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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
For the fiscal year ended December 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 Number)
10221 WATERIDGE CIRCLE 92121
SAN DIEGO, CALIFORNIA (Zip Code)
(Address of principal executive
offices)
Registrant's telephone number, including area code: (619) 458-7000
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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Common Stock, $0.01 par value American Stock Exchange
7 1/4% Convertible Subordinated American Stock Exchange
Debentures due 2002
Securities registered pursuant to Section 12(g) of the Act:
NONE
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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: ___
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. [ ]
The aggregate market value of the shares of the registrant's common stock, $0.01
par value per share ("Common Stock"), held by nonaffiliates of the registrant,
computed by reference to the price at which such stock was last sold on April
11, 1997, was $52,076,780. Solely for purposes of this calculation, the
following persons, who beneficially owned in the aggregate 47,116,309 shares of
Common Stock at April 11, 1997, have been deemed to be affiliates of the
registrant: directors of the registrant, the Named Executive Officers (as
defined) and known stockholders of the registrant beneficially owning 5% or more
of the outstanding shares of Common Stock.
At April 11, 1997, the registrant had 59,019,573 shares of Common Stock
outstanding.
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PART I
ITEM 1. BUSINESS
BACKGROUND
Advanced Medical, Inc. ("Advanced Medical"), through its major operating
subsidiary, is a leading provider of infusion systems and related technologies
to the health care industry. Advanced Medical was incorporated on September 28,
1988 under the laws of the State of Delaware.
On November 26, 1996, a series of mergers (collectively, the "Merger") were
effected pursuant to which the operations of IMED Corporation and IVAC Medical
Systems, Inc. ("IVAC Medical Systems"), formerly known as IVAC Corporation and a
wholly-owned subsidiary of IVAC Holdings, Inc. ("IVAC Holdings"), were
transferred to IVAC Holdings and IVAC Holdings became a wholly-owned subsidiary
of Advanced Medical. References herein to the "Company" refer to IVAC Holdings
after the Merger.
Prior to the Merger, IMED Corporation was a wholly-owned subsidiary of
Advanced Medical and IVAC Holdings was owned by various stockholders
unaffiliated with Advanced Medical. References herein to "IMED" refer to IMED
Corporation or IMED Corporation and its subsidiaries, as the context may
require, in each case prior to the Merger. References herein to "IVAC" refer to
IVAC Holdings and its subsidiaries (other than River Medical, Inc., the
operations of which were discontinued by IVAC in June 1996) prior to the Merger.
OVERVIEW
The Company is a leading provider of infusion systems and related
technologies to the United States hospital market, with the largest installed
base of pump delivery lines ("channels"). In addition, the Company is a leader
in the international infusion systems market. The Company, based on installed
base of infusion pumps, has a number one or two market position in eleven
Western European countries, the number three market position in Germany and
Italy, the largest installed base of infusion pumps in Australia and Canada, and
a developing position in Latin America and Asia. The Company's infusion systems,
which are used to deliver fluids, generally pharmaceuticals or nutritionals,
accurately and safely to patients, consist of single and multi-channel infusion
pumps and controllers, and proprietary and non-proprietary disposable
administration sets (plastic tubing and pump interfaces). In addition, the
Company is a leading provider of vital signs measurement products that measure
and monitor temperature, pulse and blood pressure, with the largest installed
base of hospital thermometry systems in the United States.
The Company sells a full range of products through a direct sales force
consisting of over 230 salespersons and through more than 150 distributors to
over 5,000 hospitals worldwide. On a pro forma basis, the Company's United
States sales and sales to customers located outside the United States would have
accounted for approximately 65% and 35%, respectively, of the Company's pro
forma sales for 1996. For the year ended December 31, 1996, on a pro forma
basis, the Company would have had sales of approximately $346.3 million.
The Company's goals are to: (i) enhance its worldwide position as a leading
provider of cost-effective, high-quality infusion systems in the hospital
setting; (ii) expand its presence in the alternate site market;
------------------------
The Company has registered or applied to register the following trademarks:
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-, microSTAR-Registered Trademark-, ReadyMED,
VersaSafe-Registered Trademark-, IVAC-Registered Trademark-, IVAC MEDICAL
SYSTEMS-TM-, CORE-CHECK-Registered Trademark-, DYNAMIC MONITORING-TM-, MEDSYSTEM
III-TM-, PCAM-TM-, SIGNATURE EDITION-TM-, TEMP-PLUS-Registered Trademark-,
VITAL-CHECK-Registered Trademark-, ACCUSLIDE-TM-, and Smart-Site-TM-,
SAFSITE-Registered Trademark- is a registered trademark of B. Braun, Inc.
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(iii) expand its product lines through strategic acquisitions and alliances; and
(iv) increase sales, profitability and EBITDA. In order to achieve these goals,
management will focus on implementing the following strategies: (i) expanding
internal growth by continuing to develop, manufacture and market new products
while also making innovations to its existing product lines; (ii) increasing
international operations; (iii) reducing production and operating costs; and
(iv) capitalizing on strategic acquisitions.
INFUSION SYSTEMS. At December 31, 1996, the Company had approximately
214,000 single and multi-channel large volume infusion pumps installed in the
United States, with a market share of approximately 40% of the installed base of
infusion pump channels in the United States. The Company offers a wide variety
of infusion pumps designed to meet the varying price and technological
requirements of its broad array of customers. These infusion pumps include the
Gemini series, consisting of single, dual and four channel infusion pumps
designed for use in all hospital settings by customers with sophisticated
technological requirements; the Signature Edition system, a versatile,
user-friendly single and dual channel infusion pump for use in general medical
and surgical settings; the MedSystem III instrument ("MS III"), a compact,
lightweight, programmable three channel infusion pump targeted for the hospital
critical care setting; and the 560/570 Series, consisting of single channel
infusion pumps designed for the price-conscious customer. In addition, the
Company offers the ReadyMED ambulatory infusion pump ("ReadyMED"), which is
compact, lightweight and disposable, for use in the alternate site market and a
variety of syringe infusion pumps for use primarily outside the United States.
The Company manufactures higher margin proprietary disposable administration
sets which can only be used with the Company's large volume infusion pumps.
Since the useful life of the Company's infusion pumps is typically seven to ten
years, the Company's industry-leading installed base allows it to generate
stable, predictable and recurring revenues from sales of disposable
administration sets. In 1996, the Company sold, on a pro forma basis,
approximately 49 million proprietary and 11 million non-proprietary disposable
administration sets. The Company's disposable administration sets offer
protection features designed to prevent the unregulated flow of fluids into a
patient's blood stream ("free flow"). In addition, the Company has recently
introduced several enhancements to its disposable administration sets, including
needleless access systems that are designed to reduce the risk to health care
providers of diseases, such as AIDS and hepatitis, that may be transmitted
through accidental needlesticks and, in the case of the SmartSite System, to
eliminate patient exposure to latex which can cause severe allergic or
anaphylactic shock reactions. These features continue to provide the Company's
customers with the latest cost-effective technology for the Company's installed
base of infusion pumps. For the year ended December 31, 1996, on a pro forma
basis, the Company's infusion systems sales would have been approximately $292.1
million, representing approximately 84% of the Company's pro forma sales.
VITAL SIGNS MEASUREMENT PRODUCTS. The vital signs measurement products
market consists of discrete market niches, each of which has different
competitive dynamics. The Company primarily operates in the United States,
Canada and Western Europe in two market niches of the vital signs measurement
products market: (i) hospital thermometry systems and (ii) stand-alone,
non-invasive, multi-parameter instruments used to measure and monitor a
combination of temperature, pulse and blood pressure. The Company's large base
of installed hospital thermometry instruments allows it to generate stable,
predictable and recurring revenues from sales of related disposable probe
covers. In 1996, the Company manufactured and sold over 595 million proprietary
disposable probe covers. For the year ended December 31, 1996, on a pro forma
basis, the Company's vital signs measurement products sales would have been
approximately $33.2 million, representing approximately 10% of the Company's pro
forma sales.
At December 31, 1996, the Company's installed base of thermometry
instruments constituted approximately 42% of the United States hospital
electronic and infrared thermometry market, making the Company the largest
provider of hospital thermometry systems in the United States. The Company's
principal thermometry instruments are the TEMP-PLUS II electronic thermometer
and the CORE-CHECK infrared thermometer, both of which are widely used in
hospitals and alternate site settings. The Company is also the second largest
participant in the United States infrared thermometry
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market, the fastest growing segment of the hospital thermometry market, and, at
December 31, 1996, had approximately 31% of the United States hospital installed
base. In addition, the Company's hospital installed base of stand-alone,
non-invasive, multi-parameter instruments, which measure and monitor
temperature, pulse and blood pressure, is the second largest in this market
niche in the United States.
INDUSTRY
GENERAL. Cost containment measures both imposed and proposed by federal and
state regulators and private payors, combined with increased utilization review
and case management, have led to greater financial pressure on hospitals. In
response to these cost-containment pressures, hospitals and other potential
customers for the Company's products are increasingly combining into group
purchasing organizations ("GPOs") which may be large and which effectively
police compliance with exclusive purchase commitments. GPOs may enter into
exclusive purchase commitments with as few as one or two providers of infusion
systems and/or vital signs measurement products, for a period of several years.
See "-- Marketing and Sales." These trends have, in turn, led to downward
pricing pressure on manufacturers of medical products, including the Company,
and greater use of alternate sites for treatment. Growth in the alternate site
market is also attributable to advances in technology that have facilitated the
provision of care outside of the hospital, an increased number of illnesses and
diseases considered to be treatable with home infusion therapy and increased
acceptance by the medical community of, and patient preference for, non-hospital
treatment. As both the complexity of infusion therapy treatments and the potency
of drugs administered have increased, the demand for technologically-advanced
infusion systems has risen significantly. In the vital signs measurement
products markets, similar trends of cost reduction of health care delivery and
technological innovation have resulted in the creation of a number of new
products and product areas, such as infrared thermometry products, pulse
oximetry and multi-parameter patient monitoring products.
The Company believes that as the infusion system and vital signs measurement
products markets continue to mature, providers of goods and services in these
markets will need to increase the scale of their operations and broaden the
scope of their product lines in order to leverage worldwide sales, service and
research and development infrastructures. These trends are driving industry
consolidation which, in turn, provides opportunities for leading suppliers to
increase market share and participate in strategic alliances, joint ventures and
acquisitions.
The United States hospital market consists of approximately 5,300 hospitals
with a total of approximately 900,000 licensed beds and can be divided into
three major areas: critical care (E.G., adult, pediatric and neonatal intensive
care units), specialty units (E.G., oncology, ob/gyn, coronary care and
emergency room/trauma) and general medical/surgical. The alternate site market
encompasses all health care provided outside a hospital and is comprised
primarily of home health care, freestanding clinics, skilled nursing facilities
and long-term care facilities.
INFUSION SYSTEMS. Intravenous 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. 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.
Infusion systems are differentiated on a number of characteristics including
size, weight, number of delivery channels, programmability, mechanism of
infusion, cost and service. One of the key differences among infusion systems is
the level of control that such systems afford to both medical staffs and
patients. Infusion systems are generally designed for either critical care or
general care use, with the latter group being used both in hospitals and at
alternate site facilities.
The United States infusion therapy market had sales of approximately $1.5
billion in 1996 and has grown at an estimated compound annual growth rate of
approximately 3.8% from 1992 to 1996. There are
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two principal markets for infusion systems: the hospital market and the
alternate site market. These markets had sales in the United States of
approximately $1.1 billion and $360 million, respectively, in 1996, and
estimated annual compound growth rates of approximately 1.6% and 12%,
respectively, from 1992 to 1996.
Infusion systems include three major delivery technologies:
pumps/controllers, disposable pumps and gravity delivery products. In 1996,
these three segments had sales in the United States of approximately $800
million, $80 million and $350 million, respectively. While the Company competes
in the pumps/ controllers and disposable pumps segments, it has never competed
in gravity delivery products because of the commodity nature of this market.
Controllers typically are nonvolumetric devices that regulate flow by
electronically counting drops rather than by measuring a specific volume of
fluid. The Company does not currently market a traditional controller, but some
of its infusion pumps can be used in a controller mode. Infusion pumps use
positive pressure to overcome the resistance in the infusion tubing and the back
pressure generated by the patient's circulatory system. Infusion pumps
administer precise, volumetrically measured quantities of fluids more accurately
and over a wider range of infusion rates than controllers. For this reason,
infusion pumps are used more frequently than controllers to administer
expensive, critical or potent therapeutics. Syringe pumps operate by gradually
depressing the plunger on a standard disposable syringe, thereby delivering a
more concentrated dose of medication at a very precise rate of accuracy.
Disposable pumps are single-use products designed for use primarily in general
care settings.
Historically, controllers have held a major share of the installed base of
infusion instruments, principally because they were significantly less expensive
than infusion pumps. As infusion pump prices declined and their technological
capabilities increased, the purchasing trend has been toward infusion pumps. As
of the end of 1996, infusion pumps represented approximately 98%, and
controllers represented approximately 2%, of the installed base of infusion
instruments in the United States hospital market and less than 1% of the
infusion instruments sold in 1996 were controllers.
The infusion systems sold in the markets in which the Company competes
consist of single and multi-channel infusion pumps and disposable administration
sets. As treatment regimens have become more complex and as the critically ill
constitute an increasing percentage of hospital patients, the average hospital
patient now requires a greater number of intravenous lines and more potent
therapeutics, thereby creating a greater need for technologically-advanced
infusion systems. As a result, United States sales of channels relating to
multi-channel infusion pumps have increased from approximately 28% of total
United States channels sold in 1991 to approximately 39% of total United States
channels sold in 1996.
All infusion pumps and controllers require the use of disposable
administration sets. A set consists of a plastic interface and tubing and may
have a variety of features such as volume control, pumping segments or cassette
pumping systems for more accurate delivery, clamps for flow regulation and
multiple ports for injecting medication and delivery of more than one solution.
Components such as burettes and filters may also be added for critical drugs or
special infusion. Almost all of these sets, including those manufactured by the
Company, are compatible only with their particular manufacturer's line of
infusion systems. Since these disposable administration sets tend to have
significantly higher margins than infusion pumps, the establishment of an
extensive installed base, such as the Company's, is important for generating
ongoing disposable administration set sales and enhancing overall margins.
VITAL SIGNS MEASUREMENT PRODUCTS. Vital signs measurement products are used
to measure and monitor temperature, pulse, blood pressure and respiration rate.
Products sold in this market have varying levels of technological sophistication
and are used in a variety of diagnostic and health care settings. The vital
signs measurement products market consists of discrete market niches each of
which has different competitive dynamics. The Company competes in two
niches--hospital thermometry systems, and stand-alone, non-invasive,
multi-parameter instruments which measure and monitor a combination of
temperature, pulse
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and blood pressure. In the United States, these two market niches had sales of
approximately $55.0 million and $25.0 million, respectively, in 1996.
The three major instrument types in the hospital thermometry market are
glass, electronic and infrared devices, which in 1996 accounted for
approximately 5%, 65% and 30%, respectively, of the United States hospital
market installed base. The Company offers electronic and infrared instruments
but does not compete in the glass thermometry market. Over the last several
years, there has been a shift toward increased use of infrared instruments due
primarily to their ease of use. While infrared thermometers constituted only
approximately 30% of the installed base in the United States in 1996, sales of
these products accounted for approximately 58% of total market sales in 1996.
As with the infusion therapy market, the hospital thermometry market has
higher margin disposable products that are used in concert with instruments and,
consequently, the existence of an installed base is important for generating
ongoing disposable product sales and enhancing overall margins.
PRODUCTS AND SERVICES
The Company manufactures and markets both single and multi-channel infusion
pumps and disposable administration sets. At December 31, 1996, the Company had
approximately 214,000 single and multi-channel large volume infusion pumps
installed in the United States, with a market share of approximately 40% of all
installed channels in the United States. The Company's infusion pumps include
large volume infusion pumps such as its Gemini series, the Signature Edition
system, MS III and 560/570 Series pumps, syringe infusion pumps such as P1000,
P3000, PCAM and P7000, which are sold primarily in Western Europe, and ReadyMED.
The Company's large volume infusion pumps require the use of higher margin
proprietary disposable administration sets. The Company also sells
non-proprietary disposable administration sets for use with syringe infusion
pumps manufactured by the Company and others. Furthermore, the Company
manufactures and markets hospital thermometry instruments and related disposable
probe covers, and stand-alone, non-invasive, multi-parameter instruments which
measure and monitor temperature, pulse and blood pressure. In the United States
hospital electronic and infrared thermometry market, the Company had an
installed base market share of approximately 42% in 1996 and was the second
largest supplier of hospital thermometry products in the infrared market. In its
niche of stand-alone, non-invasive, multi-parameter instruments, the Company had
an installed base market share of approximately 14% in the United States in
1996.
The table set forth below summarizes the key features, actual or estimated
market introduction dates and predecessor product line information with respect
to the Company's product line and products in development.
<TABLE>
<CAPTION>
PREDECESSOR
PRODUCT DESCRIPTION STATUS PRODUCT LINE
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<S> <C> <C> <C>
LARGE VOLUME INFUSION PUMPS
PISTON CASSETTE PUMPS Full line of single channel Various models introduced IMED
pumps between 1974 and 1981
PERISTALTIC PUMPS
GEMINI PC-1 Single channel instrument Marketed since 1988 IMED
with pump and controller
capability; for use in
all hospital settings
</TABLE>
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<TABLE>
<CAPTION>
PREDECESSOR
PRODUCT DESCRIPTION STATUS PRODUCT LINE
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<S> <C> <C> <C>
GEMINI PC-2 Dual channel instrument Marketed since 1987 IMED
with pump and controller
capability; for use in
all hospital settings
GEMINI PC-2TX Dual channel instrument Marketed since May 1994 IMED
with pump and controller
capability; programmable
drug delivery/dose
calculations and pressure
history; for use in all
hospital settings
GEMINI PC-4 Four channel instrument Marketed since December IMED
with pump and controller 1992
capability; programmable
drug delivery/dose
calculations and pressure
history; for use in all
hospital settings
MODULAR INFUSION PUMP Compact, flexible, Market introduction planned IMED
lightweight modular for 1998
infusion pump with an
adjustable hardware and
software platform with
advanced programming
capabilities; for use in
all hospital and certain
alternate site settings
560/570 SERIES Single channel pump with On market since 1983 and IVAC Medical Systems
largest installed base 1990, respectively
worldwide; for general
care use in the United
States, and general and
critical care use in
Europe
</TABLE>
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<TABLE>
<CAPTION>
PREDECESSOR
PRODUCT DESCRIPTION STATUS PRODUCT LINE
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<S> <C> <C> <C>
597/598 SERIES Single channel, multi-pump On market in Europe since IVAC Medical Systems
configuration of reduced 1993
size and weight; used
frequently for delivery
of nutritional products;
sold in Europe; for
general care and
alternate site use
MS III Three channel pump; Originally introduced in IVAC Medical Systems
smallest and lightest late 1980s by Siemens
multi-channel pump Infusion Systems, Ltd. as
available on the United MiniMed; reengineered
States market; for since its acquisition in
critical care use 1993
SIGNATURE EDITION Single and dual channel Selectively marketed since IVAC Medical Systems
(MODEL 7100/7200) pump; incorporates September 1995; full
intuitive user interface; commercial availability
for critical and general in the United States
care use achieved in the first
quarter of 1996;
introduction in Europe
planned for the second
half of 1997
SIGNATURE EDITION Single channel pump using Market introduction planned IVAC Medical Systems
(MODEL 7000) the Signature Edition for late 1997
technology platform
designed for the
price-conscious consumer;
intended to be marketed
in the United States for
general care use
SYRINGE INFUSION PUMPS
P1000, P2000, P3000, Preferred method of Various models introduced IVAC Medical Systems
P4000 delivery in many markets between late 1980s and
outside the United early 1990s
States; for critical and
non-critical care use
</TABLE>
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<TABLE>
<CAPTION>
PREDECESSOR
PRODUCT DESCRIPTION STATUS PRODUCT LINE
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<S> <C> <C> <C>
P7000 Syringe pump with advanced Introduced to European IVAC Medical Systems
features for critical, market during second
non-critical and neonatal quarter of 1996
care use in markets
outside the United States
P6000 Syringe pump using the Introduction to European IVAC Medical Systems
P7000 technology platform market planned for the
designed for the second half of 1997
price-conscious consumer
in markets outside the
United States; for
critical and non-critical
care use
PCAM (PATIENT CONTROLLED Syringe pump used in Introduced internationally IVAC Medical Systems
ANALGESIA PUMP) markets outside the in first quarter of 1995
United States that allows
patients to control the
delivery of pain
medication
AMBULATORY PUMPS
READYMED Compact, disposable, 100 mL marketed since July IMED
lightweight ambulatory 1992 and 50 mL and 250 mL
infusion pump designed introduced in 1993
for alternate site use
MICROSTAR Compact, mobile, United States market IMED
lightweight multiple introduction planned for
therapy infusion pump late 1997
designed for hospital,
ambulatory and alternate
site infusions requiring
device-based flow control
</TABLE>
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<TABLE>
<CAPTION>
PREDECESSOR
PRODUCT DESCRIPTION STATUS PRODUCT LINE
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<S> <C> <C> <C>
DISPOSABLE ADMINISTRATION Proprietary and non- On market and in IMED and IVAC Medical
SETS proprietary development Systems
administration sets for
use with each of the
Company's existing and
proposed infusion pumps
NEEDLELESS ACCESS PRODUCTS
IVAC NEEDLELESS SYSTEM Infusion system component On market since fourth IVAC Medical Systems
designed to eliminate use quarter of 1994
of hypodermic needle to
access administration
set; may reduce risk of
caregiver needlestick
injuries
VERSASAFE Infusion system component Marketed since 1994 through IMED
utilizing a blunt cannula a non- exclusive license
device combined with a
split-septum "Y" site
SAFSITE Valve which provides Introduced in 1995 IMED
needle-free access to the
administration set
through the use of a
standard male luer
SMARTSITE SYSTEM Needleless, capless, Introduced in 1996 IVAC Medical Systems
latex-free infusion
system component intended
to increase safety of
patients and health care
workers
THERMOMETRY SYSTEMS
TEMP-PLUS II (MODEL 2080) Electronic thermometer; for On market since mid-1980s IVAC Medical Systems
general hospital and
alternate site use
</TABLE>
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<TABLE>
<CAPTION>
PREDECESSOR
PRODUCT DESCRIPTION STATUS PRODUCT LINE
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<S> <C> <C> <C>
TEMP-PLUS III Electronic thermometer; a Market introduction planned IVAC Medical Systems
7-to-10-second version of for the second half of
the Model 2080; intended 1997
for general hospital use
CORE-CHECK (MODEL 2090) Infrared tympanic On market since 1991 IVAC Medical Systems
thermometer that saves
time, reduces patient
interruption and lowers
risk of infection; for
general hospital use
DISPOSABLE PROBE COVERS Proprietary covers for use On market since mid-1980s IVAC Medical Systems
with each of the
Company's existing and
proposed thermometers
OTHER VITAL SIGNS
MEASUREMENT PRODUCTS
VITAL-CHECK Continuous monitoring model On market in the United IVAC Medical Systems
(MODEL 4200) that rapidly measures States since late 1980s
pulse, blood pressure and
temperature; for general
hospital use
VITAL-CHECK Multiparameter non- invasive Market introduction planned IVAC Medical Systems
(MODEL 4400) patient monitor providing for second half of 1997
blood pressure, pulse
oximetry and temperature
monitoring
</TABLE>
LARGE VOLUME INFUSION PUMPS. The Company's large volume infusion pumps
consist of volumetric piston cassette pumps, which regulate the flow of fluid
through a syringe-like mechanism, and peristaltic pumps, which regulate fluid
flow by means of a multi-finger-like mechanism that alternately compresses
sections of the tubing contained in the pumping chamber. Peristaltic pumps
represent the largest portion of the Company's installed base of infusion pumps.
The Company discontinued manufacturing piston cassette pumps in the first
quarter of 1995 and all subsequently recognized revenue relating to piston
cassette pumps results primarily from the shipment of reconditioned pumps.
The Gemini peristaltic infusion pump series, which consists of single, dual
and four channel pumps, is based on a flexible hardware and software technology
platform. This technology platform has enabled the Company over time to offer
incremental feature enhancements based on evolving customer needs. The Gemini
series currently offers the following features: free flow protection (which the
Company pioneered); independent channel operation; ability to switch from pump
to controller mode without changing the
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disposable administration set; programmable to automatically taper-up and
taper-down infusion rates to facilitate delivery of complex drug-dosing
regimens; capability to operate in either micro mode (0.1 to 99.9 mL/hr) for use
with neonatal patients, among others, or macro mode (1 to 999 mL/hr) for use
with adult patients; drug dose calculation; pressure monitoring; pressure
history and volume/time dosing; and nuisance alarm (alarms with no clinical
significance) reduction. The Gemini PC-1 infusion pump is currently subject to a
voluntary recall initiated by the Company. See "--Government Regulation--Product
Regulation."
The 560/570 Series and the 597/598 Series are single channel peristaltic
infusion pumps that offer cost-effective solutions for drug delivery in the
general care setting. The Company believes that the 560/570 Series has the
largest installed base of any individual infusion pump worldwide.
MS III is a compact, lightweight, programmable, three channel, peristaltic
infusion pump used primarily in the critical care market. The MS III predecessor
product line was acquired from Siemens Infusion Systems, Ltd. in September 1993.
Since such time, significant resources have been invested to reengineer MS III.
The Company believes that as a result of this reengineering, MS III is one of
the smallest, most versatile and most technologically advanced multi-channel
pumps currently on the market.
The Signature Edition line of peristaltic infusion pumps includes a single
channel and dual channel pump. The Signature Edition line of infusion pumps is
designed for use primarily in hospitals. The Signature Edition line of infusion
pumps features reduced size and weight, improved ease of use and other advanced
features, including new safety features designed to minimize the chance of free
flow. The Signature Edition line of infusion pumps is currently subject to a
voluntary recall initiated by the Company. See "--Government Regulation--Product
Regulation."
During the fourth quarter of 1993, the Company commenced designing a modular
infusion pump, which can operate in a one to four channel mode, as the basis for
its next generation of infusion pumps. In addition to all of the features
available on the Gemini series, the modular infusion pump is being designed to
incorporate advanced programming capabilities in a smaller infusion pump that is
simpler to operate. A modular, building-block design is intended to allow the
user to configure the various features of the modular infusion pump to specific
situations resulting in lower cost operation and greater asset utilization.
SYRINGE PUMPS. The Company offers syringe pumps, which are small-volume
fluid delivery systems used in neonatal care, oncology, anesthesia, critical
care and labor and delivery. While these infusion pumps represent a relatively
small portion of the industry installed base in the United States, such pumps
are widely used in Europe, where they constitute approximately 60% of the
infusion pump market. Syringe pumps are more widely used in Europe because of
the general practice of European doctors to administer medications in smaller
volumes of fluid. The Company believes that it is one of the two largest
suppliers of syringe pumps in Western Europe, with a number one or number two
installed base market share in eleven countries and the number three installed
base market share in Germany and Italy. The Company is currently evaluating
customer interest and regulatory requirements in the United States for syringe
pumps.
In 1995, the Company introduced the PCAM patient controlled analgesia
infusion pump that allows patients to control the delivery of pain medication.
Designed for general care settings, the PCAM infusion pump is one of the most
advanced patient controlled analgesia infusion pumps on the European market
today, with pre-programmed and user programmable drug delivery protocols,
comprehensive patient history logging and an ergonomically designed handset with
status indicator.
The Company continued to expand its syringe pump product line by introducing
the P7000 syringe pump to the international market during the second quarter of
1996. Designed for critical, non-critical and neonatal care settings, the P7000
offers several advanced features, including an automatic dose rate calculator; a
pre-programmable drug menu; a range of pre-programmed infusion administration
protocols; and an automatic pressure reduction capability in response to
administration set occlusions.
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The Company has initiated a voluntary safety alert of its P1000, P2000,
P3000 and P4000 syringe pumps. These syringe pumps are marketed internationally.
See "--Government Regulation--Product Regulation."
AMBULATORY PUMPS. ReadyMED is a disposable, compact, ambulatory pump for
the intravenous administration of antibiotics. ReadyMED is designed to offer a
number of advantages over systems currently in use for this purpose. Traditional
systems require the patient to 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 intravenous solution pole during infusion, thereby restricting the
patient's movement. ReadyMED is 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 ReadyMED is small and uses positive pressure, the
patient is able to carry the device in a pocket or wear it on a belt. In March
1992, the Company entered into a five-year agreement with McGaw, Inc. ("McGaw")
pursuant to which McGaw obtained the exclusive right to distribute the 50 mL,
100 mL and 250 mL sizes of ReadyMED in the United States and Puerto Rican
alternate site markets. The Company and McGaw are currently in the process of
amending their distribution agreement to: (i) extend its term; (ii) adjust the
price paid by McGaw for ReadyMEDs; and (iii) convert McGaw's exclusive
distribution right into a non-exclusive distribution right.
In May 1995, the Company entered into a fifteen-year agreement with
Debiotech SA, a privately-held company located in Lausanne Switzerland, which
grants the Company exclusive rights to distribute the microSTAR ambulatory pump
in certain North and Central American countries, including the United States.
The microSTAR ambulatory pump is electromechanical, lightweight, compact and
capable of multiple therapeutic applications including continuous delivery,
total parenteral nutrition administration with adjustable tapering regimes and
intermittent dose delivery (for example, intravenous antibiotics). Design
criteria for the development of this pump have included patient safety, as well
as ease of use for medical and nonmedical personnel.
The microSTAR ambulatory pump includes many advanced features such as user
adjustable air-in-line sensitivity, automatic secondary delivery, and delayed
start. In addition to its alternate site use, the microSTAR ambulatory pump is
well suited for patient transport and transition from hospital to home infusion
therapies.
DISPOSABLE ADMINISTRATION SETS. The Company estimates that it has
approximately 214,000 single and multi-channel large volume infusion pumps
installed in the United States, each of which uses proprietary disposable
administration sets designed and manufactured only by the Company. Disposable
administration sets consist of a plastic pump interface and tubing and have a
variety of features, such as volume control, pumping segments or cassette
pumping systems for more accurate delivery, clamps for flow regulation and
multiple entry ports for injecting medication and delivery of more than one
solution. Components such as burettes and filters may also be added for critical
drugs or special infusion. In addition, many of the Company's disposable
administration sets offer protection features designed to prevent free flow.
Each of the Company's current and proposed large volume infusion pumps uses only
disposable administration sets designed by the Company for that particular pump.
NEEDLELESS ACCESS PRODUCTS. There is increasing pressure by regulatory
agencies, such as the Occupational Safety and Health Administration ("OSHA") and
the FDA, for more stringent control of needles in hospitals. OSHA requires that
hospitals must put in place systems to reduce the potential for accidental
needlesticks. The FDA recommends using needleless systems or protected needle
systems to replace hypodermic needles for accessing intravenous lines. The
Company's needleless access products are designed to permit access to the
Company's disposable administration sets without the use of needles, thus
reducing the potential for accidental needlesticks. The Company's Needleless
System introduced in the fourth quarter of 1994, is a component which is
compatible with standard luer or luer-locking syringes and
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disposable administration sets, thereby allowing users to integrate the
Needleless System into existing care practices. The VersaSafe system utilizes a
blunt cannula device combined with a split-septum "Y" site. The Company has a
non-exclusive license, which expires in April 2000, to the VersaSafe system
which was a cooperative development effort of IMED, Elcam Plastic of Israel and
Medical Associates Network. Additionally, the Company has entered into an
agreement with B. Braun, Inc. for the purchase of their SAFSITE valve. The
SAFSITE 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. The Company's latest needleless access product, the
SmartSite System, which is based upon the Company's Needleless System, offers a
fully integrated design and eliminates the need for separate caps to maintain an
infection control barrier. The SmartSite System is latex-free and therefore
reduces the risk of exposure of patients and health care workers to latex which
can cause severe allergic or anaphylactic shock reactions. The Company's
needleless access products have received strong interest from customers and
provide the Company with an opportunity to increase revenues in what has
previously been a commodity market.
THERMOMETRY. The Company is a leader in hospital thermometry systems, which
consist of thermometers and disposable probe covers, and maintains a strong
position in both the United States and Western Europe. The Company believes that
in 1996 its installed base comprised approximately 42% of the United States
hospital electronic and infrared thermometry market, thereby making the Company
the largest provider of hospital thermometry systems in the United States. The
Company's primary product is an electronic thermometer which is widely used in
hospitals and alternate site settings. The Company is currently developing the
TEMP-PLUS III (formerly known as the "Fast" 2080), an improved cost-effective
and technologically-advanced electronic thermometer designed to provide a
temperature reading in seven-to-ten seconds. The Company also manufactures and
markets the CORE-CHECK system, a thermometer that measures temperature by
detecting the emission of infrared energy in the ear. In the infrared market,
the fastest growing segment of the industry's market, the Company is currently
the second largest domestic participant, with a United States hospital installed
base market share of approximately 31% at December 31, 1996. The only disposable
probe covers which can be used with the Company's thermometry instruments are
those manufactured by the Company.
OTHER VITAL SIGNS MEASUREMENT PRODUCTS. The Company also produces
stand-alone, non-invasive, multi-parameter instruments which measure and monitor
temperature, pulse and blood pressure. In 1996, the Company's hospital installed
base of these instruments was approximately 14%, making it the second largest
participant in this market niche in the United States.
In January 1997, the Company entered into two agreements with Criticare
Systems, Inc., a manufacturer of patient monitoring systems and non-invasive
sensors for use in the hospital and alternate site markets. Under these
agreements, Criticare Systems, Inc. obtained the right to use the Company's
electronic thermometry technology in certain monitoring systems to be
manufactured and distributed by both Criticare Systems, Inc. and the Company.
The Company also obtained exclusive distribution rights to certain of these
monitoring systems in the United States hospital market and in all Canadian
markets. The first of these exclusive systems, which will be marketed as the
Vital-Check 4400, will provide non-invasive blood pressure, pulse oximetry and
temperature monitoring.
CUSTOMER SERVICE. The Company provides repair service for its products in
San Diego and at its customers' facilities through third-party contractors.
Customers may elect to enter into service agreements or to receive service on a
time and materials basis. The Company also trains customers as to the use of its
products and maintains a technical support help-line to answer customers'
questions. In addition, the Company maintains its parts inventory at levels
which enable it to deliver critical supplies immediately and minimize
back-ordered products. The Company believes that the availability of such
services is important for maintaining strong customer relations.
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MARKETING AND SALES
The Company has historically focused its sales efforts on the hospital
market. In response to the industry shift toward health care delivery outside of
the hospital, the Company has recently begun to expand its selling efforts and
products to the alternate site market. The Company's sales strategy emphasizes
increasing instrument placements and the number of units installed in order to
increase sales of its proprietary disposable administration sets and probe
covers. Sales representatives work closely with on-site primary decision makers,
which include physicians, pharmacists, nurses, materials managers, biomedical
staff and administrators. The Company has over 5,000 hospital customers
worldwide.
The Company has contracts with a number of GPOs that are emerging in
response to cost containment pressures and health care reform. GPOs often enter
into exclusive purchase commitments with as few as one or two providers of
infusion systems and/or vital signs measurement products for a period of several
years. If the Company is not one of the selected providers, it may be precluded
from making sales to members of a GPO for several years and, in certain
situations, the GPO may require removal of the Company's existing installed
infusion pumps, which would result in a loss of the related disposable
administration set sales. Even if the Company is one of the selected providers,
the Company may be at a disadvantage relative to other selected providers which
are able to offer volume discounts based on "bundled" purchases or a broader
range of medical equipment and supplies. Further, the Company may be required to
commit to pricing which has a material adverse effect on net sales and profit
margins. See "--Competition."
In January 1997, the Company entered into a five-year sole-source supply
contract with Premier Purchasing Partners, L.P. ("Premier"), an affiliate of
Premier, Inc., the nation's largest healthcare alliance GPO, for tympanic and
electronic thermometry instruments and related disposable probe covers. Under
this agreement, Premier agreed to purchase 80% of its needs for such products
from the Company. In addition, in March 1997, the Company entered into a dual
source supply agreement with Premier for the purchase of large volume infusion
pumps and associated disposable administration sets. The dual source agreement
is for a five year period with a two-year renewal option. Premier had previously
signed a seven-year supply contract with Baxter International Inc. covering a
number of hospital supplies, including a dual source award for large volume
infusion pumps and disposable administration sets.
No single account is material to the business or operations of the Company.
The Company sells its products through a combined direct sales force
consisting of over 230 salespersons and through more than 150 distributors. The
Company's domestic marketing efforts are supported by a staff of nurses and
pharmacists who consult with customers providing ongoing clinical support in the
evaluation, installation and use of the Company's products. The Company believes
its sales force in the United States and internationally plays a key role in the
effective introduction of new products.
INTERNATIONAL OPERATIONS
The Company markets products in approximately 120 countries through its
direct sales force, affiliates and distributors. The primary markets for the
Company's products outside the United States are Western Europe, Canada and
Australia. The Company also has a developing position in Asia and Latin America.
The principal products sold by the Company outside the United States are large
volume and syringe infusion pumps and related disposable administration sets.
The Company has manufacturing operations in England and Mexico. The Company has
also contracted with a number of foreign manufacturers to provide certain of its
sourcing needs. The following table sets forth, on a pro forma basis as if the
Merger
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had occurred at the beginning of each period presented, the approximate amount
of sales made to customers in each of the geographic locations set forth below
over the last three fiscal years:
<TABLE>
<CAPTION>
1994 1995 1996
--------- --------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
United States....................................... $ 231.6 $ 238.3 $ 224.6
International....................................... 103.7 114.4 121.7
--------- --------- ---------
Total sales..................................... $ 335.3 $ 352.7 $ 346.3
--------- --------- ---------
--------- --------- ---------
</TABLE>
The Company believes that sales of products to customers outside of the
United States represents a significant potential source of growth. As part of
its operating strategy, the Company intends to selectively pursue international
expansion opportunities, particularly in Europe, Japan, Southeast Asia and Latin
America.
Foreign operations are subject to special risks that can materially affect
the sales, profits and cash flows of the Company, including currency exchange
rate devaluations and fluctuations, the impact of inflation, exchange controls,
labor unrest, political instability, export duties and quotas, domestic and
international customs and tariffs, unexpected changes in regulatory
environments, potentially adverse tax consequences and other risks. Changes in
certain exchange rates could have an adverse effect on the Company's ability to
meet interest and principal obligations with respect to its United States
dollar-denominated debt and could also have a material adverse effect on the
Company.
MANUFACTURING
The Company manufactures its products at plants in San Diego, California;
Creedmoor, North Carolina; Tijuana, Mexico; and Hampshire, England. The San
Diego facilities are the primary manufacturing facilities for infusion pumps and
vital signs measurement instruments and also house a service operation for
installed infusion pumps and vital signs measurement instruments. The Creedmoor,
North Carolina facility houses a portion of the current disposables operations
and is a distribution center for North American disposable finished products.
Product sterilization and release are also executed in Creedmoor, North
Carolina. The Tijuana facilities primarily focus on the manual assembly of
disposables, and the England facility focuses on the manufacturing of syringe
pumps. Disposable products for international markets are currently supported
through a number of foreign manufacturers.
Two contractors provide the Company with assembly services for disposable
administration sets in Tijuana, Mexico. The agreements between the Company and
the contractors require that the Company pay the contractor an hourly rate per
employee hour worked on assembly of products.
The Company has designed and implemented an integrated network of quality
systems, including control procedures that are planned and executed by
technically-trained professionals. These systems result in establishing written
specifications for raw materials, packaging, labels, sterilization and overall
manufacturing process control. A substantial number of raw materials require
certificates of analysis to help ensure that finished products conform to
specifications. In addition, the Company regularly tests components and products
at various stages of the manufacturing process to ensure compliance with
applicable specifications.
The Company purchases raw materials worldwide in the ordinary course of
business from numerous suppliers. The vast majority of these materials are
generally available and the Company has not experienced any serious shortages or
material delays in obtaining these materials. In some situations, the Company
has long-term supply contracts, although the Company purchases a significant
amount of its requirements of certain raw materials by purchase order. Although
the Company is generally not dependent upon any single source of supply, it
relies upon a limited number of suppliers for PC boards and other parts which
are used in certain of its infusion systems. The loss of any such supplier would
result in a
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temporary interruption in the manufacturing of the Company's products. The
Company believes, however, that these materials are available as needed from
alternative sources.
The Company has identified the reduction of production and operating costs
as a key component of its operating strategy. As part of this strategy, the
Company has reduced overall head count through termination and attrition. The
Company will now focus on implementing the following programs: (i) consolidating
supply sources and (ii) rationalizing underutilized assets, including
consolidating executive offices, warehouse operations and manufacturing
operations.
RESEARCH AND DEVELOPMENT
The Company believes that a well-targeted research and development program
constitutes an essential part of the Company's activities and is an integral
part of its future success. IMED has historically devoted a significant portion
of its research and development budget to the development of new projects. IMED
expended approximately $6.3 million, $7.4 million and $7.8 million on in-house
research and development for the years ended December 31, 1994, 1995 and 1996,
respectively. IVAC Holdings expended approximately $18.5 million, $12.1 million
and $7.7 million on in-house research and development for the years ended
December 31, 1994 and 1995 and the nine months ended September 30, 1996,
respectively. Substantially all of each such amount was dedicated to the
development of new products.
IVAC's research and development efforts have most recently been focused
primarily on completing the development and commercial introduction of existing
product concepts, including the Signature Edition line and TEMP-PLUS III
electronic thermometer, as well as enhancing commercially available products
such as MS III and disposable administration sets.
The Company intends to focus a significant portion of its research and
development efforts on the development of new products. The Company believes
that the combination of IMED's and IVAC's research and development functions
will result in the elimination of redundant costs while increasing the
productivity of its research and development activities. The Company is
currently developing several new products and product line extensions.
PATENTS, TRADEMARKS AND PROPRIETARY RIGHTS
The Company relies heavily on patented and other proprietary technology. The
Company believes its issued and pending patents are important to its competitive
position. There can be no assurance that patent applications submitted by the
Company or its licensors will result in patents being issued or that, if issued,
such patents and patents already issued will afford protection against
competitors with similar technology. In addition, there can be no assurance that
any patents issued to or licensed by the Company will not be infringed or
designed around by others, that others will not obtain patents that the Company
will need to license or design around, that the Company's products will not
inadvertently infringe the patents of others, or that others will not
manufacture and distribute similar products upon expiration of such patents.
There can also be no assurance that key patents of the Company will not be
invalidated or that the Company or its licensors will have adequate funds to
finance the high costs of prosecuting or defending patent validity or
infringement issues.
The Company's policy is to secure patent protection for significant
inventions. The Company holds approximately 210 unexpired patents in the United
States and approximately 390 unexpired patents in foreign countries, principally
in Europe, Canada, Japan and Australia. Additional applications are pending or
in preparation. Within the next ten years, approximately 116 of the Company's
United States patents and approximately 146 of the Company's foreign patents
will expire. The Company does not believe that the expiration of any such
patents will, individually or in the aggregate, have a material adverse effect
on the Company's results of operations, business or financial condition.
The patent positions of medical device firms, including the Company, are
uncertain and involve complex legal and factual questions for which certain
legal principles are unresolved. The coverage claimed
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<PAGE>
in a patent application can be significantly reduced before a patent is issued.
In addition, patent law has recently been revised to give effect to
international accords to which the United States has become a party. Pursuant to
such accords, the patent term has been changed from 17 years from date of grant
to 20 years from date of filing and certain provisions favoring United States
inventors over foreign inventors have been eliminated.
The United States patent code was recently amended. As a result, certain
statutory remedies for patent infringement are no longer available for a medical
practitioner's otherwise infringing performance of a medical activity. As
defined in the United States patent code, medical activity does not include "the
use of a patented machine, manufacture or composition of matter in violation of
such patent." The aforesaid amendment does not apply to patents issued before
September 30, 1996. Legislation which would have prohibited the issuance of
patents directed to surgical and medical procedures did not pass in the 104th
Congress and no such legislation presently is pending.
The Company sells its products under a variety of trademarks, some of which
are considered by the Company to be of importance to warrant registration in the
United States and various foreign countries in which the Company does business.
The Company also relies on trade secrets, unpatented know-how and continuing
technological advancement to maintain its competitive position. It is the
Company's practice to enter into confidentiality agreements with key technical
employees and consultants. There can be no assurance that these measures will
prevent the unauthorized disclosure or use of the Company's trade secrets and
know-how or that others may not independently develop similar trade secrets or
know-how or obtain access to the Company's trade secrets, know-how or
proprietary technology. In addition, the Company from time to time seeks
copyright protection for the software used in certain of its products.
COMPETITION
The Company faces substantial competition in all of its markets. Many of the
Company's competitors have greater financial, research and development and
marketing resources than the Company. Some of the Company's principal
competitors are able to offer volume discounts based on "bundled" purchases of a
broad range of their medical equipment and supplies; a strategy that the Company
is currently unable to and may continue to be unable to pursue. The Company
expects the trend toward volume discounts to continue in the future. The Company
believes that the competitive factors most important in its markets are quality
of products and services, technological innovation and price.
The primary markets for the Company's products are relatively mature and
highly competitive. The Company's success is therefore dependent on the
development of new infusion technologies and the development of other markets
for its products. The Company's older infusion therapy and thermometry product
lines have experienced declining sales and market share recently, primarily due
to competitors who offer volume discounts based on "bundled" purchases of a
broader range of medical equipment and supplies, as well as to the aging of the
Company's core products. The Company's introduction of new products may offset
future declines in sales and market share. There can be no assurance, however,
that new products will be successfully completed or marketed for sale, will not
necessitate upgrades or technical adjustments after market introduction, can be
manufactured in sufficient volumes to satisfy demand, or will offset declines in
sales and market share experienced with respect to existing products. See "--
Products and Services." Moreover, there can be no assurance that the Company's
efforts to take advantage of opportunities it perceives in the alternate site
and international markets will be successful. In addition, although the pace of
technological change in the Company's industry historically has been relatively
slow, the Company is unable to predict the pace of such change in the future.
There can be no assurance that technological change will not place one or more
of the Company's existing or proposed products at a significant competitive
disadvantage. Additionally, to the extent the Company does not successfully
reposition existing products for sale to different markets, the introduction of
new products by the Company will reduce sales of such existing products.
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At December 31, 1996, on a pro forma basis, the Company had a market share
of approximately 40% of the installed base of infusion pump channels in the
United States. Major competitors in this market include Baxter International
Inc., Abbott Laboratories, Inc. and McGaw, which in the aggregate had a market
share of approximately 55% of the installed base of infusion pump channels in
the United States at December 31, 1996.
The European infusion systems market is much more regionalized and
fragmented, with a few strong competitors in each regional market. Major
competitors encountered in several markets include Graseby, Fresenius and B.
Braun Melsungen AG. The Company is among the leaders in a number of Western
European markets, with a number one or number two installed base market share in
eleven countries and the number three installed base market share in Germany and
Italy. The Western European countries in which the Company has a number one or
number two installed base market share are France, Denmark, Finland, Norway,
Sweden, the United Kingdom, Belgium, the Netherlands, Luxembourg, Spain and
Portugal.
The vital signs measurement products market is fragmented by product type.
The Company's key competitor in the United States electronic thermometer market
is Diatek and its key competitor in the infrared thermometer market is Sherwood
Medical Company.
GOVERNMENT REGULATION
PRODUCT REGULATION. The research, development, testing, production and
marketing of the Company's products are subject to extensive governmental
regulation in the United States at the federal, state and local levels, and in
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 the Company (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 FDC Act, a medical
device is classified as 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, "Good Manufacturing
Practices" (as defined in FDA regulations) ("GMP"), prohibitions on adulteration
and misbranding, and reporting of certain adverse events ("MDR"). 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 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
preclinical and clinical testing to prove safety and effectiveness of the
devices.
Virtually all of the Company's products are Class II devices. The Company is
not currently developing, manufacturing or distributing any Class III devices,
although it may do so in the future. Unless otherwise exempt, all medical
devices introduced to the market since 1976 are required by the FDA, as a
condition of marketing, to secure a 510(k) premarket notification clearance
("510(k)") or a Premarket Approval Application ("PMA"). A product will be
cleared by the FDA under a 510(k) if it is found to be substantially equivalent
in terms of safety, effectiveness and intended use to another legally marketed
medical device that was on the market prior to May 28, 1976 or to a product that
has previously received a 510(k) and is lawfully on the market. If a product is
not substantially equivalent to such a medical device, and not otherwise exempt,
the FDA must first approve a PMA before it can be marketed. An approved PMA
indicates that the FDA has determined the product has been proven, through the
submission of clinical data and manufacturing and other 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. The process of obtaining a 510(k) currently
takes, on average,
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<PAGE>
approximately six months from the date of submission. However, the review
process for a particular product may be shorter or substantially longer
depending upon the circumstances. Moreover, there can be no assurance that a
510(k) will be cleared. The 510(k) must include submission of supporting
information, including design details and labeling, and may be required to
contain safety and efficacy data. Product modifications intended to be made to a
cleared device also may require submission and clearance of a new 510(k)
application or submission and approval of a PMA, during which time the modified
product cannot be distributed in interstate commerce. Although there can be no
assurance, the Company believes that its proposed products under development
will qualify for the 510(k) procedure.
As part of its normal course of business, the FDA regularly conducts
inquiries regarding the safety or efficacy of medical products, including those
manufactured by the Company, which may result in the Company's inability to
market a particular device or cause the Company to need to generate additional
data to support submissions for market clearance. Future products developed by
the Company may require FDA clearance through either the 510(k), PMA, new drug
approval application procedures or abbreviated new drug approval application
procedures. There can be no assurance that marketing clearances or approvals
will be obtained on a timely basis or at all. Delays in receiving such
clearances or approvals could have a material adverse effect on the Company.
The FDA also regulates the commencement and conduct of clinical
investigations to determine the safety and effectiveness of devices, including
investigations of devices not cleared or approved for marketing, and
investigations involving new intended uses of previously cleared or approved
devices. Clinical investigations are regulated by the FDA under the
investigational device exemption ("IDE") regulations. The IDE regulations
include significant requirements that must be met, including informed patient
consent, criteria for selection of study investigators and monitors, review and
approval of research protocols, reporting obligations to the FDA, recordkeeping
and prohibitions against commercialization of investigational devices. A sponsor
must obtain FDA approval of an IDE before starting the investigation, unless the
device is found to be a non-significant risk device by the sponsor and each
institutional review board ("IRB") that reviews the study. The FDA, however, has
the authority to determine that a study designated as involving a
non-significant risk device by the sponsor and IRBs involves a significant risk
device and an IDE application must be submitted and approved before the study
can resume. In addition, a study of a non-significant risk device must still
comply with certain provisions of the IDE regulations, and meet other regulatory
requirements. The violation of the IDE regulations can result in a variety of
sanctions, such as warning letters, prohibition against additional clinical
research, the refusal to accept data and criminal prosecution.
The Company is also providing devices for use in a clinical trial as a
contract manufacturer. There can be no assurance that this clinical study will
comply with all elements of the FDA's regulations, that the study will provide
evidence of the safety or effectiveness of the device, or that the study will
ultimately result in the approval of the device.
Devices manufactured by the Company in the United States are exported by the
Company to other countries. Such devices, if not approved for sale in the United
States, are subject to the FDA export requirements, including restriction on
distribution in the United States.
The Company has received ISO 9000 certification for certain of its
facilities regarding the quality of its manufacturing systems, a requirement for
doing business in EC countries, and is in the process of applying for ISO 9000
certification for the balance of its manufacturing facilities. The Company has
been granted approval to affix the CE mark, pursuant to the EC Medical Device
Directives, on certain of its products. Approval to affix the CE mark to a
product does not necessarily preclude, however, additional restrictions on
marketing in any individual country in the EC.
Certain countries require the Company to obtain clearances for its products
prior to marketing the products in those countries. In addition, certain
countries impose product specifications, standards or other requirements which
differ from or are in addition to those mandated in the United States. The EC
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and certain other countries are in the process of developing new modes of
regulating medical products which may result in lengthening the time required to
obtain permission to market new products. These changes could have a material
adverse effect on the Company's ability to market its products in such countries
and would hinder or delay the successful implementation of the Company's planned
international expansion. In addition, since MS III does not meet the current EC
Electromagnetic Capability Directive (Directive 89/336/EEC) for resistance to
electromagnetic and radio frequency interference, it is currently not marketed
in Europe.
The Company is registered as a medical device manufacturer with the FDA and
certain state agencies. These agencies inspect the Company periodically to
determine whether the Company is in compliance with the FDC Act and regulations,
including regulations relating to MDR reporting, product labeling and promotion,
and medical device GMPs governing design, manufacturing, testing, quality
control, product packaging and storage practices. The FDA has recently proposed
revising certain GMP regulations which, if adopted, would increase the cost of
regulatory compliance for the Company. The MDR regulations promulgated by the
FDA require the Company to provide information to the FDA on certain
malfunctions, as well as serious injuries or deaths which may have been
associated with the use of a product. The EC Medical Device Directives also
require reporting of serious injuries or deaths which may be associated with the
use of a medical device to the competent authority in the country where the
incident occurred.
A determination that the Company is in material violation of the FDC Act or
such FDA regulations could lead to the issuance of warning letters, imposition
of civil or criminal sanctions against the Company, its officers and employees,
including fines, recalls, repair, replacement or refund to the user of the cost
of such products. In addition, if the FDA believes any of the Company's products
violate the law and present a potential health hazard, the FDA could seek to
detain and seize products, to require the Company to cease distribution and to
notify users to stop using the product. The FDA could also seek criminal
sanctions or seek to close some or all of the Company's manufacturing
facilities. Such actions could also result in an inability of the Company to
obtain additional market clearances. Since 1992, the Company has on thirteen
occasions removed products from the market that were found not to meet
performance standards. None of such recalls materially interfered with the
Company's operations and all such affected product lines were subsequently
returned to the market. One such product recall, a recent voluntary recall
related to the Company's Signature Edition infusion pumps, has not yet been
terminated or otherwise closed by the FDA and the FDA could take further
regulatory action against the Company, including actions such as those described
above. The Signature Edition infusion pumps were recalled because of an
unacceptable level of malfunction alarms due to less than expected reliability
of their pressure monitoring systems. The user of these pumps is notified of
such malfunction alarms by both a continuous audible signal and a visual
message. The Company is in the process of upgrading and replacing, at no charge
to its customers, the current pressure monitoring system contained in certain of
the infusion pumps included within the Signature Edition product line. This
recall, which is believed to affect approximately 4,000 infusion pumps, is
expected to be completed by the end of the second quarter of 1997. In connection
with this recall, estimated expenses of approximately $1.0 million were accrued
by the Company at December 31, 1996. In addition, a voluntary recall of
approximately 645 Gemini PC-1 infusion pumps (limited to distribution outside
the United States) was initiated by the Company in June 1996. At this time, the
Company has completed required modifications to all but two of the infusion
pumps subject to such voluntary recall.
The Company has initiated a voluntary safety alert of its P1000, P2000,
P3000 and P4000 syringe pumps, which are marketed internationally. This safety
alert is based on certain operational anomalies that have been observed in the
course of electronic laboratory bench testing of these syringe pumps. In
particular, under certain unusual conditions which are unlikely to be duplicated
in a clinical setting, the syringe pumps may be programmed such that they
continue to run at the initial infusion rate set by the operator for longer than
the specified length of time. Upon such occurrence, the syringe pumps emit a
continuous audible alarm. While the syringe pumps covered by the aforesaid
safety alert have been on the market for over three years, the Company is aware
of no reported instances of these anomalies occurring
21
<PAGE>
in connection with patient use. Although not required to do so by the United
Kingdom Department of Health, the Company has offered to provide customers, at
their request, with modified software for the approximately 16,000 affected
syringe pumps at no charge. The Company has not incurred material costs in
providing the upgraded software. In addition, the Company has initiated a
voluntary safety alert of its 599 Series infusion pumps, which it discontinued
selling in March 1997. This safety alert advises customers to inspect and, if
necessary, make an adjustment to the infusion pump in order to prevent
misloading of disposable administration sets.
The Company's manufacturing facilities in San Diego have been licensed by
the State of California Department of Health Services, Food and Drug Branch,
under the applicable GMP and other regulations.
ANTI-REMUNERATION LAWS. The sale of the Company's products is subject to
the illegal remuneration/ "anti-kickback" provisions of the Social Security Act
of 1935, as amended (the "Social Security Act"), which prohibits knowingly and
willfully the offering, receiving or paying of any remuneration, whether
directly or indirectly, in return for inducing the purchase of items or
services, or patient referrals to providers of services, for which payment may
be made in whole or in part by Medicare, Medicaid or similar state programs.
Violations of the statute are punishable by civil and criminal penalties and
exclusion of the provider from future participation in the Medicare and Medicaid
programs. The Social Security Act contains exceptions to these prohibitions for,
among other things, properly reported discounts and payment of certain
administrative fees to GPOs. Because of the breadth of the statutory
prohibitions, the lack of court decisions or other authority addressing the
types of arrangements that are permissible under the law and the narrowness of
statutory exceptions, the Secretary of Health and Human Services published
regulations creating "safe harbors" identifying certain practices that will not
be treated as violating the "anti-kickback" provisions of the Social Security
Act. While failure to satisfy all of the criteria for a safe harbor does not
necessarily mean that an arrangement is unlawful, engaging in a business
practice for which there is a safe harbor may be regarded as suspect if the
practice fails to meet each of the prescribed criteria of the appropriate safe
harbor. The enumerated safe harbors include safe harbors which implement, and
further refine, the statutory exceptions for discounts and payments to GPOs.
Because the Company sells some of its products to customers at prices below list
price and in various combinations, the Company is engaged in giving discounts
within the meaning of the Social Security Act. The regulations require sellers
to fully and accurately report all discounts and inform buyers of their
obligations to report such discounts. The Company also pays administrative fees
to certain purchasing agents within the meaning of the Social Security Act. In
order to qualify for the GPO safe harbor, certain requirements must be met
including disclosure of the existence of the GPO fee arrangement to GPO members
and that members are neither wholly owned by the GPO nor subsidiaries of a
parent corporation that wholly owns the GPO. Certain of the Company's discounts
and arrangements with purchasing agents may not meet all the requirements of the
appropriate safe harbors.
Several states also have statutes or regulations prohibiting financial
relationships with referral sources that are not limited to services for which
Medicare, Medicaid or other state health care program payment may be made. A
finding of non-compliance with these anti-remuneration laws by federal or state
regulatory officials, including non-compliance with appropriate safe harbors,
could have a material adverse effect on the Company.
COVERAGE AND REIMBURSEMENT. The Company's products are purchased or leased
by health care providers or suppliers which submit claims for reimbursement for
such products to third-party payors such as Medicare, Medicaid and private
health insurers. Although the Company has no knowledge that third-party payors
will adopt measures that would limit coverage of, or reimbursement for, its
products, any such measures that were applied to the Company's products could
have a material adverse effect on the Company.
HEALTH CARE REFORM. Because the cost of health care delivery has been
steadily rising and because the cost of a significant portion of medical care in
the United States and other countries is typically funded by
22
<PAGE>
governmental insurance programs, there have been a number of government
initiatives to reduce health care costs. Congress and various state legislatures
currently are proposing changes in law and regulation that could effect major
restructuring of the health care industry. Although many of these proposals may
seek to maintain or expand access to health care services, the common objective
of the proposed legislation is to achieve cost containment in the health care
sector. Changes in governmental support of health care services, the methods by
which such services are delivered, the prices for such services or the
regulations governing such services or mandated benefits may all have a material
adverse effect on the Company. Even if the ultimate impact of any such changes
on net sales is positive, no assurance can be given that the costs of complying
with possible new requirements would not have a negative impact on the Company's
future earnings. No assurance can be given that any such legislation will not
have a material adverse effect on the Company.
ENVIRONMENTAL MATTERS. The Company is subject to regulation by OSHA, the
Environmental Protection Agency and their state and local counterparts, and
under extensive and changing foreign, federal, state and local environmental
standards, including those governing the handling and disposal of solid and
hazardous wastes, discharges to the air and water, and the remediation of
contamination associated with releases of hazardous substances. Such standards
are imposed by, among other statutes, the Toxic Substances Control Act, the
Clean Air Act, the Federal Water Pollution Control Act, the Resource
Conservation and Recovery Act and the Comprehensive Environmental Response,
Compensation and Liability Act ("CERCLA"). Although there can be no assurances,
the Company believes that it is currently in material compliance with current
environmental standards. Nevertheless, the Company uses hazardous substances in
its day-to-day operations and, as is the case with manufacturers in general, if
a release of hazardous substances occurs on or from the Company's properties,
the Company may be held liable and may be required to pay the cost of remedying
the condition. The amount of any such liability could be material.
The Company has made, and will continue to make, expenditures to comply with
current and future environmental standards. Although no material capital or
operating expenditures relating to environmental controls are anticipated, there
can be no assurance that changes in, additions to or differing interpretations
of, statutory and regulatory requirements will not require material expenditures
in the future.
The Company is subject to liability under CERCLA and analogous state laws
for the investigation and remediation of environmental contamination at
properties owned and/or operated by it and at off-site locations where it has
arranged for the disposal of hazardous substances. Courts have determined that
liability under CERCLA is, in most cases, joint and several, meaning that any
responsible party could be held liable for all costs necessary for investigating
and remediating a release or threatened release of hazardous substances. As a
practical matter, liability at most CERCLA (and similar) sites is shared among
all the solvent "potentially responsible parties" ("PRPs"). The most relevant
factors in determining the probable liability of a party at a CERCLA site
usually are the cost of the investigation and remediation, the relative amount
of hazardous substances contributed by the party to the site and the number of
solvent PRPs.
The Company currently is involved in one such matter at the Seaboard
Chemical site in Jamestown, North Carolina. There are over 675 PRPs at this
site. The Company has entered into a DE MICROMIS consent order with the North
Carolina Department of Environment, Health and Natural Resources and a group of
PRPs (which represent 77% of the known waste disposed of at the site), settling
its liability for past and future response costs associated with the site. Under
the consent order, the Company receives a release from further liability
associated with the site, a covenant not to sue by the other PRPs entering into
the consent order, and protection under CERCLA against contribution actions for
matters addressed by the consent order. Protection from further liability is
conditioned on the absence of information indicating that the Company disposed
of a greater quantity of hazardous substances at the site than currently known.
Although there can be no assurance that such further information does not exist,
the Company believes the amount of its liability at this site will be DE
MINIMIS.
23
<PAGE>
The Company is aware that at one other location at which the Company has
disposed of 1,205 gallons of waste alcohol a governmental agency completed a
remedial investigation and feasability study in 1991 and an integrated
assessment in 1995. As a result, the Company believes that it could be
identified as a PRP at some time in the future; however, the Company has not
received notice of the commencement of any proceeding against it with respect to
such site. If the Company were identified as a PRP with respect to such site,
there can be no assurance that such designation, and any resulting liability
associated therewith, would not have a material adverse effect on the Company.
In addition, the Company has recently received notice from a group claiming
that the Company has violated California Proposition 65 ("Proposition 65").
Proposition 65 requires, among other things, that warnings be given in
connection with the exposure of consumers to products containing certain listed
substances. Certain of the Company's disposable administration sets contain one
such substance, DEHP. The Company believes that it has meritorious defenses to
such claim and intends to defend the action vigorously. No assurance can be
given that the Company will be successful in defending such claim or that an
adverse determination of such claim would not have a material adverse effect on
the Company. A significant portion of the Company's competitors have also
recently received similar notices claiming violations of Proposition 65.
EMPLOYEES
As of January 31, 1997, the Company had a total of 1,356 full-time
employees, of which 629 employees were employed in manufacturing, 440 employees
in sales and marketing, 183 employees in research and development and 104
employees in executive and administrative functions. None of the employees of
the Company is subject to a collective bargaining agreement, nor has the Company
experienced any work stoppages.
Advanced Medical's operations are supported by persons employed by the
Company. Advanced Medical's principal executive offices are located at 10221
Wateridge Circle, San Diego, California 92121.
24
<PAGE>
ITEM 2. PROPERTIES
The Company owns or leases the following properties:
<TABLE>
<CAPTION>
LEASE
APPROXIMATE LEASED EXPIRATION
SQUARE OR DATE
LOCATION FOOTAGE PURPOSE OWNED (IF LEASED)
- - --------------------------------- ------------ ------------------------------------------ --------- -------------
<S> <C> <C> <C> <C>
San Diego, CA(1) 49,284 Executive Offices Leased 1997
San Diego, CA 45,000 Warehouse Leased 1997(4)
San Diego, CA(1) 57,590 Manufacturing and Service Leased 1997(4)
San Diego, CA(1) 35,500 Manufacturing, Research and Development Leased 1997
Buckingham, England(1) 8,000 Sales Office and Warehouse Leased 2001
Tijuana, Mexico(2) 41,190 Contract Manufacturing of Disposable Leased 1997
Products
San Diego, CA(6) 135,516 Executive Offices Leased 2006
San Diego, CA(3) 83,520 Manufacturing of Instruments Leased 2005
Creedmoor, NC 120,000 Manufacturing of Disposable Sets Owned
Hampshire, England 10,000 Manufacturing of Syringe Pumps Leased 2012(7)
Hampshire, England 7,500 International Headquarters Leased 2000(8)
Tijuana, Mexico(2) 37,946 Contract Manufacturing of Disposable Leased (5)
Products
Geissen, Germany 6,200 Sales Office Leased 2005
Alcobendas, Spain 8,396 Sales Office Leased 1999
Taby, Sweden 3,337 Sales Office Leased 1997
Grimberger, Belgium 2,530 Sales Office Leased 2004
Amersfoort, The Netherlands 2,562 Sales Office Leased 1998
Rueil Maimaison, France 1,939 Sales Office Leased 1998(4)
Rafa, Dubai, U.A.E. 1,700 Sales Office Leased 1997
</TABLE>
- - ------------------------
(1) It is currently anticipated that these leases will not be renewed and that
the operations at such facilities will be consolidated and conducted at the
Company's other San Diego facilities.
(2) Lessee of facility is a contractor that provides the Company with certain
assembly services.
(3) Primary instrument manufacturing facility.
(4) Cancellable upon six months written notice.
(5) Cancellable upon 180 days notice. The Company is a surety with respect to
the lease.
(6) Advanced Medical's principal executive offices are located at this property.
(7) Lease contains a "break clause" that gives the Company the option to
terminate the lease in 1999.
(8) Lease contains a "break clause" that gives the Company the option to
terminate the lease in 1998.
ITEM 3. LEGAL PROCEEDINGS
The Company is a defendant in a lawsuit filed in June 1996 by Sherwood
Medical Company ("Sherwood") against IVAC. The lawsuit, which is pending in the
United States District Court for the Southern District of California, alleges
infringement of two Sherwood patents by reason of certain activities including
the sale by IVAC of disposable probe covers for use with infrared tympanic
thermometers. The lawsuit seeks injunctive relief, treble damages and the
recovery of costs and attorney fees. The discovery phase of the lawsuit has
recently commenced. The Company is currently unable to quantify its exposure in
the lawsuit. The Company believes it has sufficient defenses to all claims by
Sherwood, including the defenses of noninfringement and invalidity. However,
there can be no assurance that the Company will successfully defend all claims
made by Sherwood and the failure of the Company to successfully prevail in this
lawsuit could have a material adverse effect on the Company's operations,
business and financial condition.
The Company is a defendant in a QUI TAM lawsuit filed by a former IMED
employee in the United States District Court for the Northern District of
Illinois. On November 15, 1996, an amended complaint
25
<PAGE>
was filed which alleges fraud in the inducement, breach of employment contract,
common law fraud and violations of the Federal False Claims Act and Medicare
Fraud and Abuse Act. To date, the United States has declined to intervene in
this action. The Company believes it has sufficient defenses to all claims by
the plaintiff.
The Company is also involved in a number of legal proceedings arising in the
ordinary course of its business, none of which is expected to have a material
adverse effect on the Company's operations, business or financial condition. The
Company maintains insurance coverage against claims in an amount which it
believes to be adequate.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
26
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The Common Stock is listed and traded on the American Stock Exchange under
the symbol AMA. The following table sets forth the high and low reported sale
prices for the Common Stock as reported by the American Stock Exchange for the
quarters indicated.
<TABLE>
<CAPTION>
HIGH LOW
------- -------
<S> <C> <C>
1995:
First Quarter..... 3 7/8 1 3/4
Second Quarter.... 2 13/16 2 3/16
Third Quarter..... 3 3/8 1 15/16
Fourth Quarter.... 3 5/16 2 5/8
1996:
First Quarter..... 3 1/8 2 1/4
Second Quarter.... 3 1/16 2 1/8
Third Quarter..... 4 1/16 2 1/16
Fourth Quarter.... 3 7/8 2 11/16
</TABLE>
At April 11, 1997, there were 534 holders of record of the Common Stock.
Advanced Medical has not paid any dividends on the Common Stock since its
organization, and it is not contemplated that it will pay any dividends on the
Common Stock in the foreseeable future. Advanced Medical is prohibited from
declaring and paying dividends on the Common Stock under the credit facility
(the "New Credit Facility") it and the Company entered into in connection with
the Merger. In addition, the New Credit Facility limits the Company's ability to
declare and pay dividends and to make other distributions and payments to
Advanced Medical. See "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
ITEM 6. SELECTED FINANCIAL DATA.
The following selected historical consolidated financial data of Advanced
Medical at December 31, 1992, 1993, 1994, 1995 and 1996, and for the years then
ended, have been derived from Advanced Medical's annual financial statements
including the consolidated balance sheets at December 31, 1995 and
27
<PAGE>
1996 and the related consolidated statements of operations for the three-year
period ended December 31, 1996 and notes thereto which appear elsewhere herein.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1992 1993 1994 1995 1996
---------- ---------- ---------- ---------- ----------
<CAPTION>
(DOLLAR AND SHARE AMOUNTS IN THOUSANDS, EXCEPT PER SHARE
DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Sales.............................................. $ 128,642 $ 119,858 $ 112,122 $ 112,551 $ 136,371
Cost of sales...................................... 72,952 72,209 65,590 63,219 78,616
---------- ---------- ---------- ---------- ----------
Gross margin....................................... 55,690 47,649 46,532 49,332 57,755
---------- ---------- ---------- ---------- ----------
Total operating expenses (1)....................... (44,918) (51,057) (33,941) (34,614) (105,614)
Lease interest income (2).......................... 1,918 2,627 2,449 2,333 2,501
---------- ---------- ---------- ---------- ----------
Income (loss) from operations...................... 12,690 (781) 15,040 17,051 (45,358)
Interest income.................................... 719 140 77 192 1,193
Interest expense................................... (11,617) (10,880) (8,690) (8,153) (13,393)
Debt conversion expense (8)........................ -- -- -- -- (10,000)
Other, net......................................... 2,285 6,004 1,136 313 1,222
---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes, minority
interests, extraordinary item and cumulative
effect of change in accounting principle (3) (6)
(8).............................................. 4,077 (5,517) 7,563 9,403 (66,336)
Provision (benefit) for income taxes............... 1,956 926 1,886 (9,374) (730)
Minority interests in consolidated subsidiaries.... (4,565) 3,755 -- (6,500) --
---------- ---------- ---------- ---------- ----------
Income (loss) before extraordinary item and
cumulative effect of change in accounting
principle........................................ (2,444) (2,688) 5,677 12,277 (65,606)
Dividends and accretion on mandatorily redeemable
preferred stock.................................. 1,832 1,387 874 650 962
---------- ---------- ---------- ---------- ----------
Income (loss) applicable to common stock before
extraordinary item and cumulative effect of
change in accounting principle................... $ (4,276) $ (4,075) $ 4,803 $ 11,627 $ (66,568)
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Income (loss) per common share before extraordinary
item and cumulative effect of change in
accounting principle assuming no dilution........ $ (.30) $ (.29) $ .34 $ .74 $ (3.27)
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Income (loss) per common share before extraordinary
item and cumulative effect of change in
accounting principle assuming full dilution...... $ (.30) $ (.29) $ .22 $ .37 $ (3.27)
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Weighted average common shares outstanding assuming
no dilution...................................... 13,962 14,073 14,069 15,755 20,343
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
Weighted average common shares outstanding assuming
full dilution.................................... 13,962 14,073 24,099 33,183 20,343
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
</TABLE>
28
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1992 1993 1994 1995 1996
---------- ---------- ---------- ---------- ----------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash................................................ $ 2,443 $ 1,762 $ 1,340 $ 1,862 $ 12,084
Working capital (deficit)........................... 4,246 (2,833) 29,576 31,938 87,785
Total assets........................................ 177,496 142,891 132,124 169,630 593,382
Short-term debt (4) (5)............................. 34,382 35,815 1,214 322 3,963
Long-term debt (2) (4) (5) (6) (7) (8).............. 83,821 70,999 91,803 86,789 436,130
Mandatorily redeemable equity securities............ 9,451 6,478 6,567 7,217 --
Stockholders' (deficit) equity (6) (8) (9).......... (8,560) (8,274) (2,238) 31,532 46,053
ADJUSTED EBITDA (10).................................. $ 23,444 $ 18,420 $ 22,851 $ 24,626 $ 27,775
Inventory purchase price allocation
adjustment (11)..................................... -- -- -- -- (4,014)
Restructuring, integration and other non-recurring
charges............................................. -- (9,352) -- -- (15,277)
Purchased in-process research and development......... -- -- -- -- (44,000)
Depreciation and amortization (12).................... (10,754) (9,849) (7,811) (7,575) (9,842)
Interest income....................................... 719 140 77 192 1,193
Interest expense...................................... (11,617) (10,880) (8,690) (8,153) (13,393)
Debt conversion expense............................... -- -- -- -- (10,000)
Other, net............................................ 2,285 6,004 1,136 313 1,222
(Provision) benefit for income taxes.................. (1,956) (926) (1,886) 9,374 730
Minority interests in consolidated subsidiaries....... (4,565) 3,755 -- (6,500) --
Extraordinary gain (loss)............................. (8,632) -- -- 15,177 (1,630)
Cumulative effect of change in accounting principle... -- 3,985 -- -- --
---------- ---------- ---------- ---------- ----------
Net income (loss)..................................... $ (11,076) $ 1,297 $ 5,677 $ 27,454 $ (67,236)
---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ----------
</TABLE>
- - ------------------------
(1) In 1993 and 1996 Advanced Medical restructured its operations. Operating
expenses for the years ended December 31, 1993 and 1996 include
restructuring charges of $9,352 and $15,277, respectively. Additionally, in
1996, the Company recorded $44,000 of purchased in-process research and
development in connection with the Merger.
(2) Lease interest income consists of interest income associated with contracts
or agreements pursuant to which a third party acquires infusion pumps under
sales-type leases.
(3) On January 31, 1992, Advanced Medical repaid and restructured its debt and
recorded a $8,632 extraordinary loss on extinguishment of debt.
(4) In January 1992, Advanced Medical issued 7 1/4% convertible subordinated
debentures due 2002 in the principal amount of $60,000 and 500 shares of
Common Stock at $15.375 per share. For further discussion, see Note 4 to the
Consolidated Financial Statements.
(5) In August 1994, IMED amended its revolving credit facility with General
Electric Capital Corporation. For further discussion, see Note 4 to the
Consolidated Financial Statements.
(6) In 1995, Advanced Medical completed exchanges wherein $43,848 of Advanced
Medical's 7 1/4% convertible subordinated debentures due 2002 were exchanged
for an aggregate of $21,924 of the Company's 15% subordinated debentures due
1999 and 2,062 shares of Common Stock. As a result of these transactions,
Advanced Medical's long term debt was reduced $21,924 and Advanced Medical
29
<PAGE>
recorded an extraordinary gain on extinguishment of debt of $15,177. For
further discussion, see Note 4 to the Consolidated Financial Statements.
(7) On December 4, 1995, Advanced Medical issued a $25,000 secured convertible
promissory note. For further discussion, see Note 4 to the Consolidated
Financial Statements.
(8) In connection with the Merger, the Company entered into the $250,000 New
Credit Facility and also issued $200,000 of 9 3/4% senior subordinated notes
due 2006. Additionally, convertible promissory notes in the aggregate
principal amount of $37,500 were exchanged for 29,416,086 shares of Common
Stock, including 3,333,333 shares issued as an inducement to convert, which
resulted in $10,000 of debt conversion expense. Advanced Medical also
redeemed the remaining $21,924 principal amount of its 15% subordinated
debentures due 1999 and recorded an extraordinary loss on extinguishment of
debt of $1,630 as a result of this transaction. For further discussion, see
Note 4 to the Consolidated Financial Statements.
(9) Advanced Medical has never paid dividends on the Common Stock.
(10) Adjusted EBITDA represents income from operations before restructuring
charges, non-cash purchase accounting charges and depreciation and
amortization. Adjusted EBITDA does not represent net income or cash flows
from operations, as these terms are defined under generally accepted
accounting principles, and should not be considered as an alternative to net
income as an indicator of the Company's operating performance or to cash
flows as a measure of liquidity. Advanced Medical has included information
concerning Adjusted EBITDA herein because it understands that such
information is used by certain investors as one measure of an issuer's
historical ability to service debt. Restructuring and other one-time
non-recurring charges are excluded from Adjusted EBITDA as Advanced Medical
believes that the inclusion of these items would not be helpful to an
investor's understanding of Advanced Medical's ability to service debt.
Advanced Medical's computaton of Adjusted EBITDA may not be comparable to
similar titled measures of other companies.
(11) Amount represents that portion of the purchase accounting adjustments made
to adjust the acquired IVAC inventory to its estimated fair value on the
Merger date which was charged to cost of sales during December 1996.
(12) Depreciation and amortization excludes amortization of debt issuance costs
included in interest expense of $770, $732, $681, $521 and $1,332 for the
years ended December 31, 1992, 1993, 1994, 1995 and 1996, respectively.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE FOLLOWING SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED FINANCIAL
STATEMENTS OF ADVANCED MEDICAL AND THE RELATED NOTES THERETO INCLUDED ELSEWHERE
IN THIS ANNUAL REPORT.
OVERVIEW
Advanced Medical is a holding company for the Company. Advanced Medical 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 from operations of the Company, external borrowings, sale of
investments and other external sources of funds to meet its obligations.
As described in Note 1 to the Consolidated Financial Statements, IMED was
the predecessor to the Company for financial reporting purposes. As a result of
the Merger on November 26, 1996, the operating results reported for the year
ended December 31, 1996 are not comparable to 1995. The 1996 operating results
represent those of Advanced Medical and IMED for the entire year plus the
results of the
30
<PAGE>
Company for the period from November 27, 1996 through December 31, 1996. Unless
otherwise indicated, the changes in operating results described herein relate
only to Advanced Medical and IMED exclusive of the impact on the 1996 results
due to the Merger.
The Company sells and services infusion systems primarily in the United
States, Western Europe, Canada, Australia, Latin America and the Middle East.
Additionally, as a result of the Merger, the Company now generates revenue from
the sale of vital signs measurement products. IMED generated revenues from the
sale and/or lease of infusion pumps and sales of associated proprietary
disposable administration sets. Prior to 1993, disposable administration sets
used with IMED's piston cassette infusion pumps had generated a majority of
IMED's overall sales of disposable administration sets and total revenues.
During 1995 and 1996, virtually all of IMED's revenues from the sale or lease of
infusion pumps were attributable to IMED's Gemini series of large volume
peristaltic infusion pumps reflecting the trend in the health care industry away
from older piston cassette technology toward the peristaltic technology
incorporated in the Gemini series. The Company expects that the shift away from
piston cassette technology toward peristaltic technology will continue. IMED
discontinued manufacturing piston cassette infusion pumps in the first quarter
of 1995. IMED's infusion systems are priced at the high end of the industry
price range and compete on the basis of technological sophistication, quality,
safety and flexibility in application.
Approximately 69% and 72% of IMED's sales during 1995 and 1996,
respectively, were attributable to sales of proprietary disposable
administration sets. Prior to the third quarter of 1992, a majority of IMED's
net sales attributable to disposable administration sets were generated by sales
of disposable administration sets used with IMED's piston cassette infusion
pumps. During 1995 and 1996, however, approximately 79% and 83% of IMED's
disposable administration set sales were attributable to sales of disposable
administration sets used with IMED's Gemini series infusion pumps reflecting the
industry shift away from piston cassette technology toward peristaltic
technology and IMED's growing installed base of peristaltic infusion pumps.
In recent years, IMED's results of operations have been affected by the cost
containment pressures applicable to health care providers. In particular, in
order to reduce costs, certain hospitals have adopted a new protocol increasing
the maximum time between disposable administration set changes from every 24
hours to as much as every 72 hours. Notwithstanding this change in protocol,
unit sales volume of IMED's disposable administration sets have increased in
every year since 1993, primarily as a result of its growing installed base of
infusion pumps. The Company's profitability is also affected by the increasing
use of GPOs which are better able to negotiate favorable pricing from providers
of infusion systems, such as the Company, and which police compliance with
exclusive buying arrangements for their members. These buying arrangements, in
certain situations, also may result in the GPO requiring removal of the
Company's existing infusion pumps. The Company expects that such GPOs will
become increasingly more common and may have an adverse effect on the Company's
profitability in the future. Finally, the enactment of national health care
reform or other legislation affecting payment mechanisms and health care
delivery would affect the Company's future results of operations. Although the
final form of any such legislation is not known, it is likely that any such
legislation may impose limits on the number and type of medical procedures which
may be performed and may restrict a provider's ability to select specific
devices or products for use in administering care which, in turn, could
adversely impact demand and/or pricing for the Company's infusion systems. It is
impossible to predict the extent to which the Company may be affected by any
such change in legislation.
Commencing in 1993, IMED undertook a number of measures designed to reduce
manufacturing costs and increase Adjusted EBITDA. These measures included (i)
selling IMED's Irish molding manufacturing operations in August 1994; (ii)
decreasing IMED's domestic work force by approximately 10% during 1993; and
(iii) modifying certain employee benefit plans in 1993. Since that time, IMED
has also undertaken to outsource certain component parts and negotiate price
reductions from key suppliers in order to further improve its gross margin.
31
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, selected
financial information expressed as a percentage of net sales:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1994 1995 1996 1996(A)
----------- ----------- -------------- --------------
(AS REPORTED)
<S> <C> <C> <C> <C>
Sales........................................................... 100.0% 100.0% 100.0% 100.0%
Cost of sales................................................... 58.5 56.2 57.6 55.2
----- ----- ----- -----
Gross margin.................................................... 41.5% 43.8% 42.4% 44.8%
Selling and marketing expense................................... 15.0 14.7 16.3 15.9
General and administrative expense.............................. 9.6 9.5 11.2 11.1
Research and development expense................................ 5.7 6.6 6.5 6.9
Purchased in-process research and development................... -- -- 32.3 --
Restructuring, integration and other non-recurring charges...... -- -- 11.2 --
Lease interest income........................................... 2.2 2.1 1.8 2.1
----- ----- ----- -----
Income (loss) from operations................................... 13.4 15.1 (33.3) 13.0
Interest expense................................................ (7.8) (7.2) (9.8) (11.8)
Other, net...................................................... 1.0 0.3 0.9 1.1
OTHER DATA:
Adjusted EBITDA............................................... 20.4% 21.9% 20.4% 20.3%
</TABLE>
- - ------------------------------
(A) Amounts represent those of consolidated Advanced Medical exclusive of the
impact of the Merger, purchase accounting and restructuring.
The following table sets forth sales by major product groups for the periods
presented:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1994 1995 1996
--------- --------- ---------
(IN MILLIONS)
<S> <C> <C> <C>
Piston cassette disposables.......................................................... $ 22.1 $ 16.6 $ 14.1
Peristaltic disposables.............................................................. 53.8 60.5 66.9
Piston cassette infusion pumps....................................................... .7 .5 --
Peristaltic infusion pumps........................................................... 22.5 25.3 22.9
ReadyMED............................................................................. 3.5 2.5 2.1
Products manufactured in Ireland..................................................... 2.6 -- --
Other (1)............................................................................ 6.9 7.2 7.0
--------- --------- ---------
Total IMED only.................................................................... 112.1 112.6 113.0
IVAC Sales........................................................................... -- -- 23.4
--------- --------- ---------
Total.............................................................................. $ 112.1 $ 112.6 $ 136.4
--------- --------- ---------
--------- --------- ---------
</TABLE>
- - ------------------------------
(1) Consists primarily of operating lease income relating to pumps, service
fees, license fee revenue and accessory sales.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
SALES. Sales increased approximately $23.8 million or 21.2% due to the
inclusion of IVAC's sales for December 1996. Excluding IVAC sales, total IMED
only sales increased approximately $0.4 million during 1996 as compared to 1995.
United States sales decreased approximately $4.5 million or 4.9% during 1996 as
compared to 1995. Within the United States infusion therapy business, sales
decreased for 1996, as compared to 1995, primarily due to a (i) decrease in the
volume of infusion pump shipments primarily
32
<PAGE>
attributable to several large transactions during 1995 and (ii) decline in the
average selling price of IMED's infusion pumps and disposable administration
sets, offset in part by an increase in unit volume of disposable administration
set sales. Sales to customers located outside of the United States increased
$5.0 million, or 24.5%, from $20.4 million for 1995 to $25.4 million for 1996
primarily as a result of increased unit volume of disposable administration sets
resulting from IMED's growing installed base in Canada, Australia, Latin America
and the Far East. Also contributing to the growth in international sales was
IMED's repurchase of the European distribution rights for its products in August
1996. This repurchase resulted in higher end-user sales prices being recognized
than charged to the European distributor in 1995.
GROSS MARGIN. Gross margin increased $8.4 million or 17.1% from 1995 to
1996 primarily due to the Merger. Additionally, 1996 gross margin was reduced by
$4.0 million due to that portion of the purchase accounting adjustments made to
adjust the acquired IVAC inventory to its estimated fair value on the Merger
date which was charged to cost of sales during December 1996. Excluding the
Merger, IMED only gross margin increased $1.4 million from $49.3 million for
1995 to $50.7 million for 1996 due primarily to the decrease in cost of sales
discussed below. Despite the decline in average selling prices of infusion pumps
and disposable administration sets discussed above, IMED only gross margin, as a
percentage of IMED only sales, increased from 43.8% for 1995 to 44.8% for 1996
primarily as a result of reductions in the manufacturing cost of disposable
administration sets caused by (i) increased outsourcing of molded parts and
components; (ii) negotiated price reductions from suppliers; and (iii) the
favorable effects of increased manufacturing volume. Gross margin also increased
for 1996, compared to 1995, as a result of lower unit cost for inventory at
December 31, 1995 that were sold during 1996 compared to the unit cost for
inventory at December 31, 1994 that were sold during 1995.
SELLING AND MARKETING. Selling and marketing expense increased $5.7 million
or 34.4% during 1996 as compared to 1995 primarily due to the Merger. Exclusive
of the Merger, as a percentage of IMED only sales, selling and marketing expense
increased from 14.7% for 1995 to 15.9% for 1996. IMED only selling and marketing
expense increased from $16.6 million for 1995 to $18.0 million for 1996
primarily due to the recognition of selling and marketing expense by IMED Ltd.
in 1996 as a result of IMED's repurchase of the European distribution rights for
IMED products from Pharmacia & Upjohn, Inc. Also contributing to this increase
were compensation and relocation expenses for selling and marketing management
personnel hired during 1996.
GENERAL AND ADMINISTRATIVE. General and administrative expense increased
$4.5 million or 42.7% during 1996 as compared to 1995 primarily due to the
Merger. Exclusive of the Merger, general and administrative expense increased
from $10.7 million for 1995 to $12.5 million for 1996 as a result of recruitment
and relocation expenses of development personnel and increased management
compensation. General and administrative expense also increased for 1996,
compared to 1995, due to the recognition of general and administrative expenses
by IMED Ltd. in 1996. As a percentage of IMED only sales, IMED only general and
administrative expense increased from 7.9% for 1995 to 9.5% for 1996 primarily
as a result of the increase in general and administrative expenses discussed
above.
RESEARCH AND DEVELOPMENT. Research and development expense increased $1.5
million or 19.9% during 1996 as compared to 1995 primarily due to the Merger.
IMED only research and development expense increased from $7.4 million for 1995
to $7.8 million for 1996 primarily as a result of the timing of certain expenses
associated with the development of a new modular infusion system. Due to the
increase in IMED only research and development costs, research and development
expense, as a percentage of sales, increased from 6.6% for 1995 to 6.9% for
1996.
PURCHASED RESEARCH AND DEVELOPMENT. In connection with the Merger, the
assets and liabilities of IVAC were adjusted to their estimated fair values. As
a result of this process, the Company incurred a one-time $44.0 million
write-off related to the value assigned to the acquired in-process research and
development of IVAC projects for which technological feasibility had not been
established and for which there was no
33
<PAGE>
alternative future use. Such amount was determined with the assistance of a
third party appraiser based upon the present value of estimated future cash flow
contributions from the identified projects. The Company has continued to invest
in the development necessary to obtain technological feasibility of these
projects. The project, which represents the most significant portion of the
acquired in-process research and development charge, is an improved cost
effective and technologically advanced electronic thermometer designed to
provide a temperature reading in seven-to-ten seconds. Market introduction of
this product is planned for the second half of 1997.
RESTRUCTURING, INTEGRATION AND OTHER NON-RECURRING COSTS. In connection
with the Merger, management performed an extensive review of the operating
activities of both IMED and IVAC in order to reduce costs and maximize
synergies. Management identified duplicative costs to eliminate and developed
and implemented plans to consolidate and integrate the companies' operations
including product strategies, manufacturing, service centers, research and
development, marketing and other administrative functions. As a result, the
Company has recorded a non-recurring charge related to the implementation of
these plans in the amount of $15.3 million in 1996. Estimated dealer termination
costs, as well as severance and benefits costs related to the acquired company's
personnel in the amount of $2.8 million were also accrued at the acquisition
date. The remaining unpaid portion of approximately $2.7 million is included in
accrued restructuring costs at December 31, 1996 and is expected to be paid
during 1997. In accordance with generally accepted accounting principles, such
items effectively increased the amount of goodwill recorded in connection with
the Merger and were not included in the $15.3 million restructuring and
integration expense included in the Consolidated Statement of Operations for the
year ended December 31, 1996. At December 31, 1996, the Company has
approximately $15.1 million accrued related to restructuring costs, primarily
all of which the Company believes will be paid during 1997. Additionally, the
Company expects to incur additional integration expenses during 1997 to fully
implement its plans.
As a result of these plans, approximately 225 employees from all functional
areas were given notice of termination in December 1996. Approximately 125 of
such terminations were effective December 31, 1996 while the additional 100
employees are being phased-out during the first half of 1997.
Due to excess capacity at the manufacturing facilities of both companies,
the Company has consolidated IMED's instrument manufacturing operations into the
existing IVAC facility. This consolidation was completed in December 1996. In
addition, as a result of the employee terminations described above, management
decided to consolidate the headquarters of IMED into IVAC's existing
headquarters. This consolidation was substantially completed during the first
quarter of 1997.
Management has also identified additional cost savings related to volume
discounts expected to be received as a result of vendor consolidation.
Management believes that all of the items described above will lead to
reduced manufacturing and operating costs of the Company in future periods as
compared to the combined historical costs of the two companies. The extent of
the savings is dependent upon the timing of when such consolidation and
integration is completed.
LEASE INTEREST INCOME. Lease interest income during both periods consists
of interest income associated with contracts or agreements pursuant to which a
third party acquired infusion pumps under sales-type leases. Lease interest
income increased $0.2 million or 7.2% for 1996 as compared to 1995 primarily due
to the Merger.
INCOME (LOSS) FROM OPERATIONS. Income from operations decreased from $17.1
million for 1995 to a loss of $45.3 million for 1996 primarily due to the Merger
and resulting purchase accounting adjustments which more than offset the IVAC
only operating consolidated generated in December 1996. Excluding the impact of
the Merger on the 1996 operating results, consolidated Advanced Medical
operating income decreased $2.3 million or 13.5% from $17.1 million in 1995 to
$14.8 million in 1996 due to the reasons discussed above.
34
<PAGE>
ADJUSTED EBITDA For the reasons discussed above excluding the impact of the
Merger, as a percentage of sales, Adjusted EBITDA decreased from 21.9%, or $24.6
million, for 1995 to 20.3%, or $22.9 million, for 1996. Adjusted EBITDA
represents income from operations before restructuring charges, non-cash
purchase accounting charges and depreciation and amortization. Adjusted EBITDA
does not represent net income or cash flows from operations, as these terms are
defined under generally accepted accounting principles, and should not be
considered as an alternative to net income or to cash flows as an indicator of
operating performance or as a measure of liquidity. Advanced Medical has
included information concerning Adjusted EBITDA herein because it believes that
such information is generally used by investors as a measure of an issuer's
ability to service its debt obligations. Restructuring and other one-time non-
recurring charges are excluded from Adjusted EBITDA as Advanced Medical believes
that the inclusion of these items would not be helpful to an investor's
understanding of Advanced Medical's ability to service debt. Advanced Medical's
computation of Adjusted EBITDA may not be comparable to similarly titled
measures of other companies.
INTEREST EXPENSE. Interest expense increased $5.2 million from $8.2 million
during 1995 to $13.4 million during 1996. The increase in interest expense was
due to the increase in debt obtained to finance the Merger. Also contributing to
the increase was the interest on approximately $11.0 million of borrowings made
by IMED in August 1996 related to the repurchase of the European distribution
rights for IMED products, as well as interest on $25.0 million of convertible
notes payable to Decisions Incorporated ("Decisions") which was borrowed in
December 1995 and converted to Common Stock in November 1996 in connection with
the Merger.
INTEREST INCOME. Interest income increased approximately $1.0 million
during 1996 as compared to 1995 due to the interest earned on the proceeds of
the $25.0 million borrowed from Decisions in December 1995. Approximately $12.5
million of such proceeds was utilized in June 1996 to fund the purchase of a
warrant which entitled the holder to purchase up to 10% of IMED's common stock.
The remaining proceeds were utilized in November 1996 in connection with the
Merger.
DEBT CONVERSION EXPENSE. In connection with the Merger, $37.5 million of
convertible notes payable to Decisions were converted to Common Stock. In order
to induce conversion, 3,333,333 shares of Common Stock were issued to Decisions.
As a result, during 1996 Advanced Medical recorded a non-cash charge of $10.0
million based upon the fair value of the shares issued.
OTHER INCOME. During 1996, Advanced Medical sold its investment in the
common stock of Alteon, Inc. for approximately $2.4 million and realized a gain
of approximately $0.7 million.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
SALES. Sales increased $0.4 million, or 0.4%, from $112.1 million for 1994
to $112.6 million for 1995. United States sales, which were 81.8% of sales for
1995, increased $0.9 million or 1.0%, from $91.2 million for 1994 to $92.1
million for 1995. Within the United States infusion therapy business, sales
increased for 1995 as compared to 1994 primarily due to an increase in the
volume of infusion pump and disposable administration set shipments, offset in
part by a decline in average selling price of infusion pumps and disposable
administration sets and a reduction in ReadyMED sales volume due to lower demand
for the product. Sales to customers outside of the United States increased $2.1
million, or 11.5%, from $18.3 million for 1994 to $20.4 million for 1995
primarily as a result of increased (i) unit volume of disposable administration
sets in Australia, the Middle East and the Far East and (ii) sales of infusion
pumps in the Middle East, the Far East and Western Europe, partially offset by
decreased volume of disposable administration sets in Western Europe reflecting
a decline in installed instrument base. The increased volume of infusion pumps
and disposable administration sets in the Middle East and the Far East reflect
the additional investment in direct sales personnel in these territories which
were previously covered exclusively by dealer networks.
35
<PAGE>
GROSS MARGIN. Gross margin increased $2.8 million from $46.5 million for
1994 to $49.3 million for 1995 primarily due to reductions in cost of sales.
Gross margin as a percentage of sales increased from 41.5% for 1994 to 43.8% for
1995 primarily due to (i) increased outsourcing of molded parts and components;
(ii) the discontinuance of lower margin sales generated from the production by
IMED of a customer's products; and (iii) the favorable effects of the peso
devaluation on the labor cost on the assembly of disposable administration sets
at IMED's Mexico facility in 1995, partially offset by the decline in the
average selling price of IMED's instruments and disposable administration sets
in the United States.
SELLING AND MARKETING. As a percentage of sales, selling and marketing
expense decreased from 15.0%, or $16.9 million, for 1994 to 14.7%, or $16.6
million, for 1995, primarily due to cost containment programs which continue to
reduce expenses, partially offset by expenses associated with certain 1995 sales
meetings not held in 1994 and increases in personnel costs associated with
additional head count in international territories previously covered
exclusively by dealer networks.
GENERAL AND ADMINISTRATIVE. General and administrative expense was
approximately $10.7 million for both 1994 and 1995. As a percentage of sales,
general and administrative expense decreased from 9.6% for 1994 to 9.5% for
1995.
RESEARCH AND DEVELOPMENT. Research and development expense increased from
$6.3 million, or 5.7% of sales, for 1994 to $7.4 million, or 6.6% of sales, for
1995 primarily as a result of increases in personnel and related costs
associated with the development of a new modular infusion system.
LEASE INTEREST INCOME. Lease interest income during both periods consisted
of interest income associated with contracts or agreements pursuant to which a
third party acquired infusion pumps under sales-type leases.
ADJUSTED EBITDA. For the reasons discussed above, as a percentage of sales,
Adjusted EBITDA increased from 20.4%, or $22.9 million, for 1994 to 21.9%, or
$24.6 million, for 1995. Adjusted EBITDA represents income from operations
before restructuring charges, non-cash purchase accounting charges and
depreciation and amortization. Adjusted EBITDA does not represent net income or
cash flows from operations, as these terms are defined under generally accepted
accounting principles, and should not be considered as an alternative to net
income or to cash flows as an indicator of operating performance or as a measure
of liquidity. Advanced Medical has included information concerning Adjusted
EBITDA herein because it believes that such information is generally used by
investors as a measure of an issuer's ability to service its debt obligations.
Restructuring and other one-time non-recurring charges are excluded from
Adjusted EBITDA as Advanced Medical believes that the inclusion of these items
would not be helpful to an investor's understanding of Advanced Medical's
ability to service debt. Advanced Medical's computation of Adjusted EBITDA may
not be comparable to similarly titled measures of other companies.
INCOME FROM OPERATIONS. For the reasons discussed above, as a percentage of
sales, income from operations increased from 13.4%, or $15.0 million, for 1994
to 15.1%, or $17.1 million, for 1995.
INTEREST EXPENSE. Interest expense decreased from $8.7 million for 1994 to
$8.2 million for 1995 primarily as a result of lower average borrowings at IMED.
PROVISION (BENEFIT) FOR INCOME TAXES. Provision for income taxes was $1.9
million for 1994 compared to $9.4 million of income tax benefit for 1995. The
1995 income tax benefit includes approximately $10.5 million of benefit related
to the recognition of deferred tax assets which, in the opinion of management,
are more likely than not of realization. Additionally, the provision for income
taxes in 1994 includes taxes on foreign earnings relating to the sale of IMED's
Irish manufacturing facility in August 1994.
EXTRAORDINARY ITEM. During 1995 Advanced Medical recognized an
extraordinary gain of $15.2 million, net of income taxes of $1.1 million,
related to two transactions whereby a total of approximately $43.8 million of
Advanced Medical 7 1/4% convertible subordinated debentures due 2002 (the
"Convertible
36
<PAGE>
Debentures") were exchanged for approximately $21.9 million of newly issued 15%
subordinated debentures due 1999.
LIQUIDITY AND CAPITAL RESOURCES
Management currently believes that sufficient cash will be available through
the Company, based upon current operations, to satisfy debt service and other
corporate expenses of Advanced Medical in the foreseeable future. In particular,
the New Credit Facility permits the Company to transfer to Advanced Medical up
to $1.5 million annually to fund Advanced Medical's operating expenses and
additional amounts sufficient to meet interest expense requirements.
The Company expects to continue to meet its liquidity needs, including, in
the short-term, funding of restructuring and integration costs, as well as
long-term capital expenditures requirements with cash flow from operations and
borrowings under the New Credit Facility. The Company's primary future use of
funds will be to fund capital expenditures and strategic acquisitions and to pay
debt service on outstanding indebtedness.
At December 31, 1996, the Company's outstanding indebtedness was $423.9
million, including $200.0 million of bank term debt under the New Credit
Facility and $200.0 million of Senior Subordinated Notes due 2006 (the "Notes"),
all of which was borrowed in connection with the Merger. The bank debt bears
interest at floating rates based, at the Company's option, on Eurodollar or
prime rates. As a result, a one percent increase in the rate of interest charged
on indebtedness outstanding under the New Credit Facility at December 31, 1996
would result in additional annual interest expense of approximately $2.3
million. The Company is required under the New Credit Facility to enter into an
interest rate protection agreement covering at least 50% of its term loan
borrowings. The Company expects to enter into an interest rate protection
agreement by the end of the second quarter of 1997. In addition to the Company's
debt, at December 31, 1996, Advanced Medical had $16.2 million of outstanding
Convertible Debentures.
In connection with obtaining the Merger financing, the Company also obtained
a $50.0 million revolving credit facility as part of the New Credit Facility. At
December 31, 1996, $15.2 million in borrowings and $0.5 million under letters of
credit were outstanding under this facility and $34.3 million was available.
In connection with the Merger, the Company assumed IVAC's obligations to
Siemens Infusion Systems Ltd. These obligations relate to the payment of
additional purchase consideration related to the acquisition of the MiniMed
product line (the predecessor product line to MS III) and provide for the
payment of the greater of $3.0 million per year or 8% of the prior year's MS III
sales in 1997 through 1999.
As a result of the Company's significant indebtedness, the Company expects
to incur significant interest expense in future periods. The Company believes
that cash provided by operations will be sufficient to meet its interest expense
obligations.
Annual amortizations of the Company's indebtedness are $4.0 million, $14.6
million and $15.6 million for 1997, 1998 and 1999, respectively.
The Convertible Debentures provide for semi-annual interest payments of
approximately $0.6 million and mature on January 15, 2002. The Notes and the New
Credit Facility permit the Company to fund interest payments on the Convertible
Debentures and to make limited distributions to Advanced Medical to fund
operating expenses and to pay income taxes; PROVIDED THAT, with respect to the
New Credit Facility, there exists no default or event of default under the New
Credit Facility. The Notes and the New Credit Facility, however, restricts
distributions to Advanced Medical to fund the repayment of the Convertible Notes
at maturity.
37
<PAGE>
In addition to routine capital expenditures that are expected to be
consistent with the combined historical capital expenditures of IMED and IVAC,
the Company expects to make a total of approximately $12.0 million of capital
and operating expenditures during 1997 and 1998 for the acquisition and
implementation of a new enterprise-wide information system. In addition, during
1997 the Company plans to make approximately $5.5 million of capital
expenditures with respect to leasehold improvements in connection with the
consolidation of the domestic operations of IMED and IVAC.
The Company believes that it will generate sufficient cash flow from
operations to fund its operations, make planned capital expenditures and make
required payments of principal and interest under the New Credit Facility and
interest on the Notes; however, the Company may not generate sufficient cash
flow from operations to repay the Notes at maturity. Accordingly, the Company
may have to refinance the Notes at or prior to maturity or sell assets or raise
equity capital to repay the principal amount of the Notes. In addition, the
Company's ability to fund its operations, to make planned capital expenditures
and to make scheduled principal and interest payments will be dependent on the
Company's future operating performance, which is itself dependent on a number of
factors, many of which the Company cannot control, including conditions
affecting the Company's foreign operations, prevailing economic conditions,
availability of other sources of liquidity, and financial, business, regulatory
and other factors affecting the Company's business and operations.
SEASONALITY
Infusion pump sales are typically higher in the fourth quarter due to sales
compensation plans which reward the achievement of annual quotas and the
seasonal nature of the health care industry, including hospital purchasing
patterns. First quarter sales are traditionally not as strong as the fourth
quarter.
BACKLOG
The backlog of orders, believed to be firm, at December 31, 1996 was $8.5
million.
FOREIGN OPERATIONS
As a result of the Merger, the Company has significant foreign operations.
Accordingly, the Company is subject to various risks, including without
limitation, foreign currency translation risks. Historically, neither IMED nor
IVAC has entered into foreign currency contracts to hedge such exposure and such
risk has not had a material impact on either such company's operating results,
financial condition or cash flows.
HEALTH CARE REFORM
Because the cost of health care delivery has been steadily rising and
because the cost of a significant portion of medical care in the United States
and other countries is typically funded by governmental insurance programs,
there have been a number of government initiatives to reduce health care costs.
Congress and various state legislatures currently are proposing changes in law
and regulation that could effect major restructuring of the health care
industry. Although many of these proposals may seek to maintain or expand access
to health care services, the common objective of the proposed legislation is to
achieve cost containment in the health care sector. Changes in governmental
support of health care services, the methods by which such services are
delivered, the prices for such services, or the regulations governing such
services or mandated benefits, as well as the growth of managed care
organizations, may all have a material adverse effect on the Company's net sales
and expenses. Even if the ultimate impact of any such changes on net sales is
positive, no assurance can be given that the costs of complying with possible
new requirements would not have a negative impact on the Company's future
earnings. No assurance can be given that any such legislation will not have a
material adverse effect on the Company's business and results of operations. In
addition, the Company believes that the trend toward cost containment in the
health care industry resulted in a change of protocol at certain hospitals
whereby the maximum time
38
<PAGE>
between changes of disposable administration sets increased from every 24 hours
to as much as every 72 hours. Unless sales of disposable administration sets
increase because of an increased installed base of infusion pumps, this change
in protocol, which the Company expects other hospitals will adopt, will have an
adverse effect on the Company's business and results of operations. Moreover,
this change in protocol and other changes in the United States health care
market which may occur in the future could force the Company to alter its
approach in selling, marketing, distributing and servicing its customer base.
FORWARD-LOOKING STATEMENTS
Certain statements contained herein, including without limitation,
statements containing the words "believes," "anticipates," "intends," "expects"
and words of similar import, constitute "forward-looking statements" made
pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Such forward-looking statements involve known and unknown
risks, uncertainties and other factors that may cause the actual results,
performance or achievements of Advanced Medical or industry results to be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Such factors include,
among others, the following: general economic and business conditions, both
domestic and foreign; industry capacity; demographic changes; existing
government regulations and changes in, or the failure to comply with, government
regulations; legislative proposals for health care reform; liability and other
claims asserted against the Company; competition; the loss of any significant
customers; changes in operating strategy or development plans; the ability to
attract and retain qualified personnel; the significant indebtedness of the
Company after the Merger; the successful integration of IMED's and IVAC's
operations following the Merger; the availability and terms of capital to fund
the expansion of the Company's business; and other factors referenced herein.
Certain of these factors are discussed in more detail elsewhere herein.
39
<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 82 present fairly, in all material
respects, the financial position of Advanced Medical, Inc. and its subsidiaries
at December 31, 1995 and 1996, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1996, 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.
PRICE WATERHOUSE LLP
San Diego, California
April 11, 1997
40
<PAGE>
ADVANCED MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(DOLLAR AND SHARE AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1996
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash...................................................................................... $ 1,862 $ 12,084
Restricted cash and investment securities................................................. 2,218 2,332
Securities available for sale............................................................. 6,975 --
Receivables, net.......................................................................... 27,023 87,880
Inventories............................................................................... 15,829 58,976
Prepaid expenses and other current assets................................................. 3,651 21,582
--------- ---------
Total current assets.................................................................... 57,558 182,854
--------- ---------
Restricted cash............................................................................. 25,000 --
Net investment in sales-type leases, less current portion................................... 15,179 27,276
Property, plant and equipment, net.......................................................... 12,653 56,628
Other non-current assets.................................................................... 11,834 18,107
Intangible assets, net...................................................................... 47,406 308,517
--------- ---------
$ 169,630 $ 593,382
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt......................................................... $ 322 $ 3,963
Accounts payable.......................................................................... 7,881 25,812
Accrued expenses and other current liabilities............................................ 17,417 50,196
Accrued restructuring and integration costs............................................... -- 15,098
--------- ---------
Total current liabilities............................................................... 25,620 95,069
--------- ---------
Long-term debt.............................................................................. 86,789 436,130
Other non-current liabilities............................................................... 6,972 16,130
--------- ---------
Total non-current liabilities........................................................... 93,761 452,260
--------- ---------
Minority interests in consolidated subsidiaries............................................. 11,500 --
--------- ---------
Contingent liabilities and commitments (Notes 9 and 12)
Mandatorily redeemable equity securities.................................................... 7,217 --
--------- ---------
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
and 58,977 shares at December 31, 1995 and 1996, respectively........................... 162 589
Capital in excess of par value............................................................ 62,965 147,840
Accumulated deficit....................................................................... (34,468) (101,704)
Treasury stock............................................................................ (734) (734)
Unrealized holding gains from securities available for sale, net of tax................... 3,577 --
Other equity.............................................................................. 30 62
--------- ---------
Total non-redeemable preferred stock, common stock and other stockholders' equity....... 31,532 46,053
--------- ---------
$ 169,630 $ 593,382
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
41
<PAGE>
ADVANCED MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(DOLLARS AND SHARE AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
<S> <C> <C> <C>
1994 1995 1996
--------- --------- ---------
Sales........................................................................... $ 112,122 $ 112,551 $ 136,371
Cost of sales................................................................... 65,590 63,219 78,616
--------- --------- ---------
Gross margin................................................................ 46,532 49,332 57,755
--------- --------- ---------
Selling and marketing expense................................................... 16,850 16,567 22,273
General and administrative expense.............................................. 10,746 10,661 15,210
Research and development expense................................................ 6,345 7,386 8,854
Purchased in-process research and development................................... -- -- 44,000
Restructuring, integration and other non-recurring charges...................... -- -- 15,277
--------- --------- ---------
Total operating expenses.................................................... 33,941 34,614 105,614
--------- --------- ---------
Lease interest income........................................................... 2,449 2,333 2,501
--------- --------- ---------
Income (loss) from operations............................................... 15,040 17,051 (45,358)
Other income (expense):
Interest income............................................................... 77 192 1,193
Interest expense.............................................................. (8,690) (8,153) (13,393)
Debt conversion expense....................................................... -- -- (10,000)
Other, net.................................................................... 1,136 313 1,222
--------- --------- ---------
Total other expense......................................................... (7,477) (7,648) (20,978)
--------- --------- ---------
Income (loss) before income taxes, minority interests and extraordinary item.... 7,563 9,403 (66,336)
Provision (benefit) for income taxes............................................ 1,886 (9,374) (730)
--------- --------- ---------
Income (loss) before minority interests and extraordinary item.................. 5,677 18,777 (65,606)
Minority interests in consolidated subsidiaries................................. -- (6,500) --
--------- --------- ---------
Income (loss) before extraordinary item......................................... 5,677 12,277 (65,606)
Extraordinary item--gain (loss) on early retirement of debt, net of taxes....... -- 15,177 (1,630)
--------- --------- ---------
Net income (loss)............................................................... 5,677 27,454 (67,236)
Dividends and accretion on mandatorily redeemable preferred stock............... 874 650 962
--------- --------- ---------
Net income (loss) attributable to common stock.................................. $ 4,803 $ 26,804 $ (68,198)
--------- --------- ---------
--------- --------- ---------
Income (loss) per common share assuming no dilution:
Income (loss) before extraordinary item..................................... $ .34 $ .74 $ (3.27)
Extraordinary item.......................................................... -- .96 (.08)
--------- --------- ---------
Net income (loss) per common share assuming no dilution................. $ .34 $ 1.70 $ (3.35)
--------- --------- ---------
--------- --------- ---------
Income (loss) per common share assuming full dilution:
Income (loss) before extraordinary item..................................... $ .22 $ .37 $ (3.27)
Extraordinary item.......................................................... -- .46 (.08)
--------- --------- ---------
Net income (loss) per common share assuming full dilution............... $ .22 $ .83 $ (3.35)
--------- --------- ---------
--------- --------- ---------
Weighted average common shares outstanding assuming no dilution................. 14,069 15,755 20,343
--------- --------- ---------
--------- --------- ---------
Weighted average common shares outstanding assuming full dilution............... 24,099 33,183 20,343
--------- --------- ---------
--------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
42
<PAGE>
ADVANCED MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
<S> <C> <C> <C>
1994 1995 1996
--------- --------- ---------
Cash flows from operating activities:
Net income (loss)................................................................. $ 5,677 $ 27,454 $ (67,236)
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization................................................... 8,492 8,096 11,174
Net gain on disposal/write-off of property, plant and equipment................. (880) (176) (452)
Minority interests in consolidated subsidiaries................................. -- 6,500 --
Extraordinary (gain) loss--early retirement of debt, net of taxes............... -- (15,177) 1,630
Debt conversion expense......................................................... -- -- 10,000
Write-off of debt issue costs................................................... -- -- 657
Purchased in-process research and development................................... -- -- 44,000
Inventory purchase price allocation adjustment.................................. -- -- 4,014
Non-cash restructuring charges.................................................. -- -- 1,616
(Increase) decrease in assets, net of effects of the Merger:
Receivables................................................................... 1,283 (2,096) (2,932)
Inventories................................................................... (976) 4,518 (1,223)
Prepaid expenses and other current assets..................................... (409) (1,511) 578
Net investment in sales-type leases........................................... 458 (458) 1,830
Other non-current assets...................................................... 1,509 (10,718) 7,872
Increase (decrease) in liabilities, net of effects of the Merger:
Accounts payable.............................................................. 1,918 (546) 2,975
Accrued expenses and other current liabilities................................ (1,780) 2,900 1,536
Other non-current liabilities................................................. (3,502) (313) (8,324)
--------- --------- ---------
Net cash provided by operating activities........................................... 11,790 18,473 7,715
--------- --------- ---------
Cash flows from investing activities:
Net decrease (increase) in restricted cash and investments........................ 130 (25,486) 24,886
Capital expenditures.............................................................. (4,549) (4,803) (9,502)
Payments for product distribution rights.......................................... -- (3,402) (12,556)
Proceeds from disposal of property, plant and equipment........................... 253 17 106
Proceeds from sale of investments................................................. 7,534 859 2,374
Acquisition of business, net of cash acquired (Note 2)............................ -- -- (219,459)
--------- --------- ---------
Net cash provided by (used in) investing activities................................. 3,368 (32,815) (214,151)
--------- --------- ---------
Cash flows from financing activities:
Net (repayments) proceeds under former revolving credit facilities................ (5,296) (7,764) 10,006
Principal payments on long-term debt.............................................. (44,998) (1,218) (322)
Proceeds from issuance of notes payable and long-term debt........................ 36,293 25,000 400,000
Proceeds from revolving credit facility........................................... -- -- 15,200
Proceeds from issuance of common stock............................................ -- -- 40,024
Debt issuance costs............................................................... (1,205) (498) (16,888)
Debt repaid in merger............................................................. -- -- (210,723)
Redemption/repurchase of preferred stock including related dividends.............. (686) -- (7,844)
Purchase of common stock warrant.................................................. -- -- (12,500)
--------- --------- ---------
Net cash (used in) provided by financing activities................................. (15,892) 15,520 216,953
--------- --------- ---------
Effect of exchange rate changes on cash............................................. 312 (656) (295)
--------- --------- ---------
Net (decrease) increase in cash..................................................... (422) 522 10,222
Cash at beginning of year........................................................... 1,762 1,340 1,862
--------- --------- ---------
Cash at end of year................................................................. $ 1,340 $ 1,862 $ 12,084
--------- --------- ---------
--------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
43
<PAGE>
ADVANCED MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
(DOLLAR AND SHARE AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
UNREALIZED
HOLDING
GAINS
FROM
COMMON STOCK CAPITAL IN TREASURY STOCK SECURITIES
---------------------- EXCESS OF ACCUMULATED ------------------------ AVAILABLE
SHARES AMOUNT PAR VALUE DEFICIT SHARES AMOUNT FOR SALE
--------- ----------- ---------- ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993....... 14,152 $ 142 $ 59,478 $ (67,599) 83 $ (734)
Accretion and dividends on
mandatorily redeemable preferred
stock............................ (874)
Increase in unrealized holding
gains from securities available
for sale, net of tax............. $ 883
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) 883
Issuance of common stock........... 2,062 20 4,912
Dividends on mandatorily redeemable
preferred stock.................. (650)
Increase in unrealized holding
gains from securities available
for sale, net of tax............. 2,694
Other equity transactions..........
Net income for the year............ 27,454
--
--------- ----- ---------- ------------ ----- -----------
Balance at December 31, 1995....... 16,214 162 62,965 (34,468) 83 (734) 3,577
Issuance of common stock upon
conversion of notes payable (Note
4)............................... 29,416 294 47,206
Issuance of common stock (Note
12).............................. 13,333 133 39,867
Dividends on mandatorily redeemable
preferred stock.................. (962)
Decrease in unrealized gain on
securities available for sale,
net of tax....................... (3,577)
Purchase of common stock warrant... (1,000)
Exercise of stock options.......... 14 24
Other equity transactions.......... (260)
Net loss for the year.............. (67,236)
--
--------- ----- ---------- ------------ ----- -----------
Balance at December 31, 1996....... 58,977 $ 589 $ 147,840 $ (101,704) 83 $ (734) $ --
--
--
--------- ----- ---------- ------------ ----- -----------
--------- ----- ---------- ------------ ----- -----------
<CAPTION>
OTHER
EQUITY TOTAL
----------- ---------
<S> <C> <C>
Balance at December 31, 1993....... $ 439 $ (8,274)
Accretion and dividends on
mandatorily redeemable preferred
stock............................ (874)
Increase in unrealized holding
gains from securities available
for sale, net of tax............. 883
Other equity transactions.......... 251 350
Net income for the year............ 5,677
----- ---------
Balance at December 31, 1994....... 690 (2,238)
Issuance of common stock........... 4,932
Dividends on mandatorily redeemable
preferred stock.................. (650)
Increase in unrealized holding
gains from securities available
for sale, net of tax............. 2,694
Other equity transactions.......... (660) (660)
Net income for the year............ 27,454
----- ---------
Balance at December 31, 1995....... 30 31,532
Issuance of common stock upon
conversion of notes payable (Note
4)............................... 47,500
Issuance of common stock (Note
12).............................. 40,000
Dividends on mandatorily redeemable
preferred stock.................. (962)
Decrease in unrealized gain on
securities available for sale,
net of tax....................... (3,577)
Purchase of common stock warrant... (1,000)
Exercise of stock options.......... 24
Other equity transactions.......... 32 (228)
Net loss for the year.............. (67,236)
----- ---------
Balance at December 31, 1996....... $ 62 $ 46,053
----- ---------
----- ---------
</TABLE>
The accompanying notes are an integral part of these Consolidated Financial
Statements.
44
<PAGE>
ADVANCED MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
NOTE 1--BUSINESS AND ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY:
Advanced Medical, Inc. ("Advanced Medical"), operating through its
consolidated subsidiaries, designs, manufactures, distributes and services
intravenous infusion therapy and vital signs measurement instruments and related
disposables and accessories. On April 2, 1990, Advanced Medical acquired the
IMED Division of Fisher Scientific Company through IMED Corporation ("IMED").
IMED is a wholly-owned subsidiary of Advanced Medical. On November 26, 1996,
IMED acquired all of the outstanding stock of IVAC Holdings, Inc. ("IVAC
Holdings") and its subsidiaries including IVAC Medical Systems, Inc. (Note 2).
In connection with the acquisition, IMED and IVAC Medical Systems, Inc. were
merged into IVAC Holdings (the "Merger"). The accompanying balance sheet as of
December 31, 1996 reflects the assets, liabilities and stockholders' equity of
Advanced Medical and its subsidiaries, including the merged entity. The
accompanying statements of operations, of cash flows and of stockholders' equity
for the year ended December 31, 1996, reflect the operations and cash flows of
Advanced Medical and its subsidiaries up to the date of the acquisition and the
operations and cash flows of Advanced Medical and its subsidiaries, including
the merged entity, subsequent to the acquisition date. (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.
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 and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
REVENUE RECOGNITION:
Revenue is recorded upon product shipment, net of an allowance for estimated
returns, or service delivery. Additionally, the Company leases instruments to
customers under non-cancelable sales-type capital leases and operating lease
contracts with terms ranging generally from 1 to 6 years. The Company sells
instruments via long-term financing arrangements to a number of customers under
agreements which allow customers to acquire instruments with no initial payment.
The sales price for the instruments is recovered via surcharges applied to
minimum purchase commitments of related disposables. The term of the financing
is generally three to five years, with interest at rates of 9% to 15%. Unearned
finance revenue is calculated using the inherent rate of interest on each
agreement, the expected disposable shipment period and the principal balance
financed and is recognized as disposables are shipped using a reducing principal
balance method which approximates the interest method. Contract provisions
include
45
<PAGE>
ADVANCED MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
NOTE 1--BUSINESS AND ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
liquidated damage clauses which are sufficient to recover the sales price of the
instruments in the event of customer cancellation.
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 and Europe 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:
The Company classifies its investment securities as "available for sale";
accordingly, such investment securities are recorded at their fair market value
with increases or decreases in fair value recorded as a component of
stockholders' equity. Actual gains and losses are recognized in the statement of
operations as the underlying securities are sold.
INVENTORIES:
Inventories are stated at the lower of cost, determined by the first-in,
first-out (FIFO) method, or market. Cost of inventory acquired in the Merger was
determined based on an allocation of the purchase price to all assets and
liabilities including inventory, as determined by an independent appraisal, at
the date of acquisition (Note 2).
PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment is stated at cost. Depreciation and
amortization is 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>
3 to 10
Building and leasehold improvements........................... years
3 to 10
Machinery and equipment....................................... years
Furniture and fixtures........................................ 4 to 8 years
Instruments on operating lease contracts...................... 1 to 6 years
</TABLE>
INTANGIBLE ASSETS:
The Company has recorded goodwill for the excess purchase price over the
estimated fair values of tangible and intangible assets acquired and liabilities
assumed resulting from acquisitions. In connection with the Merger, a portion of
the purchase price was allocated to various identifiable intangible assets,
including patents, trademarks, workforce and supply agreements, based on their
fair values at the date of acquisition. The excess purchase price over the
estimated fair value of the net assets acquired has been assigned to goodwill.
Additionally, the Company has recorded intangible assets related to purchases of
patents and product distribution rights.
46
<PAGE>
ADVANCED MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
NOTE 1--BUSINESS AND ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Intangible assets are amortized as follows:
<TABLE>
<S> <C> <C>
Supply agreements................... Straight-line 3 years
13 years (weighted
Patents............................. Straight-line average)
Workforce........................... Straight-line 16 years
Product distribution license fee.... Straight-line 15 years
Trademarks.......................... Straight-line 30 years
Goodwill............................ Straight-line 30 to 35 years
</TABLE>
IMPAIRMENT OF LONG-LIVED ASSETS:
The Company investigates potential impairments of long-lived assets and
certain identifiable intangibles including goodwill, on an exception basis, when
there is evidence that events or changes in circumstances may have made recovery
of an asset's carrying value unlikely. An impairment loss is recognized when the
sum of the expected, undiscounted future net cash flows is less than the
carrying amount of the asset. The Company has not identified any such losses.
DEBT ISSUE COSTS:
Debt issue costs aggregating $1,980 and $17,504 at December 31, 1995 and
1996, respectively, are amortized using the interest 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 separate component of stockholders' equity.
RESEARCH AND DEVELOPMENT COSTS:
Research and development costs are expensed as incurred.
FAIR VALUE OF FINANCIAL INSTRUMENTS:
The carrying amount of the Company's financial instruments, including cash,
trade receivables and payables, approximates their fair value due to their short
term maturities. The fair values of the Company's long-term lease receivables
are estimated by discounting future cash flows using discount rates that reflect
the risk associated with similar types of loans. The fair value of the Company's
long-term debt is estimated based on comparison with similar issues or current
rates offered to the Company for debt of the same remaining maturities and the
quoted market price for the debentures. The estimated fair values of both the
47
<PAGE>
ADVANCED MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
NOTE 1--BUSINESS AND ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Company's long-term lease receivables and long-term debt, with the exception of
the debentures, approximate their carrying values. The fair value of the
debentures was approximately $12,800 at December 31, 1996.
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 local jurisdictions. The Company provides for
deferred income taxes on undistributed earnings of its foreign subsidiaries.
The Company recognizes deferred tax assets and liabilities based on the
expected future tax consequences of events that have been included in the
financial statements and tax returns in different periods. 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. The Company provides a reserve against its net deferred assets when,
in the opinion of management, it is more likely than not that such assets will
not be realized.
STOCK-BASED COMPENSATION:
During the year ended December 31, 1996, the Company adopted Statement of
Financial Accounting Standard No. 123, "Accounting for Stock-Based Compensation"
("SFAS 123"). The Company has continued to measure compensation expense for its
stock-based employee compensation plans using the intrinsic value method
prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees."
The Company has evaluated the pro forma effects of SFAS 123, which was effective
for the Company's fiscal year-end 1996. Based on its evaluation, the effects are
not material to the Company's consolidated financial position, liquidity or
results of operations.
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 and
dilutive common stock equivalents using the treasury stock method. The Company's
net income (loss) per common share assuming full dilution is computed using the
weighted average number of common shares outstanding plus dilutive common stock
equivalents using the treasury stock method at the higher of the average or
ending market price during the reporting period and non-common stock
equivalents. The Company's non-common stock equivalents for the years ended
December 31, 1994, 1995 and 1996 consist of convertible promissory notes issued
to Decisions Incorporated ("Decisions"), a corporation wholly owned by Advanced
Medical's principal stockholder. Since conversion was assumed from the beginning
of the period or date of issuance, if later, net income attributable to common
stock for the years ended December 31, 1994 and 1995 has been increased by $386
and $684, respectively, for the interest expense (net of tax) on the convertible
promissory notes. Net loss per common share assuming no dilution and full
dilution is the same for 1996, as the Company experienced a net loss for the
year ended December 31, 1996.
48
<PAGE>
ADVANCED MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
NOTE 2--THE MERGER
On November 26, 1996, IMED acquired all of the outstanding stock of IVAC
Holdings and its subsidiaries including IVAC Medical Systems, Inc., in exchange
for $390,000 plus acquired cash of $7,225 less total debt assumed aggregating
$173,314 plus related expenses. The Merger was financed with $204,200 in bank
debt and $200,000 in senior subordinated notes. Subsequent to the acquisition,
IVAC Medical Systems, Inc. and IMED were merged into IVAC Holdings.
In connection with the Merger, Advanced Medical contributed $19,588 to IMED
(the "Capital Contribution"). The Capital Contribution was funded in part
through the sale to Decisions by Advanced Medical of 13,333,333 shares of its
common stock for aggregate proceeds of $40,000 (the "Decisions Contribution").
The balance of the Capital Contribution was funded with existing cash balances
of Advanced Medical. The portion of the net proceeds of the Decisions
Contribution not applied to make the Capital Contribution was used by Advanced
Medical to redeem $21,924 principal amount of its 15% subordinated debentures
due 1999 (Note 4) and fund the redemption of Advanced Medical's outstanding
preferred stock (Note 6). In connection with the Decisions Contribution,
Decisions exchanged an aggregate of $37,500 in principal amount of convertible
promissory notes previously issued by Advanced Medical for 29,416,086 shares of
Advanced Medical common stock, including 3,333,333 shares of Advanced Medical
common stock issued as an inducement to convert (Note 4).
The acquisition was accounted for as a purchase, whereby the purchase price,
including related expenses, was allocated to identified assets, including
intangible assets, purchased research and development and liabilities based upon
their respective fair values. The excess of the purchase price over the value of
identified assets and liabilities, in the amount of $132,482, was recorded as
goodwill and is being amortized over its estimated life of thirty years.
The following unaudited pro forma financial information presents the
operations of the Company, as if the Merger had been consummated on January 1,
of the respective year, excluding certain one time non-recurring charges related
to the Merger.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER, 31
------------------------
1995 1996
----------- -----------
<S> <C> <C>
Sales:
As reported....................................................... $ 112,551 $ 136,371
Pro forma......................................................... $ 352,728 $ 346,348
Income (loss) before extraordinary item:
As reported....................................................... $ 12,277 $ (65,606)
Pro forma......................................................... $ (38,372) $ (1,364)
</TABLE>
49
<PAGE>
ADVANCED MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
NOTE 3--COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
<S> <C> <C>
1995 1996
--------- ---------
RECEIVABLES:
Trade receivables......................................................................... $ 20,473 $ 75,164
Allowance for doubtful accounts........................................................... (875) (4,085)
--------- ---------
19,598 71,079
Current portion of net investment in sales-type
leases (Note 9)......................................................................... 7,034 16,795
Other..................................................................................... 391 6
--------- ---------
$ 27,023 $ 87,880
--------- ---------
--------- ---------
INVENTORIES:
Raw materials............................................................................. $ 6,946 $ 24,711
Work-in-process........................................................................... 1,686 9,622
Finished goods............................................................................ 7,197 24,643
--------- ---------
$ 15,829 $ 58,976
--------- ---------
--------- ---------
PREPAID EXPENSES AND OTHER CURRENT ASSETS:
Deferred income tax asset................................................................. $ 2,345 $ 16,201
Other..................................................................................... 1,306 5,381
--------- ---------
$ 3,651 $ 21,582
--------- ---------
--------- ---------
PROPERTY, PLANT AND EQUIPMENT:
Land...................................................................................... $ -- $ 640
Building and leasehold improvements....................................................... 2,681 10,073
Machinery and equipment................................................................... 9,885 32,230
Furniture and fixtures.................................................................... 3,389 5,215
Instruments under operating lease contracts............................................... 12,762 17,245
Construction-in-process................................................................... 1,991 8,102
--------- ---------
30,708 73,505
Accumulated depreciation and amortization................................................. (18,055) (16,877)
--------- ---------
$ 12,653 $ 56,628
--------- ---------
--------- ---------
</TABLE>
50
<PAGE>
ADVANCED MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
NOTE 3--COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS (CONTINUED)
Depreciation expense was $3,893, $4,211 and $5,827 for 1994, 1995 and 1996,
respectively.
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
<S> <C> <C>
1995 1996
--------- ----------
OTHER NON-CURRENT ASSETS:
Debt issue costs......................................................................... $ 1,980 $ 17,504
Deferred tax asset....................................................................... 9,491 --
Other.................................................................................... 363 603
--------- ----------
$ 11,834 $ 18,107
--------- ----------
--------- ----------
INTANGIBLE ASSETS:
Goodwill................................................................................. $ 47,513 $ 179,879
Patents.................................................................................. 15,116 28,661
Product distribution license fee......................................................... 3,402 8,742
Supply agreements........................................................................ -- 10,758
Trademarks............................................................................... -- 90,000
Workforce................................................................................ -- 7,100
--------- ----------
66,031 325,140
Accumulated amortization................................................................. (18,625) (16,623)
--------- ----------
$ 47,406 $ 308,517
--------- ----------
--------- ----------
</TABLE>
Supply agreements represent non-cancelable customer commitments to purchase
specified quantities of disposable administration sets and probe covers at
contractual prices.
Amortization expense was $2,210, $2,338 and $4,168 during 1994, 1995 and
1996, respectively.
<TABLE>
<S> <C> <C>
ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES:
Income taxes payable.................................................... $ 3,248 $ 2,647
Compensation............................................................ 3,819 8,096
Warranty................................................................ 2,210 16,676
Interest................................................................ 2,323 3,907
Other................................................................... 5,817 18,870
--------- ---------
$ 17,417 $ 50,196
--------- ---------
--------- ---------
OTHER NON-CURRENT LIABILITIES:
Deferred income tax liability........................................... $ -- $ 8,943
Deferred revenue........................................................ 4,618 137
Other................................................................... 2,354 7,050
--------- ---------
$ 6,972 $ 16,130
--------- ---------
--------- ---------
</TABLE>
51
<PAGE>
ADVANCED MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
NOTE 4--NOTES PAYABLE AND LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
<S> <C> <C>
1995 1996
---------- ----------
Bank credit facility
Term loan facilities.................................................................... $ -- $ 200,000
Revolving credit facilities............................................................. -- 15,200
9.75% Senior subordinated notes due 2006.................................................. -- 200,000
7.25% Convertible subordinated debentures due 2002........................................ 16,152 16,152
15% Subordinated debentures due 1999...................................................... 21,924 --
Decisions notes........................................................................... 37,500 --
GECC revolving credit facility............................................................ 10,733 --
Other..................................................................................... 802 8,741
---------- ----------
87,111 440,093
Current portion......................................................................... (322) (3,963)
---------- ----------
Long-term debt............................................................................ $ 86,789 $ 436,130
---------- ----------
---------- ----------
</TABLE>
BANK CREDIT FACILITY:
In connection with the Merger, IMED entered into a $250,000 bank credit
facility (the "Facility") with a syndicate of financial institutions which
consists of $200,000 of term loans ($75,000 Tranche A Term Loans maturing in
2002, $42,500 Tranche B Term Loans maturing in 2003, $42,500 Tranche C Term
Loans maturing in 2004 and $40,000 Tranche D Term Loans maturing in 2005) and a
$50,000 revolving credit facility maturing in 2002 of which $15,200 in principal
was outstanding at December 31, 1996. Available funds under the revolving credit
facility ($34,300 at December 31, 1996) are limited to the difference between
$50,000 and the amounts of outstanding letters of credit and borrowings issued
under the revolving credit facility.
Tranche A, B, C and D term loans bear interest at a Eurodollar rate plus
2.5%, 3.0%, 3.5% and 3.75%, respectively. Such total rates were 8.0%, 8.5%, 9.0%
and 9.25%, respectively, at December 31, 1996. Borrowings under the revolving
credit facility bear interest at the same rate as Tranche A term loans.
The Facility contains various operating and financial covenants, as well as
certain covenants relating to reporting requirements.
SENIOR SUBORDINATED NOTES:
In connection with the Merger, on November 19, 1996, IMED issued $200,000 of
senior subordinated notes due 2006 (the "Notes"). The Notes bear interest at a
rate of 9.75% per annum, which is payable semi-annually on June 1 and December 1
of each year, commencing June 1, 1997. The Company is not required to make
mandatory redemption or sinking fund payments with respect to the Notes prior to
maturity. The Notes are redeemable at the option of the Company, in whole or in
part, at any time on or after December 1, 2001 at the redemption prices set
forth in the indenture plus accrued and unpaid interest to the date of
redemption. In the event of a change of control, as defined in the indenture,
holders
52
<PAGE>
ADVANCED MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
NOTE 4--NOTES PAYABLE AND LONG-TERM DEBT (CONTINUED)
of the Notes will have the right to require the Company to purchase their Notes
in cash in an amount equal to 101% of the principal amount thereof, plus accrued
and unpaid interest, if any, to the date of repurchase. The Notes are general
unsecured obligations of the Company, subordinated in right of payment to all
existing and future senior debt of the Company, including indebtedness pursuant
to the Facility. The Notes are guaranteed by two wholly-owned nonoperating
subsidiaries of IVAC Holdings. Such subsidiaries have no material assets or
liabilities and do not generate cash flow.
DEBENTURES:
At December 31, 1994, the Company had outstanding 7.25% convertible
subordinated debentures due 2002 ("7.25% Debentures") in the principal amount of
$60,000. The 7.25% 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 7.25% Debentures mature on January 15, 2002.
Interest on the 7.25% Debentures is payable semi-annually on each January 15 and
July 15. The 7.25% Debentures are 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.
The 7.25% Debenture holders may require the Company to repurchase the 7.25%
Debentures, in whole or in part, in certain circumstances involving a change in
control of the Company. The 7.25% 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.
On March 31, 1995, the Company completed an exchange (the "Exchange")
wherein $28,245, or approximately 47%, in principal amount of the 7.25%
Debentures ("Old Debentures") were exchanged for an aggregate of $14,123 in
principal amount of newly created subordinated debentures ("First Debentures")
and 1,340,441 shares of the Company's common stock ("Common Stock"). As a result
of this transaction, the Company recognized an extraordinary gain on the
extinguishment of debt of $8,807 (net of the write-off of unamortized debt issue
costs of $1,343 related to the Old Debentures and net of $705, the taxes
applicable to the Exchange).
On May 19, 1995, the Company completed a second exchange ("Second Exchange")
wherein $15,603 of Old Debentures were exchanged for an aggregate of $7,801 of
newly created 15% Subordinated Debentures due 1999 ("New Debentures") and
733,341 shares of Common Stock. In addition, the Company accepted for exchange
all of the First Debentures and Common Stock from the Exchange for an aggregate
of $14,123 of New Debentures and 1,327,515 shares of Common Stock. As a result
of these transactions, the Company recognized an extraordinary gain on the
extinguishment of debt of $6,370 (net of the write-off of unamortized debt issue
costs of $727 related to the Old Debentures and net of $362, the taxes
applicable to the Second Exchange).
In connection with the Merger, the Company redeemed the remaining $21,924
principal amount of New Debentures plus a 10% premium. As a result of this
transaction, the Company recognized an extraordinary loss on the extinguishment
of debt of $1,630, net of income tax benefit of $878.
53
<PAGE>
ADVANCED MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
NOTE 4--NOTES PAYABLE AND LONG-TERM DEBT (CONTINUED)
REFINANCINGS:
During 1994 and 1995, the Company borrowed an aggregate of $37,500 from
Decisions (the "Decisions Notes"). The Decisions Notes bore interest at 7% to
9%, were due January 4, 2001 and were used for various corporate purposes
including the repayment of other debt and acquisition of the minority interest
in IMED. The Decisions Notes were convertible, at the option of the holder, into
an aggregate of up to 26,082,753 shares of Common Stock, at prices ranging from
$0.62 to $2.625 per share, subject to certain anti-dilution protection. Proceeds
from $25,000 of the Decisions Notes were restricted in their use.
In connection with the Merger, the Decisions Notes in the aggregate
principal amount of $37,500 were exchanged for 29,416,086 shares of Advanced
Medical common stock, including 3,333,333 shares issued as an inducement to
convert. The Company recognized $10,000 of debt conversion expense in connection
with the shares issued as an inducement to convert.
GECC REVOLVING CREDIT FACILITY:
The Company had a revolving credit agreement with General Electric Capital
Corporation ("GECC"), which included a $38,500 revolving credit facility with an
interest rate at the index rate as defined in the agreement plus 2% (10.75% at
December 31, 1995). In connection with the Merger, the Company repaid the
outstanding balance on the GECC revolving credit facility in the amount of
$20,739.
OTHER DEBT:
Other debt primarily consists of consideration owed to Siemens Infusion
Systems, Ltd. ("SIS") resulting from IVAC Medical Systems, Inc.'s acquisition of
the MiniMed product line from SIS in 1993. In accordance with the acquisition
agreement, the Company's remaining obligation to SIS is $3,000 per year or 8% of
the prior year's product sales in 1997 through 1999. The original liability was
discounted at an imputed interest rate of 7% and recorded as debt. The
unamortized discount, which is amortized using the interest method over the term
of the payments, is $739 at December 31, 1996.
Maturities of long-term debt during the years subsequent to December 31,
1996 are as follows:
<TABLE>
<S> <C>
1997.............................................................. $ 3,963
1998.............................................................. 14,559
1999.............................................................. 15,569
2000.............................................................. 13,650
2001.............................................................. 21,650
Thereafter........................................................ 370,702
---------
$ 440,093
---------
---------
</TABLE>
54
<PAGE>
ADVANCED MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
NOTE 5--INCOME TAXES
The provision for income taxes comprises the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
<S> <C> <C> <C>
1994 1995 1996
--------- --------- ---------
Current:
Federal....................................................... $ 60 221 $ --
State......................................................... 664 1,524 609
Foreign....................................................... 1,049 157 1,000
--------- --------- ---------
Total Current............................................... 1,773 1,902 1,609
--------- --------- ---------
Deferred:
Federal....................................................... 81 (9,132) (1,964)
State......................................................... 115 (2,613) (307)
Foreign....................................................... (83) 469 (68)
--------- --------- ---------
Total Deferred.............................................. 113 (11,276) (2,339)
--------- --------- ---------
Provision (benefit) for income taxes........................ $ 1,886 $ (9,374) $ (730)
--------- --------- ---------
--------- --------- ---------
</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,
--------------------------------
<S> <C> <C> <C>
1994 1995 1996
--------- --------- ----------
Taxes computed at statutory rate................................................ $ 2,578 $ 3,197 $ (22,554)
State income taxes, net of federal benefit...................................... 884 1,018 199
Foreign taxes................................................................... 965 164 886
Taxes above the U.S. rate on earnings deemed repatriated........................ 397 (59) 2,630
Amortization of non-deductible intangible assets................................ 442 442 574
Federal tax credits............................................................. -- -- (2,343)
Debt conversion expense......................................................... -- -- 3,400
Purchased in-process research and development................................... -- -- 14,960
Items affected by valuation allowance........................................... (3,380) (14,136) 1,243
Other, net...................................................................... -- -- 275
--------- --------- ----------
Provision for income taxes before extraordinary item............................ 1,886 (9,374) (730)
--------- --------- ----------
Extraordinary item:
Taxes computed at statutory rate................................................ -- 5,523 (853)
State income taxes, net of federal benefit...................................... -- 488 (25)
Items affected by valuation allowance........................................... -- (4,944) --
--------- --------- ----------
-- 1,067 (878)
--------- --------- ----------
Total............................................................................. $ 1,886 $ (8,307) $ (1,608)
--------- --------- ----------
--------- --------- ----------
</TABLE>
55
<PAGE>
ADVANCED MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
NOTE 5--INCOME TAXES (CONTINUED)
The components of the net deferred tax assets included in other assets as of
December 31, 1995 and 1996 are as follows:
<TABLE>
<CAPTION>
1995 1996
--------- ---------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards.......................................................... $ 1,312 $ 17,431
Accrued liabilities and reserves.......................................................... 3,326 20,783
Unearned income........................................................................... 2,047 1,979
Credit carryforwards...................................................................... 2,434 4,699
Inventory................................................................................. 948 1,713
Property, plant and equipment............................................................. 956 --
Miscellaneous............................................................................. 1,243 850
--------- ---------
12,266 47,455
Valuation allowance....................................................................... (430) (1,673)
--------- ---------
Total deferred tax assets................................................................. 11,836 45,782
Deferred tax liabilities:
Property, plant and equipment............................................................. -- 86
Intangible assets......................................................................... -- 36,979
Miscellaneous............................................................................. 922 1,459
--------- ---------
Net deferred tax assets..................................................................... $ 10,914 $ 7,258
--------- ---------
--------- ---------
</TABLE>
As of December 31, 1996, the Company had federal and state net operating
loss carryforwards of approximately $47,522 and $27,558, respectively.
Additionally, as of December 31, 1996, the Company had a foreign tax credit
carryforward and an alternative minimum tax credit carryforward of approximately
$2,058 and $583, respectively, for federal tax purposes and research and
development tax credits of approximately $1,822 and $358 for federal and state
purposes, respectively. The federal and state net operating loss carryforwards
expire from 1997 to 2011. The foreign tax credit expires in 2001 and the
research and development tax credits expire from 2005 to 2011.
As a result of certain changes in the Company's stock ownership which
occurred during the year, portions of the above described carryforwards are
subject to annual income offset limitations on a prospective basis. Accordingly,
approximately $28,677 and $10,424 of the federal and state net operating loss
carryforwards, approximately $583 of the federal alternative minimum tax credit
carryforward and approximately $1,799 and $342 of the federal and state research
and development credits are subject to a general annual income offset limitation
of approximately $4,000. Additionally, certain built-in gains recognized by the
Company will increase the annual utilization rate of the net operating losses.
Finally, the Company possesses certain unrealized built-in losses which will be
subject to the annual utilization limitation when recognized.
56
<PAGE>
ADVANCED MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
NOTE 6-- 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,
-------------------------------
<S> <C> <C> <C>
1994 1995 1996
--------- --------- ---------
Balance at beginning of period............................................. $ 6,478 $ 6,567 $ 7,217
Retirement of 10% preferred stock.......................................... -- -- (3,299)
Repurchase of 10% preferred stock.......................................... (785) -- --
Retirement of convertible preferred stock.................................. -- -- (2,131)
Accretion of amounts payable upon redemption............................... 177 -- --
Accrued dividends.......................................................... 697 650 962
Payment of dividends....................................................... -- -- (2,749)
--------- --------- ---------
Balance at end of period................................................... $ 6,567 $ 7,217 $ --
--------- --------- ---------
--------- --------- ---------
</TABLE>
In connection with the capitalization of Advanced Medical, the Company
issued 1,594,000 shares of $.01 par value mandatorily redeemable, 10% preferred
stock ("10% Preferred Stock"). The 10% Preferred Stock had a liquidation value
of $10.00 per share plus accrued and unpaid dividends. The 10% Preferred Stock
was recorded at its fair value at the issuance date ($6.26 per share), and was
accreted to its redemption value using the interest method and resulted in a
corresponding decrease to paid-in capital.
The Company redeemed 180,000 shares of its 10% Preferred Stock during 1990
and, in 1991, redeemed an additional 262,000 shares through the issuance of
333,000 shares of a newly created class of mandatorily redeemable convertible
preferred stock ("Convertible Preferred Stock") issued to a stockholder or
entities controlled by the stockholder. The Convertible Preferred Stock was
subordinate to the existing 10% Preferred Stock and had a liquidation preference
of $6.40 per share.
During 1994, pursuant to a tender offer, IMED acquired 69,000 shares of the
10% Preferred Stock. Immediately upon purchase thereof, IMED distributed all
such shares 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.
The Company had not made the March 1994 redemption or declared and paid the
semi-annual dividends since September 1993 on its 10% Preferred Stock. In
connection with the Merger, the Company redeemed all outstanding shares of its
10% Preferred Stock and Convertible Preferred Stock, plus accrued and unpaid
dividends.
57
<PAGE>
ADVANCED MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
NOTE 6-- MANDATORILY REDEEMABLE EQUITY SECURITIES AND MINORITY
INTERESTS IN CONSOLIDATED SUBSIDIARIES (CONTINUED)
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
consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
<S> <C> <C>
1995 1996
--------- ---------
IMED common stock warrant (includes cumulative net accretion to estimated redemption
price of $8,991 at December 31, 1995............................................... $ 11,500 $ --
--------- ---------
--------- ---------
</TABLE>
In connection with the GECC revolving credit facility (Note 4), IMED issued
a warrant allowing GECC to purchase up to 10% of IMED's common stock on a
fully-diluted basis for nominal consideration, subject to adjustment as provided
in the loan agreement, and exercisable at any time until August 12, 2004. On an
annual basis, IMED adjusted the carrying value of the warrant based on its
estimated fair value. In June 1996, Advanced Medical purchased the GECC warrant
for $12,500. The $1,000 difference between the carrying value of the minority
interest and the purchase price was charged directly to stockholders' equity.
The warrant acquired by Advanced Medical was then canceled.
NOTE 7--STOCK OPTION PLANS:
The Company maintains several stock option plans under which incentive stock
options may be granted to key employees of the Company and nonqualified stock
options may be granted to key employees, directors, officers, independent
contractors and consultants.
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 over a three-year period. 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.
58
<PAGE>
ADVANCED MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
NOTE 7--STOCK OPTION PLANS: (CONTINUED)
STOCK OPTION ACTIVITY:
Activity for 1994, 1995 and 1996 with respect to these plans is as follows:
<TABLE>
<CAPTION>
SHARES OPTION
UNDERLYING PRICE PER
OPTIONS SHARE
---------- --------------
<S> <C> <C>
Outstanding at December 31, 1993..................................................... 470,656 $4.47-$16.94
Canceled........................................................................... (143,150) $6.93-$16.94
----------
Outstanding at December 31, 1994..................................................... 327,506 $4.47-$16.94
Granted............................................................................ 1,270,107 $1.81-$ 3.03
Canceled........................................................................... (504,796) $1.81-$16.94
----------
Outstanding at December 31,1995...................................................... 1,092,817 $1.81-$ 6.93
Granted............................................................................ 2,860,620 $2.28-$ 3.78
Exercised.......................................................................... (14,125) $1.81-$ 1.81
Canceled........................................................................... (311,466) $1.81-$ 3.47
----------
Outstanding at December 31, 1996..................................................... 3,627,846 $1.81-$ 6.93
----------
----------
</TABLE>
At December 31, 1996, options for 691,196 shares were exercisable at
$1.81-$6.93 under the plans and 1,984,847 shares were available for future
grant. Additionally, as of December 31, 1996, 5,612,693 shares of common stock
were reserved for issuance pursuant to the Company's stock option plans.
NOTE 8--BENEFIT PLANS
PENSION PLANS:
The Company had a defined benefit pension plan (the "Plan") which covered
substantially all of its U.S. employees as of December 31, 1993. 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 were preserved and
the Company will continue to contribute to the Plan as necessary to fund earned
benefits. No contributions to the Plan were required during 1994, 1995 or 1996
due to the prepaid position of the Plan during those years.
59
<PAGE>
ADVANCED MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
NOTE 8--BENEFIT PLANS (CONTINUED)
The following table sets forth the Plan's estimated funded status and
amounts recognized in the Company's balance sheet:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
<S> <C> <C>
1995 1996
--------- ---------
Actuarial present value of benefit obligation:
Vested benefit obligation.................................................................. $ 10,343 $ 9,733
--------- ---------
--------- ---------
Accumulated benefit obligation............................................................. $ 10,440 $ 9,822
--------- ---------
--------- ---------
Projected benefit obligation for service rendered to date.................................... $ 10,440 $ 9,822
Plan assets at fair value, consisting of equity and fixed income mutual funds................ 11,305 13,053
--------- ---------
Plan assets greater than projected benefit obligation........................................ 865 3,231
Unrecognized net gain........................................................................ (697) (2,940)
--------- ---------
Prepaid pension cost......................................................................... $ 168 $ 291
--------- ---------
--------- ---------
</TABLE>
The components of net periodic pension cost (benefit) are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
<S> <C> <C> <C>
1994 1995 1996
--------- --------- ---------
Service cost during the period........................................................ $ 143 $ 146 $ 181
Interest cost on projected benefit obligation......................................... 631 608 706
Actual loss (return) on Plan assets................................................... 263 (2,494) (1,896)
Amortization and deferred amounts..................................................... (1,075) 1,666 886
--------- --------- ---------
Net periodic pension cost (benefit)................................................... $ (38) $ (74) $ (123)
--------- --------- ---------
--------- --------- ---------
Assumptions used in the accounting are as follows:
Discount rates...................................................................... 8.56% 6.82% 7.45%
Rates of increase in compensation levels............................................ N/A N/A N/A
Expected long-term rates of return on assets........................................ 9.00% 9.00% 9.00%
</TABLE>
NOTE 9--LEASES
LEASE RECEIVABLES
The Company leases instruments to customers under capital and operating
lease contracts with terms ranging generally from 1 to 6 years. Certain capital
lease agreements obligate the lessee to purchase a specified annual minimum of
disposable sets and payment of liquidating damages if the agreement is
60
<PAGE>
ADVANCED MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
NOTE 9--LEASES (CONTINUED)
terminated by the lessee. Anticipated future minimum lease receivables as of
December 31, 1996 are as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
YEAR ENDING DECEMBER 31: LEASES LEASES
- - -------------------------------------------------------------------------------- --------- -----------
<S> <C> <C>
1997............................................................................ $ 20,530 $ 2,023
1998............................................................................ 15,029 1,688
1999............................................................................ 10,640 1,417
2000............................................................................ 5,896 688
2001............................................................................ 2,235 53
Thereafter...................................................................... 2,204 30
--------- -----------
Total minimum lease receivables................................................. $ 56,534 $ 5,899
--------- -----------
--------- -----------
</TABLE>
The net investment in sales-type leases consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
<S> <C> <C>
1995 1996
--------- ---------
Minimum lease payments............................................................ $ 25,978 $ 56,534
Unguaranteed residual value of leased equipment................................... 727 789
Unearned interest income.......................................................... (4,096) (10,750)
Allowance for uncollectible lease receivables..................................... (396) (2,502)
--------- ---------
Net investment in sales-type leases............................................... 22,213 44,071
Current portion................................................................... (7,034) (16,795)
--------- ---------
Net investment in sales-type leases, less current portion......................... $ 15,179 $ 27,276
--------- ---------
--------- ---------
</TABLE>
Operating lease revenue totaled $2,033, $1,476 and $1,521 during 1994, 1995
and 1996, respectively.
LEASE COMMITMENTS:
The Company leases buildings and equipment under non-cancelable operating
leases with terms ranging from 2 to 10 years. Scheduled future minimum lease
commitments as of December 31, 1996 are as follows:
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31:
- - -----------------------------------------------------------------------------------
<S> <C>
1997............................................................................... $ 4,838
1998............................................................................... 3,738
1999............................................................................... 3,355
2000............................................................................... 3,125
2001............................................................................... 3,144
Thereafter......................................................................... 14,301
---------
$ 32,501
---------
---------
</TABLE>
Rental expense was $3,740, $3,149 and $3,474 during 1994, 1995 and 1996,
respectively.
61
<PAGE>
ADVANCED MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
NOTE 10--SECURITIES AVAILABLE FOR SALE
Current marketable securities comprise the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------
<S> <C> <C> <C> <C>
1995 1996
-------------------- ----------------------
<CAPTION>
MARKET MARKET
COST VALUE COST VALUE
--------- --------- --------- -----------
<S> <C> <C> <C> <C>
Alteon, Inc. ("Alteon")...................................................... $ 1,687 $ 6,975 $ -- $ --
</TABLE>
During 1994, the Company sold all remaining 107,212 shares of its Applied
Immune Sciences, Inc. common stock for $1,005, resulting in a realized gain of
$133 and sold 378,000 shares of its Alteon common stock for $2,763, resulting in
a realized gain of $1,293.
During 1995, the Company sold 80,000 shares of its Alteon common stock for
$858, resulting in a realized gain of $546.
During 1996, the Company sold all remaining 432,600 shares of its Alteon
common stock for $2,374, resulting in a realized gain of $686.
NOTE 11--RESTRUCTURING CHARGES
In connection with the Merger, management performed an extensive review of
the operating activities of both IMED and IVAC Medical Systems, Inc. in order to
reduce costs and maximize synergies. Management identified duplicative costs to
eliminate and developed and implemented plans to consolidate and integrate the
companies' operations including product strategies, manufacturing, service
centers, research and development, marketing and other administrative functions.
As a result, the Company has recorded a non-recurring charge related to the
implementation of these plans in the amount of approximately $15,300 in 1996.
The following summarizes the significant components of the Company's 1996
restructuring and integration charge included in the Consolidated Statement of
Operations:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1996
-------------------
(IN MILLIONS)
<S> <C>
RESTRUCTURING
Severance and related benefits............................................................... $ 4.4
Cost to vacate facilities.................................................................... 3.4
Write-off unused furniture, fixtures and equipment........................................... 1.5
Distributor terminations..................................................................... .8
Other........................................................................................ .5
-----
Total restructuring........................................................................ 10.6
INTEGRATION
Consulting and bonuses....................................................................... 4.7
-----
Total restructuring and integration........................................................ $ 15.3
-----
-----
</TABLE>
Additionally, estimated dealer termination costs as well as severance and
benefits costs related to the acquired company's personnel in the amount of
approximately $2,800 were also accrued at the acquisition
62
<PAGE>
ADVANCED MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
NOTE 11--RESTRUCTURING CHARGES (CONTINUED)
date. The remaining unpaid portion of approximately $2,700 is included in
accrued restructuring costs at December 31, 1996 and is expected to be paid
during 1997. In accordance with generally accepted accounting principles, such
items effectively increased the amount of goodwill recorded in connection with
the Merger and were not included in the approximately $15,300 restructuring and
integration expense included in the consolidated statement of operations for the
year ended December 31, 1996. At December 31, 1996, the Company has
approximately $15,100 accrued related to restructuring and integration costs.
In connection with the Company's restructuring plans, in December 1996
management provided termination notifications to 225 employees from all
functional areas of the Company. Accrued restructuring costs at December 31,
1996 includes approximately $4,400 of employee termination costs which were
charged to the 1996 consolidated operating results and approximately $1,800 of
employee termination costs which were recorded in purchase accounting.
Approximately $260 of termination costs were paid during 1996.
NOTE 12--RELATED PARTY ARRANGEMENTS AND COMMITMENTS
In October 1991, IMED sold certain European assets to Pharmacia and Upjohn,
Inc. ("Pharmacia") and entered into a marketing, distribution and development
arrangement with Advanced Medical and Pharmacia (the "Pharmacia Transaction"),
pursuant to which Pharmacia obtained the exclusive right to market and
distribute IMED's infusion products in a territory that included most of Europe.
In August 1994, Advanced Medical, IMED and Pharmacia amended their distribution
agreement. Under the terms of the Amended and Restated Distribution Agreement
("Amended Distribution Agreement"), Pharmacia retained the exclusive right
(subject to certain exceptions) to distribute IMED's infusion products in the
territory that included most of Europe. Under the Amended Distribution
Agreement, Pharmacia had the right not to distribute certain products currently
under development by IMED. In the event of such an election, IMED had the right
to sell such products directly or through others, and under certain
circumstances, had the right to repurchase from Pharmacia the distribution
rights to IMED products currently distributed by Pharmacia in the territory.
During 1996, Advanced Medical and IMED entered into an agreement with Pharmacia
to reacquire for approximately $11,000 the European distribution rights to
IMED's intravenous infusion pumps and related disposable administration sets and
certain related assets. The purchase price was allocated between the tangible
assets and the distribution fee based upon their estimated fair values. The
amount allocated to the distribution fee has been capitalized net of the
unamortized deferred revenue resulting from the 1991 sale of the aforesaid
European distribution rights to Pharmacia which was being amortized over the
15-year term of the original distribution agreement. The net distribution fee is
being amortized over approximately 10 years, which represents the remaining term
of the original distribution agreement.
In June 1996, Advanced Medical purchased GECC's warrant to acquire common
shares equal to 10% of IMED's common stock, on a fully diluted basis, for
$12,500. The warrant acquired by Advanced Medical was then canceled (Note 6).
Effective June 30, 1996, Advanced Medical made non-cash contributions
totaling $41,160 to IMED. Included in this capital contribution was $2,885,
representing Advanced Medical's net carrying value of certain patents which up
to June 30, 1996 had been licensed to IMED for $1,100 per year. Amounts accrued
to Advanced Medical under this license, as well as other intercompany charges
due to Advanced
63
<PAGE>
ADVANCED MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
NOTE 12--RELATED PARTY ARRANGEMENTS AND COMMITMENTS (CONTINUED)
Medical totaling $9,399 were contributed to IMED. Additionally, Advanced Medical
contributed $8,776 representing the outstanding par value and accrued dividends
on all outstanding shares of IMED's 12% preferred stock, all of which were owned
by Advanced Medical. The preferred shares were then canceled.
Included in the $41,160 non-cash contribution are tax payments due from IMED
to Advanced Medical. Pursuant to IMED's tax sharing agreement with Advanced
Medical, for Federal and California income tax purposes, IMED was required to
calculate its current income tax liability on a stand-along basis as if it were
not included in the Advanced Medical consolidated income tax return. The
resulting tax liability was payable to Advanced Medical. Due to restrictions on
payments from IMED to Advanced Medical contained in the GECC revolving credit
facility agreement, income tax payments to Advanced Medical were limited to
actual tax liabilities of the Advanced Medical consolidated group. Due to losses
incurred at the Advanced Medical level which have served to reduce the
consolidated taxable income, the income tax liabilities recorded by IMED on a
stand-alone basis have been significantly greater than the amounts actually paid
to Advanced Medical. As of June 30, 1996 Advanced Medical agreed to contribute
to IMED's stockholder's equity, income tax payments due from IMED but which
could not be paid pursuant to the GECC revolving credit facility. As a result of
this agreement, approximately $20,100 was credited to IMED's capital in excess
of par and the corresponding income tax liabilities were eliminated from the
IMED consolidated balance sheet. Such liabilities amounted to approximately
$18,900 at December 31, 1995 and were included in non-current liabilities as
amounts due to related parties at December 31, 1995.
During November 1996, in connection with the Merger, Advanced Medical
contributed $19,588 to IMED.
During 1994 and 1995, the Company issued the Decisions Notes. During
November 1996, in connection with the Merger, the Decisions Notes in the
aggregate principal amount of $37,500 were exchanged for 29,416,086 shares of
Advanced Medical common stock, including 3,333,333 shares issued as an
inducement to convert. Additionally, Decisions was issued 13,333,333 shares of
Advanced Medical common stock for aggregate proceeds of $40,000.
NOTE 13--PARENT GUARANTOR OF SUBSIDIARY DEBT
All obligations of IVAC Holdings under the Facility (Note 4) are guaranteed
by Advanced Medical and each existing and subsequently formed or acquired
domestic subsidiary of Advanced Medical.
64
<PAGE>
ADVANCED MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
NOTE 13--PARENT GUARANTOR OF SUBSIDIARY DEBT (CONTINUED)
Summarized financial information of IVAC Holdings, the issuer of the Facility,
at December 31, 1995 and 1996 and for the years ended December 31, 1994, 1995
and 1996 is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1995 1996
---------- ----------
<S> <C> <C>
CONDENSED BALANCE SHEET
Current assets.......................................................................... $ 46,975 $ 178,124
Non-current assets...................................................................... 75,622 408,017
---------- ----------
$ 122,597 $ 586,141
---------- ----------
---------- ----------
Current liabilities..................................................................... $ 21,222 $ 93,655
Long-term debt and other non-current liabilities........................................ 45,267 442,465
---------- ----------
66,489 536,120
---------- ----------
Mandatorily redeemable equity securities................................................ 23,631 --
Total common stock and other stockholder's equity....................................... 32,477 50,021
---------- ----------
$ 122,597 $ 586,141
---------- ----------
---------- ----------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
<S> <C> <C> <C>
1994 1995 1996
---------- ---------- ----------
CONDENSED STATEMENT OF OPERATIONS
Sales...................................................................... $ 112,122 $ 112,551 $ 136,371
Cost of sales.............................................................. 65,641 63,270 78,642
---------- ---------- ----------
Gross margin............................................................... 46,481 49,281 57,729
---------- ---------- ----------
Total operating expenses................................................... (31,921) (32,846) (103,838)
Lease interest income...................................................... 2,449 2,333 2,501
---------- ---------- ----------
Income (loss) from operations.............................................. 17,009 18,768 (43,608)
Total other expense........................................................ 3,054 2,403 5,796
Provision for income taxes................................................. 8,310 8,099 1,270
---------- ---------- ----------
Net income (loss).......................................................... $ 5,645 $ 8,266 $ (50,674)
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
65
<PAGE>
ADVANCED MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
NOTE 14--GEOGRAPHIC INFORMATION
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
SALES TO UNAFFILIATED CUSTOMERS:
United States.............................................................. $ 99,228 $ 102,830 $ 111,877
Australia.................................................................. 5,020 5,841 7,723
United Kingdom............................................................. -- -- 6,100
Canada..................................................................... 3,489 3,880 5,377
Other...................................................................... 4,385 -- 5,294
---------- ---------- ----------
Sales as reported in the accompanying statement of operations............ $ 112,122 $ 112,551 $ 136,371
---------- ---------- ----------
---------- ---------- ----------
INTERGEOGRAPHIC SALES:
United States.............................................................. $ 7,668 $ 6,973 $ 17,133
United Kingdom............................................................. -- -- 2,891
Other...................................................................... 6,565 -- --
---------- ---------- ----------
Total intergeographic sales.............................................. $ 14,233 $ 6,973 $ 20,024
---------- ---------- ----------
---------- ---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES:
United States.............................................................. $ 11,122 $ 13,810 $ (47,345)
Australia.................................................................. 753 1,123 1,253
United Kingdom............................................................. -- -- (2,050)
Canada..................................................................... (289) (194) (248)
Other...................................................................... 1,633 -- 468
Lease interest income...................................................... 2,449 2,333 2,501
Eliminations and adjustments............................................... (628) (21) 63
---------- ---------- ----------
Income (loss) from operations.............................................. 15,040 17,051 (45,358)
---------- ---------- ----------
Interest expense........................................................... (8,690) (8,153) (13,393)
Interest income............................................................ 77 192 1,193
Debt conversion expense.................................................... -- -- (10,000)
Other, net................................................................. 1,136 313 1,222
---------- ---------- ----------
Income (loss) before income taxes........................................ $ 7,563 $ 9,403 $ (66,336)
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
66
<PAGE>
ADVANCED MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
NOTE 14--GEOGRAPHIC INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1995 1996
---------- ----------
<S> <C> <C>
IDENTIFIABLE ASSETS:
United States........................................................................... $ 165,206 $ 552,168
Australia............................................................................... 3,794 6,405
United Kingdom.......................................................................... -- 28,243
Canada.................................................................................. 3,258 5,855
Other................................................................................... 51 24,583
Eliminations and adjustments............................................................ (2,679) (23,872)
---------- ----------
Total assets as reported in the accompanying balance sheet............................ $ 169,630 $ 593,382
---------- ----------
---------- ----------
</TABLE>
Other sales to unaffiliated customers, intergeographic sales and income
(loss) before income taxes include results of operations in Germany, Spain,
France, Sweden, Holland and Belgium that are individually less than 10% of the
absolute amount of sales to unaffiliated customers, intergeographic sales and
income (loss) before income taxes.
NOTE 15--SUPPLEMENTAL INFORMATION TO STATEMENTS OF CASH FLOWS
Federal, state and foreign income taxes paid during 1994, 1995 and 1996
totaled $1,433, $1,726 and $3,592, respectively. Interest paid during 1994, 1995
and 1996 totaled $7,745, $6,097 and $8,960, respectively.
NOTE 16--LITIGATION AND CONTINGENCIES
The Company is a defendant in a lawsuit which alleges infringement of two
patents by reason of sales of the Company's vital signs measurement products.
The lawsuit seeks injunctive relief, treble damages and the recovery of costs
and attorney fees. The discovery phase of the lawsuit has recently commenced.
The Company is currently unable to quantify its exposure to the lawsuit;
however, the Company believes it has sufficient defenses to all claims,
including the defenses of noninfringement and invalidity. However, there can be
no assurance that the Company will successfully defend all claims and the
failure of the Company to successfully prevail in this lawsuit could have a
material adverse effect on the Company's operations, financial condition and
cash flows.
The Company is also a defendant in various actions, claims, and legal
proceedings arising from its 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
on discussions with legal counsel, liabilities arising from such matters, if
any, will not have a material adverse effect on consolidated financial position,
results of operations or cash flows.
67
<PAGE>
ADVANCED MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
NOTE 17--SUMMARIZED QUARTERLY DATA (UNAUDITED)
The following financial information reflects all normal recurring
adjustments which are, in the opinion of management, necessary for a fair
statement of the results of the interim periods. Summarized quarterly data for
fiscal 1996 and 1995 is as follows:
<TABLE>
<CAPTION>
IN THOUSANDS, EXCEPT PER SHARE DATA 1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
- - ------------------------------------------------------------ ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
1996
Sales..................................................... $ 25,875 $ 28,216 $ 27,679 $ 54,601
Gross margin.............................................. 11,980 12,460 12,599 20,716
Income (loss) from operations............................. 3,595 3,849 4,002 (56,804)
Income (loss) before extraordinary item................... 859 1,150 779 (68,394)
Extraordinary item--loss on early retirement of debt, net
of taxes................................................ -- -- -- (1,630)
Net income (loss)......................................... 859 1,150 779 (70,024)
Income (loss) per common share assuming no dilution (1):
Income (loss) before extraordinary item................. $ 0.04 $ 0.06 $ 0.04 $ (2.09)
Extraordinary item...................................... -- -- -- (0.05)
----------- ----------- ----------- -----------
Net income (loss)..................................... $ 0.04 $ 0.06 $ 0.04 $ (2.14)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Income (loss) per common share assuming full dilution (1):
Income (loss) before extraordinary item................. $ 0.03 $ 0.03 $ 0.02 $ (2.09)
Extraordinary item...................................... -- -- -- (0.05)
----------- ----------- ----------- -----------
Net income (loss)..................................... $ 0.03 $ 0.03 $ 0.02 $ (2.14)
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
1995
Sales..................................................... $ 28,700 $ 29,276 $ 25,036 $ 29,539
Gross margin.............................................. 11,669 12,893 11,855 12,915
Income (loss) from operations............................. 3,036 4,563 4,297 5,155
Income before extraordinary item.......................... 1,023 2,038 2,406 6,810
Extraordinary item--gain on early retirement of debt, net
of taxes................................................ 8,807 6,370 -- --
Net income................................................ 9,830 8,408 2,406 6,810
Income per common share assuming no
dilution (1):
Income before extraordinary item........................ $ 0.06 $ 0.12 $ 0.14 $ 0.40
Extraordinary item...................................... 0.63 0.40 -- --
----------- ----------- ----------- -----------
Net income ........................................... $ 0.69 $ 0.52 $ 0.14 $ 0.40
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Income per common share assuming full
dilution (1):
Income before extraordinary item........................ $ 0.03 $ 0.06 $ 0.07 $ 0.19
Extraordinary item...................................... 0.29 0.20 -- --
----------- ----------- ----------- -----------
Net income............................................ $ 0.32 $ 0.26 $ 0.07 $ 0.19
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
- - ------------------------
(1) Income (loss) per share are computed independently for each of the quarters
presented. Therefore, the sum of the quarterly net income (loss) per share
will not necessarily equal the total for the year.
68
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS AND KEY EXECUTIVE OFFICERS
The following table sets forth certain information with respect to the
Directors and certain key executive officers of Advanced Medical and the Company
at March 28, 1997:
<TABLE>
<CAPTION>
NAME AGE POSITION
- - ------------------------------------ --- -----------------------------------------------------------
<S> <C> <C>
Jeffry M. Picower................... 54 Director, Chairman of the Board of Advanced Medical and the
Company
William J. Mercer................... 49 Director, President, Chief Executive Officer and Chief
Financial Officer of Advanced Medical and the Company
Norman M. Dean(1)(2)................ 76 Director
Henry Green......................... 54 Director
Richard B. Kelsky(2)................ 41 Director
Frederic Greenberg(1)............... 56 Director
John A. deGroot..................... 41 Secretary of Advanced Medical and the Company; Vice
President and General Counsel of the Company
Jake St. Philip..................... 44 Vice President of Sales--North America of the Company
Anthony B. Semedo................... 45 Vice President of Research, Development and Engineering of
the Company
Richard M. Mirando.................. 54 Vice President of Operations of the Company
Henk van Rossem..................... 54 Vice President and General Manager for Europe, Africa and
the Middle East of the Company
</TABLE>
- - ------------------------------
(1) Member of the Audit Committee of Advanced Medical and the Company
(2) Member of the Compensation Committee of Advanced Medical and the Company
JEFFRY M. PICOWER--Mr. Picower became a Director and the Chairman of the
Board of the Company upon consummation of the Merger. Prior thereto, Mr. Picower
served as a Director of IMED since March 1993 and the Chairman of the Board of
IMED since May 1993. Mr. Picower has served at Advanced Medical as Chief
Executive Officer since September 1993, Chairman of the Board since May 1993, a
Director since March 1993 and Co-Chairman of the Board from March 1993 to May
1993. He was also a Director, Vice President and Assistant Treasurer of Advanced
Medical from September 1988 to March 1989 and Vice Chairman from December 1988
to June 1989. Since 1984, Mr. Picower has been Chairman of the Board and Chief
Executive Officer of Monroe Systems for Business, Inc. ("Monroe"), a worldwide
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.
WILLIAM J. MERCER--Mr. Mercer became a Director, the President and the Chief
Executive Officer of each of the Company and Advanced Medical upon consummation
of the Merger. Mr. Mercer became the Chief Financial Officer of Advanced Medical
and the Company in March 1997. Prior to the Merger,
69
<PAGE>
Mr. Mercer served as President, Chief Executive Officer and a Director of IVAC
Medical Systems and President and a Director of IVAC Holdings since May 1995 and
Chief Executive Officer of IVAC Holdings since January 1996. Prior to joining
IVAC Medical Systems, Mr. Mercer held various positions at Mallinckrodt Group
Inc. for 17 years, most recently as Senior Vice President. Mallinckrodt Group,
Inc. is an international company serving specialty markets in human healthcare,
chemicals and animal health.
NORMAN M. DEAN--Mr. Dean became a Director of the Company upon consummation
of the Merger. Prior thereto, Mr. Dean served as a Director of IMED since April
1990. He has been a Director of Advanced Medical since 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., a commercial cattle feeder, since May 1990.
HENRY GREEN--Mr. Green became a Director of the Company upon consummation of
the Merger. Prior thereto, Mr. Green served as a Director of IMED since
September 1991. Mr. Green was President and Chief Operating Officer of Advanced
Medical from September 1990 to March 1993 and has been a Director of Advanced
Medical since 1991. Mr. Green was employed by PCN in March 1993, elected as
President of PCN in May 1993, Chief Executive Officer of PCN in June 1994 and a
Director of PCN in July 1993.
RICHARD B. KELSKY--Mr. Kelsky became a Director of the Company upon
consummation of the Merger. Prior thereto, Mr. Kelsky served as a Director of
IMED since April 1990. He has served as a Director of Advanced Medical since
June 1989. Mr. Kelsky is a Director of Monroe and from 1984 to 1996 served as
Vice President and General Counsel of Monroe and has served as Vice Chairman of
Monroe since 1996. Mr. Kelsky has served as a Director of PCN since January
1992.
FREDERIC GREENBERG--Mr. Greenberg became a Director of the Company upon
consummation of the Merger. Prior thereto, Mr. Greenberg served as a Director of
IMED since October 1996. He has been a Director of Advanced Medical since June
7, 1995. Mr. Greenberg is a partner with EGS Partners LLC, an asset management
and merchant banking firm which Mr. Greenberg founded in 1989. From 1974 to
1989, Mr. Greenberg served as a pharmaceutical analyst with Goldman Sachs &
Company, an investment banking firm. Mr. Greenberg serves as an advisor to
various health care companies and has been a Director of PCN since July 1993.
JOHN A. DE GROOT--Mr. de Groot became a Vice President and General Counsel
of the Company upon consummation of the Merger. Mr. de Groot became the
Secretary of Advanced Medical and the Company in March 1997. Prior to the
Merger, Mr. de Groot served as a Vice President and General Counsel of IVAC
Holdings and IVAC Medical Systems since April 1995. From January 1991 to
December 1996, Mr. de Groot was a partner in the law firm of Brobeck, Phleger &
Harrison LLP, a firm he had been associated with since March 1987.
JAKE ST. PHILIP--Mr. St. Philip became Vice President of Sales--North
America of the Company upon consummation of the Merger. Prior thereto, Mr. St.
Philip served as Vice President of Sales--North America of IVAC Medical Systems
since June 1994. From 1981 to June 1994, Mr. St. Philip held various sales and
marketing positions with IVAC Medical Systems.
ANTHONY B. SEMEDO--Mr. Semedo became Vice President of Research, Development
and Engineering of the Company upon consummation of the Merger. Prior thereto,
Mr. Semedo served as Vice President of Research and Development of IVAC Medical
Systems since February 1995. From September 1994 to February 1995, Mr. Semedo
served as Vice President of Quality of IVAC Medical Systems. From August 1992 to
September 1994, Mr. Semedo served as the Business Development Manager of the
cardiovascular business and the Quality Assurance Manager of the medical devices
and diagnostics division of Eli Lilly and Company. Eli Lilly and Company is
engaged in the discovery, development, manufacture and sale of products, and the
provision of services in the life sciences industry.
RICHARD M. MIRANDO--Mr. Mirando became Vice President of Operations of the
Company upon consummation of the Merger. Prior thereto, Mr. Mirando served as
Vice President and General Manager
70
<PAGE>
of International Business of IVAC Medical Systems since January 1995. From 1978
to January 1995, Mr. Mirando held various positions, including Marketing
Manager, Director of Market Planning and Research, Director of Sales, Executive
Director of International Operations, Vice President Sales and Marketing--Fluid
Delivery Division, Vice President--Corporate Accounts and Pricing, and Vice
President--Corporate Quality/Service Business Unit, with IVAC Medical Systems.
HENK VAN ROSSEM--Mr. van Rossem became the Company's Vice President and
General Manager for Europe, Africa and the Middle East in January 1997. Prior
thereto, Mr. van Rossem held various international marketing and sales positions
with Mallinckrodt Group, Inc. since 1984. Mr. van Rossem's last position with
Mallinckrodt Group, Inc. was Vice President and General Manager of the European
nuclear medicine division.
There are no family relationships among the above Directors and executive
officers.
BOARD OF DIRECTORS
The Board of Directors of Advanced Medical consists of six members.
Directors serve for terms of one year and until their successors are duly
elected and have qualified. The members of the Board of Directors of Advanced
Medical also serve as and constitute all of the members of the Board of
Directors of the Company.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
Advanced Medical's executive officers, Directors and persons who beneficially
own more than 10% of a registered class of Advanced Medical's equity securities
to file reports of ownership and changes in ownership with the Securities and
Exchange Commission and the American Stock Exchange. Such individuals are
required by regulations promulgated by the Securities and Exchange Commission to
furnish Advanced Medical with copies of all Section 16(a) reports that they
file. Based solely on review of the copies of such reports furnished to Advanced
Medical, or written representations that no reports were required, Advanced
Medical believes that during 1996, all of its executive officers, Directors and
greater-than-10% beneficial owners complied with the Section 16(a) filing
requirements applicable to them, except that Mr. Mercer filed one Form 4
approximately one week late disclosing two transactions involving the purchase
of shares of Common Stock.
ITEM 11. EXECUTIVE COMPENSATION
The following table summarizes certain information regarding compensation
paid or accrued by the Company, Advanced Medical, IMED or IVAC Medical Systems
to or on behalf of the Chief Executive Officer of Advanced Medical and the
Company, each of the four most highly compensated executive officers of the
Company, other than the Chief Executive Officer, whose total annual salary and
bonus for the year ended December 31, 1996 exceeded $100,000 (collectively, the
"Named Executive Officers") and Joseph W. Kuhn:
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<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
1996 1996
ANNUAL COMPENSATION LONG-TERM
----------------------------------- COMPENSATION
OTHER ------------- 1996 ALL
ANNUAL COMMON STOCK OTHER
SALARY BONUS COMPENSATION UNDERLYING COMPENSATION
($)(1) ($) ($)(2) OPTIONS ($)
--------- --------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
William J. Mercer ........................................ 319,334 312,965 -- 600,000 2,998,298(3)
Chief Executive Officer and Chief Financial Officer of
Advanced Medical and the Company
Joseph W. Kuhn(4)......................................... 226,348 139,236 12,519(5) 175,000 3,413(6)
Anthony B. Semedo ........................................ 146,808 100,804 -- 180,000 671,210(7)
Vice President of Research, Development and Engineering
of the Company
Jake St. Philip .......................................... 144,894 111,425 -- 180,000 607,734(8)
Vice President of Sales--North America of the Company
Richard M. Mirando ....................................... 181,319 92,401 13,216(9) 180,000 622,680(10)
Vice President of Operations of the Company
John A. deGroot .......................................... 131,254 125,232 -- 180,000 384,108(11)
Secretary of Advanced Medical and the Company; Vice
President and General Counsel of the Company
</TABLE>
- - ------------------------------
(1) "Salary" with respect to (i) Messrs. Mercer, Semedo, St. Philip, Mirando and
deGroot consists of eleven months of salary paid by IVAC Medical Systems and
one month of salary paid by the Company and (ii) Mr. Kuhn consists of eleven
months of salary paid by IMED and one month of salary paid by the Company.
(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 Executive Officers' annual
salary and bonus.
(3) Consists of (i) $271,980 in relocation and temporary housing expenses paid
by IVAC Medical Systems and the Company; (ii) an aggregate contribution of
$4,120 made by IVAC Medical Systems and the Company to match pre-tax
elective deferred contributions (included under "Salary") made by Mr. Mercer
to the IVAC Medical Systems and Advanced Medical 401(k) plans (collectively,
the "401(k) Plans"); and (iii) $2,722,198 stock option cancelation payment
paid by the Company in connection with the Merger for unexercised options
previously granted under the IVAC Holdings 1995 stock option plan.
(4) Mr. Kuhn resigned from his position as the Company's Chief Financial Officer
in March 1997. Prior to the Merger, Mr. Kuhn served as President, Treasurer
and Secretary of IMED and as President, Chief Financial Officer, Treasurer
and Secretary of Advanced Medical.
(5) Consists of a car allowance paid by IMED and the Company.
(6) Consists of contributions made by IMED to Advanced Medical'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.
(7) Consists of (i) $8,568 of in relocation expenses paid by IVAC Medical
Systems; (ii) an aggregate contribution of $4,404 made by IVAC Medical
Systems and the Company to match pre-tax elective deferred contributions
(included under "Salary") made by Mr. Semedo to the 401(k) Plans; and (iii)
$658,238 stock option cancelation payment paid by the Company in connection
with the Merger for unexercised options previously granted under the IVAC
Holdings 1995 stock option plan.
(8) Consists of (i) $4,504 of in relocation expenses paid by IVAC Medical
Systems; (ii) an aggregate contribution of $4,346 made by IVAC Medical
Systems and the Company to match pre-tax elective deferral contributions
(included under "Salary") made by Mr. St. Philip to the 401(k) Plans; and
(iii) $598,884 stock option cancelation payment paid by the Company in
connection with the Merger for unexercised options previously granted under
the IVAC Holdings 1995 stock option plan.
(9) Consists of a car allowance paid by IVAC Medical Systems and the Company.
(10) Consists of (i) an aggregate contribution of $5,440 made by IVAC Medical
Systems and the Company to match pre-tax elective deferral contributions
(included under "Salary") made by Mr. Mirando to the 401(k) Plans; (ii)
$6,727 in housing expenses paid
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by IVAC Medical Systems and the Company; and (iii) $597,297 stock option
cancelation payment paid by the Company in connection with the Merger for
unexercised options previously granted under the IVAC Holdings 1995 stock
option plan.
(11) Consists of an aggregate contribution of $3,000 made by IVAC Medical
Systems and the Company to match pre-tax elective deferral contributions
(included under "Salary") made by Mr. deGroot to the 401(k) Plans and (ii)
$381,108 stock option cancelation payment paid by the Company in connection
with the Merger for unexercised options previously granted under the IVAC
Holdings 1995 stock option plan.
EMPLOYMENT AGREEMENTS
In August 1996, Mr. Mercer entered into an employment agreement whereby he
became employed full time by the Company and Advanced Medical upon consummation
of the Merger. The agreement is for a term of five years, subject to automatic
renewal for successive one-year periods and to earlier termination as provided
therein. The agreement provides for, among other things, a base salary of
$400,000, certain annual and additional bonuses beginning in the Company's 1997
fiscal year in an aggregate amount up to 100% of Mr. Mercer's base annual salary
in each such year, options to purchase an aggregate of 600,000 shares of Common
Stock, and, in the event Mr. Mercer's employment is terminated by the Company or
Advanced Medical without cause or disability (as defined in the agreement), or
by Mr. Mercer for good reason (as defined in the agreement), severance payments
in an amount equal to Mr. Mercer's base salary annually until the end of the
employment term. The agreement also contains certain confidentiality,
non-solicitation and non-competition provisions.
STOCK-BASED BENEFIT PLANS
1988 STOCK OPTION PLAN. The Third Amended and Restated 1988 Stock Option
Plan of Advanced Medical (the "1988 Option Plan") was approved by the Board of
Directors of Advanced Medical and became effective on June 28, 1994. Under the
1988 Option Plan, incentive stock options with respect to shares of Common Stock
("ISOs"), as provided in Section 422 of the Internal Revenue Code, may be
granted to key employees of Advanced Medical and its subsidiaries (including the
Company), and non-qualified stock options with respect to shares of Common Stock
("NQSOs") may be granted to key employees, Directors (except Directors eligible
to participate in the Directors Plan), and officers of Advanced Medical, its
subsidiaries (including the Company) and affiliates, as well as independent
contractors and consultants performing services for such entities. The maximum
aggregate number of shares of Common Stock that may be issued under the 1988
Option Plan is 1,700,200. The number of shares of Common Stock which remain
available for issuance under the 1988 Option Plan is 1,625,755, of which
1,150,179 are subject to currently outstanding options. The number of shares of
Common Stock available under the 1988 Option Plan will be reduced on a
share-for-share basis in respect of each share issued other than under the 1988
Option Plan to persons eligible to participate in the 1988 Option Plan. In the
event of a change in the capitalization of Advanced Medical which affects the
Common Stock, the 1988 Committee (as defined) 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 1988 Option Plan on or after
December 27, 1998.
The 1988 Option Plan provides for administration by a committee appointed by
the Board of Directors of Advanced Medical (the "1988 Committee"). No member of
the 1988 Committee is eligible to receive options under the 1988 Option Plan.
The 1988 Committee has authority, subject to the terms of the 1988 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 1988 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
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<PAGE>
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 Advanced Medical
or any parent or subsidiary of Advanced Medical ("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 1988 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 Shareholders which must expire within five years of the date of
grant. Options granted vest and become exercisable as determined by the 1988
Committee. The 1988 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 1988 Committee may, pursuant to the
terms of the stock option agreement between the optionee and Advanced Medical,
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 1988 Option Plan are subject to
forfeiture under certain circumstances in the event an optionee is no longer
employed by or performing services for Advanced Medical or 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 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 of control, as defined in the 1988 Option Plan,
unless otherwise determined by the 1988 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.
1996 STOCK OPTION PLAN. The 1996 Stock Option Plan of Advanced Medical (the
"1996 Option Plan") was approved by the Board of Directors of Advanced Medical
and became effective on November 26, 1996, subject to approval by the
stockholders of Advanced Medical at a meeting held within twelve months
following such date. Under the 1996 Option Plan, ISOs with respect to shares of
Common Stock may be granted to key employees of Advanced Medical and its
subsidiaries (including the Company), and NQSOs with respect to shares of Common
Stock may be granted to key employees, Directors (except Directors eligible to
participate in the Directors Plan), and officers of Advanced Medical, its
subsidiaries (including the Company) and affiliates, as well as independent
contractors and consultants performing services for such entities. The maximum
aggregate number of shares of Common Stock that may be issued under the 1996
Option Plan is 3,750,000. The number of shares of Common Stock which remain
available for issuance under the 1996 Option Plan is 3,750,000, of which
2,373,667 are subject to currently outstanding options. The number of shares of
Common Stock available under the 1996 Option Plan will be reduced on a
share-for-share basis in respect of each share issued other than under the 1996
Option Plan to persons eligible to participate in the 1996 Option Plan. In the
event of a change in the capitalization of Advanced Medical which affects the
Common Stock, the 1996 Committee (as defined) 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 1996 Option Plan on or after
November 26, 2006.
The 1996 Option Plan provides for administration by a committee appointed by
the Board of Directors of Advanced Medical (the "1996 Committee"). No member of
the 1996 Committee is eligible to
74
<PAGE>
receive options under the 1996 Option Plan. The 1996 Committee has authority,
subject to the terms of the 1996 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 1996 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 Advanced Medical or any parent or subsidiary of
Advanced Medical ("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 1996 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 Shareholders
which must expire within five years of the date of grant. Options granted vest
and become exercisable as determined by the 1996 Committee. The 1996 Committee
will limit the grant so that no more than 600,000 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 or by his or her guardian or legal
representative, except that the 1996 Committee may permit a NQSO to be
transferred to and exercised by one or more transferees of an optionee during
such optionee's lifetime. Options are not transferable other than (i) as
provided in the immediately preceding sentence; (ii) by will; (iii) by the laws
of descent and distribution; or (iv) to a beneficiary upon the death of the
optionee.
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 1996 Committee may, pursuant to the
terms of the stock option agreement between the optionee and Advanced Medical,
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 1996 Option Plan are subject to
forfeiture under certain circumstances in the event an optionee is no longer
employed by or performing services for Advanced Medical or 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 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 of control, as defined in the 1996 Option Plan,
unless otherwise determined by the 1996 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 prior to such effective time. Unless otherwise determined by the 1996
Committee in an optionee's stock option agreement or at the time of the change
of control, in the event of a change of control, all unexercised options held by
such optionee shall terminate and cease to be outstanding immediately following
the change of control.
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<PAGE>
The following table sets forth certain information with respect to stock
options granted during 1996 to the Named Executive Officers and Mr. Kuhn
pursuant to the 1988 Option Plan and the 1996 Option Plan.
OPTION GRANTS IN FISCAL YEAR 1996
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
--------------------------------------------------------
POTENTIAL REALIZABLE VALUE
NUMBER OF % OF TOTAL AT ASSUMED ANNUAL RATE OF
SECURITIES OPTIONS EXERCISE STOCK APPRECIATION FOR THE
UNDERLYING GRANTED TO OF BASE OPTIONS TERM
OPTIONS EMPLOYEES IN PRICE EXPIRATION -----------------------------
NAME GRANTED FISCAL YEAR ($/SHARE) DATE 5%($) 10%($)
- - ------------------------- ----------- --------------- ------------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
William J. Mercer........ 600,000 21.1% 3.00 11-26-06 1,132,010 2,868,736
Joseph W. Kuhn........... 100,000 3.5% 2.437 3-12-06 141,501 358,592
75,000 2.6% 3.00 11-26-06 153,262 388,395
Anthony B. Semedo........ 180,000 6.3% 3.00 11-26-06 339,603 860,621
Jake St. Philip.......... 180,000 6.3% 3.00 11-26-06 339,603 860,621
Richard M. Mirando....... 180,000 6.3% 3.00 11-26-06 339,603 860,621
John A. deGroot.......... 180,000 6.3% 3.00 11-26-06 339,603 860,621
</TABLE>
- - ------------------------------
(1) The option on 100,000 shares granted to Mr. Kuhn was made under the 1988
Option Plan. The balance of the option grants set forth in the table were
made under the 1996 Option Plan.
The following table sets forth certain information with respect to
unexercised stock options during 1996:
AGGREGATED OPTION EXERCISE IN FISCAL YEAR 1996
AND OPTION VALUES AS OF DECEMBER 31, 1996
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
SHARES VALUE OPTIONS AT 12/31/96 AT 12/31/96 ($)(1)
ACQUIRED REALIZED ----------------------------- -----------------------------
NAME ON EXERCISE $ EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- - ------------------------------ ------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
William J. Mercer............. -- -- 100,000 500,000 75,000 375,000
Joseph W. Kuhn................ -- -- 40,000 260,000 59,688 370,050
Anthony B. Semedo............. -- -- 36,000 144,000 27,000 108,000
Jake St. Philip............... -- -- 36,000 144,000 27,000 108,000
Richard M. Mirando............ -- -- 36,000 144,000 27,000 108,000
John A. deGroot............... -- -- 36,000 144,000 27,000 108,000
</TABLE>
- - ------------------------
(1) Calculated based on the excess of the closing price of Advanced Medical's
common stock on December 31, 1996 ($3.75) as reported in the American Stock
Exchange Composite Transactions published in THE WALL STREET JOURNAL over
the option exercise price.
DIRECTORS PLAN. Certain Directors of the Company will be eligible to
participate in the Second Amended and Restated 1990 Non-Qualified Stock Option
Plan for Non-Employee Directors of Advanced Medical (the "Directors Plan"). The
Directors Plan 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 1988 Option Plan and the 1996 Option
Plan. An aggregate of 250,000 shares of 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 238,800, of which 84,000 are subject
to currently outstanding options. 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
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<PAGE>
Advanced Medical which affects the Common Stock, the committee of the Board of
Directors of Advanced Medical which administers the Directors Plan (the "Plan
Committee") may make proportionate adjustments to the number of shares of Common
Stock for which NQSOs 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 on or 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
Advanced Medical's 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 of the Company or
Advanced Medical. 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 shares for every twelve-month period of
continuous service on the Board of Directors, provided that the optionee is
still a member of the Board of Directors 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 Advanced Medical or 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 of Directors 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 of 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
Members of the Board of Directors who are not employees of the Company are
paid $10,000 per annum. In addition, every three years such Directors receive
options to purchase 12,000 shares of Common Stock pursuant to the Directors
Plan, which options vest at a rate of 4,000 shares per annum. See "--Stock-Based
Benefit Plans--Directors Plan." Travel and accommodation expenses of Directors
incurred in connection with meetings are reimbursed by the Company. All of the
Directors are covered by Advanced Medical's director's liability insurance
policy.
In 1996, two Directors were each granted an option on 10,000 shares of
Common Stock in consideration for service on a special committee of the Board of
Directors of Advanced Medical. See "Item 12. Security Ownership of Certain
Beneficial Owners and Management."
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<PAGE>
On March 15, 1996, Mr. Green's consulting agreement with Advanced Medical
expired. The consulting agreement, which had a three-year term, provided for the
payment to Mr. Green of consulting fees in the amount of $100,000 per annum. On
March 16, 1996, Mr. Green became eligible to receive the aforesaid non-employee
annual Director compensation of $10,000 and an option to purchase 12,000 shares
of Common Stock under the Directors Plan.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
There are no reportable compensation committee interlocks or insider
participation transactions.
In connection with the Merger, Mr. Mercer entered into a new employment
agreement with the Company and Advanced Medical. See "--Employment Agreements."
For further information regarding certain relationships and related
transactions, see "Item 13. Certain Relationships and Related Transactions."
78
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, at April 11, 1997, information regarding the
beneficial ownership of Common Stock by (i) all persons known by Advanced
Medical who own beneficially more than 5% of the outstanding Common Stock; (ii)
each Director of Advanced Medical; (iii) each of the Named Executive Officers;
and (iv) all Directors and the Named Executive Officers as a group. Unless
otherwise stated, Advanced Medical believes that the beneficial owners of the
shares listed below have sole investment and voting power with respect to such
shares. In addition, unless otherwise indicated, each such person's business
address is 10221 Wateridge Circle, San Diego, California 92121.
<TABLE>
<CAPTION>
PERCENTAGE
NAME AND ADDRESS OF OF CLASS
BENEFICIAL OWNERS NUMBER (1)
- - ------------------------------------------------------------ ------------- ----------
<S> <C> <C>
Jeffry M. Picower........................................... 46,643,209(2) 79.0%
South Ocean Blvd.
Palm Beach, FL 33480
William J. Mercer........................................... 200,000(3) *
Norman M. Dean.............................................. 16,000(4) *
Henry Green................................................. 5,000(5) *
Frederic Greenberg.......................................... 14,000(6) *
Richard B. Kelsky........................................... 94,100(7) *
Anthony B. Semedo........................................... 36,000(8) *
Jake St. Philip............................................. 36,000(8) *
Richard M. Mirando.......................................... 36,000(8) *
John A. deGroot............................................. 36,000(8) *
All Directors and Named Executive Officers as a group (10 47,116,309(9) 79.8%
individuals)..............................................
</TABLE>
- - ------------------------
* Less than 1%
(1) Calculated in accordance with Rule 13d-3(d)(1) under the Securities Exchange
Act of 1934, as amended. At April 11, 1997, Advanced Medical had 59,019,573
shares of Common Stock outstanding.
(2) Includes (i) 20,079,477 shares of Common Stock owned by Decisions; (ii)
2,489,463 shares of Common Stock owned by JA Special Partnership Limited
("JA Special"); and (iii) 24,074,269 shares of Common Stock owned by JD
Partnership, L.P. ("JD Partnership"). Mr. Picower is the sole stockholder
and sole Director of Decisions, which is the sole general partner of JD
Partnership, and the sole general partner of JA Special. As a result, Mr.
Picower 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) Includes (i) 100,000 shares of Common Stock owned by the William J. Mercer
Trust, of which Mr. Mercer is the trustee and a beneficiary, and (ii)
currently exercisable option on 100,000 shares of Common Stock granted upon
consummation of the Merger under the 1996 Option Plan. In addition, pursuant
to an employment agreement with the Company and Advanced Medical, Mr. Mercer
has been granted under the 1996 Option Plan an additional option on 500,000
shares of Common Stock that vests over time. See "Management--Employment
Agreements."
(4) Includes currently exercisable option on 12,000 shares of Common Stock under
the Directors Plan. Does not include (i) option on an additional 12,000
shares of Common Stock granted under the Directors Plan that vests over time
and (ii) option on 10,000 shares of Common Stock granted in consideration
for service on a special committee of the Board of Directors of Advanced
Medical that vests over time.
(5) Does not include an option to purchase 12,000 of Common Stock granted under
the Directors Plan that vests over time.
(6) Includes currently exercisable option on 4,000 shares of Common Stock
granted under the Directors Plan. Does not include (i) option on an
additional 8,000 shares of Common Stock granted under the
79
<PAGE>
Directors Plan that vests over time and (ii) option on 10,000 shares of
Common Stock granted in consideration for service on a special committee of
the Board of Directors of Advanced Medical that vests over time.
(7) Includes currently exercisable option on 12,000 shares of Common Stock
granted under the Directors Plan. Does not include option on an additional
12,000 shares of Common Stock granted under the Directors Plan that vests
over time.
(8) Represents currently exercisable option on 36,000 shares of Common Stock
granted under the 1996 Option Plan. Does not include option of 144,000
shares of Common Stock granted under the 1996 Option Plan that vests over
time.
(9) Includes currently exercisable options on 244,000 shares of Common Stock
granted under the 1996 Option Plan and 20,000 shares of Common Stock granted
under the Directors Plan.
POSSIBLE CHANGES IN CONTROL
All of the Company's outstanding equity securities have been pledged by
Advanced Medical to secure the Company's obligations under the New Credit
Facility. The New Credit Facility contains certain events of default after
expiration of applicable grace periods, including failure to make payments under
the New Credit Facility; breach of representations and warranties; breach of
covenants; default under other agreements or conditions relating to
indebtedness; certain events of insolvency or bankruptcy with respect to the
Company or certain subsidiaries; certain ERISA violations; invalidity or
disaffirmance of any guarantee or pledge agreement; certain judgments and
certain events relating to changes in control of the Company and Advanced
Medical. In the event of a default under the New Credit Facility, the lenders
thereunder have certain rights as secured creditors under the terms of the New
Credit Facility to vote and to sell or otherwise dispose of such pledged shares.
80
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
DECISIONS CONTRIBUTION
In connection with the financing of the Merger, Advanced Medical made a
capital contribution (the "Capital Contribution") of approximately $19.6 million
to IMED. The Capital Contribution was funded in part through the sale to
Decisions by Advanced Medical of 13,333,333 shares of Common Stock for aggregate
proceeds of $40.0 million (the "Decisions Contribution"). The balance of the
Capital Contribution was funded with existing cash balances of Advanced Medical.
The portion of the net proceeds of the Decisions Contribution not applied to
make the Capital Contribution was used by Advanced Medical to redeem
approximately $22.0 million principal amount of its 15% Subordinated Debentures
due 1999 and fund the redemption of Advanced Medical's outstanding preferred
stock. Mr. Picower, Decisions and JA Special owned a portion of the debentures
and the preferred stock so redeemed. In connection with the Decisions
Contribution, Decisions exchanged an aggregate of $37.5 million in principal
amount of convertible promissory notes issued by Advanced Medical for 29,416,086
shares of Common Stock. The balance of the Capital Contribution was funded with
existing cash balances of Advanced Medical. Mr. Picower is the sole stockholder
and sole director of Decisions. See "Item 10. Directors and Executive Officers
of the Registrant--Directors and Key Executive Officers" and "Item 12. Security
Ownership of Certain Beneficial Owners and Management."
NON-CASH CONTRIBUTIONS
Effective June 30, 1996, Advanced Medical made non-cash contributions
totaling $41.2 million to IMED. Included in this capital contribution was $2.9
million representing Advanced Medical's net carrying value of certain patents
which up to June 30, 1996 had been licensed to IMED for $1.1 million per year.
Amounts accrued to Advanced Medical under this license, as well as other
intercompany charges due to Advanced Medical totaling $9.4 million were
contributed to IMED. Additionally, Advanced Medical contributed $8.8 million
representing the outstanding par value and accrued dividends on all outstanding
shares of IMED's 12% preferred stock. These preferred shares were then
cancelled. Payments to Advanced Medical relating to each of the contributed
items were restricted pursuant to IMED's then existing revolving credit facility
(the "Existing Credit Facility") with General Electric Credit Corporation.
Pursuant to IMED's tax sharing agreement with Advanced Medical, for Federal
and California income tax purposes, IMED was required to calculate its current
income tax liability on a stand-alone basis as if it were not included in the
Advanced Medical consolidated income tax return. The resulting tax liability was
payable to Advanced Medical. Due to restrictions on payments from IMED to
Advanced Medical contained in the Existing Credit Facility, income tax payments
to Advanced Medical were limited to actual tax liabilities of Advanced Medical.
Due to losses incurred at the Advanced Medical level which served to reduce the
consolidated taxable income, the income tax liabilities recorded by IMED on a
stand-alone basis were significantly greater than the amounts actually paid to
Advanced Medical. As of June 30, 1996, Advanced Medical agreed to contribute to
IMED's stockholder's equity, income tax payments due from IMED but which could
not be paid pursuant to the Existing Credit Facility. As a result of this
agreement by Advanced Medical, approximately $20.1 million was credited to
IMED's capital in excess of par and the corresponding income tax liabilities
were eliminated from the IMED consolidated balance sheet. Such liabilities
amounted to approximately $18.9 million at December 31, 1995.
TRANSACTIONS WITH MANAGEMENT
In connection with the Merger, Mr. Mercer entered into a new employment
agreement with the Company and Advanced Medical. See "Item 11. Executive
Compensation--Employment Agreements."
81
<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........................................................... 40
Consolidated Balance Sheet at December 31, 1995 and 1996.................................... 41
Consolidated Statement of Operations for the years ended December 31, 1994, 1995 and 1996... 42
Consolidated Statement of Cash Flows for the years ended December 31, 1994, 1995 and 1996... 43
Consolidated Statement of Stockholders' Equity (Deficit) for the period from December 31,
1993 to December 31, 1996................................................................. 44
Notes to Consolidated Financial Statements.................................................. 45
</TABLE>
2. Financial Statement Schedules:
Schedule II--Valuation and Qualifying Accounts and Reserves for the
three years ended
December 31, 1996.
Schedule III--Condensed Financial Information of Advanced Medical, Inc.
as of December 31,
1995 and 1996 and for the three years ended December 31, 1996.
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. DESCRIPTION OF EXHIBIT
- - ------------- ------------------------------------------------------------------------------------------------
<C> <C> <S>
2.1 -- Agreement and Plan of Merger dated August 23, 1996 among the Participating Stockholders, IMED
Corporation, IMED Merger Sub, Inc., IVAC Holdings, Inc. and IVAC Medical Systems, Inc.
(Incorporated by reference to Exhibit 2 to Advanced Medical, Inc.'s report on Form 8-K dated
August 23, 1996 (the "AM August 8-K")).
2.2 -- Agreement of Stock Purchase and Plan of Recapitalization dated November 26, 1996 among Advanced
Medical, Inc., Decisions Incorporated and Jeffry M. Picower (Incorporated by reference to
Exhibit 10.3 to Advanced Medical, Inc.'s report on Form 8-K dated December 11, 1996 (the "AM
December 8-K")).
3.1 -- Certificate of Incorporation of Advanced Medical, Inc. and form of Certificate of Incorporation
of Advanced Medical, Inc., 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, Inc. (the "Prospectus/Joint Proxy Statement")).
3.2 -- By-Laws of Advanced Medical, Inc., as amended. (Incorporated by reference to Exhibit 3.1(b) to
the Prospectus/Joint Proxy Statement.)
</TABLE>
82
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- - ------------- ------------------------------------------------------------------------------------------------
<C> <C> <S>
3.3 -- Amendments to Articles First and Fourth of the Restated Certificate of Incorporation of Advanced
Medical, Inc. (Incorporated by reference to Exhibits A and B to Advanced Medical Inc.'s Proxy
Statement, dated August 15, 1990, for its Special Meeting of Stockholders held on September 7,
1990).
3.4 -- Amendment to Article Fourth of the Restated Certificate of Incorporation of Advanced Medical,
Inc. (Incorporated by reference to Annex III to Advanced Medical Inc.'s Proxy Statement, dated
July 25, 1994, for its Special Meeting of Stockholders held on August 11, 1994).
4.1 -- Indenture dated as of November 26, 1996 among IMED Corporation, IMED International Trading Corp.
and United States Trust Company of New York, as trustee (including form of Notes) (Incorporated
by reference to Exhibit 10.2 to the AM December 8-K).
4.2 -- Indenture Assumption Agreement dated as of November 26, 1996 between IVAC Holdings, Inc. and
United States Trust Company of New York, as trustee.*
4.3 -- Supplemental Indenture dated as of November 26, 1996 between IVAC Overseas Holdings, Inc. and
United States Trust Company of New York, as trustee.*
4.4 -- Registration Rights Agreement dated as of November 26, 1996 among IMED Corporation, IMED
International Trading Corp., Donaldson, Lufkin and Jenrette Securities Corporation, BT
Securities Corporation, Bear, Stearns & Co. Inc. and Paribas Corporation.*
4.5 -- Registration Rights Assumption Agreement dated as of November 26, 1996 between IVAC Holdings,
Inc. and IVAC Overseas Holdings, Inc.*
4.6 -- Indenture to U.S. Trust Company of 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).
4.7 -- Modification Agreement dated February 3, 1995 by and between Advanced Medical, Inc. and
Decisions Incorporated. (Incorporated by reference to Exhibit 4.11 to Advanced Medical Inc.'s
Annual Report on Form 10-K for the year ended December 31, 1994 (the "1994 10-K")).
4.8 -- Exchange Agreement dated February 3, 1995 by and among Advanced Medical, Inc. and Fidelity
Convertible Securities Fund and Fidelity Select Healthcare Fund. (Incorporated by reference to
Advanced Medical Inc.'s 1994 10-K).
10.1 -- Credit Agreement dated as of November 26, 1996 among Advanced Medical, Inc., IMED Corporation,
Various Lending Institutions, Bankers Trust Company, Banque Paribas and Donaldson, Lufkin &
Jenrette Securities Corporation (Incorporated by reference to Exhibit 10.1 to the AM December
8-K).
10.2 -- Employment Agreement dated as of August 23, 1996 among William J. Mercer, IMED Corporation and
Advanced Medical, Inc. (Incorporated by reference to Exhibit 10.4 to the AM December 8-K).
10.3 -- Employment Agreement dated as of August 23, 1996 among Joseph W. Kuhn, IMED Corporation and
Advanced Medical, Inc. (Incorporated by reference to Exhibit 10.5 to the AM December 8-K).
</TABLE>
83
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- - ------------- ------------------------------------------------------------------------------------------------
<C> <C> <S>
10.4 -- Advanced Medical, Inc.'s Third Amended and Restated 1988 Stock Option Plan (Incorporated by
reference to Annex IV to Advanced Medical, Inc.'s Proxy Statement dated July 25, 1994 for its
Special Meeting of Stockholders held on August 11, 1994 (the "AM August 1994 Proxy Statement")).
10.5 -- Advanced Medical, Inc.'s Second Amended and Restated 1990 Non-Qualified Stock Option Plan for
Non-Employee Directors (Incorporated by reference to Annex V to the AM August 1994 Proxy
Statement).
10.6 -- Form of Indemnification Agreements between IVAC Holdings, Inc. and certain of its directors and
officers (Incorporated by reference to Exhibit 10.2 to IVAC Medical System, Inc.'s Report on
Form 10-Q for the quarter ended June 30, 1996).
10.7 -- Wateridge Plaza Office Building Lease Agreement dated as of December 1, 1995 between California
Public Employees' Retirement System and IVAC Corporation (Incorporated by reference to Exhibit
10.12 to IVAC Medical Systems, Inc.'s Report on Form 10-K for the year ended December 31, 1995
(the "IVAC 1995 Form 10-K")).
10.8 -- Activity Road Lease Agreement dated as of October 25, 1995 between Rancho Bernardo Corporate
Center Ltd. and IVAC Corporation (Incorporated by reference to Exhibit 10.13 to the IVAC 1995
Form 10-K).
10.9 -- Kenamar Court Lease Agreement dated as of January 24, 1996 between Brentcrest Properties, Inc.
and IVAC Corporation (Incorporated by reference to Exhibit 10.14 of the IVAC 1995 Form 10-K).
10.10 -- Development and Exclusive Distribution Agreement dated May 8, 1995 between Debiotech SA and IMED
Corporation (Incorporated by reference to Exhibit 10.7 of Amendment No. 2 dated January 31, 1996
to Advanced Medical, Inc.'s Report on Form 10-Q for the quarter ended September 30, 1995).
10.11 -- Asset Transfer Agreement dated June 26, 1996 among IMED Ltd., IMED Corporation, Pharmacia AB and
Pharmacia & Upjohn Limited with respect to the acquisition of certain European assets
(Incorporated by reference to Exhibit 10.28 to Advanced Medical, Inc.'s Report on Form 10-Q for
the quarter ended June 30, 1996 (the "AM June 1996 Form 10-Q")).
10.12 -- Assignment Agreement dated June 26, 1996 among IMED Corporation, IMED International Trading
Corp., Advanced Medical, Inc. and Pharmacia, AB with respect to the acquisition of European
distribution rights (Incorporated by reference to Exhibit 10.29 to the AM June 1996 Form 10-Q).
10.13 -- 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.)
10.14 -- Consulting Agreement dated March 15, 1993 between Henry Green and Advanced Medical, Inc.
(Incorporated by reference to Exhibit 10.89 to Advanced Medical, Inc.'s Annual Report on Form
10-K for the year ended December 31, 1992).
11 -- Computation of Net (Loss) Income per share for the three years ended December 31, 1996.
21 -- List of Subsidiaries of Advanced Medical, Inc.
23 -- Consent of Price Waterhouse LLP.
</TABLE>
84
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- - ------------- ------------------------------------------------------------------------------------------------
<C> <C> <S>
27 -- Financial Data Schedule.
</TABLE>
- - ------------------------
* Filed as an exhibit to the Registration Statement on Form S-4 (333-18687) of
the Company, IVAC Overseas Holdings, Inc. and IMED International Trading
Corp. dated December 24, 1996.
(b) Report on Form 8-K.
During the fourth quarter of 1996, Advanced Medical filed reports on Form
8-K dated November 27, 1996 and December 10, 1996. These reports contain
information regarding the Merger.
85
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 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, in the City of San
Diego, State of California, on April 14, 1997.
ADVANCED MEDICAL, INC.
By: /s/ WILLIAM J. MERCER
-----------------------------------------
Name: William J. Mercer
Title: President
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.
<TABLE>
<CAPTION>
NAME TITLE(S) DATE
- - ---------------------------------------- ------------------------------ --------------------
<C> <S> <C>
/s/ JEFFRY M. PICOWER
- - ---------------------------------------- Director and Chairman of the April 14, 1997
Jeffry M. Picower Board
Director, President, Chief
/s/ WILLIAM J. MERCER Executive Officer, Chief
- - ---------------------------------------- Financial Officer and Chief April 14, 1997
William J. Mercer Accounting Officer
/s/ NORMAN M. DEAN
- - ---------------------------------------- Director April 14, 1997
Norman M. Dean
/s/ HENRY GREEN
- - ---------------------------------------- Director April 14, 1997
Henry Green
/s/ FREDERIC GREENBERG
- - ---------------------------------------- Director April 14, 1997
Frederic Greenberg
/s/ RICHARD B. KELSKY
- - ---------------------------------------- Director April 14, 1997
Richard B. Kelsky
</TABLE>
86
<PAGE>
ADVANCED MEDICAL, INC. AND SUBSIDIARIES
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE THREE YEARS ENDED DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS ADDITIONS
BALANCE AT CHARGED TO CHARGED BALANCE AT
BEGINNING COSTS AND TO OTHER END OF
OF PERIOD EXPENSES ACCOUNTS(1) DEDUCTIONS(2) PERIOD
----------- ----------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Deducted from receivables
Allowance for doubtful accounts:
Year ended December 31, 1994................... $ 804 $ 100 -- $ (49) $ 855
Year ended December 31, 1995................... 855 100 -- (80) 875
Year ended December 31, 1996................... 875 100 $ 3,320 (210) 4,085
</TABLE>
- - ------------------------
(1) Represents amount of allowance for doubtful accounts assigned to accounts
receivables acquired in the Merger.
(2) Represents accounts written-off as uncollectible, net of collections on
accounts previously written-off.
S-II-1
<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,
-----------------------
1995 1996
---------- -----------
<S> <C> <C>
Current assets:
Cash................................................................................... $ 1,391 $ 2,936
Securities available for sale.......................................................... 6,975 --
Receivables, prepaid expenses and other current assets................................. 993 767
---------- -----------
Total current assets................................................................... 9,359 3,703
Restricted cash.......................................................................... 25,000 --
Investments in and net advances from subsidiaries........................................ 73,871 54,538
Other investments, at cost............................................................... 174 174
Intangible assets, net................................................................... 5,100 1,714
Other non-current assets................................................................. 4,387 3,850
---------- -----------
$ 117,891 $ 63,979
---------- -----------
---------- -----------
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable....................................................................... $ 10 $ 4
Accrued expenses and other current liabilities......................................... 3,556 1,770
---------- -----------
Total current liabilities.............................................................. 3,566 1,774
---------- -----------
Long-term debt........................................................................... 75,576 16,152
---------- -----------
Contingent liabilities and commitments (Note 7)
Mandatorily redeemable equity securities................................................. 7,217 --
---------- -----------
Preferred stock, common stock and stockholders' equity (deficit):
Common stock........................................................................... 162 589
Capital in excess of par value......................................................... 62,965 147,840
Accumulated deficit.................................................................... (34,468) (101,704)
Treasury stock......................................................................... (734) (734)
Unrealized holding gain from securities available for sale, net of tax................. 3,577 --
Other equity........................................................................... 30 62
---------- -----------
31,532 46,053
---------- -----------
$ 117,891 $ 63,979
---------- -----------
---------- -----------
</TABLE>
The accompanying notes are an integral part of these Condensed Financial
Statements.
S-III-1
<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,
-----------------------------------
1994 1995 1996
---------- ---------- -----------
<S> <C> <C> <C>
General and administrative expense........................................... $ 2,616 $ 2,209 $ 2,278
Other income (expense):
Interest income............................................................ 15 108 950
Interest expense........................................................... (5,787) (6,044) (7,087)
Debt conversion expense.................................................... -- -- (10,000)
Equity in earnings (loss) of unconsolidated subsidiaries................... 12,554 19,766 (48,637)
Other, net................................................................. 1,511 656 716
---------- ---------- -----------
8,293 14,486 (64,058)
---------- ---------- -----------
Income (loss) before income taxes and extraordinary item..................... 5,677 12,277 (66,336)
Income tax benefit........................................................... -- -- 730
---------- ---------- -----------
Income (loss) before extraordinary item...................................... 5,677 12,277 (65,606)
Extraordinary item:
Gain (loss) on early retirement of debt, net of taxes...................... 15,177 (1,630)
---------- ---------- -----------
Net income (loss)............................................................ 5,677 27,454 (67,236)
Accumulated deficit at beginning of year..................................... (67,599) (61,922) (34,468)
---------- ---------- -----------
Accumulated deficit at end of year........................................... $ (61,922) $ (34,468) $ (101,704)
---------- ---------- -----------
---------- ---------- -----------
</TABLE>
The accompanying notes are an integral part of these Condensed Financial
Statements.
S-III-2
<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,
---------------------------------
1994 1995 1996
--------- ---------- ----------
<S> <C> <C> <C>
Net cash used in operating activities.......................................... $ (7,143) $ (6,743) $ (9,222)
--------- ---------- ----------
Cash flows from investing activities:
Dividends on IMED redeemable preferred stock................................. 2,273 6,684 4,067
Proceeds from sale of IMED redeemable preferred stock........................ -- 880 3,350
Net decrease (increase) in restricted cash................................... -- (25,000) 25,000
Proceeds from sale of investments............................................ 3,768 859 2,374
--------- ---------- ----------
Net cash provided by (used in) investing activities............................ 6,041 (16,577) 34,791
--------- ---------- ----------
Cash flows from financing activities:
Proceeds from issuance of long-term debt..................................... 12,500 25,000 --
Proceeds from issuance of common stock....................................... -- -- 40,024
Debt repaid in merger........................................................ -- -- (24,116)
Principal payments on long-term debt......................................... (9,300) -- --
Intercompany borrowings...................................................... (1,978) -- --
Debt issuance costs.......................................................... -- (488) --
Redemption/purchase of preferred stock including related dividends........... (686) -- (7,844)
Purchase of IMED common stock warrant........................................ -- -- (12,500)
Capital contribution to IMED................................................. -- -- (19,588)
--------- ---------- ----------
Net cash provided by (used in) financing activities............................ 536 24,512 (24,024)
--------- ---------- ----------
Net (decrease) increase in cash................................................ (566) 1,192 1,545
Cash at beginning of year...................................................... 765 199 1,391
--------- ---------- ----------
Cash at end of year............................................................ $ 199 $ 1,391 $ 2,936
--------- ---------- ----------
--------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these Condensed Financial
Statements.
S-III-3
<PAGE>
ADVANCED MEDICAL, INC. AND SUBSIDIARIES
SCHEDULE III - CONDENSED FINANCIAL INFORMATION OF ADVANCED MEDICAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(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.
RECLASSIFICATIONS:
Certain prior year amounts have been reclassified to conform to the
classifications used in 1996.
NOTE 2--SECURITIES AVAILABLE FOR SALE:
The Company classifies its investment securities as "available for sale";
accordingly, such investment securities are recorded at their fair market value
with increases or decreases in fair value recorded as a component of
stockholders' equity. Actual gains and losses are recognized in the statement of
operations as the underlying securities are sold.
See Note 10 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 or losses. Investments in preferred stock are stated at cost.
Investments in and net advances to/(from) subsidiaries comprise the
following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1996
--------- ---------
<S> <C> <C>
IMED redeemable preferred stock......................................... $ 12,116 $ --
IMED common ownership interest and advances............................. 60,520 53,332
Other subsidiaries...................................................... 1,235 1,206
--------- ---------
$ 73,871 $ 54,538
--------- ---------
--------- ---------
</TABLE>
At December 31, 1995, IMED had 1,212 shares of $0.01 par value mandatorily
redeemable preferred stock ("12% Preferred Stock") outstanding, all of which
were owned by Advanced Medical. The 12% Preferred Stock had a stated value of
$10,000 per share. During 1995 and 1996, IMED redeemed 88 and 335 shares,
respectively, of its 12% Preferred Stock from Advanced Medical for $880 and
$3,350, respectively. In June 1996, Advanced Medical contributed to IMED $8,776
representing the outstanding par value and accrued dividends on all the
remaining outstanding shares of IMED's 12% Preferred Stock. The preferred shares
were then canceled. IMED made dividend payments to Advanced Medical of $2,273,
$6,684 and $4,067 during 1994, 1995 and 1996, respectively, related to the 12%
Preferred Stock.
S-III-4
<PAGE>
ADVANCED MEDICAL, INC. AND SUBSIDIARIES
SCHEDULE III - CONDENSED FINANCIAL INFORMATION OF ADVANCED MEDICAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(DOLLARS IN THOUSANDS)
NOTE 4--PATENTS:
Advanced Medical acquired patents for $10,000 on April 2, 1990. These
patents were licensed to IMED for a royalty of $1,100 per annum. Effective June
30, 1996, Advanced Medical made a non-cash contribution of $2,885 to IMED
representing Advanced Medical's net carrying value of these patents.
NOTE 5--LONG-TERM DEBT:
The terms and maturities of Advanced Medical's long-term debt are described
in Note 4 to the Consolidated Financial Statements.
NOTE 6--MANDATORILY REDEEMABLE EQUITY SECURITIES:
Advanced Medical's mandatorily redeemable equity securities are described in
Note 6 to the Consolidated Financial Statements.
NOTE 7--LITIGATION AND CONTINGENCIES:
Litigation and contingencies are described in Note 16 to the Consolidated
Financial Statements.
S-III-5
<PAGE>
EXHIBIT 11
ADVANCED MEDICAL, INC. AND SUBSIDIARIES
COMPUTATION OF NET (LOSS) INCOME PER SHARE
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1994 1995 1996
--------- --------- ----------
<S> <C> <C> <C>
INCOME (LOSS) PER COMMON SHARE ASSUMING NO DILUTION
Income (loss) before extraordinary item and dividends and accretion on
mandatorily redeemable preferred stock...................................... $ 5,677 $ 12,277 $ (65,606)
Dividends and accretion on mandatorily redeemable preferred stock............. 874 650 962
--------- --------- ----------
Income (loss) before extraordinary item....................................... 4,803 11,627 (66,568)
Extraordinary item--gain (loss) on early retirement of debt, net of taxes..... -- 15,177 (1,630)
--------- --------- ----------
Net income attributable to common stock....................................... $ 4,803 $ 26,804 $ (68,198)
--------- --------- ----------
--------- --------- ----------
Weighted average common shares outstanding assuming no dilution (1)........... 14,069 15,755 20,343
--------- --------- ----------
--------- --------- ----------
Income (loss) per common share assuming no dilution:
Income (loss) before extraordinary item....................................... $ .34 $ .74 $ (3.27)
Extraordinary item--gain (loss) on early retirement of debt, net of taxes..... -- .96 (0.08)
--------- --------- ----------
Net income (loss) per common share assuming no dilution....................... $ .34 $ 1.70 $ (3.35)
--------- --------- ----------
--------- --------- ----------
INCOME PER COMMON SHARE ASSUMING FULL DILUTION (2)
Income before extraordinary item and dividends and accretion on mandatorily
redeemable preferred stock.................................................. $ 5,677 $ 12,277
Dividends and accretion on mandatorily redeemable preferred stock............. 874 650
Add: interest expense, net of tax, on convertible promissory notes............ 386 684
--------- ---------
Income before extraordinary item.............................................. 5,189 12,311
Extraordinary item--gain on early retirement of debt, net of taxes............ -- 15,177
--------- ---------
Net income attributable to common stock....................................... $ 5,189 $ 27,488
--------- ---------
--------- ---------
Weighted average common shares outstanding prior to conversion of convertible
promissory notes (1)........................................................... 14,069 15,907
Add: Weighted average shares issued upon conversion of convertible promissory
notes.......................................................................... 10,030 17,276
Weighted average common shares outstanding assuming full
dilution....................................................................... 24,099 33,183
--------- ---------
--------- ---------
Income per common share assuming full dilution:
Income before extraordinary item.............................................. $ .22 $ .37
Extraordinary item--gain on early retirement of debt, net of taxes............ -- .46
--------- ---------
Net income per common share assuming full dilution............................ $ .22 $ .83
--------- ---------
--------- ---------
</TABLE>
- - ------------------------
(1) Includes the common stock equivalent of dilutive options outstanding at the
end of each period.
(2) Fully diluted loss per common share is not included for fiscal year 1996 as
it is anti-dilutive.
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF ADVANCED MEDICAL, INC.
<TABLE>
<CAPTION>
NAME JURISDICTION OF INCORPORATION
- - --------------------------------------- -------------------------------------------------------------------------
<C> <S>
IVAC Holdings, Inc. Delaware
IVAC Overseas Holdings, Inc. Delaware
River Medical, Inc. Delaware
IVAC Foreign Sales Corp. Barbados
IVAC Canada, Inc. Canada
IVAC-Medical, B.V. Belgium
IVAC Scandinavia AB Sweden
IVAC Industries Limited United Kingdom
IVAC UK Limited United Kingdom
IVAC France S.A. France
IVAC Medizintechnik GmbH Germany
Electromedicina IVAC, S.L. Spain
IMED International Trading Corp. Delaware
IMED Ltd. United Kingdom
IMED Pty. Ltd. Australia
IMED Canada Ltd. Canada
IMED Holding Co. Ltd. British Virgin Islands
</TABLE>
<PAGE>
EXHIBIT 23
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 April 11, 1997 appearing on page 40 of this Form 10-K.
PRICE WATERHOUSE LLP
San Diego, California
April 14, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORAMTION 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> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 14,416
<SECURITIES> 0
<RECEIVABLES> 75,164
<ALLOWANCES> (4,085)
<INVENTORY> 58,976
<CURRENT-ASSETS> 182,854
<PP&E> 73,505
<DEPRECIATION> (16,877)
<TOTAL-ASSETS> 593,382
<CURRENT-LIABILITIES> 95,069
<BONDS> 436,130
0
0
<COMMON> 589
<OTHER-SE> 45,464
<TOTAL-LIABILITY-AND-EQUITY> 593,382
<SALES> 136,371
<TOTAL-REVENUES> 136,371
<CGS> 78,616
<TOTAL-COSTS> 78,616
<OTHER-EXPENSES> 105,514
<LOSS-PROVISION> 100
<INTEREST-EXPENSE> 13,393
<INCOME-PRETAX> (66,336)
<INCOME-TAX> (730)
<INCOME-CONTINUING> (65,606)
<DISCONTINUED> 0
<EXTRAORDINARY> (1,630)
<CHANGES> 0
<NET-INCOME> (67,236)
<EPS-PRIMARY> (3.35)
<EPS-DILUTED> (3.35)
</TABLE>
