<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(MARK ONE)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended MARCH 31, 1996 or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from ___________ to ___________
Commission File Number: 33-26398
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 No.)
9775 Businesspark Avenue, San Diego, CA 92131
(Address of principal executive offices) (Zip Code)
(619) 566-0426
(Registrant's telephone number, including area code)
Not applicable
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
--- ----
On May 8, 1996, 16,135,125 shares of Registrant's Common Stock were
outstanding.
Page 1 of 16
<PAGE>
ADVANCED MEDICAL, INC. AND SUBSIDIARIES
- -------------------------------------------------------------------------------
INDEX
PART I. FINANCIAL INFORMATION
Item 1 - Financial Statements:
PAGE
----
Condensed consolidated balance sheets at
December 31, 1995 and March 31, 1996. . . . . . . . . . . . . 3
Condensed consolidated statements of operations for the
three months ended March 31, 1995 and 1996. . . . . . . . . . 4
Condensed consolidated statements of cash flows for the
three months ended March 31, 1995 and 1996. . . . . . . . . . 5
Condensed consolidated statement of changes in
stockholders' equity for the period from
December 31, 1995 to March 31, 1996 . . . . . . . . . . . . . 6
Notes to the condensed consolidated financial statements. . . 7
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations . . .. . . . . . . 9
PART II. OTHER INFORMATION
Item 1 - Legal Proceedings. . . . . . . . . . . . . . . . . . 13
Item 2 - Changes in Securities. . . . . . . . . . . . . . . . Not applicable
Item 3 - Defaults Upon Senior Securities. . . . . . . . . . . 13
Item 4 - Submission of Matters to a Vote of Security - Holders Not applicable
Item 5 - Other Information. . . . . . . . . . . . . . . . . . Not applicable
Item 6 - Exhibits and Reports on Form 8-K . . . . . . . . . . 14
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
- 2 -
<PAGE>
FORM 10 - Q
PART 1 - ITEM 1
FINANCIAL INFORMATION
ADVANCED MEDICAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLAR AND SHARE AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS DECEMBER 31, MARCH 31,
1995 1996
------------- ----------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents . . . . . . . . . . . . $ 1,862 $ 1,763
Restricted cash and investment securities . . . . 2,218 2,237
Securities available for sale . . . . . . . . . . 6,975 4,434
Receivables, net. . . . . . . . . . . . . . . . . 27,023 24,062
Inventories . . . . . . . . . . . . . . . . . . . 15,829 17,635
Prepaid expenses and other current assets . . . . 3,651 4,118
-------- -------
Total current assets. . . . . . . . . . . . . . 57,558 54,249
Restricted cash . . . . . . . . . . . . . . . . . . 25,000 25,000
Net investment in sales-type
and direct financing leases. . . . . . . . . . . 15,179 14,067
Property, plant and equipment, net. . . . . . . . . 12,653 12,692
Other non-current assets. . . . . . . . . . . . . . 11,834 11,064
Intangible assets, net. . . . . . . . . . . . . . . 47,406 48,068
-------- ---------
$169,630 165,140
======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt . . . . . . . . $ 322 $ 149
Accounts payable. . . . . . . . . . . . . . . . . 7,881 8,526
Accrued expenses and other current liabilities. . 17,417 14,639
-------- -------
Total current liabilities . . . . . . . . . . . 25,620 23,314
-------- -------
Long-term debt. . . . . . . . . . . . . . . . . . . 86,789 86,408
Other non-current liabilities . . . . . . . . . . . 6,972 6,804
-------- -------
93,761 93,212
-------- -------
Minority interests in consolidated subsidiaries . . 11,500 11,500
-------- -------
Contingent liabilities (Note 4)
Mandatorily redeemable equity securities. . . . . . 7,217 7,379
-------- -------
Non-redeemable preferred stock, common stock
and other stockholders' equity:
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 -- 16,214 shares
and 16,218 shares at December 31, 1995 and
March 31, 1996, respectively . . . . . . . . . 162 162
Capital in excess of par value. . . . . . . . . . 62,965 62,811
Accumulated deficit . . . . . . . . . . . . . . . (34,468) (33,609)
Treasury stock. . . . . . . . . . . . . . . . . . (734) (734)
Unrealized holding gains from securities
available for sale, net of tax. . . . . . . . . . 3,577 1,036
Other equity . . . . . . . . . . . . . . . . . . . 30 69
-------- -------
Total non-redeemable preferred stock,
common stock and other stockholders' equity . . 31,532 29,735
-------- -------
$169,630 $165,140
======== ========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
- 3 -
<PAGE>
ADVANCED MEDICAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(DOLLAR AND SHARE AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------
1995 1996
-------- -------
<S> <C> <C>
Sales . . . . . . . . . . . . . . . . . . . . . . $28,590 $25,765
Cost of sales . . . . . . . . . . . . . . . . . . 17,031 13,895
------- -------
Gross margin. . . . . . . . . . . . . . . . . . 11,559 11,870
------- -------
License fees revenue. . . . . . . . . . . . . . . 110 110
------- -------
Selling expenses. . . . . . . . . . . . . . . . . 4,220 4,207
General and administrative expenses . . . . . . . 2,873 2,966
Research and development expenses . . . . . . . . 2,086 1,812
------- -------
Total operating expenses. . . . . . . . . . . . 9,179 8,985
------- -------
Income from operations. . . . . . . . . . . . . 2,490 2,995
------- -------
Other income (expenses):
Interest income . . . . . . . . . . . . . . . . 563 957
Interest expense. . . . . . . . . . . . . . . . (1,742) (2,215)
Other, net. . . . . . . . . . . . . . . . . . . (159) 2
------- -------
(1,338) (1,256)
------- -------
Income before income taxes and extraordinary item 1,152 1,739
Provision for income taxes. . . . . . . . . . . . 129 880
------- -------
Income before extraordinary item. . . . . . . . . 1,023 859
Extraordinary item - gain on early retirement
of debt, net of taxes. . . . . . . . . . . . . . 8,807
------- -------
Net income. . . . . . . . . . . . . . . . . . . . 9,830 859
Dividends on mandatorily redeemable
preferred stock. . . . . . . . . . . . . . . . 163 162
------- -------
Net income applicable to common stock . . . . . $ 9,667 $ 697
======= =======
Income per common share assuming no dilution:
Income before extraordinary item. . . . . . . . $ .06 $ .04
Extraordinary item. . . . . . . . . . . . . . . .63
------- -------
Net income per common share assuming
no dilution . . . . . . . . . . . . . . . . $ .69 $ .04
======= =======
Income per common share assuming full dilution:
Income before extraordinary item. . . . . . . . $ .03 $ .03
Extraordinary item. . . . . . . . . . . . . . . .29
------- -------
Net income per common share assuming
full dilution . . . . . . . . . . . . . . . . $ .32 $ .03
======= =======
Weighted average common shares outstanding
assuming no dilution . . . . . . . . . . . . . . 14,084 16,461
======= ======
Weighted average common shares outstanding
assuming full dilution . . . . . . . . . . . . . 30,568 42,550
====== ======
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
- 4 -
<PAGE>
ADVANCED MEDICAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS IN THOUSANDS)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-----------------------------
1995 1996
--------- ----------
<S> <C> <C>
Net cash provided by operating activities . . . . . $ 3,028 $ 3,162
------- -------
Cash flows from investing activities:
Net increase in restricted cash and investments . (19)
Capital expenditures. . . . . . . . . . . . . . . (944) (1,205)
Payment for product distribution rights . . . . . (1,503)
Proceeds from disposal of property. . . . . . . . 11
------- -------
Net cash used in investing activities . . . . . . . (944) (2,716)
------- -------
Cash flows from financing activities:
Net repayments under credit facilities. . . . . . (2,688) (232)
Principal payments on long-term debt. . . . . . . (296) (322)
Other . . . . . . . . . . . . . . . . . . . . . . 8
------- -------
Net cash used in financing activities . . . . . . . (2,984) (546)
------- -------
Effect of exchange rate changes on cash . . . . . . 7 1
------- -------
Net decrease in cash and cash equivalents . . . . . (893) (99)
Cash and cash equivalents at beginning of period. . 1,340 1,862
------- -------
Cash and cash equivalents at end of period. . . . . $ 447 $ 1,763
======== =======
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
- 5 -
<PAGE>
ADVANCED MEDICAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN
STOCKHOLDERS' EQUITY (UNAUDITED)
(DOLLAR AND SHARE AMOUNTS IN THOUSANDS)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
UNREALIZED
HOLDING
GAINS
FROM
COMMON STOCK CAPITAL IN TREASURY STOCK SECURITIES
---------------- EXCESS OF ACCUMULATED -------------- AVAILABLE OTHER
SHARES AMOUNT PAR VALUE DEFICIT SHARES AMOUNT FOR SALE EQUITY TOTAL
------ ------ --------- ---------- ------ ------ -------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31, 1995 16,214 $ 162 $62,965 $(34,468) 83 $734) $3,577 $30 $31,532
Issuance of common stock 4 8 8
Dividends on mandatorily
redeemable preferred stock (162) (162)
Unrealized holding loss from
securities available for sale (2,541) (2,541)
Other equity transactions
39 39
Net income for the period 859 859
------ ------ --------- ---------- ------ ------ -------- ------ ------
Balance at
March 31, 1996 16,218 $ 162 $62,811 $(33,609) 83 $(734) $1,036 $69 $29,735
====== ====== ======= ======== ==== ===== ====== ===== =======
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
- 6 -
<PAGE>
ADVANCED MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLARS AND SHARE AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 1 -- BUSINESS AND STATEMENT OF ACCOUNTING POLICY
BUSINESS:
Advanced Medical, Inc. ("Advanced Medical"), operating through its major
operating subsidiary, IMED Corporation ("IMED"), is a leading developer and
manufacturer of infusion products and related technologies for the health
care industry (Advanced Medical and its subsidiaries are collectively
referred to herein as "the Company").
STATEMENT OF ACCOUNTING POLICY:
The accompanying financial statements have been prepared by the Company
without audit 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, although the Company believes that the
disclosures herein are adequate to make the information not misleading.
In the opinion of the Company, the accompanying financial statements contain
all adjustments, consisting of normal recurring adjustments, necessary for a
fair statement of the Company's financial position as of March 31, 1996, and
the results of its operations and its cash flows for the three months ended
March 31, 1995 and 1996.
USE OF ESTIMATES:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the period. Actual results could differ from those estimates.
NET INCOME PER COMMON SHARE:
Net income per common share assuming no dilution is computed using the
weighted average number of common and common stock equivalent shares
outstanding during the period. Net income per common share assuming full
dilution is computed using the weighted average number of common and common
stock equivalent shares outstanding during the period plus the shares that
would be outstanding assuming conversion of the $6,000 secured promissory
note ("$6,000 Note") issued to Decisions Incorporated, a corporation
affiliated with Jeffry M. Picower, Chairman and CEO of the Company
("Decisions"), during January 1994, conversion of the $6,500 secured
promissory note ("$6,500 Note") issued to Decisions during August 1994, and
conversion of the $25,000 secured promissory note ("$25,000 Note")
(collectively, "the Notes") issued to Decisions during December 1995.
Assuming conversion of the Notes, interest expense (net of taxes) on the
convertible debt has been added to the net income applicable to common stock
in the amount of $149 and $412 for the three months ended March 31, 1995 and
1996, respectively. Common stock equivalent shares are excluded from the
computation in periods in which they have an anti-dilutive effect.
NOTE 2 -- INVENTORIES
Inventories comprise the following:
DECEMBER 31, MARCH 31,
1995 1996
------------ ----------
Raw materials. . . . . . . . . . . $ 6,946 $ 6,979
Work-in-process. . . . . . . . . . 1,686 2,684
Finished goods . . . . . . . . . . 7,197 7,972
-------- --------
$15,829 $17,635
======== ========
- 7 -
<PAGE>
NOTE 3 -- INTANGIBLE ASSETS
Pursuant to the exclusive distribution agreement with Debiotech SA
("Debiotech") ("the Agreement"), IMED paid Debiotech $1.5 million during the
three months ended March 31, 1996 upon the attainment of certain milestones.
The additional payment has been classified as an intangible asset with
previous payments made under the Agreement, and is being amortized on a
straight-line basis over the 15-year term of the Agreement.
NOTE 4 -- 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 affect on consolidated
financial position or results of operations.
NOTE 5 -- MANDATORILY REDEEMABLE EQUITY SECURITIES
As of March 31, 1996, dividends in arrears on the $.01 par value mandatorily
redeemable preferred stock ("10% Preferred Stock") and the $.01 par value
mandatorily redeemable convertible preferred stock ("Convertible Preferred
Stock") were approximately $990 and $959, respectively. Additionally, the
Company did not declare the March 28, 1994 redemption of its 10% Preferred
Stock (redemption price of approximately $3,300).
On March 19, 1996, the Company entered into a memorandum of understanding
with respect to the settlement of an action based on the Company's failure to
redeem its outstanding shares of 10% Preferred Stock. Pursuant to the
memorandum of understanding, the Company agreed to (i) redeem its outstanding
10% Preferred Stock, plus accrued and unpaid dividends less amounts (not to
exceed $1.50 per share), if any, awarded by the court as fees to counsel for
the plaintiffs and (ii) the payment of up to $500 in attorney's fees. The
settlement is subject to negotiation of a definitive agreement and approval
of the court.
NOTE 6 -- SUPPLEMENTAL INFORMATION TO STATEMENTS OF CASH FLOWS
Income taxes paid during the three months ended March 31, 1995 and 1996
totaled $909 and $2,402, respectively. Interest paid during the three months
ended March 31, 1995 and 1996 totaled $2,857 and $2,559, respectively.
Depreciation and amortization expense for the three months ended March 31,
1995 and 1996 totaled $1,795 and $2,042, respectively.
- 8 -
<PAGE>
PART I -- ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
- -------------------------------------------------------------------------------
OVERVIEW:
Advanced Medical is a holding company for IMED, Fidata Corporation ("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 expenses 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.
For purposes of this discussion and analysis, the three months ended March
31, 1995 and 1996 are referred to as 1995 and 1996, respectively.
LIQUIDITY AND CAPITAL RESOURCES:
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. In
particular, the loan agreement between IMED and General Electric Capital
Corporation ("GECC") ("Amended Loan Agreement") permits IMED to transfer to
Advanced Medical up to $9.25 million annually to fund Advanced Medical's cash
requirements for operating and interest expenses.
In 1996, IMED's cash flow from operations was $5.8 million which was used for
(i) repayments of $.2 million under the revolving credit facility, (ii)
advances of $2.8 million to Advanced Medical, as permitted under the Amended
Loan Agreement, (iii) payments of $1.5 million for the Debiotech Agreement,
and (iv) capital expenditures of $1.2 million. In addition to IMED's cash
flow from operations, IMED has readily available financial resources under a
$35.0 million revolving credit facility. As of March 31, 1996, IMED had
$22.9 million available for use under its revolving credit facility. 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, capital expenditures and transfers to
Advanced Medical.
In addition to financial resources available to IMED from operations and the
revolving credit facility, management considers it important for Advanced
Medical to maintain financial resources to take advantage of growth and
investment opportunities. Accordingly, in December 1995, the Company
borrowed $25.0 million from Decisions Incorporated ("Decisions") (the "$25.0
Million Note"). At March 31, 1996, the proceeds from the $25.0 Million Note
remain available to satisfy growth and investment opportunities, with some
restrictions, and are classified as restricted cash (non-current) in the
condensed consolidated balance sheet.
The Company considers its investment in the common stock of Alteon, Inc.
("Alteon") to be a significant source of capital and liquidity. Under the
loan agreements, the Alteon common stock holdings and the proceeds from any
sales are pledged as security and are restricted to the satisfaction of
working capital requirements. As of March 31, 1996, the Company owned
432,600 shares of Alteon common stock which were registered under the
Securities Act on October 1, 1993, and had an aggregate market value of
approximately $4.4 million based upon the closing price per share on the
NASDAQ National Market System ("NASDAQ"). Prices obtainable in any private
sales of such securities are likely to be lower than those quoted on the
NASDAQ. 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 Company had working capital of $31.9 million as of December 31, 1995
compared with working capital of $30.9 million as of March 31, 1996. The
decrease in working capital in 1996 resulted primarily from a decrease in the
market value of Alteon common stock and a seasonal reduction in accounts
receivable due to the collection of year-end receivables. The decrease in
working capital was partly offset by increased inventory levels and a
reduction in taxes payable due to tax payments in 1996.
- 9 -
<PAGE>
The Company did not pay the March 28, 1994 mandatory redemption of all
outstanding shares of $.01 par value mandatorily redeemable preferred stock
("10% Preferred Stock") and has not declared and paid dividends since March
1993. As of March 31, 1996, there were 329,913 shares of 10% Preferred Stock
currently outstanding with a liquidation preference of $10 per share and
accrued and unpaid dividends were approximately $1.0 million. In addition to
the 10% Preferred Stock, as of March 31, 1996, there were 333,000 shares of
15% convertible preferred stock currently outstanding with a liquidation
preference of $6.40 per share and accrued and unpaid dividends were
approximately $1.0 million. Since the Company has obtained the consent of
the holders of the $25.0 Million Note to do so, the Company intends to
redeem the outstanding 10% Preferred Stock, the 15% convertible preferred
stock and to pay all accrued dividends thereon, in the near future from a
portion of the proceeds from the $25.0 Million Note. (See Part 1, Item 1,
Note 5.)
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 of IMED ("the IMED
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 warrant, or warrant stock if the warrant is exercised. The
Company's liquidity would be adversely affected, and financial resources
would be significantly reduced, in the event GECC exercises its mandatory
redemption rights. However, the Company believes it has sufficient borrowing
capacity and readily available financial resources under the $25.0 Million
Note to acquire the IMED Warrant.
RESULTS OF OPERATIONS:
1995 1996
-------- --------
(IN MILLIONS)
U.S. sales . . . . . . . . . . . . . . . . $ 23.5 $20.1
International sales. . . . . . . . . . . . 5.1 5.7
------ ------
Total sales. . . . . . . . . . . . . . . $ 28.6 $25.8
====== =====
Total sales. . . . . . . . . . . . . . . . 100.0% 100.0%
Cost of sales. . . . . . . . . . . . . . . 59.6 53.9
----- -----
Gross margin . . . . . . . . . . . . . . . 40.4% 46.1%
====== =====
Selling expenses . . . . . . . . . . . . . $ 4.2 $ 4.2
====== =====
Selling expenses as a percentage of sales. 14.8% 16.3%
====== =====
SALES
The following table sets forth IMED sales, by major product groups, for the
periods presented.
1995 1996
---------- ---------
(IN MILLIONS)
Piston Cassette Disposables. . . . . . $ 5.4 $ 3.6
Peristaltic Disposables. . . . . . . . 13.7 16.1
Piston Cassette Pumps. . . . . . . . . 0.4 0.1
Peristaltic Pumps. . . . . . . . . . . 6.2 3.7
ReadyMED . . . . . . . . . . . . . . . 0.9 0.5
Other (1). . . . . . . . . . . . . . . 2.0 1.8
------ ------
Total . . . . . . . . . . . . . . . . . $ 28.6 $ 25.8
====== ======
(1) Primarily includes operating lease income relating to pumps, service fees
and accessory sales.
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 1995 through 1996. 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 applications
- 10 -
<PAGE>
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 1996
approximately 4% 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 during 1995 and 1996
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. 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.
The decrease in U.S. sales from 1995 to 1996 is due primarily to decreased
volume of instrument shipments. The 1995 sales reflected instrument volume
associated with several large transactions. Volume declines of the ReadyMED
product line due to lower demand for the product also contributed to the
decrease in sales from 1995 to 1996. Efforts by hospitals to control
operating expenses continued to put pressure on selling prices of IMED's
disposable administration sets. However, the decline in U.S. sales from
price declines were offset by the sales generated through increased
disposable administration set volume.
The increase in International sales from 1995 to 1996 is primarily due to
increased volumes of disposable administration sets which resulted from (i)
increases in the number of instruments installed and utilizing disposable
administration sets in Canada, Australia, Latin America and the Far East and
(ii) purchasing patterns by IMED's European marketing and distribution
partner, Pharmacia AB ("Pharmacia"), which were higher in 1996.
GROSS MARGIN
The gross margin percentage increased from 1995 to 1996
primarily due to (i) reductions in the manufacturing cost of disposable
administration sets resulting from increased outsourcing of molded parts and
components from lower cost vendors and the favorable effects of increased
manufacturing volume and (ii) lower unit cost for disposable administration
sets in inventory at December 31, 1995 that were sold in 1996 compared to the
unit cost for disposable administration sets in inventory at December 31,
1994 that were sold in 1995. The increase in gross margin percentage from
1995 to 1996 was achieved despite the decline in selling prices in the U.S.
market, as previously discussed.
GENERAL AND ADMINISTRATIVE EXPENSES
The following table sets forth general and administrative ("G&A") expenses,
in millions, for Advanced Medical and its subsidiaries for the periods
presented.
1995 1996
-------- -------
IMED . . . . . . . . . . . . . $ 2.4 $ 2.3
Advanced Medical . . . . . . . .4 .7
Fidata . . . . . . . . . . . . .1
------ -----
Total G&A expenses. . . . . $ 2.9 $ 3.0
====== =====
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.
- 11 -
<PAGE>
Advanced Medical has been winding down Fidata's remaining operations and
settling its remaining claims 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 1995. Management expects to settle certain
remaining claims and liquidate Fidata completely in 1996. However, there can
be no assurance that Fidata will be completely liquidated in 1996 as such
will require court and regulatory approval.
RESEARCH AND DEVELOPMENT EXPENSES
The Company's research and development ("R&D") expenses, which consist
exclusively of IMED's R&D, decreased from 1995 to 1996 due to the timing of
incurring certain expenses associated with the development of a new line of
hospital infusion pumps and associated disposable administration sets. R&D
expenses for the year ending December 31, 1996 are expected to be comparable
to those for the year ended December 31, 1995.
RESTRUCTURINGS
During 1993, the Company recorded a $3.5 million restructuring charge in
connection with the sale of IMED Ireland and relocation of its molding
operations to the United States. The charge included accruals of $1.3
million related to estimated relocation costs and professional fees. Cash
payments of approximately $.1 million were made during 1995 and no cash
payments were made in 1996. As of March 31, 1996, the remaining accrual of
$.5 million is expected to be paid during 1996.
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 but is unable
to predict the effect, if any, from health care reform and increased
competitive pressures.
OTHER MATTERS
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). SFAS 123 defines a fair value based method of
accounting for an employee stock option or similar equity instrument. It
also allows an entity to continue to measure compensation cost for those
plans using the intrinsic value based method of accounting prescribed by
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25"). The Company has elected to continue to measure its
stock-based compensation in accordance with APB 25. Certain pro forma
disclosures required by SFAS 123 will be made in 1996 in accordance with SFAS
123. The Company does not expect the adoption of SFAS 123 to have a
significant effect on its financial position or results of operations.
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.
FORWARD-LOOKING STATEMENTS
Forward-Looking Statements in this report are made pursuant to the Safe
Harbor Provisions of the Private Securities Litigation Reform Act of 1995.
Persons reading this report are cautioned that such forward-looking
statements involve risks and uncertainties, including, without limitation,
the effect of legislative and regulatory changes effecting the health care
industry; the potential of increased levels of competition; technological
changes; the dependence of the Company upon the success of new products and
ongoing research and development efforts; restrictions contained in the
instruments governing the Company's indebtedness; the significant leverage to
which the Company is subject; and other matters referred to in this report.
- 12 -
<PAGE>
PART II
OTHER INFORMATION
- -------------------------------------------------------------------------------
ITEM 1. LEGAL PROCEEDINGS
See Item 3. of the Company's December 31, 1995 Form 10-K.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
(B) ARREARAGES IN THE PAYMENT OF PREFERRED STOCK DIVIDENDS
The Company did not pay the March 28, 1994 mandatory redemption of all
outstanding shares of $.01 par value mandatorily redeemable preferred stock
("10% Preferred Stock") and has not declared and paid dividends since March
1993. As of March 31, 1996, there were 329,913 shares of 10% Preferred Stock
currently outstanding with a liquidation preference of $10 per share and
accrued and unpaid dividends were approximately $990,000. In addition to the
10% Preferred Stock, as of March 31, 1996, there were 333,000 shares of 15%
convertible preferred stock currently outstanding with a liquidation
preference of $6.40 per share and accrued and unpaid dividends were
approximately $959,000.
On March 19, 1996, the Company entered into a memorandum of understanding
with respect to the settlement of an action based on the Company's failure to
redeem its outstanding shares of 10% Preferred Stock. Pursuant to the
memorandum of understanding, the Company agreed to (i) redeem its outstanding
10% Preferred Stock, plus accrued and unpaid dividends less amounts (not to
exceed $1.50 per share), if any, awarded by the court as fees to counsel for
the plaintiffs and (ii) the payment of up to $500,000 in attorney's fees.
The settlement is subject to negotiation of a definitive agreement and
approval of the court.
- 13 -
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.27 Memorandum of Understanding dated March 19, 1996, by and between
the Company and plaintiff class represented by Richard C. Goodwin,
with respect to the settlement of a class action lawsuit.
11.1 Computation of Net Income per share for the three months ended
March 31, 1995 and 1996.
_________________________________________
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter for which this report is
being filed.
- 14 -
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ADVANCED MEDICAL, INC.
(REGISTRANT)
Date: May 13, 1996 By: /s/ JOSEPH W. KUHN
----------------------------
Joseph W. Kuhn
PRESIDENT
(PRINCIPAL FINANCIAL OFFICER)
- 15 -
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Page
No. No.
- ------- -----
<S> <C> <C>
10.27 Memorandum of Understanding dated March 19, 1996, by and between
the Company and plaintiff class represented by Richard C. Goodwin,
with respect to the settlement of a class action lawsuit . . . . . . . . 17
11.1 Computation of Net Income per share for the three months
ended March 31, 1995 and 1996. . . . . . . . . . . . . . . . . . . . . . 25
</TABLE>
- 16 -
<PAGE>
EXHIBIT 10.27
MEMORANDUM OF UNDERSTANDING
WHEREAS, the parties to the action (the "Action") entitled RICHARD C.
GOODWIN ET AL, V. JEFFRY PICOWER, ET AL., Del. Ch., C.A. 14618, now pending
in the Court of Chancery of the State of Delaware in and for New Castle
County (the "Court"), by their respective attorneys, have reached this
Memorandum of Understanding providing for the settlement of the Action on the
terms and subject to the conditions set forth below (the "Settlement");
NOW, THEREFORE, it is mutually agreed, subject to the negotiation and
execution of a stipulation of settlement, and to the approval of the Court,
as contemplated hereinbelow, as follows:
1. Within 10 days after the later of (a) the date on which the order
of the Court approving the Settlement becomes final and no longer subject to
appeal, whether by exhaustion of any possible appeal, lapse of time or
otherwise, and (b) the date on which the order of the Court granting the
application of plaintiff's counsel for an award of Fees and Expenses (as
defined in paragraph 7 below) becomes final and no longer subject to appeal,
whether by exhaustion of any possible appeal, lapse of time or otherwise (the
later of the dates referred to in (a) and (b) of this paragraph being
referred to herein as the "Approval Date"):
1
<PAGE>
(a) Advanced Medical, Inc. (the "Company") shall, in accordance with
and in satisfaction of, the terms of the certificate of designation governing
the 10% cumulative preferred stock of the Company (the "Preferred Stock"),
cause the Preferred Stock to be redeemed at a price of $10.00 plus accrued
dividends pro-rated as of the Approval Date (the "Settlement Redemption
Price") less any amount deducted pro-rata from the Settlement Redemption
Price as the Court may award to plaintiff's counsel as contemplated by
paragraph 7 below; and
(b) the Company shall amend its by-laws to provide that the Company
will not subsequently enter into any additional material related-party
transactions (to be defined in the Stipulation referred to in paragraph 3
below) with any control person or any entity controlled by such control
person without the approval of a "special committee." Control person means
any person controlling the Company. For the purposes of this definition,
"control", as used with respect to any person, shall mean the possession,
directly or indirectly, of the power to direct or cause the direction of the
management of another person whether through the ownership of voting
securities, by agreement or otherwise. A "special committee" shall mean a
committee of not less than two directors of the Company, deemed to be
independent pursuant to the rules of the exchange on which the Company's
common stock is then currently listed, appointed to review, negotiate and
make recommendations to the Company's Board
2
<PAGE>
of Directors concerning the proposed material related-party transaction, which
special committee, in connection with the foregoing, shall: (i) retain
independent legal counsel, at the Company's expense, to advise it with
respect to such transaction; and (ii) retain an independent financial
advisor, at the Company's expense, to advise it with respect to such
transaction, if such action is determined by the committee to be advisable
upon consultation with independent counsel.
2. Upon the execution of this Memorandum of Understanding, the
Company shall issue a press release announcing that it has entered into an
agreement in principal, subject to approval by the Court, providing for the
settlement of the Action on the terms and subject to the conditions set forth
herein (the "Press Release").
3. Based upon the consideration recited in paragraph 1 hereof, the
parties hereto will use their best efforts and will attempt in good faith to
agree upon and execute, at the earliest practicable time, a definitive
Stipulation and Agreement of Compromise and Settlement (the "Stipulation")
upon the terms set forth in this Memorandum of Understanding, together with
such other documentation as may be required in order to: (i) implement the
matters enumerated herein; (ii) obtain approval by the Court of the
Settlement of the Action pursuant to Rule 23(b)(1),
3
<PAGE>
23(b)(2), 23(e) and 23.1 of the Chancery Court Rules; and (iii) secure
dismissal of the Action with prejudice and without costs for any party
(except, as to costs, as provided in paragraph 7 hereof), except for the
claims, if any, of any shareholders of the Company who are not members of the
Preferred or Common Settlement Classes (as defined below). In addition, if
any claims which are or would be subject to the release and dismissal
contemplated by the Settlement are asserted against any person in any court
prior to final approval of the Settlement, the plaintiff shall cooperate,
where possible, with defendants' efforts to dismiss or stay such proceedings
and to effect a withdrawal or dismissal of the claims.
4. Pending the negotiation and execution of the Stipulation, all
proceedings in the Action will be stayed, except as provided herein;
provide, however, that as a condition of the consummation of the Settlement,
plaintiff may take additional discovery upon mutual consent of the parties
directed to any claim contained in the Amended Complaint.
5. The Stipulation shall describe plaintiffs' claims and the
procedural history of the Action, and will expressly provide:
(a) that the parties shall seek the certification of the Action,
for settlement purposes only, as a mandatory, non-
4
<PAGE>
opt out class action, pursuant to Rules 23(a), 23(b)(1) and 23(b)(2) of the
Chancery Court Rules to include all record holders and beneficial owners of
shares of Preferred Stock of the Company as of and after the date of the
issuance of the Press Release, and their legal representatives, heirs,
predecessors and successors-in-interest, and all transferees and assigns of
all such foregoing holders, immediate and remote (the "Preferred Settlement
Class") and all record holders and beneficial owners of shares of common
stock of the Company as of and after the date of the issuance of the Press
Release, and their legal representatives, heirs, predecessors and
successors-in-interest, and all transferees and assigns of all such foregoing
holders, immediate and remote (the "Common Settlement Class");
(b) for the complete discharge, settlement and release of, and a
final injunction barring all claims, rights, causes of action, suits, matters
and issues, whether known or unknown, that have been or could have been,
asserted in the Action or otherwise by or on behalf of plaintiff, the
Company, or any member of the Preferred and Common Settlement Classes,
whether individual, class, derivative, representative, legal, equitable or
any other type or in any other capacity, against defendants or any of their
associates, affiliates, subsidiaries, present or former officers, directors,
employees, attorneys, financial or legal advisors or agents, heirs,
executors, personal representatives, estates, administrators, and successors
and
5
<PAGE>
assigns (collectively the "Released Parties") that have arisen, arise now or
hereafter arise out of or relate in any way to the allegations, transactions
or events set forth in the Amended Complaint;
(c) that defendants in the Action have denied and continue to
deny, that any of them committed any violations of law or breaches of
fiduciary duty or contract; and
(d) that defendants in the Action are entering into this
agreement because settlement would eliminate the burden and expense of further
litigation, which they believe is in the best interests of the Company and
all of its shareholders.
6. If: (i) following the satisfaction by the parties of their
obligations under paragraph 3 hereof, the Stipulation is not signed in
accordance with the provisions of this Memorandum of Understanding; or (ii)
following the execution of the Stipulation, the Settlement is not approved by
the Court, or an order and final judgment approving the Settlement which is
no longer subject to appeal is not entered, then this Memorandum shall be
rendered null and void and of no force or effect, and shall not be deemed,
used or offered to prejudice in any way the positions of the parties with
respect to the Action or otherwise.
7. In connection with the settlement contemplated by this Memorandum of
Understanding, plaintiff's counsel will apply
6
<PAGE>
to the Court for an aggregate award of attorneys' fees and reimbursement of
expenses (collectively referred to herein as "Fees and Expenses") in an
amount not to exceed $500,000.00 to be paid by the Company, subject to Court
approval. In addition, the defendants will not oppose an application by
plaintiff's counsel for an additional award of Fees and Expenses of up to
$1.50 per share of Preferred Stock redeemed pursuant to and in accordance
with the terms of the Settlement, which shall be paid from, and deducted
pro-rata (on a per share basis) from, the Settlement Redemption Price payable
in respect of each share of Preferred Stock to be redeemed pursuant to and in
accordance with the terms of the Settlement, it being expressly understood
and agreed that the Company's obligation to pay any such Fees and Expenses
other than by deducting the amount awarded by the Court on a pro-rata basis
from the Settlement Redemption Price shall be limited to $500,000 in the
aggregate.
8. Subject to the terms and conditions of this Memorandum of
Understanding, and the terms and conditions of the Stipulation of Settlement
contemplated herein, the Company shall pay plaintiff's counsel such Fees and
Expenses as may be awarded by the Court and in accordance with the terms set
forth in this paragraph, within 10 days after the Approval Date. The Company
shall also pay the costs of providing notice of the proposed Settlement. No
other Released Party shall have any obligation to
7
<PAGE>
pay such Fees and Expenses or costs of providing such notice. To the extent
the Company may be required to provide notice to any shareholders of the
Company who are not members of the Common or Preferred Settlement Classes,
the parties shall seek to be excused by the Court from having to provide such
notice.
9. This Memorandum of Understanding and the Settlement contemplated by
it shall be governed by, and construed in accordance with, the laws of the
State of Delaware. this Memorandum of Understanding may be modified or
amended only by a writing signed by all the signatories hereto.
Dated: Wilmington Delaware
March 19, 1996
- ------------------------------ ------------------------------
Keith L. Schaitkin, Esq. Ann D. White, Esq.
Samuel L. Barkin, Esq. MAGER, LIEBENBERG and
GORDON ALTMAN BUTOWSKY WHITE
WEITZEN SHALOV & WEIN Two Penn Center
114 West 47th Street Philadelphia, PA 19102
New York, NY 10036 (215) 569-6921
(212) 626-0800 Attorneys for Plaintiff
Attorneys for Defendants
- ------------------------------
Jay W. Eisenhofer, Esq.
Stuart M. Grant, Esq.
Joanne B. Wills, Esq.
John L. Reed, Esq.
BLANK ROME COMISKY
& McCAULEY
1220 Market Street
Wilmington, DE 19801
(302) 425-6400
Attorneys for Plaintiff
8
<PAGE>
EXHIBIT 11.1
COMPUTATION OF NET INCOME PER SHARE
FOR THE THREE MONTHS ENDED MARCH 31, 1995 AND 1996
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
---------------------------
1995 1996
--------- ---------
<S> <C> <C>
INCOME PER COMMON SHARE ASSUMING NO DILUTION
Income before extraordinary item and dividends
on mandatorily redeemable preferred stock. . . . . . . . . . . $ 1,023 $ 859
Dividends on mandatorily redeemable
preferred stock. . . . . . . . . . . . . . . . . . . . . . . . (163) (162)
------- -------
Income before extraordinary item. . . . . . . . . . . . . . . . 860 697
Extraordinary item - gain on early retirement
of debt, net of taxes . . . . . . . . . . . . . . . . . . . . 8,807
------- -------
Net income applicable to common stock . . . . . . . . . . . . . $9,667 $ 697
======= =======
Weighted average common shares outstanding (1) . . . . . . . . . 14,084 16,461
======= =======
Income per common share assuming no dilution:
Income before extraordinary item. . . . . . . . . . . . . . . . $ .06 $ .04
Extraordinary item. . . . . . . . . . . . . . . . . . . . . . . .63
------- -------
Net income per common share assuming no dilution. . . . . . . . $ .69 $ .04
======= =======
INCOME PER COMMON SHARE ASSUMING FULL DILUTION
Income before extraordinary item and dividends
on mandatorily redeemable preferred stock. . . . . . $1,023 $ 859
Dividends on mandatorily redeemable
preferred stock. . . . . . . . . . . . . . . . . . . . . . . . (163) (162)
Add back interest expense, net of taxes, on convertible
promissory notes . . . . . . . . . . . . . . . . . . . . . . . 149 412
------- -------
Income before extraordinary item. . . . . . . . . . . . . . . . 1,009 1,109
Extraordinary item - gain on early retirement of debt,
net of taxes . . . . . . . . . . . . . . . . . . . . . . . . . 8,807
------- -------
Net income applicable to common stock . . . . . . . . . . . . . . $ 9,816 $1,109
======= =======
Weighted average common shares outstanding prior
to conversion of convertible promissory notes (1). . . . . . . 14,084 16,461
Add weighted average shares issued upon conversion
of convertible promissory notes. . . . . . . . . . . . . . . . 16,484 26,089
Weighted average common shares outstanding. . . . . . . . . . . 30,568 42,550
======= =======
Income per common share assuming full dilution:
Income before extraordinary item. . . . . . . . . . . . . . . . $ .03 $ .03
Extraordinary item. . . . . . . . . . . . . . . . . . . . . . . .29
------- -------
Net income per common share assuming full dilution. . . . . $ .32 $ .03
======= =======
</TABLE>
(1) INCLUDES THE COMMON STOCK EQUIVALENT OF DILUTIVE OPTIONS OUTSTANDING AT
THE END OF EACH PERIOD.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
The Schedule contains summary financial information extracted from the Condensed
Consolidated Balance Sheet and Condensed Consolidated Statement of Operations
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 4,000
<SECURITIES> 4,434
<RECEIVABLES> 17,517
<ALLOWANCES> (889)
<INVENTORY> 17,635
<CURRENT-ASSETS> 54,249
<PP&E> 31,651
<DEPRECIATION> (18,959)
<TOTAL-ASSETS> 165,140
<CURRENT-LIABILITIES> 23,314
<BONDS> 86,408
162
7,379
<COMMON> 0
<OTHER-SE> 29,573
<TOTAL-LIABILITY-AND-EQUITY> 165,140
<SALES> 25,765
<TOTAL-REVENUES> 25,875
<CGS> 13,895
<TOTAL-COSTS> 13,895
<OTHER-EXPENSES> 8,960
<LOSS-PROVISION> 25
<INTEREST-EXPENSE> 2,215
<INCOME-PRETAX> 1,739
<INCOME-TAX> 880
<INCOME-CONTINUING> 859
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 859
<EPS-PRIMARY> .04
<EPS-DILUTED> .03
</TABLE>
