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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
/X/ Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934. (FEE REQUIRED)
For the fiscal year ended DECEMBER 31, 1994 or
/ / Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934. (NO FEE REQUIRED)
For the period from _________ to _________
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Commission file number 33-26398
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ADVANCED MEDICAL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 13-3492624
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
9775 BUSINESSPARK AVE., SAN DIEGO, CALIFORNIA 92131
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (619) 566-0426
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
-------------------------------------------------- ----------------------------
Common Stock, $0.01 par value American Stock Exchange
10% Cumulative Preferred Stock, $0.01 par value American Stock Exchange
7 1/4% Convertible Subordinated Debentures due
2002 American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
NONE
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(Title of Class)
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, and (2) has been subject to such filing
requirements for the past 90 days. YES: _X_ NO ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/
The aggregate market value of the Common Stock held by nonaffiliates of the
registrant, computed by reference to the price at which such stock was last
sold, on March 30, 1995, was $9,673,240. Solely for purposes of this
calculation, persons beneficially owning more than 20% of the Company's common
stock, directors and officers beneficially owning 3,969,323 outstanding shares
of Common Stock, have been deemed affiliates.
As of March 30, 1995, registrant had 14,069,861 shares of its Common Stock
($0.01 par value) outstanding.
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PART I
ITEM 1. BUSINESS.
GENERAL
Advanced Medical, Inc. ("Advanced Medical" or the "Company") through its
major operating subsidiary, IMED Corporation ("IMED"), is a leading developer
and manufacturer of infusion systems and related technologies for the health
care industry. IMED is one of the largest manufacturers of intravenous infusion
instruments (which consist of pumps and controllers) and disposable
administration sets in the United States. The Company acquired IMED on April 2,
1990 and owns 90% of IMED's common stock (on a fully diluted basis).
Advanced Medical was incorporated on September 28, 1988 under the laws of
the State of Delaware.
A description of the business of IMED and the other enterprises which the
Company controls or in which the Company has invested is set forth below.
IMED CORPORATION
GENERAL
IMED is one of the largest manufacturers of intravenous infusion pumps and
disposable administration sets in the United States. IMED's infusion pumps are
used to deliver fluids, generally pharmaceuticals or nutritionals, to patients
in hospitals or in alternate-care sites, such as patients' homes or
free-standing outpatient clinics. IMED's pumps can be used only with IMED's
proprietary disposable administration sets, each of which consists of a plastic
pump interface and tubing. IMED's products are widely used in hospitals and
other patient care settings where accuracy and safety in fluid delivery and
monitoring are crucial. IMED has been an innovator in the intravenous instrument
market since developing the first volumetric pump in 1974. Its infusion products
in development incorporate recent innovations in microprocessor and
electromechanical technologies that are designed to reduce instrument size and
weight significantly. These innovations are also intended to enhance clinical
performance, reduce manufacturing cost and simplify operation of IMED's
products.
Management currently estimates that IMED has a domestic installed base of
approximately 93,000 infusion instruments, approximately 24,000 of which have
been leased to customers. Approximately 150 IMED proprietary disposable
administration sets are used per year with each pump. For the year ended
December 31, 1992, IMED's revenues attributable to pumps and to disposable
administration sets were $44.4 million and $78.6 million, respectively. During
the year ended December 31, 1993, such revenues were $30.6 million and $78.8
million, respectively. For the year ended December 31, 1994, such revenues were
$25.4 million and $75.9 million, respectively.
IMED's products are sold principally in the critical care segment of the
domestic hospital market. The Company is seeking to expand IMED's customer base
by taking advantage of opportunities it perceives in other areas of the domestic
hospital market and in the home health care and international markets for
infusion products. In October 1991, IMED sold certain European assets to
Pharmacia AB ("Pharmacia"), a major European pharmaceutical company, and entered
into a marketing, distribution and development arrangement with Pharmacia,
pursuant to which IMED granted Pharmacia exclusive marketing and distribution
rights for IMED products in territories which include most of Europe. See
"Marketing and Sales -- INTERNATIONAL." In March 1992, IMED entered into a
five-year agreement with McGaw, Inc. ("McGaw") pursuant to which McGaw has an
exclusive right in the alternate-site market to market, sell and distribute
IMED's ReadyMED 50 mL, 100 mL and 250 mL lightweight disposable ambulatory
infusion pumps in the United States and Puerto Rico. See "Marketing and Sales --
DOMESTIC."
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IMED-Registered Trademark-, Accuset-Registered Trademark-,
Graviset-Registered Trademark-, Microset-Registered Trademark-,
Flo-Stop-Registered Trademark-, Gemini-Registered Trademark-, Gemini
PC-1-Registered Trademark-, Gemini PC-2-Registered Trademark-, Gemini
PC-4-Registered Trademark-, Gemini PC-2TX-Registered Trademark-,
PC-1-Registered Trademark-, PC-2-Registered Trademark-,
PC-4-Registered Trademark-, Autotaper-Registered Trademark-,
Versataper-Registered Trademark- and ReadyMED-Registered Trademark- are
registered trademarks of IMED. IMED has applied to register the trademark
Versasafe.
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INFUSION THERAPY INDUSTRY
Infusion therapy generally involves the delivery of one or more fluids,
primarily pharmaceuticals or nutritionals, to a patient through an infusion line
inserted into the circulatory system. The intravenous infusion of fluids was
pioneered in the early 1900's and is now a frequent and sophisticated component
of patient care. Over the past 20 years, as both the reliance on intravenous
drug therapy and the potency of the drugs administered have increased, the need
for extremely precise administration and monitoring of intravenous fluids has
risen significantly.
The infusion therapy industry can be divided generally into two markets: the
hospital market and the alternate-site market. The hospital market can be
further divided into a critical care segment, which includes pediatric and adult
intensive care units (ICUs), coronary care and oncology units, operating rooms,
and a general care segment, which also includes hospital outpatient clinics. The
alternate-site market is comprised primarily of home health care and also
includes free standing clinics and nursing homes.
In recent years, a number of trends have affected the hospital market for
infusion products. Sophisticated treatments and technologies, often involving
more complex infusion therapies, now allow hospitals to treat more acutely ill
patients. Consequently, the average patient now requires a greater number of
intravenous lines and has a greater need for technologically advanced infusion
instruments. For example, while in 1985 a typical ICU patient required
approximately two instrumented intravenous lines, today it is not unusual for
such a patient to require four or more instrumented intravenous lines. Other
factors work to reduce demand for IMED products. Demand for disposable
administration sets, for example, depends on the frequency with which sets must
be changed. Some hospitals have introduced new clinical protocols increasing the
maximum time between disposable set changes for certain applications from every
24 hours to as much as every 72 hours.
Complications associated with intravenous therapy are well recognized, and
technology to minimize patient risks and enhance safety of infusion systems is
increasingly demanded. One such complication is unintentional free-flow -- the
unregulated flow of fluids into the patient. Unintentional free-flow can result
in severe patient injury or death. All of IMED's infusion products are designed
to prevent unintentional free-flow. Most of IMED's competitors have incorporated
a version of free-flow protection into some of their products.
As intravenous therapies have become more complex, the need for monitoring
of patients has increased. Implementation of cost containment measures by
hospitals has reduced the number of hospital personnel available to monitor
patients. Accordingly, health care providers have become increasingly aware of
the need for accuracy and safety features in infusion instruments. IMED's
products compete primarily on the basis of technological sophistication,
quality, accuracy, safety and flexibility in application.
In addition, implementation of cost containment measures, including those
relating to Medicare reimbursement, has resulted in the treatment of less
seriously ill patients as outpatients, often in the alternate-site market. This
growth in the alternate-site market has stimulated the development of new
infusion instrument technology. In 1992, IMED introduced the ReadyMED which is a
lightweight disposable ambulatory infusion pump for the alternate-site market.
See "Marketing and Sales -- DOMESTIC."
INFUSION INSTRUMENTS
Infusion instruments may be classified according to the method by which they
deliver fluids. Controllers, which use gravity; and infusion pumps, which use
positive pressure. Controllers typically are nonvolumetric devices that regulate
flow by electronically counting drops rather than by measuring a specific volume
of fluid. Since an equal number of drops of two different fluids may represent
significantly different fluid volumes, this method of regulating flow is less
accurate than volumetric methods. Drop-counting controllers have generally been
used to administer less critical fluids and drugs that do not require precise
volumetric measurement.
Infusion pumps use positive pressure to overcome the resistance existing in
infusion sets and the back pressure generated by the patient's circulatory
system. Infusion pumps administer precise, volumetrically
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measured quantities of fluids more accurately and over a wider range of infusion
rates than drop-counting controllers. For this reason infusion pumps are used
with increasing frequency to administer expensive, high-potency therapeutics.
Historically, controllers held a major share of the installed base of
instruments, principally because they were significantly less expensive than
pumps. As pump prices declined and their technological capabilities increased,
the purchasing trend has been toward pumps. As of the end of 1994, infusion
pumps represented approximately 96%, and controllers represented approximately
4%, of the installed base of infusion instruments in the U.S. hospital market.
All intravenous pumps and controllers require the use of disposable
administration sets. A set consists of a plastic pump interface and tubing and
may have a variety of features including multiple entry ports for injecting
medications or combining several lines. Almost all of these sets, including
those manufactured by IMED, are proprietary and compatible only with their
particular manufacturer's line of intravenous infusion instruments.
IMED PRODUCT LINE
IMED manufactures and markets single channel (one intravenous line), dual
channel and four channel infusion instruments and disposable administration
sets. The Company estimates that IMED has a domestic installed base of
approximately 93,000 intravenous instruments, of which approximately 63,000 are
single channel instruments, approximately 27,000 are dual channel instruments
and approximately 3,000 are four channel instruments. Based upon past experience
and current usage patterns, the Company estimates that IMED's single channel
instruments use on average approximately 130 disposable administration sets per
year, its dual channel instruments use on average approximately 190 disposable
administration sets per year and its four channel instruments use on the average
300 disposable administration sets per year. For the year ended December 31,
1992, disposable administration sets accounted for approximately 61%, and
infusion instruments accounted for approximately 35%, of IMED's total revenues.
For the year ended December 31, 1993, disposable administration sets accounted
for approximately 66%, and infusion instruments accounted for approximately 26%,
of IMED's total revenue. For the year ended December 31, 1994, disposable
administration sets accounted for approximately 68%, and infusion instruments
accounted for approximately 23%, of IMED's total revenue.
IMED's inventory levels reflect the need to deliver critical supplies
immediately and minimize back-ordered products. See "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations."
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The following table summarizes the key features and actual or estimated
market introduction dates of IMED's current infusion product line and products
in development. For sales information for IMED's major product groups, see "Item
7. Management's Discussion and Analysis of Financial Condition and Results of
Operations."
<TABLE>
<CAPTION>
PRODUCT DESCRIPTION STATUS
------------------------- ---------------------------------- ----------------------------
INFUSION INSTRUMENTS
<S> <C> <C>
Piston Cassette Pumps Full line of single channel pumps. Various models introduced
between 1974 and 1981
Peristaltic Pumps
Gemini PC-1 Single channel instrument with On market since 1988
pump and controller capability.
Gemini PC-2 Dual channel instrument with pump On market since 1987
and controller capability.
Gemini PC-2TX Dual channel instrument with pump On market since May 1994
and controller capability;
programmable drug delivery/dose
calculations and pressure
history.
Gemini PC-4 Four channel instrument with pump On market since December
and controller capability; 1992
programmable drug delivery/dose
calculations and pressure
history.
ReadyMED Ambulatory Compact, disposable, lightweight 100 mL on market since July
Infusion Pumps ambulatory infusion pump designed 1992 and 50 mL and 250 mL
for alternate-site use. introduced in 1993
Modular Infusion System Compact, flexible, lightweight In development; market
modular infusion pump system with introduction estimated in
an adjustable hardware and 1996
software platform with advanced
programming capabilities.
DISPOSABLE ADMINISTRATION Proprietary administration sets On market and in development
SETS for use with each of IMED's
existing and proposed infusion
instruments.
Needleless access systems. On market in February 1995
and in development
STATUS Real-time medical device On market and in development
monitoring and data gathering
system.
</TABLE>
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INFUSION INSTRUMENTS
PISTON CASSETTE PUMPS. Since 1974, IMED has manufactured and marketed
various models of volumetric piston cassette pumps which utilize IMED's Accuset,
Graviset or Microset disposable administration sets to regulate the flow of
fluid through a syringe-like mechanism. IMED's piston cassette pumps are as
accurate as its Gemini series of peristaltic pumps but do not have some of the
features of the Gemini series, such as multi-channel capability, programmable
drug delivery and the ability to operate either as a pump or a controller. The
installed base of piston cassette pumps is expected to decline in size over time
as customers replace piston cassette pumps with the Gemini product line or other
new technology offered by IMED or its competitors. IMED currently intends to
discontinue manufacturing piston cassette pumps by the end of the first quarter
1995.
PERISTALTIC PUMPS -- GEMINI SERIES OF PUMPS. The Gemini series is a line of
peristaltic pumps that regulate fluid flow by means of a multi-finger-like
mechanism that alternately compresses sections of the tubing contained in the
pumping chamber. The family of Gemini pumps is based on the foundation of a
flexible hardware and software technology platform. This technology platform has
allowed incremental feature enhancements based on evolving customer needs.
In late 1987, IMED introduced the Gemini PC-2, the first of its line of
Gemini pumps. Peristaltic pumps represent the largest portion of IMED's
installed base of instruments. The PC-2 has two channels that can be programmed
from the pump's single keypad. Each channel can operate independently and can be
easily switched from pump to controller mode without changing the disposable
administration set.
In the second half of 1988, IMED introduced the Gemini PC-1, a single
channel version of the PC-2. The PC-1 can be programmed automatically to
taper-up and taper-down infusion rates to facilitate delivery of total
parenteral nutrition therapy (the intravenous administration of nutrients, such
as proteins, carbohydrates, fats and vitamins, in predigested form) and other
complex drug-dosing regimens.
In the third quarter of 1989, IMED incorporated into the PC-1 a capability
to operate in either micro mode (0.1 to 99.9mL/hr) for use with neonatal
patients, among others, or macro mode (1 to 999mL/hr) for use with adult
patients. This micro/macro capability, which is not available in IMED's piston
cassette pumps, was added to the PC-2 during the second quarter of 1991. During
the same period, IMED incorporated into the PC-2 a rapid rate titration feature,
which allows rapid adjustments of the flow rate in small increments and is
designed for use in the operating room and critical care settings. IMED
incorporated rapid rate titration into the PC-1 during the first quarter of
1992.
In December 1992, IMED introduced the Gemini PC-4, a four channel version of
the PC-1. The PC-4 has all the features currently available with the PC-2 and,
in addition, offers such features as drug dose calculation and programmable drug
delivery to meet the special needs associated with intensive care, anesthesia
and oncology applications.
IMED introduced the PC-2TX, an enhanced version of the PC-2, in the second
quarter of 1994. The PC-2TX has all the features currently available with the
PC-2 and the PC-4 discussed previously and, in addition, offers enhanced
features such as pressure monitoring, pressure history and volume/time dosing.
IMED incorporated these enhanced features into the PC-4 during the fourth
quarter of 1994.
The Gemini series of instruments incorporates a patented pressure sensor
system within the peristaltic pumping mechanism. This technology permits the
Gemini to be operated as either a pump or a controller. When operated in the
pump mode, the Gemini automatically adjusts pressure settings to permit rapid
detection of occlusions (blockages) at all flow rates. The Gemini pressure
sensor system also allows an instrument to operate as a volumetric controller,
thereby eliminating the need for remote electronic drop sensing used in
traditional controllers. The Gemini technology significantly reduced the
frequency of nuisance alarms (alarms with no clinical significance) associated
with patient movement and transport. Nuisance alarms often occur during
transport of patients, when the IV bag can sway and cause the controller's
remote electronic drop sensor to monitor drop flow incorrectly.
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Unintentional free-flow can result in severe patient injury or death and
IMED believes this feature is important in the infusion instrument market. IMED
pioneered free-flow protection and all Gemini instruments use a patented
Flo-Stop mechanism in the disposable administration set, which is designed to
automatically clamp off the administration set to prevent unintentional
free-flow of fluids into the patient when the set is removed from an instrument.
By the end of 1994 most of IMED's competitors had incorporated some version of
free-flow protection in their products.
In addition, the Gemini pumps have an internal computer interface capability
that is designed to enable the device to be monitored from a remote nursing
station. See "Status."
READYMED. ReadyMED is a disposable, compact, ambulatory device for the
intravenous administration of antibiotics. The ReadyMED pump is designed to
offer a number of advantages over systems currently in use for this purpose.
With traditional systems, the patient must attach a small bag and tubing set,
through which the antibiotics are administered, to a catheter placed in the
patient's circulatory system. The patient must eliminate all air from the system
and set a manual rate adjustment clamp, a process that generally must be
repeated every four to six hours. Since traditional systems are gravity driven,
the bag must remain on an IV pole during infusion, thereby restricting the
patient's movement. The ReadyMED pump is provided to patients pre-filled (in 50
mL, 100 mL and 250 mL sizes) and pre-primed, allowing infusion to be initiated
when the patient simply opens a clamp. In addition, since the ReadyMED pump is
small and uses positive pressure, the patient is able to carry the device in a
pocket or wear it on a belt.
MODULAR INFUSION SYSTEM. During the fourth quarter of 1993, IMED commenced
designing a modular infusion system as the basis for its next generation of
infusion instruments. In addition to all of the features available on the Gemini
series, the system is being designed to incorporate advanced programming
capabilities in a smaller system that is simpler to operate and less expensive
to manufacture. A modular, building-block design is intended to allow the user
of the system to easily combine a number of infusion instruments into an
integrated multi-channel delivery system tailored for a specific patient's
needs.
The Company's strategy will be to unbundle certain hardware and software
features to stratify pricing and thus increase customer value. This will allow
flexibility in providing product configurations to meet the requirements of both
the domestic and international marketplaces. The design of this system is
intended to supply the best combination of price and performance by allowing a
low pump acquisition cost, extended product life cycle, improved asset
utilization and lower cost per use over the product life.
During the fourth quarter of 1993, the Company cancelled its research and
development arrangements with AM Development Limited Partnership ("AMD") which
provided such services through Deka Products (the principal of Deka Products is
Dean Kamen). Therefore, the modular infusion system currently under development
by IMED is not the same as the system which was being developed for IMED by Deka
Products in prior years.
DISPOSABLE ADMINISTRATION SETS
The Company estimates that IMED has a domestic installed base of
approximately 93,000 intravenous infusion instruments, each of which uses
proprietary disposable administration sets designed and manufactured only by
IMED. Disposable administration sets consist of a plastic pump interface and
tubing and have a variety of features, such as clamps for flow regulation and
multiple entry ports for injecting medications or combining several lines. Each
of IMED's current and proposed infusion instrument product lines uses disposable
sets designed for that particular product line.
Based upon past experience and current usage patterns, the Company estimates
that single channel pumps typically use approximately 130 disposable sets per
year, dual channel pumps typically use approximately 190 disposable sets per
year and its four channel instruments use on the average 300 disposable
administration sets per year. The rate at which disposables are used depends on
the utilization rate for the pump and the frequency with which sets must be
changed, which in turn depends on the therapy being administered. Certain
hospitals have effected a change in protocol increasing the maximum time between
set changes for certain applications from every 24 hours to as much as every 72
hours. See "Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations."
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IMED's disposable sets are designed to automatically stop or restrict the
flow of fluids when removed from an infusion instrument, protecting against
unintentional free-flow. Given the potency of medications administered to
seriously ill patients, the Company believes that this has become an
increasingly important feature in the infusion market. IMED pioneered free-flow
protection. Most of IMED's competitors have incorporated a version of free-flow
protection in some of their products. As a result, IMED improved its free-flow
protection and introduced into the market an enhanced Flo-Stop in late 1994.
There is increasing pressure by regulatory agencies, such as Occupational
Safety and Health Administration ("OSHA") and the Food and Drug Administration
("FDA"), for more stringent control of needles in hospitals. OSHA requires that
hospitals must put in place systems to reduce the potential for needle sticks.
The FDA recommends using needleless systems or protected needle systems to
replace hypodermic needles for accessing intravenous lines. IMED's needleless
strategy is a dual product line approach which incorporates the ability to
access IMED's administration sets without the use of needles, thus reducing the
potential for accidental needle sticks. The VersaSafe system utilizes a blunt
cannula device, combined with a split-septum "Y" site. IMED has a non-exclusive
license to the VersaSafe system which was a cooperative development effort of
IMED, Elcam Plastic of Israel and Medical Associates Network. Additionally, IMED
has entered into an agreement with B. Braun, Inc. for the purchase of their
SAFSITE-Registered Trademark- valve. The SAFSITE-Registered Trademark- valve
provides needle-free access through the use of a standard male luer, eliminating
the need for needleless blunt cannulae to access the administration set. This
parallel product strategy will satisfy IMED customer requirements for
needle-free systems, as well as assist its customers in complying with OSHA
standards.
STATUS
The Status system monitors, in real-time, the status of intravenous infusion
instruments and other bedside devices, such as pulse oximeters and ventilators
that can save hospitals valuable time documenting equipment readouts, searching
for the source of equipment alarms, and assessing the progress of intravenous
therapy. Status automatically gathers data from bedside instruments and, through
touch-screen technology, displays the information on computer monitors. These
monitors can be at one or more locations, such as the central nursing station,
so clinicians can see immediately what is occurring at the bedside. In addition,
Status can recall data for documentation and other reports, which assists health
care facilities fulfill their obligations under the Safe Medical Device Act
("SMDA") of 1990. SMDA requires user facilities to track and report problems
with many medical devices, including ventilators and infusion pumps, to the FDA
and the manufacturer. Status can also improve coordination between nursing and
pharmacy, and assist in tracking and documenting instrument uses. As of December
31, 1994, seven systems have been installed.
MARKETING AND SALES
DOMESTIC. IMED supplies its infusion instruments and related proprietary
disposable administration sets to approximately 1,300 hospitals in the United
States. Sales are made primarily through IMED's experienced direct sales force
of approximately 55 sales representatives and regional managers. IMED's domestic
marketing efforts are supported by a staff of 15 nurses and pharmacists who
consult with customers with respect to evaluation, installation and use of IMED
products and provide ongoing clinical support. IMED operates six instrument
service centers from which service engineers provide product maintenance and
conduct training seminars.
In response to cost containment pressures, many hospitals have joined buying
groups that negotiate contracts with suppliers of medical products. These
contracts typically establish pricing structures for qualified vendors'
products. In many cases, qualification as an approved vendor to a buying group
is important in gaining access to the member hospitals. IMED has been approved
as a qualified vendor for a number of buying groups. IMED is actively seeking
contracts with additional groups.
IMED also sells its products to a number of alternate site care providers.
Management believes that this segment of the infusion market, although much
smaller than the hospital segment, should experience significant growth. In
1992, IMED introduced the ReadyMED which is a lightweight disposable ambulatory
infusion pump. In March 1992, IMED entered into a five-year agreement with McGaw
pursuant to which
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IMED granted McGaw exclusive right in the alternate-site market to market, sell
and distribute IMED's ReadyMED 50 mL, 100 mL and 250 mL lightweight disposable
ambulatory infusion pumps in the United States and Puerto Rico.
Approximately 24,000 of IMED's 93,000 domestic installed base of infusion
instruments are leased to customers. IMED's leases have terms ranging from one
to five years and generally provide the customers with a purchase option at the
end of the lease term. In the case of some customers who lease infusion
instruments, the related supply agreements for disposables also provide for the
purchase of minimum quantities at agreed prices. As of December 31, 1994,
disposables relating to approximately 18,000 instruments were being sold under
such agreements. IMED does not rely on one or a small number of customers. In
1994, no single customer accounted for more than 2% of IMED's sales. For
information concerning domestic and foreign sales, see "Item 8. Financial
Statements and Supplementary Data -- Note 14 to the Consolidated Financial
Statements."
INTERNATIONAL. In 1994, approximately 12% of IMED's sales were made to
customers by its foreign subsidiaries. These sales were concentrated in
Australia (approximately 39%), Canada (approximately 27%) and Europe
(approximately 34%). Additionally, products exported in 1994 from IMED's
domestic operation to unaffiliated customers were approximately 7% of sales.
In October 1991, IMED sold certain European assets to Pharmacia and entered
into a marketing, distribution and development arrangement with Pharmacia (the
"Pharmacia Transaction"), pursuant to which Pharmacia obtained the exclusive
right to market and distribute IMED's infusion products in a territory that
includes most of Europe. IMED supplies its pumps and related proprietary
disposable administration sets to hospitals outside the United States (excluding
territories served by Pharmacia) through a combination of 11 direct sales
representatives and a network of 32 dealers.
On August 12, 1994, Advanced Medical, IMED and Pharmacia amended their
distribution agreement. Under the terms of the Amended and Restated Distribution
Agreement ("Amended Distribution Agreement"), Pharmacia retains the exclusive
right (subject to certain exceptions) to distribute IMED's infusion products in
the territory that includes most of Europe. Under the Amended Distribution
Agreement, Pharmacia has the right not to distribute certain products currently
under development by IMED. In the event of such an election, IMED has the right
to sell such products directly or through others, and under certain
circumstances, has the right to repurchase from Pharmacia the distribution
rights to IMED products currently distributed by Pharmacia in the territory. In
addition, Pharmacia has the right to terminate the Amended Distribution
Agreement at any time on 12 months notice, in which event Pharmacia would be
required to make a payment of $2.5 million to IMED and IMED would be required to
make payments to Pharmacia based on net sales of products currently distributed
by Pharmacia for the 4 years following termination.
COMPETITION
The primary market for IMED's existing products is mature and highly
competitive. IMED's primary domestic competitors are major diversified health
care companies with greater financial and other resources than IMED. Management
believes that IMED's products, which are in the upper price range of infusion
products, compete primarily on the basis of technical sophistication, quality,
accuracy, safety and flexibility of application. IMED's competitors engage in a
strategy of offering their products at reduced prices in order to enhance their
market share positions. Two of IMED's largest domestic competitors, Abbott
Laboratories ("Abbott") and Baxter Healthcare Corporation ("Baxter"), offer
customers volume discounts based on purchases of a broad range of their medical
equipment and supplies, including infusion instruments and intravenous
solutions, a strategy that IMED is unable to pursue.
According to industry sources, as of December 31, 1994, IMED together with
IVAC Corporation ("IVAC"), Abbott, Baxter and McGaw accounted for approximately
94% of the U.S. installed base of instrument channels.
IMED sells infusion instruments which are multi-channeled. According to
industry sources, IMED also had the fourth largest installed base of instrument
channels as of December 31, 1994 with a market share of
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19.4%, behind Baxter (24.1%), IVAC (23.3%), Abbott (20.8%) and ahead of McGaw
(6.3%). For the year ended December 31, 1994, IMED was fourth in the domestic
placement of new infusion instrument channels with a market share of 18.1%,
Baxter was first (25.9%), Abbott was second (24.8%), IVAC was third (21.0%) and
McGaw was fifth (7.9%). See "Marketing and Sales -- INTERNATIONAL" for
information concerning the foreign markets in which IMED competes.
RESEARCH AND DEVELOPMENT
IMED engages in product design, engineering, development and performance
validation to enhance its existing products and to develop new products. IMED
expended approximately $5.5 million, $5.5 million and $6.3 million on in-house
research and development for the years ended December 31, 1992, 1993 and 1994,
respectively. In addition, the Company expended $3.9 million and $3.6 million
for the years ended December 31, 1992 and 1993 on early-state and new products
research and development performed by Deka Products Limited Partnership
("Deka"), an outside contractor.
Under an agreement with Deka established in 1990, a modular infusion system
was being designed. IMED had planned to introduce this product by late 1993.
Development features to enhance marketability required further engineering work
resulting in substantial delays and increase in costs. As a result, the Company
no longer considered the Deka program to be commercially feasible and
discontinued its funding of that program in October 1993. However, IMED retains
a royalty interest in certain commercial applications of the Deka technology. As
described below, IMED has accelerated its own in-house development of a new line
of hospital infusion pumps and associated disposables based upon its patented
technology and know-how.
During the fourth quarter of 1993, IMED's product development process was
re-engineered to utilize concurrent engineering and cross-functional development
teams (R&D, marketing, manufacturing, etc.). Management believes the new
development process will reduce product development time, improve product
manufacturability, and meet customers' needs. The increase in IMED's research
and development expenses in 1994 resulted primarily from the costs of additional
personnel.
IMED expended approximately $8.9 million on research and development for the
year ended December 31, 1992 and $8.6 million for the year ended December 31,
1993, including amounts paid to Deka Products through AMD. For the year ended
December 31, 1994, IMED expended approximately $6.3 million.
MANUFACTURING
IMED's instrument manufacturing facility is located in San Diego,
California. A contractor provides IMED with assembly services for disposable
administration sets in Tijuana, Mexico. The agreement between IMED and the
contractor may be terminated by either party on 90 days' notice and requires
that IMED pay the contractor an hourly rate per employee hour worked on assembly
of IMED products. At the end of 1994, approximately 95% of IMED's completed
disposable administration sets were assembled at the Tijuana facility.
During 1994, IMED sold its Irish manufacturing facility to Pharmacia. The
Irish manufacturing facility primarily produced molded components used to
assemble disposable administration sets. In connection with the sale of the
Irish manufacturing facility, IMED entered into an agreement with Pharmacia for
the purchase, at fixed prices, of minimum quantities of disposable
administration sets and components used to assemble disposable administration
sets for three years, effective January 1, 1994. See Note 2 to the Consolidated
Financial Statements.
The raw materials used in IMED's production process are available from
several suppliers. IMED generally either has an alternate supplier for its raw
materials or can readily replace the primary supplier. Although IMED is
generally not dependent upon any single source of supply, it has chosen to rely
upon a single supplier for certain components used in its infusion pumps and
disposable administration sets. Although the Company believes that IMED can find
an alternate supplier for these components, the loss of any such supplier could
result in a temporary interruption in the manufacturing of its instruments and
disposables.
10
<PAGE>
PATENTS AND PROPRIETARY RIGHTS
IMED's policy is to secure patent protection for significant innovations.
IMED currently holds 90 unexpired patents in the United States and in foreign
countries, principally in Europe, Canada, Japan and Australia. Additional
applications are pending or in preparation. In addition, Advanced Medical
currently holds 48 unexpired patents granted in the United States and various
foreign countries which it has licensed to IMED on an exclusive worldwide basis
for $1.1 million annually. The patents owned or licensed to IMED which the
Company deems material to IMED's operations expire at various times through
2010. A patent covering IMED's piston cassette pumps and Accuset disposable
administration sets expired in Australia during 1992, in the United States
during 1993 and in Germany in 1994. The Company does not believe that the
expiration of this patent had or will have a material effect on the Company's
results of operations. Although the Company is not aware of any generic
manufacturers of disposable administration sets which intend to manufacture a
product similar to the Accuset, it is possible that other manufacturers could
decide to manufacture and distribute disposable administration sets to IMED
piston cassette pump customers in direct competition with IMED. The percentage
of IMED's total installed base of infusion pumps represented by piston cassette
pumps is declining as sales of Accuset disposable administration sets accounted
for approximately 27%, 24% and 19% of the Company's consolidated revenues in
1992, 1993 and 1994, respectively. Sales of disposable administration sets could
be adversely affected if a competitor were to begin manufacturing a product that
competed with IMED's Accuset disposable administration set. However, because
IMED holds an additional patent relating to the Accuset disposable
administration set that does not expire until 2001 and in light of other
competitive factors, the Company believes that the loss of the patent that
expired in 1993 will not have a material effect on the Company's future results
of operations. See "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations."
There can be no assurance that the patents on which IMED principally relies
will not be invalidated or that any issued patent will provide protection that
has commercial significance. Litigation may be necessary to protect IMED's
patent position. Such litigation can be costly and time consuming, and there can
be no assurance that IMED would be successful if such litigation were
instituted. The validation of patents owned by or licensed to IMED could have a
material adverse effect on IMED.
IMED sells its products under a variety of trademarks, some of which are
considered by IMED to be of sufficient importance to warrant registration in the
United States and various foreign countries in which IMED does business. IMED
also relies on trade secrets, unpatented know-how and continuing technological
advancement to maintain its competitive position. It is IMED's practice to enter
into confidentiality agreements with key technical employees and consultants.
There can be no assurance, however, that these measures will prevent the
unauthorized disclosure or use of IMED's trade secrets and know-how or that
others may not independently develop similar trade secrets or know-how or obtain
access to IMED's trade secrets, know-how or proprietary technology.
GOVERNMENT REGULATION
The research, development, testing, production and marketing of IMED's
products are subject to extensive governmental regulation in the United States
and certain other countries. Non-compliance with applicable requirements may
result in recall or seizure of products, total or partial suspension of
production, refusal of the government to allow clinical testing or commercial
distribution of products, civil penalties or fines and criminal prosecution.
The FDA regulates the development, production, distribution and promotion of
medical devices in the United States. Virtually all of the products being
developed, manufactured and sold by IMED (and products likely to be developed,
manufactured or sold in the foreseeable future) are subject to regulation as
medical devices by the FDA. Pursuant to the Federal Food, Drug and Cosmetic Act
(the "FDA Act"), a medical device is classified as either a Class I, Class II or
Class III device. Class I devices are subject to general controls, including
registration, device listing, recordkeeping requirements, labeling requirements
and "Good Manufacturing Practices" (as such term is defined in the FDA Act). In
addition to general controls, Class II devices may be subject to special
controls that could include performance standards, postmarket surveillance,
patient registries, guidelines, recommendations and other actions as the FDA
deems necessary
11
<PAGE>
to provide reasonable assurance of safety and effectiveness. Class III devices
must meet the most stringent regulatory requirements and must be approved by the
FDA before they can be marketed. Such premarket approval can involve extensive
pre-clinical and clinical testing to prove safety and effectiveness of the
devices.
Virtually all of IMED's products are Class II devices. IMED is not currently
developing, manufacturing or distributing any Class III devices, although it may
do so in the future.
All medical devices introduced to the market since 1976 are required by the
FDA, as a condition of marketing, to secure either a 510(k) premarket
notification clearance ("510(k)") or an approved Premarket Approval Application
("PMA"). A product qualifies for a 510(k) if it is substantially equivalent in
terms of safety, effectiveness and intended use to another legally marketed
medical device. If a product is not substantially equivalent to such a device,
the FDA must first approve a PMA application before it can be marketed. An
approved PMA application indicates that the FDA has determined the device has
been proven, through the submission of clinical data and manufacturing
information, to be safe and effective for its labeled indications. The PMA
process typically takes more than a year and requires the submission of
significant quantities of clinical data and supporting information, while the
process of obtaining a 510(k) typically takes less than one year and involves
the submission of less clinical data and supporting information. Management
believes that IMED's proposed products described under "IMED Product Line"
should qualify for the 510(k) procedure.
At present, all of IMED's products and manufacturing facilities and all
phases of its manufacturing and distribution process are subject to pervasive
and continuing regulation by the FDA. Labeling and promotional activities are
subject to scrutiny by the FDA and, in certain instances, by the Federal Trade
Commission. The export of infusion products is also subject to regulation. In
complying with the standards set forth in these regulations, manufacturers must
continue to expend time, money and effort in the areas of production and quality
systems to ensure full technical compliance. Failure to comply subjects the
manufacturer to possible FDA action, such as recall or seizure of the product or
the suspension of manufacturing of the product. IMED's manufacturing facilities
are subject to periodic inspections by the FDA and the Food and Drug Branch of
the California Department of Health Services, as well as by several foreign
governments. If significant violations of applicable regulations are noted
during these inspections, the continued marketing of any product manufactured by
IMED may be adversely affected.
The Medical Device Reporting ("MDR") regulations obligate IMED to provide
information to the FDA on serious injuries or death which may have been
associated with the use of a product or in connection with certain product
malfunctions which could potentially cause injury. If, as a result of FDA
inspections, MDR reports or other information, the FDA believed that IMED was
not in compliance with the law, the FDA could institute proceedings to detain or
seize products, enjoin future violations, or assess civil or criminal penalties
against IMED, its officers and employees. In addition, if the FDA believed any
of IMED's products presented a potential health hazard, the FDA could also
require IMED to notify the users to cease use of the product, and could require
IMED to recall, or repair or replace, or refund to the user the cost of, such
product. To date, IMED and its products have not been the subject of such FDA
enforcement action, although MDR reports with respect to the Company's products
have been filed in the past. From time to time, the Company has voluntarily
recalled products to make repairs and enhancements/upgrades to its products and
may do so in the future as circumstances warrant. Any enforcement action by the
FDA could result in a disruption of IMED's operations for an undetermined period
of time.
IMED is also subject to foreign regulatory authorities. Whether or not FDA
market clearance has been obtained, registration of a product by comparable
regulatory authorities of foreign countries must be obtained prior to the
commencement of marketing of the product in those countries. The approval
process varies from country to country, and the time required may be longer or
shorter than that required by the FDA.
The European Community is in the process of developing a new approach to
regulation of medical products which may significantly change the way products
are regulated in these countries within the next several years.
12
<PAGE>
IMED is subject to regulation by the OSHA and the Environmental Protection
Agency ("EPA") and their state and local counterparts. IMED, like most medical
device manufacturing companies, is subject to regulation under the Toxic
Substances Control Act, the Resource Conservation and Recovery Act, the
Comprehensive Environmental Response, Compensation and Liability Act and other
environmental regulatory statutes and may in the future be subject to other
federal, state or local regulations. Either one or both of OSHA and the EPA or
their state or local counterparts may promulgate regulations that may affect
IMED's development or manufacturing programs. The Company is unable to predict
whether any agency will adopt any regulation or take other action which would
have a material adverse effect on IMED's operations, and there can be no
assurance that changes in such regulations will not impose the need for
additional capital expenditures or other requirements. Compliance with federal,
state and local environmental and employee health safety laws has not had a
material effect on the capital expenditures, earnings and competitive position
of IMED, and management does not anticipate that it will make any material
capital expenditures for environmental control facilities in the near future.
Heightened public awareness and concerns regarding the growth in overall
health care expenditures in the United States may result in the enactment of
national health care reform or other legislation affecting payment mechanisms
and health care delivery. Legislation which imposes limits on the number and
type of medical procedures which may be performed or which has the effect of
restricting a provider's ability to select specific devices or products for use
in administrating medical care may adversely impact the demand for the Company's
products. In addition, legislation which imposes restrictions on the price which
may be charged for medical products may adversely affect the Company's results
of operations. However, it is not possible to predict the extent to which the
Company or the health care industry in general may be adversely affected by the
aforementioned in the future.
EMPLOYEES
As of March 1, 1995, IMED employed a work force of 559 individuals. Of these
employees, 422 were located in San Diego, 105 were located in the field in the
United States and 32 were located in foreign locations. In addition, IMED's
contractor in Tijuana employed approximately 485 employees who assemble certain
IMED products. Of IMED's employees, 58 were engaged in product development.
IMED's employees are not represented by a union.
Management considers IMED's relationship with its employees to be good and
is not aware of any problems with respect to the work force employed in Tijuana.
AM DEVELOPMENT LIMITED PARTNERSHIP
On April 2, 1990, AM General Development Corp. ("AM General"), AM
Development Limited ("AM Limited") and Deka Products entered into an agreement
to form AMD, a joint venture partnership for the primary purpose of developing
medical technologies, including those of Deka Products. AM General and Deka
Products were the general partners of AMD, and AM Limited was the sole limited
partner. AM General and AM Limited are both wholly-owned subsidiaries of
Advanced Medical. The general partner of Deka Products is a corporation
wholly-owned by Dean L. Kamen.
Deka Products and its employees, including Mr. Kamen, provided certain
research and development services to AMD pursuant to a development agreement
between AMD and Deka Products. As consideration for the research and development
activities, AMD paid Deka Products on a cost-plus basis. For the years ended
December 31, 1992 and 1993, AMD paid Deka Products approximately $500,000 and
$300,000, respectively, pursuant to the development agreement for research and
development activities conducted by Deka Products for AMD, which amounts did not
include approximately $3.8 million and $3.3 million for 1992 and 1993,
respectively, paid to Deka Products in connection with research and development
conducted on behalf of IMED. See "Business -- IMED Corporation -- Research and
Development."
During the fourth quarter of 1993, the Company entered into an agreement
with Deka Products and Kamen to terminate AMD as well as licenses and
development agreements among Advanced Medical and its subsidiaries and Kamen and
his affiliates and pursuant to which the Company discontinued its funding of
13
<PAGE>
AMD. Kamen and his affiliates can independently commercialize products based on
Kamen's fluid management technology. IMED retains a royalty interest in certain
future commercial applications of Kamen's technology.
DESCRIPTION OF OTHER HOLDINGS
ALTEON, INC. ("ALTEON")
Alteon is a development stage pharmaceutical company engaged in the
discovery and development of novel therapeutic and diagnostic products for the
complications associated with diabetes and aging. Alteon's present focus is on
the development of compounds to treat the major complications of diabetes, which
include diseases of the kidney, cardiovascular system, nervous system and the
eye.
The Company owns 512,600 shares of Alteon common stock, which represented
less than 5% of the issued and outstanding shares of Alteon common stock on a
fully diluted basis as of December 31, 1994. The Alteon shares owned by the
Company were registered under the Securities Act on October 1, 1993. The Alteon
common stock owned by the Company is pledged to secure senior debt. Under the
terms of senior debt agreements, the Company is permitted to sell such shares,
see "Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations."
FIDATA CORPORATION
At the time of the Company's acquisition of Fidata in March 1989, Fidata had
cash but no operations, and its business primarily consisted of defending and
settling claims and liquidating its business. Fidata disposed of substantially
all of its businesses in 1985 and 1986. As of this date, Fidata has settled
substantially all of the claims against it and is continuing to wind down its
business which should be completed in 1995.
COMPANY EMPLOYEES
The Company's operations are supported by persons employed by IMED. The
Company's principal offices are located in San Diego, California.
ITEM 2. PROPERTIES.
Pursuant to six separate leases, IMED rents a total of approximately 216,000
square feet in San Diego, California. These facilities house Advanced Medical's
principal executive offices, IMED's principal executive offices, engineering and
development facilities and IMED's approximately 131,000 square foot domestic
manufacturing and warehouse operations. One of the leases for the San Diego
facility provides for termination by either IMED or the landlord on six months'
notice. The remaining leases have terms expiring at various times through 1998
and have varying clauses providing for renewal at IMED's option. In addition,
the disposable administration sets assembly is provided by a contractor in a
41,190 square foot facility in Tijuana, Mexico.
During the fourth quarter of 1993, IMED adopted a plan to reduce by
approximately 27,000 square feet its facilities in San Diego. This plan is
currently scheduled to be completed in the second quarter of 1995.
Fidata leases approximately 200 square feet of office space in New York, New
York under a lease that will expire in May 1995. The Company is planning to rent
this space on a monthly basis until the wind down is complete.
ITEM 3. LEGAL PROCEEDINGS.
The Company is a defendant in various actions, claims, and legal proceedings
arising from normal business operations. Management believes they have
meritorious defenses and intends to vigorously defend against all allegations
and claims.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
None.
14
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The Company's common stock is listed on the American Stock Exchange under
the symbol AMA. The following table sets forth the high and low last reported
sale prices for the common stock of the Company as reported by the American
Stock Exchange for the quarters indicated.
<TABLE>
<CAPTION>
HIGH LOW
-------- ---------
<S> <C> <C>
1993:
First Quarter..... $ 9 3/8 $ 5 3/4
Second Quarter.... 5 7/8 4 1/8
Third Quarter..... 4 1/2 2
Fourth Quarter.... 2 3/16 15/16
1994:
First Quarter..... 1 7/16 1
Second Quarter.... 1 3/4 5/8
Third Quarter..... 1 7/16 1/2
Fourth Quarter.... 2 1/2 7/8
</TABLE>
As of March 30, 1995, there were 546 holders of record of the Company's
common stock.
The Company has not paid any dividends on its common stock since its
organization, and it is not contemplated that it will pay any dividends on the
common stock in the foreseeable future. The Company is prohibited from declaring
and paying dividends on the common stock under certain debt agreements and
pursuant to the terms of its convertible preferred stock. In addition, the
Amended IMED Loan Agreement limits IMED's ability to declare and pay dividends
and to make other distributions and payments to the Company. See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations."
The Company did not declare and pay the September 1993, March 1994 and
September 1994 dividends and the March 1994 redemption and does not anticipate
declaring dividends and redeeming its preferred stocks in the foreseeable future
on its 10% mandatorily redeemable preferred stocks, $.01 per share par value
("10% Preferred Stocks"). As a result, the 10% Preferred Stock shareholders are
entitled to elect, as a class, two members to the Company's board of directors.
15
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
The following selected historical consolidated financial data of the Company
at December 31, 1990, 1991, 1992, 1993 and 1994, and for the years then ended,
have been derived from the Company's annual financial statements including the
consolidated balance sheets at December 31, 1993 and 1994 and the related
consolidated statements of operations for the three years ended December 31,
1994 and notes thereto which appear elsewhere herein.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1990(1) 1991(3) 1992 1993 1994
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA: (IN THOUSANDS, EXCEPT PER SHARE DATA)
Sales........................................................... $ 91,799 $ 127,131 $ 128,286 $ 119,417 $ 111,681
Cost of sales................................................... 50,765 71,008 72,952 72,209 65,590
--------- --------- --------- --------- ---------
Gross margin.................................................... 41,034 56,123 55,334 47,208 46,091
License fee revenue............................................. 91 356 441 441
Total operating expenses........................................ (46,091) (55,584) (44,918) (47,118) (33,941)
--------- --------- --------- --------- ---------
Income (loss) from operations................................... (5,057) 630 10,772 531 12,591
Interest expense................................................ (10,794) (16,951) (11,617) (10,880) (8,690)
Interest income................................................. 1,666 2,012 2,637 2,767 2,526
Other (expense) income, net..................................... (909) 1,940 2,285 2,065 1,136
--------- --------- --------- --------- ---------
Income (loss) before income taxes, minority interests,
extraordinary item and cumulative effect of change in
accounting principle (2)....................................... (15,094) (12,369) 4,077 (5,517) 7,563
Provision for income taxes...................................... 2,172 2,204 1,956 926 1,886
--------- --------- --------- --------- ---------
(17,266) (14,573) 2,121 (6,443) 5,677
Minority interests in consolidated subsidiaries................. (459) (1,781) (4,565) 3,755
--------- --------- --------- --------- ---------
Income (loss) before extraordinary item and cumulative effect of
change in accounting principle................................. (17,725) (16,354) (2,444) (2,688) 5,677
Dividends and accretion on mandatorily redeemable preferred
stock.......................................................... 3,050 2,249 1,832 1,387 874
--------- --------- --------- --------- ---------
Income (loss) applicable to common stock before extraordinary
item and cumulative effect of change in accounting principle... $ (20,775) $ (18,603) $ (4,276) $ (4,075) $ 4,803
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Income (loss) per common share before extraordinary item and
cumulative effect of change in accounting principle assuming no
dilution....................................................... $ (1.81) $ (1.55) $ (.30) $ (.29) $ .34
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Income (loss) per common share before extraordinary item and
cumulative effect of change in accounting principle assuming
full dilution.................................................. $ (1.81) $ (1.55) $ (.30) $ (.29) $ .22
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Weighted average common shares outstanding assuming no
dilution....................................................... 11,497 12,012 13,962 14,073 14,069
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Weighted average common shares outstanding assuming full
dilution....................................................... 11,497 12,012 13,962 14,073 24,099
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
DECEMBER 31,
------------------------------------------------------------------
PRO FORMA
1990 1991 1992 1993 1994 1994(6)
--------- --------- --------- --------- --------- -----------
BALANCE SHEET DATA: (IN THOUSANDS)
Cash and cash equivalents............................ $ 2,387 $ 3,039 $ 2,443 $ 1,762 $ 1,340 $ 1,040
Working capital (deficit)............................ (1,752) (10,958) 4,246 (2,833) 29,576 28,656
Total assets......................................... 183,060 168,654 177,496 142,891 132,124 130,731
Short-term debt (5).................................. 25,119 29,569 34,382 35,815 1,214 1,214
Long-term debt (2) (4) (5)........................... 80,267 66,525 83,821 70,999 91,803 77,681
Mandatorily redeemable equity securities............. 18,947 18,187 9,451 6,478 6,567 6,567
Stockholders' (deficit) equity....................... (5,035) (18,093) (8,560) (8,274) (2,238) 9,871
<FN>
------------------------------
(1) The Company consummated the IMED acquisition on April 2, 1990. Under the
purchase method of accounting, the Company's historical statement of
operations data for the year ended December 31, 1990 includes IMED's
results of operations commencing April 2, 1990. As a result, the Company's
historical consolidated statement of operations for the year ended December
31, 1990 is not directly comparable to subsequent years.
(2) On October 29, 1991, the Company repaid $13,000 of subordinated debt and
recorded a $1,236 extraordinary loss on this extinguishment of debt. On
January 31, 1992 the Company repaid and restructured its debt and recorded
a $8,632 extraordinary loss on this extinguishment of debt. For further
discussion see Note 6 to the Consolidated Financial Statements.
(3) In June 1991 CTC ceased operations and in October 1991 IMED sold its
European operations. These transactions affect the comparability of the
1991 data to 1990 and 1992.
(4) On January 31, 1992, the Company issued 7 1/4% convertible subordinated
debentures in the principal amount of $60,000 and 500 shares of its common
stock at $15.375 per share. For further discussion, see Note 6 to the
Consolidated Financial Statements.
(5) On August 12, 1994, IMED amended its Loan Agreement. For further discussion
see Note 6 to the Consolidated Financial Statements.
(6) On March 31, 1995, the Company completed an exchange wherein $28,245 of the
Company's 7 1/4% convertible subordinated debentures were exchanged for an
aggregate of $14,123 of the Company's 15% subordinated debentures and 1,340
shares of the Company's common stock. For further discussion see Note 16 to
the Consolidated Financial Statements.
(7) The Company has never paid dividends on its common stock.
</TABLE>
16
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Advanced Medical is a holding company for IMED, Fidata and several
investments. It also identifies and evaluates potential acquisitions and
investments and performs various corporate functions. As a holding company,
Advanced Medical currently has no revenues to fund its operating and interest
expense and relies on cash generated by cash flow from IMED, external
borrowings, sale of investments and other external sources of funds to meet its
obligations.
The following discussion and analysis should be read in conjunction with
"Item 6. Selected Financial Data," and "Item 8. Financial Statements and
Supplementary Data" included elsewhere herein.
LIQUIDITY AND CAPITAL RESOURCES
As a result of the Company's debt restructuring transactions discussed
below, management currently believes that sufficient cash will be available
through IMED, based upon current operations, to satisfy debt service and other
corporate expenses of Advanced Medical in the foreseeable future. The Company's
debt restructuring consisted of the following transactions:
- On January 4, 1994, the Company borrowed $6 million (the "Decisions Note")
from Decisions Incorporated ("Decisions"). The Decisions Note was payable
on June 30, 1994 and has an annual interest rate of 7%. The note is
convertible into 6,000,000 shares of the Company's common stock at a
conversion price of $1.00 per share. The proceeds of the note were used by
the Company to pay $6 million of indebtedness to Aeneas Venture
Corporation ("Aeneas").
On May 13, 1994, Decisions agreed to amend the terms of the Decisions Note
to provide that (i) accrued and unpaid interest shall be due and payable
in arrears on June 30 and December 31, beginning on June 30, 1994, (ii)
the principal amount shall be payable upon the earlier of January 4, 2001
or on demand by Decisions provided the repayment is generated by net
income of the Company exclusive of IMED, any borrowing or debt or equity
offering by the Company, or funds available through distribution from
affiliates, including IMED.
- On August 12, 1994, the Company borrowed $6.5 million from Decisions (the
"Note"). The Note is payable on January 4, 2001 and has an annual interest
rate of 9%. Interest on the principal is due on June 30 and December 31 of
each year. The Note is convertible, at the option of the holder, into up
to 10,483,870 shares of Common Stock at a conversion price of $.62 per
share (subject to antidilution protection), which shares Decisions will
not be permitted to sell into the public market prior to August 12, 1996.
The proceeds of the Note were used to pay in full the outstanding
indebtedness to Aeneas, pay in full the July 15, 1994 scheduled interest
payment on the Debentures and to pay other corporate obligations of the
Company.
- IMED's Amended Loan Agreement with GECC, entered into on August 12, 1994,
includes a $42 million revolving credit facility that replaces the
previous $22 million revolving credit facility and the term loan. The
interest rate on the Amended Loan Agreement is the index rate (defined as
the greater of the highest prime, base or equivalent rate charged by any
of the five largest member banks of the New York Clearing House
Association, Inc. and the most recent published annual yield on ninety-day
commercial paper placed by dealers) plus 2% (10 1/2% at December 31,
1994). Outstanding indebtedness under the Amended Loan Agreement will
mature in March 1999. Advances under the Amended Loan Agreement can be
used by IMED for (i) purchase of shares of Advanced Medical 10% Preferred
in the Tender Offer described below, (ii) capital expenditures, (iii)
IMED's working capital and general corporate purposes, (iv) subject to
certain limitations, tax sharing payments to Advanced Medical, and (v)
subject to certain restrictions, to pay to Advanced Medical dividends on
IMED's common stock, dividends on and redemption of IMED's preferred stock
and accrued and unpaid royalties owed by IMED to Advanced Medical with
respect to certain patents owned by Advanced Medical and used by IMED in
connection with its business (collectively, "Permitted
17
<PAGE>
Payments"). Permitted Payments received by Advanced Medical can be used to
pay debt service, operating expenses, dividends on and redemption of the
10% Preferred not acquired in the Tender Offer and dividends on the
Convertible Preferred Stock.
The Company had negative working capital of $2.8 million as of December 31,
1993 compared with working capital of $29.6 million as of December 31, 1994. The
increase in working capital from December 31, 1993 to December 31, 1994 was due
primarily to repayment of debt with cash flow from operations and the debt
restructuring transactions described above.
In 1994, IMED's cash flow from operations was $18.7 million which was used
for (i) repayments of $8.4 million under the revolving credit facility, (ii)
Permitted Payments of $2.3 million to Advanced Medical, (iii) capital
expenditures of $4.5 million and (iv) repayment of $4 million of long-term debt
(the repayment of long-term debt is net of the $3.8 million proceeds from the
sale of Irish operations). IMED relies on cash generated from operations,
together with funds available from the revolving credit facility, to fund its
working capital requirements, interest on the GECC credit facility and capital
expenditures. Cash generated from IMED's operations also provide Permitted
Payments to Advanced Medical to fund Advanced Medical's debt service and
operating expenses. Management believes IMED's cash flow will exceed its cash
requirements, including interest on the GECC credit facility, capital
expenditures and Permitted Payments to Advanced Medical in 1995.
The Company considers its investment in the common stock of Alteon to be a
significant source of capital and liquidity if the sale of this investment
becomes necessary. The Company owns 512,600 shares of Alteon common stock which
were registered under the Securities Act on October 1, 1993, and have an
aggregate market value of approximately $3.3 million based upon the closing
price per share on March 28, 1995 on the NASDAQ National Market System. Prices
obtainable in any private sales of such securities are likely to be lower than
those quoted on the NASDAQ National Market System. Alteon is engaged in the
research and development of medical and pharmaceutical products and as such has
not yet successfully brought products to the market. Therefore, failure of
Alteon to develop and market their products successfully could adversely affect
the ability of the Company to dispose of its investments therein upon favorable
terms.
The August 12, 1994 sale of the net assets held for sale related to the
Irish manufacturing facility (totaling $3,925 at December 31, 1993) to Pharmacia
did not have a significant effect on working capital and all of the net proceeds
were used to reduce the outstanding indebtedness owed to GECC. See Note 2 to the
Condensed Consolidated Financial Statements.
The Company did not pay the March 28, 1994 mandatory redemption of all
outstanding shares of 10% Preferred Stock. As of December 31, 1994, there were
329,928 shares of 10% Preferred Stock currently outstanding with a liquidation
preference of $10 per share and accrued and unpaid dividends were approximately
$.6 million. In addition to the 10% Preferred Stock, as of December 31, 1994,
there were 333,000 shares of Convertible Preferred Stock currently outstanding
with a liquidation preference of $6.40 per share and accrued and unpaid
dividends were approximately $.6 million. Under Delaware General Corporate Law,
the Company does not have sufficient capital or surplus to declare dividends or
redeem the preferred stock issues.
On July 12, 1994, IMED commenced a Tender Offer for up to all of the
outstanding shares of 10% Preferred Stock for a cash price equal to $9.00 per
share (the "Tender Offer"). The Tender Offer expired on August 30, 1994, at
which time 68,517 shares of the 10% Preferred Stock were tendered. Immediately
upon purchase thereof, IMED distributed all such shares of the 10% Preferred
Stock acquired by it pursuant to the Tender Offer to Advanced Medical and
received a credit from Advanced Medical against the amount of accrued and unpaid
dividends on shares of IMED's preferred stock held by Advanced Medical in an
amount equal to the liquidation value of the 10% Preferred Stock ($10 per share)
plus accrued and unpaid dividends thereon ($1.45 per share).
In connection with borrowings associated with the IMED acquisition, IMED
issued to GECC a warrant to acquire at a de minimis price common shares equal to
10%, on a fully diluted basis, of the common stock
18
<PAGE>
of IMED. Under the Amended Loan Agreement, GECC retained the warrant. The IMED
warrant is redeemable at the option of GECC until August 12, 2004 at the higher
of fair value or fully-diluted net book value at the redemption date.
Additionally, IMED has the option to redeem not less than 25% of the shares
under warrant, or warrant stock if exercised, beginning April 2, 1995. The
Company's liquidity would be adversely affected, and capital resources would be
significantly reduced, in the event GECC exercises its mandatory redemption
rights. However, GECC cannot require redemption to the extent that it would
render IMED unable to pay its debts as they mature.
RESULTS OF OPERATIONS
The comparability of the Company's consolidated results of operations for
the three years ended December 31, 1994 is significantly affected by (i) the
plan adopted by the Company in 1993 to sell its Irish manufacturing facility,
(ii) the restructurings of the Company's operations in 1993 and (iii) the
cumulative effect of a required change in accounting principle for income taxes
effective January 1, 1993. See Notes 2, 4, 6 and 7 to the Company's Consolidated
Financial Statements.
The Company's sales, cost of sales, and selling expenses for the historical
periods shown consist exclusively of IMED's sales, cost of sales and selling
expenses and are presented in the table below.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1992 1993 1994
--------- --------- ---------
<S> <C> <C> <C>
(IN MILLIONS)
U.S. sales............................................................... $ 110.4 $ 100.6 $ 90.8
International sales...................................................... 17.9 18.8 20.9
--------- --------- ---------
Total sales............................................................ $ 128.3 $ 119.4 $ 111.7
--------- --------- ---------
--------- --------- ---------
Total sales.............................................................. 100.0% 100.0% 100.0%
Cost of sales............................................................ 56.9 60.5 58.8
--------- --------- ---------
Gross margin............................................................. 43.1% 39.5% 41.2%
--------- --------- ---------
Selling expenses......................................................... $ 19.7 $ 18.9 $ 16.9
--------- --------- ---------
--------- --------- ---------
Selling expenses as a percentage of sales................................ 15.4% 15.8% 15.1%
--------- --------- ---------
--------- --------- ---------
</TABLE>
SALES
The following table sets forth IMED sales by major product groups, for the
periods presented.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1992 1993 1994
--------- --------- ---------
<S> <C> <C> <C>
(IN MILLIONS)
Piston Cassette Disposables.............................................. $ 39.0 $ 30.8 $ 22.1
Peristaltic Disposables.................................................. 39.6 48.0 53.8
Piston Cassette Pumps.................................................... 3.5 1.7 .7
Peristaltic Pumps........................................................ 32.6 26.4 22.5
ReadyMED................................................................. .6 3.8 3.5
Other (1)................................................................ 13.0 8.7 9.1
--------- --------- ---------
Total.................................................................. $ 128.3 $ 119.4 $ 111.7
--------- --------- ---------
--------- --------- ---------
<FN>
------------------------
(1) Primarily includes operating lease income relating to pumps, service fees
and accessory sales and in 1992 includes $2.5 million from the sale of
pumps under operating leases.
</TABLE>
The Company's major source of revenue is the sale of proprietary disposable
administration sets for its installed infusion instrument base. The overall
volume of disposables sold has grown from 1992 through 1994. This growth has
been achieved despite a change in protocol at certain hospitals increasing the
maximum time between set changes from every 24 hours to as much as every 72
hours, and results primarily from an increase in IMED's installed base,
including the addition of new accounts. The Company is unable to predict the
potential effect of this change in protocol, which is expected to continue with
respect to certain
19
<PAGE>
applications of IMED's products, on the Company's future financial condition or
results of operations.IMED's products are at the high end of the industry price
range and compete on the basis of technological sophistication, quality, safety
and flexibility in application.
Disposable administration sets used with IMED's piston cassette pumps had
generated, prior to the third quarter of 1992, a majority of IMED's overall
sales of disposables and of IMED's total revenues. However, during 1994 fewer
than 6% of the worldwide unit sales of new pumps were attributable to piston
cassette pumps, with the remainder being represented by sales of Gemini pumps.
Virtually all placements to new customers in 1992, 1993 and 1994 consisted of
Gemini instruments. Therefore, sales of piston cassette products (pumps and
disposables) are expected to continue to decline as demand for IMED's pumps and
proprietary disposable administration sets reflects to an increasing extent the
expected gradual shift away from piston cassette technology and toward
peristaltic technology, such as that used in IMED's Gemini series of
instruments, and other newer technology. IMED's current sales efforts, which
emphasize its Gemini series of products, are both consistent with and encourage
this shift. Although the decline in sales of piston cassette products from 1992
compared to 1993 and from 1993 compared to 1994 exceeded the increase in sales
of Gemini products from comparable years, management believes a general slowdown
in hospital buying decisions caused by uncertainties regarding health care
reform and an increase in competitive pressures resulted in a decline in the
sales volume of Gemini pumps during 1993 and 1994. There can be no assurance
that future sales of peristaltic products will be sufficient to offset the
anticipated continued decline in sales of older technology.
Sales of disposable administration sets, and accordingly the Company's
results of operations, could be adversely affected if, due to the expiration in
1993 of one of the patents covering the Accuset disposable administration set, a
competitor were to begin manufacturing a product that competed with such
disposable administration set. Revenue from sales of this product accounted for
27%, 24% and 19% of IMED's total worldwide revenues for 1992, 1993 and 1994,
respectively. However, the Company believes that the expiration of this patent
will not have a material effect on the Company's future results of operations
for several reasons. As discussed above, there has been a market shift, which
the Company expects to continue, away from piston cassette technology and toward
newer technology such as that used in IMED's Gemini series of pumps and other
non-piston cassette technologies. In addition, IMED holds an additional patent
(expiring in 2001) covering a feature of the Accuset disposable administration
set that the Company believes significantly enhances its reliability. The
Company believes that it would not be economical for a competitor to incur the
tooling and other start-up costs required to produce a product that could
compete with the Accuset without the benefit of IMED's manufacturing know-how
and the additional patent mentioned above. Finally, the Company believes that it
could respond to any such competing product on the bases of, among other things,
proven reliability, brand loyalty and price. See "Item 1. Business -- IMED
Corporation -- Patents and Proprietary Rights."
The volume of disposable administration sets sold in the U.S. increased from
1992 to 1993 and decreased slightly from 1993 to 1994. Additionally, declines in
selling prices for disposable administration sets from 1992 to 1993 and from
1993 to 1994 are a result of market conditions. As hospitals continue to seek
ways to control operating costs, IMED can expect continuing pressure to reduce
prices. The Company believes that its future levels of profitability will depend
on reducing manufacturing costs, successful new product introductions and the
development of new markets for these new products. See "Item 1. Business -- IMED
Product Line and -- Government Regulation."
The decrease in U.S. sales from 1992 to 1993 results primarily from (i)
reduced instrument sales volume believed to be attributable to a general
slowdown of hospital buying decisions caused by uncertainty associated with
health care reform and increased competitive pressures, (ii) a decline in
instrument and disposable administration sets selling prices as a result of
market conditions and emphasis on increasing IMED's installed base by obtaining
new accounts formerly served by competitors (which generally offer pricing
advantages) and (iii) the sale of operating leases during 1992 ($2.5 million)
which did not occur during 1993. The decrease from 1992 to 1993 was partially
offset due to (i) a full year of sales from new products introduced into the
market in late 1992 and (ii) unit placements reflecting direct sales and sales-
type leases as opposed to operating leases.
20
<PAGE>
The decrease in U.S. sales from 1993 to 1994 is due primarily to (i)
decreased volume of instruments and (ii) a decline in selling prices of
instruments and disposable administration sets.
International sales increased from 1992 to 1993 due to (i) increased volume
of instruments and disposables in the Middle East and (ii) revenue associated
with Pharmacia products manufactured in Ireland for Pharmacia. These increases
were partly offset by (i) unfavorable effect of exchange rate changes in Canada
and Australia, and (ii) a decrease in instrument sales volumes.
The increase in international sales from 1993 to 1994 is primarily due to
(i) revenue associated with Pharmacia products manufactured in Ireland during
1994 for Pharmacia, which will not continue due to the sale of the Irish
manufacturing facility to Pharmacia in August 1994, (ii) increased volume of
instruments and disposables in Australia and (iii) increased volume of
disposables sold in the European territory covered by the distribution agreement
with Pharmacia ("European Territory"). These increases were partly offset by
decreased instrument sales volume in the European Territory.
IMED's policy is to maintain sufficient inventory to permit shipping of
products within a short period after receiving firm purchase orders.
Accordingly, backlog at the end of any period is usually relatively
insignificant and generally not indicative of future sales (backlog was $.1
million at December 31, 1993 and December 31, 1994). IMED expects to fill the
orders comprising the December 31, 1994 backlog in the first quarter of 1995.
GROSS MARGIN
The gross margin percentage declined from 1992 to 1993 primarily due to (i)
manufacturing start-up costs associated with the ReadyMED product line, (ii) the
decline in disposable administration sets selling prices in the U.S. market
previously discussed, (iii) increased instrument unit costs caused by lower
sales volumes and (iv) resolution of a disputed sales contract with a major
customer which adversely affected the 1993 gross margin percentage. The decline
in the gross margin percentage was partially offset by reductions in
manufacturing costs of disposable administration sets resulting from the
continued consolidation of labor intensive final assembly operations from
Ireland to Mexico and the favorable effect of exchange rates on manufacturing
costs at IMED's Irish manufacturing facility.
The gross margin percentage increased from 1993 to 1994 primarily due to (i)
reductions in the manufacturing costs of disposable administration sets due to
cost containment programs which were implemented as part of the restructuring
during the fourth quarter of 1993 and resulted in the elimination of certain
non-value added activities and expenditures, (ii) molded parts and components
for disposable administration sets sourced from outside vendors at lower costs
than previous costs to manufacture in Ireland and (iii) the 1993 resolution of a
disputed sales contract with a major customer. The increase in gross margin
percentage from 1993 to 1994 was partially offset by (i) the decline in
instrument and disposable administration sets selling prices in the U.S. market
as previously discussed and (ii) higher unit costs for instruments in inventory
at December 31, 1993 that were sold in 1994 than the unit costs for instruments
in inventory at December 31, 1992 that were sold in 1993 due to the unfavorable
effect on unit overhead costs during the year ended December 31, 1993 from lower
instrument volumes.
SELLING EXPENSES
The decrease in selling expenses from 1992 to 1993 is primarily due to
reductions in commissions and distribution expenses from lower sales volumes,
which were partially offset by costs incurred for field evaluation units
supplied to the IMED sales force and sales training-related expenditures.
The decrease in selling expenses from 1993 to 1994 is primarily due to (i)
cost containment programs for the field sales force which were implemented as
part of the restructuring during the fourth quarter of 1993 discussed previously
and (ii) reductions in promotion and advertising expenses. Selling expenses in
1993 were reduced $.7 million by adjustments to the liability recorded for stock
appreciation rights granted to a hospital buying group as consideration for
purchasing IMED's products. No such adjustments were required during 1994.
21
<PAGE>
GENERAL AND ADMINISTRATIVE EXPENSES
The following table sets forth general and administrative ("G&A") expenses
for Advanced Medical and its subsidiaries for the periods presented.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
----------------------
1992 1993 1994
------ ------ ------
<S> <C> <C> <C>
(IN MILLIONS)
IMED........................................................ $ 10.4 $ 10.4 $ 8.7
Advanced Medical............................................ 4.3 2.5 1.5
Fidata and AMD.............................................. 1.1 0.9 0.5
------ ------ ------
Total general and administrative expenses................. $ 15.8 $ 13.8 $ 10.7
------ ------ ------
------ ------ ------
</TABLE>
IMED's G&A expenses were the same for 1992 and 1993 as cost containment
efforts in 1993 were offset by (i) increased legal expenses associated with
litigation and (ii) the costs associated with the 1993 implementation of IMED's
Total Quality Management program. The decrease in IMED's G&A expenses from 1993
to 1994 results from (i) implementation costs incurred in 1993 and not in 1994
for Total Quality Management programs and (ii) reductions in personnel and
related costs resulting from the restructurings during the fourth quarter of
1993.
Due to the nature of Advanced Medical's operations, G&A expenses fluctuate
from period to period as the majority of its costs are comprised of (i)
professional and consulting fees and indirect costs (such as travel costs)
associated with identifying, evaluating and making acquisitions and investments,
(ii) communication and meeting costs of shareholder and investor relations and
(iii) other costs of performing general holding company functions. G&A expenses
decreased from 1992 to 1993 primarily due to reductions in personnel and related
costs, professional fees and the effect in 1992 of relocating the corporate
headquarters from San Francisco to San Diego. G&A expenses decreased from 1993
to 1994 primarily due to the elimination of a management layer as part of the
restructurings implemented in 1993.
Advanced Medical has been winding down Fidata's remaining operations and
settling its remaining claims and operations since it was acquired in March
1989. Due to unresolved claims and lack of court and regulatory approval, the
liquidation of Fidata did not occur in 1994. Management expects to settle
certain remaining claims and liquidate Fidata completely in 1995. However, there
can be no assurance that Fidata will be completely liquidated in 1995 as such
will require court and regulatory approval.
RESEARCH AND DEVELOPMENT EXPENSES
The following table sets forth research and development ("R&D") expenses for
the periods presented.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
DECEMBER 31,
----------------------
1992 1993 1994
------ ------ ------
<S> <C> <C> <C>
(IN MILLIONS)
IMED........................................................ $ 5.5 $ 5.5 $ 6.3
AMD......................................................... 3.9 3.6
------ ------ ------
Total research and development expenses................... $ 9.4 $ 9.1 $ 6.3
------ ------ ------
------ ------ ------
</TABLE>
Under an agreement with Deka Products established in 1990, a patented,
modular infusion system incorporating advanced programming capabilities in a
package that is smaller, simpler to operate, and less costly to manufacture was
being designed. The Company had planned to introduce this product by late 1993.
Development of features to enhance marketability required further engineering
work resulting in substantial delays and increases in costs. As a result, the
Company no longer considered the Deka Products program to be commercially
feasible and discontinued its funding of that program in the third quarter of
1993. However, IMED retains a royalty interest in certain future commercial
applications of Deka Products technology. See
22
<PAGE>
"Item 1 -- Business -- AM Development Limited Partnership." In 1993, the Company
recorded a non-cash charge of $1,919 to other expense from the write-off of
licenses associated with Deka Products' technology (See Note 4 to the
Consolidated Financial Statements).
R&D expenses for AMD were eliminated in 1994 and declined in 1993 compared
to 1992 as the Company discontinued funding Deka as previously discussed.
IMED's R&D expenses were the same for 1992 and 1993 as cost containment
programs in 1993 were offset by increases in personnel and related costs
associated with the acceleration of IMED's in-house development of a new line of
hospital infusion pumps and associated disposable administration sets based upon
its patented technology and know-how in late 1993. R&D expenses for IMED
increased from 1993 to 1994 due to the acceleration of its own in-house
development discussed above.
RESTRUCTURINGS
The Company restructured its corporate operations during 1993 and recorded a
$.9 million restructuring charge. The restructuring, primarily severance costs,
eliminated a management layer. Expenditures of approximately $.5 million and $.4
million were paid and charged against the restructuring accrual during 1993 and
1994, respectively.
As more fully described in Note 3 to the Consolidated Financial Statements,
the Company recorded a $3.5 million restructuring charge during 1993 in
connection with the sale of its Irish manufacturing operations and relocation of
its molding operations to the United States. Outside vendors can supply to the
Company molded parts and components at costs which are lower than the costs to
manufacture in Ireland. Due to the time required to relocate molding operations,
the Company will purchase molded parts and components from Pharmacia in
declining quantities over several years, pursuant to an agreement. The charge
included accruals of $1.3 million related to estimated relocation costs and
professional fees. Cash payments of approximately $.1 million and $.4 million
were made during 1993 and 1994, respectively. Expenditures of $.6 million and
$.2 million are expected to be paid during 1995 and 1996, respectively.
The Company implemented a plan to restructure the operations of IMED during
the fourth quarter of 1993 and recorded a $1.0 million restructuring charge. The
restructuring included (i) consolidation of certain operations, (ii) the
reduction in IMED's domestic work force by approximately 10%, (iii) the
modification of certain employee benefit plans and (iv) the elimination of
non-value added activities and expenditures. Accrued severance costs and other
restructuring expenses of approximately $1.2 million remained at December 31,
1993, of which $.7 million was paid during 1994. Expenditures of $.5 million are
expected to be paid in 1995.
SEASONALITY
Infusion instrument sales are typically higher in the fourth quarter due to
sales compensation plans which reward the achievement of annual quotas and the
seasonal characteristics of the industry, including hospital purchasing
patterns. First quarter sales are traditionally not as strong as the fourth
quarter. The Company anticipates that this trend will continue in the first
quarter of 1995.
OTHER MATTERS
Other income (expenses), net for 1992, 1993 and 1994 in the accompanying
Consolidated Statements of Operations include income of $1.6 million, $6.7
million and $1.4 million, respectively, from the sale of marketable securities.
See Note 5 to the Consolidated Financial Statements. Other income (expenses) for
1993 includes $1.9 million in litigation settlements and a non-cash charge of
$1.9 million, consisting of the write-off of unamortized technology licenses of
$3.9 million less a non-refundable product development fee of $2.0 million. See
Notes 4 and 8 to the Consolidated Financial Statements.
The Company's operations are not significantly affected by inflation.
Effective January 1, 1993 the Company adopted the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS
109"). As permitted under SFAS 109, the 1992 Consolidated Statement of
Operations has not been restated. See Notes 1 and 7 to the Consolidated
Financial Statements.
23
<PAGE>
HEALTH CARE REFORM
Heightened public awareness and concerns regarding the growth in overall
health care expenditures in the United States may result in the enactment of
national health care reform or other legislation affecting payment mechanisms
and health care delivery. Legislation which imposes limits on the number and
type of medical procedures which may be performed or which has the effect of
restricting a provider's ability to select specific devices or products for use
in administrating medical care may adversely impact the demand for the Company's
products. In addition, legislation which imposes restrictions on the price which
may be charged for medical products may adversely affect the Company's results
of operations. It is not possible to predict the extent to which the Company or
the health care industry in general may be adversely affected by the
aforementioned in the future. However, sales decreased approximately 6% from the
year ended December 31, 1993 ("1993") compared to the year ended December 31,
1994 ("1994"), which management believes was partially due to the general
slowdown of hospital buying decisions caused by uncertainties regarding the
aforementioned. (See Sales.)
24
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Advanced Medical, Inc.
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) and (2) on page 58 present fairly, in all material
respects, the financial position of Advanced Medical, Inc. and its subsidiaries
at December 31, 1993 and 1994, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1994, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
As discussed in Note 1 to the financial statements, the Company changed its
method of accounting for income taxes in 1993 to comply with the provisions of
Statement of Financial Accounting Standards No. 109.
As discussed in Note 1 to the financial statements, the Company changed its
method of accounting for investments in 1994 to comply with the provisions of
Statement of Financial Accounting Standards No. 115.
PRICE WATERHOUSE LLP
San Diego, California
March 17, 1995
25
<PAGE>
ADVANCED MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLAR AND SHARE AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1993 1994
--------- ---------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................................................ $ 1,762 $ 1,340
Restricted cash and investment securities................................................ 1,862 1,732
Securities available for sale............................................................ 4,343 2,883
Receivables, net......................................................................... 25,999 24,841
Inventories.............................................................................. 19,371 20,347
Prepaid expenses and other current assets................................................ 1,731 2,140
--------- ---------
Total current assets................................................................... 55,068 53,283
Net assets held for sale................................................................... 3,925
Net investment in sales-type and direct financing leases................................... 15,067 14,807
Property, plant and equipment, net......................................................... 11,800 11,595
Other non-current assets................................................................... 6,258 4,921
Intangible assets, net..................................................................... 50,773 47,518
--------- ---------
$ 142,891 $ 132,124
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Current portion of long-term debt........................................................ $ 19,125 $ 1,214
Notes payable............................................................................ 16,690
Accounts payable......................................................................... 6,509 8,427
Accrued expenses and other current liabilities........................................... 15,577 14,066
--------- ---------
Total current liabilities.............................................................. 57,901 23,707
--------- ---------
Long-term debt............................................................................. 70,999 91,803
Other non-current liabilities.............................................................. 10,787 7,285
--------- ---------
81,786 99,088
--------- ---------
Minority interests in consolidated subsidiaries............................................ 5,000 5,000
--------- ---------
Contingent liabilities and commitments (Notes 8, 12, and 13)
Mandatorily redeemable equity securities................................................... 6,478 6,567
--------- ---------
Non-redeemable preferred stock, common stock and other stockholders' equity (deficit):
Preferred stock, authorized 6,000 and 3,000 shares at $.001 and $.01 par value,
respectively; issued and outstanding -- none............................................
Common stock, authorized 75,000 shares at $.01 par value; issued and outstanding --
14,152 shares........................................................................... 142 142
Capital in excess of par value........................................................... 59,478 58,703
Accumulated deficit...................................................................... (67,599) (61,922)
Treasury stock........................................................................... (734) (734)
Unrealized holding gains from securities available for sale.............................. 883
Other equity............................................................................. 439 690
--------- ---------
Total non-redeemable preferred stock, common stock and other stockholders' equity
(deficit)............................................................................. (8,274) (2,238)
--------- ---------
$ 142,891 $ 132,124
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
26
<PAGE>
ADVANCED MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLAR AND SHARE AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1992 1993 1994
--------- --------- ---------
<S> <C> <C> <C>
Sales........................................................................... $ 128,286 $ 119,417 $ 111,681
Cost of sales................................................................... 72,952 72,209 65,590
--------- --------- ---------
Gross margin.................................................................. 55,334 47,208 46,091
--------- --------- ---------
License fees revenue............................................................ 356 441 441
--------- --------- ---------
Selling expenses................................................................ 19,715 18,882 16,850
General and administrative expenses............................................. 15,778 13,773 10,746
Research and development expenses............................................... 9,425 9,050 6,345
Restructuring charges........................................................... 5,413
--------- --------- ---------
Total operating expenses...................................................... 44,918 47,118 33,941
--------- --------- ---------
Income from operations........................................................ 10,772 531 12,591
--------- --------- ---------
Other income (expenses):
Interest income............................................................... 2,637 2,767 2,526
Interest expense.............................................................. (11,617) (10,880) (8,690)
Other, net.................................................................... 2,285 2,065 1,136
--------- --------- ---------
(6,695) (6,048) (5,028)
--------- --------- ---------
Income (loss) before income taxes, minority interests, extraordinary item and
cumulative effect of change in accounting principle............................ 4,077 (5,517) 7,563
Provision for income taxes...................................................... 1,956 926 1,886
--------- --------- ---------
Income (loss) before minority interests, extraordinary item and cumulative
effect of change in accounting principle....................................... 2,121 (6,443) 5,677
Minority interests in consolidated subsidiaries................................. (4,565) 3,755
--------- --------- ---------
Income (loss) before extraordinary item and cumulative effect of change in
accounting principle........................................................... (2,444) (2,688) 5,677
Extraordinary item -- loss on early retirement of debt.......................... 8,632
--------- --------- ---------
Income (loss) before cumulative effect of change in accounting principle........ (11,076) (2,688) 5,677
Cumulative effect on prior years of accounting change for income taxes.......... 3,985
--------- --------- ---------
Net income (loss)............................................................... (11,076) 1,297 5,677
Dividends and accretion on mandatorily redeemable preferred stock............... 1,832 1,387 874
--------- --------- ---------
Net income (loss) applicable to common stock.................................... $ (12,908) $ (90) $ 4,803
--------- --------- ---------
--------- --------- ---------
Income (loss) per common share assuming no dilution:
Income (loss) before extraordinary item and cumulative effect of change in
accounting principle......................................................... $ (.30) $ (.29) $ .34
Extraordinary item............................................................ (.62)
Cumulative effect of change in accounting principle........................... .28
--------- --------- ---------
Net income (loss) per common share assuming no dilution..................... $ (.92) $ (.01) $ .34
--------- --------- ---------
--------- --------- ---------
Income (loss) per common share assuming full dilution:
Income (loss) before extraordinary item and cumulative effect of change in
accounting principle......................................................... $ (.30) $ (.29) $ .22
Extraordinary item............................................................ (.62)
Cumulative effect of change in accounting principle........................... .28
--------- --------- ---------
Net income (loss) per common share assuming full dilution................... $ (.92) $ (.01) $ .22
--------- --------- ---------
--------- --------- ---------
Weighted average common shares outstanding assuming no dilution................. 13,962 14,073 14,069
--------- --------- ---------
--------- --------- ---------
Weighted average common shares outstanding assuming full dilution............... 13,962 14,073 24,099
--------- --------- ---------
--------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
27
<PAGE>
ADVANCED MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1992 1993 1994
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)............................................................. $ (11,076) $ 1,297 $ 5,677
Adjustments to reconcile net income (loss) to net cash (used in) provided by
operating activities:
Depreciation and amortization............................................... 11,524 10,581 8,492
Cumulative effect of change in accounting principle......................... (3,985)
Restructuring charges....................................................... 5,413
Net gain on disposal/write-off of property and investments.................. (1,973) (3,895) (880)
Equity in net loss (gain) of investee and minority interests................ 4,565 (3,755)
Extraordinary loss -- early retirement of debt.............................. 8,632
(Increase) decrease, net of effects from acquisitions and divestitures:
Receivables............................................................... (1,209) 4,944 1,283
Inventories............................................................... (2,932) (1,233) (976)
Prepaid expenses and other current assets................................. 84 753 (409)
Net investment in sales-type leases....................................... (6,768) (107) 458
Other non-current assets.................................................. 709 (1,681) 304
Increase (decrease), net of effects from acquisitions and divestitures:
Accounts payable.......................................................... 2,230 (3,404) 1,918
Accrued expenses and other current liabilities............................ (3,381) (3,768) (1,530)
Litigation settlements.................................................... (1,000) (250)
Other non-current liabilities............................................. (15,431) 371 (3,502)
--------- --------- ---------
Net cash (used in) provided by operating activities............................. (15,026) 531 10,585
--------- --------- ---------
Cash flows from investing activities:
Net decrease (increase) in restricted cash and investments.................... 81 (746) 130
Capital expenditures.......................................................... (3,984) (1,616) (4,549)
Investments................................................................... (8,540) (1,960)
Proceeds from disposal of property............................................ 2,492 104 253
Proceeds from sale of investments............................................. 3,136 20,027 7,534
Notes receivable.............................................................. (200) 200
--------- --------- ---------
Net cash (used in) provided by investing activities............................. (7,015) 16,009 3,368
--------- --------- ---------
Cash flows from financing activities:
Net borrowings (repayments) under credit facilities........................... 366 (2,823) (5,296)
Principal payments on long-term debt.......................................... (40,853) (10,535) (44,998)
Proceeds from issuance of notes payable and long-term debt.................... 63,500 300 36,293
Dividends paid................................................................ (1,115) (544)
Proceeds from issuance of common stock........................................ 7,688
Offering costs................................................................ (4,603)
Redemption/repurchase of preferred stock...................................... (3,703) (3,816) (686)
--------- --------- ---------
Net cash provided by (used in) financing activities............................. 21,280 (17,418) (14,687)
--------- --------- ---------
Effect of exchange rate changes on cash......................................... 165 197 312
--------- --------- ---------
Net decrease in cash and cash equivalents....................................... (596) (681) (422)
Cash and cash equivalents at beginning of year.................................. 3,039 2,443 1,762
--------- --------- ---------
Cash and cash equivalents at end of year........................................ $ 2,443 $ 1,762 $ 1,340
--------- --------- ---------
--------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
28
<PAGE>
ADVANCED MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(DOLLAR AND SHARE AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK CAPITAL IN TREASURY STOCK
-------------- EXCESS OF ACCUMULATED ---------------
SHARES AMOUNT PAR VALUE DEFICIT SHARES AMOUNT
------ ------ ---------- ----------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1991....... 12,652 $127 $39,982 $(57,820) 74 $(704)
Accretion and dividends on
mandatorily redeemable preferred
stock............................. (1,832)
Issuance of common stock........... 500 5 6,954
Exercise of common stock
warrant........................... 1,000 10 15,740
Other equity transactions.......... 20 (11) 111
Net loss for the year.............. (11,076)
------ ------ ---------- ----------- ------ ------
Balance at December 31, 1992....... 14,152 142 60,864 (68,896) 63 (593)
Accretion and dividends on
mandatorily redeemable preferred
stock............................. (1,387)
Other equity transactions.......... 1 20 (141)
Net income for the year............ 1,297
------ ------ ---------- ----------- ------ ------
Balance at December 31, 1993....... 14,152 142 59,478 (67,599) 83 (734)
Accretion and dividends on
mandatorily redeemable preferred
stock............................. (874)
Unrealized holding gains from
securities available for sale.....
Other equity transactions.......... 99
Net income for the year............ 5,677
------ ------ ---------- ----------- ------ ------
Balance at December 31, 1994....... 14,152 $142 $58,703 $(61,922) 83 $(734)
------ ------ ---------- ----------- ------ ------
------ ------ ---------- ----------- ------ ------
<CAPTION>
UNREALIZED
HOLDING
GAINS FROM
SECURITIES
AVAILABLE OTHER
FOR SALE EQUITY TOTAL
---------- ------ --------
<S> <C> <C> <C>
Balance at December 31, 1991....... $ 322 $(18,093)
Accretion and dividends on
mandatorily redeemable preferred
stock............................. (1,832)
Issuance of common stock........... 6,959
Exercise of common stock
warrant........................... 15,750
Other equity transactions.......... (399) (268)
Net loss for the year.............. (11,076)
----- ------ --------
Balance at December 31, 1992....... (77) (8,560)
Accretion and dividends on
mandatorily redeemable preferred
stock............................. (1,387)
Other equity transactions.......... 516 376
Net income for the year............ 1,297
----- ------ --------
Balance at December 31, 1993....... 439 (8,274)
Accretion and dividends on
mandatorily redeemable preferred
stock............................. (874)
Unrealized holding gains from
securities available for sale..... $883 883
Other equity transactions.......... 251 350
Net income for the year............ 5,677
----- ------ --------
Balance at December 31, 1994....... $883 $ 690 $ (2,238)
----- ------ --------
----- ------ --------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
29
<PAGE>
ADVANCED MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE)
NOTE 1 -- BUSINESS AND ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES:
BUSINESS AND ORGANIZATION:
Advanced Medical, Inc. ("Advanced Medical"), operating through its
consolidated subsidiaries, is a leading developer and manufacturer of infusion
products and related technologies for the health care industry. On April 2,
1990, Advanced Medical acquired the IMED Division of Fisher Scientific Company
through IMED Corporation ("IMED"). IMED is a 90% owned subsidiary on a
fully-diluted basis. (Advanced Medical and its subsidiaries are collectively
referred to as the "Company".)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
CONSOLIDATION:
The financial statements include the accounts of Advanced Medical and its
greater than 50 percent-owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation. IMED's foreign
subsidiaries are consolidated as of and for the periods ended November 30, 1992,
1993 and 1994 in the December 31, 1992, 1993 and 1994 consolidated financial
statements, respectively.
REVENUE RECOGNITION:
Revenues from sales of fluid delivery instruments and related disposable
products, and from instrument capital lease contracts, are recognized at the
time such products are shipped. Revenues from instrument operating lease
contracts are recognized over the terms of the lease agreements, ranging from 1
to 5 years.
LICENSE FEE REVENUE RECOGNITION:
During 1991, IMED entered into a marketing, distribution and development
agreement with Pharmacia AB ("Pharmacia"). Pursuant to the agreement, a product
distribution fee of $6,530 was classified as deferred revenue (a non-current
liability) and is recognized on a straight-line basis over the 15 year term of
the agreement.
CONCENTRATIONS OF CREDIT RISK:
The Company provides a variety of financing arrangements for its customers.
The majority of the Company's accounts receivable are from hospitals throughout
the United States with credit terms of generally 30 days. The Company maintains
adequate reserves for potential credit losses and such losses, which have been
minimal, have been within management's estimates.
SECURITIES AVAILABLE FOR SALE:
Effective January 1, 1994, the Company adopted Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities" ("SFAS 115"). As permitted under SFAS 115, the Company
adopted the standard on a prospective basis. In accordance with SFAS 115, the
Company's investment in Alteon, Inc. (Note 5) is classified as securities
available for sale and is required to be carried at fair market value. During
1993, the Company accounted for its securities available for sale using the cost
method.
INVENTORIES:
Inventories are stated at the lower of cost (determined using the first-in,
first-out method) or market.
PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment are stated at cost. Depreciation and
amortization are provided using the straight-line method based upon the
following estimated useful lives of the assets or lease terms, if shorter, for
leasehold improvements and instrument operating leases:
<TABLE>
<S> <C>
Leasehold improvements......................................... 3 to 10 years
Machinery and equipment........................................ 3 to 10 years
Furniture and fixtures......................................... 4 to 8 years
Instruments on operating lease contracts....................... 1 to 5 years
</TABLE>
30
<PAGE>
ADVANCED MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE)
NOTE 1 -- BUSINESS AND ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES:
(CONTINUED)
INTANGIBLE ASSETS:
The excess of purchase price over the estimated fair values of assets
acquired and liabilities assumed has been recorded as goodwill and is amortized
using the straight-line method over 35 years. Patents are amortized using the
straight-line method over estimated useful lives of 4 to 12 years. Technology
licenses are amortized using the straight-line method over estimated useful
lives of 15 years. Management periodically reviews intangible assets for
impairment.
DEBT ISSUE COSTS:
Debt issue costs of $3,901 and $4,074 at December 31, 1993 and 1994,
respectively, are amortized using the straight-line method over the respective
terms of the debt agreements and are included in other non-current assets.
FOREIGN CURRENCY TRANSLATION:
The accounts of foreign subsidiaries which use local currencies as
functional currencies are translated into U.S. dollars using year-end exchange
rates for assets and liabilities, historical exchange rates for equity and
weighted average exchange rates during the period for revenues and expenses. The
gains or losses resulting from translations are excluded from results of
operations and accumulated as a component of stockholders' deficit.
RESEARCH AND DEVELOPMENT COSTS:
Research and development costs are expensed as incurred.
INCOME TAXES:
The Company and its domestic subsidiaries file a consolidated Federal income
tax return. Domestic subsidiaries file income tax returns in multiple states on
either a stand-alone or combined basis. Foreign subsidiaries file income tax
returns in their respective jurisdictions based on their separate taxable
income. The Company provides for deferred income taxes on undistributed earnings
of its foreign subsidiaries.
Effective January 1, 1993 the Company adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). SFAS
109 requires recognition of deferred tax liabilities and assets for the expected
future tax consequences of events that have been included in the financial
statements or tax returns. Under this method, deferred tax liabilities and
assets are determined based on the difference between the financial statement
and tax bases of assets and liabilities using enacted tax rates in effect for
the year in which the differences are expected to reverse (see Note 7). As
permitted under SFAS 109, the Company's 1992 consolidated statement of
operations has not been restated.
Prior to 1993, the provision for income taxes was based on income and
expense included in the accompanying consolidated statements of operations.
Differences between taxes so computed and taxes payable under applicable
statutes and regulations were classified as deferred taxes arising from timing
differences.
STATEMENT OF CASH FLOWS:
For the purpose of the statement of cash flows, the Company considers
short-term investments with an original maturity of three months or less to be
cash equivalents, excluding restricted amounts held in escrow or trust.
NET INCOME (LOSS) PER COMMON SHARE:
The Company's net income (loss) per common share assuming no dilution is
computed using the weighted average number of common shares outstanding during
the respective periods. Net income (loss)
31
<PAGE>
ADVANCED MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE)
NOTE 1 -- BUSINESS AND ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES:
(CONTINUED)
per common share assuming no dilution does not include common stock equivalents
(options and warrants) because the effect would be antidilutive. The Company's
net income (loss) per common share assuming full dilution is computed using the
weighted average number of common shares outstanding plus, for the year ended
December 31, 1994, the shares that would be outstanding assuming conversion of
the $6,000 secured promissory note ("Decisions Note") issued to Decisions
Incorporated ("Decisions") on January 4, 1994, and conversion of the $6,500
secured promissory note ("the Note") issued to Decisions on August 12, 1994 (see
Note 6). Net income (loss) applicable to common stock for the year ended
December 31, 1994 has been increased by $386 for the interest expense (net of
tax) on the convertible debt since conversion on January 4, 1994 and August 12,
1994, respectively, was assumed. The calculation of net income (loss) per common
share assuming full dilution excludes common stock equivalents and convertible
securities that are antidilutive.
NOTE 2 -- RESTRUCTURINGS AND ASSETS HELD FOR SALE:
During 1993, the Company adopted a plan to sell its Irish manufacturing
facility to a wholly-owned subsidiary of its European marketing and distribution
partner, Pharmacia. The Irish manufacturing facility primarily produces molded
components used to assemble disposable administration sets ("Sets").
Net assets held for sale in the accompanying balance sheet consists of the
following at December 31, 1993:
<TABLE>
<S> <C>
Inventories......................................................... $ 1,258
Property, plant and equipment....................................... 3,000
Other assets........................................................ 939
---------
Total assets...................................................... 5,197
Accounts payable and accrued expenses............................... 1,272
---------
Net assets held for sale............................................ $ 3,925
---------
---------
</TABLE>
Assets held for sale are presented at their expected net realizable values
and liabilities are presented at their carrying amounts.
The Company recorded a $3,515 restructuring charge during 1993 in connection
with the proposed sale of its Irish manufacturing operations and the relocation
of its molding operations to the United States. Professional fees and relocation
costs of $1,300 are included in the restructuring charge. During 1993, the
Company also recorded a $1,898 charge to consolidate certain of the Company's
operations. The provision includes severance payments, facilities consolidation
costs and the write-off of equipment associated with discontinued products, net
of the defined benefit plan curtailment gain (see Note 11).
During 1994, the Company sold its Irish manufacturing facility to Pharmacia
for $4,089, from which the net proceeds were used to repay a portion of the GECC
long-term debt. The Company entered into an agreement with Pharmacia for the
purchase, at fixed prices, of minimum quantities of Sets and components used to
assemble Sets through 1996. The Company is obligated to purchase approximately
$2,300 and $800 from Pharmacia during 1995 and 1996, respectively.
32
<PAGE>
ADVANCED MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE)
NOTE 3 -- COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1993 1994
--------- ---------
<S> <C> <C>
Receivables:
Trade receivables............................................................... $ 19,204 $ 17,822
Allowance for doubtful accounts................................................. (804) (855)
--------- ---------
18,400 16,967
Current portion of net investment in sales-type and direct financing leases
(Note 12)...................................................................... 7,146 6,948
Other........................................................................... 453 926
--------- ---------
$ 25,999 $ 24,841
--------- ---------
--------- ---------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1993 1994
--------- ---------
<S> <C> <C>
Inventories:
Raw materials................................................................... $ 5,094 $ 5,311
Work-in-process................................................................. 4,438 3,753
Finished goods.................................................................. 9,839 11,283
--------- ---------
$ 19,371 $ 20,347
--------- ---------
--------- ---------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1993 1994
--------- ---------
<S> <C> <C>
Property, plant and equipment:
Machinery and equipment......................................................... 10,671 8,530
Furniture and fixtures.......................................................... 2,779 2,915
Leasehold improvements.......................................................... 2,749 2,776
Instruments on operating lease contracts........................................ 9,156 10,729
Construction-in-process......................................................... 731 1,717
--------- ---------
26,086 26,667
Accumulated depreciation and amortization....................................... (14,286) (15,072)
--------- ---------
$ 11,800 $ 11,595
--------- ---------
--------- ---------
</TABLE>
Depreciation expense was $6,709, $5,659 and $3,893 for 1992, 1993 and 1994,
respectively.
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1993 1994
--------- ---------
<S> <C> <C>
Accrued expenses and other current liabilities:
Compensation.................................................................... $ 3,275 $ 2,958
Restructuring................................................................... 1,176 1,234
Interest........................................................................ 2,350 216
Deferred revenue................................................................ 1,048 637
Income taxes.................................................................... 1,665 2,025
Warranty........................................................................ 2,671 2,355
Other........................................................................... 3,392 4,641
--------- ---------
$ 15,577 $ 14,066
--------- ---------
--------- ---------
</TABLE>
33
<PAGE>
ADVANCED MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE)
NOTE 3 -- COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS: (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1993 1994
--------- ---------
<S> <C> <C>
Other non-current liabilities:
Deferred revenue................................................ $ 5,763 $ 5,119
Restructuring................................................... 1,725 200
Warranty........................................................ 1,176 1,185
Other........................................................... 2,123 781
--------- ---------
$ 10,787 $ 7,285
--------- ---------
--------- ---------
</TABLE>
NOTE 4 -- INTANGIBLES:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1993 1994
--------- ---------
<S> <C> <C>
Intangible assets:
Goodwill........................................................................ $ 47,513 $ 47,513
Patents......................................................................... 15,816 15,816
Technology licenses and other................................................... 19
--------- ---------
63,348 63,329
Accumulated amortization........................................................ (12,575) (15,811)
--------- ---------
$ 50,773 $ 47,518
--------- ---------
--------- ---------
</TABLE>
During 1993, the Company discontinued its funding of Dean Kamen and his
affiliates ("Kamen") to develop hospital infusion pumps and related disposables
based on Kamen's fluid management technology. Other expenses in 1993 includes a
loss of $1,919, consisting of the write off of unamortized technology licenses
of $3,919 less a non-refundable product development fee of $2,000. The product
development fee was received in 1991 from Pharmacia as part of a $10,000
arrangement to develop products using Kamen's fluids management technology. The
fees were to be earned upon the attainment of certain development milestones.
Since IMED discontinued funding Kamen, the deferred revenue of $2,000 was
released to income and IMED will not receive any of the remaining $8,000 of
product development fees.
Goodwill was reduced by $3,234 during 1993 as a result of Advanced Medical
acquiring Kamen's interests in IMED (see Note 9).
NOTE 5 -- SECURITIES AVAILABLE FOR SALE:
Current marketable securities comprise the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1993 DECEMBER 31, 1994
-------------------- --------------------
MARKET MARKET
COST VALUE COST VALUE
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Applied Immune Sciences, Inc. ("AIS")............................ $ 873 $ 1,072
Alteon, Inc. ("Alteon").......................................... 3,470 7,570 $ 2,000 $ 2,883
--------- --------- --------- ---------
$ 4,343 $ 8,642 $ 2,000 $ 2,883
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
During 1993, the Company sold 327 shares of its AIS common stock for $6,332,
resulting in a realized gain of $3,681. During 1994, the Company sold all
remaining 107 shares of its AIS common stock for $1,005, resulting in a realized
gain of $133.
34
<PAGE>
ADVANCED MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE)
NOTE 5 -- SECURITIES AVAILABLE FOR SALE: (CONTINUED)
During 1993, the Company sold 554 shares of its Alteon common stock for
$5,180, resulting in a realized gain of $3,020. During 1994, the Company sold
378 shares of its Alteon common stock for $2,763, resulting in a realized gain
of $1,293. At December 31, 1994, the Company owned 513 shares of Alteon common
stock.
The market value at December 31, 1994 is based on the quoted market price
and is considered to represent fair value as determined under SFAS 115. The fair
value may not represent actual value of the Alteon common stock that could have
been realized as of December 31, 1994 or that will be realized in the future.
The gross unrealized gain as of March 17, 1995 on the current marketable
equity securities was $1,332.
NOTE 6 -- NOTES PAYABLE AND LONG-TERM DEBT:
In connection with the acquisition of the IMED Division, IMED entered into a
revolving credit facility and a term loan agreement with GECC. During 1994, IMED
restructured its loan agreement with GECC ("Amended Loan Agreement").
Long-term debt comprises the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1993 1994
--------- ---------
<S> <C> <C>
GECC term loan (IMED)............................................................. $ 17,742
GECC revolving credit facility (IMED)............................................. $ 18,497
Debentures (Advanced Medical)..................................................... 60,000 60,000
Exchanged Senior Note (Advanced Medical).......................................... 9,300
Decisions Note and the Note (Advanced Medical).................................... 12,500
Other............................................................................. 3,082 2,020
--------- ---------
90,124 93,017
Current portion................................................................... (19,125) (1,214)
--------- ---------
$ 70,999 $ 91,803
--------- ---------
--------- ---------
</TABLE>
GECC LONG-TERM DEBT
The Amended Loan Agreement includes a $42,000 revolving credit facility that
replaces the previous $22,000 revolving credit facility and the term loan. The
interest rate on the Amended Loan Agreement is the index rate plus 2% (10 1/2%
at December 31, 1994). Outstanding indebtedness under the Amended Loan Agreement
will mature in March 1999. Advances under the Amended Loan Agreement will be
made against a borrowing base consisting of 85% of eligible accounts receivable,
65% of eligible inventory and 85% of the future value of eligible instrument
lease receivables. The Amended Loan Agreement contains affirmative and negative
covenants, including, among others, the maintenance of certain financial ratios,
balances, and earnings levels, limitations on capital expenditures and transfer
of funds to Advanced Medical and restrictions on incurring additional debt. The
Amended Loan Agreement is secured by a first priority interest in all of IMED's
assets and the IMED capital stock and certain patents used in IMED's business,
owned by Advanced Medical.
DEBENTURES
The Company has outstanding 7 1/4% convertible subordinated debentures
("Debentures") in the princi-
pal amount of $60,000. The Debentures are convertible at the option of the
holder into common stock of the Company at any time prior to maturity, unless
previously redeemed or repurchased, at a conversion price of $18.14 per share,
subject to adjustment in certain events. The Debentures mature on January 15,
2002. Interest on the Debentures is payable semi-annually on each January 15 and
July 15. The Debentures are
35
<PAGE>
ADVANCED MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE)
NOTE 6 -- NOTES PAYABLE AND LONG-TERM DEBT: (CONTINUED)
redeemable in whole or in part at the option of the Company at any time on or
after January 15, 1993, at the redemption prices set forth in the indenture,
together with accrued and unpaid interest, provided that the Debentures may not
be redeemed during the twelve-month periods commencing on January 15, 1993 and
January 15, 1994, unless the last reported sale price of the common stock for a
specified period prior to such redemption is at least 170% and 160%,
respectively, of the conversion price then in effect. The Debenture holders may
require the Company to repurchase the Debentures, in whole or in part, in
certain circumstances involving a change in control of the Company. The
Debentures are subordinate to all existing or future senior indebtedness of the
Company, and are also effectively subordinated to liabilities of the Company's
subsidiaries. The indenture does not restrict the incurrence of senior
indebtedness or other indebtedness by the Company or any subsidiary (see Note
16).
REFINANCINGS
On January 4, 1994, the Company issued the Decisions Note and borrowed
$6,000 from Decisions. The Note bears interest at 7% and is payable on the
earlier of January 4, 2001 or on demand by Decisions provided the repayment is
generated by net income of the Company exclusive of IMED, any borrowing or debt
or equity offering by the Company, or funds available through distribution from
affiliates, including IMED. The principal portion of the note is convertible at
the option of the holder into 6,000,000 shares of the Company's common stock at
a conversion price of $1.00 per share (subject to antidilution protection). The
Decisions Note is secured by a first priority security interest in all of the
Company's assets subject to the rights of GECC under the Amended Loan Agreement.
The proceeds of the Note were used by the Company to pay $6,000 of indebtedness
to Aeneas Venture Corporation ("Aeneas").
On August 12, 1994, the Company issued the Note and borrowed an additional
$6,500 from Decisions. The proceeds of the loan were used to (i) pay all
remaining indebtedness to Aeneas in the amount of $3,188, (ii) make the July 15,
1994 interest payment on the Debentures in the amount of $2,187 and (iii) pay
other obligations of the Company. The payment of all indebtedness owed by
Advanced Medical to Aeneas released Advanced Medical from its obligations under
a letter agreement with Aeneas thereby removing the restrictions imposed on
Advanced Medical's use of its available cash. The Note is payable on January 4,
2001 and has an annual interest rate of 9%. Interest on the principal is due on
June 30 and December 31 of each year. In regards to security, the Note ranks
pari passu with the Decisions Note. The Note is convertible, at the option of
the holder, into up to 10,483,870 shares of the Company's common stock at a
conversion price of $.62 per share (subject to antidilution protection). Any
shares of common stock converted cannot be sold into the public market prior to
August 12, 1996.
MATURITIES
Maturities of long-term debt during the years subsequent to December 31,
1995 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
-------------------------------------------------------------------------
<S> <C>
1996..................................................................... $ 326
1997..................................................................... 149
1998..................................................................... 160
1999..................................................................... 18,668
Thereafter............................................................... 72,500
---------
$ 91,803
---------
---------
</TABLE>
At December 31, 1994, the fair value, as determined under SFAS No. 107, of
long-term debt, including current maturities, was $69,017. The estimated fair
values represent the quoted market price for the Debentures and carrying amounts
for all other debt.
36
<PAGE>
ADVANCED MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE)
NOTE 7 -- INCOME TAXES:
Income (loss) before income taxes, minority interests, extraordinary item
and cumulative effect of change in accounting principle comprises the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1992 1993 1994
<S> <C> <C> <C>
Domestic operations...................................................... $ (5,778) $ (9,650) $ 2,515
Foreign operations....................................................... 9,855 4,133 5,048
--------- --------- ---------
$ 4,077 $ (5,517) $ 7,563
--------- --------- ---------
--------- --------- ---------
</TABLE>
The provision for income taxes comprises the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1992 1993 1994
<S> <C> <C> <C>
Current:
Federal.................................................................. $ 60
State.................................................................... $ 601 $ 281 664
Foreign.................................................................. 1,082 818 1,049
--------- --------- ---------
1,683 1,099 1,773
--------- --------- ---------
Deferred:
Federal.................................................................. 140 (338) 81
State.................................................................... 250 509 115
Foreign.................................................................. (117) (344) (83)
--------- --------- ---------
273 (173) 113
--------- --------- ---------
$ 1,956 $ 926 $ 1,886
--------- --------- ---------
--------- --------- ---------
</TABLE>
The principal items accounting for the differences in income taxes computed
at the U.S. statutory rate (34%) and the effective income tax rate comprise the
following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1992 1993 1994
--------- --------- ---------
<S> <C> <C> <C>
Taxes computed at statutory rate......................................... $ 1,386 $ (1,875) $ 2,578
State income taxes, net of federal benefit............................... 562 521 884
Foreign taxes............................................................ 965 442 965
Taxes above the U.S. rate on earnings deemed repatriated................. (527) 374 397
Amortization of non-deductible intangible assets......................... 606 744 442
Non-taxable basis difference............................................. (1,036)
Losses for which no current benefits are available....................... 451
Limitations of acquired tax benefits..................................... 306
Items affected by valuation allowance.................................... (3,380)
Miscellaneous............................................................ (37)
--------- --------- ---------
Provision for income taxes before extraordinary item..................... 1,956 926 1,886
--------- --------- ---------
Extraordinary item:
Taxes computed at statutory rate....................................... (3,025)
State income taxes, net of federal benefit............................. (83)
Losses for which no current benefits are available..................... 2,842
--------- --------- ---------
(266)
--------- --------- ---------
Total.................................................................... $ 1,690 $ 926 $ 1,886
--------- --------- ---------
--------- --------- ---------
</TABLE>
37
<PAGE>
ADVANCED MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE)
NOTE 7 -- INCOME TAXES: (CONTINUED)
As of December 31, 1994 the Company has net operating loss carryforwards of
approximately $29,000 for federal income tax purposes which expire in varying
amounts through 2008. As of December 31, 1994 the Company has capital loss
carryforwards of approximately $5,000 for federal income tax purposes which
expire in varying amounts through 1996. The availability of the Company's net
operating loss and capital loss carryforwards would be subject to substantial
limitations if it should be determined that certain stockholders of the Company
have increased their percentage of ownership of the Company's stock by more than
50% during a specified period.
The components of the net deferred tax asset as of December 31, 1994 are as
follows:
<TABLE>
<S> <C>
Deferred tax assets:
Net operating loss carryforward......................... $ 10,523
Capital loss carryforward............................... 2,047
Accrued liabilities and reserves........................ 3,116
Unearned income......................................... 2,394
Debt issue costs........................................ 732
Inventory............................................... 984
Book and tax depreciation/amortization differences...... 877
Miscellaneous........................................... 1,522
---------
22,195
Valuation allowance..................................... (20,436)
---------
Total deferred tax assets............................... 1,759
---------
Deferred tax liabilities:
Miscellaneous........................................... 459
---------
Total deferred tax liabilities.......................... 459
---------
Net deferred tax assets............................... $ 1,300
---------
---------
</TABLE>
NOTE 8 -- LITIGATION AND CONTINGENCIES:
The Company is a defendant in various actions, claims, and legal proceedings
arising from normal business operations. Management believes they have
meritorious defenses and intends to vigorously defend against all allegations
and claims. As the ultimate outcome of these matters is uncertain, no contingent
liabilities or provisions have been recorded in the accompanying financial
statements for such matters. However, in management's opinion, based upon
discussion with legal counsel, liabilities arising from these matters, if any,
will not have a material adverse effect on the consolidated financial position
or results of operations.
An action was commenced during 1986 against various parties including the
corporate predecessor of IMED alleging, among other matters, breach of
employment contract and wrongful discharge and seeking $5,000 and $40,000 in
actual and punitive damages, respectively. During 1993, IMED settled this action
with the plaintiff. Pursuant to the settlement agreement, the action was
dismissed and IMED paid $1,000 to the plaintiff during 1993 and delivered to the
plaintiff a promissory note, payable over 2 years, in the principle amount of
$1,275. As a $1,375 contingent liability was previously recorded, $900 was
charged to other expense during 1993.
An action was commenced during 1991 against IMED, Fisher and various other
parties alleging, among other matters, breach of contract and misappropriation
of trade secrets. The plaintiffs were seeking unspecified punitive and
compensatory damages. During 1994, IMED settled this action with the plaintiffs.
Pursuant
38
<PAGE>
ADVANCED MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE)
NOTE 8 -- LITIGATION AND CONTINGENCIES: (CONTINUED)
to the settlement agreement, the action was dismissed and IMED paid $250 to the
plaintiff and delivered to a subsidiary of Fisher a promissory note, payable
over 5 years, in the principal amount of $750. A charge related to this
liability in the amount of $1,200 was recorded in the fourth quarter of 1993.
NOTE 9 -- MANDATORILY REDEEMABLE EQUITY SECURITIES AND MINORITY INTERESTS IN
CONSOLIDATED SUBSIDIARIES:
PREFERRED STOCK:
Mandatorily redeemable preferred stock activity comprises the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1992 1993 1994
<S> <C> <C> <C>
Balance at beginning of period........................................... $ 12,437 $ 9,451 $ 6,478
Retirement of 10% preferred stock........................................ (3,703) (3,816)
Repurchase of 10% preferred stock........................................ (785)
Accretion of amounts payable upon redemption............................. 733 575 177
Accrued dividends........................................................ 1,099 812 697
Payment of dividends..................................................... (1,115) (544)
--------- --------- ---------
Balance at end of period................................................. $ 9,451 $ 6,478 $ 6,567
--------- --------- ---------
--------- --------- ---------
</TABLE>
In connection with the capitalization of Advanced Medical and mergers during
1989, 1,594 shares of $.01 par value mandatorily redeemable preferred stock
("10% preferred stock") were issued (1,800 shares authorized). The 10% preferred
stockholders are entitled to cumulative dividends in preference to any dividends
on common stock, payable semi-annually on March 27 and September 27, if
declared, out of funds legally available. The 10% preferred stock has a
liquidation value of $10.00 per share plus accrued and unpaid dividends. The 10%
preferred stockholders have limited voting rights under certain circumstances;
the stock is not convertible into any other class of stock.
The 10% preferred stock was recorded at its fair value at the issuance date
($6.26 per share). The carrying amount is periodically increased for the amounts
which will be payable upon redemption. The accretion to the carrying amount is
determined using the interest method and results in a corresponding decrease to
paid-in capital.
The 10% preferred stock is redeemable at any time at the option of the Board
of Directors, in whole or in part, and is mandatorily redeemable in the amount
of $3,985 by March 27 of each year from 1991 through 1994, if declared
(aggregate redemption price of $15,940).
The Company redeemed 180 shares of its 10% preferred stock during 1990. To
satisfy the remaining redemption requirement of 219 shares, the Company redeemed
262 shares of its 10% preferred stock in March 1991 through the issuance of 333
shares of a newly created class of mandatorily redeemable convertible preferred
stock ("convertible preferred stock") to a stockholder or entities controlled by
the stockholder. The convertible preferred stock is subordinate to the existing
10% preferred stock and has a liquidation preference of $6.40 per share.
Cumulative dividends are payable semi-annually at 15% of the liquidation
preference. Each share is convertible into .617 common shares, subject to
anti-dilution adjustments, at any time prior to redemption. The convertible
preferred stock is redeemable after all the 10% preferred shares are redeemed
(a) at the holder's option at the liquidation preference plus accrued dividends,
or (b) at the Company's option at the liquidation preference plus accrued
dividends, plus $1.50 per share. The convertible preferred stock is mandatorily
redeemable at the liquidation preference plus accrued dividends on the later of
March 26, 1998 or the date all existing 10% preferred stock is redeemed.
39
<PAGE>
ADVANCED MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE)
NOTE 9 -- MANDATORILY REDEEMABLE EQUITY SECURITIES AND MINORITY INTERESTS IN
CONSOLIDATED SUBSIDIARIES: (CONTINUED)
On July 12, 1994, IMED commenced a Tender Offer for up to all of the
outstanding shares of 10% Preferred Stock for a cash price equal to $9.00 per
share (the "Tender Offer"). The Tender Offer expired on August 30, 1994, at
which time 68,517 shares of the 10% Preferred Stock were tendered. Immediately
upon purchase thereof, IMED distributed all such shares of the 10% Preferred
Stock acquired by it pursuant to the Tender Offer to Advanced Medical and
received a credit from Advanced Medical against the amount of accrued and unpaid
dividends on shares of IMED's preferred stock held by Advanced Medical in an
amount equal to the liquidation value of the 10% Preferred Stock ($10 per share)
plus accrued and unpaid dividends thereon ($1.45 per share).
COMMON STOCK WARRANT
IMED's common stock warrant held by GECC and included in minority interests
in consolidated subsidiaries on the accompanying consolidated balance sheet is
comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1993 1994
--------- ---------
<S> <C> <C>
IMED common stock warrant (includes net accretion to estimated redemption price of
$2,491 at December 31, 1993 and 1994)............................................... $ 5,000 $ 5,000
--------- ---------
--------- ---------
</TABLE>
In connection with the loan agreements, IMED issued a warrant allowing GECC
to purchase 10% of IMED's common stock on a fully-diluted basis for nominal
consideration, subject to adjustment as provided in the agreement, and
exercisable at any time until August 12, 2004. IMED is required to purchase not
less than 25% of the shares under the warrant, or warrant stock if exercised, at
the option of GECC, and also upon (a) the filing of a registration statement for
the offering of IMED's common stock; (b) the sale of IMED; (c) the prepayment in
full of the GECC loans, or (d) the termination by GECC of the revolving loan
under provisions of the loan agreement. Additionally, IMED has the option to
redeem not less than 25% of the shares under warrant, or warrant stock if
exercised, beginning April 2, 1995. The purchase price per share will be the
higher of fair value (determined by either an investment banking firm or at
quoted price if the shares are publicly traded) or fully-diluted net book value
at the purchase date. Additionally, the warrant shares, or warrant stock if
exercised, have specified registration rights.
In September 1993, the Company acquired all of the interests of IMED held by
Kamen, which included a 10.79% common equity interest and $1,690 of 10%
redeemable preferred stock, for $1,750. Minority interests were reduced by the
carrying amount of Kamen's interests of $4,984. The excess of the carrying
amount ($4,984) over the purchase price ($1,750) has been recorded as a
reduction in goodwill.
NOTE 10 -- STOCK OPTION PLANS:
The Company maintains several stock option and purchase plans under which
incentive stock options may be granted to key employees and nonqualified stock
options may be granted to key employees, directors, officers, independent
contractors and consultants. A maximum of 1,950 shares of common stock are
subject to issuance under the Plans.
The exercise price for incentive stock options generally may not be less
than the underlying stock's fair market value at the grant date. The exercise
price for non-qualified stock options granted to non-directors will not be less
than the par value of a share of common stock, as determined by a committee
appointed by the Board of Directors ("the Committee"). The exercise price for
non-qualified stock options granted to directors may not be less than the
underlying stock's fair market value at the grant date.
Options granted to non-directors generally vest and become exercisable as
determined by the Committee. Options granted to directors generally vest and
become exercisable at a rate of four thousand shares for
40
<PAGE>
ADVANCED MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE)
NOTE 10 -- STOCK OPTION PLANS: (CONTINUED)
each 12 month period of continuous service as a director. Options granted to
non-directors generally expire upon the earlier of the termination of the
optionee's employment or ten years from the grant date. Options granted to
directors generally expire upon the earlier of the date the optionee is no
longer a director or five years from the grant date.
STOCK OPTION ACTIVITY
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
----------------------
1992 1993 1994
------ ------ ------
<S> <C> <C> <C>
Outstanding, beginning of year...................................................................... 631 589 471
Granted during the year............................................................................. 8
Cancelled during the year........................................................................... (42 ) (126) (143)
------ ------ ------
Outstanding, end of year (at prices ranging from $4.47 to $16.94 per share)......................... 589 471 328
------ ------ ------
------ ------ ------
Fully vested and exercisable at end of the year (at prices ranging from $4.47 to $16.94 per
share)............................................................................................. 198 294 254
------ ------ ------
------ ------ ------
</TABLE>
At December 31, 1994, there were 1,551 shares reserved for future grants.
During January 1995, the Company cancelled options to acquire 266 shares of
common stock (at prices ranging from $4.47 to $16.94 per share) and granted
options to acquire 1,224 shares of common stock (at $1.8125 per share) to key
employees of the Company.
NOTE 11 -- BENEFIT PLANS:
PENSION PLANS
The Company has a defined benefit pension plan (the "Plan") which covers
substantially all of its U.S. employees. On December 1, 1993, the Company's
Board of Directors approved amendments to the Plan provisions which include,
among other matters, cessation of benefit accruals after December 31, 1993. All
earned benefits as of that date are preserved and the Company continues to
contribute to the Plan as necessary to fund earned benefits. The portion of the
projected benefit obligation based on the expected future compensation levels
decreased $1,381, and nonvested benefits decreased $508. The Plan also had an
unrecognized net loss, resulting from Plan asset performance experience
different than assumed, remaining unamortized of $1,219 and unrecognized prior
service costs of $18 at December 31, 1993. The sum of the effects resulting from
the Plan curtailment was a gain of $652 and was included in restructuring
charges at December 31, 1993 as described in Note 2.
Certain of the Company's foreign employees are covered by defined benefit
pension plans. Benefits are based on years of service and the employee's
compensation during the last five years of employment. The Company's funding
policy is to contribute the net pension cost annually to the plan. As a result
of the Company's plan to sell its Irish manufacturing facility, the foreign
accrued pension cost of $298 is included in net assets held for sale at December
31, 1993 as described in Note 2.
41
<PAGE>
ADVANCED MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE)
NOTE 11 -- BENEFIT PLANS: (CONTINUED)
The following table sets forth the plans' estimated funded status and
amounts recognized in the Company's balance sheet:
<TABLE>
<CAPTION>
DECEMBER 31, 1993 DECEMBER 31, 1994
---------------------- -----------------
DOMESTIC FOREIGN DOMESTIC
----------- --------- -----------------
<S> <C> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation............................................... $ 8,836 $ 620 $ 7,080
----------- --------- -------
----------- --------- -------
Accumulated benefit obligation.......................................... $ 9,171 $ 783 $ 7,310
----------- --------- -------
----------- --------- -------
Projected benefit obligation for service rendered to date............... $ 9,171 $ 1,572 $ 7,310
Plan assets at fair value, consisting of equity and fixed income
restricted funds (Domestic) and equities, fixed income securities and
cash (Foreign)......................................................... 8,880 1,513 8,937
----------- --------- -------
Plan assets (less) greater than projected benefit obligation............ (291) (59) 1,627
Unrecognized net gain................................................... (65) (239) (1,533)
----------- --------- -------
(Accrued) prepaid pension cost.......................................... $ (356) $ (298) $ 94
----------- --------- -------
----------- --------- -------
</TABLE>
The components of net periodic pension cost (benefit) are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1993 DECEMBER 31, 1994
------------------------ -----------------
DOMESTIC FOREIGN DOMESTIC
----------- ----------- -----------------
<S> <C> <C> <C>
Service cost-benefits earned during the period............................ $ 1,391 $ 230 $ 143
Interest cost on projected benefit obligation............................. 674 135 631
Actual return on plan assets.............................................. (775) (129) 263
Amortization and deferred amounts......................................... 147 17 (1,075)
Employee contributions.................................................... (108)
----------- ----- -------
Net periodic pension cost (benefit)....................................... $ 1,437 $ 145 $ (38)
----------- ----- -------
----------- ----- -------
Discount rates............................................................ 7.02% 7.5% 8.56%
Rates of increase in compensation levels.................................. 4.0% 5.5% 4.0%
Expected long-term rate of return on assets............................... 9.0% 8.0% 9.0%
</TABLE>
42
<PAGE>
ADVANCED MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE)
NOTE 12 -- LEASES:
LEASE RECEIVABLES
The Company leases instruments to customers under non-cancelable capital and
operating lease contracts with terms ranging generally from 1 to 5 years.
Scheduled future minimum lease payments are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
YEAR ENDING DECEMBER 31: LEASES LEASES
----------------------------------------------------------------- --------- -----------
<S> <C> <C>
1995........................................................... $ 9,319 $ 1,486
1996........................................................... 7,296 1,136
1997........................................................... 4,852 918
1998........................................................... 3,044 675
1999........................................................... 1,465 414
Thereafter..................................................... 194
--------- -----------
Total minimum lease payments................................... 26,170 $ 4,629
-----------
-----------
Allowance for uncollectible lease payments..................... (396)
Unearned income................................................ (4,019)
---------
21,755
Current portion (see Note 3)................................... (6,948)
---------
Net investment in sales-type and direct financing leases....... $ 14,807
---------
---------
</TABLE>
Operating lease revenue totaled $7,673, $2,838 and $2,033 during 1992, 1993
and 1994, respectively.
LEASE COMMITMENTS
The Company leases buildings and equipment under non-cancelable operating
leases with initial terms ranging from 1 to 6 years. Scheduled future minimum
lease commitments as of December 31, 1994 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31:
------------------------------------------------------------
<S> <C>
1995...................................................... $ 2,325
1996...................................................... 2,095
1997...................................................... 1,143
1998...................................................... 83
---------
$ 5,646
---------
---------
</TABLE>
Rent expense was $3,840, $3,845 and $3,740 during 1992, 1993 and 1994,
respectively.
NOTE 13 -- RELATED PARTY ARRANGEMENTS AND COMMITMENTS:
On April 2, 1990, IMED entered into an agreement with Deka Products Limited
Partnership ("Deka") whereby Deka granted IMED an exclusive, worldwide,
royalty-free license of certain intravenous infusion pump technology developed
by Deka. In consideration for this technology, IMED issued Deka 10.79% of its
common stock and 13% of its preferred stock (each on a fully-diluted basis).
During 1993, the Company discontinued its funding of Deka and AMD to develop
hospital infusion pumps and related disposables based on Deka's fluid management
technology and the Company acquired all the interests of IMED held by Deka (see
Notes 4 and 9).
During 1990, IMED entered into a five year purchase and supply agreement
with a hospital buying group. Pursuant to the agreement, the buying group is to
market IMED's products to the individual hospitals which are members of the
buying group. In exchange for such marketing efforts, IMED granted the buying
43
<PAGE>
ADVANCED MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE)
NOTE 13 -- RELATED PARTY ARRANGEMENTS AND COMMITMENTS: (CONTINUED)
group stock appreciation rights ("SARs") of up to an aggregate of 250,000 shares
of Advanced Medical common stock, subject to a vesting schedule based on
purchasing volumes. Upon signing the agreement the buying group was immediately
vested in 50,000 SARs and during 1991 the buying group's purchasing volumes
qualified it to become vested in an additional 50,000 SARs. The recorded
liability related to such SARs totaled $400 at December 31, 1993. During 1994,
IMED repurchased all vested SARs and paid $400 to the buying group.
In October 1991, IMED sold certain European assets to Pharmacia and entered
into a marketing, distribution and development arrangement with Pharmacia (the
"Pharmacia Transaction"), pursuant to which Pharmacia obtained the exclusive
right to market and distribute IMED's infusion products in a territory that
includes most of Europe. On August 12, 1994, the Company, IMED and Pharmacia
amended their distribution agreement. Under the terms of the Amended and
Restated Distribution Agreement ("Amended Distribution Agreement"), Pharmacia
retains the exclusive right (subject to certain exceptions) to distribute IMED's
infusion products in the territory that includes most of Europe. Under the
Amended Distribution Agreement, Pharmacia has the right not to distribute
certain products currently under development by IMED. In the event of such an
election, IMED has the right to sell such products directly or through others,
and under certain circumstances, has the right to repurchase from Pharmacia the
distribution rights to IMED products currently distributed by Pharmacia in the
territory. In addition, Pharmacia has the right to terminate the Amended
Distribution Agreement at any time on 12 months notice, in which event Pharmacia
would be required to make a payment of $2,500 to IMED and IMED would be required
to make payments to Pharmacia based on net sales of products currently
distributed by Pharmacia for the 4 years following termination.
During 1994, the Company issued the Decisions Note and the Note to
Decisions, a corporation affiliated with Jeffry M. Picower. Mr. Picower is an
officer, director and significant stockholder of the Company. (See Note 6.)
44
<PAGE>
ADVANCED MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE)
NOTE 14 -- SEGMENT INFORMATION:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1992 1993 1994
---------- ---------- ----------
<S> <C> <C> <C>
Net sales to unaffiliated customers:
United States.............................................................. $ 117,099 $ 107,434 $ 98,787
Foreign.................................................................... 11,187 11,983 12,894
---------- ---------- ----------
Net sales as reported in the accompanying statement of operations............ $ 128,286 $ 119,417 $ 111,681
---------- ---------- ----------
---------- ---------- ----------
Intergeographic sales:
United States.............................................................. $ 5,480 $ 5,014 $ 7,668
Foreign.................................................................... 19,744 11,948 6,565
---------- ---------- ----------
Total intergeographic sales.................................................. $ 25,224 $ 16,962 $ 14,233
---------- ---------- ----------
---------- ---------- ----------
Income from operations:
United States.............................................................. $ 13,868 $ 3,149 $ 12,438
Foreign.................................................................... 1,242 676 1,584
---------- ---------- ----------
15,110 3,825 14,022
General corporate expenses................................................... (4,338) (3,294) (1,431)
Interest income.............................................................. 2,637 2,767 2,526
Interest expense............................................................. (11,617) (10,880) (8,690)
Other, net................................................................... 2,285 2,065 1,136
---------- ---------- ----------
Income (loss) before income taxes, minority interests, extraordinary item and
cumulative change in accounting principle................................... $ 4,077 $ (5,517) $ 7,563
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1993 1994
---------- ----------
<S> <C> <C>
Identifiable assets:
United States........................................................................... $ 121,665 $ 117,408
Foreign................................................................................. 10,259 6,875
---------- ----------
131,924 124,283
General corporate assets.................................................................. 10,967 7,841
---------- ----------
Total assets as reported in the accompanying balance sheet................................ $ 142,891 $ 132,124
---------- ----------
---------- ----------
</TABLE>
NOTE 15 -- SUPPLEMENTAL INFORMATION TO STATEMENTS OF CASH FLOWS:
Foreign and state income taxes paid during 1992, 1993 and 1994 totaled
$2,061, $870 and $1,433, respectively. Interest paid during 1992, 1993 and 1994
totaled $19,568, $10,280 and $7,745, respectively. Interest paid during 1992
includes $12,451 accrued in previous periods.
NOTE 16 -- SUBSEQUENT EVENT (UNAUDITED):
Effective March 31, 1995, the Company completed an exchange (the "Exchange")
wherein $28,245, or approximately 47%, in principal amount of the Company's
Debentures were exchanged for an aggregate of $14,123 in principal amount of the
Company's newly created 15% Subordinated Debentures due 1999 ("15% Debentures")
and 1,340,441 shares of the Company's common stock ("Common Stock"). As a result
of this transaction, the Company will recognize an extraordinary gain on the
extinguishment of debt of approximately $8,200 in the first quarter of 1995.
45
<PAGE>
ADVANCED MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE)
NOTE 16 -- SUBSEQUENT EVENT (UNAUDITED): (CONTINUED)
PRO FORMA CONDENSED BALANCE SHEET
The unaudited Pro Forma Condensed Balance Sheet is based upon the Company's
historical consolidated balance sheet at December 31, 1994, after giving effect
to the pro forma adjustments described in the footnotes hereto as if the
Exchange had been consummated on December 31, 1994.
The pro forma adjustments described herein are based upon currently
available information and upon certain assumptions that the Company believes are
reasonable under current circumstances and which are described herein. The
unaudited Pro Forma Condensed Balance Sheet should be read in conjunction with
the Company's historical consolidated financial statements and accompanying
notes thereto. Due to the fact that the Exchange and certain related
transactions occurred subsequent to December 31, 1994, the pro forma financial
information presented herein is not necessarily indicative of the results or
balances that would have been attained had the Exchange actually taken place
prior to December 31, 1994 and the actual adjustments and balances may vary from
those presented in the unaudited Pro Forma Condensed Balance Sheet. However,
management believes that any differences between actual adjustments and pro
forma adjustments will not have a material impact on the pro forma financial
statements.
PRO FORMA CONDENSED STATEMENT OF OPERATIONS
The unaudited Pro Forma Condensed Statement of Operations is based upon the
Company's historical consolidated statement of operations for the year ended
December 31, 1994, after giving effect to the pro forma adjustments described in
the footnotes hereto as if the Exchange had been consummated on January 1, 1994.
The pro forma adjustments described herein are based upon currently
available information and upon certain assumptions that the Company believes are
reasonable under current circumstances and which are described herein. The
unaudited Pro Forma Condensed Statement of Operations should be read in
conjunction with the historical consolidated financial statements and
accompanying notes thereto. The Pro Forma Condensed Statement of Operations is
not necessarily indicative of what actual results of operations would have been
for the respective period presented had the Exchange actually taken place on
January 1, 1994 and does not purport to project the Company's results of
operations for any future period.
46
<PAGE>
ADVANCED MEDICAL, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED BALANCE SHEET (UNAUDITED)
DECEMBER 31, 1994
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
EXCHANGE DECEMBER 31,
PRO FORMA 1994 PRO
ACTUAL ADJUSTMENTS FORMA AS
1994 DEBIT/(CREDIT) ADJUSTED
---------- -------------- ------------
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents........................................... $ 1,340 $ (300)(B) $ 1,040
Receivables, net.................................................... 24,841 24,841
Inventories......................................................... 20,347 20,347
Restricted cash and investment securities, securities available for
sale, prepaid expenses and other current assets.................... 6,755 6,755
---------- ------------
Total current assets.............................................. 53,283 52,983
Net investment in sales-type and direct financing leases.............. 14,807 14,807
Property, plant and equipment, net.................................... 11,595 11,595
Other non-current assets.............................................. 4,921 (1,393)(A) 3,828
300(B)
Intangible assets, net................................................ 47,518 47,518
---------- ------------
$ 132,124 $ 130,731
---------- ------------
---------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion of long-term debt and accounts payable.............. $ 9,641 $ 9,641
Accrued expenses and other current liabilities...................... 14,066 (620)(A) 14,686
---------- ------------
Total current liabilities......................................... 23,707 24,327
---------- ------------
Long-term debt........................................................ 91,803 28,245(A) 77,681
(14,123)(A)
Other non-current liabilities......................................... 7,285 7,285
---------- ------------
99,088 84,966
---------- ------------
Minority interests in consolidated subsidiaries and mandatorily
redeemable equity securities......................................... 11,567 11,567
---------- ------------
Common stock and other stockholders' equity (deficit):
Preferred stock
Common stock........................................................ 142 (13)(A) 155
Capital in excess of par value...................................... 58,703 (3,673)(A) 62,376
Accumulated deficit................................................. (61,922) (8,423)(A) (53,499)
Treasury stock, unrealized holding gains from securities available
for sale and other equity.......................................... 839 839
---------- ------------
Total non-redeemable preferred stock, common stock and other
stockholders' (deficit) equity................................... (2,238) 9,871
---------- ------------
$ 132,124 $ 130,731
---------- ------------
---------- ------------
</TABLE>
47
<PAGE>
ADVANCED MEDICAL, INC. AND SUBSIDIARIES
NOTES TO PRO FORMA CONDENSED BALANCE SHEET (UNAUDITED)
DECEMBER 31, 1994
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Note 1 -- The Exchange pro forma adjustments assume the surrender of $28,245 in
principal amount of Debentures in exchange for an aggregate of $14,123 in
principal amount of the Company's newly-created 15% Debentures and 1,340,441 of
Common Stock. The Exchange pro forma adjustments are made as follows:
(A) Reflects the surrender of $28,245 of Debentures in exchange for an aggregate
of $14,123 in principal amount of the Company's newly created 15% Debentures
and 1,340,441 shares of Common Stock ($2.75/share) and the corresponding
extraordinary gain on retirement of debt of $10,436. The extraordinary gain
is recorded net of $1,393, comprising the write-off of approximately 47% of
the unamortized Debenture debt issue costs and net of $620, the effective
tax rate applicable to the Exchange.
(B) Reflects the use of cash to pay $300 of debt issue costs in connection with
the Company's newly created 15% Debentures.
48
<PAGE>
ADVANCED MEDICAL, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED STATEMENT OF OPERATIONS (UNAUDITED)
YEAR ENDED DECEMBER 31, 1994
(DOLLAR AND SHARE AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
EXCHANGE
PRO FORMA
ADJUSTMENTS PRO FORMA
1994 DEBIT/(CREDIT) AS ADJUSTED
--------- -------------- -----------
<S> <C> <C> <C>
Income from operations.................................................... $ 12,591 $ 12,591
--------- -----------
Other income (expenses):
Interest income......................................................... 2,526 2,526
Interest expense........................................................ (8,690) $ (122)(D) (8,638)
70(E)
Other, net.............................................................. 1,136 1,136
--------- -----------
(5,028) (4,976)
--------- -----------
Income before income taxes and extraordinary item......................... 7,563 7,615
Provision for income taxes................................................ 1,886 20(F) 1,906
--------- -----------
Income before extraordinary item.......................................... 5,677 5,709
Extraordinary item-gain on early retirement of debt....................... (8,226)(C) 8,226
--------- -----------
Net Income................................................................ 5,677 13,935
Dividends on mandatorily redeemable preferred stock....................... 874 874
--------- -----------
Net income applicable to common stock..................................... $ 4,803 $ 13,061
--------- -----------
--------- -----------
Income per common share assuming no dilution:
Income before extraordinary item........................................ $ .34 $ .32
Extraordinary item...................................................... .53
--------- -----------
Net income per common share assuming no dilution...................... $ .34 $ .85
--------- -----------
--------- -----------
Income per common share assuming full dilution:
Income before extraordinary item........................................ $ .22 $ .21
Extraordinary item...................................................... .32
--------- -----------
Net income per common share assuming full dilution.................... $ .22 $ .53
--------- -----------
--------- -----------
Weighted average common shares outstanding assuming no dilution........... 14,069 15,409
--------- -----------
--------- -----------
Weighted average common shares outstanding assuming full dilution......... 24,099 25,439
--------- -----------
--------- -----------
</TABLE>
49
<PAGE>
ADVANCED MEDICAL, INC. AND SUBSIDIARIES
NOTES TO PRO FORMA CONDENSED STATEMENT OF OPERATIONS (UNAUDITED)
YEAR ENDED DECEMBER 31, 1994
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Note 1 -- The Exchange pro forma adjustments assume the surrender of $28,245 in
principal amount of Debentures in exchange for an aggregate of $14,123 in
principal amount of the Company's newly-created 15% Debentures and 1,340,441 of
Common Stock. The Exchange pro forma adjustments are made as follows:
(C) Reflects the extraordinary gain of $10,436 on the extinguishment of debt due
to the Exchange of $28,245 in principal amount of Debentures for an
aggregate of $14,123 in principal amount of 15% Debentures and 1,340,441
shares of Common Stock ($2.75/share). The extraordinary gain is recorded net
of $1,590, comprising the write-off of approximately 47% of the unamortized
Debenture debt issue costs and net of $620, the effective tax rate
applicable to the Exchange.
(D) Reflects the elimination of approximately 47% of the amortization of
Debenture debt issue costs of $197, net of additional amortization of debt
issue costs of $75 incurred with the Exchange.
(E) Reflects additional interest expense of $2,118 incurred on the $14,123 of
15% Debentures, net of the elimination of interest expense of $2,048 related
to the $28,245 of Debentures which is assumed to have been retired in
connection with the Exchange.
(F) Reflects the tax effect on items (D) and (E) above, calculated at the
statutory rate.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
50
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The executive officers and directors of the Company and executive officers
of IMED are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH COMPANY AND IMED
------------------------------------- --- --------------------------------------------------------------------
<S> <C> <C>
Jeffry M. Picower.................... 52 Director, Chairman of the Board and Chief Executive Officer;
Chairman of the Board -- IMED
Joseph W. Kuhn....................... 34 President, Chief Financial Officer, Treasurer and Secretary;
President, Treasurer and Secretary -- IMED
Anthony Cerami (1)(2)................ 54 Director
Norman M. Dean (1)(3)................ 74 Director
Henry Green.......................... 52 Director
Richard B. Kelsky (2)(3)............. 39 Director
<FN>
------------------------
(1) Member of Audit Committee
(2) Member of Acquisition Committee
(3) Member of Compensation Committee
</TABLE>
JEFFRY M. PICOWER -- Mr. Picower was a Director, Vice President and
Assistant Treasurer of the Company from September 1988 to March 1989 and Vice
Chairman from December 1988 to June 1989. Mr. Picower was re-elected as a
Director and Co-chairman of the Board on March 8, 1993 and became Chairman of
the Board on May 4, 1993. Mr. Picower has been Chief Executive Officer since
September 7, 1993. He has, since 1984, been Chairman of the Board and Chief
Executive Officer of Monroe Systems for Business, Inc. ("Monroe"), a world-wide
office equipment, distribution and service organization. Mr. Picower has been a
director of Physician Computer Network, Inc. ("PCN") since January 1994 and
Chairman of the Board since June 1994. PCN, a corporation whose principal
shareholder is Mr. Picower, operates a computer network linking its office-based
physician members to health care organizations.
JOSEPH W. KUHN -- Mr. Kuhn was appointed President of the Company and IMED
in January 1995. Since August 1993, Mr. Kuhn has been Chief Financial Officer,
Treasurer and Secretary of the Company and Treasurer and Secretary of IMED. From
August 1993 to January 1995, Mr. Kuhn was Vice President of the Company and
Executive Vice President of IMED. Mr. Kuhn was Corporate Controller of the
Company from January 1990 to August 1993. Mr. Kuhn joined Controlled
Therapeutics Corporation ("CTC") (a development stage pharmaceutical company and
a former subsidiary of the Company) in September 1989 and was its Corporate
Controller through December 1991. From 1983 to 1989, Mr. Kuhn held positions of
increasing responsibility, including senior manager, with Price Waterhouse, a
public accounting firm. From 1982 to September 1983, Mr. Kuhn was employed by
Main Hurdman, a public accounting firm. Mr. Kuhn holds a B.A. degree from
Rutgers University and is a Certified Public Accountant.
ANTHONY CERAMI, PH.D. -- Dr. Cerami was first elected to the Board of
Directors of the Company in March 1989. He has been President of The Picower
Institute for Medical Research since October 1991. Dr. Cerami was Dean, Graduate
and Postgraduate Studies at The Rockefeller University from 1986 through January
1991 and was a Professor at The Rockefeller University from 1978 until October
1991. He is an editor of the JOURNAL -- MOLECULAR MEDICINE and is on the
editorial boards of several biomedical journals. He has been an author of
numerous publications covering many aspects of medical biochemistry. He holds a
B.S. from Rutgers University and a Ph.D. from The Rockefeller University. Dr.
Cerami is Chairman of the Scientific Advisory Board and a director of Alteon.
NORMAN M. DEAN -- Mr. Dean was first elected to the Board of Directors of
the Company in March 1989. Mr. Dean has been a director and President of
Foothills Financial Corporation, a venture capital company, since January 1985
and Chairman of the Board of Miller Diversified Corp. since May 1990.
51
<PAGE>
HENRY GREEN -- Mr. Green was President and Chief Operating Officer of the
Company from September 1990 to March 1993 and has been a director of the Company
since 1991. Mr. Green was also President and Chief Executive Officer of CTC from
February 1991 to December 1992. Mr. Green became an employee of PCN in March
1993 and Chief Executive Officer in June 1994. Mr. Green was elected President
of PCN in May 1993 and Chief Executive Officer in June 1994. He was elected as a
director of PCN in July 1993. From 1988 to September 1990, Mr. Green was Vice
President of Johnson & Johnson International. From 1981 to 1988, Mr. Green was
President of Vistakon, Inc., a subsidiary of Johnson & Johnson. Mr. Green holds
a B.S. and an M.B.A. from Drexel University.
RICHARD B. KELSKY -- Mr. Kelsky has been a Director of the Company since
June 1989. Since 1984, Mr. Kelsky has been Vice President and General Counsel of
Monroe. Mr. Kelsky has been a director of PCN since January 1992.
Directors are elected for terms of one year and until their successors are
duly elected and have qualified. There are no family relationships among the
above directors.
ITEM 11. EXECUTIVE COMPENSATION.
The following table provides certain summary information concerning
compensation paid or accrued by the Company and IMED to or on behalf of the
Company's Chief Executive Officer and each of the other most highly compensated
executive officers of the Company whose salary and bonus exceeded $100,000
(determined for and as of the end of 1994) (the "Named Executive Officers") for
the years ended December 31, 1992, 1993 and 1994:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
----------------------------------- ----------------------------------
OTHER ANNUAL SECURIITES ALL OTHER
SALARY COMPENSATION UNDERLYING COMPENSATION
YEAR ($) BONUS ($) ($)(2) OPTIONS ($)(3)
--------- --------- --------- ------------- ----------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Jeffry M. Picower (1) .................... 1994 0 0 12,500 0 0
Chairman of the Board and 1993 0 0 7,895 0 0
Chief Executive Officer
Joseph W. Kuhn ........................... 1994 135,500 40,650 9,250 0 2,063
President, Chief Financial Officer, 1993 138,627 0 104,376 0 2,222
Treasurer and Secretary; 1992 131,183 30,000 185,208 0 1,964
President, Treasurer and
Secretary -- IMED
<FN>
------------------------
(1) Mr. Picower does not receive an annual salary or bonus from the Company.
"Other Annual Compensation" for Mr. Picower represents compensation earned
as a director. See "Compensation of Directors."
(2) "Other Annual Compensation" includes annual compensation, other than salary
or bonus, including perquisites and other personal benefits where such
exceed the lesser of $50,000 or 10% of the Named Executives Officer's
annual salary and bonus. In the amounts reported for 1994, Mr Kuhn received
supplemental income for the use of a vehicle valued at $9,250. In the
amounts reported for 1993, Mr. Kuhn received supplemental income of $67,750
and cancellation of a $35,543 loan in connection with his acceptance of
employment as the Company's Chief Financial Officer and the use of a
vehicle valued at $1,083. In the amount reported for 1992, Mr. Kuhn
received payments to or on his behalf totaling $124,226 and $60,982 for
relocation expenses and tax liabilities on the relocation expenses,
respectively.
(3) The respective amounts reported as "All Other Compensation" for Mr. Kuhn
represent contributions made by the Company to the Company's 401(K) Plan on
behalf of Mr. Kuhn to match pre-tax elective deferral contributions
(included under salary) made by Mr. Kuhn to such plan.
</TABLE>
52
<PAGE>
EMPLOYMENT AGREEMENTS
Mr. Kuhn is employed by the Company and IMED as President pursuant to an
employment agreement providing for a base salary of $175,000. The agreement
provides that, upon termination of his employment by the Company other than for
cause, Mr. Kuhn will receive an amount, to be paid over a six-month period
commencing with the date his employment terminates, equal to six months' salary,
which amount will be reduced by any salary or compensation that Mr. Kuhn
receives from any other sources during such six-month period. In addition,
subject to certain conditions, the option to purchase shares of common stock
previously granted to Mr. Kuhn will become fully vested when his employment
terminates. From September 1993 through December 1994, Mr. Kuhn was employed by
the Company as Chief Financial Officer and by IMED as Executive Vice President
pursuant to an employment agreement providing for a base salary of $135,500.
During 1994, Mr. Kuhn received a performance bonus of $40,650 pursuant to
his employment contract.
In connection with Mr. Kuhn's acceptance of employment as the Company's
Chief Financial Officer on September 1, 1993, he received supplemental income of
$67,750 and the cancellation of a $35,543 loan made by the Company to Mr. Kuhn
in connection with his relocation to California in 1990.
STOCK-BASED BENEFIT PLANS
STOCK OPTION PLAN
The Company's Stock Option Plan (the "Option Plan"), was originally adopted
by the Board of Directors on December 27, 1988. The Option Plan in its first
amended and restated form was adopted by the Board of Directors on July 12, 1990
and became effective on September 7, 1990. The Option Plan in it second amended
and restated form was adopted by the Board of Directors on June 30, 1992. The
Option Plan in its third amended and restated form was approved by the Board of
Directors and became effective on June 28, 1994. Under the Option Plan,
incentive stock options ("ISOs"), as provided in Section 422 of the Internal
Revenue Code, may be granted to key employees of the Company and its
subsidiaries, and nonqualified stock options ("NQSOs") may be granted to key
employees, directors (except directors eligible to participate in the Directors
Plan), and officers of the Company, its subsidiaries or affiliates, as well as
independent contractors and consultants performing services for such entities.
The maximum aggregate number of shares of the Company's common stock that may be
issued under the Option Plan is 1,700,200. The number of shares of common stock
which remained available for issuance under the Option Plan was 1,638,680 of
which 1,107,305 are subject to currently outstanding options. The number of
shares of common stock available under the Option Plan will be reduced on a
share for share basis in respect of each share issued other than under the
Option Plan to persons eligible to participate in the Option Plan. In the event
of a change in the capitalization of the Company which affects the common stock,
the Committee may make proportionate adjustments to the number of shares of
common stock for which options may be granted and the number and exercise price
of shares of common stock subject to outstanding options. Options may not be
granted under the Stock Option Plan after December 27, 1998.
The Option Plan provides for administration by a committee appointed by the
Board of Directors (the "Committee"). No member of the Committee is eligible to
receive options under the Option Plan. The Committee has authority, subject to
the terms of the Option Plan, to determine the individuals to whom options may
be granted, the exercise price and number of shares of common stock subject to
each option, whether the options granted to employees are to be ISOs, the time
or times during which all or a portion of each option may be exercised and
certain other provisions of each option.
Pursuant to the Option Plan, the purchase price of shares of common stock
subject to ISOs must be not less than the fair market value of the common stock
at the date of the grant; provided, that the purchase price of shares subject to
ISOs granted to any optionee who owns shares possessing more than 10% of the
combined voting power of the Company or any parent or subsidiary of the Company
("Ten Percent Shareholder") must be not less than 110% of the fair market value
of the common stock at the date of the grant. With respect to NQSOs, the
purchase price of shares will be determined by the Committee at the time of the
grant, but will not be less than the par value of a share of common stock. The
maximum term of an option may not exceed 10 years from the date of grant, except
with respect to ISOs granted to Ten Percent
53
<PAGE>
Shareholders which must expire within five years of the date of grant. Options
granted vest and become exercisable as determined by the Committee. The
Committee will limit the grant so that no more than 250,000 shares of common
stock (subject to certain adjustments) may be awarded to any one employee in any
calendar year. During the lifetime of an optionee, his or her options may be
exercised only by such optionee. Options are not transferable other than by will
or by the laws of descent and distribution.
Payment of the purchase price for the shares of common stock to be received
upon exercise of an option may be made in cash, in shares of common stock or in
any combination thereof. In addition, the Committee may, pursuant to the terms
of the stock option agreement between the optionee and the Company, provide for
payment of the purchase price by promissory note or by any other form of
consideration permitted by law.
Options granted to participants under the Option Plan are subject to
forfeiture under certain circumstances in the event an optionee is no longer
employed by or performing services for the Company. In the event an optionee is
terminated for cause, all unexercised options held by such optionee (whether or
not vested) expire upon such termination. If an optionee is no longer an
Officer, Director or Employee (as defined in the Option Plan) other than as the
result of having been terminated for cause, all unvested options expire at such
time and all vested options expire twelve months thereafter, unless by their
terms such options expire sooner.
In the event of a change in control, as defined in the Option Plan, unless
otherwise determined by the Committee at the time of grant or by amendment (with
the holder's consent) of such grant, all options not vested on or prior to the
effective time of any such change of control shall immediately vest as of such
effective time.
No options were granted under the Option Plan in 1994 to any director of the
Company or Named Executive Officer.
AGGREGATED OPTION EXERCISES IN FISCAL YEAR 1994
AND OPTION VALUES AS OF DECEMBER 31, 1994
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT 12/31/94 AT 12/31/94 ($)(1)
SHARES ACQUIRED VALUE REALIZED -------------------------- --------------------------
ON EXERCISE ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------------- --------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Jeffry M. Picower.................. 0 0 0 0 0 0
Joseph W. Kuhn (2)................. 0 0 19,200 10,800 0 0
<FN>
------------------------
(1) Calculated based on the excess of the closing price of the Company's common
stock on December 31, 1994 ($2.00) as reported in the American Stock
Exchange Composite Transactions published in The Wall Street Journal over
the option exercise price.
(2) On January 5, 1995, the Company cancelled the options to acquire 30,000
shares of common stock owned by Mr. Kuhn and granted Mr. Kuhn an option to
acquire 125,000 shares of common stock ($1.8125 per share).
</TABLE>
DIRECTORS PLAN
The Company's Non-Qualified Stock Option Plan for Non-Employee Directors
(the "Directors Plan"), a separate plan pursuant to which it grants NQSOs to its
non-employee directors, was originally adopted by the Board on July 12, 1990 and
became effective on September 7, 1990. The Directors Plan in its amended and
restated form was adopted by the Board of Directors and became effective on June
30, 1992. The Directors Plan in its second amended and restated form was
approved by the Board of Directors and became effective on June 28, 1994.
Directors who are eligible participants in the Directors Plan are not eligible
to receive awards under the Option Plan. An aggregate of 250,000 shares of the
Company's common stock may be issued under the Directors Plan. The number of
shares of common stock which remained available for issuance under the Directors
Plan was 240,000, of which 62,000 are subject to currently outstanding options.
54
<PAGE>
The number of shares of common stock available under the Directors Plan will be
reduced on a share for share basis in respect of each share issued other than
under the Directors Plan to persons eligible to participate in the Directors
Plan. In the event of a change in the capitalization of the Company which
affects the common stock, the committee which administers the Directors Plan
(the "Plan Committee") may make proportionate adjustments to the number of
shares of common stock for NQSOs which may be granted and to the number and
exercise price of shares of common stock subject to outstanding NQSOs. NQSOs may
not be granted under the Directors Plan after September 7, 2000.
The Plan Committee consists of at least two individuals who are not eligible
to participate in the Directors Plan. The Plan Committee has the authority to
administer all aspects of the Directors Plan other than (i) the grant of NQSOs;
(ii) the number of shares of common stock subject to NQSOs; (iii) the rate at
which options granted thereunder vest and become first exercisable; and (iv) the
price at which each share covered by a NQSO may be purchased, all of which are
determined automatically under the Directors Plan.
On September 10, 1990, initial grants of NQSOs covering 12,000 shares of
common stock were made automatically under the Directors Plan to each of the
Company's three non-employee directors. An initial grant of NQSOs covering
12,000 shares of common stock also will be made automatically to any person who
becomes an eligible participant after September 10, 1990, on the business day
following such person's election to the Board of Directors. During the term of
the Directors Plan, additional grants of NQSOs covering 12,000 shares of common
stock will be made to each participant in the Directors Plan every three years
on the anniversary of such person's initial NQSO grant. The NQSOs granted under
the Directors Plan will vest and become exercisable at the rate of 4,000 for
every twelve month period of continuous service on the Board, provided that the
optionee is still a member of the Board on that date. For purposes of vesting,
participants will receive credit for any period of continuous service prior to
September 7, 1990. The term of each NQSO is five years from the date of grant.
During the lifetime of an optionee, his or her NQSOs may be exercised only by
the optionee and the NQSOs are not transferable other than by will or by the
laws of descent and distribution. NQSOs granted under the Directors Plan which
have not yet vested are subject to termination if the optionee ceases to be a
director or becomes an employee of the Company and all NQSOs which have vested
expire twelve months after such change in status, unless by their terms such
NQSOs expire sooner. In the event that an optionee is removed from the Board for
cause, all unexercised NQSOs, whether or not vested, expire upon such removal.
The purchase price of shares of common stock subject to NQSOs is the fair
market value of the common stock on the date of the grant. Payment for the
shares of Common Stock to be received by a optionee upon exercise of a NQSO may
be in cash or in shares of common stock. In addition, the Plan Committee may
provide in such optionee's stock option agreement for payment of the purchase
price by promissory note or any other form of consideration permitted by law.
In the event of a change in control, as defined in the Directors Plan, all
NQSOs not vested on or prior to the effective time of any such change in control
shall immediately vest as of such effective time.
COMPENSATION OF DIRECTORS
The Company's current policy is to compensate members of its Board of
Directors who are not employees of the Company at the annual rate of $10,000
plus options to purchase 4,000 shares of the Company's Common Stock pursuant to
the Directors Plan. See "Stock-Based Benefit Plans Directors Plan." Travel and
accommodation expenses of directors incurred in connection with meetings are
reimbursed by the Company.
In March 1993, the Company and Mr. Green entered into a consulting agreement
with a three year term, expiring on March 15, 1996, and providing for the
payment to Mr. Green of consulting fees in the amount of $100,000 annually. Mr.
Green does not currently receive the $10,000 annual director's compensation or
the option to purchase the Company's common stock pursuant to the Directors
Plan.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The table below sets forth, as of March 30, 1995, information regarding the
beneficial ownership of the Company's Common Stock by (i) all persons known by
the Company to own beneficially more than 5% of its
55
<PAGE>
outstanding Common Stock, (ii) each director of the Company, (iii) each of the
Named Executive Officers who still hold an office with the Company and/or its
subsidiaries, and (iv) all directors and officers of the Company as a group.
Unless otherwise stated, the Company believes that the beneficial owners of the
shares listed below have sole investment and voting power with respect to such
shares.
<TABLE>
<CAPTION>
SHARES
BENEFICIALLY PERCENTAGE OF
OWNED TOTAL (1)
--------------- -------------
<S> <C> <C>
Jeffry M. Picower ................................................................... 20,655,510(2) 66.9%
South Ocean Blvd.
Palm Beach, FL 33480
FMR Corporation ..................................................................... 1,557,062(3) 5.0
Devonshire Street
Boston, MA 02109
Anthony Cerami....................................................................... 21,159(4) *
Norman M. Dean....................................................................... 16,000(4) *
Henry Green.......................................................................... 5,000 *
Richard B. Kelsky.................................................................... 92,100(4) *
Joseph W. Kuhn....................................................................... 0 *
All directors and officers as a group (6 individuals)................................ 20,789,769(5) 67.3
<FN>
------------------------
* Less than 1%
(1) Based on 14,069,861 shares of Common Stock outstanding, which does not
include the shares of Common Stock issuable upon conversion of the
Debentures or the exercise of the warrants or options or the conversion of
Convertible Preferred Stock or the conversion of the Convertible Notes
described below in footnotes (2) through (5). However, in computing the
respective percentages of the Common Stock beneficially owned by the
holders described in footnotes (2) through (5), the shares of Common Stock
subject to the warrant, option or conversion privileges described therein
were deemed outstanding.
(2) The total for Mr. Picower includes (i) 1,379,600 shares of Common Stock
owned by Decisions, (ii) 357,100 shares of Common Stock owned by JA Special
Partnership Limited (the "Partnership"), (iii) 267,099 shares of Common
Stock issuable upon the conversion of an aggregate of 333,000 shares of
Convertible Preferred Stock owned by Mr. Picower (166,674 shares),
Decisions (30,317 shares) and the Partnership (136,009), (iv) 6,000,000
shares of Common Stock issuable upon conversion of the $6,000,000
Convertible Note owned by Decisions and (v) 10,483,870 shares of Common
Stock issuable upon conversion of the $6,500,000 Convertible Note owned by
Decisions. The shares of Convertible Preferred Stock owned by Mr. Picower,
Decisions and the Partnership, collectively, represent 100% of the issued
and outstanding shares of Convertible Preferred Stock. Mr. Picower is the
sole stockholder and sole director of Decisions and the sole general
partner of the Partnership and, as such, shares or has the sole power to
vote or direct the vote of and to dispose or direct the disposition of such
shares of Common Stock and may be deemed to be the beneficial owner of such
shares.
(3) The total for FMR Corp. includes 1,557,062 shares beneficially owned by
Fidelity Management & Research Company, as a result of its serving as
investment advisor to various investment companies registered under Section
8 of the Investment Company Act of 1940 and serving as investment advisor
to certain other funds which are generally offered to limited groups if
investors. The number of shares beneficially owned by Fidelity Management &
Research Company includes 1,557,062 shares as a result of the assumed
conversion of $28,245,000 principal amount of the debentures at a
conversion price of $18.14 per share. FMR Corp. has sole voting power with
respect to zero shares and sole dispositive power with respect to 1,557,062
shares.
(4) The total for each of Dr. Cerami and Messrs. Dean and Kelsky includes
currently exercisable options on 16,000, 12,000 and 10,000 shares of Common
Stock, respectively, under the Directors Plan. In addition, Dr. Cerami owns
beneficially 741 shares of 10% Preferred Stock.
</TABLE>
56
<PAGE>
<TABLE>
<S> <C>
(5) The total includes currently exercisable options on 38,000 shares under the
Directors Plan. In addition, all directors and officers as a group own an
aggregate of 741 shares of 10% Preferred Stock, which represent less than
1% of the outstanding shares of 10% Preferred Stock.
</TABLE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
On January 4, 1994, the Company issued a secured promissory note to
Decisions in the amount of $6,000,000, the proceeds of which were used to repay
principal to Aeneas Venture Corporation ("Aeneas"). The note bears interest at
7% and is payable on the earlier of January 4, 2001 or on demand by Decisions
provided the repayment is generated by net income of the Company exclusive of
IMED, any borrowing or debt or equity offering by the Company, or funds
available through distribution from affiliates, including IMED. The principal
portion of the note is convertible at the option of the holder into 6,000 shares
of the Company's common stock at a conversion price of $1.00 per share (subject
to antidilution protection). The Decisions Note is secured by a first priority
security interest in all of the Company's assets subject to the rights of GECC
under the Amended Loan Agreement.
On August 12, 1994, the Company issued the Note and borrowed $6,500,000 from
Decisions. The proceeds of the loan were used to (i) pay all indebtedness to
Aeneas in the amount of $3,188,000, (ii) make the July 15, 1994 interest payment
on the Company's 7% convertible subordinated debentures ("Debentures") in the
amount of $2,187,000 and (iii) pay other obligations of the Company. The payment
of the interest due on the Debentures cured Advanced Medical's default in its
payment of interest. The payment of all indebtedness owed by Advanced Medical to
Aeneas released Advanced Medical from its obligations under a letter agreement
with Aeneas thereby removing the restrictions imposed therein on Advanced
Medical's use of its available cash. The Note is payable on January 4, 2001 and
has an annual interest rate of 9%. Interest on the principal is due on June 30
and December 31 of each year. In regards to security, the Note ranks pari passu
with the Decisions Note. The Note is convertible, at the option of the holder,
into up to 10,483,870 shares of Common Stock at a conversion price of $.62 per
share (subject to antidilution protection). Any shares of Common Stock converted
cannot be sold into the public market prior to August 12, 1996.
57
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this report.
1. FINANCIAL STATEMENTS:
The following financial statements of Advanced Medical, Inc. and its
subsidiaries are included in Part II, Item 8 of this report, on the following
pages:
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Report of Independent Accountants................................................................ 25
Consolidated balance sheets at December 31, 1993 and 1994........................................ 26
Consolidated statements of (loss) income for the years ended December 31, 1992,
1993 and 1994................................................................................... 27
Consolidated statements of cash flows for the years ended December 31, 1992,
1993 and 1994................................................................................... 28
Consolidated statements of stockholders' equity (deficit) for the period from December 31, 1991
to December 31, 1994............................................................................ 29
Notes to consolidated financial statements....................................................... 30
</TABLE>
2. FINANCIAL STATEMENT SCHEDULES:
Schedule III -- Condensed Financial Information of Advanced Medical, Inc. as
of December 31, 1993 and 1994 and for the three years ended December 31,
1994.
Schedule VIII -- Valuation and Qualifying Accounts and Reserves for the
three years ended December 31, 1994.
All other schedules have been omitted because they are inapplicable, not
required or the required information is included in the financial statements or
notes thereto.
3. EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NO.
---------
<S> <C> <C>
2.1 -- Asset Sale Agreement dated October 28, 1991 by and among IMED Limited, IMED France S.N.C., IMED
Medizintechnik GmbH, Kabi Pharmacia Limited, Pharmacia France S.A., Kabi Pharmacia GmbH, Kabi
Pharmacia AB and IMED. (Incorporated by reference to Exhibit 2-10 to the Company's report on Form
10-Q for the quarter ended September 30, 1991 (the "September 30, 1991 10-Q").)*
2.2 -- Asset Sale Agreement dated October 28, 1991 by and among IMED, IMED France S.N.C., and Pharmacia
France S.A. (Incorporated by reference to Exhibit 2-11 to the September 30, 1991 10-Q.)
2.3 -- Letter dated October 28, 1991 by and among IMED Limited, IMED France, S.N.C., IMED Medizintechnik
GmbH, Kabi Pharmacia GmbH and Kabi Pharmacia AB. (Incorporated by reference to Exhibit 2-12 to
the September 30, 1991 10-Q.)
3.1 -- Certificate of Incorporation of the Company and form of Certificate of Incorporation of the
Company, as amended. (Incorporated by reference to Exhibit 3.1(a) to the Prospectus/Joint Proxy
Statement, dated March 3, 1989, of Fidata Corporation, Advanced Medical, Inc. and Controlled
Therapeutics Corporation included and forming part of the Registration Statement on Form S-4 of
Advanced Medical (the "Prospectus/Joint Proxy Statement").)
3.2 -- By-Laws of the Company, as amended. (Incorporated by reference to Exhibit 3.1(b) to the
Prospectus/Joint Proxy Statement.)
3.3 -- Amendments to Articles First and Fourth of the Restated Certificate of Incorporation of the
Company. (Incorporated by reference to Exhibits A and B to the Company's Proxy Statement, dated
August 15, 1990, for its Special Meeting of Stockholders held on September 7, 1990) [the
"September 1990 Proxy Statement"].)
</TABLE>
58
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO.
---------
<S> <C> <C>
3.4 -- Amendment to Article Fourth of the Restated Certificate of Incorporation of the Company.
(Incorporated by reference to Annex III to the Company's Proxy Statement, dated July 25, 1994,
for its Special Meeting of Stockholders held on August 11, 1994.)
4.1 -- Form of Certificate of Voting Powers, Designation, Rights, Preferences and Restrictions of 10%
Cumulative Preferred Stock. (Incorporated by reference to Appendix A to Prospectus/ Joint Proxy
Statement.)
4.2 -- Loan Agreement, dated as of April 2, 1990, by and among IMED, as borrower, and General Electric
Capital Corporation ("GECC"), as agent and lender. (Incorporated by reference to Exhibit 10(a) to
the April 17, 1990 8-K.)
4.3 -- Form of Certificates of Voting Powers, Designation, Rights, Preferences and Restrictions of
Convertible Preferred Stock. (Incorporated by reference to the Company's report on Form 10-K for
the year ended December 31, 1990 (the "1990 10-K").)
4.4 -- Registration Rights Agreement, dated as of March 26, 1991, by and among the Company, Mr. Picower,
Decisions and JA Special Limited Partnership, regarding the Convertible Preferred Stock.
(Incorporated by reference to Exhibit 10.10(a) to the 1990 10-K.)
4.5 -- Common Stock Purchase Warrant, dated July 29, 1991, for 25,000 shares of Common Stock of the
Company issued by the Company and registered in the name of MMV II. (Incorporated by reference to
Exhibit 19-3(a) to the Company's report on Form 10-Q for the quarter ended June 30, 1991 (the
"June 30, 1991 10-Q").)
4.6 -- Registration Rights Agreement, dated July 29, 1991, by and between MMV II and the Company.
(Incorporated by reference to Exhibit 19-3(b) to the June 30, 1991 10-Q.)
4.7 -- Indenture to U.S. Trust Company California, N.A., Trustee, dated January 30, 1992. (Incorporated
by reference to Exhibit 4.26 to the Company's Annual Report on Form 10-K for the year ended
December 31, 1991 [the "1991 10-K"].)
4.8 -- Letter Agreement, dated as of December 27, 1993, by and between Mr. Picower and the Company.
(Incorporated by reference to Exhibit 1 to the Company's report on Form 8-K dated January 12,
1994 ["January 12, 1994 8-K"].)
4.9 -- Promissory Note dated January 4, 1994 issued to Decisions. (Incorporated by reference to Exhibit
4.33 to the Company's Annual Report on Form 10-K for the year ended December 31, 1993 [the "1993
10-K"].)
4.10 -- Promissory Note, dated August 12, 1994, issued to Decisions. (Incorporated by reference to Exhibit
99.3 to the June 30, 1994 10-Q.)
4.11 -- Modification Agreement dated February 3, 1995, by and between the Company and Decisions
Incorporated.
4.12 -- Exchange Agreement, dated February 3, 1995, by and among the Company and Fidelity Convertible
Securities Fund and Fidelity Select Healthcare Fund.
10.1 -- Amended and Restated 1988 Stock Option Plan of the Company. (Incorporated by reference to Exhibit
C to the September 1990 Proxy Statement.)
10.2 -- 1988 Stock Purchase Plan of the Company. (Incorporated by reference to Exhibit 10.1(c) to the
Prospectus/Joint Proxy Statement.)
10.3 -- 1990 Non-Qualified Stock Option Plan for Non-Employee Directors. (Incorporated by reference to
Exhibit D to the September 1990 Proxy Statement.)
10.4 -- Security Agreement, dated April 2, 1990, by IMED in favor of GECC. (Incorporated by reference to
Exhibit 10-14 to the March 31, 1990 10-Q.)
10.5 -- Limited Recourse Guaranty, dated April 2, 1990, by the Company in favor of GECC. (Incorporated by
reference to Exhibit 10-15 to the March 31, 1990 10-Q.)
10.6 -- Security Agreement, dated April 2, 1990, by the Company in favor of GECC. (Incorporated by
reference to Exhibit 10-16 to the March 31, 1990 10-Q.)
</TABLE>
59
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO.
---------
<S> <C> <C>
10.7 -- Stock Pledge Agreement, dated April 2, 1990, by and among the Company, IMED, IMED Nominee, Inc.
and GECC regarding the pledge by the Company to GECC of the stock of IMED owned by the Company.
(Incorporated by reference to Exhibit 10-17 to the March 31, 1990 10-Q.)
10.8 -- Warrant Purchase Agreement, dated April 2, 1990, between IMED and GECC. (Incorporated by reference
to Exhibit 10-18 to the March 31, 1990 10-Q.)
10.9 -- Warrant to Purchase Common Stock of IMED, dated April 2, 1990. (Incorporated by reference to
Exhibit 10-19 to the March 31, 1990 10-Q.)
10.10 -- Secured Promissory Note, dated March 30, 1992 made by Richard D. Propper in favor of the Company.
(Incorporated by reference to Exhibit 19.1 to the Company's report on Form 10-Q for the quarter
ended March 31, 1992 [the "March 31, 1992 10-Q"].)
10.11 -- Settlement Agreement, dated May 13, 1992, by and between Rouse & Associates -- 380 Commerce Drive
Limited Partnership and Controlled Therapeutics Corporation. (Incorporated by reference to
Exhibit 19.2 to the Company's report on Form 10-Q for the quarter ended March 31, 1992 [the
"March 31, 1992 10-Q"].)
10.12 -- Release, dated May 13, 1992, by and between Rouse & Associates -- 380 Commerce Drive Limited
Partnership and Controlled Therapeutics Corporation. (Incorporated by reference to Exhibit 19.3
to the Company's report on Form 10-Q for the quarter ended March 31, 1992 [the "March 31, 1992
10-Q"].)
10.13 -- Escrow Agreement I, dated May 13, 1992, by and among Rouse & Associates -- 380 Commerce Drive
Limited Partnership and Controlled Therapeutics Corporation, Richard S. Hannye, Esquire and
Thomas C. Zielinski, Esquire. (Incorporated by reference to Exhibit 19.4 to the Company's report
on Form 10-Q for the quarter ended March 31, 1992 [the "March 31, 1992 10-Q"].)
10.14 -- Escrow Agreement II, dated May 13, 1992, by and among Rouse & Associates -- 380 Commerce Drive
Limited Partnership and Controlled Therapeutics Corporation, Richard S. Hannye, Esquire and
Thomas Zielinski, Esquire. (Incorporated by reference to Exhibit 19.5 to the Company's report on
Form 10-Q for the quarter ended March 31, 1992 [the "March 31, 1992 10-Q"].)
10.15 -- Consulting Agreement, dated March 15, 1993, by and between Henry Green and the Company.
(Incorporated by reference to Exhibit 10.89 to the Company's 1992 10-K.)
10.16 -- Acquisition and Common Stock Purchase Agreement, dated October 30, 1992, by and among Himedics,
Inc., MMV I, MMV II, Peregrine Ventures, Peregrine Ventures II, L.P., CTS, CTS Partnership, the
Company, PGE2 Investing Incorporated, PharmaSciences, Inc., Philip Heimlich and Richard P. Storm.
(Incorporated by reference to Exhibit 10.92 to the Company's 1992 10-K.)
10.17 -- Letter dated March 30, 1993 from GECC to IMED regarding financial covenants to Loan Agreement
dated as of April 2, 1990. (Incorporated by reference to Exhibit 10.93 to the Company's 1992
10-K.)
10.18 -- Confidential Settlement Agreement and Mutual General Release of all Claims, dated May 11, 1993 by
and among Richard L. Grounsell, IMED Corporation, Warner-Lambert Company, Donald O'Neill, John
Sifers, Michael Scharing, Dan Kelly and Bud Humphrey. (Incorporated by reference to Exhibit 19.1
to the Company's Report on Form 10-Q for the quarter ended March 31, 1993.)
10.19 -- Employment Agreement, dated as of August 31, 1993, by and among the Company, IMED and Joseph W.
Kuhn.
10.20 -- Agreement, dated August 26, 1993, by and among the Company, AM General, AM Limited, Dean Kamen,
Deka Products, Deka Research & Development Corp., IMED and AMD regarding modification of existing
relationships.
</TABLE>
60
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO.
---------
<S> <C> <C>
10.21 -- Amended and Restated Distribution Agreement dated as of August 12, 1994 by and among Pharmacia AB,
IMED Corporation and the Company (Incorporated by reference to Exhibit 10.25 to the Company's
Form 10-Q for the quarter ended September 30, 1994 [the "September 30, 1994 10-Q"].)
10.22 -- Final Agreement dated as of August 12, 1994, by and between Mr. Picower and the Company
(Incorporated by reference to Exhibit 10.26 to the Company's September 1994 10-Q.)
10.23 -- Letter Agreement, dated as of June 29, 1994, by and between Mr. Picower and the Company.
(Incorporated by reference to Exhibit 99.1 to the Company's report on Form 10-Q for the quarter
ended June 30, 1994 [the "June 30, 1994 10-Q"].)
10.24 -- Amended and Restated Loan Agreement, dated August 12, 1994, by and between IMED and GECC.
(Incorporated by reference to Exhibit 99.2 to the June 30, 1994 10-Q.)
10.25 -- Letter Agreement, dated July 8, 1994, by and among the Company, MMV I and MMV II. (Incorporated by
reference to Exhibit 99.4 to the June 30, 1994 10-Q.)
11.1 -- Computation of Net (Loss) Income per share for the three years ended December 31, 1994.
21.1 -- List of Subsidiaries of the Company.
23.1 -- Consent of Price Waterhouse LLP.
<FN>
------------------------
The Company has been granted confidential treatment with respect to certain
portions of this exhibit under Rule 24b-2 of the Securities Exchange Act of
1934, as amended.
</TABLE>
(b) Report on Form 8-K
The Company did not file any reports during the last quarter of the period
covered by this report.
61
<PAGE>
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
ADVANCED MEDICAL, INC.
By: /s/ JEFFRY M. PICOWER
--------------------------------------
Jeffry M. Picower
CHAIRMAN OF THE BOARD,
CHIEF EXECUTIVE OFFICER AND
DIRECTOR
Date: March 31, 1995
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
NAME TITLE DATE
----------------------------------- ------------------------- ----------------
Chairman of the Board,
/s/ JEFFRY M. PICOWER Chief Executive Officer
------------------------------ and Director (Principal March 31, 1995
Jeffry M. Picower executive officer)
President, Treasurer and
/s/ JOSEPH W. KUHN Secretary (Principal
------------------------------ accounting and financial March 31, 1995
Joseph W. Kuhn officer)
/s/ ANTHONY CERAMI
------------------------------ Director March 31, 1995
Anthony Cerami
/s/ NORMAN M. DEAN
------------------------------ Director March 31, 1995
Norman M. Dean
/s/ HENRY GREEN
------------------------------ Director March 31, 1995
Henry Green
/s/ RICHARD B. KELSKY
------------------------------ Director March 31, 1995
Richard B. Kelsky
62
<PAGE>
ADVANCED MEDICAL, INC. AND SUBSIDIARIES
SCHEDULE III -- CONDENSED FINANCIAL INFORMATION OF ADVANCED MEDICAL, INC.
CONDENSED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1993 1994
---------- ----------
<S> <C> <C>
Current assets:
Cash and cash equivalents............................................................... $ 765 $ 199
Securities available for sale........................................................... 4,343 2,883
Receivables, prepaid expenses and other current assets.................................. 1,012 937
---------- ----------
Total current assets.................................................................... 6,120 4,019
Investments in and net advances from subsidiaries......................................... 51,380 63,738
Other investments, at cost................................................................ 235 235
Intangible assets, net of accumulated amortization........................................ 5,526 4,458
Other assets.............................................................................. 6,675 6,250
---------- ----------
$ 69,936 $ 78,700
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Current portion of long-term debt....................................................... $ 9,300
Accounts payable........................................................................ 297
Accrued expenses and other current liabilities.......................................... 2,594 $ 2,561
---------- ----------
Total current liabilities............................................................... 12,191 2,561
---------- ----------
Long-term debt............................................................................ 60,000 72,500
---------- ----------
Contingent liabilities and commitments (Note 6)
Mandatorily redeemable equity securities.................................................. 6,478 6,567
---------- ----------
Preferred stock, common stock and stockholders' equity (deficit):
Common stock............................................................................ 142 142
Capital in excess of par value.......................................................... 59,478 58,703
Accumulated deficit..................................................................... (67,599) (61,922)
Treasury stock.......................................................................... (734) (734)
Unrealized holding gain from securities available for sale.............................. 883
Other................................................................................... (20)
---------- ----------
(8,733) (2,928)
---------- ----------
$ 69,936 $ 78,700
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
63
<PAGE>
ADVANCED MEDICAL, INC. AND SUBSIDIARIES
SCHEDULE III -- CONDENSED FINANCIAL INFORMATION OF ADVANCED MEDICAL, INC.
CONDENSED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1992 1993 1994
---------- ---------- ----------
<S> <C> <C> <C>
General and administrative expenses........................................... $ 5,450 $ 3,496 $ 2,616
Restructuring charges......................................................... 910
---------- ---------- ----------
Total operating expenses and loss from operations........................... 5,450 4,406 2,616
---------- ---------- ----------
Other income (expenses):
Interest income............................................................. 604 68 15
Interest expense............................................................ (6,305) (6,564) (5,787)
Equity in earnings of unconsolidated subsidiaries (excluding extraordinary
items and cumulative effect of change in accounting principle)............. 6,907 1,700 12,554
Other, net.................................................................. 2,219 6,514 1,511
---------- ---------- ----------
3,425 1,718 8,293
---------- ---------- ----------
Income (loss) before income taxes, extraordinary items and cumulative effect
of change in accounting principle............................................ (2,025) (2,688) 5,677
Provision for income taxes.................................................... 153
---------- ---------- ----------
Income (loss) before extraordinary items and cumulative effect of change in
accounting principle......................................................... (2,178) (2,688) 5,677
Extraordinary items:
Loss on early retirement of debt............................................ (8,898)
Cumulative effect on prior years of accounting change for income taxes........ 3,985
---------- ---------- ----------
Net income (loss)............................................................. (11,076) 1,297 5,677
Accumulated deficit at beginning of year...................................... (57,820) (68,896) (67,599)
---------- ---------- ----------
Accumulated deficit at end of year............................................ $ (68,896) $ (67,599) $ (61,922)
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
64
<PAGE>
ADVANCED MEDICAL, INC. AND SUBSIDIARIES
SCHEDULE III -- CONDENSED FINANCIAL INFORMATION OF ADVANCED MEDICAL, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1992 1993 1994
---------- ---------- ----------
<S> <C> <C> <C>
Net cash used in operating activities......................................... $ (20,550) $ (10,469) $ (4,870)
---------- ---------- ----------
Cash flows from investing activities:
Investments................................................................. (9,158) (2,196)
Notes receivable............................................................ (200) 200
Proceeds from sale of investments........................................... 3,136 20,027 3,768
---------- ---------- ----------
Net cash (used in) provided by investing activities........................... (6,222) 18,031 3,768
---------- ---------- ----------
Cash flows from financing activities:
Proceeds from the issuance of long-term debt................................ 63,500 300 12,500
Proceeds from the issuance of common stock.................................. 7,688
Offering costs.............................................................. (4,603)
Dividends paid.............................................................. (1,115) (544)
Principal payments under long-term debt..................................... (30,868) (1,423) (9,300)
Intercompany borrowings..................................................... (2,946) (2,746) (1,978)
Redemption/purchase of preferred stock...................................... (3,703) (3,816) (686)
---------- ---------- ----------
Net cash provided by (used in) financing activities........................... 27,953 (8,229) 536
---------- ---------- ----------
Effect of exchange rate changes on cash....................................... (88)
---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents.......................... 1,093 (667) (566)
Cash and cash equivalents at beginning of year................................ 339 1,432 765
---------- ---------- ----------
Cash and cash equivalents at end of year...................................... $ 1,432 $ 765 $ 199
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
65
<PAGE>
ADVANCED MEDICAL, INC. AND SUBSIDIARIES
SCHEDULE III -- CONDENSED FINANCIAL INFORMATION OF ADVANCED MEDICAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS OF ADVANCED MEDICAL, INC.
(DOLLARS IN THOUSANDS)
NOTE 1 -- STATEMENT OF ACCOUNTING POLICY:
The accompanying condensed financial statements have been prepared by
Advanced Medical pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to those rules and
regulations. It is therefore suggested that these condensed financial statements
be read in conjunction with the Consolidated Financial Statements and notes
thereto.
NOTE 2 -- SECURITIES AVAILABLE FOR SALE:
The market value at December 31, 1994 is based on the quoted market price
and is considered to represent fair value as determined under SFAS 115. The fair
value may not represent actual value of the Alteon common stock that could have
been realized as of December 31, 1994 or that will be realized in the future.
See Note 5 to the Consolidated Financial Statements.
NOTE 3 -- INVESTMENTS IN AND NET ADVANCES FROM SUBSIDIARIES:
Advanced Medical accounts for its investments in subsidiaries using the
equity method. Under the equity method, investments are carried at cost,
adjusted for Advanced Medical's proportionate share of their undistributed
earnings on losses. Investments in preferred stock are stated at cost.
Investments in and net advances to/(from) subsidiaries comprise the
following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1993 1994
--------- ---------
<S> <C> <C>
IMED redeemable preferred stock............................................................. $ 13,000 $ 13,000
IMED common ownership interest and advances................................................. 39,176 50,483
Other subsidiaries.......................................................................... (796) 255
--------- ---------
$ 51,380 $ 63,738
--------- ---------
--------- ---------
</TABLE>
The IMED preferred stock held by Advanced Medical is entitled to receive 12%
cumulative dividends on its stated value ($13,000) and is redeemable at Advanced
Medical's option, after January 1, 2000, at $13,000 plus accrued and unpaid
dividends. IMED paid dividends to Advanced Medical in the amount of $2,273
during 1994.
NOTE 4 -- PATENTS:
Advanced Medical acquired patents for $10,000 on April 2, 1990. These
patents are licensed to IMED for a royalty of $1,100 per annum.
NOTE 5 -- LONG-TERM DEBT:
The terms and maturities of Advanced Medical's long-term debt are described
in Note 6 to the Consolidated Financial Statements.
NOTE 6 -- MANDATORILY REDEEMABLE EQUITY SECURITIES:
Advanced Medical's mandatorily redeemable equity securities are described in
Note 9 to the Consolidated Financial Statements.
NOTE 7 -- LITIGATION AND CONTINGENCIES:
Litigation and contingencies are described in Note 8 to the Consolidated
Financial Statements.
66
<PAGE>
ADVANCED MEDICAL, INC. AND SUBSIDIARIES
SCHEDULE VIII -- VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE THREE YEARS ENDED DECEMBER 31, 1993
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS ADDITIONS
BALANCE AT CHARGED TO CHARGED TO
BEGINNING COSTS AND OTHER BALANCE AT
OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS(1) END OF PERIOD
----------- ------------- ------------- --------------- -------------
<S> <C> <C> <C> <C> <C>
Deducted from receivables........................
Allowance for doubtful accounts:
Year ended December 31, 1992................... $ 1,044 $ (99) $ 945
Year ended December 31, 1993................... 945 (141) 804
Year ended December 31, 1994................... 804 $ 100 (49) 855
<FN>
------------------------
(1) Represents accounts written-off as uncollectible, net of collections on
accounts previously written-off.
</TABLE>
67
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT PAGE
NO. NO.
--------- ---------
<S> <C> <C> <C>
4.11 -- Modification Agreement, dated February 3, 1995, by and between the Company and Decisions
Incorporated...................................................................................
4.12 -- Exchange Agreement, dated February 3, 1995, by and among the Company and Fidelity Convertible
Securities Fund and Fidelity Select Healthcare Fund............................................
11.1 -- Computation of Net (Loss) Income per share for the three years ended December 31, 1994..........
21.1 -- List of Subsidiaries of the Company.............................................................
23.1 -- Consent of Price Waterhouse LLP.................................................................
<FN>
------------------------
The Company has been granted confidential treatment with respect to certain
portions of this exhibit under Rule 24b-2 of the Securities Exchange Act of
1934, as amended.
</TABLE>
68
<PAGE>
EXHIBIT 4.11
MODIFICATION AGREEMENT
Agreement dated this 3rd day of February, 1995 by and between Advanced
Medical, Inc., a Delaware corporation ("AM") and Decisions Incorporated, a
Delaware corporation ("Decisions").
Background
AM and Decisions are parties to a promissory note dated January 4, 1994,
in the original principal amount of $6 million (as amended by a letter
agreement dated May 13, 1994, the "First Note") (which matures no later than
January 4, 2001) and a promissory note dated August 12, 1994 in the original
principal amount of $6.5 million (which matures on January 4, 2001) (the
"Second Note" and together with the First Note, the "Decisions Notes"). AM
currently has outstanding $60 million in original principal amount of 7 1/4%
convertible subordinated debentures (the "Debentures") (which mature on
January 15, 2002).
AM desires to engage in one or more transactions (the "Transactions")
pursuant to which, in consideration of the conversion of a portion of the
Debentures into an aggregate of up to 2,847,457 million shares of common
stock of AM in accordance with the terms of the Debentures (involving the
conversion of approximately 86.1% of the outstanding principal amount of each
such Debenture) and the surrender to AM of a portion of the Debentures
(constituting, with respect to each such Debenture, the balance of such
Debenture remaining outstanding following the conversion of 86.1% thereof as
contemplated above), AM will issue to the holders of the Debentures,
promissory notes in the form contemplated in the indenture attached hereto as
EXHIBIT 1 (such notes, together with the related indenture and all of the
terms and provisions thereof, collectively, the "New Notes") having an
aggregate principal amount not to exceed $30 million (to be issued to each
Debenture holder in an original principal amount equal to 50% of the
outstanding principal amount of the Debentures converted and surrendered as
contemplated above), due not more than four (4) years from the date of
issuance and bearing interest at the rate of 15% per annum. AM and Decisions
desire to maintain the priority of the Decisions Notes with respect to final
payment over the indebtedness currently embodied in the Debentures.
Decisions desires to consent, pursuant to the terms of the Decisions Notes,
to the issuance of the New Notes and the payment of interest and
<PAGE>
principal in accordance with the terms thereof, and AM and Decisions desire
to amend the Decisions Notes in order to more clearly reflect the existing
agreement of the parties regarding payments AM is permitted to make with
respect to indebtedness of AM.
NOW THEREFORE, the parties hereto, desiring to be bound, do hereby agree
as follows:
1. SUPPLEMENT TO THE DECISIONS NOTES. In addition to the other terms
and provisions of the Decisions Notes (as modified hereby) or of or with
respect to the New Notes, AM hereby agrees that not less than ten (10) days
prior to the date of the payment of any principal portion of any New Note
(including, without limitation, any prepayment or redemption thereof or any
similar payment thereunder, other than the payment of regularly scheduled
interest thereon) AM will deliver written notice thereof to Decisions (the
"Payment Notice") which notice shall specify the date upon which AM intends
to make such payment. For a period of five (5) days following the date of
receipt of the Payment Notice by Decisions (the "Exercise Period") Decisions
will have the right (the "Acceleration Right") to declare all or any portion
of the outstanding interest and principal under the Decisions Notes (or
either of them) to be immediately due and payable, such right to be exercised
by delivery of notice thereof (the "Decisions Notice") by Decisions to AM
prior to the expiration of the Exercise Period.
In the event of the exercise of the Acceleration Right by Decisions, all
such outstanding amounts so specified by Decisions in the Decisions Notice
(the "Accelerated Amounts") under the Decisions Notes shall immediately
become due and payable and AM shall thereafter make no further payment under
the New Notes or the Debentures until the Accelerated Amounts have been paid
in full.
Any failure of AM to comply with the terms and provisions of this
Modification Agreement in any material respect shall, upon notice thereof by
Decisions, constitute an Event of Default (as such term is defined in
Decisions Notes) under the Decisions Notes.
2. MODIFICATION OF FIRST NOTE. The First Note is hereby modified as
follows:
(i) the following terms are added to Article I:
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<PAGE>
"New Notes" shall have the meaning attached to it in the January
1995 Agreement.
"January 1995 Agreement" shall mean the Modification Agreement
dated February 3, 1995, between the Initial Noteholder and the Company.
(ii) the following terms in Article I are amended and restated in
their entirety as follows:
"GECC Loan" shall mean the Loan Agreement, dated August 12, 1994,
between IMED Corporation ("IMED") and General Electric Capital Corporation
("GECC").
"GECC 1993 Intercreditor Agreement" shall mean the Intercreditor
Agreement dated January 3, 1994 between the Initial Noteholder and GECC, as
modified by the terms of the Subordination Agreement, dated August 12, 1994,
between the Initial Noteholder and GECC, as agent.
(iii) Article II is hereby deleted and the following is substituted
therefor:
"ARTICLE II RANKING OF THE NOTE. Any Indebtedness of the Company
evidenced by this Note shall be senior in right of payment to any of the
Company's Indebtedness, including, without limitation, the Debentures and the
New Notes, PROVIDED, HOWEVER, that Indebtedness of the Company evidenced by
this Note shall constitute Indebtedness ranking PARI PASSU with the
Indebtedness outstanding under the promissory note of the Company dated
August 12, 1994, payable to Decisions Incorporated as the same has heretofore
or is hereafter modified, amended or supplemented; and PROVIDED FURTHER,
HOWEVER, that subject to the terms and provisions of the New Notes and of the
January 1995 Agreement, so long as there exists no Event of Default hereunder
and no event which, with the passage of time or the giving of notice or both
would result in the occurrence of an Event of Default, the Company may make:
(i) any payment on any Indebtedness of the Company outstanding as of the date
hereof in accordance with and subject to the terms thereof; (ii) any payment
under the New Notes in accordance with and subject to the terms thereof; and
(iii) any payment of regularly scheduled interest upon any other
Indebtedness, when the same is due and payable in accordance with and subject
to the terms thereof."
(iii) Section 3.1 of Article III is amended and restated in its
entirety as follows:
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<PAGE>
"SECTION 3.1. CREATION OF INDEBTEDNESS. So long as this Note shall
remain outstanding the Company shall not, without having obtained the prior
written consent of the Noteholder, create, incur, assume or guarantee any
Indebtedness: (i) which is secured by any lien, claim, security interest or
other encumbrance on any assets, property or rights of the Company or any
Affiliate, or upon the income derived therefrom; or (ii) the principal
portion of which is due or payable prior to the payment in full of the
Indebtedness evidenced by this Note: (x) in each case, other than those
arising with respect to the GECC Loan; and (y) in the case of clause (ii),
other than the New Notes."
3. MODIFICATION OF THE SECOND NOTE. The Second Note is hereby
modified as follows:
(i) The following terms are added to Article I:
"New Notes" shall have the meaning attributed to it in the
January 1995 Agreement.
"January 1995 Agreement" shall mean the Modification Agreement
dated February 3, 1995 between the Initial Noteholder and the Company.
(ii) Article II is deleted and the following is substituted therefor:
"ARTICLE II RANKING OF THE NOTE. Any Indebtedness of the Company
evidenced by this Note shall be senior in right of payment to any of the
Company's Indebtedness, including, without limitation, the Debentures and the
New Notes, PROVIDED, HOWEVER, that Indebtedness of the Company evidenced by
this Note shall constitute Indebtedness ranking PARI PASSU with the
Indebtedness outstanding under the promissory note of the Company dated
January 4, 1994, payable to Decisions Incorporated as the same has heretofore
or is hereafter modified, amended or supplemented; and PROVIDED FURTHER,
HOWEVER, that subject to the terms and provisions of the New Notes and of the
January 1995 Agreement, so long as there exists no Event of Default hereunder
and no event which, with the passage of time or the giving of notice or both
would result in the occurrence of an Event of Default, the Company may make:
(i) any payment on any Indebtedness of the Company outstanding as of the date
hereof in accordance with and subject to the terms thereof; (ii) any payment
under the New Notes in accordance with and subject to the terms thereof; and
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<PAGE>
(iii) any payment of regularly scheduled interest upon any other
Indebtedness, when the same is due and payable in accordance with and subject
to the terms thereof."
(iii) Section 3.1 of Article III is amended and restated in its
entirety as follows:
"SECTION 3.1. CREATION OF INDEBTEDNESS. So long as this Note shall
remain outstanding the Company shall not, without having obtained the prior
written consent of the Noteholder, create, incur, assume or guarantee any
Indebtedness: (i) which is secured by any lien, claim, security interest or
other encumbrance on any assets, property or rights of the Company or any
Affiliate, or upon the income derived therefrom; or (ii)the principal portion
of which is due or payable prior to the payment in full of the Indebtedness
evidenced by this Note: (x) in each case, other than those arising with
respect to the GECC Loan Agreement; and (y) in the case of clause (ii), other
than the New Notes."
4. REPRESENTATIONS AND WARRANTIES OF AM. AM makes the following
representations and warranties to Decisions:
(a) ORGANIZATIONAL STATUS AND AUTHORITY OF AM. AM is a corporation
duly organized, validly existing and in good standing under the laws of the
State of Delaware, and has the power and authority to enter into this
Modification Agreement, to consummate the transactions contemplated hereby
and otherwise carry out its obligations hereunder. The execution, delivery
and performance of this Modification Agreement and the consummation of the
transactions contemplated hereby by AM have been duly authorized by all
necessary action on the part of AM. This Modification Agreement when
executed and delivered by AM, constitutes the legal, valid and binding
obligation of AM, enforceable against AM in accordance with its terms,
subject, as to the enforcement of remedies, to applicable bankruptcy,
insolvency, reorganization and other similar laws affecting the enforcement
of creditors' rights generally and to general principles of equity.
(b) MODIFICATION AGREEMENT NOT IN BREACH OF OTHER INSTRUMENTS AFFECTING
AM. The execution and delivery of this Modification Agreement, the
consummation of the transactions contemplated by this Modification Agreement
and the fulfillment of the terms of this Modification Agreement by AM will
not result in the breach of any of the terms and provisions of, or constitute
a default under, or conflict with, any agreement or other instrument by which
AM is bound,
-5-
<PAGE>
AM's Certificate of Incorporation or bylaws or other comparable
organizational documents, any judgment, decree, order or award of any court,
governmental body or arbitrator applicable to AM, or any applicable law, rule
or regulation.
(c) NO CONSENTS REQUIRED. The execution and delivery of this
Modification Agreement, the consummation of the transactions provided for in
this Modification Agreement by AM and the fulfillment of the terms of this
Modification Agreement by AM do not require the consent of any governmental
authority or any other Person.
5. REPRESENTATIONS AND WARRANTIES OF DECISIONS. Decisions makes the
following representations and warranties to AM:
(a) ORGANIZATIONAL STATUS AND AUTHORITY OF DECISIONS. Decisions is a
corporation duly organized, validly existing and in good standing under the
laws of the State of Delaware, and has the power and authority to enter into
this Modification Agreement, to consummate the transactions contemplated
hereby and otherwise carry out its obligations hereunder. The execution,
delivery and performance of this Modification Agreement and the consummation
of the transactions contemplated hereby by Decisions have been duly
authorized by all necessary action on the part of Decisions. This
Modification Agreement when executed and delivered by Decisions, constitute
the legal, valid and binding obligation of Decisions, enforceable against
Decisions in accordance with its terms, subject, as to the enforcement of
remedies, to applicable bankruptcy, insolvency, reorganization and other
similar laws affecting the enforcement of creditors' rights generally and to
general principles of equity.
(b) MODIFICATION AGREEMENT NOT IN BREACH OF OTHER INSTRUMENTS AFFECTING
DECISIONS. The execution and delivery of this Modification Agreement, the
consummation of the transactions contemplated by this Modification Agreement
and the fulfillment of the terms of this Modification Agreement by Decisions
will not result in the breach of any of the terms and provisions of, or
constitute a default under, or conflict with, any agreement or other
instrument by which Decisions is bound, Decision's Certificate of
Incorporation or bylaws or other comparable organizational documents, any
judgment, decree, order or award of any court, governmental body or
arbitrator applicable to Decisions, or any applicable law, rule or regulation.
-6-
<PAGE>
(c) NO CONSENTS REQUIRED. The execution and delivery of this
Modification Agreement, the consummation of the transactions provided for in
this Modification Agreement by Decisions and the fulfillment of the terms of
this Modification Agreement by Decisions do not require the consent of any
governmental authority or any other Person.
6. ADDITIONAL COVENANTS.
(a) AM will not issue the New Notes: (i) other than in accordance with
the terms of the Transaction as contemplated herein; (ii) in a form
containing any material deviation from the form attached hereto as EXHIBIT 1
hereto; or (iii) in excess of $30 million in aggregate principal amount.
(b) AM will not, without the prior written consent of Decisions, which
may be withheld in its discretion, consent or agree to any modification,
amendment or waiver of any term or provision of any New Note; PROVIDED,
HOWEVER, that the foregoing shall not be deemed to limit the right or ability
of AM to comply with its obligations under Section 3 (Future Exchanges) under
that certain agreement of even date between AM, Fidelity Select Healthcare
Fund and Fidelity Convertible Securities Fund.
7. MISCELLANEOUS.
(a) NO WAIVER; CUMULATIVE REMEDIES. No failure or delay on the part of
Decisions in exercising any right, power or remedy under this Modification
Agreement shall operate as a waiver thereof; nor shall any single or partial
exercise of any such right, power or remedy preclude any other or further
exercise thereof or the exercise of any other right, power or remedy right,
power or remedy preclude any other or further exercise thereof or the
exercise of any other right, power or remedy under this Modification
Agreement. The remedies provided in this Modification Agreement are
cumulative and not exclusive of any remedies provided by law.
(b) AMENDMENTS, ETC. No amendment, modification, termination, or
waiver of any provision of this Modification Agreement nor consent to any
departure by AM therefrom, shall in any event be effective unless the same
shall be in writing and signed by Decisions, and then such waiver or consent
shall be effective only in the specific instance and for the specific purpose
for which given. No notice or demand on AM
-7-
<PAGE>
in any case shall entitle AM to any other or further notice or demand in
similar or other circumstances.
(c) ADDRESSES FOR NOTICES, ETC. All notices, requests, demands,
directions and other communications provided for under this Modification
Agreement (including, without limitation, Section 1 hereof) shall be in
writing and shall be effective when delivered at the addresses indicated
below:
If to the AM:
Advanced Medical, Inc.
9775 Businesspark Avenue
San Diego, California 92131
Attention: Chief Financial Officer
If to the Decisions:
Decisions Incorporated
22 Saw Mill River Road
Hawthorne, New York 10532
Attention: President
or, as to each party, at such other address as shall be designated by such
party in a written notice to each other party complying as to delivery with
the terms of this Section.
(d) PAYMENT ON NON-BUSINESS DAYS. Whenever any payment to be made
under this Modification Agreement shall be stated to be due on a Saturday,
Sunday or holiday such payment may be made on the next succeeding business
day, and such extension of time shall in such case be included in the
computation of payment of interest.
(e) BINDING EFFECT; ASSIGNMENT. This Modification Agreement shall be
binding upon and inure to the benefit of such parties and their respective
successors and assigns.
(f) GOVERNING LAW. This Modification Agreement shall be governed by,
and construed in accordance with, the laws of the State of New York
applicable to contracts made and to be performed wholly within such State.
(g) SEVERABILITY OF PROVISIONS. Any provision of this Modification
Agreement which is prohibited or unenforceable in any jurisdiction shall, as
to such jurisdiction, be ineffective to the extent of such prohibition
-8-
<PAGE>
or unenforceability without invalidating the remaining provisions hereof or
affecting the validity or enforceability of such provision in any other
jurisdiction.
(h) HEADINGS. Article and Section headings in this Modification
Agreement are included herein for convenience of reference only and shall not
constitute a part hereof for any other purpose.
(i) DEBENTURES. The Indebtedness under the Decisions Notes, as
modified and supplemented hereby, constitutes "Senior Indebtedness" within
the meaning ascribed to such term under the indenture creating the Debentures
and under the New Notes.
(j) COUNTING DAYS. In computing any number of days for purposes of
this Modification Agreement, all days will be counted, including Saturdays,
Sundays and holidays; PROVIDED, HOWEVER, that if the final day of any time
period falls on a Saturday, Sunday or holiday on which Federal banks are or
may elect to be closed, then the final day will be deemed to be the next day
which is not a Saturday, Sunday or such holiday.
IN WITNESS WHEREOF, the parties hereto have caused this Modification
Agreement to be executed by their proper corporate officers thereunto duly
authorized as of the date first above written.
ADVANCED MEDICAL, INC.
By:___________________________
DECISIONS INCORPORATED
By:___________________________
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<PAGE>
EXHIBIT 4.12
AGREEMENT
Agreement dated as of February 3, 1995, by and among ADVANCED MEDICAL,
INC., a Delaware Corporation ("AM"), FIDELITY SELECT HEALTHCARE FUND
("Fidelity Healthcare"), a series fund of Fidelity Select Portfolios, a
Massachusetts business trust, and FIDELITY CONVERTIBLE SECURITIES FUND
("Fidelity Convertible") , a series fund of Fidelity Financial Trust, a
Massachusetts business trust (Fidelity Healthcare and Fidelity Convertible
are referred to collectively herein as the "Funds").
WHEREAS, Fidelity Convertible is the beneficial owner of Twenty Four
Million Sixty Five Thousand Dollars ($24,065,000.00) principal amount (the
"Fidelity Convertible Debentures") of 7% Convertible Subordinated Debentures
due 2002 (the "Debentures") issued by AM pursuant to an Indenture dated as
of January 15, 1992 (the "Old Indenture"), between AM and U.S. Trust Company
of California, N.A., such amount constituting 40.1% of the total outstanding
principal amount of the Debentures and Fidelity Healthcare is the owner of
Four Million One Hundred Eighty Thousand ($4,180,000.00) principal amount of
the Debentures (the "Fidelity Healthcare Debentures"), constituting 6.96% of
the total outstanding principal amount of the Debentures; and
WHEREAS, the Funds and AM have agreed that the Funds will convert a
certain number of their Debentures and exchange all of their remaining
Debentures (the "Non- Converted Debentures") to AM and AM will receive from
the Funds all of the Non-Converted Debentures beneficially owned by the
Funds pursuant to the terms and provisions of this Agreement;
NOW, THEREFORE, in consideration of the premises and mutual
representations, warranties, covenants and agreements hereinafter set forth,
the parties hereto, desiring to be legally bound, do hereby agree as follows:
1. ISSUANCE OF NEW DEBENTURES; CONVERSION OF DEBENTURES.
1.1 DEBENTURES. Subject to the terms and conditions set forth herein,
at the Closing, AM shall issue 15% Subordinated Debentures of AM due 1999
(the "15% Debentures") pursuant to an indenture (the "Indenture")
<PAGE>
substantially in the form attached as Exhibit 1.1 hereto: (x) to Fidelity
Convertible, in the principal amount of Twelve Million Thirty Two Thousand
Five Hundred Dollars ($12,032,500.00) and (y) to Fidelity Healthcare, in the
principal amount of Two Million Ninety Thousand Dollars ($2,090,000.00) in
consideration for: (i) the Conversions (as defined below) by the Funds
pursuant to Section 1.2 below and (ii) the surrender by each of the Funds to
AM of the Non-Converted Debentures, which shall represent all of the
Debentures beneficially owned by each of the Funds after the Conversions.
1.2 CONVERSION OF DEBENTURES. Fidelity Convertible hereby agrees to
convert Twenty Million Seven Hundred Seventeen Thousand One Hundred Thirteen
Dollars and Fifty Two Cents ($20,717,113.52) principal amount of the
Fidelity Convertible Debentures into One Million One Hundred Forty Two
Thousand Sixty Eight (1,142,068) shares of common stock, par value .01 per
share of AM (the "Common Stock") and Fidelity Healthcare hereby agrees to
convert Three Million Five Hundred Ninety Eight Thousand Four Hundred Eight
Six Dollars and Twenty Two Cents ($3,598,486.22) principal amount of the
Fidelity Healthcare Debentures into One Hundred Ninety Eight Thousand Three
Hundred Seventy Three (198,373) shares of Common Stock (collectively, the
"Conversions"). Each of the Funds agrees that it will surrender the
Debentures to be converted pursuant to this Section 1.2, duly endorsed to AM
on the back thereof at the offices of Gordon Altman Butowsky Weitzen Shalov
& Wein, 114 West 47th Street, New York, New York, accompanied by written
notice to AM in the form of Exhibit 1.2 attached hereto. The conversion of
the Fidelity Convertible Debentures pursuant to this Section 2.1 shall for
all purposes be deemed to have occurred under and in accordance with the
terms and provisions of the Old Indenture, including, without limitation,
Section 1202 thereof.
2. CLOSING. The closing of the transactions contemplated by this
Agreement (the "Closing") shall take place at the offices of Gordon Altman
Butowsky Weitzen Shalov & Wein, 114 West 47th Street, New York, New York,
five business days after the qualification of the Indenture for registration
on Form T-3 under the Trust Indenture Act of 1939. At the Closing, each of
the Funds shall deliver to AM bond powers duly endorsed in the form of
Exhibit 2 hereto for the Non-Converted Debentures and each shall conduct the
Conversions pursuant to Section 1.2 above.
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<PAGE>
3. FUTURE EXCHANGES. AM hereby agrees that both Fidelity Healthcare and
Fidelity Convertible shall, in the event of any tender or exchange offer or
any other exchange or purchase of Debentures (other than open market
purchases made in cash which are effected on the American Stock Exchange or
such other securities exchange as the Debentures may then be listed on) by
AM (an "Exchange Offer") with or from any one or more holders of the
Debentures for the acquisition of the Debentures, be provided the
opportunity to obtain consideration, on the same terms and conditions,
except as otherwise provided in this Section 3, as such other holder(s)
shall receive in connection with the closing of any such Exchange Offer,
equal to a Proportionate Share (as defined below) for each Unit (as defined
below) surrendered by each Fund. The parties hereto acknowledge and agree
that AM has no obligation to engage in any Exchange Offer. AM shall provide
notice to the Funds of any such Exchange Offer promptly after such Exchange
Offer is made to such other holder(s).
"Unit" shall mean $500 in principal amount of the 15% Debentures and
47.45763 of the shares of Common Stock each of the Funds received pursuant
to this Agreement (equitably adjusted, in the case of Common Stock, for
stock dividends, stock splits, reclassifications and similar extraordinary
events).
"Proportionate Share" shall mean the total consideration received by each
holder of a Debenture through its participation in the Exchange Offer (and
compliance with all terms and conditions thereof) in respect of each $1,000
in principal amount of Debentures exchanged, tendered, converted or
otherwise surrendered to AM. For example if, in the Exchange Offer a holder
of $5,000 in principal amount of Debentures is entitled to convert $4,000 in
principal amount thereof into 250 shares of Common Stock and surrenders the
balance of such Debentures to AM in exchange for new notes having an initial
principal amount of $2,500, then the Proportionate Share, in respect of the
Exchange Offer, would be 50 shares of Common Stock and $500 in initial
principal amount of new notes.
4. REPRESENTATIONS OF FIDELITY HEALTHCARE.
Fidelity Healthcare represents to AM that:
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<PAGE>
4.1 AUTHORITY RELATIVE TO THIS AGREEMENT. Fidelity Healthcare has all
necessary power and authority to execute and deliver this Agreement and to
consummate the transactions contemplated hereby. The execution and delivery
of this Agreement by Fidelity Healthcare and the consummation by Fidelity
Healthcare of the transactions contemplated hereby have been duly and
validly authorized and no other proceedings on the part of Fidelity
Healthcare are necessary to authorize this Agreement or to consummate the
transactions so contemplated. This Agreement has been duly and validly
executed and delivered by Fidelity Healthcare and, assuming this Agreement
constitutes a valid and binding obligation of AM, constitutes a valid and
binding agreement of Fidelity Healthcare, enforceable against Fidelity
Healthcare in accordance with its terms.
4.2 SECURITIES. Fidelity Healthcare owns, and at the Closing will own,
the Fidelity Healthcare Debentures free and clear of all liens, pledges,
encumbrances, security interests or other claims of any nature or kind.
4.3 BINDING AGREEMENT. This Agreement constitutes the legal, valid and
binding agreement of Fidelity Healthcare, enforceable against it in
accordance with its terms, except to the extent that enforceability may be
limited by applicable bankruptcy, insolvency, reorganization or other laws
affecting the enforcement of creditors' rights generally or by general
equitable principles.
4.4 FEES. Fidelity Healthcare has not paid or become obligated to pay any
fee or commission to any investment banker, broker, finder or intermediary
in connection with the transactions contemplated by this Agreement.
5. REPRESENTATIONS OF FIDELITY CONVERTIBLE.
Fidelity Convertible represents to AM that:
5.1 AUTHORITY RELATIVE TO THIS AGREEMENT. Fidelity Convertible has all
necessary power and authority to execute and deliver this Agreement and to
consummate the transactions contemplated hereby. The execution and delivery
of this Agreement by Fidelity Convertible and the consummation by Fidelity
Convertible of the transactions contemplated hereby have been duly and
validly authorized
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<PAGE>
and no other proceedings on the part of Fidelity Convertible are necessary
to authorize this Agreement or to consummate the transactions so
contemplated. This Agreement has been duly and validly executed and
delivered by Fidelity Convertible and, assuming this Agreement constitutes a
valid and binding obligation of AM, constitutes a valid and binding
agreement of Fidelity Convertible, enforceable against Fidelity Healthcare
in accordance with its terms.
5.2 SECURITIES. Fidelity Convertible owns, and at the Closing will own,
the Fidelity Convertible Debentures free and clear of all liens, pledges,
encumbrances, security interests or other claims of any nature or kind.
5.3 BINDING AGREEMENT. This Agreement constitutes the legal, valid and
binding agreement of Fidelity Convertible, enforceable against it in
accordance with its terms, except to the extent that enforceability may be
limited by applicable bankruptcy, insolvency, reorganization or other laws
affecting the enforcement of creditors' rights generally or by general
equitable principles.
5.4 FEES. Fidelity Convertible has not paid or become obligated to pay
any fee or commission to any investment banker, broker, finder or
intermediary in connection with the transactions contemplated by this
Agreement.
6. REPRESENTATIONS OF AM. AM represents and warrants to the Funds that,
except for all matters disclosed: (x) with regard to Sections 6.2, 6.6, 6.7,
6.8, and 6.9 below, in the SEC Reports (as hereinafter defined); or (y) on
Schedule 6 provided by AM to the Funds:
6.1 ORGANIZATION. AM is a corporation duly organized, validly existing
and in good standing under the laws of the State of Delaware. All
Significant Subsidiaries (as defined in the Indenture) of AM are
corporations duly organized, validly existing and in good standing under the
laws of their respective jurisdictions of incorporation. AM and its
Significant Subsidiaries have the requisite corporate power to conduct their
businesses as they are currently conducted and are duly qualified to do
business in each jurisdiction in which the property owned, leased or
operated by it or the nature of the business conducted by it
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<PAGE>
makes such qualification necessary, except where the lack of such
qualification would not in the aggregate have a material adverse effect on
the business, results of operations or financial condition of AM and its
Significant Subsidiaries taken as a whole (a "Material Adverse Effect"). The
copies of AM's Certificate of Incorporation and By-Laws previously delivered
to the Funds are true, complete and correct as of the date hereof.
6.2 CAPITALIZATION. As of the date hereof, the authorized capital stock
of AM consists of 75,000,000 shares of Common Stock, 3,000,000 shares of
preferred stock, par value $.01 per share and 6,000,000 shares of preferred
stock, par value $.001 per share. As of the date hereof, AM has outstanding
14,069,261 shares of Common Stock and 333,000 shares of convertible
preferred stock, par value $.01 per share, and 329,928 shares of 10%
cumulative preferred stock, par value $.01 per share, all of which shares
have been duly authorized, validly issued, fully paid and non-assessable and
free of preemptive rights. AM does not have any outstanding options,
warrants, subscriptions or other rights, agreements or commitments to
purchase shares of capital stock which obligates AM to issue, sell or
transfer any shares of capital stock of AM or any other securities
convertible into or evidencing the right to subscribe for any shares of
capital stock of AM. AM owns all of the outstanding shares of capital stock
of each of its Significant Subsidiaries, and such shares are duly
authorized, validly issued, fully paid and non-assessable, and free and
clear of all preemptive rights and all liens, charges, encumbrances,
equities, claims and options whatsoever. There are not any outstanding
subscriptions, options, warrants or other rights, agreements or commitments
to purchase any additional shares of such subsidiary's capital stock or any
other securities convertible into or evidencing the right to subscribe for
any capital stock of such subsidiary. The Common Stock to be issued to each
of the Funds pursuant to this Agreement will be duly authorized, validly
issued, fully paid and non-assessable and free of preemptive rights.
6.3 AUTHORITY RELATIVE TO THIS AGREEMENT. AM has all necessary corporate
power and authority to execute and deliver this Agreement and to consummate
the transactions contemplated hereby. The execution and delivery of this
Agreement by AM and the consummation by AM of the transactions contemplated
hereby have been duly and validly authorized by its Board of Directors and
no other corporate
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proceedings on the part of AM are necessary to authorize this Agreement or
to consummate the transactions so contemplated. This Agreement has been
duly and validly executed and delivered by AM and, assuming this Agreement
constitutes a valid and binding obligation of the Funds, constitutes a valid
and binding agreement of AM, enforceable against AM in accordance with its
terms.
6.4 CONSENTS AND APPROVALS; NO VIOLATIONS.
(i) As of the date hereof, the execution and delivery of this
Agreement by AM does not, and the performance of this Agreement by AM will
not, require any filing with or notification to, or any consent, approval,
authorization or permit from, any governmental or regulatory authority (a
"Governmental Entity") except (i) for applicable requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), state
securities or "blue sky" laws, and the filing and qualification of the
Indenture under the Trust Indenture Act or (ii) where failure to obtain such
consents, approvals, authorizations or permits, or to make such filings or
notifications, would not prevent AM Company from performing its obligations
under this Agreement and would not, individually or in the aggregate, have a
Material Adverse Effect.
(ii) As of the date hereof, the execution and delivery of this
Agreement by AM does not, and the performance of this Agreement by AM will
not (i) conflict with or violate the Certificate of Incorporation or By-Laws
of AM or of any of its Significant Subsidiaries, (ii) result in a violation
or breach of, or constitute (with or without due notice or lapse of time or
both) a default (or give rise to any right of termination, cancellation or
acceleration) under, any of the terms, conditions or provisions of any note,
bond, mortgage, indenture, license, contract, agreement or other instrument
or obligation to which AM or any of its Significant Subsidiaries is a party
or by which any of them or any of their respective properties or assets may
be bound or (iii) violate any order, writ, injunction, decree, statue,
treaty, rule or regulation applicable to AM or any of its Significant
Subsidiaries or any of their respective properties or assets, excepting such
violations, breaches, defaults, terminations, cancellations or accelerations
which would not in the aggregate have a Material Adverse Effect.
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6.5 SEC REPORTS.
(i) As of the date hereof, AM has filed all required forms, reports
and documents with the Securities and Exchange Commission (the "SEC") all of
which were prepared in accordance with the applicable requirements of the
Securities Act of 1933, as amended, and the Exchange Act. For purposes of
this Agreement the term "SEC Reports" shall mean all forms, reports and
documents, including, without limitation, any proxy statements filed by AM
with the SEC, together with all exhibits to any of the foregoing, and all
annual reports provided to shareholders.
(ii) None of the SEC Reports, including without limitation any
financial statements or schedules included therein, as of the dates they
were respectively filed with the SEC, contained any untrue statement of a
material fact or omitted to state a material fact required to be stated
therein or necessary in order to make the statements therein not misleading,
and the balance sheets (including the related notes) included in the SEC
Reports fairly present the consolidated financial position of AM and its
consolidated Significant Subsidiaries as of the respective dates thereof,
and the other related statements (including the related notes) included
therein fairly present the results of operations and cash flows of AM and
its consolidated Significant Subsidiaries for the respective fiscal periods
set forth therein in accordance with generally accepted accounting
principles applied on a consistent basis, except in the case of interim
financial statements for normal recurring and certain non-recurring
adjustments necessary for a fair presentation of the financial position and
operating results of AM and its consolidated Significant Subsidiaries for
the interim periods.
6.6 ABSENCE OF CERTAIN CHANGES. As of the date hereof, since September
30, 1994, there have not occurred any changes concerning AM or its
Significant Subsidiaries having a Material Adverse Effect. As of the date
hereof, except as disclosed in AM's filings and reports under the Exchange
Act, since September 30, 1994, there has not been (a) any declaration,
setting aside or payment of any dividend or other distribution in respect of
the shares of Common Stock or any redemption or other acquisition by AM of
any such shares; (b) any entry into any agreement, commitment or transaction
by AM which is material to AM and its Significant Subsidiaries taken as a
whole, except
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agreements, commitments or transactions in the ordinary course of business;
or (c) any significant change by AM in accounting methods, principles or
practices except as required or permitted by generally accepted accounting
principles.
6.7 ENVIRONMENTAL MATTERS. As of date hereof, AM and its Significant
Subsidiaries are in compliance with all Environmental Laws, except for any
noncompliance that either singly or in the aggregate, would not have a
Material Adverse Effect. "Environmental Laws" shall mean all federal, state
and local laws, rules, regulations, ordinances and orders which purport to
regulate the release of hazardous substances or other materials to the
environment, or impose requirements relating to environmental protection.
6.8 OUTSTANDING DEBT. At and as of the Closing and after giving effect to
the Conversion, neither AM nor any of its Significant Subsidiaries will have
outstanding any debt for borrowed money, or evidenced by bonds, debentures,
notes or other similar instruments or under capital leases, except as
reflected on the balance sheet of AM's most recent Form 10-Q filed with the
SEC.
6.9 LITIGATION. As of the date hereof, there is no litigation, suit,
action, proceeding, or compliant pending or, to the knowledge of AM,
threatened against AM or any of its Significant Subsidiaries (including,
without limitation, any litigation, suit, action, proceeding or complaint in
which any person alleges (i) the release, threat of release or placement of
any hazardous substance in connection with the business of AM or any
subsidiary of AM, (ii) the generation, transportation, storage, treatment or
disposal of any hazardous substance, hazardous waste, pollutant, contaminant
or other substance listed or regulated under the Environmental Laws in
connection with the business of AM or any subsidiary of AM, or (iii) any
failure of AM or a subsidiary of AM to comply with any of the Environmental
Laws) as to which there is a reasonable likelihood of an adverse
determination and which, if adversely determined, individually or in the
aggregate with other such litigation, suits, actions, proceedings, or
complaints could reasonably be expected to (i) have a Material Adverse
Effect, (ii) materially and adversely effect AM's ability to perform its
obligations under this Agreement or (iii) prevent the consummation of any of
the transactions contemplated by this Agreement.
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6.10 REGISTRATION RIGHTS. As of the date hereof, except as set forth on
Schedule 6, AM has no obligation under any registration rights agreements or
otherwise with any holders of securities of AM (the "Holders"), other than
the Funds, providing the right to cause the registration of or to have
registered any securities held by any such Holder.
6.11 MODIFICATION AGREEMENT. The agreement in the form attached hereto as
Exhibit 6.11 (the "Modification Agreement") has been duly executed and
delivered by the parties thereto.
6.12 DECISIONS DEBT. As of the date hereof, the promissory note issued by
AM to Decisions Incorporated, a Delaware corporation ("Decisions") dated
January 4, 1994 in the original principal amount of $6,000,000 (as amended
by a letter agreement (the "Letter Agreement") dated May 13, 1994), and the
promissory note issued by AM to Decisions, dated August 12, 1994 in the
original principal amount of $6,500,000 constitute all of the debt owed to
Decisions by AM (the "Decisions Debt") and no default by AM exists
thereunder; and such promissory notes together with the Letter Agreement and
the Modification Agreement constitute all of the documents evidencing the
Decisions Debt.
6.13 INVESTMENT COMPANY ACT. AM is not an "investment company," or a
company "controlled" by an "investment company," within the meaning of the
Investment Company Act of 1940, as amended.
6.14 PUBLIC UTILITY HOLDING COMPANY ACT. AM is not a "holding company,"
or a "subsidiary company" of a "holding company," or an "affiliate" of a
"holding company" or of a "subsidiary company" of a "holding company," as
such terms are defined in the Public Utility Holding Company Act of 1935, as
amended.
6.15 FEES. Neither AM nor any of its subsidiaries has paid or become
obligated to pay any fee or commission to any investment banker, broker,
finder or intermediary in connection with the transactions contemplated by
this Agreement.
7. CONDITIONS TO OBLIGATIONS OF AM. The obligations of AM under this
Agreement are subject to the
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fulfillment, or the waiver in writing by AM, of the conditions set forth in
this Section 7 on or before Closing.
7.1 PERFORMANCE. The Funds have and shall have performed and complied
with all agreements and conditions contained in this Agreement required to
be performed or complied with by the Funds prior to or at Closing.
7.2 [INTENTIONALLY LEFT BLANK]
7.3 SECRETARY'S CERTIFICATE. Fidelity Healthcare shall have delivered to
AM a certificate of the Secretary or Assistant Secretary of Fidelity Select
Portfolios ("FSP") certifying as to FSP's Declaration of Trust and By-Laws,
and the incumbency of certain officers of FSP and Fidelity Healthcare.
Fidelity Convertible shall have delivered to AM a certificate of the
Secretary or Assistant Secretary of Fidelity Financial Trust ("FFT")
certifying as to FFT's Declaration of Trust and By-Laws, and the incumbency
of certain officers of FFT and Fidelity Convertible.
7.4 OTHER MATTERS. All corporate or other proceedings in connection with
the transactions contemplated by this Agreement, and all documents and
instruments incident to such transactions, shall be reasonably satisfactory
in substance and form to AM and its counsel, AM and its counsel shall have
received all such counterpart originals or certified or other copies of such
documents as they may reasonably request.
7.5 INDENTURE. The Indenture shall have been qualified for registration
on Form T-3 as required under the Trust Indenture Act of 1939, as amended
(the "Trust Indenture Act").
8. CONDITIONS TO THE OBLIGATIONS OF FIDELITY HEALTHCARE. The obligations
of Fidelity Healthcare under this Agreement are subject to the fulfillment,
or the waiver in writing by Fidelity Healthcare, of the conditions set forth
in this Section 8 on or before Closing.
8.1 PERFORMANCE. AM has and shall have performed and complied with all
agreements and conditions contained in this Agreement required to be
performed or complied with by AM prior to or at Closing.
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8.2 OPINION OF COUNSEL. AM shall have delivered to Fidelity Healthcare an
opinion of Gordon Altman Butowsky Weitzen Shalov & Wein, counsel to AM, in
the form of Exhibit 8.2 hereto.
8.3 SECRETARY'S CERTIFICATE. AM shall have delivered to Fidelity
Healthcare a certificate of the Secretary or Assistant Secretary of AM,
certifying as to Certificate of Incorporation, By-Laws, corporate
resolutions and incumbency.
8.4 OTHER MATTERS. All corporate or other proceedings in connection with
the transactions contemplated by this Agreement, and all documents and
instruments incident to such transactions, shall be reasonably satisfactory
in substance and form to Fidelity Healthcare and its counsel, Fidelity
Healthcare and its counsel shall have received all such counterpart
originals or certified or other copies of such documents as they may
reasonably request.
8.5 INDENTURE. The Indenture shall have been qualified for registration
on Form T-3 as required under the Trust Indenture Act.
8.6 REGISTRATION RIGHTS. AM shall have executed the Registration Rights
Agreement in the form attached hereto as Exhibit 8.6 on behalf of Fidelity
Healthcare.
8.7 MODIFICATION AGREEMENT. The Modification Agreement, as executed, has
not been amended and remains in full force and effect.
9. CONDITIONS TO THE OBLIGATIONS OF FIDELITY CONVERTIBLE. The obligations
of Fidelity Convertible under this Agreement are subject to the fulfillment,
or the waiver in writing by Fidelity Convertible, of the conditions set
forth in this Section 9 on or before Closing.
9.1 PERFORMANCE. AM has and shall have performed and complied with all
agreements and conditions contained in this Agreement required to be
performed or complied with by AM prior to or at Closing.
9.2 OPINION OF COUNSEL. AM shall have delivered to Fidelity Convertible
an opinion of Gordon
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Altman Butowsky Weitzen Shalov & Wein, counsel to AM, in the form of Exhibit
8.2 hereto.
9.3 SECRETARY'S CERTIFICATE. AM shall have delivered to Fidelity
Convertible a certificate of the Secretary or Assistant Secretary of AM,
certifying as to Certificate of Incorporation, By-Laws, corporate
resolutions and incumbency.
9.4 OTHER MATTERS. All corporate or other proceedings in connections with
the transactions contemplated by this Agreement, and all documents and
instruments incident to such transactions, shall be reasonably satisfactory
in substance and form to Fidelity Convertible and its counsel, Fidelity
Convertible and its counsel shall have received all such counterpart
originals or certified or other copies of such documents as they may
reasonably request.
9.5 INDENTURE. The Indenture shall have been qualified for registration
on Form T-3 as required under the Trust Indenture Act.
9.6 REGISTRATION RIGHTS. AM shall have executed the Registration Rights
Agreement in the form attached hereto as Exhibit 8.6 on behalf of Fidelity
Convertible.
9.7 MODIFICATION AGREEMENT. The Modification Agreement, as executed, has
not been amended and remains in full force and effect.
10. INDEMNIFICATION.
10.1 LEGAL FEES. AM acknowledges that the letter agreement between
Goodwin, Procter & Hoar, counsel to the Funds and AM dated January 17, 1995,
relating to the payment of the reasonable legal fees of Goodwin, Procter &
Hoar by AM in connection with this Agreement and the transactions
contemplated hereby, continues to be in full force and effect.
10.2 INDEMNIFICATION OF FUNDS.
(a) AM shall, without limitation as to time (except as otherwise
provided herein) indemnify each of the Funds and their respective
affiliates, employees,
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officers, directors, agents and investment advisors (collectively, the
"Funds' Indemnified Parties") against, and hold each of the Funds'
Indemnified Parties harmless from, all losses, claim, damages, liabilities,
costs (including the costs of preparation and reasonable attorneys' fees)
and expenses (collectively, the "Losses") incurred by such the Funds'
Indemnified Parties (i) in connection with or arising from any breach of any
warranty, or the inaccuracy of any representation made by AM or the failure
of AM to fulfill any of its agreements or undertakings under this Agreement,
(ii) pursuant to any investigation or proceeding against AM or any of the
Funds' Indemnified Parties, brought by any third-party, arising out of or in
connection with this Agreement (or any other document or instrument executed
herewith or pursuant hereto) or the transactions to which they relate,
whether or not the transactions contemplated herein are consummated, which
investigation or proceeding requires the participation of, or is commenced
or filed against, such of the Funds' Indemnified Parties because of this
Agreement (or any such document or instrument executed herewith or pursuant
hereto) or the transactions contemplated hereby, or (iii) in connection with
or arising from (A) the failure of AM or any of its subsidiaries to comply
with any federal, state or local environmental, health or safety law,
ordinance, regulation, rule or other legally enforceable requirement, or (B)
the presence, treatment, recycling, storage, disposal or actual or potential
release of any hazardous waste, hazardous substance, hazardous material, or
oil or any petroleum product or pollutant or contaminant at, on or under any
property owned or operated by AM or any of its subsidiaries, or at, on or
under any other place if such hazardous waste, hazardous substance,
hazardous material, oil, petroleum product, pollutant or contaminant was
transported or generated by AM or any of its Subsidiaries. Notwithstanding
the foregoing, AM shall not be liable for any Losses resulting from action
on the part of any of the Funds' Indemnified Parties which is finally
determined in such proceeding to be an act of gross negligence, recklessness
or willful misconduct by such of the Funds' Indemnified Parties or is
unrelated to any breach of any warranty, or the inaccuracy of any
representation made by AM or the failure of AM to fulfill any of its
agreements or undertakings under this Agreement, or was not taken by any of
the Funds' Indemnified Parties in reliance upon any of the warranties,
covenants or promises of AM herein or in any other documents contemplated
hereby, including certificates delivered by AM or its representatives
pursuant hereto. AM
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agrees to reimburse any of the Funds' Indemnified Parties promptly for all
such Losses as they are incurred by any of the Funds' Indemnified Parties,
subject to repayment by such of the Funds' Indemnified Parties in the case
of any Losses referred to in the previous sentence. The obligations of AM
to each of the Funds' Indemnified Parties hereunder shall be separate
obligations to each of the Funds' Indemnified Parties, and the liability of
AM to any of the Funds' Indemnified Parties hereunder shall not be
extinguished solely because any other of the Funds' Indemnified Parties are
not entitled to indemnity hereunder. The obligations of AM under this
Section 10.2(a) shall survive the termination of this Agreement.
(b) If the indemnification provided for in Section 10.2(a) is
unavailable to any of the Funds' Indemnified Parties in respect of any
Losses in connection with or arising from any breach of any warranty, or the
inaccuracy of any representation made by AM or the failure of AM to fulfill
any of its agreements or undertakings under this Agreement, then AM in lieu
of indemnifying such of the Funds' Indemnified Parties, shall contribute to
the amount paid or payable by such of the Funds' Indemnified Parties as a
result of such Losses in such proportions as is appropriate to reflect the
relative fault of AM, on the one hand and such of the Funds' Indemnified
Parties, on the other hand, in connection with the actions which resulted in
such Losses as well as any other relevant equitable considerations. The
relative fault of AM, on the one hand and any of the Funds' Indemnified
Parties, on the other hand, shall be determined by reference to, among other
things, whether any action in question, including any untrue or alleged
untrue statement of a material fact or omission or alleged omission to state
a material fact, has been taken by, or relates to information supplied by,
AM, on the one hand or such of the Funds' Indemnified Parties, on the other
hand, and such of the Funds' Indemnified Parties' relative intent,
knowledge, access to information and opportunity to correct or prevent any
such action, statement or omission.
The parties hereto agree that it would not be just and equitable if
contribution pursuant to this Section 10.2(b) were determined by pro rata
allocation or by any other method of allocation which does not take account
of the equitable considerations referred to in the immediately preceding
paragraph. No person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from
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any person who was not guilty of such fraudulent misrepresentation.
The amount paid or payable by a party as a result of the losses, claims,
damages, liabilities and expenses referred to above shall be deemed to
include, subject to the limitations set forth in the second paragraph of
this Section 10.2(b), any reasonable legal or other fees or expenses
reasonably incurred by such party in connection with investigating or
defending any action or proceeding. The obligations of AM under this Section
10.1(b) shall survive the termination of this Agreement.
10.3 INDEMNIFICATION OF AM.
(a) Each of the Funds shall, without limitation as to time (except
as otherwise provided herein) indemnify AM and its respective affiliates,
employees, officers, directors, agents and investment advisors
(collectively, the "AM Indemnified Parties") against, and hold each AM
Indemnified Party harmless from, all losses, claim, damages, liabilities,
costs (including the costs of preparation and reasonable attorneys' fees)
and expenses (collectively, the "Losses") incurred by such AM Indemnified
Party (i) in connection with or arising from any breach of any warranty, or
the inaccuracy of any representation made by each of the Funds or the
failure of each of the Funds to fulfill any of its agreements or
undertakings under this Agreement, or (ii) pursuant to any investigation or
proceeding against each of the Funds or any of the AM Indemnified Parties,
brought by any third-party, arising out of or in connection with this
Agreement (or any other document or instrument executed herewith or pursuant
hereto) or the transactions to which they relate, whether or not the
transactions contemplated herein are consummated, with investigation or
proceeding requires the participation of, or is commenced or filed against,
such AM Indemnified Party because of this Agreement (or any such document or
instrument executed herewith or pursuant hereto) or the transactions
contemplated hereby. Notwithstanding the foregoing, each of the Funds shall
not be liable for any Losses resulting from action on the part of any AM
Indemnified Party which is finally determined in such proceeding to be an
act of gross negligence, recklessness or willful misconduct by such AM
Indemnified Party or is unrelated to any breach of any warranty, or the
inaccuracy of any representation made by each of the Funds or the failure of
each of the Funds to fulfill any of its
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agreements or undertakings under this Agreement, or was not taken by any AM
Indemnified Party in reliance upon any of the warranties, covenants or
promises of each of the Funds herein or in any other documents contemplated
hereby, including certificates delivered by each of the Funds or its
representatives pursuant hereto. Each of the Funds agrees to reimburse any
AM Indemnified Party promptly for all such Losses as they are incurred by
any AM Indemnified Party, subject to repayment by such AM Indemnified Party
in the case of any Losses referred to in the previous sentence. The
obligations of each of the Funds to the AM Indemnified Parties hereunder
shall be separate obligations to each AM Indemnified Party, and the
liability of each of the Funds to AM Indemnified Parties hereunder shall not
be extinguished solely because any other of the AM Indemnified Parties is
not entitled to indemnity hereunder. The obligations of each of the Funds
under this Section 10.3(a) shall survive the termination of this Agreement.
(b) If the indemnification provided for in Section 10.3(a) is
unavailable to any AM Indemnified Parties in respect of any Losses in
connection with or arising from any breach of any warranty, or the
inaccuracy of any representation made by AM or the failure of AM to fulfill
any of its agreements or undertakings under this Agreement, then each of the
Funds in lieu of indemnifying such AM Indemnified Party, shall contribute to
the amount paid or payable by such AM Indemnified Party as a result of such
Losses in such proportions as is appropriate to reflect the relative fault
of each of the Funds, on the one hand and such AM Indemnified Party, on the
other hand, in connection with the actions which resulted in such Losses as
well as any other relevant equitable considerations. The relative fault of
each of the Funds, on the one hand and any AM Indemnified Party, on the
other hand, shall be determined by reference to, among other things, whether
any action in question, including any untrue or alleged untrue statement of
a material fact or omission or alleged omission to state a material fact,
has been taken by, or relates to information supplied by, each of the Funds,
on the one hand or such AM Indemnified Party, on the other hand, and such AM
Indemnified Party's relative intent, knowledge, access to information and
opportunity to correct or prevent any such action, statement or omission.
The parties hereto agree that it would not be just and equitable if
contribution pursuant to this Section 10.3(b) were determined by pro rata
allocation or by any
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other method of allocation which does not take account of the equitable
considerations referred to in the immediately preceding paragraph. No
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) shall be entitled to contribution from any
person who was not guilty of such fraudulent misrepresentation.
The amount paid or payable by a party as a result of the losses, claims,
damages, liabilities and expenses referred to above shall be deemed to
include, subject to the limitations set forth in the second paragraph of
this Section 10.3(b), any reasonable legal or other fees or expenses
reasonably incurred by such party in connection with investigating or
defending any action or proceeding. The obligations of each of the Funds
under this Section 10.3(b) shall survive the termination of this Agreement.
11. CLOSING CONDITIONS. AM shall use reasonable commercial efforts
(without any obligation to pay any money other than necessary filing fees as
required under the Trust Indenture Act and fees of the Indenture Trustee (as
defined in the Indenture) or undertake any other obligations) to cause the
conditions set forth in Sections 8 and 9 to occur. The Funds shall each use
reasonable commercial efforts (without any obligation to pay any money or
undertake any obligations) to cause the conditions set forth in Section 7 to
occur.
12. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The representations and
warranties contained herein shall survive the closing of the transactions
contemplated hereby.
13. TERMINATION. Either AM or the Funds, in the event that Closing has
not occurred either (i) within five business days after the Indenture has
been qualified for registration on Form T-3 under the Trust Indenture Act,
or (ii) within 60 days after February 6, 1995, may terminate this Agreement
and render such null and void; PROVIDED, HOWEVER, that in the event of any
such termination, all parties hereto shall remain liable for the breach of
any covenant, agreement or warranty, or the inaccuracy of any representation
made by such party under this Agreement, including, without limitation the
breach of any obligation under Section 11 hereof.
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14. MISCELLANEOUS.
14.1 NOTICES. All notices, demands, requests, or other communications
which may be or are required to be given or made by any party to any other
party pursuant to this Agreement shall be in writing and shall be mailed by
first-class, registered, certified, or express mail, return receipt
requested, postage prepaid, or transmitted by telegram, telefax or hand
delivered, addressed as follows:
(A) If to AM:
Advanced Medical, Inc.
9775 Businesspark Avenue
San Diego, CA 92131
With a copy to:
Keith L. Schaitkin, Esq.
Gordon Altman Butowsky Weitzen
Shalov & Wein
114 West 47th Street
New York, New York 10036-1510
(B) If to either of the Funds:
With a copy to:
Kevin Dennis, Esq.
Goodwin, Procter & Hoar
Exchange Place
Boston, MA 02109
or such other address as the addressee may indicate by written notice. Each
notice, demand, request, or communication which shall be given or made in
the manner described above shall be deemed sufficiently given or made for
all purposes at such time as it is delivered to the addressee (with the
return receipt, the delivery receipt, or the affidavit of messenger being
deemed conclusive but not exclusive evidence of such delivery) or at such
time as delivery is refused by the addressee upon presentation.
14.2 SEVERABILITY AND GOVERNING LAW. Should any section or any part of a
section within this Agreement be rendered void, invalid or unenforceable by
any court of law
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for any reason, such provision shall be construed to be enforceable to the
maximum extent possible, and such invalidity or unenforceability shall not
void or render invalid or unenforceable any other section or part of a
section in this Agreement. This Agreement shall be construed and governed
by the laws of the State of New York.
14.3 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument.
14.4 SECTION HEADINGS. Section titles or captions contained in this
Agreement are inserted as a matter of convenience and for reference purposes
only, and in no way de- fine, limit, extend or describe the scope of this
Agreement or the intent of any provision hereof.
14.5 SINGULAR AND PLURAL, ETC. Whenever the singular number is used
herein and where required by the context, the same shall include the plural,
and the neuter gender shall include the masculine and feminine genders and
vice versa.
14.6 SUCCESSORS AND ASSIGNS. All rights, covenants and agreements of the
parties contained in this Agreement shall, except as otherwise provided
herein, be binding upon and inure to the benefit of their respective
successors and assigns.
14.7 THIRD PARTY BENEFICIARIES. Except as otherwise provided herein,
nothing in this Agreement is intended to, or shall be construed so as to
create any third party beneficiary in this Agreement or otherwise confer any
rights upon any person, firm or corporation that is not a party hereto.
14.8 PUBLICITY. Except as provided below, any public disclosure of the
transaction contemplated hereby and the terms hereof or results obtained
hereunder (including but not limited to press releases or other statements
made available generally by a party hereto to the public) will be reviewed
and consented to by each party prior to such disclosure. Such consent shall
not be untimely or unreasonably withheld by any party hereto.
Notwithstanding the foregoing, any party hereto may, without the prior
written consent of the other parties hereto: (a) disclose (i) the existence
of this Agreement, (ii) the general
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subject matter thereof (other than material business, technical and
commercial terms thereof or related thereto), and (iii) the identity of the
parties hereto; or (b) make public disclosure of this Agreement and of the
transactions contemplated hereby, the aggregate consideration to be paid
hereunder, the terms hereof or the results obtained hereunder to the extent
that such public disclosure is required by any law, or rule or regulation of
any agency, including, without limitation, the United States Securities and
Exchange Commission or any securities exchange on which securities of the
disclosing party are then listed (and may thereafter disclose without
consent the information so disclosed). Subject to the foregoing provisions
of this Section 13.8, AM may file this Agreement and any exhibits hereto
pursuant to Form 8-K.
14.9 ENTIRE AGREEMENT; AMENDMENT. This Agreement the Documents and the
attached Exhibits contain the entire understanding of the parties and there
are no further or other agreements or understandings, written or oral, in
effect between the parties relating to the subject matter hereof. This
Agreement may be amended only by a written instrument signed by all the
parties hereto.
14.10 COOPERATION AND FURTHER ASSURANCES. Each party hereto agrees to
execute, acknowledge, deliver, file and record such further certificates,
instruments and documents, and to do all such other acts and things as may
be required by law, or as may, in the reasonable opinion of a party hereto
or counsel to any of them, be necessary or advisable, to carry out the full
intents and purposes of this Agreement.
-21-
<PAGE>
IN WITNESS WHEREOF, the parties have hereunto set their hands as of the
date first above written.
ADVANCED MEDICAL, INC.
By: _________________________
Name: Joseph W. Kuhn
Title: President
-22-
<PAGE>
Index of Exhibits and Schedules
-------------------------------
Exhibit Description
------- -----------
Exhibit 1.1 Form of Indenture
Exhibit 1.2 Form of Written Notice
Exhibit 2 Form of Bond Powers
Exhibit 6.11 Modification Agreement
Exhibit 8.2 Opinion of AM's Counsel
Exhibit 8.6 Registration Right Agreement
Schedule Description
-------- -----------
Schedule 6 Schedule related to AM
Representations
-23-
<PAGE>
EXHIBIT 11.1
ADVANCED MEDICAL, INC. AND SUBSIDIARIES
Computation of Net (Loss) Income Per Share
-------------------------------------------------------------------------------
(Dollars in Thousands)
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------
1992 1993 1994
PRIMARY NET (LOSS) INCOME PER SHARE --------- ------- -------
<S> <C> <C> <C>
(Loss) income before extraordinary item, cumulative
effect of change in accounting principle and dividends
and accretion on mandatorily redeemable preferred stock $ (2,444) $ (2,688) $ 5,677
Dividends and accretion on mandatorily redeemable
preferred stock 1,832 1,387 874
-------- -------- -------
(Loss) income before extraordinary item and cumulative
effect of change in accounting principle (4,276) (4,075) 4,803
Extraordinary item - loss on early retirement of debt (8,632)
Cumulative effect of change in accounting principle 3,985
------ ------- -------
Net (loss) income applicable to common stock $(12,908) $ (90) $ 4,803
-------- ------- -------
-------- ------- -------
Weighted average common shares outstanding 13,962 14,073 14,069
-------- ------- -------
-------- ------- -------
Primary net (loss) income per share:
(Loss) income before extraordinary item and cumulative
effect of change in accounting principle (.30) (.29) .34
Extraordinary item - loss on early retirement of debt (.62)
Cumulative effect of change in accounting principle .28
-------- ------- -------
Net (loss) income applicable to common stock $ (.92) $ (.01) $ .34
-------- ------- -------
-------- ------- -------
FULLY DILUTED NET (LOSS) INCOME PER SHARE (1)
Income before extraordinary item, cumulative effect
of change in accounting principle and dividends and
accretion on mandatorily redeemable preferred stock
$ 5,677
Dividends and accretion on mandatorily redeemable
preferred stock (874)
Add back interest expense, net of tax, on convertible bonds 386
-------
Net income applicable to common stock $ 5,189
-------
-------
Weighted average common shares outstanding
prior to conversion of convertible promissory notes 14,069
Add weighted average shares issued upon conversion
of convertible promissory notes 10,030
-------
Weighted average common shares outstanding 24,099
-------
-------
Fully diluted net income per share:
Net income applicable to common stock $ .22
-------
<FN> -------
(1) Fully diluted (loss) per share are not included for fiscal years 1992 and 1993 as it is antidilutive.
</TABLE>
<PAGE>
EXHIBIT 21.1
LIST OF SUBSIDIARIES OF THE COMPANY
--------------------------------------------------------------------------------
Except as otherwise indicated, each subsidiary was incorporated in the
State of Delaware.
Fidata Corporation
AM Development Limited
AM General Development Corp.
IMED Corporation
IMED Nominee, Inc.
IMED Pty. Ltd. (Australia)
IMED Canada Ltd. (Canada)
IMED Ltd. (United Kingdom)
IMED France (France)
IMED Medizintechnik GmbH (Germany)
IMED Ireland (Ireland)
IMED Holding Co. Ltd. (British Virgin Islands)
Fidata Trust Company New York (New York)
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Forms S-8 (No. 33-40568 and No. 33-40406) of Advanced
Medical, Inc. of our report dated March 17, 1995 appearing on page 25 of
this Form 10-K.
PRICE WATERHOUSE LLP
San Diego, California
March 31, 1995
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<CIK> 0000817161
<NAME> ADVANCED MEDICAL, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> DEC-31-1994
<CASH> 1,340
<SECURITIES> 2,883
<RECEIVABLES> 24,770
<ALLOWANCES> (855)
<INVENTORY> 20,347
<CURRENT-ASSETS> 53,283
<PP&E> 26,667
<DEPRECIATION> (15,072)
<TOTAL-ASSETS> 132,124
<CURRENT-LIABILITIES> 23,707
<BONDS> 91,803
<COMMON> 142
6,567
0
<OTHER-SE> (2,380)
<TOTAL-LIABILITY-AND-EQUITY> 132,124
<SALES> 111,681
<TOTAL-REVENUES> 112,122
<CGS> 65,590
<TOTAL-COSTS> 65,590
<OTHER-EXPENSES> 33,841
<LOSS-PROVISION> 100
<INTEREST-EXPENSE> 8,690
<INCOME-PRETAX> 7,563
<INCOME-TAX> 1,886
<INCOME-CONTINUING> 5,677
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,677
<EPS-PRIMARY> .34
<EPS-DILUTED> .22
</TABLE>
