% on a constant currency basis.
Selling, general and administrative
.
Selling, general and administrative expenses for the nine months ended September 30,
2010 increased 2.0% to $73.4 million from $71.9 million for the same
period in 2009. This increase of $1.5 million was due to an increase in costs
related primarily to expanding our direct sales force in several European
countries and North America associated with the expansion of our business, and
offset by a decrease in general and administrative expenses, primarily due to
lower legal fees and the effects of the appreciation of the U.S. dollar against
foreign currencies. As a percentage of
net sales, our selling, general and
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administrative
expenses for the nine months ended September 30, 2010 decreased to 47.2%
compared to 49.7% for the same period in 2009.
Research and development
. Research and
development expenses for the nine months ended September 30, 2010
increased 35.1% to $33.6 million from $24.9 million for the same
period in 2009. This increase was primarily attributable to spending increases
for new clinical trials and higher patient enrollment for existing trials
during the nine months ended September 30, 2010, and partially attributable
to increased headcount to support both our pre-clinical and development efforts
compared with the same period in 2009. As a percentage of net sales, our
research and development expenses for the nine months ended September 30,
2010 increased to 21.6% from 17.2% for the same period in 2009.
Litigation settlement.
The litigation
settlement expense of $31.9 million for the nine months ended September 30,
2010 was attributable to the settlement reached with Medtronic related to the
Jervis patent lawsuit, as described in more detail in Note 9 to our unaudited
consolidated financial statements included in Part I, Item 1 of this
Report, and represents the discounted value of the $35.0 million settlement to
be paid over four years.
Amortization of intangible assets
. Amortization
expenses for the nine months ended September 30, 2010 decreased 0.3% to
$14.9 million compared to $15.0 million for the same period in 2009.
As a percentage of net sales, amortization of intangible assets for the nine
months ended September 30, 2010 decreased to 9.6% from 10.4% for the same
period in 2009.
Change in purchase consideration.
Change
in purchase consideration for the nine months ended September 30, 2010
included a benefit of $1.1 million compared with a benefit of $1.1 million for
the same period in 2009. The benefit
recorded in the nine months ended September 30, 2010 is derived from the
reduction in fair value of the contingent payment obligation resulting from the
acquisition of distribution rights from our former distributor in Italy. The
benefit recorded in the nine months ended September 30, 2009 is derived
from a $1.3 million reduction in fair value of the contingent payment
obligations resulting from the acquisition of distribution rights from former
distributors in Italy and Canada, offset by a $0.2 million increase in fair
value of the contingent payment obligations resulting from the acquisitions of
distributor rights from former distributors in Portugal and France.
Investment loss.
The $2.4 million loss
in 2009 reflected a write-off of our investment in Ample Medical, Inc., a
privately-held, early stage company focused on pre-clinical studies relating to
the development of minimally invasive devices to treat structural heart
defects. For additional information, see Note 14 to our unaudited
consolidated financial statements included in Part I, Item 1 of this
Report.
Interest income
. Interest income for
the nine months ended September 30, 2010 decreased to $77,000 from $80,000
for the same period in 2009.
Interest expense
. Interest expense for
the nine months ended September 30, 2010 decreased 40.6% to
$7.2 million from $12.1 million for the same period in 2009. The $7.2
million includes a $0.4 million non-cash charge representing a portion of the unamortized debt discount
associated with the $15.0 million senior subordinated notes which we prepaid to
the extent of $5.0 million during the period.
The decrease in interest expense reflects the reduction in overall debt,
which was directly attributable to the use of the proceeds from the initial
public offering in 2009 and lower average interest rates for the nine months
ended September 30, 2010. This was
partially offset by the accretion of the discount associated with the Medtronic
litigation settlement charge taken in the first quarter of 2010.
Other income (expense), net
. Other income
(expense), net for the nine months ended September 30, 2010 was an expense
of $0.7 million, as compared to income of $1.6 million for the same
period in 2009, mainly as a result of foreign exchange losses for the nine
months ended September 30, 2010 compared to foreign exchange gains for the
nine months ended September 30, 2009.
Income tax expense (benefit)
. Income tax benefit
for the nine months ended September 30, 2010 was $10.7 million as
compared to a $0.6 million benefit for the same period in 2009, due to
lower pre-tax income, primarily resulting from the Medtronic litigation
settlement.
Net loss
. Net loss for the
nine months ended September 30, 2010 was $16.1 million as compared to net
loss of $2.0 million for the same period in 2009. The increase to the net
loss was primarily attributable to the litigation settlement expense incurred
in the first quarter of 2010 and higher research and development expense during
the nine-months ended September 30, 2010, as discussed in more detail
above.
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Liquidity and Capital Resources
Our
principal sources of liquidity are existing cash, internally generated cash
flow and borrowings under our senior secured credit facility. We believe that
these sources will provide sufficient liquidity for us to meet our liquidity
requirements for the next 12 months. Our principal liquidity requirements
are to service our debt and to meet our working capital, research and
development, including clinical trials, and capital expenditure needs. We may,
however, require additional liquidity as we continue to execute our business
strategy. We anticipate that to the extent that we require additional
liquidity, it will be funded through the incurrence of indebtedness, equity
financings or a combination of these potential sources of liquidity. We cannot
assure you that we will be able to obtain this additional liquidity on
reasonable terms, or at all. Additionally, our liquidity and our ability to
fund our capital requirements is also dependent on our future financial
performance, which is subject to general economic, financial and other factors
that are beyond our control.
Restricted
cash balances that are pledged as collateral for letters of credit affect our
liquidity. The majority of letters of
credit are issued in currencies other than U.S. dollar. Fluctuations in the rate of exchange between
the U.S. dollar and foreign currencies could adversely affect our liquidity and
require increases to our restricted cash balances. As of September 30, 2010, we had
restricted cash of $8.3 million compared to $3.3 million as of
December 31, 2009, an increase of $5.0 million. Restricted cash is expected to become
available to us upon satisfaction of the obligations pursuant to which the
letters of credit were issued.
Cash Flows
Cash Flows Provided By Operating Activities
Net cash provided by operating activities for the nine months ended September 30,
2010 increased to $12.1 million from $6.8 million of net cash provided in
operating activities for the nine months ended September 30, 2009. This
increase was primarily attributable to the following changes in cash flows for
the nine months ended September 30, 2010 compared to the same period in
2009: a $24.4 million increase to the
provision related to Medtronic litigation, a net $2.2 million increase in
non-cash items, including depreciation, amortization, debt discount accretion,
write-off of unamortized discount on long-term debt, deferred financing cost
amortization, and stock-based compensation expense, and a net increase of $5.3 million related to changes in working
capital balances and a $2.4 million decrease in losses on our equity
investment due to our impairment and write-off of this investment during March 2009,
which were partially offset by a $14.1 million increase in net loss and a $10.1
million decrease in deferred taxes.
Cash Flows Used In Investing Activities
Net cash used in investing activities for the nine months ended September 30,
2010 decreased to $12.6 million from $45.0 million for the same period in 2009.
This decrease was primarily attributable to the following changes in cash flows
for the nine months ended September 30, 2010 compared to the same period
in 2009: a $28.6 million decrease
related to acquisitions of distribution rights from former distributors and a
$5.1 million decrease in purchases of property and equipment, which was
partially offset by a $4.1 million increase in restricted cash and a $2.8
million increase in proceeds from litigation settlement related to the
Occlutech litigation.
Cash Flows Provided by (used in) Financing Activities
Net cash provided by (used in) financing activities for the nine months
ended September 30, 2010 was a use of cash of $4.2 million as compared to $28.2 million
provided by financing activities for the same period in 2009. This decrease was primarily attributable to
the following changes in cash flows for the nine months ended September 30,
2010 compared to the same period in 2009:
$10.0 million total increase in payments to long-term debt and payments
to our revolving credit facility, a $10.0 million decrease in amounts drawn
under our revolving credit facility, and a $15.0 million decrease from the
issuance of notes, which factors were partially offset by a $0.3 million
increase in cash from the issuance of common stock under employee stock
purchase plan and $1.0 million increase in cash from proceeds from exercise of
stock options, and a $1.0 million decrease in cash used for payments of
deferred financing fees.
Cash Position and
Indebtedness
Our total gross indebtedness exclusive of discounts was $222.3 million
at December 31, 2009 and $241.3 million at September 30, 2010.
As of September 30, 2010, our senior secured credit facility
consisted of a $215.0 million seven-year Tranche B term loan facility and
a revolving credit facility. The Tranche B term loan facility matures on
April 28, 2013. On April 14,
2010, we borrowed
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$5.0 million under the revolving credit facility to provide sufficient
funds to pay Medtronic $7.5 million due under the settlement and license
agreement entered into on March 26, 2010.
On May 13, 2010, we repaid $5.0 million under the revolving credit
facility.
On August 3, 2010, our revolving credit facility was increased
from $25.0 million to $40.0 million, with a new maturity date of
January 28, 2013. The maturity date
will be January 28, 2012 if the senior subordinated notes due 2012 have
not been retired in full by January 28, 2012. No change was made to the guarantors,
collateral, the representations and warranties or the covenants. We incurred deferred financing fees of
approximately $0.7 million that will be recorded to interest expense over the
term of the revolving credit facility.
As of September 30, 2010, we did not have outstanding borrowings
under our revolving credit facility and had $197.0 million outstanding
under our Tranche B term loan facility.
Our senior secured credit facility contains customary covenants,
including restrictions on our ability to incur indebtedness, grant liens, pay
dividends, sell our assets, effect a change of control, use funds for capital
expenditures, make investments, make optional payments or modify debt
instruments, or enter into sale and leaseback transactions. Our senior secured
credit facility also requires us to maintain compliance with specified
financial covenants. As of September 30, 2010, we were in compliance with
all of our financial covenants specified in our senior secured credit facility.
Our senior secured credit facility also contains customary events of default.
Upon the occurrence of an event of default, lenders thereunder may cease to
make loans and declare amounts outstanding to be immediately due and payable.
The indebtedness under our senior secured credit facility is secured by a
perfected first priority security interest in all of our tangible and
intangible assets (including, without limitation, intellectual property, owned
real property and all of our capital stock and each direct and indirect
subsidiaries, provided that no assets of any foreign subsidiary is included as
collateral and no more than 65% of the voting stock of any first-tier foreign
subsidiary is required to be pledged).
The following table sets forth the amounts outstanding under our
Tranche B term loan facility and our revolving credit facility, the effective
interest rates on such outstanding amounts and amounts available for additional
borrowing thereunder as of September 30, 2010. As discussed under the
subsection of this Part I, Item 2 entitled Recent Developments, if
the transactions contemplated by the Merger Agreement are completed, St. Jude
expects to prepay a portion of our debt.
Senior Secured Credit Facility
|
|
Effective
Interest Rate
|
|
Amount
Outstanding
|
|
Amount Available
for Additional
Borrowing
|
|
|
|
|
|
(dollars in millions)
|
|
Revolving Credit Facility
|
|
4.76
|
%
|
$
|
|
|
$
|
40.0
|
|
Tranche B Term Loan Facility
|
|
2.50
|
%
|
197.0
|
|
|
|
Total
|
|
|
|
$
|
197.0
|
|
$
|
40.0
|
|
In
addition to our Tranche B term loan facility and our revolving credit facility,
as of September 30, 2010, we had $10.0 million outstanding aggregate
principal amount of 2009 notes. The effective interest rate of the 2009 notes
at September 30, 2010 was 19.1%, compounded semiannually. In September 2010 the Company made a
prepayment of $5.0 million, reducing the principal balance from $15.0 million
to $10.0 million. In conjunction with
the voluntary prepayment the Company recorded a non-cash charge of $0.4 million
representing the related portion of the unamortized debt discount. As part of the securities purchase agreement
entered into in connection with the issuance of the 2009 notes, AGA Medical
issued 1,879 shares of Series B preferred stock valued at $1.9 million to
the purchaser of the 2009 notes, which shares of Series B preferred stock
were converted to 95,562 shares of our common stock immediately prior to
completion of our initial public offering. As a result, the discounted issue
value of the 2009 notes was $13.1 million. As of September 30, 2010, the
accreted value of the outstanding 2009 notes on our balance sheet was $9.3
million. The $1.9 million of discount from the face value is being accreted on
our balance sheet to the 2009 notes repayment amount utilizing the effective
interest rate. The original issue discount has been recognized as interest
expense of $0.5 million and $0.7 million for the three and nine months ended
September 30, 2010, respectively, and $0.1 million and $0.4 million for
the three and nine months ended September 30, 2009, respectively. The interest expense for the three and nine
months ended September 30, 2010 includes $0.4 million write-off of the
unamortized debt discount recorded in conjunction with $5.0 million prepayment
made in September 2010. Total
original issue discount recorded to interest expense from date of issuances of
notes is $1.2 million. Interest on the
2009 notes is payable on a semiannual basis in arrears on January 1 and
July 1 of each year.
Off-Balance Sheet Arrangements
We do not currently have, nor have we ever had, any relationships with
unconsolidated entities or financial partnerships, such as entities referred to
as structured finance or special purpose entities, which would have been
established for the purpose of facilitating off-balance sheet arrangements or
other contractually narrow or limited purposes.
23
Table of Contents
Seasonality
While
our results of operations are not materially affected by seasonality, our net
sales are affected by holiday and vacation periods, especially in the first and
third quarters in Europe.
PART I
FINANCIAL INFORMATION
ITEM 3.
Quantitative
and Qualitative Disclosures about Market Risk
Foreign Exchange Risk Management
Fluctuations
in the rate of exchange between the U.S. dollar and foreign currencies could
adversely affect our financial results. Approximately $89.1 million, or
44.8% and $65.8 million, or 42.3%, of our net sales were denominated in
foreign currencies for the year ended December 31, 2009 and the nine
months ended September 30, 2010, respectively. Selling, marketing and
general costs related to these foreign currency sales are largely denominated
in the same respective currency, thereby partially offsetting our foreign
exchange risk exposure. For sales not denominated in U.S. dollars, if there is
an increase in the rate at which a foreign currency is exchanged for U.S.
dollars, it will require more of the foreign currency to equal a specified
amount of U.S. dollars than before the rate increase. In such cases and if we
price our products in the foreign currency, we will receive less in U.S.
dollars than we did before the rate increase went into effect. If we price our
products in U.S. dollars and competitors price their products in local
currency, an increase in the relative strength of the U.S. dollar could result
in our price not being competitive in a market where business is transacted in
the local currency.
In
the first quarter of 2009, we initiated a foreign currency hedging program. The
objectives of the program are to reduce earnings volatility due to movements in
foreign currency markets, limit loss in foreign currency-denominated cash
flows, and preserve the operating margins of our foreign subsidiaries. We
generally use foreign currency forward contracts to hedge transactions related
to known inter-company sales and inter-company debt. We also may hedge firm
commitments. These contracts generally relate to our European operations and
are denominated primarily in Euros and sterling. All of our foreign exchange
contracts are recognized on the balance sheet at their fair value. We do not
enter into foreign exchange contracts for speculative purposes. We recorded
losses from foreign currency forward contracts of $2.3 million and $0.5 million
for the three and nine months ended September 30, 2010, respectively and
we recorded gains from foreign currency forward contracts of $0.3 million and
$0.2 million for the three and nine months ended September 30, 2009,
respectively. These are reflected on the
consolidated statement of operations in the other income (expense), net
line. Amounts on our balance sheet at
September 30, 2010 and December 31, 2009 are immaterial.
Interest Rate Risk
We
are exposed to interest rate risk in connection with our Tranche B term
loan facility and any borrowings under our revolving credit facility, which
bear interest at floating rates based on Eurodollar or the greater of prime
rate or the federal funds rate plus an applicable borrowing margin. For
variable rate debt, interest rate changes generally do not affect the fair
value of the debt instrument, but do impact future earnings and cash flows,
assuming other factors are held constant.
We
entered into an amended and restated senior secured credit agreement in
connection with our April 2006 recapitalization and repaid our prior
senior term loan. The transaction resulted in a $215.0 million Tranche B
term loan facility and a revolving credit facility of $25.0 million.
On August 3, 2010, our revolving credit facility was increased
from $25.0 million to $40.0 million, with a new maturity date of
January 28, 2013. The maturity date
will be January 28, 2012 if the senior subordinated notes due 2012 have
not been retired in full by January 28, 2012. No change was made to the guarantors,
collateral, the representations and warranties or the covenants. We incurred deferred financing fees of
approximately $0.7 million that will be recorded to interest expense over the
term of the revolving credit facility.
As
of September 30, 2010, we had outstanding borrowings of $197.0 million
under the Tranche B term loan facility and no amounts outstanding under our
revolving credit facility as of September 30, 2010 and December 31,
2009.
ITEM 4.
Controls
and Procedures
Disclosure Controls
Our
management, including our Chief Executive Officer and Chief Financial Officer,
evaluated the effectiveness of our disclosure controls and procedures pursuant
to Rule 13a-15 under the Exchange Act as of the end of the period covered
by this report. Based on that evaluation, our Chief Executive Officer and Chief
Financial Officer have concluded that, as of the end of the period covered by
this quarterly report, our disclosure controls and procedures (as defined in
Rule 13a-15(e) under the Exchange Act) are effective, in all material
respects, to ensure that information we are required to disclose in reports
that we file or submit under the
24
Table of Contents
Exchange
Act is recorded, processed, summarized and reported within the time periods
specified in Securities and Exchange Commission rules and forms, and that
such information is accumulated and communicated to our management, including
our Chief Executive Officer and Chief Financial Officer, as appropriate, to
allow timely decisions regarding required disclosure.
Changes
in Internal Controls
There
were no changes in our internal controls over financial reporting during the
third quarter of fiscal year 2010 that may have materially affected, or are
reasonably likely to materially affect, the Companys internal control over
financial reporting.
PART II.
OTHER
INFORMATION
Explanatory note
:
Unless
the context otherwise requires, references in this Quarterly Report on
Form 10-Q to (1) we, us, our and the Company refer
collectively to AGA Medical Holdings, Inc.
and its consolidated subsidiaries and (2) AGA Medical refers to
AGA Medical Corporation, a wholly-owned subsidiary of the Company.
Item 1. Legal Proceedings.
On
October 29, 2010, a putative stockholder class action complaint was filed
in Hennepin County District Court, Fourth Judicial District Court, State of
Minnesota. The complaint, captioned Michael Rubin v. AGA Medical Holdings, Inc.,
et al., names as defendants the members of the Companys Board of Directors, as
well as the Company, Parent, Purchaser, Welsh, Carson, Anderson &
Stowe IX, L.P., WCAS Capital Partners IV, L.P., Gougeon Shares, LLC and The
Franck L. Gougeon Revocable Trust. The plaintiff alleges that the Companys
directors breached their fiduciary duties to the Companys stockholders. The
complaint also alleges that the Companys purported controlling stockholders
owed fiduciary duties to the Companys minority stockholders in connection with
the transaction and breached such duties. The plaintiff further claims that
Parent and its subsidiaries aided and abetted the purported breaches of
fiduciary duty. The complaint alleges, inter alia, that in approving the
proposed transaction between the Company and Parent, Company Board members
accepted an inadequate price, failed to make full disclosure, and utilized
unreasonable deal protection devices and that the Company Board members acted
to put their personal interests ahead of the interests of Company stockholders.
The complaint seeks injunctive relief, including to enjoin the transaction, in
addition to unspecified compensatory damages, attorneys fees, other fees and
costs and other relief. The Company believes the plaintiffs allegations lack
merit. The foregoing description is qualified in its entirety by reference to
the complaint, which is filed as Exhibit 99.1 hereto and is
incorporated herein by reference.
On
October 28, 2010, a putative stockholder class action complaint was filed
in the Delaware Court of Chancery. The complaint, captioned Jennifer Walling v.
AGA Medical Holdings, Inc., et al., names as defendants the members of the
Companys Board of Directors, as well as the Company, Parent and Purchaser. The
plaintiff alleges that the Companys directors breached their fiduciary duties
to the Companys stockholders and further alleges that the Company and Parent
aided and abetted the purported breaches of fiduciary duty. The complaint
alleges, inter alia, that in approving the proposed transaction between the
Company and Parent, Company Board members accepted an inadequate price, failed
to make full disclosure, and utilized unreasonable deal protection devices and
that the Company Board members acted to put their personal interests ahead of
the interests of Company stockholders. The complaint seeks injunctive relief,
including to enjoin the transaction, in addition to unspecified compensatory
damages, attorneys fees, other fees and costs and other relief. The Company
believes the plaintiffs allegations lack merit. The foregoing description is
qualified in its entirety by reference to the complaint, which is filed as Exhibit 99.2 hereto
and is incorporated herein by reference.
Management
believes that the claims involved in these complaints are without merit and
does not expect the litigations to have a material adverse effect on our
business, financial condition, or results of operations. We will, however,
incur costs and diversion of management resources in defending the claims.
Moreover, because litigation is inherently uncertain, we cannot guarantee that
the outcome of these litigations will be favorable to us, that the litigation
will not delay or prevent completion of the transactions contemplated by the
Merger Agreement, or that material damages will not be awarded against us.
In
addition, other than the Occlutech judgment, Medtronic litigation settlement
and the Gore litigation described in Note 9 to our unaudited consolidated
financial statements included in Part I, Item 1 of this Report: Commitments and Contingencies (Litigation),
there have been no material changes in the information provided under the
heading Legal Proceedings in our Form 10-K for the year ended
December 31, 2009 filed with the Securities and Exchange Commission on
March 4, 2010.
Item 1A. Risk Factors.
If our merger transaction with St.
Jude Medical, Inc. is not completed or is delayed, our share price,
business and results of operations may materially suffer.
25
Table of Contents
It
is possible the merger transaction with St. Jude Medical, Inc. might not
be completed or could be delayed for a number of reasons. If the consummation
of the merger is delayed or otherwise not consummated within the contemplated
time periods or not at all, we could suffer a number of consequences that may
adversely affect our business, results of operations and share price
materially, including:
·
a loss of revenue and market position that we
may not be able to regain if the proposed transactions are not consummated;
·
damage to our relationships with our
customers, suppliers, and other business partners;
·
a potential obligation to pay a $32.5 million
(or, in certain circumstances, $21.7 million)
termination fee depending on the reasons for terminating the merger
transaction;
·
significant costs related to the proposed transaction,
including substantial legal, accounting and investment banking expenses;
·
key employees may be lost during the pendency
of the merger and our relationships with employees may be damaged; and
·
business and organizational opportunities may
be lost due to covenants in the merger agreement that restrict certain actions
by us prior to completion of the merger
A lawsuit has been filed and
additional lawsuits may be filed against us and the members of our board of
directors arising out of the merger transaction with St. Jude Medical, Inc.
On
October 29, 2010, a putative stockholder class action complaint was filed in
Hennepin County District Court, Fourth Judicial District Court, State of
Minnesota. The complaint, captioned Michael Rubin v. AGA Medical Holdings, Inc.,
et al., names as defendants the members of the Companys Board of Directors, as
well as the Company, Parent, Purchaser, Welsh, Carson, Anderson &
Stowe IX, L.P., WCAS Capital Partners IV, L.P., Gougeon Shares, LLC and The
Franck L. Gougeon Revocable Trust. The plaintiff alleges that the Companys
directors breached their fiduciary duties to the Companys stockholders. The
complaint also alleges that the Companys purported controlling stockholders
owed fiduciary duties to the Companys minority stockholders in connection with
the transaction and breached such duties. The plaintiff further claims that
Parent and its subsidiaries aided and abetted the purported breaches of
fiduciary duty. The complaint alleges, inter alia, that in approving the
proposed transaction between the Company and Parent, Company Board members
accepted an inadequate price, failed to make full disclosure, and utilized
unreasonable deal protection devices and that the Company Board members acted
to put their personal interests ahead of the interests of Company stockholders.
The complaint seeks injunctive relief, including to enjoin the transaction, in
addition to unspecified compensatory damages, attorneys fees, other fees and costs
and other relief.
On
October 28, 2010, a putative stockholder class action complaint was filed
in the Delaware Court of Chancery. The complaint, captioned Jennifer Walling v.
AGA Medical Holdings, Inc., et al., names as defendants the members of the
Companys Board of Directors, as well as the Company, Parent and Purchaser. The
plaintiff alleges that the Companys directors breached their fiduciary duties
to the Companys stockholders and further alleges that the Company and Parent
aided and abetted the purported breaches of fiduciary duty. The complaint
alleges, inter alia, that in approving the proposed transaction between the
Company and Parent, Company Board members accepted an inadequate price, failed
to make full disclosure, and utilized unreasonable deal protection devices and
that the Company Board members acted to put their personal interests ahead of
the interests of Company stockholders. The complaint seeks injunctive relief,
including to enjoin the transaction, in addition to unspecified compensatory
damages, attorneys fees, other fees and costs and other relief.
As
a result of entering into the Merger Agreement and engaging in the transactions
contemplated thereby, we may become subject to additional lawsuits on behalf of
stockholders alleging that our directors breached their fiduciary duties,
challenging the fairness of the consideration to be received by stockholders,
or making other claims regarding the fairness of the Merger Agreement and the
transactions contemplated thereby. Such lawsuits may seek to prevent completion
of the merger transaction or to rescind the transaction after it has occurred.
We may also be subject to litigation related to any failure to complete the
transaction or subject to enforcement proceedings to perform our obligations
under the Merger Agreement.
The
outcome of all litigation is uncertain and we may not be successful in
defending against such claims. Moreover, regardless of the outcome of any such
lawsuit, it could delay or prevent completion of the transactions contemplated
by the Merger Agreement, divert the attention of our management and employees
from day-to-day business operations, and otherwise adversely affect our
business, financial condition, and results of operations.
Healthcare policy changes, including
new legislation to reform the U.S. healthcare system, may have a material
adverse effect on us.
26
Table of Contents
On
March 23, 2010, the Patient Protection and Affordable Care Act was enacted
and was subsequently amended by the enactment on March 30, 2010 of the
Health Care and Education Reconciliation Act.
Together, these laws are commonly referred to as Health Care Reform. The Health Care Reform legislation may not be
implemented in its present form and any implementation will likely take several
years. The full timing and financial
impact of Health Care Reform on our business operations and financial
statements is uncertain. However, Health
Care Reform as enacted includes the following provisions: (i) a medical
device tax of 2.3%; (ii) creation of an independent medical advisory board
to reduce Medicare spending and other national health expenditures by targeted
percentages over several years; (iii) creation of a patient-centered
outcomes research institute to conduct comparative effectiveness of medical
treatments which may make findings that may be used to make public health care
insurance coverage decisions; and (iv) creation of other programs which
may reduce public and private health care expenditures. Any of these provisions or other provisions
of the Health Care Reform legislation could increase our taxes, limit the
prices we are able to charge for our products or the amounts of reimbursement
available for our products, and could limit the acceptance and availability of
our products. The full implementation of
some or all of these provisions could have a material adverse effect on our
financial position and results of operations.
There
have been no other material changes in the information provided under the
heading Risk Factors in our Form 10-K
for the year ended
December 31, 2009 filed with the Securities and Exchange Commission
on March 4, 2010.
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds.
Unregistered Sales of Equity Securities
.
None
.
Use of Proceeds.
The effective date of our registration statement filed on Form S-1
under the Securities Act of 1933 (File No. 333-151822) relating to our
initial public offering of shares of common stock, $0.01 par value was
October 20, 2009. A total of 15,812,500 shares of our common stock were
registered and 13,750,000 were sold, including 6,509,000 shares of common stock
sold by us and 7,241,000 shares of common stock sold by the selling
stockholders. The option we granted to the underwriters to purchase up to
2,062,500 additional shares of our common stock expired without being
exercised. Merrill Lynch, Pierce, Fenner & Smith Incorporated,
Citigroup Global Markets Inc., Deutsche Bank Securities Inc., Leerink Swann LLC
and Wells Fargo Securities, LLC acted as joint book-running managers of the
offering.
The
aggregate offering price of securities registered was $229,281,250 and the
aggregate amount sold was $199,375,000. The aggregate underwriting discount was
$12,959,375, none of which was paid to our affiliates. We incurred
approximately $5.0 million of other expenses in connection with the offering.
Net proceeds we received from this offering totaled approximately $82.2
million. We used $25.0 million of the net proceeds from our initial public
offering to fully repay principal and accrued and unpaid interest under our
revolving credit facility. We used $50.0 million of the net proceeds from our
initial public offering to prepay the principal amount of our 10% senior
subordinated notes due 2012 that were issued in 2005, or the 2005 notes. In
addition, we used approximately $5.0 million of the net proceeds from our
initial public offering to pay accrued and unpaid interest on the 2005 notes and
the 10% senior subordinated notes due 2012 that were issued in 2009. The
remaining proceeds from our IPO are being used for working capital and general
corporate purposes.
Item 3.
Defaults Upon Senior Securities.
None.
Item 4.
(Removed and Reserved).
Item 5.
Other Information.
On
August 23, 2010, Dr. Kurt Amplatz extended his research and
development contract that was set to expire in December 2010 for an
additional five-year term. Dr. Amplatzs research and development contract
is now set to expire in December 2015. A copy of the amendment to Dr. Amplatzs
research and development contract is attached as Exhibit 10.1 and is
incorporated herein by reference.
Item 6.
Exhibits.
See
Exhibit Index.
27
Table of Contents
SIGNATURES
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 hereunto
duly authorized.
|
|
AGA
MEDICAL HOLDINGS, INC.
(Registrant)
|
|
|
|
Date:
November 9, 2010
|
|
|
By:
|
/s/
John R. Barr
|
|
|
|
Name:
John R. Barr
|
|
|
|
Title:
President and Chief Executive Officer
|
|
|
|
(Principal
Executive Officer)
|
|
|
|
|
Date:
November 9, 2010
|
|
|
By:
|
/s/
Brigid A. Makes
|
|
|
|
Name:
Brigid A. Makes
|
|
|
|
Title:
Chief Financial Officer
|
|
|
|
(Principal
Financial Officer and Principal Accounting Officer)
|
28
Table of Contents
EXHIBIT INDEX
Exhibit
Number
|
|
Description of Exhibit
|
2.1
|
|
Agreement
and Plan of Merger and Reorganization incorporated by reference to Exhibit
2.1 to our Current Report on Form 8-K filed on October 18, 2010.
|
3.1
|
|
Form of
Amended and Restated Certificate of Incorporation of AGA Medical
Holdings, Inc.incorporated by reference to Exhibit 3.1 to our
Registration Statement on Form S-1/A filed on October 20, 2009.
|
3.2
|
|
Form of
Amended and Restated Bylaws of AGA Medical Holdings, Inc.incorporated
by reference to Exhibit 3.2 to our Registration Statement on
Form S-1/A filed on October 1, 2009.
|
10.1*
|
|
Amendment,
dated August 23, 2010 to Research Agreement with Dr. Kurt Amplatz
dated December 23, 2005
|
31.1*
|
|
Rule 13a-14(a) Certification
of Principal Executive Officer
|
31.2*
|
|
Rule 13a-14(a) Certification
of Principal Financial Officer
|
32*
|
|
Section 1350
Certification of Principal Executive Officer and Principal Financial Officer
|
99.1
|
|
Complaint
filed on October 29, 2010 in Hennepin County District Court, Fourth Judicial
District, State of Minnesota (Rubin v. AGA Medical Holdings, Inc., et al.),
incorporated by reference to Exhibit (a)(5)(D) to Amendment No. 1 to the
Tender OFFER Statement on Schedule TO filed with the Securities and Exchange
Commission by St. Jude Medical, Inc. on October 29, 2010.
|
99.2
|
|
Complaint
filed on October 28, 2010 in the Delaware Court of Chancery (Walling v. AGA
Medical Holdings, Inc., et al.), incorporated by reference to Exhibit
(a)(5)(E) to Amendment No.1 to the Tender OFFER Statement on Schedule TO
filed with the Securities and Exchange Commission by St. Jude Medical, Inc.
on October 29, 2010
|
*Filed
herewith
29
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