**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington, D.C.20549**

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**FORM10-K**

**ý****ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF**

**THE SECURITIES EXCHANGE ACT OF 1934**

**For thefiscal year ended December 31, 2004**

**or**

**o****TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF**

**THE SECURITIES EXCHANGE ACT OF 1934**

 

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**Commission File No. 333-112848-03**

 

**MEDVEST HOLDINGS CORPORATION**

(Exact name of Registrant asspecified in its charter)

 
| **Ohio**                                                        | ** ** | **31-1750092**                        |
|-----------------------------------------------------------------|------------|---------------------------------------|
| (State or other jurisdiction of

incorporation or organization) |       | (I.R.S. Employer

Identification No.) |

 

**2231 RutherfordRoad**

**Carlsbad,California 92008**

(Address of principal executiveoffice)

**(760) 602-4400**

(Registrant’s telephone number,including area code)

 

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**Securitiesregistered pursuant to Section 12(b) of the Act: **None

 

**Securitiesregistered pursuant to Section 12(g) of the Act: **None

 

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*               *Indicate by checkmark whether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.

Yes ý            No o

 

                Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K (229.405of this chapter) is not contained herein, and will not be contained, to thebest of registrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or any amendment tothis Form 10-K.  o

 

                Indicate by checkmark whether the registrant is an accelerated filer (as defined in Rule 12b-2of the Act).

Yes o            No ý

 

                There is no established trading marketfor the registrant’s common stock or preferred stock.  As of March 10, 2005, no shares of theregistrant’s common stock or preferred stock were held by non-affiliates.

 

                At March 10, 2005,there were 1,974,870 shares of common stock outstanding and 17,773,826 sharesof preferred stock outstanding.

 

**Documents Incorporated by Reference:** None

 

 

 

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**MEDVEST HOLDINGS CORPORATION**

**2004 FORM10-K ANNUAL REPORT**

 

**TABLE OF CONTENTS**

** **
| **Item No.** | ** ** | **Description**                                                                                                     | ** ** |
|--------------|------------|---------------------------------------------------------------------------------------------------------------------|------------|
|         |       |                                                                                                                |       |
|         |       | Important  Information Regarding Forward-Looking Statements                                                         |       |
|         |       |                                                                                                                |       |
| ** **   | ** ** | **PART I**                                                                                                          | ** ** |
|         |       |                                                                                                                |       |
| Item  1.     |       | Business                                                                                                            |       |
| Item  2.     |       | Properties                                                                                                          |       |
| Item 3.      |       | Legal Proceedings                                                                                                   |       |
| Item  4.     |       | Submission  of Matters to a Vote of Security Holders                                                                |       |
|         |       |                                                                                                                |       |
| ** **   | ** ** | **PART II**                                                                                                         |       |
|         |       |                                                                                                                |       |
| Item  5.     |       | Market  for Registrant’s Common Equity, Related Stockholder Matters and Issuer  Purchases of Equity Securities |       |
| Item 6.      |       | Selected  Financial Data                                                                                            |       |
| Item  7.     |       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                         |       |
| Item  7A.    |       | Quantitative  and Qualitative Disclosures About Market Risk                                                         |       |
| Item  8.     |       | Financial  Statements and Supplementary Data                                                                        |       |
| Item  9.     |       | Changes  in and Disagreements With Accountants on Accounting and Financial Disclosure                               |       |
| Item 9A.     |       | Controls and  Procedures                                                                                            |       |
| Item 9B.     |       | Other Information                                                                                                   |       |
|         |       |                                                                                                                |       |
| ** **   | ** ** | **PART III**                                                                                                        |       |
|         |       |                                                                                                                |       |
| Item  10.    |       | Directors  and Executive Officers of the Registrant                                                                 |       |
| Item 11.     |       | Executive Compensation                                                                                              |       |
| Item  12.    |       | Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters                    |       |
| Item  13.    |       | Certain  Relationships and Related Transactions                                                                     |       |
| Item  14.    |       | Principal  Accounting Fees and Services                                                                             |       |
|         |       |                                                                                                                |       |
| ** **   | ** ** | **PART IV**                                                                                                         |       |
| Item  15.    |       | Exhibits  and Financial Statement Schedules                                                                         |       |
|         |       |                                                                                                                |       |
|         |       | Signatures                                                                                                          |       |
|         |       | Certifications                                                                                                      |       |
|         |       |                                                                                                                |       |

 

 

 

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**IMPORTANT INFORMATION REGARDING FORWARD-LOOKINGSTATEMENTS**

 

Certain of thematters discussed in this report, including, without limitation, mattersdiscussed under Item 7, “Management’s Discussion and Analysis of FinancialCondition and Results of Operations,” may constitute forward-looking statementswithin the meaning of Section 21E of the Securities Exchange Act of 1934, asamended.  Certain of theseforward-looking statements can be identified by the use of forward-lookingterminology such as “believes,” “expects,” “may,” “will,” “should,” “seeks,” “approximately,”“intends,” “plans,” “estimates,” or “anticipates” or the negative of theseterms or other comparable terminology, or by discussions of strategy, plans orintention. Statements contained in this report that are not historical factsare forward-looking statements.  Withoutlimiting the generality of the preceding statement, all statements in thisreport concerning or relating to estimated and projected earnings, margins,costs, expenditures, cash flows, growth rates and financial results areforward-looking statements.  In addition,through senior management of MedVest Holdings Corporation and Medex, Inc.,forward-looking statements are made concerning expected future operations,performance and other developments.  Suchforward-looking statements are necessary estimates reflecting management’s bestjudgment based upon current information and involve a number of risks anduncertainties.  Other factors may affectthe accuracy of these forward-looking statements and actual results may differmaterially from the results anticipated in these forward-lookingstatements.  While it is impossible toidentify all such factors, factors that could cause actual results to differmaterially from those estimated include, but are not limited to, those factorsor conditions described under Item 7, “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations.”

 

**PART I**

 

**ITEM 1. BUSINESS**

 

MedVest Holdings Corporation (the “Corporation” or “MedVest”) owns allof the assets and liabilities of Medex, Inc.  MedVest’sonly assets are its investment in and advances to Medex, Inc.  Management believes that the financialstatements and operating results of MedVest and Medex, Inc. do not vary significantly.  Therefore, the consolidated group is referredto herein as “the Company” or “Medex”.

 

Medex is a leadingglobal manufacturer and marketer of critical care disposable and non-disposablemedical products. The Company’s products are used primarily in acute caresettings for a variety of diagnostic and therapeutic procedures. Medex focuseson products for: operating rooms; adult, pediatric and neonatal intensive careunits (“ICUs”); catheterization and radiology laboratories; and respiratory departments.The Company offers its customers a complete fluid and drug infusion systemcomprised of infusion pumps, fluid and drug administration products and peripheralintravenous catheters (“PIVCs”), all of which function together to safelydeliver measured doses of fluids and drugs into a patient’s vascular system. TheCompany also manufactures and markets invasive pressure monitoring systems,catheterization laboratory (“cath lab”) packs and accessories and respiratoryproducts. The Company believes that most of its products have establishedwell-recognized brand names in the critical care market. Worldwide, the Companyhas a history of product innovation and development, and its products garnersignificant market share in both domestic and international markets.

 

For the year endedDecember 31, 2004, the Company had net sales and operating earnings of $340.7million and $74.2 million, respectively. The Company has a diversified endcustomer base, which consists of hospitals and other alternate care settings,with its top 10 customers representing less than 6% of our net sales for theyear ended December 31, 2004. The following table sets forth the percentage of theCompany’s net sales for the year ended December 31, 2004 provided by each of itsfour primary product lines (in thousands):

 

| ** **                      | ** ** | ** **    | ** ** | **Percentage of** | ** ** |
|---------------------------------|------------|---------------|------------|-------------------|------------|
| ** **                      | ** ** | **Net Sales** | ** ** | **Net Sales**     | ** ** |
|                            |       |          |       |              |       |
| Infusion Systems                |       | $             | 273,477    |              | 80.3       | % |
| Pressure  Monitoring Systems    |       | 32,087        |       | 9.4               | %          |
| Cath Lab Packs  and Accessories |       | 27,756        |       | 8.1               | %          |
| Respiratory  Products           |       | 7,412         |       | 2.2               | %          |
|                            |       |          |       |              |       |
| Total                           |       | $             | 340,732    |              | 100.0      | % |

 

 

The Company marketsits products through a dedicated global sales force of approximately 200 salesrepresentatives and a network of distributors to over 5,500 hospitals andalternate care settings in more than 80 countries. In the United States, theCompany

 

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has long-standingrelationships with some of the largest and most prominent group purchasingorganizations (“GPOs”) and integrated delivery networks (“IDNs”), which itbelieves positions its sales force to sell its entire portfolio of products tothe appropriate call point within a hospital during a single sales call.  Outside the United States, the Company’ssales force is direct in 11 countries. The Company believes that having adirect sales force in foreign markets ensures that its products receiveappropriate focus and allows it to better understand local preferences so as tobetter serve such markets. The Company generated approximately 42.7% of its netsales for the year ended December 31, 2004 outside of the United States.

 

The Company wasformed through a management buyout from Compangnie de Saint-Gobain (“Saint-Gobain”)that was completed in February 2001. Following the management buyout, theCompany was largely focused on sales of its infusion, drug administration,pressure monitoring and cath lab products. In 2002, the Company acquired InhalationPlastics, Inc. (“IPI”), which provided it with a respiratory franchiseconsisting of products used for oxygen administration, anesthesia andventilator circuits, unit dose solutions and humidification. In May 2003, theCompany acquired substantially all of the assets of the Jelco PIVCs business fromEthicon Endo-Surgery, Inc., a wholly owned subsidiary of Johnson & Johnson(“Ethicon”).  Management refers to thisas the “Jelco acquisition” or “Jelco transaction”.  The Jelco transaction was integral inallowing the Company to provide its customers with a complete fluid and druginfusion system.

 

**Recent Developments**

 

**TheMerger**

 

On March 21, 2005,the Company announced the acquisition of its worldwide business by SmithsMedical, a division of Smiths Group plc (“Smiths”), in exchange forconsideration consisting of (i) a cash payment of approximately $650 million tothe Company’s stockholders and option holders, subject to post-closingadjustments, (ii) repayment of the Company’s $128.1 million term loan atclosing, and (iii) the assumption of approximately $200 million of the Company’soutstanding 8 7/8% Senior Subordinated Notes due2013.  On March 22, 2005, the Companycommenced a cash tender offer for any and all of the 8 7/8%Senior Subordinated Notes due 2013, and a consent solicitation to amend therelated indenture.  The tender offer isexpected to close on or about April 19, 2005.

 

The merger was subject to customary conditions,including the receipt of required antitrust approvals and clearances.  The merger has received the requisiteapprovals and clearances from authorities in the United States, Britain,Austria, Germany and Brazil.  Review byMexican regulatory authorities, which is conducted on a post-closing basis, isongoing.

 

Smiths, a British company listed on the London StockExchange, designs, manufactures and sells safety critical systems and productsand has market-leading positions in aerospace systems, detection systems,medical devices, mechanical seals and interconnect products.  Smiths will assume responsibility for theCompany’s worldwide manufacturing operations, to support existing Companybusiness operations.

 

**Recapitalization**

 

In April 2003, the Company entered into a recapitalization andstock purchase agreement with One Equity Partners, pursuant to which One EquityPartners made a capital contribution of $119.5 million to purchase MedVest’scapital stock, of which $103.1 million was paid directly to MedVest and$16.4 million was paid to other stockholders. As a result of theseinvestments, One Equity Partners and members of the Company’s senior managementheld all of the Company’s outstanding capital stock prior to the mergerdescribed above. In connection with this equity investment, the Company alsoentered into a purchase agreement with Ethicon Endo-Surgery, Inc. (“Ethicon”),a wholly owned subsidiary of Johnson and Johnson, to acquire substantially allof the assets of Ethicon’s peripheral intravenous catheter business (“Jelco”)for $340.0 million. Under the terms of the purchase agreement, the Companyacquired Jelco’s worldwide assets from Ethicon and certain of its affiliatesand assumed those of Jelco’s liabilities arising upon or after the closing ofthe acquisition. In addition, the Company acquired all of the issued andoutstanding capital stock of Johnson & Johnson Medical de MonterreyS.A. de C.V. (“Monterrey”), a subsidiary of Ethicon, a Mexican maquiladora witha manufacturing facility in Monterrey, Mexico, dedicated to the Jelco business.

 

**TheCompany’s Equity Sponsor**

 

One Equity Partners manages $3.5 billion of investments and commitmentsfor JPMorgan Chase & Co. in direct private equity transactions as well asventure and management buyout funds. Our investment professionals are locatedacross North America and Europe, with offices in New York, Chicago, Detroit,and Frankfurt. One Equity Partners focuses on making majority-ownership investmentsin late-stage, middle-market companies, with an emphasis on corporatepartnerships and divestitures.

 

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As of December 31,2004, affiliates of One Equity Partners owned approximately 83.3% of the Company’soutstanding capital stock on a fully-diluted basis.  As of the closing of the Smiths merger onMarch 21, 2005, One Equity Partners no longer owns any of the Company’soutstanding capital stock.

 

**TheCritical Care Market**

 

The Companymanufactures and distributes products in a $4.0 billion segment of the criticalcare products market. Critical care products typically account for asubstantial portion of a hospital’s total budget. Primary hospital call pointswithin this market include Intensive Care Units, Operating Rooms andCatheterization/Radiology departments. The critical care products industry ishighly fragmented with several of the businesses operating as subsidiaries ordivisions within larger companies. As divisions within larger entities, criticalcare businesses often do not receive adequate management focus. In recentyears, this has led several larger competitors to divest their critical carebusinesses. In addition, several of the smaller companies within the criticalcare segment often lack sufficient scale and breadth of product offering tocompete across the various categories within the critical care market. TheCompany believes that breadth of product offering and scale are important inthe critical care market as GPOs, IDNs and distributors seek to contract withsuppliers that provide a wide range of products allowing them to negotiatefavorable pricing and discounts across the spectrum of product offering.

 

The Company expectsthat growth in the critical care market will be driven primarily by:

 

•  *Heightened Focus onReducing Adverse Drug Events.*Hospitals and healthcare officials have expressedgrowing concerns over the safe administration of drugs and the potential foradverse events as the result of improper drug administration. Syringe pumpsadminister more precise volumes of fluids and drugs than volumetric pumps and shouldtherefore benefit from the increased focus on patient safety. Furthermore, theintroduction of infusion pumps that are programmable with enhanced safety featureshas reduced the potential for improper drug administration.

 

•  *Increased Demand forSingle-Use Disposable Products.*In response to growing concerns over the spread of infectiousdiseases and pressures to reduce healthcare costs, healthcare providers areincreasingly using single-use disposable products. Single-use products reducethe spread of infectious disease and are less costly than sterilizing andreprocessing critical care devices and instruments.

 

•  *An Aging Population.*According to the U.S. Census Bureau,individuals aged 65 and older in the United States comprise the fastest growingsegment of the population, with expected growth of 14% from 2000 to 2010. Inaddition, the populations of Europe and Japan are aging at a faster pace thanthe population of the United States. As a result, the number of critically illpatients and the percentage of critical care hospital admissions continue togrow. This growth is driving an increase in procedures requiring critical careproducts.

 

•  *Increased Focus onSafety Driving Favorable Government Legislation.*In April 2001, the Needlestick Safety andPrevention Act was enacted. The act requires that healthcare employers providetheir employees with the option to use safety-engineered sharp devices andmandates the involvement of clinicians in evaluating and selecting devices forclinical use. This legislation has contributed to the growth of safetycatheters, which currently represent over 90% of the U.S. PIVC market in termsof unit volume. While the U.S. market has shifted to safety PIVCs, a majorityof the markets outside the United States continue to use conventional PIVCs. TheCompany believes that the increased attention to the dangers of accidentalneedle sticks will lead other countries to pass similar legislation and willincrease the penetration of safety PIVCs outside the United States.

 

**Products**

 

The Company isfocused on delivering to its customers and to patients products that improvepatient care and increase practitioner safety. The Company continues to focuson product innovation and development to achieve this goal and to maintain itsmarket leading positions across our product lines. The Company categorizes itsproducts into the following primary product lines: (1) infusion systems,including its infusion pumps, disposables for fluid and drug administration andvascular access products, primarily PIVCs; (2) pressure monitoring systems; (3)cath lab packs and accessories; and (4) respiratory products.

 

***Infusion Systems***

 

The Company’sinfusion systems consist of a portfolio of complementary products that functiontogether to deliver fluids and drugs into a patient’s vascular system. Itsinfusion pumps deliver measured doses of fluids and drugs through various fluidand drug administration products to the patient’s vascular system through itsvascular access products, primarily PIVCs.

 

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*Infusion Pumps.* Infusion pumps facilitate the delivery of one or morefluids, primarily drugs, into a patient’s vascular system. With the growingnumber of critically ill hospital patients and more potent and complextreatment regimens, the average number of intravenous lines per patient hassignificantly increased. As reliance on intravenous drug therapy has increased,the awareness of the need for extremely precise intravenous administration ofdrugs and more accurate monitoring of intravenous fluid delivery hasintensified. The Company’s infusion pumps accounted for approximately $26.8million, or 7.9%, of its net sales for the year ended December 31, 2004.

 

The two primaryinfusion pumps are syringe pumps and volumetric pumps. The two systems differon a number of characteristics including size, weight, number of deliverychannels, programmability, mechanism of infusion, cost and service. The keydifference between syringe pumps and volumetric pumps is the level of controlover fluid delivery that each system affords medical staff and patients.Syringe pumps allow for more precise lower cost intravenous fluid delivery.

 

The Company focusesits efforts primarily on the higher margin syringe pump segment of this market.In the United States, syringe pumps predominantly are used in the pediatric andneonatal ICUs and anesthesia departments because of their ability to deliverprecise volumes of fluids. Syringe pumps represent approximately 17% of theU.S. infusion pump hardware market. In Europe, the Company believes thatsyringe pumps are the standard of care, representing approximately 65% of theEuropean infusion pump hardware market. The Company believes that its syringepumps offer leading technology and, as a result, provide the most accuratemeans for fluid and drug delivery to patients. The Company believes that it isthe market leader in the syringe pump segment of the domestic infusion pumpmarket, with approximately 39% U.S. market share.

 

•  *Syringe Pumps.*The Company produces various models ofsyringe pumps that are capable of accepting syringes ranging from 1 to 60 millilitersin volume and delivering fluids at precise flow rates ranging from 0.01milliliters to 1,130.0 milliliters per hour. This capability to deliver precise amounts of low volume drug dosesmakes the syringe pump more effective than the volumetric pump for theintravenous and regional infusion of anesthetic agents in the operating room,adult, pediatric and neonatal ICUs. The Company’s PharmGuard medication safetysoftware enables hospitals to comply with the Joint Commission on Accreditationof Healthcare Organizations Patient Safety initiatives and minimize adversedrug events. The PharmGuard software permits entry of drug parameters,including upper and lower limits for dose, rate, bolus, and loading doseinformation into a drug library.  As theclinician selects a particular drug for infusion, the PharmGuard softwareensures accurate delivery parameters and alerts the clinician if a drug limitis exceeded. The Company markets its line of syringe pumps under the Medfusionbrand name.

 

•  *Volumetric Pumps.*The Company also manufactures and sellsvolumetric pumps used to administer large fluid volumes ranging from 0.1milliliters to 999.9 milliliters per hour. The Company has designed avolumetric pump specifically for use in the pediatric and neonatal markets,which it refers to as its “KIDS” model. The Company’s KIDS volumetric pump canbe used for the administration of large, as well as small, fluid volumes tochildren and infants. The Company is currently designing a programmablevolumetric pump with enhanced safety features to reduce the possibility ofadverse events from drug administration.

 

•  *Infusion PumpAdministration Sets.*All infusion pumps require the use of disposable administration sets.An administration set consists of a plastic interface and tubing and may have avariety of features such as volume control, pumping segments or cassettepumping systems for more accurate delivery, clamps for flow regulation and multipleports for injecting medication and delivery of more than one solution.Components such as burettes and filters may also be added for critical drugs orspecial infusion. The Company produces a full line of single-use disposablefluid administration sets to accompany its infusion pumps and capture theassociated recurring net sales.

 

*Fluid and Drug Administration Products.*  Fluid and drug administration products consist of awide variety of single-use disposable stopcocks, adapters, manifolds,connectors, tubing, extension sets, T-connectors, injection adapters,anesthesia sets and needle-free products that facilitate and regulateintravenous delivery of fluids and drugs. These products are primarily the disposablesused in our infusion systems for fluid and drug therapies. The Company marketsthese products in all areas of the critical care market. The Company alsosupplies a small number of original equipment manufacturer (“OEM”) suppliers inthis product line who reach the end-user market via other manufacturers orproviders. The Company believes that it has leading market shares for a numberof its fluid and drug administration products. The Company’s fluid and drugadministration products accounted for approximately $29.7 million, or 8.7%, of itsnet sales for the year ended December 31, 2004.

 

*Vascular Access.* The Company’s vascularaccess products consist of catheters that provide the direct entry-point tointroduce fluids and drugs intravenously into patients. Single-use disposablePIVCs are the most commonly used catheters. The Company is a leadingmanufacturer of both conventional and safety PIVCs. The Company’s predominantfocus is on the relatively higher priced,

 

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higher margin, safetycatheter segment of the PIVC market, which currently represents over 90% interms of dollars and units, of the U.S. PIVC market. The Company believes that itcurrently has the number two market share position with over 35% market sharein terms of dollar and unit volume in the U.S. safety PIVC market. The Companybelieves that it has the number one market share position outside the UnitedStates in safety PIVCs in terms of dollar and unit volume. The Company’s vascularaccess products accounted for approximately $217.0 million, or 63.7%, of itsnet sales for the year ended December 31, 2004, with sales of PIVCs accountingfor 98.3% of these sales.

 

The Company alsomanufactures and markets a complete line of single and multi-lumen centralvenous catheters (“CVCs”) that are used for longer-term intravenous delivery offluids and drugs to patients. In addition, it offers percutaneous sheath introducersets, dialysis catheters, arterial cannulae and related medical device productsfor use in cardiology and intensive care.

 

The Company hasdeveloped an anti-microbial material that can be molded or extruded intomedical products and thereby reduce the likelihood of infections. Infections atthe site of the insertion of the catheter are the most common side-effect ofcatheter use. The Company believes that its anti-microbial material can be usedto reduce the likelihood of infection at the PIVC and CVC hub, which is thecatheter’s entry point into a patient’s body. The Company currently markets theanti-microbial CVC catheter, AgTive LogiCath, in Europe and is conducting Foodand Drug Administration (“FDA”) clinical trials in order to market this productin the United States.

 

***Pressure Monitoring Systems***

 

Invasive pressuremonitoring systems include disposable, semi-disposable and reusable pressuretransducers that are used to measure blood pressure within the body. Includedin our pressure monitoring systems are blood pressure transducers, which senseintravascular pressure and convert it to an electrical signal that istransmitted to a patient monitor. The monitor then processes and graphicallydisplays this data, allowing clinicians to monitor the cardiovascular system.Most blood pressure transducers carry a microchip, which converts themechanical pressure reading to an electrical signal, in the disposable part ofthe transducer. The Company was the first company to develop a transducer withthe microchip built into the non-disposable transducer mounting plate.

 

The Company alsomarkets intrauterine pressure (“IUP”) catheters used during high risk labor anddelivery situations to monitor and graphically display intrauterine pressure. Itspressure monitoring systems accounted for approximately $32.1 million, or 9.4%,of its net sales for the year ended December 31, 2004.  The Company designs, manufactures and marketsa complete line of disposable and reusable pressure infusion bags. Its pressuremonitoring product line also includes standard and customized pressuremonitoring sets, closed blood sampling kits, and intracranial pressuremonitoring devices and accessories. The Company believes that it currently hasapproximately 4% domestic market share and that it has over 21% European marketshare in this segment.

 

***Cath Lab Packs and Accessories***

 

Cath lab packs aresterilized pre-packaged trays that are assembled with single-use productsselected by the cardiac catheterization and radiology laboratory personnelperforming diagnostic and interventional catheterization procedures. TheCompany’s typical cath lab pack includes various devices used in thecatheterization process (such as manifolds, pressure transducers, tubing,syringes and introducing guide wires). It manufactures most of these productsand customizes our trays based on each customer’s exact specifications. InEurope, where the Company was the first company to offer cath lab packs overnine years ago, it believes that it is the leading provider of cath lab packs,with approximately 19% market share. Its cath lab packs and accessoriesaccounted for approximately $27.8 million, or 8.1%, of its net sales for theyear ended December 31, 2004.

 

***Respiratory Products***

 

The Companyentered the respiratory products market with its acquisition of certain assetsof IPI in 2002. Respiratory products include medical devices used for oxygenadministration, anesthesia and ventilator circuits, drug delivery, unit dosesolutions and humidification. While its respiratory products did not accountfor a material amount of its net sales for the year ended December 31, 2004,the critical care market exhibits attractive growth characteristics for ourrespiratory products and will help drive our future growth.

 

**Sales, Marketingand Distribution**

 

The Company sells itsproducts, both directly and indirectly, to a diverse group of customers in thehealthcare industry. Its primary markets consist of acute care centers,alternate care facilities, and OEM medical companies in North America, Europeand other geographic locations worldwide. Although the Company markets its products to healthcare professionals,who are the ultimate end users of its products and drive its sales growth, theCompany typically sells its products to distributors and OEMs, which then

 

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supply its products tothe end-user market.  For the year ended December31, 2004, the Company generated net sales of $340.7 million, of which approximately33.9% were derived from customers outside North America.

 

In North Americanand most European hospitals, the sales process consists of presenting productsto medical professionals in various areas of the acute care setting. Theseareas include anesthesia, neonatal intensive care, adult intensive care,cardiac cath labs, radiology and various alternate care facilities. Once theCompany has presented its products, the Company then works to gain clinicalsupport to obtain recommendations for its products from hospital personnel,including personnel in materials management, biomedical departments and pharmacies,who are in a position to make purchasing decisions regarding its products fromdistributors.

 

In response topressures in the United States to control medical costs, hospitals and otherpotential customers for Company products are increasingly combining theirpurchasing power through GPOs and IDNs. A GPO is a third-party purchasingorganization that negotiates pricing for its member hospitals. GPOs monitormember compliance to ensure minimum purchasing levels from contracted suppliersof approved products. IDNs are groups of hospitals that join together tomaximize certain functions, such as purchasing, for the benefit of the group.GPOs and IDNs typically enter into non-exclusive contracts that may last up toseveral years with a small number of providers of medical products and urgetheir member hospitals to use these products. Some manufacturers combineproducts such as fluids, disposable sets and equipment to secure groupcontracts. Although the level of hospitals’ compliance with the terms of groupcontracts varies by product, GPO and member hospital, it is significantlyeasier to sell to a hospital if a group contract is present. The Company haslong-standing GPO contracts with some of the largest GPOs in the country,including Premier, Inc., Novation, LLC/VPIA Inc., University Health SystemConsortium, AmeriNet, Inc., Consorta, Inc. and MedAssets, Inc.

 

In Europe, unlikethe United States, large buying groups are insignificant. A large percentage ofits sales are generated from annual contracts resulting from a tender process.In a tender process, an individual hospital or group of hospitals evaluatesoffers from potential suppliers to be sole providers of certain products forthat hospital or group for a specific period of time (typically ranging fromone to three years). During that period of time, the hospital will orderexclusively from the selected supplier at the specified tender price unlessquality, shipping, or other issues arise.

 

The Companyconducts its global sales and marketing efforts through its direct salesnetwork and through independent sales agents in select geographic areas. TheCompany conducts sales to certain international markets through independentdistributors located in the various countries. These sales representatives workwith independent hospital supply dealers to whom the Company sells many of itsmedical devices. In addition, these sales representatives work with dealersales forces at the hospital level to promote sales of its products. For the yearended December 31, 2004, the Company’s direct global sales accounted forapproximately 85.7% of its net sales.

 

The Company alsosells products to other medical device manufacturers, some of which arereferred to as original equipment manufacturers (“OEM”s). Its OEM sales aretypically made to other medical manufacturers, distributors and providers ofcath lab packs who incorporate its products into their product offerings. Inaddition, the Company customizes existing designs to the OEMs’ specifications. TheCompany has supply agreements with several OEM customers. Its OEM contractstypically specify delivery and ordering schedules, quality specifications andnet price levels. Meeting customer delivery and quality requirements are themost important factors in determining the ability to retain these accounts. OEMsales represented approximately 3.5% of its net sales for the year ended December31, 2004.

 

**Competition**

 

The market for theCompany’s products is highly competitive, and its customers have numeroussupply alternatives. Some of its competitors have substantially greaterresources than the Company. In addition, its customers are not bound bylong-term supply arrangements, so the Company may be unable to shift itsproduction to other products following a loss of customers to its competitors.However, the Company believes that it is able to compete favorably in itsvarious product areas on the basis of product quality, technological superiorityand price.

 

The followingtable identifies the Company’s principal competitors with respect to itsvarious products:

 

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| **Selected  Products**                | ** ** | **Selected  Competitors**                                 |
|---------------------------------------|------------|-----------------------------------------------------------|
|                                  |       |                                                      |
| Infusion  Systems—Infusion Pumps |       | Hospira, Inc. (recently  spun off from Abbott             |
|                                  |       | Laboratories),  Cardinal, Inc. (which recently acquired   |
|                                  |       | ALARIS Medical Systems,  Inc.), Baxter                    |
|                                  |       | International Inc., B.  Braun Melsungen AG and            |
|                                  |       | Fresenius Medical Care  Corporation                       |
|                                  |       |                                                      |
| Infusion Systems—Fluid  and Drug |       | Hospira, Inc., Baxter  International Inc., B. Braun       |
| Administration                        |       | Melsungen AG, Vygon  Corporation and Cardinal, Inc.       |
|                                  |       |                                                      |
| Infusion  Systems—Vascular       |       | Arrow International,  Inc., Becton Dickinson and          |
| Access                                |       | Company, B. Braun  Melsungen AG, Cook Critical Care,      |
|                                  |       | C.R. Bard, Inc. and  Terumo Medical Corporation           |
|                                  |       |                                                      |
| Pressure Monitoring  Systems          |       | Hospira, Inc., Becton  Dickinson and Company and          |
|                                  |       | Edwards Lifesciences  Corporation                         |
|                                  |       |                                                      |
| Cath Lab Packs and  Accessories       |       | B. Braun Melsungen AG,  Cardinal Health, Inc., DeRoyal    |
|                                  |       | Industries, Inc.,  Medline Industries, Inc.,              |
|                                  |       | Merit Medical Systems,  Inc. and Kimal plc                |
|                                  |       |                                                      |
| Respiratory Products                  |       | Cardinal Health, Inc.  and Teleflex, Inc. (which recently |
|                                  |       | acquired Hudson  Respiratory Care)                        |

 

 

**Manufacturingand Properties**

 

The Company operates nine manufacturing facilities, located inNorth America and Europe.  The Companybelieves its manufacturing facilities are adequate in terms of space,production capacity and suitability for its needs over the next several years.

 

All of the Company’sproducts are classified as medical devices subject to regulation by the FDA. Asa manufacturer of medical devices, Company manufacturing processes andfacilities in the United States are subject to on-site inspection andcontinuing review by the FDA for compliance with FDA Quality SystemRegulations. Manufacturing and sales of Company products outside the UnitedStates are also subject to foreign regulatory requirements that vary fromcountry to country. The time required to obtain approvals from foreigncountries may be longer or shorter than that required for FDA approval, andrequirements for foreign approvals may differ from FDA requirements.

 

The Company hasfully automated manufacturing facilities in Connecticut and Italy. In general, itsmanufacturing facilities have available capacity to accommodate its futuremanufacturing needs. Its manufacturing strategy is to manufacture products atthe highest quality, lowest cost and with timely delivery. The Company alsoexpects to achieve additional manufacturing synergies through futurerationalizations of facilities.

 

**Employees**

 

As of December 31,2004, the Company had over 2,000 employees in manufacturing, research anddevelopment, sales, marketing, executive and administrative positions. Of theseemployees, approximately 350 are subject to some form of collective bargainingagreement. These employees are located at our Latina, Italy and Monterrey,Mexico manufacturing facilities. None of its operations in the United Statesare subject to collective bargaining agreements. The Company considers itsrelations with its employees to be good. The Company has never experienced anystrikes or work stoppages.

 

**Researchand Development**

 

During the yearsended December 31, 2004, 2003 and 2002, the Company spent approximately $6.3million, $2.7 million and $2.5 million, respectively, for research anddevelopment. During 2005, the Company expects to spend up to 3.3% of its netsales for research and development. Its research and development programs focuson the development of new products, as well as technological enhancement toexisting products and updated designs. For example, the Company is studying thefeasibility of applying its patented anti-microbial materials to its PIVCs. TheCompany continually seeks to develop new technologies to improve the durability,

 

7

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performance and utilityof its existing products. In addition to its own research and developmentactivities, the Company receives new product and technology disclosures,especially in procedure-specific areas, from surgeons, inventors and operatingroom personnel. The Company seeks to obtain the rights to disclosures that itdeems promising from a clinical and commercial perspective by negotiatingagreements, which typically compensate the originator of the idea.

 

**Patents,Trademarks and Proprietary Rights**

 

The Company relies,in part, on patented and other proprietary technology. It typically seeks toobtain patent protection for

significant inventions. TheCompany currently holds a substantial number of patents, including patents inforeign jurisdictions. In

addition, it has severalpatents pending in the United States and numerous patents pending in foreignjurisdictions.

 

The products andtechnology that the Company currently licenses accounted for approximately 45.1%of its net sales for the year ended December 31, 2004. For the year endedDecember 31, 2004, approximately $1.9 million in royalties were due pursuant tothe terms of these license agreements. These license agreements include itslicense for the technology used in its Protectiv PIVCs, which accounted forapproximately 37.1% of its net sales for the year ended December 31, 2004.Under the terms of the Protectiv license agreement, the Company pays annualroyalties in an amount equal to 1.75% of worldwide net sales of ProtectivPIVCs. This license agreement terminates upon the expiration of the patentsunderlying the licensed technology, which expire in 2014. The Company has alsolicensed rights under many U.S. patents and corresponding foreign patentscovering a wide range of our products, both on an exclusive and non-exclusivebasis. In addition, certain patents are currently licensed to third parties ona non-exclusive basis. The Company sells its products under a variety oftrademarks, some of which it considers to be of sufficient importance towarrant registration in the United States and various foreign countries inwhich it does business. The Company also relies on trade secrets, unpatentedknow-how and continuing technological advancement to maintain its competitiveposition. The Company cannot assure you that the measures it uses to protect itstrade secrets and know-how will prevent their unauthorized disclosure or use orothers may not independently develop similar trade secrets or know-how orobtain access to its trade secrets, know-how or proprietary technology.

 

**Raw Materials**

 

The primary rawmaterials used in the production of the Company’s products include thermoplasticresins, plastic tubing, paper, plastic and Tyvek packaging materials andelectronic components. The Company obtains the majority of its raw materialsfrom multiple suppliers, and has substitute materials readily available. Itpurchases resins from Bayer Polymers LLC, The Geon Company, Dow PlasticsMedical Group and General Electric Company, with most supply moving throughdistributors such as PolyOne Distribution Corporation and The General PolymersDivision of Ashland Distribution Company. Although recent polycarbonateshortages were highly publicized, the Company was not materially impacted and hasnot experienced any shortages or significant delivery delays. The Company usespolycarbonate in the manufacture of certain plastic components used in its medicaldevices. The resins it uses are typically in pellet or powder form and areusually purchased on a spot market basis or under short-term pricing contracts.The Company establishes blanket supply contracts regarding its pricingstandards (no minimum quantities) wherever possible to lock pricing based onvolume.

 

As prices increasefor raw materials, the Company seeks to pass such price increases through toits customers, although a lag period often exists.

 

**Backlog**

 

Demand for itsprimary product lines is relatively constant throughout the year and seasonalfluctuations in marketing, production, shipments and inventories are notsignificant.  Backlogs are not asignificant factor in the industry and the Company does not have a significantbacklog.

 

**EnvironmentalMatters**

 

Compliance withenvironmental laws and regulations designed to regulate the discharge ofmaterials into the environment or otherwise protect the environment requirescontinuing management effort and expenditure by the Company. Some of theproperty owned and leased by the Company, including those acquired in theacquisition of the Jelco business, have historical industrial uses that areunrelated to the current site uses. The Company’s Southington, Connecticutfacility, acquired in the Jelco acquisition, is the subject of an ongoinginvestigation with respect to on-site contamination. Remediation plans withrespect to such contamination are being developed. Although the Companypresently cannot predict the final outcome of this investigation or estimatethe cost of any remediation, Ethicon has agreed to undertake, and bear anycosts related to, such investigation and remediation. The Company does notbelieve that the operating costs incurred in the ordinary course of business tosatisfy air and other permit requirements, properly 

 

8

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dispose of hazardousmaterials and otherwise comply with these laws and regulations form or arereasonably likely to form a material component of its operating costs, nor doesthe Company believe such costs have or are reasonably likely to have a materialadverse effect on its competitive or consolidated financial positions.

 

**RegulatoryMatters**

 

The Company’sproducts are classified as medical devices subject to regulation by the FDA.New products and certain changes to existing products generally require FDAclearance under a procedure known as premarket notification 510(k). A premarketnotification 510(k) clearance indicates FDA agreement with an applicant’sdetermination that the product for which clearance has been sought issubstantially equivalent to another medical device that was on the market priorto 1976 or that has received premarket notification 510(k) clearance. Someproducts were legally on the market prior to May 1976 and are therefore consideredpre-amendment devices requiring no 510(k) clearance. The Company’s productsgenerally are either Class I or Class II products with the FDA, meaning that itsproducts must meet certain FDA standards and controls and are subject to the premarketnotification requirements discussed above. Later discovery of previouslyunknown problems may result in restrictions on a product’s marketing, recall orwithdrawal of the product from the market.

 

The Company hasquality control/regulatory compliance groups that are tasked with monitoringcompliance with design specifications and relevant government regulations forall of its products. The Company and substantially all of its products aresubject to the provisions of the Federal Food, Drug and Cosmetic Act of 1938,as amended by the Medical Device Amendments of 1976, the Safe Medical DeviceAct of 1990, as amended in 1992, the Medical Device User Fee and ModernizationAct of 2002, and similar foreign regulations. In addition, certain of itsproducts are indirectly subject to the Needlestick Safety Act of 2001.

 

In April 2001,Congress passed the Needlestick Safety and Prevention Act. This actstrengthened the requirements for the use of safety-engineered sharp devices,including PIVCs. The Needlestick Safety and Prevention Act requires employers toimplement the use of safety medical devices designed to eliminate or minimizeoccupational exposure to blood borne pathogens through needle stick or otherinjuries. Under the Needlestick Safety and Prevention Act, healthcarefacilities must (1) review and update exposure control

plans to reflecttechnological advances, (2) maintain a sharp injury log in areas where sharpdevices are used, noting the type and brand of device used and (3) seek inputon engineering and work practice controls from the affected healthcare workers.

 

As a manufacturerof medical devices, our manufacturing processes and facilities are subject toperiodic on-site inspections and continuing review by the FDA to ensurecompliance with the Quality System Regulations as specified in Title 21, Codeof Federal Regulation (“CFR”) part 820. Many of the Company’s products aresubject to industry-set standards. Industry standards relating to its productsare generally formulated by committees of the Association for the Advancementof Medical Instrumentation (“AAMI”), International Organization forStandardization (“ISO”), International Electrotechnical Commission (“IEC”),American National Standards Institute (“ANSI”) or Institute of Electrical andElectronic Engineers (“IEEE”). The Company believes that its products presentlymeet applicable standards. The Company markets its products in a number offoreign markets. Requirements pertaining to its products vary widely fromcountry to country, ranging from simple product registrations to detailedsubmissions such as those required by the FDA. The Company believes that itsproducts currently meet applicable standards for the countries in which theyare marketed.

 

The Company issubject to product recall and has made product recalls in the past. No recallhas had a material effect on its financial condition, but there can be noassurance regulatory issues may not have a material adverse effect in thefuture.

 

Failure to comply withapplicable governmental regulations might result in penalties, including fines,recalls or seizure of product, total or partial suspension of production,refusal or delay in product approvals or clearances, increased quality controlcosts, or criminal prosecution.

 

Any change inexisting federal, state or foreign laws or regulations, or in theinterpretation or enforcement thereof, or the

promulgation of anyadditional laws or regulations could have an adverse effect on the Company’sfinancial condition or results of operations.

 

An event that hasa material impact on the Company’s foreign operations may materially adverselyaffect its operations as a whole.  Thebusiness, regulatory and political environments in many of the countries whereit has operations differ from those in the United States and its foreignoperations are exposed to a number of inherent risks, including, but notlimited to, changes in international trade laws, changes in local labor lawsand regulations, labor disruptions, longer payment cycles, trade barriers andpolitical instability.

 

 

9

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***Anti-Kickback Laws***

 

Several types ofstate and federal laws have been applied to restrict certain marketingpractices in the medical device industry in recent years. These include federaland state anti-kickback statutes. The federal health care program anti-kickbackstatute prohibits persons from knowingly and willfully offering, paying,soliciting, or receiving remuneration in return for referrals or in return forpurchasing, leasing, ordering, or arranging for or recommending purchasing,leasing or ordering any service or item payable under Medicare, Medicaid, orcertain other federally funded health care programs. These provisions have beenbroadly interpreted to apply to certain relationships between manufacturers,purchasers of manufacturers’ products, and parties in a position to refer orrecommend purchases. Under current law, federal courts and the Office ofInspector General of the United States Department of Health and Human Serviceshave stated that the statute may be violated if one purpose (as opposed to aprimary or sole purpose) of remuneration is to induce prohibited purchases,recommendations, or referrals.

 

There are a numberof statutory exceptions and regulatory safe harbors under the federalanti-kickback statute, including those for properly disclosed reductions inprice, payments to bona fide employees, payments to group purchasingorganizations, compensation under personal services contracts, and warranties.Although a failure to satisfy all of the criteria for a particular safe harbordoes not necessarily mean that an arrangement is unlawful, practices thatinvolve remuneration intended to induce purchases or recommendations may besubject to government scrutiny if they do not qualify for a safe harbor.

 

The majority ofstates also have statutes or regulations similar to the federal health careprogram anti-kickback statute. Certain of these laws do not have exemptions orsafe harbors. Moreover, in several states, these laws apply regardless ofwhether payment for the services in question may be made under Medicaid orstate health programs. Sanctions under these federal and state laws may includecivil money penalties, license suspension or revocation, exclusion of medicalproduct companies, providers, or practitioners from participation in federal orstate health care programs, and criminal fines or imprisonment. The Company’spractices may not in all cases meet all of the criteria for safe harborprotection from anti-kickback liability. Because of the breadth of thesestatutes, it is possible that some of its business activities could be subjectto challenge under one or more of such laws. Such a challenge could have amaterial adverse effect on the Company’s business and financial condition.

 

***Third-Party Reimbursement***

 

The Company’sproducts typically are purchased by hospitals which bill various third-partypayors, such as governmental programs and private insurance plans, for thehealthcare services provided to their patients. Third-party payors carefullyreview and increasingly challenge the prices charged for medical products andservices. Reimbursement rates from private companies vary depending on theprocedure performed, the third-party payor, the patient’s insurance plan, andother factors. Medicare reimburses hospitals a prospectively determined fixedamount for the costs associated with an in-patient hospitalization based on thepatient’s discharge diagnosis, and reimburses physicians a prospectivelydetermined fixed amount based on the procedure performed, regardless of theactual costs incurred by the hospital or physician in furnishing the care andunrelated to the specific devices used in that procedure.

 

Medicare and otherthird-party payors are increasingly scrutinizing whether to cover new productsand the level of reimbursement for covered products. A new product may facelimited demand unless private and governmental third-party payors cover its cost.Even if these payors cover a new product’s cost, the reimbursement level maynot be sufficient to facilitate consumer interest. In addition, currentreimbursement amounts may be decreased in the future and future legislation,regulations, or reimbursement policies of third-party payors could have amaterial adverse affect on demand for the Company’s products or its ability tosell products on a profitable basis, particularly if its system is moreexpensive than competing products or procedures. If third-party payor coverageor reimbursement is unavailable or inadequate, the Company’s business,financial condition, and results of operations could be materially adverselyaffected.

 

**Geographic Area Financial Information**

 

For financial information regarding thegeographic areas in which the Company operates, see Note 14, “Business Segments”to the Consolidated Financial Statements.

 

**AvailableInformation**

 

The Company’swebsite address is www.medex.com. Through a link on the Investors and Presssection of its website, the Company makes available the following filings assoon as reasonably practicable after they are electronically filed with orfurnished to the SEC: the Annual Report on Form 10-K, Quarterly Reports on Form10-Q, Current Reports on Form 8-K, and any amendments to those reports filed orfurnished pursuant to Section 13(a), 15(d) or 16 of the Exchange Act. The informationon the Company’s website is not part of this report and is included as aninactive textual reference only.

 

10

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You may read and copy any of the Company’s filingswith the SEC at the SEC’s Public Reference Room at 450 Fifth Street, N.W.,Washington D.C. 20549.  You may obtaininformation on the operation of the Public Conference Room by calling the SEC at1-800-SEC0330.  The SEC also maintains anInternet site for issuers that make filings with the SEC electronically athttp://www.sec.gov.

 

**ITEM 2. PROPERTIES**

 

The Companybelieves that its properties are properly maintained, suitable for theirrespective operations and provide sufficient capacity to meet reasonablyforeseeable production requirements.  TheCompany owns or leases the following properties which are material to itsoperations:

 
| ** **                      | ** ** | **Size (in** | ** ** | ** **                                                              | ** ** | ** ** | ** ** |
|---------------------------------|------------|--------------|------------|-------------------------------------------------------------------------|------------|------------|------------|
| **Location**                    | ** ** | **sq. ft.)** | ** ** | **Purpose**                                                             | ** ** | **Status** | ** ** |
| **United  States**              |       |         |       |                                                                    |       |       |       |
| Carlsbad,  California           |       | 24,827       |       | Global headquarters                                                     |       | Leased     |       |
| Dublin, Ohio                    |       | 162,848      |       | Shared services, manufacturing, distribution,  research and development |       | Owned      |       |
| Southington,  Connecticut       |       | 134,208      |       | Manufacturing, research and development                                 |       | Owned      |       |
| Duluth, Georgia                 |       | 44,200       |       | Manufacturing, distribution, pump services, research  and development   |       | Leased     |       |
| Chicago,  Illinois              |       | 40,419       |       | Manufacturing and distribution                                          |       | Leased     |       |
|                            |       |         |       |                                                                    |       |       |       |
| **Europe**                      |       |         |       |                                                                    |       |       |       |
| Latina, Italy                   |       | 88,400       |       | Manufacturing, sales and marketing                                      |       | Owned      |       |
| Fraureuth,  Germany             |       | 46,234       |       | Manufacturing, distribution, research and  development                  |       | Leased     |       |
| Mainz, Germany                  |       | 26,551       |       | Sales, distribution and administrative                                  |       | Leased     |       |
| Rossendale,  England            |       | 80,490       |       | Manufacturing, distribution and administrative                          |       | Owned      |       |
| Cumbernauld,  Scotland          |       | 17,147       |       | Manufacturing and distribution                                          |       | Leased     |       |
| Dusseldorf,  Germany            |       | 9,738        |       | European headquarters                                                   |       | Leased     |       |
| Nantes, France                  |       | 9,727        |       | Sales, distribution and administrative                                  |       | Leased     |       |
|                            |       |         |       |                                                                    |       |       |       |
| **Central  America and Mexico** |       |         |       |                                                                    |       |       |       |
| Monterrey,  Mexico              |       | 114,237      |       | Manufacturing                                                           |       | Owned      |       |

 

 

The Company alsoleases sales offices in Brazil, Japan, Portugal, Spain and Switzerland.

 

**ITEM 3. LEGALPROCEEDINGS**

 

The Company or itssubsidiaries are at any one time parties to a number of lawsuits or subject toclaims arising out of its respective operations, including product liability,patent and trademark, or other intellectual property infringement, contractualliability, workplace safety and environmental claims and cases, some of whichinvolve claims for substantial damages. The Company or its subsidiaries arevigorously defending against such lawsuits and other claims. While any action,proceeding or claim contains an element of uncertainty, management does not believethat the outcome of ongoing actions, proceedings or claims will have a materialadverse effect on its business, financial condition or results of operations (seeNote 3 to Item 8, “Financial Statements and Supplementary Data”).

 

**ITEM 4. SUBMISSION OF MATTERS TOA VOTE OF SECURITY HOLDERS**

 

On December 5, 2004, the Company entered into anAgreement and Plan of Merger among the Company, Smiths Medical Holdco Limited,Forest Acquisition Corp., principal stockholders of the Company and OEP MedVestLLC, as representative of the Company’s stockholders (the “Agreement”).  The Agreement was approved by stockholdersholding a majority of the issued and outstanding common stock of the Company onDecember 3, 2004 by written consent.  OnDecember 22, 2004, an Information Statement, which set forth the dissenters’rights under Ohio law, and a Consent, Release and Stockholder RepresentativeAgreement (the “Consent”) were distributed to all stockholders and optionholders of the Company.  Each such stockholderand option holder has duly executed the Consent, and thereby consented to theadoption of the Agreement and the approval of the transactions contemplated bythe Agreement.

 

11

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**PART II**

 

**ITEM 5. MARKET FOR THE REGISTRANT’SCOMMON EQUITY, RELATED STOCK-HOLDER MATTERS AND ISSUER PURCHASES OF EQUITYSECURITIES**

 

**(a)  Market Information**

 

There is no established trading market for the Company’scommon stock.

 

**(b)  Holders**

 

As of March 10, 2005, there were 14 holders of the Company’scommon stock.

 

**(c)  Dividends**

 

The Company has not paid cash dividends on its commonstock and does not intend to pay dividends in the foreseeable future.  The Company’s ability to pay dividends isrestricted by certain restrictive provisions in the Company’s revolving creditfacility.  See Item 7, “Management’sDiscussion and Analysis of Financial Condition and Results of Operations -Liquidity and Capital Resources — Financing Matters.”

 

**(d)  Securities Authorized for Issuance underEquity Compensation Plans**

 

See Item 12, “SecurityOwnership of Certain Beneficial Owners and Management and Related StockholderMatters.”

 

**ITEM 6. SELECTED CONSOLIDATEDFINANCIAL DATA**

 

The Company derived the annual MedVest historical information from theaudited consolidated financial statements of MedVest as of and for the yearsended December 31, 2004, December 31, 2003, December 31, 2002 and asof December 31, 2001 for the period from February 9, 2001 (the date onwhich MedVest operations commenced) through December 31, 2001. Informationwas also derived from the unaudited financial statements of the predecessorentity that existed before the management buyout for the period fromJanuary 1, 2001 through February 8, 2001. The management buyout isdescribed in more detail in Item 1, “Business.” The results presented for theyear ended December 31, 2003 include results of the Jelco business fromMay 21, 2003 through December 31, 2003. The information is only a summaryand should be read in conjunction with Item 8 of this Annual Report on Form10-K, “Management’s Discussion and Analysis of Financial Condition and Resultsof Operations” and the consolidated financial statements and notes theretoincluded elsewhere in this report. The historical results included below andelsewhere in this document are not indicative of the future performance of theCompany.

 

12

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| ** **                                      | ** ** | ** **           | ** ** | ** **           | ** ** | ** **           | ** ** | ** **           | ** ** | ** **           | ** ** | **Predecessor(1)**   | ** ** |
|-------------------------------------------------|------------|----------------------|------------|----------------------|------------|----------------------|------------|----------------------|------------|----------------------|------------|----------------------|------------|
| ** **                                      | ** ** | ** **           | ** ** | ** **           | ** ** | ** **           | ** ** | **Period from**      | ** ** | ** **           | ** ** | **Period from**      | ** ** |
| ** **                                      | ** ** | ** **           | ** ** | ** **           | ** ** | ** **           | ** ** | **February 9,** | ** ** | ** **           | ** ** | **January 1,**  | ** ** |
| ** **                                      | ** ** | **Year Ended**       | ** ** | **Year Ended**       | ** ** | **Year Ended**       | ** ** | **2001 to**          | ** ** | **Year Ended**       | ** ** | **2001 to**          | ** ** |
| ** **                                      | ** ** | **December 3,** | ** ** | **December 3,** | ** ** | **December 3,** | ** ** | **December 3,** | ** ** | **December 3,** | ** ** | **February 8,** | ** ** |
| ** **                                      | ** ** | **2004**             | ** ** | **2003**             | ** ** | **2002**             | ** ** | **2001**             | ** ** | **2001(2)**          | ** ** | **2001(2)**          | ** ** |
| (Dollars in  thousands)                         |       |                 |       |                 |       |                 |       |                 |       |                 |       |                 |       |
|                                            |       |                 |       |                 |       |                 |       |                 |       |                 |       |                 |       |
| Statement of  operations data:                  |       |                 |       |                 |       |                 |       |                 |       |                 |       |                 |       |
| Net sales                                       |       | $                    | 340,732    |                 | $          | 219,110              |       | $                    | 100,757    |                 | $          | 80,981               |       | $ | 90,865 |   | $ | 9,884 |   |
| Cost of goods  sold                             |       | 157,063              |       | 124,568              |       | 59,004               |       | 50,026               |       | 55,954               |       | 5,928                |       |
| Gross margin                                    |       | 183,669              |       | 94,542               |       | 41,753               |       | 30,955               |       | 34,911               |       | 3,956                |       |
| Selling, general  and administrative expenses   |       | 109,356              |       | 76,072               |       | 33,389               |       | 24,890               |       | 27,965               |       | 3,075                |       |
| Loss from  operations of abandoned facility     |       | 121                  |       | 2,132                |       | 59                   |       | —               |       | —               |       | —               |       |
| Operating  earnings                             |       | 74,192               |       | 16,338               |       | 8,305                |       | 6,065                |       | 6,946                |       | 881                  |       |
|                                            |       |                 |       |                 |       |                 |       |                 |       |                 |       |                 |       |
| Interest expense  (income), net                 |       | 24,676               |       | 20,240               |       | 7,159                |       | 4,581                |       | 4,436                |       | (145                 | )          |
| Loss on early  extinguishment of long-term debt |       | —               |       | 3,727                |       | 2,549                |       | 396                  |       | 396                  |       | —               |       |
| Other (income)  expense                         |       | 387                  |       | (703                 | )          | (555                 | )          | (236                 | )          | (293                 | )          | (57                  | )          |
|                                            |       |                 |       |                 |       |                 |       |                 |       |                 |       |                 |       |
| Income (loss)  before income taxes              |       | 49,129               |       | (6,926               | )          | (848                 | )          | 1,324                |       | 2,407                |       | 1,083                |       |
| Income tax  expense                             |       | 4,231                |       | 460                  |       | 848                  |       | 1,158                |       | 1,433                |       | 275                  |       |
| Net income  (loss)                              |       | $                    | 44,898     |                 | $          | (7,386               | )          | $                    | (1,696     | )                    | $          | 166                  |       | $ | 974 |   | $ | 808 |   |
|                                            |       |                 |       |                 |       |                 |       |                 |       |                 |       |                 |       |
| Balance sheet  data (at period end):            |       |                 |       |                 |       |                 |       |                 |       |                 |       |                 |       |
| Cash and cash  equivalents                      |       | $                    | 50,063     |                 | $          | 23,860               |       | $                    | 1,282      |                 | $          | 1,252                |       | $ | 1,252 |   | n/a |   |
| Total assets                                    |       | 527,287              |       | 474,184              |       | 71,538               |       | 64,273               |       | 64,273               |       | n/a                  |       |
| Total long-term  debt                           |       | 328,050              |       | 329,350              |       | 61,300               |       | 33,131               |       | 33,131               |       | n/a                  |       |
| Redeemable  warrants                            |       | —               |       | —               |       | —               |       | 5,355                |       | 5,355                |       | n/a                  |       |
| Shareholders’  equity (deficit)            |       | 141,266              |       | 90,523               |       | (3,660               | )          | (970                 | )          | (970                 | )          | n/a                  |       |
| Other financial  data and ratios:               |       |                 |       |                 |       |                 |       |                 |       |                 |       |                 |       |
| Gross margin                                    |       | 53.9                 | %          | 43.1                 | %          | 41.4                 | %          | 38.2                 | %          | 38.4                 | %          | 40.0                 | %          |
|                                            |       |                 |       |                 |       |                 |       |                 |       |                 |       |                 |       |
| Depreciation and  amortization                  |       | $                    | 24,972     |                 | $          | 15,951               |       | $                    | 3,653      |                 | $          | 4,034                |       | $ | 4,814 |   | $ | 780 |   |
| Capital  expenditures                           |       | 11,141               |       | 10,981               |       | 3,173                |       | 3,375                |       | 3,766                |       | 391                  |       |
| Cash provided by  (used in):                    |       |                 |       |                 |       |                 |       |                 |       |                 |       |                 |       |
| Operating  activities                           |       | 40,673               |       | 23,957               |       | 2,477                |       | 9,852                |       | 9,852                |       | n/a                  | (5)        |
| Investing  activities                           |       | (10,095              | )          | (352,680             | )          | (3,025               | )          | (3,550               | )          | (3,550               | )          | n/a                  | (5)        |
| Financing  activities                           |       | (1,300               | )          | 352,690              |       | 448                  |       | (7,357               | )          | (7,357               | )          | n/a                  | (5)        |
| EBITDA(3)                                       |       | 98,777               |       | 32,992               |       | 12,513               |       | 10,335               |       | 12,053               |       | 1,718                |       |
| Ratio of  earnings to fixed charges(4)          |       | 2.99                 |       | 0.66                 |       | 0.88                 |       | 1.29                 |       | n/a                  |       | n/a                  |       |
|                                                 |            |                      |            |                      |            |                      |            |                      |            |                      |            |                      |            |  |  |  |  |  |  |  |

 

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(1)                                  The predecessor’sformer parent company and the predecessor were purchased on October 27,1999 by Saint-Gobain. Saint-Gobain elected not to allocate anypurchase price to the predecessor; accordingly, the financial statements of thepredecessor are presented on a historical basis. Both the predecessor’s formerparent company and Saint-Gobain charged certain general and administrativesupport services to the predecessor. In the opinion of management, thesecharges have been determined on a reasonable basis and reflect the expenses ofthe predecessor as operated by the parent. However, the charges for the supportservices were not necessarily indicative of the level of expenses that mighthave been incurred had the predecessor been operating as a stand-aloneentity.

 

(2)                                  The informationprovided in the period from January 1, 2001 to February 8, 2001 andthe year ended December 31, 2001 may not be Generally Accepted Accounting Principles(“GAAP”) financial information derived from the Company’s internal records.This information has been included to provide more meaningful and comparableinformation to the readers of this report and is not intended to provide a GAAPmeasure of operations.

 

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(3)                                  EBITDA is defined asnet income (loss) before depreciation and amortization, income taxes, andinterest expense (including loss on extinguishment of debt). The table belowincludes reconciliation from net income to EBITDA. This data should not beconsidered as an alternative to any measure of performance or liquidity aspromulgated under generally accepted accounting principles (such as cash providedby/used in operating, investing and financing activities), nor should this databe considered as an indicator of our overall financial performance. Also, theEBITDA definition used by us may not be comparable to similarly titled measuresreported by other companies.

 

                                                Reconciliation ofnet income to EBITDA:

 
| ** **                      | ** ** | ** **           | ** ** | ** **           | ** ** | ** **           | ** ** | ** **           | ** ** | ** **           | ** ** | **Predecessor**      | ** ** |
|---------------------------------|------------|----------------------|------------|----------------------|------------|----------------------|------------|----------------------|------------|----------------------|------------|----------------------|------------|
| ** **                      | ** ** | ** **           | ** ** | ** **           | ** ** | ** **           | ** ** | **Period from**      | ** ** | ** **           | ** ** | **Period from**      | ** ** |
| ** **                      | ** ** | ** **           | ** ** | ** **           | ** ** | ** **           | ** ** | **February 9,** | ** ** | ** **           | ** ** | **January 1,**  | ** ** |
| ** **                      | ** ** | **Year Ended**       | ** ** | **Year Ended**       | ** ** | **Year Ended**       | ** ** | **2001 to**          | ** ** | **Year Ended**       | ** ** | **2001 to**          | ** ** |
| ** **                      | ** ** | **December 3,** | ** ** | **December 3,** | ** ** | **December 3,** | ** ** | **December 3,** | ** ** | **December 3,** | ** ** | **February 8,** | ** ** |
| ** **                      | ** ** | **2004**             | ** ** | **2003**             | ** ** | **2002**             | ** ** | **2001**             | ** ** | **2001**             | ** ** | **2001**             | ** ** |
| (Dollars in  thousands)         |       |                 |       |                 |       |                 |       |                 |       |                 |       |                 |       |
|                            |       |                 |       |                 |       |                 |       |                 |       |                 |       |                 |       |
| Income (loss)  before taxes     |       | $                    | 49,129     |                 | $          | (6,926               | )          | $                    | (848       | )                    | $          | 1,324                |       | $ | 2,407 |   | $ | 1,083 |   |
| Interest expense  (income), net |       | 24,676               |       | 20,240               |       | 7,159                |       | 4,581                |       | 4,436                |       | (145                 | )          |
| Loss on  extinguishment of debt |       | —               |       | 3,727                |       | 2,549                |       | 396                  |       | 396                  |       | —               |       |
| Depreciation and  amortization  |       | 24,972               |       | 15,951               |       | 3,653                |       | 4,034                |       | 4,814                |       | 780                  |       |
| EBITDA                          |       | $                    | 98,777     |                 | $          | 32,992               |       | $                    | 12,513     |                 | $          | 10,335               |       | $ | 12,053 |   | $ | 1,718 |   |

 

(4)                                  For purposes ofcalculating the ratio of earnings to fixed charges, earnings include income(loss) before taxes plus fixed charges. Fixed charges consist of interestexpenses.

 

(5)                                  Cash provided by(used in) operating activities, investing activities and financing activitiesfor the period from January 1, 2001 to February 8, 2001 could not bederived from the unaudited predecessor financial statements.

 

**ITEM 7. MANAGEMENT’S DISCUSSIONAND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

The followingdiscussion and analysis of the Company’s financial condition and results ofoperations is based on MedVest’s consolidated financial statements, which havebeen prepared in accordance with accounting principles generally accepted inthe United States. The preparation of these consolidated financial statementsrequires its management to make estimates and assumptions that affect thereported amounts of assets and liabilities and the disclosure of contingentassets and liabilities at the date of the consolidated financial statements andthe reported amounts of net sales and expenses during the reporting period. Onan ongoing basis, the Company’s management evaluates its estimates andjudgments. Management bases its estimates and judgments on historicalexperience and on various other factors that are believed to be reasonableunder the circumstances, the results of which form the basis for makingjudgments about the carrying value of assets and liabilities that are notreadily apparent from other sources. Actual results may differ from theseestimates under different assumptions or conditions. If actual amounts areultimately different from previous estimates, the revisions are included in ourresults for the period in which the actual amounts become known. Historically,the aggregate differences, if any, between its estimates and actual amounts inany year have not had a significant impact on the Company’s consolidatedfinancial statements. The following discussion should be read together with “SelectedHistorical Financial Data,” and its consolidated financial statements and therelated notes included elsewhere in this prospectus. MedVest’s fiscal year endsDecember 31.

 

**Overview**

 

The Companymanufactures and markets a broad range of critical care medical products. Itsproducts are used primarily in acute care settings for a variety of bothdiagnostic and therapeutic procedures. The Company’s focus is on products for:anesthesia departments; operating rooms; adult, pediatric and neonatalintensive care units; catheterization and radiology laboratories; andrespiratory departments. The acquisition of the Jelco business on May 21, 2003allowed us to offer customers a complete fluid and drug infusion systemcomprised of infusion pumps, fluid and drug administration products, andcentral venous and peripheral intravenous catheters, all of which functiontogether to safely deliver measured doses of fluids and drugs into a patient’svascular system. The Company also manufactures and markets invasive pressuremonitoring systems, cath lab packs and accessories and respiratory products.

 

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The Company’s netsales, which it records in one reportable segment, are derived primarily fromsales of infusion systems, pressure monitoring systems, cath lab packs andaccessories, and respiratory products, which comprised 80.3%, 9.4%, 8.1% and 2.2%of the Company’s net sales, respectively, for the year ended December 31, 2004.The mix of net sales has changed over the past few years, primarily due to theacquisition of Jelco, which expanded the Company’s sales of PIVCs.Approximately 57.3% and 26.3% of its net sales for the year ended December 31,2004 were into U.S. and European markets, respectively. Approximately 16.4% of itsnet sales for the year ended December 31, 2004 were from sales into Canada,Asia and Latin America. The geographic distribution of the Company’s net saleshas shifted to more domestic sales due to increased sales in North America ofPIVCs as a result of the Jelco acquisition in May 2003. In addition, syringepump sales have contributed to the increase in North American sales.  Rest of world sales have also increased as apercentage of net sales, primarily due to direct sales operations in Canada,Japan and Brazil.  The Company’sinternational net sales are sensitive to the risks associated with itsinternational operations, as their contribution to its net sales has increased.The risks include adverse fluctuations in exchange rates and additionalregulatory requirements, each of which could affect the Company’s business andresults of operations in the future.

 

The Company sells itsproducts, both directly and indirectly, to a diverse group of customers in thehealthcare industry. Its primary markets consist of acute care centers,alternate care facilities, and OEM medical devices companies in North America,Europe and other geographic locations worldwide. Although the Company markets itsproducts to healthcare professionals, who are the ultimate end users of itsproducts and drive its sales growth, in the U.S. the Company typically sells itsproducts to distributors and OEMs, which then supply its products to theend-user market.

 

In response to thepressures in the United States to control medical costs, hospitals and otherpotential customers for the Company’s products are increasingly combining theirpurchasing power through GPOs and IDNs. A GPO is a third-party purchasingorganization that negotiates pricing for its member hospitals. GPOs monitormember compliance to ensure minimum purchasing levels from contracted suppliersof approved products. IDNs are groups of hospitals that join together tomaximize certain functions, such as purchasing, for the benefit of the group.Although the level of compliance varies by product, GPO and member hospital, itis significantly easier to sell to a hospital if a group contract is present. TheCompany has long-standing GPO contracts with the largest GPOs in the country,including Premier, Inc., Novation, LLC/VPIA Inc. and the University HealthSystem Consortium, AmeriNet, Inc., Consorta, Inc. and MedAssets, Inc.

 

The Company alsosells products to other medical device manufacturers on an OEM basis. Its OEMsales are typically made to other medical manufacturers, distributors andproviders of cath lab packs who incorporate its products into their productofferings. In addition, the Company customize existing designs to the OEM’sspecifications. The Company has supply agreements with several OEM customers. ItsOEM contracts typically specify delivery and ordering schedules, qualityspecifications and net price levels. Meeting customer delivery and qualityrequirements are the most important factors in determining the ability toretain these accounts.

 

The Company pricesits products competitively, and its product prices have remained relativelystable.

 

Increases in theCompany’s international net sales over the last three years have been driven inpart by the Jelco acquisition and the strengthening of the euro and Britishpound against the U.S. dollar. In periods in which the euro or British poundstrengthens against the U.S. dollar, its international net sales increasebecause the Company’s euro or British pound denominated net sales will translateinto a greater number of U.S. dollars. Conversely, in periods in which the euroor British pound weakens against the U.S. dollar, its international net salesdecrease because its euro or British pound denominated net sales will translateinto fewer U.S. dollars.

 

The Company’sgrowth will depend, in part, on its ability to continue to provide itscustomers with systems solutions, expand into the alternate care market,leverage its GPO and IDN relationships, and introduce new products. Inaddition, the Company intends to expand its direct sales presence into newmarkets, as well as increase its sales coverage in existing markets.

 

Since the Jelcoacquisition, the Company’s profitability improved due to higher margin salesrelated to the PIVCs. For the year ended December 31, 2004, the Company sawgross margins increase to 53.9%, compared to 43.1% for the year ended December31, 2003. A decrease in the Company’s selling, general and administrative costsas a percentage of its net sales has contributed to the Company’s improvedprofitability, as the Company has successfully integrated the Jelcoacquisition.

 

The Company’smanagement reviews and analyzes several key performance indicators in order tomanage its business and assess the quality of and potential variability of itsearnings and cash flows. These key performance indicators include:

 

•  netsales, which are an indicator of the Company’s overall business growth;

 

•  grossmargin, which is an indicator of both its product mix, general pricing and competitivepressures, and the Company’s cost of its products;

 

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•  operatingexpenses as a percentage of revenue, which is an indicator of the efficiency ofthe Company’s business and its ability to manage its business to budget; and

 

•  collectionof receivables, which is an indicator of the Company’s success in collectingthe revenue from its sales and is used by management to plan its cash needs andestablish proper reserves.

 

**TheJelco Acquisition**

 

On May 21, 2003, theCompany acquired the Jelco business from Ethicon for $340.0 million, which itfunded with proceeds from Medex’s offering of $200.0 million in aggregateprincipal amount of 8 7 / 8 % seniorsubordinated notes, from borrowings under the Company’s credit facility andfrom the proceeds of an equity investment by an affiliate of One EquityPartners. Through this acquisition, the Company acquired Jelco’s worldwideassets and certain of its affiliates, as well as liabilities arising upon orafter the closing of the acquisition. In December 2003, the Company recorded$1.9 million in employee separation costs related to the reorganization of theJelco business. To facilitate smooth client transition, it entered into atransition services agreement under which Ethicon and certain of its affiliatesprovided the Company with customary post-closing services such as distribution,customer service, credit and collections, systems support and various otherfunctions at mutually agreed upon costs. The Company has completelytransitioned all operations under the transition services agreementworldwide.  The Company has entered into separatedistributor agreements with Ethicon to provide distribution services in certainforeign countries.

 

**Results of Operations**

 

***Year Ended December 31, 2004 Compared to Year Ended December31, 2003***

 

*NetSales.*  Net sales increased by $121.6 million, or55.5%, to $340.7 million in 2004 compared to $219.1 million in 2003. Thefollowing table summarizes the Company’s sales into each geographic market forthe years ended December 31, 2004 and December 31, 2003 (in millions):

 
| ** **    | ** ** | **December 31,** | ** ** | **December 31,** | ** ** | **Increase/**  | ** ** | **Percent** | ** ** |
|---------------|------------|------------------|------------|------------------|------------|----------------|------------|-------------|------------|
| ** **    | ** ** | **2004**         | ** ** | **2003**         | ** ** | **(Decrease)** | ** ** | **Change**  | ** ** |
| Net Sales     |       |             |       |             |       |           |       |        |       |
| United States |       | $                | 195.3      |             | $          | 125.5          |       | $           | 69.8       |   | 55.6 | % |
| Europe        |       | 89.6             |       | 65.5             |       | 24.1           |       | 36.8        | %          |
| Rest of world |       | 55.8             |       | 28.1             |       | 27.7           |       | 98.6        | %          |
| Total         |       | $                | 340.7      |             | $          | 219.1          |       | $           | 121.6      |   |   |   |

 

Sales into the United States (“U.S.”) market increasedby $69.8 million, or 55.6%, to $195.3 million in 2004 compared to $125.5million in 2003.  The increase wasprimarily attributed to favorable catheter sales of $52.9 million as a resultof the Jelco acquisition in May 2003. Also contributing to the  increasein U.S. sales was increased catheter volume of approximately $3.0 million, strongersyringe pump sales of $9.2 million and favorable disposable sales of $4.9million.  Driving the increased volume inthe U.S. is increased penetration into the hospital and alternate care marketsas a result of the larger sales force following the Jelco acquisition and theCompany’s ability to sell a complete infusion system.

 

European net sales increased by $24.1 million, or36.8%, to $89.6 million in 2004 compared to $65.5 million in 2003.  The increase was primarily attributed tofavorable catheter sales of $16.1 million as a result of the Jelco acquisitionand favorable currency impact of $8.4 million partially offset by slightlylower disposable volume of approximately $0.4 million.

 

The Company defines rest of world sales as productsold into markets outside the U.S. and Europe. Rest of world sales increased $27.7 million, or 98.6%, to $55.8 millionin 2004 compared to $28.1 million in 2003. The increase was primarily attributed to favorable catheter sales as aresult of the Jelco acquisition of $18.8 million.  In addition, the Company had higher rest ofworld sales as a result of changing the distribution system in these areas fromJohnson & Johnson (“J&J”) affiliates under the transition services agreement (“TSA”) to either direct salesoperations or full service third party distributors.  The change in distribution system resulted inincreased sales pricing as Medex realized market pricing versus the price Medexwas attaining in 2003 through J&J affiliates under the terms of the TSAagreement.  The improvement due toincreased sales prices represents approximately $7.3 million of the salesincrease, with the remaining growth being attributed to currency gains of $1.1million and unit volume growth.

 

*Cost ofGoods Sold and Gross Margin.*  Cost of goodssold increased $32.5 million, or 26.1%, to $157.1 million in 2004

 

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compared to $124.6 million in 2003. Gross margin in 2004 increased $89.2 million, or 94.3%, to $183.7million from $94.5 million in 2003. Gross margin as a percentage of net sales increased to 53.9% in 2004from 43.1% in 2003.  The increase ingross margin as a percentage of net sales is primarily the result of highermargin sales related to the newly acquired Jelco business.  Also contributing to the increased marginswere increased production volume driven by higher sales, favorable product mixof peripheral catheters and syringe pumps and one time charges of $5.9 millionor 2.7% of sales incurred in 2003 related to the write-up of the Jelcoinventory.  No such charges to cost ofsales were recorded in 2004.  Grossmargin was also impacted by increased sales pricing as a result of changingrest of the world distribution system as noted for net sales.  It is estimated that the change indistribution outlets generated approximately $7.3 million of incremental marginversus the prior year.

 

*Selling,General, and Administrative Expenses.*  Selling,general, and administrative expenses increased $33.3 million, or 43.8%, to$109.4 million in 2004 compared to $76.1 million in 2003.  Selling, general and administrative expensesas a percentage of net sales decreased to 32.1% in 2004 compared to 34.7% in2003.  Operating expenses have increasedprimarily due to having a larger infrastructure for the whole year due to the Jelcoacquisition.  Operating expenses as apercentage of sales decreased as a result of management recording one timeadjustments for the Jelco acquisition of $8.4 million, or 3.8% of sales in2003.  These one time adjustments wereprimarily related to an inventory write-up and termination of the Company’semployee stock ownership plan due to the Jelco acquisition.  No such charges to cost of sales wererecorded in 2004.  Furthermore, inconjunction with the acquisition, Johnson and Johnson charged the Company fortransition services related to distribution, customer service, credit andcollections, systems support and various other functions.  Throughout 2004, the TSA agreements wereterminating, creating cost reductions. Partially offsetting these cost reductions was the build ofinfrastructure to support the existing business in marketing, sales,information systems and finance, as well as increased investment in the futurewith a build in the research and development function.

 

*Depreciation and Amortization.* Depreciation and amortization expenses increased $9.0 million, or 56.6%,to $25.0 million in 2004 compared to $16.0 million in 2003.  The increase in depreciation and amortizationis primarily due to the depreciation on acquired Jelco facilities andequipment, as well as amortization of patents and manufacturing technologyattributed to the acquisition for a full year compared to seven months in 2003.

 

*Interest Expense.*  Interestexpense increased by $0.7 million, or 3.0%, to $24.7 million in 2004 comparedto $24.0 million in 2003.  Outstandingborrowings under various long-term obligations decreased to approximately$328.1 million at December 31, 2004 compared to approximately $329.4 million atDecember 31, 2003.  For furtherinformation regarding the Company’s external indebtedness, see Note 7 of Item 8of the Annual Report, “Financial Statements and Supplementary Data”.

 

*Income Taxes.*  Income taxexpense increased $3.7 million to $4.2 million in 2004 compared to $0.5 millionin 2003.  The change is attributable tothe significant increase in the profitability of the Company’s operations as aresult of the Jelco acquisition.   The2004 tax expense differs from the federal statutory rate of 35% due primarilyto the reduction in the valuation allowance previously maintained on deferredtax assets.  The valuation allowance wasreduced as net operating losses were utilized during the year and the Companyexpects to generate sufficient income in future years to utilize all of thedomestic losses and most of the foreign losses.

 

*NetIncome (Loss).*  The Company recorded net income of $44.9million in 2004 compared to a net loss of $7.4 million in 2003.  The increase was primarily due to theacquisition of the Jelco business and reduced integration expenses for the yearended December 31, 2004.

 

***Year Ended December 31, 2003 Compared to Year Ended December31, 2002***

 

*NetSales.*  Net sales increased by $118.3 million, or 117.5%,to $219.1 million in 2003 compared to $100.8 million in 2002.  The following table summarizes the Company’ssales into each geographic market for the years ended December 31, 2003 andDecember 31, 2002 (in millions):

 

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| ** **    | ** ** | **December 31,** | ** ** | **December 31,** | ** ** | **Increase/**  | ** ** | **Percent** | ** ** |
|---------------|------------|------------------|------------|------------------|------------|----------------|------------|-------------|------------|
| ** **    | ** ** | **2003**         | ** ** | **2002**         | ** ** | **(Decrease)** | ** ** | **Change**  | ** ** |
| Net Sales     |       |             |       |             |       |           |       |        |       |
| United States |       | $                | 125.5      |             | $          | 53.1           |       | $           | 72.4       |   | 136.3 | % |
| Europe        |       | 65.5             |       | 40.7             |       | 24.8           |       | 60.9        | %          |
| Rest of world |       | 28.1             |       | 7.0              |       | 21.1           |       | 301.4       | %          |
| Total         |       | $                | 219.1      |             | $          | 100.8          |       | $           | 118.3      |   |   |   |

 

Sales into the U.S. market increased by $72.4 million,or 136.3%, to $125.5 million in 2003 compared to $53.1 million in 2002.  The increase was primarily attributed tofavorable catheter sales of $77.3 million from the Jelco acquisition.  Partially offsetting the catheter sales was adecrease of $4.9 million related to a loss in market share for the Company’slarge volume pump disposable products, as well as a decrease in U.S. sales dueto timing of syringe pump orders.

 

European net sales increased by $24.8 million, or 60.9%,to $65.5 million in 2003 compared to $40.7 million in 2002.  Similar to the U.S. market, the increase inEuropean sales was due primarily to favorable catheter sales of $19.9 millionrelated to the Jelco acquisition.  Inaddition, favorable foreign exchange translation rates increasedpre-acquisition sales by approximately $6.4 million.

 

The Company defines rest of world sales as productsold into markets outside the U.S. and direct European countries.  Rest of world sales increased $21.1 million,or 301.4%, to $28.1 million in 2003 compared to $7.0 million in 2002.  Again, the increase was primarily due to increasedcatheter sales of $17.6 million related to the Jelco acquisition.  Strong export sales of the Company’sdisposable products also contributed to the increased sales.

 

*Cost ofGoods Sold and Gross Margin.*  Cost of goodssold increased $65.6 million, or 111.2%, to $124.6 million in 2003 compared to$59.0 million in 2002.  Gross margin in2003 increased $52.7 million, or 126.4%, to $94.5 million from $41.8 million in2002.  Gross margin as a percentage ofnet sales increased to 43.1% in 2003 from 41.4% in 2002.  Theincrease in gross margin as a percentage of net sales is primarily the resultof higher margin sales related to the newly acquired Jelco business. Partiallyoffsetting this increase is the purchase accounting adjustment of$5.9 million, or 2.7% of sales, related to the Jelco inventory write-up.

 

*Selling,General, and Administrative Expenses.*  Selling,general, and administrative expenses increased $42.7 million, or 127.8%, to $76.1million in 2003 compared to $33.4 million in 2002.  Selling, general and administrative expensesas a percentage of net sales increased to 34.7% in 2003 compared to 33.1% in2002.  Theincrease in selling, general and administrative expenses is primarily due toincreased costs related to the newly acquired Jelco business. In addition,management recorded accounting adjustments for the Jelco acquisition of$8.4 million, or 3.8% of sales related to management retention andnon-compete bonuses and compensation expense for payoff of foreign ESOP plans.Furthermore, in conjunction with the acquisition Johnson and Johnson chargedthe Company for transition services related to distribution, customer service,credit and collections, systems support and various other functions. Suchexpenses were $9.3 million in 2003.

 

*Depreciation and Amortization.* Depreciation and amortization expenses increased $12.3 million, or 336.7%,to $16.0 million in 2003 compared to $3.7 million in 2002.  Theincrease in depreciation and amortization is primarily due to the depreciationon acquired Jelco facilities and equipment, as well as amortization of patentsand manufacturing technology attributed to the acquisition.

 

*Interest Expense.*  Interestexpense increased by $14.3 million, or 146.9%, to $24.0 million in 2003compared to $9.7 million in 2002. Outstanding borrowings under various long-term obligations increased toapproximately $329.4 million at December 31, 2003 compared to approximately $61.3million at December 31, 2002.  The increase in both interest expense andoutstanding borrowings is a result of financing necessary for the Jelcoacquisition on May 21, 2003. For further information regarding the Company’sexternal indebtedness, see Note 7 of the Company’s consolidated financialstatements.

 

*Income Taxes.*  Income taxexpense decreased $0.4 million to $0.5 million in 2003 compared to $0.9 millionin 2002.  The decrease was primarily due to lower taxable income in foreign jurisdictions.

 

*NetLoss.*  The Company recorded a net loss of $7.4million in 2003 compared to a net loss of $1.7 million in 2002.  Theincreased loss was primarily due to increased interest expense as a result ofthe Jelco acquisition.

 

 

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**Liquidity and Capital Resources**

 

*General.* The Company has historically financed its capital and working capitalrequirements through a combination of cash flows from operations and variousborrowings.  Traditionally cash generatedby operations and existing cash and cash equivalents, together withavailability under the Company’s revolving credit facility, has been sufficientto meet working capital requirements, service debt and finance capitalexpenditures for the foreseeable future. As a result of the closing of the Smiths transaction on March 21, 2005,the Company’s revolving credit facility has been repaid and a tender offer forthe Company’s outstanding Notes has commenced.

 

*CashProvided by Operating Activities.*  Cash flowsprovided by operations were $40.7 million in 2004 compared to $24.0 million in2003.  The $16.7 million increase in cashflows was primarily attributable to increased net income of $47.2 million.  This increase was partially offset byincreases in accounts receivable and inventories of $21.5 million and $3.4million, respectively, and a reduction in accounts payable of $8.7 million.

 

Increased sales volume was the primary driver for theincrease in accounts receivable from December 31, 2003 to December 31,2004.  The increase in accountsreceivable was also attributed to J&J remitting cash to the Company basedupon the contracted terms of the TSA rather than actual days salesoutstanding.  Therefore, in 2003, J&Jwas paying Medex within 35 days, whereas actual collections by the Company areslightly over 40 days. In addition, the Company’s accounts receivable balanceat December 31, 2004 included no balance due from J&J under the TSA, howeverat December 31, 2003, the Company’s accounts payable balance included an amountdue from J&J of $5.4 million. Inventory levels also increased as a result of building domesticinventories to cover customer requirements during manufacturing rationalizationactivities and increased inventory in 2004 at new direct distribution locationsin Japan, Canada, Brazil and Spain. Offsetting the positive operating cash flow was the reduction in tradeaccounts payable, as the Company paid balances owed to J&J for transitionservices and closing inventory.

 

*CashUsed in Investing Activities. *Cash used in investing activitiesdecreased $342.6 million in 2004 to $10.1 million compared to $352.7 million in2003.  The decrease is primarily due tothe cost to acquire the Jelco business in May 2003 for $338.2 million (net ofcash acquired of $1.2 million) and $3.5 million of other acquisitioncosts.  This decrease was offset by proceedsfrom sale of assets of $0.7 million in 2004, while there were no proceeds fromsale of assets in 2003.  The Companyexpects to spend approximately $15.5 million on capital expenditures in fiscalyear 2005, subject to approval by Smiths.

 

*CashUsed in Financing Activities. *Cash used in financing activities in 2004was $1.3 million, consisting of debt payments on the term loan during theperiod.  Cash provided by financingactivities in 2003 was a result of changes in the Company’s equity structureand external indebtedness to finance the Jelco acquisition.  The proceeds from the sale of stock to OneEquity Partners represent 15,151,515 and 307,037 of newly issued shares ofstock at $6.68 and $6.27 per share, respectively.  In addition, the Company refinanced itsexisting debt and financed the Jelco acquisition with the proceeds of $130.0million from a term loan and $200.0 million of 8 7/8%senior subordinated notes.  The infusionof cash was offset by the repayment of debt to the Company’s former lenders andtransaction fees associated with the equity and debt restructuring.  Pursuant to the closing of the Smiths mergeron March 21, 2005, the Company repaid all amounts borrowed under the term loanfacility.  For further informationregarding the Smiths merger, see Note 16 to the Company’s audited consolidatedfinancial statements.

 

*FinancingMatters. *As a result of therecapitalization and stock purchase agreement and the Jelco acquisition, theCompany entered into new borrowing arrangements and used the proceeds, alongwith the capital contribution from One Equity Partners, to finance theacquisition of the Jelco business and retire debt obligations existing at May21, 2003.

 

At December 31, 2004, the Company had outstanding a $128.1million term loan with a syndicate of banks. At December 31, 2004, the Company’sterm loan was designated at a LIBOR rate plus applicable margin, totaling 5.41%.  The term loan is due in twenty-fourconsecutive installments commencing September 30, 2003 through the maturitydate of the loan on May 21, 2009.  Inconjunction with the term loan, the Company also has a $40.0 million revolvingcredit facility, including a letter of credit sub-facility of $2.0 million anda swing line loan sub-facility of $5.0 million. The Company had no outstandingborrowings under its revolving credit facility or sub-facilities at December 31,2004.

 

The Company also had outstanding $200.0 million in 87/8% senior subordinated notes.  The interest on the notes is payablesemi-annually in arrears on May 15 and November 15, commencing on November 15,2003.  The notes will mature on May 15,2013 at which time the principal is due in full.  For additional information on the Company’sexternal indebtedness, see Note 7 to the Company’s audited consolidatedfinancial statements.

 

As a result of theclosing of the Smiths transaction on March 21, 2005, the Company’s outstandingborrowing of $128.1 million term loan has been repaid and a tender offer forthe Company’s $200.0 million of outstanding 8 7/8% seniorsubordinated notes has commenced.

 

*OtherLiquidity Matters*.  The Company is subject to legal proceedingsand claims that arise in the ordinary course of business.  Management evaluates each claim and providesfor any potential loss when the claim is probable and estimable.  In

 

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management’s opinion, the ultimate liability with respect to theseactions will not materially affect the consolidated financial position orresults of operations.

 

The Company expenses and accrues expenditures relatedto investigation and remediation of contaminated sites when it becomes probablethat a liability has been incurred and the Company’s proportionate share of theamount can be reasonably estimated. Such accrued liabilities are exclusive ofclaims against third parties (except where payment has been received or theamount of liability or contribution by such third parties, including insurancecompanies, has been agreed) and are not discounted.  In management’s opinion, the ultimateliability with respect to these actions will not materially affect theconsolidated financial position or results of operations.

 

*ContractualObligations.*Thefollowing data is provided to facilitate an understanding of Medex’scontractual

obligations andcommitments as of December 31, 2004:

 
| ** **                     | ** ** | **Payments due by Period** | ** ** |
|--------------------------------|------------|----------------------------|------------|
| ** **                     | ** ** | ** **                 | ** ** | **Within 1** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                     | ** ** | **Total**                  | ** ** | **Year** | ** ** | **2-3 Years** | ** ** | **4-5 Years** | ** ** | **After 5 Years** | ** ** |
| ** **                     | ** ** | **(Dollars in thousands)** | ** ** |
| Long-term debt                 |       | $                          | 328,050    |   | $ | 23,400 |   | $ | 2,600 |   | $ | 102,050 |   | $ | 200,000 |   |
| Operating leases               |       | 17,019                     |       | 4,662 |   | 6,621 |   | 3,507 |   | 2,229 |   |
| Management  retention payments |       | 1,000                      |       | 1,000 |   | — |   | — |   | — |   |
| OEP management  fees           |       | 14,400                     |       | 2,400 |   | 4,800 |   | 4,800 |   | 2,400 |   |
| Interest on  fixed rate debt   |       | 150,875                    |       | 17,750 |   | 35,500 |   | 35,500 |   | 62,125 |   |
|                           |       | $                          | 511,344    |   | $ | 49,212 |   | $ | 49,521 |   | $ | 145,857 |   | $ | 266,754 |   |

 

Due to the close of the Smiths transaction on March 21, 2005, the Company’soutstanding obligations are only those related to operating leases andmanagement retention payments, as listed in the table above.  The Company has commenced a tender offerrelated to the fixed rate Notes.  Allother obligations have been extinguished.

 

**Impactof Inflation**

 

In general, theCompany’s cost of sales is affected by the inflation in each country in which itmaintains a manufacturing operation.  Theeffects of inflation in the United States and foreign countries have beenoffset by a combination of improved operating efficiency and permanent, ongoingcost savings.  As a result, effects ofinflation have not had a significant adverse impact on the Company’s results ofoperations for any periods presented herein.

 

**Off-Balance Sheet Arrangements**

 

The Company doesnot have any off-balance sheet transactions, arrangements or obligations(including contingent obligations), that would have a material effect on itsfinancial conditions.

 

**CriticalAccounting Policies**

 

Certain amounts inthe Company’s financial statements require that management make assumptions andestimates based on the best available information at that time. Actual resultscould vary from these estimates and assumptions. While a summary of itssignificant accounting policies can be found in Note 1 to the consolidatedfinancial statements, the Company believes the following critical accountingpolicies affect its more significant judgments and estimates used in thepreparation of its consolidated financial statements.

 

*RevenueRecognition.*TheCompany recognizes sales upon transfer of title to the customer, which occursat the time of shipment. Because it enters into rebate arrangements withcertain distributors and customers, who require it to make rebate payments tothem, the Company estimates amounts due under these arrangements at the time ofshipment. Net sales are based upon the amounts invoiced for the shipped goodsless estimated future rebates, allowances for estimated returns, promotions andother discounts. These estimates are based upon the Company’s historicalexperience and the terms under current rebate agreements. Revisions to theseestimates are recorded in the period in which a change in factors orcircumstances becomes known.

 

*BusinessCombinations, Goodwill and Intangible Assets.*The Company accounts for all business combinations aspurchase transactions, resulting in goodwill. Goodwill represents the pricepaid for net assets acquired in excess of their fair market value. Inconnection with the Jelco acquisition, the Company recorded as goodwillapproximately $114.1 million of cost in excess of Jelco

 

20

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assets. Goodwill andintangible assets not subject to amortization are reviewed for impairmentannually or when circumstances indicate that the carrying amount may beimpaired. No impairment charges have been recorded for any periods presented.Intangible assets subject to amortization are primarily product andmanufacturing technology, which are amortized using the straight line methodover 9 to 20 years.

 

*ProductWarranties.*TheCompany determines warranty provisions related to product sales based upon anestimate of costs that may be incurred under warranty and support programs. TheCompany reviews its assumptions and estimates periodically to account forchanges in factors such as material costs, wages and warranty claim experience.

 

*Receivablesand the Allowance for Doubtful Accounts.*The Company provides an allowance for doubtfulaccounts based upon continual evaluations of its customers’ financial health,the current status of its trade receivables and any historical write-offexperience. The Company maintains both specific customer reserves as well asgeneral reserves. General reserves are based upon its historical bad debtexperience, overall review of the Company’s aging of accounts receivablebalances and general economic conditions of its industry or geographicalregions.

 

*Valuationof Inventory.*Whennecessary, the Company provides allowances to adjust the carrying value of itsinventory to the lower of cost or net realizable value, including deducting anyselling or disposal costs. The determination of the status of inventory itemsas slow moving, obsolete or in excess of needs requires the Company to makeestimates about the future demand for its products. These future demandestimates are subject to the ongoing success of the Company’s products andmanagement’s forecasts about market conditions and industry trends.

 

*AssetImpairments.*TheCompany reviews its operations to ascertain whether its tangible fixed assets,goodwill and other intangibles have been impaired. The Company recognizes animpairment loss by writing the assets down to fair market value if the sum ofexpected future undiscounted cash flows from operating activities is less thanthe carrying amount of the assets. The estimate of the future undiscounted cashflows is based upon operating projections, which include current results,trends and business assumptions. The Company recorded no impairment charges infiscal years 2004 and 2002, however during fiscal year 2003, the Companyrecorded a charge for impaired assets related to an abandoned facility of $1.0million.

 

*Accrualsfor Self-Insurance.*TheCompany makes self-insurance accruals for certain claims associated with employeehealthcare, workers’ compensation and general liability insurance. The Companyevaluates its self-insurance accruals based upon historical loss developmentfactors and current events, such as serious health conditions and workers’compensation judgments.

 

*IncomeTaxes.*TheCompany recognizes deferred tax assets and liabilities based on the differencesbetween the financial statement carrying amounts and the tax basis of suchassets and liabilities. The Company regularly reviews its deferred tax assets forrecoverability and maintain a valuation allowance based on historical losses,projected future taxable income and the expected timing of the reversals ofexisting temporary differences. The Company has a valuation allowance againstdeferred tax assets in jurisdictions outside of the United States where thereare uncertainties surrounding the expected realization of these assets due to ahistory of losses.

 

**RecentlyIssued Accounting Standards**

 

In December 2004,the FASB issued revised SFAS No. 123, “Share-Based Payment” which replaces SFASNo. 123, “Accounting for Stock-Based Compensation” and supersedes APB OpinionNo. 25, “Accounting for Stock Issued to Employees.” This statement, whichrequires the cost of all share-based payment transactions be recognized in thefinancial statements, establishes fair value as the measurement objective andrequires entities to apply a fair-value-based measurement method in accountingfor share-based payment transactions. The statement applies to all awardsgranted, modified, repurchased or cancelled after July 1, 2005, and unvestedportions of previously issued and outstanding awards. The Company is currentlyevaluating the impact of adopting this statement.

 

In November 2004,the FASB issued SFAS No. 151, “Inventory Costs - an amendment of ARB No. 43,Chapter 4,” which clarifies the accounting for abnormal amounts of idlefacility expense, freight, handling costs, and wasted material (spoilage) andalso requires that the allocation of fixed production overhead be based on thenormal capacity of the production facilities. SFAS No. 151 is effective forinventory costs incurred during fiscal years beginning after June 15, 2005. TheCompany is currently evaluating the impact of adopting this statement.

 

In January 2003,the FASB issued FASB Interpretation No. 46 (“FIN 46”), “Consolidation ofVariable Interest Entities.” FIN 46 clarifies the application of AccountingResearch Bulletin No. 51, “Consolidated Financial Statements,” to certainentities in which equity investors do not have the characteristics of acontrolling financial interest or do not have sufficient equity at risk for theentity to finance its activities without additional subordinated financialsupport from other parties. FIN 46 requires a variable interest

 

21

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entity to be consolidatedby a company, if that company is subject to a majority of the risk of loss fromthe variable interest entity’s activities or entitled to receive a majority ofthe entity’s residual returns or both. FIN 46 also requires disclosures aboutvariable interest entities that a company is not required to consolidate but inwhich it has a significant variable interest. The adoption of FIN 46 did nothave a material impact on the Company’s consolidated financial statements.

 

**ITEM 7A. QUANTITATIVE ANDQUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

***Foreign Currency Exchange Rate Risk***

 

The Company conducts business in various regions ofthe world, and export and import products to and from many countries.  Therefore, operations may be subject tovolatility because of currency fluctuations, inflation changes and changes inpolitical and economic conditions in these countries.  Sales and expenses are frequently denominatedin local currencies, and results of operations may be affected adversely ascurrency fluctuations affect product prices and operating costs or those ofcompetitors.

 

The Company’s primary foreign currency risk exposureresults from the strengthening of the U.S. dollar against the euro and Britishpound. It faces currency exposures in its global operations as a result ofmaintaining U.S. dollar debt and payables in these foreign countries. For itsforeign operations, exchange rates impact the U.S. Dollar value of its reportedearnings, its investments in the subsidiaries and the intercompany transactionswith the subsidiaries.  Approximately 42.7%of the Company’s sales occur outside of the United States, with approximately 26.3%generated from its European operations that use the Euro or the British Poundas their functional currency.  As a result, fluctuations in the value offoreign currencies against the U.S. Dollar, particularly the Euro and BritishPound, may have a significant impact on its reported results.  Revenues andexpenses denominated in foreign currencies are translated into U.S. Dollars atthe end of the fiscal period using the average exchange rates in effect duringthe period.  Consequently, as the value of the U.S. Dollar changesrelative to the currencies of its major markets, the Company’s reported resultsvary.

 

Fluctuations in currency exchange rates also impactthe U.S. Dollar amount of the Company’s stockholders’ equity.  The assetsand liabilities of its non-U.S. subsidiaries are translated into U.S. Dollarsat the exchange rates in effect at the end of the fiscal period.  The U.S.Dollar weakened relative to many foreign currencies as of December 31, 2004compared to December 31, 2003.  Consequently, stockholders’ equityincreased by $5.8 million as a result of the change in foreign currencytranslation adjustments.  If the U.S. Dollar had weakened an additional10% during fiscal 2004, resulting translation adjustments recorded instockholders’ equity would have increased by approximately $6.0 million.

 

The Companyintends to engage in hedging operations, including forward foreign exchangecontracts, to reduce the exposure of cash flows to fluctuations in foreigncurrency rates. The Company does not engage in hedging for speculativeinvestment reasons. Historical results do not reflect any foreign exchangehedging activity. There can be no assurance that hedging operations willeliminate or substantially reduce risks associated with fluctuating currencies.As of December 31, 2004, the Company had no outstanding foreign currencyexchange contracts.

 

***Interest Rate Risk***

 

As of December 31,2004, the Company had approximately $128.1 million of debt outstanding under itscredit facility subject to variable rates. Accordingly, the Company’s earningsand cash flows have historically been affected by changes in interest rates. Inthe event of an adverse change in interest rates, management would likely takeactions that would mitigate the Company’s exposure to interest rate risk. TheCompany is not currently engaged in any interest rate risk management. Assumingno changes in its outstanding debt subject to variable rates, a 1% change inthe interest rate for the Company’s credit facility would result in an annualchange in interest expense of approximately $1.3 million.  Due to the close of the Smiths transaction onMarch 21, 2005, the Company’s outstanding variable interest rate debt has beenrepaid.

 

***Commodity Price Risk***

 

The Company usescertain raw materials that are subject to price volatility caused by supplyconditions, political and economic variables and other unpredictable factors.Operations may, therefore, be subject to volatility due to fluctuations in theprice of raw materials. To manage fluctuations in the price of raw materials,the Company has entered into purchase contracts to set pricing standards (nominimum quantities) with suppliers up to one year in advance.  The Company has not engaged in hedgingoperations to further reduce the exposure of cash flow fluctuations in the costof raw materials.  Commodity priceexposure has not had a material impact on the Company’s financial statementsfor any periods presented.

 

22

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**ITEM 8. FINANCIAL STATEMENTS ANDSUPPLEMENTARY DATA**

 

**REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

 

To the Board of Directors of MedVest Holdings Corporation

 

We have audited the accompanying consolidated balancesheets of MedVest Holdings Corporation and subsidiaries as of December 31, 2004and 2003, and the related consolidated statements of operations, shareholders’equity (deficiency), and cash flows for the three years in the period endedDecember 31, 2004. Our audits also included the financial statement schedulelisted in the Index as Item 15.  Thesefinancial statements and financial statement schedule are the responsibility ofthe Company’s management.  Ourresponsibility is to express an opinion on these financial statements based onour audits.

We conducted our auditsin accordance with standards of the Public Company Accounting Oversight Board(United States).  Those standards requirethat we plan and perform the audit to obtain reasonable assurance about whetherthe financial statements are free of material misstatement.  The Company is not required to have, nor werewe engaged to perform, an audit of its internal control over financialreporting.  Our audit includedconsideration of internal control over financial reporting as a basis fordesigning audit procedures that are appropriate in the circumstances but notfor the purpose of expressing an opinion on the effectiveness of the Company’sinternal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements, assessing theaccounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonablebasis for our opinion.

In our opinion, suchconsolidated financial statements present fairly, in all material respects, thefinancial position of MedVest Holdings Corporation and its subsidiaries atDecember 31, 2004 and 2003, and the results of their operations and their cashflows for each of the three years in the period ended December 31, 2004, inconformity with accounting principles generally accepted in the United Statesof America.  Also, in our opinion, suchfinancial statement schedule, when considered in relation to the basicconsolidated financial statements taken as a whole, presents fairly, in allmaterial respects, the information set forth therein.

 

 

 
| /s/ Deloitte & Touche LLP |
|-------------------------------|

 

Columbus, Ohio

April 6, 2005

 

23

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**MedVestHoldings Corporation**

**Consolidated BalanceSheets**

 
| ** **                                                                                              | ** ** | **December 31,**                         | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|------------------------------------------|------------|------------------|------------|
| ** **                                                                                              | ** ** | **2004**                                 | ** ** | **2003**         | ** ** |
| ** **                                                                                              | ** ** | **(in thousands, except share amounts)** | ** ** |
| ** **                                                                                              | ** ** | ** **                               | ** ** | ** **       | ** ** |
| **ASSETS**                                                                                              | ** ** | ** **                               | ** ** | ** **       | ** ** |
| CURRENT ASSETS:                                                                                         |       |                                     |       |             |       |
| Cash and cash  equivalents                                                                              |       | $                                        | 50,063     |             | $          | 23,860 |   |
| Accounts  receivable, net                                                                               |       | 56,975                                   |       | 33,703           |       |
| Inventories, net                                                                                        |       | 56,842                                   |       | 50,156           |       |
| Other current  assets                                                                                   |       | 16,647                                   |       | 6,839            |       |
| Total current  assets                                                                                   |       | 180,527                                  |       | 114,558          |       |
|                                                                                                    |       |                                     |       |             |       |
| PROPERTY, PLANT  AND EQUIPMENT:                                                                         |       |                                     |       |             |       |
| Land and land  improvements                                                                             |       | 5,395                                    |       | 7,877            |       |
| Buildings and  building improvements                                                                    |       | 27,080                                   |       | 25,194           |       |
| Machinery and  equipment                                                                                |       | 114,750                                  |       | 104,339          |       |
| Total property,  plant and equipment                                                                    |       | 147,225                                  |       | 137,410          |       |
| Less:  accumulated depreciation                                                                         |       | 39,607                                   |       | 21,260           |       |
| Property, plant  and equipment, net                                                                     |       | 107,618                                  |       | 116,150          |       |
| Goodwill                                                                                                |       | 125,558                                  |       | 124,304          |       |
| Other intangible  assets, net                                                                           |       | 102,524                                  |       | 106,186          |       |
| Other long-term  assets                                                                                 |       | 11,060                                   |       | 12,986           |       |
| TOTAL ASSETS                                                                                            |       | $                                        | 527,287    |             | $          | 474,184 |   |
|                                                                                                    |       |                                     |       |             |       |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**                                                          |       |                                     |       |             |       |
| CURRENT  LIABILITIES:                                                                                   |       |                                     |       |             |       |
| Trade accounts  payable                                                                                 |       | $                                        | 12,055     |             | $          | 21,100 |   |
| Salaries and  wages payable                                                                             |       | 15,861                                   |       | 8,978            |       |
| Accrued  inventory repurchase liability                                                                 |       | —                                   |       | 3,826            |       |
| Accrued interest                                                                                        |       | 3,042                                    |       | 3,762            |       |
| Accrued expenses  and other liabilities                                                                 |       | 15,479                                   |       | 11,936           |       |
| Income taxes  payable                                                                                   |       | 1,824                                    |       | 711              |       |
| Current portion  of long-term debt                                                                      |       | 23,400                                   |       | 1,300            |       |
| Total current  liabilities                                                                              |       | 71,661                                   |       | 51,613           |       |
|                                                                                                    |       |                                     |       |             |       |
| Long-term debt                                                                                          |       | 304,650                                  |       | 328,050          |       |
| Other long-term  liabilities                                                                            |       | 9,710                                    |       | 3,998            |       |
|                                                                                                    |       |                                     |       |             |       |
| COMMITMENTS AND  CONTINGENCIES (NOTE 3)                                                                 |       |                                     |       |             |       |
| SHAREHOLDERS’  EQUITY:                                                                             |       |                                     |       |             |       |
| Preferred stock,  no par value; 25,000,000 shares authorized, 17,773,826 shares issued and  outstanding |       | 91,256                                   |       | 91,256           |       |
| Common stock, no  par value; 25,000,000 shares authorized, 1,974,870 shares issued and  outstanding     |       | 9,798                                    |       | 9,798            |       |
| Accumulated  other comprehensive income                                                                 |       | 9,686                                    |       | 3,841            |       |
| Retained  earnings (deficit)                                                                            |       | 30,526                                   |       | (14,372          | )          |
| Total  shareholders’ equity                                                                        |       | 141,266                                  |       | 90,523           |       |
| TOTAL  LIABILITIES AND SHAREHOLDERS’ EQUITY                                                        |       | $                                        | 527,287    |             | $          | 474,184 |   |

 

 

See accompanyingnotes to consolidated financial statements.

 

24

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**MedVest Holdings Corporation**

**ConsolidatedStatements of Operations**

**For the Years ended December 31, 2004, 2003 and 2002**

 
| ** **                                      | ** ** | **2004**           | ** ** | **2003** | ** ** | **2002** | ** ** |
|-------------------------------------------------|------------|--------------------|------------|----------|------------|----------|------------|
| ** **                                      | ** ** | **(in thousands)** | ** ** |
|                                            |       |               |       |     |       |     |       |
| NET SALES                                       |       | $                  | 340,732    |     | $          | 219,110  |       | $ | 100,757 |   |
|                                            |       |               |       |     |       |     |       |
| COST OF GOODS  SOLD                             |       | 157,063            |       | 124,568  |       | 59,004   |       |
|                                            |       |               |       |     |       |     |       |
| GROSS MARGIN                                    |       | 183,669            |       | 94,542   |       | 41,753   |       |
|                                            |       |               |       |     |       |     |       |
| SELLING, GENERAL  AND ADMINISTRATIVE EXPENSES   |       | 109,356            |       | 76,072   |       | 33,389   |       |
|                                            |       |               |       |     |       |     |       |
| LOSS FROM  OPERATIONS OF ABANDONED FACILITY     |       | 121                |       | 2,132    |       | 59       |       |
|                                            |       |               |       |     |       |     |       |
| OPERATING  EARNINGS                             |       | 74,192             |       | 16,338   |       | 8,305    |       |
|                                            |       |               |       |     |       |     |       |
| OTHER INCOME  (EXPENSE):                        |       |               |       |     |       |     |       |
| Interest  expense, net                          |       | (24,676            | )          | (20,240  | )          | (7,159   | )          |
| Loss on early  extinguishment of long-term debt |       | —             |       | (3,727   | )          | (2,549   | )          |
| Other                                           |       | (387               | )          | 703      |       | 555      |       |
| Other income  (expense), net                    |       | (25,063            | )          | (23,264  | )          | (9,153   | )          |
|                                            |       |               |       |     |       |     |       |
| INCOME (LOSS)  BEFORE INCOME TAXES              |       | 49,129             |       | (6,926   | )          | (848     | )          |
|                                            |       |               |       |     |       |     |       |
| INCOME TAX  EXPENSE                             |       | (4,231             | )          | (460     | )          | (848     | )          |
|                                            |       |               |       |     |       |     |       |
| NET INCOME  (LOSS)                              |       | $                  | 44,898     |     | $          | (7,386   | )          | $ | (1,696 | ) |

 

 

See accompanying notes to consolidated financial statements.

 

25

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**MedVest Holdings Corporation**

**ConsolidatedStatements of Shareholders’Equity (Deficiency)**

**For the Years ended December 31, 2004, 2003 and 2002**

 
|                                                         |   |                 |       |              |       |           |       |       |       |            |       | **Contributed** |       |         |       |         |       |                   |       |          |       |          |   |
|--------------------------------------------------------------|--------|----------------------|------------|-------------------|------------|----------------|------------|------------|------------|-----------------|------------|-----------------|------------|--------------|------------|--------------|------------|------------------------|------------|---------------|------------|---------------|--------|
|                                                         |   |                 |       |              |       |           |       |       |       |            |       | **Capital-**    | ** ** | ** **   | ** ** | ** **   | ** ** | **Accumulated**        | ** ** | ** **    | ** ** | **Total**     |   |
|                                                         |   | **Preferred  Stock** | ** ** | **Common  Stock** | ** ** | ** **     | ** ** | **Common** | ** ** | **Contributed** | ** ** | **Unearned**    | ** ** | **Other**    | ** ** | **Retained** | ** ** | **Shareholders’** |       |
|                                                         |   | **Number  of**       | ** ** | ** **        | ** ** | **Number  of** | ** ** | ** ** | ** ** | **Treasury**    | ** ** | **Stock**       | ** ** | **Capital-** | ** ** | **ESOP**     | ** ** | **Comprehensive**      | ** ** | **Earnings**  | ** ** | **Equity**    |   |
|                                                         |   | **Stock**            | ** ** | **Amount**        | ** ** | **Stock**      | ** ** | **Amount** | ** ** | **Stock**       | ** ** | **Warrants**    | ** ** | **ESOP**     | ** ** | **Shares**   | ** ** | **Loss**               | ** ** | **(Deficit)** | ** ** | **(Deficit)** |   |
|                                                         |   | **(in  thousands)**  |       |
| BALANCES AT  DECEMBER 31, 2001                               |   | —               |       | $                 | —     |           | 3,998      |       | $          | 354             |       | $               | —     |         | $          | 80           |       | $                      | 701        |          | $          | —        |   | $ | (297 | ) | $ | (1,809 | ) | $ | (971 | ) |
| Comprehensive  loss:                                         |   |                 |       |              |       |           |       |       |       |            |       |            |       |         |       |         |       |                   |       |          |       |          |   |
| Net loss                                                     |   |                 |       |              |       |           |       |       |       |            |       |            |       |         |       |         |       |                   |       | (1,696        | )          | (1,696        | )      |
| Foreign currency  translation adjustment                     |   |                 |       |              |       |           |       |       |       |            |       |            |       |         |       |         |       | 1,092                  |       |          |       | 1,092         |   |
| Adjustment to  fair value of interest rate swaps, net of tax |   |                 |       |              |       |           |       |       |       |            |       |            |       |         |       |         |       | 8                      |       |          |       | 8             |   |
| Total  comprehensive loss                                    |   |                 |       |              |       |           |       |       |       |            |       |            |       |         |       |         |       |                   |       |          |       | (596          | )      |
| Stock issued  under ESOP                                     |   |                 |       |              |       | 437            |       |       |       |            |       |            |       | 1,548        |       | (1,548       | )          |                   |       |          |       | —        |   |
| ESOP compensation  earned                                    |   |                 |       |              |       |           |       |       |       |            |       |            |       |         |       | 1,548        |       |                   |       |          |       | 1,548         |   |
| Accretion of  warrants                                       |   |                 |       |              |       |           |       |       |       |            |       |            |       |         |       |         |       |                   |       | (3,481        | )          | (3,481        | )      |
| Extinguishment of  warrants                                  |   |                 |       |              |       |           |       |       |       |            |       | (80             | )          |         |       |         |       |                   |       |          |       | (80           | )      |
| Stock repurchase                                             |   |                 |       |              |       |           |       |       |       | (80             | )          |            |       |         |       |         |       |                   |       |          |       | (80           | )      |
| BALANCES AT  DECEMBER 31, 2002                               |   | —               |       | —            |       | 4,435          |       | 354        |       | (80             | )          | —          |       | 2,249        |       | —       |       | 803                    |       | (6,986        | )          | (3,660        | )      |
| Comprehensive  loss:                                         |   |                 |       |              |       |           |       |       |       |            |       |            |       |         |       |         |       |                   |       |          |       |          |   |
| Net loss                                                     |   |                 |       |              |       |           |       |       |       |            |       |            |       |         |       |         |       |                   |       | (7,386        | )          | (7,386        | )      |
| Foreign currency  translation adjustment                     |   |                 |       |              |       |           |       |       |       |            |       |            |       |         |       |         |       | 2,859                  |       |          |       | 2,859         |   |
| Termination of  interest rate swap agreements                |   |                 |       |              |       |           |       |       |       |            |       |            |       |         |       |         |       | 179                    |       |          |       | 179           |   |
| Total  comprehensive loss                                    |   |                 |       |              |       |           |       |       |       |            |       |            |       |         |       |         |       |                   |       |          |       | (4,348        | )      |
| Stock issued due  to recapitalization                        |   | 17,775               |       | 91,265            |       | (2,460         | )          | 9,444      |       | 80              |       |            |       | (2,249       | )          |         |       |                   |       |          |       | 98,540        |   |
| Stock repurchase                                             |   | (2                   | )          | (9                | )          |           |       |       |       |            |       |            |       |         |       |         |       |                   |       |          |       | (9            | )      |
| BALANCES AT  DECEMBER 31, 2003                               |   | 17,773               |       | 91,256            |       | 1,975          |       | 9,798      |       | —          |       | —          |       | —       |       | —       |       | 3,841                  |       | (14,372       | )          | 90,523        |   |
| Comprehensive  income:                                       |   |                 |       |              |       |           |       |       |       |            |       |            |       |         |       |         |       |                   |       |          |       |          |   |
| Net income                                                   |   |                 |       |              |       |           |       |       |       |            |       |            |       |         |       |         |       |                   |       | 44,898        |       | 44,898        |   |
| Foreign currency  translation adjustment                     |   |                 |       |              |       |           |       |       |       |            |       |            |       |         |       |         |       | 5,845                  |       |          |       | 5,845         |   |
| Total  comprehensive income                                  |   |                 |       |              |       |           |       |       |       |            |       |            |       |         |       |         |       |                   |       |          |       | 50,743        |   |
| BALANCES AT  DECEMBER 31, 2004                               |   | 17,773               |       | $                 | 91,256     |           | 1,975      |       | $          | 9,798           |       | $               | —     |         | $          | —       |       | $                      | —     |          | $          | —        |   | $ | 9,686 |   | $ | 30,526 |   | $ | 141,266 |   |

 

 

Seeaccompanying notes to consolidated financial statements.

 

26

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**MedVestHoldings Corporation**

**Condensed Consolidated Statements of Cash Flows**

**Forthe years ended December 31, 2004, 2003 and 2002**

 
| ** **                                                                                | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|-------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| CASH FLOWS FROM  OPERATING ACTIVITIES:                                                    |       |     |       |     |       |     |       |
| Net income  (loss)                                                                        |       | $        | 44,898     |     | $          | (7,386   | )          | $ | (1,696 | ) |
| Adjustments to  reconcile net income (loss) to net cash provided by operating activities: |       |     |       |     |       |     |       |
| Depreciation                                                                              |       | 20,169   |       | 13,146   |       | 3,646    |       |
| Amortization                                                                              |       | 4,803    |       | 2,805    |       | 7        |       |
| Accretion of  discounted debt                                                             |       | —   |       | —   |       | 1,568    |       |
| ESOP  compensation earned                                                                 |       | —   |       | —   |       | 1,548    |       |
| Loss on early  extinguishment of long-term debt                                           |       | —   |       | 3,727    |       | 2,549    |       |
| Loss on disposal  of assets                                                               |       | 779      |       | —   |       | 83       |       |
| Changes in  operating assets and liabilities:                                             |       |     |       |     |       |     |       |
| Accounts  receivable, net                                                                 |       | (21,474  | )          | (16,748  | )          | (1,627   | )          |
| Inventories, net                                                                          |       | (3,438   | )          | 6,224    |       | (1,979   | )          |
| Other assets                                                                              |       | (152     | )          | (6,661   | )          | (302     | )          |
| Trade accounts  payable                                                                   |       | (8,696   | )          | 15,113   |       | (454     | )          |
| Salaries and  wages payable                                                               |       | 6,405    |       | 3,594    |       | (4,244   | )          |
| Accrued expenses  and other liabilities                                                   |       | 3,860    |       | 10,844   |       | 2,722    |       |
| Income taxes  payable                                                                     |       | (6,481   | )     | (701     | )          | 656      |       |
| Net cash  provided by operating activities                                                |       | 40,673   |       | 23,957   |       | 2,477    |       |
|                                                                                      |       |     |       |     |       |     |       |
| CASH FLOWS FROM  INVESTING ACTIVITIES:                                                    |       |     |       |     |       |     |       |
| Acquisition of  businesses, net of cash acquired                                          |       | —   |       | (338,184 | )          | (511     | )          |
| Acquisition  costs                                                                        |       | —   |       | (3,461   | )          | (195     | )          |
| Adjustment to  purchase price of acquisitions                                             |       | 396      |       | (54      | )          | 854      |       |
| Purchases of  property, plant and equipment                                               |       | (11,141  | )          | (10,981  | )          | (3,173   | )          |
| Proceeds from  sale of assets                                                             |       | 650      |       | —   |       | —   |       |
| Net cash used in  investing activities                                                    |       | (10,095  | )          | (352,680 | )          | (3,025   | )          |
|                                                                                      |       |     |       |     |       |     |       |
| CASH FLOWS FROM  FINANCING ACTIVITIES:                                                    |       |     |       |     |       |     |       |
| Proceeds from  long-term debt                                                             |       | —   |       | 331,397  |       | 61,300   |       |
| Proceeds from  sale of stock                                                              |       | —   |       | 103,125  |       | —   |       |
| Stock  transaction costs                                                                  |       | —   |       | (4,593   | )          | —   |       |
| Payments on  revolving line of credit                                                     |       | —   |       | (13,000  | )          | (6,748   | )          |
| Debt issuance  costs                                                                      |       | —   |       | (13,922  | )          | (1,299   | )          |
| Principal payments  on long-term debt                                                     |       | (1,300   | )          | (50,317  | )          | (52,725  | )          |
| Repurchase of  common stock                                                               |       | —   |       | —   |       | (80      | )          |
| Net cash  provided by (used in) financing activities                                      |       | (1,300   | )          | 352,690  |       | 448      |       |
|                                                                                      |       |     |       |     |       |     |       |
| EFFECT OF  EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS                             |       | (3,075   | )          | (1,389   | )          | 130      |       |
|                                                                                      |       |     |       |     |       |     |       |
| NET CHANGE IN  CASH AND CASH EQUIVALENTS                                                  |       | 26,203   |       | 22,578   |       | 30       |       |
|                                                                                      |       |     |       |     |       |     |       |
| CASH AND CASH  EQUIVALENTS - Beginning of period                                          |       | 23,860   |       | 1,282    |       | 1,252    |       |
|                                                                                      |       |     |       |     |       |     |       |
| CASH AND CASH  EQUIVALENTS - End of period                                                |       | $        | 50,063     |     | $          | 23,860   |       | $ | 1,282 |   |
|                                                                                      |       |     |       |     |       |     |       |
| SUPPLEMENTAL  CASH FLOW DISCLOSURES:                                                      |       |     |       |     |       |     |       |
| Interest paid                                                                             |       | $        | 24,085     |     | $          | 14,926   |       | $ | 4,971 |   |
| Income taxes  paid                                                                        |       | $        | 7,460      |     | $          | 1,271    |       | $ | 128 |   |
|                                                                                           |            |          |            |          |            |          |            |  |  |  |  |

 

 

See accompanying notes to consolidated financial statements.

 

27

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**MedVest Holdings Corporation**

**Notes toConsolidated Financial Statements**

**For YearsEnded December 31, 2004, 2003 and 2002**

 

**1.  BASIS OFPRESENTATION**

 

***                Natureof Business—***The Company principally manufactures and distributes a broadrange of critical care infusion systems and medical products, which are used inacute care settings for a variety of patient treatment and diagnosticprocedures.

 

***                Principlesof Consolidation—***The accompanying consolidated financial statementsinclude the accounts of MedVest and its subsidiaries, all of which are whollyowned. MedVest’s only asset is its investment in Medex, Inc.  All of the Company’s operations are conductedthrough Medex, Inc. and its subsidiaries. Significant intercompany accounts andtransactions have been eliminated in consolidation.

 

***                Useof Estimates—***The preparation of the consolidated financial statementsin conformity with accounting principles generally accepted in the UnitedStates of America requires management to make estimates and assumptions thataffect the amounts reported in the financial statements and accompanying notes.Actual results could differ from those estimates.

 

***                Cashand Cash Equivalents—***The Company considers all highly liquid financialinstruments with maturities of three months or less at the time of purchase tobe cash equivalents. All cash is principally on deposit at three banks.

 

***                AccountsReceivable—***The Company estimates and records provisions for rebates,sales returns, and allowances in the period sales are recognized, based uponits experience and arrangements with customers. At December 31, 2004 and2003, accounts receivable is recorded net of an allowance for doubtful accountsof approximately $0.9 million and $0.7 million, respectively. Inaddition, at December 31, 2004 and 2003, accounts receivable is recordednet of rebate and sales discounts of approximately $9.0 million and$8.8 million, respectively.

 

***                Concentrationof Credit Risk—***Credit is extended based on an evaluation of the customer’sfinancial condition and collateral is generally not required. Credit terms areconsistent with industry practice and estimated losses from credit sales, whichhave historically been consistent with management’s expectations, are providedfor in the consolidated financial statements. The Company’s customers arehighly concentrated in the healthcare industry. Any significant changes in theindustry could adversely affect the Company’s business and financial results.

 

***                Inventories—***Inventories arestated at the lower of cost or market. Cost is determined using the first-in,first-out (FIFO) method. The Company provides reserves for obsolete and slowmoving inventory based on its best estimate at the time.

 

***                Property,Plant and Equipment—***Property, plant and equipment were recorded atestimated fair value at the acquisition date. Subsequent additions are recordedat cost. Depreciation is computed using the straight-line method over theestimated useful lives of the respective assets, ranging from 3 to 8 yearsfor machinery and equipment and up to 39 years for buildings.

 

***                Goodwill—***Goodwill representsthe price paid for net assets acquired in excess of their fair market value. Inaccordance with Statement of Financial Accounting Standards (“SFAS”)No. 142, “Goodwill and Other Intangible Assets”, goodwill is no longeramortized.  The Company estimates that approximately$94.9 million of the goodwill recorded for the acquisition in 2003 isdeductible for tax purposes (see Note 4 for further discussion regardingacquisitions).

 

***                Long-LivedAssets—***Impairment of long-lived assets is recognized when eventsor changes in circumstances indicate that the carrying amount of the asset orrelated group of assets may not be recoverable. In evaluating property, plantand equipment and other intangible assets, if the expected future undiscountedcash flows are less than the carrying amount of the asset, an impairment lossis recognized at that time. In evaluating its goodwill, the Company estimatesthe fair value of the Company at each reporting date to determine if anyimpairment issues exist. Measurement of impairment may be based upon appraisal,market value of similar assets, or discounted cash flows.

 

***                ForeignCurrency Translation—***In accordance with SFAS No. 52, “ForeignCurrency Translation”, the balance sheet amounts of foreign subsidiaries aretranslated from local currency into U.S. dollars at the exchange rate on thebalance sheet date. Income statement amounts of foreign subsidiaries aretranslated from local currency into U.S. dollars using the average exchangerate for the period. Gains and losses resulting from foreign currencytransactions are recognized currently in income and those resulting fromtranslation of financial statements are recognized in other comprehensive income.The Company has certain intercompany loans with affiliates that it deems to belong-term in nature and has accordingly translated at historical exchangerates. Management does not expect to demand or receive any payments in theforeseeable future.

 

28

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***                DerivativeFinancial Instruments—***The Company records allderivatives at fair value. Derivatives that are not hedges are adjusted to fairvalue through income. If the derivative is a hedge, depending on the nature ofthe hedge, changes in the fair value of derivatives are either offset againstthe change in fair value of assets, liabilities, or firm commitments throughearnings or recognized in other comprehensive income until the hedged item isrecognized in earnings. The ineffective portion of a derivative’s change infair value is immediately recognized in earnings.  As of December 31, 2004, the Company has no derivativefinancial instruments.

 

***                EstimatedFair Value of Financial Instruments—***As of December 31, 2004, the fair value of theCompany’s subordinated debt was estimated to be $232.0 million based upontrading activity as of December 31, 2004. The carrying amount of theCompany’s long-term debt approximated fair value at December 31, 2003. Thefair value of the Company’s long-term debt at December 31, 2003 was estimatedbased on the current interest rates offered for debt of the same remainingmaturities. The fair value of the Company’s accounts receivable, accountspayable and term loan facility approximated their carrying value as of December31, 2004. At December 31, 2004 and 2003, there were no interest rateprotection agreements.

 

***                IncomeTaxes—***The Company accounts for income taxes using the liabilitymethod in accordance with the provisions of SFAS No. 109, “Accounting forIncome Taxes”. The provision for income taxes is computed based upon the pretaxincome of the combined entities located in each taxing country based uponcurrent tax law. The Company’s foreign subsidiaries calculate and pay income taxesin each taxing country. Deferred income taxes are provided for the temporarydifferences between the financial reporting basis and the tax basis of theCompany’s assets and liabilities. The Company establishes a valuation allowanceagainst deferred tax assets when it deems the realization of such assets to beuncertain.

 

***                RevenueRecognition—***TheCompany recognizes sales upon transfer of title to the customer, which occursat the time of shipment. Because it enters into rebate arrangements withcertain distributors and customers, who require it to make rebate payments tothem, the Company estimates amounts due under these arrangements at the time ofshipment. Net sales are based upon the amounts invoiced for the shipped goodsless estimated future rebates, allowances for estimated returns, promotions andother discounts. These estimates are based upon the Company’s historicalexperience and the terms under current rebate agreements. Revisions to theseestimates are recorded in the period in which a change in factors orcircumstances becomes known.

 

***                ShippingCosts***— In accordance with the Emerging Issues Tax Force (“EITF”)No. 00-10 “Accounting For Shipping and Handling Fees And Costs,”the Company recordsshipping fees billed to customers as revenue and costs associated with shippingactivities are recorded in selling, general and administrative expenses on theconsolidated statement of operations. Total shipping costs for the years endedDecember 31, 2004, 2003 and 2002 were approximately $4.0 million, $2.3 millionand $2.0 million, respectively. The Company’s gross profit may not becomparable to other entities whose shipping and handling is a component of costof sales.

 

***                Researchand Development Costs—***The Company charges research anddevelopment costs to expense as incurred. Total research and development costsfor the years ended December 31, 2004, 2003 and 2002 were approximately$6.3 million, $2.7 million and $2.5 million, respectively.

 

**                *Advertising******Costs***—The Company charges advertising costs toexpense as incurred.  Total advertisingcosts for the year ended December 31, 2004 was $0.8 million.  In fiscal years 2003 and 2002, advertisingcosts were minimal.

 

***                ProductWarranties—***Warranty provisions related to product sales aredetermined based upon an estimate of costs that may be incurred under warrantyand other post-sales support programs. During 2003, the Company reversed aspecific warranty reserve of $0.5 million, as actual warranty costsincurred and number of units serviced were less that originally estimated.Activity related to product warranty provisions for the years endedDecember 31, 2004, 2003 and 2002 was as follows (in thousands):

 
| Balance,  December 31, 2001          |   | $    | 755    |   |
|--------------------------------------|--------|------|--------|--------|
| Less: warranty  provision adjustment |   | 328  |   |
| Less: services  provided             |   | (262 | )      |
| Balance,  December 31, 2002          |   | 821  |   |
| Less: warranty  provision adjustment |   | (479 | )      |
| Less: services  provided             |   | (202 | )      |
| Balance,  December 31, 2003          |   | 140  |   |
| Add: warranty  provision adjustment  |   | 185  |   |
| Less: services  provided             |   | (162 | )      |
| Balance,  December 31, 2004          |   | $    | 163    |   |

 

 

***                StockOptions—***The Company has adopted the disclosure provisions of SFASNo. 148, “Accounting for Stock-Based Compensation—Transition andDisclosure—an amendment to FASB Statement No. 123”. The Statement requiresprominent disclosures in financial statements regarding the method ofaccounting for stock-based employee compensation and the effect of themethod used on reported results. The Company accounts for stock compensationawards under the recognition and measurement principles of AccountingPrinciples Board Opinion No.25, “Accounting for Stock Issued to Employees”, andrelated Interpretations. No stock-based employee compensation cost isreflected in results of operations, as all options granted under the plan hadan exercise price equal to the market value

 

29

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ofthe underlying common stock on the date of grant. The following tableillustrates the effect on results of operations if the Company had applied thefair value recognition provisions of SFAS No. 123 for the years endedDecember 31, 2004, 2003 and 2002.

 

 

 

 
| ** **                                                                              | ** ** | **December 31,**    | ** ** |
|-----------------------------------------------------------------------------------------|------------|---------------------|------------|
| ** **                                                                              | ** ** | **2004**            | ** ** | **2003** | ** ** | **2002** | ** ** |
|                                                                                    |       | **(in  thousands)** |       |
|                                                                                    |       |                |       |   |   |   |   |
| Net income  (loss) as reported                                                          |       | $                   | 44,898     |   | $ | (7,386 | ) | $ | (1,696 | ) |
| Less: total  stock-based compensation expense determined under fair value based methods |       | (215                | )          | (396 | ) | (490 | ) |
| Pro forma net  income (loss)                                                            |       | $                   | 44,683     |   | $ | (7,782 | ) | $ | (2,186 | ) |

 

                The weighted-average fairvalue at date of grant of a common stock option granted under the Company’soption plans during the years ended December 31, 2004, 2003 and 2002 was$10.02, $1.01 and $0.63, respectively. The fair value of each option grantedduring the years ended December 31, 2004, 2003 and 2002 was estimated onthe date of grant using the Black-Scholes option-pricing model withthe following weighted-average assumptions:

 
| ** **                        | ** ** | **December 31,** | ** ** |
|-----------------------------------|------------|------------------|------------|
| ** **                        | ** ** | **2004**         | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                        | ** ** | ** **       | ** ** | ** ** | ** ** | ** ** | ** ** |
| Dividend yield                    |       | 0.00             | %          | 0.00 | % | 0.00 | % |
| Expected  volatility              |       | 0.00             | %          | 0.00 | % | 0.00 | % |
| Risk-free  interest rate          |       | 4.48             | %          | 3.81 | % | 5.08 | % |
| Expected option  lives (in years) |       | 10               |       | 10 |   | 10 |   |

 

***                Reclassifications—***Certain 2003 and2002 amounts have been reclassified to conform to the December 31, 2004financial statement presentation.

 

**2.  EFFECT OF NEWACCOUNTING STANDARDS**

 

In December 2004,the FASB issued revised SFAS No. 123, “Share-Based Payment” which replaces SFASNo. 123, “Accounting for Stock-Based Compensation” and supersedes APB OpinionNo. 25, “Accounting for Stock Issued to Employees.” This statement, whichrequires the cost of all share-based payment transactions be recognized in thefinancial statements, establishes fair value as the measurement objective andrequires entities to apply a fair-value-based measurement method in accountingfor share-based payment transactions. The statement applies to all awardsgranted, modified, repurchased or cancelled after July 1, 2005, and unvestedportions of previously issued and outstanding awards. The Company is currentlyevaluating the impact of adopting this statement.

 

In November 2004,the FASB issued SFAS No. 151, “Inventory Costs - an amendment of ARB No. 43,Chapter 4,” which clarifies the accounting for abnormal amounts of idlefacility expense, freight, handling costs, and wasted material (spoilage) andalso requires that the allocation of fixed production overhead be based on thenormal capacity of the production facilities. SFAS No. 151 is effective forinventory costs incurred during fiscal years beginning after June 15, 2005. TheCompany is currently evaluating the impact of adopting this statement.

 

In January 2003,the FASB issued FASB Interpretation No. 46 (“FIN 46”), “Consolidation ofVariable Interest Entities.”

FIN 46 clarifies theapplication of Accounting Research Bulletin No. 51, “Consolidated FinancialStatements,” to certain entities in which equity investors do not have thecharacteristics of a controlling financial interest or do not have sufficientequity at risk for the entity to finance its activities without additionalsubordinated financial support from other parties. FIN 46 requires a variableinterest entity to be consolidated by a company, if that company is subject toa majority of the risk of loss from the variable interest entity’s activitiesor entitled to receive a majority of the entity’s residual returns or both. FIN46 also requires disclosures about variable interest entities that a company isnot required to consolidate but in which it has a significant variableinterest. The adoption of FIN 46 did not have a material impact on the Company’sconsolidated financial statements.

 

 

30

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**3.  CONTINGENCIES**

 

                The Company and its subsidiariesare at any one time parties to a number of lawsuits or subject to claimsarising out of its respective operations, including product liability, patent andtrademark, or other intellectual property infringement, contractual liability,workplace safety and environmental claims and cases, some of which may involveclaims for substantial damages. The Company and its subsidiaries vigorouslydefend against the lawsuits and other claims brought against it. While anyaction, proceeding or claim involves significant uncertainty; managementbelieves that the outcome of such actions, proceedings or claims will not havea material adverse effect on the Company’s business, financial condition orresults of operations.

 

                Approximately 350 of the Company’semployees in Europe and Latin America, or approximately 18% of worldwideemployees, are subject to forms of collective bargaining agreements, where workstoppages are relatively common. Management believes its employee relations aregood.

 

                Expenditures related toinvestigation and remediation of contaminated sites are expensed and accrued bythe Company when it becomes probable that a liability has been incurred and itsproportionate share of the amount can be reasonably estimated. Such accruedliabilities are exclusive of claims against third parties (except where paymenthas been received or the amount of liability or contribution by such otherparties, including insurance companies, has been agreed upon) and are notdiscounted. In management’s opinion, the ultimate liability with respect tothese actions will not materially affect the consolidated financial position orresults of operations.

 

**4.  ACQUISITIONS ANDOTHER SIGNIFICANT EVENTS**

 

                In April 2003, the Companyentered into a recapitalization and stock purchase agreement with One EquityPartners, pursuant to which One Equity Partners made a capital contribution of$119.5 million to purchase MedVest’s capital stock, of which$103.1 million was paid directly to MedVest and $16.4 million waspaid to other stockholders. As a result of these investments, One EquityPartners and members of senior management now own all of the Company’soutstanding capital stock. In connection with this equity investment, theCompany also entered into a purchase agreement with EthiconEndo-Surgery, Inc. (“Ethicon”), a wholly owned subsidiary of Johnson andJohnson, to acquire substantially all of the assets of its peripheralintravenous catheter business (“Jelco”) for $340.0 million. Under theterms of the purchase agreement, the Company acquired the worldwide assets ofthe Jelco business from Ethicon and certain of its affiliates and assumed theliabilities of the Jelco business arising upon or after the closing of theacquisition. In addition, the Company acquired all of the issued andoutstanding capital stock of Johnson & Johnson Medical de MonterreyS.A. de C.V. (“Monterrey”), a subsidiary of Ethicon, a Mexican maquiladora witha manufacturing facility in Monterrey, Mexico, dedicated to the Jelco business.

 

                Reconciliation of purchase price(in thousands):

 
| Purchase price       |   | $     | 340,000 |   |
|----------------------|--------|-------|---------|--------|
| Closing  adjustments |   | (596  | )       |
| Transaction  costs   |   | 3,513 |    |
| Total Costs          |   | $     | 342,917 |   |
|                      |        |       |         |        |  |

 

                As a result of the recapitalizationand stock purchase agreement and the Jelco acquisition, the Company enteredinto new borrowing arrangements (see Note 7) and used the proceeds, alongwith the capital contribution, to finance the acquisition of the Jelco businessand retire existing debt obligations. The Company obtained a senior securedterm loan bearing interest at a variable interest rate, senior subordinatednotes bearing interest at a fixed interest rate, and a revolving creditfacility bearing interest at a variable interest rate.  As a result of the Smiths transaction onMarch 21, 2005, the Company’s term loan has been repaid and a tender offer forthe Company’s senior subordinated notes has commenced.

 

                The acquisition of the Jelcobusiness, the recapitalization and stock purchase agreement with One EquityPartners, the refinancing of existing debt, and new borrowing arrangements werecompleted on May 21, 2003. The Jelco acquisition was accounted for underthe purchase method of accounting. The consolidated financial statementsinclude the results of operations from the Jelco business combinations as ofthe date of acquisition. The following is a summary of the assets acquired andthe liabilities assumed (in thousands):

 

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| ** **             | ** ** | **Value at  May 21, 2003** | ** ** |
|------------------------|------------|----------------------------|------------|
|                   |       |                       |       |
| Cash                   |       | 1,220                      |       |
| Inventory              |       | 33,352                     |       |
| Long-lived  assets     |       | 95,743                     |       |
| Other assets           |       | 517                        |       |
| Intangible  assets     |       | 108,800                    |       |
| Goodwill               |       | 114,055                    |       |
| Total assets  acquired |       | 353,687                    |       |
| Liabilities            |       | (10,770                    | )          |
| Net assets  acquired   |       | 342,917                    |       |
|                   |       |                       |       |

 

                The followingunaudited pro forma information has been presented as if the Jelco acquisitionoccurred on January 1, 2002. This information is based on historicalresults of operations and, in the opinion of management, is not necessarily indicativeof what the results would have been had the Company operated Jelco sinceJanuary 1, 2002 (in thousands): 

 
| ** **         | ** ** | **December 31,** | ** ** |
|--------------------|------------|------------------|------------|
| ** **         | ** ** | **2003**         | ** ** | **2002** | ** ** |
|               |       |             |       |   |   |
| Net sales          |       | $                | 300,871    |   | $ | 295,163 |   |
| Net profit  (loss) |       | (427             | )          | 1,442 |   |
|                    |            |                  |            |  |  |  |  |

 

                At the date of the transaction,the Company entered into a transition services agreements (“TSA”) with J&Jin which distribution, customer service, credit and collections, systemssupport and various other functions are to be provided by J&J as necessaryfor up to one year for a charge.  By theend of the TSA in May 2004, the Company completed the transition andassumed all necessary support functions. In addition, the Company has assumed the entire inventory from J&Jsubject to the TSA as of December 31, 2004. However, at December 31, 2003, the Company had included in itsconsolidated balance sheet, inventory and a related accrual of$3.8 million for inventory still to be assumed per the TSA.

 

As a result of the Jelco acquisition, managementdecided to close its Costa Rica manufacturing facility and relocate itsoperations to Jelco’s Monterrey, Mexico facility.  The closure of the facility was substantiallycompleted as of December 31, 2003.  TheCosta Rica facility recorded no revenues and recognized a pre-tax loss fromoperations of $2.1 million for the year ended December 31, 2003.  This included an impairment charge of $1.0million recorded in the first quarter of 2003, associated with the write-downof certain long-lived assets.  During theyear ended December 31, 2004, the Company recorded $0.1 million of finaladjustments related to the closure of the Costa Rica facility.  No future charges are expected related to theclosure of this facility and no liability related to the closure exists atDecember 31, 2004.

 

**5.  INTANGIBLE ASSETS**

 

                The changes in the carryingamount of goodwill for the years ended December 31, 2004 and 2003 are asfollows (in thousands): 

 
| Balance as of  December 31, 2002         |   | $9,001   |   |
|------------------------------------------|--------|----------|--------|
| Goodwill from  business acquisitions     |   | 115,303  |   |
|                                     |   |     |   |
| Balance as of  December 31, 2003         |   | 124,304  |   |
| Adjustment to  purchase price allocation |   | (1,592   | )      |
| Currency  translation adjustment         |   | 2,846    |   |
| Balance as of  December 31, 2004         |   | $125,558 |   |

 

                During fiscal year 2004, the Company reduced goodwillby $1.6 million related to purchase price adjustments.  Of this amount, $1.2 million related to theJelco acquisition (see Note 4) and the balance was adjustments for prioracquisitions.  Following the 2004adjustments, goodwill recorded for the Jelco acquisition totaled $114.1million.

 

                The Company’s other intangibleassets, primarily from the Jelco acquisition, consisted of (in thousands):

 

32

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| ** **                           | ** ** | **December 31, 2004** | ** ** | **December 31, 2003** | ** ** |
|--------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                           | ** ** | **Gross**             | ** ** | ** **            | ** ** | ** ** | ** ** | **Gross** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                           | ** ** | **Carrying**          | ** ** | **Accumulated**       | ** ** | ** ** | ** ** | **Carrying** | ** ** | **Accumulated** | ** ** | ** ** | ** ** |
| ** **                           | ** ** | **Amount**            | ** ** | **Amortization**      | ** ** | **Net** | ** ** | **Amount** | ** ** | **Amortization** | ** ** | **Net** | ** ** |
| Amortized  intangible assets         |       |                  |       |                  |       |   |   |   |   |   |   |   |   |
| Product  technology                  |       | $                     | 21,635     |                  | $          | (3,877 | ) | $ | 17,758 |   | $ | 20,600 |   | $ | (1,387 | ) | $ | 19,213 |   |
| Manufacturing  technology            |       | 48,000                |       | (3,750                | )          | 44,250 |   | 48,000 |   | (1,454 | ) | 46,546 |   |
| Other                                |       | 356                   |       | (40                   | )          | 316 |   | 250 |   | (23 | ) | 227 |   |
| Total amortized  intangible assets   |       | 69,991                |       | (7,667                | )          | 62,324 |   | 68,850 |   | (2,864 | ) | 65,986 |   |
|                                 |       |                  |       |                  |       |   |   |   |   |   |   |   |   |
| Unamortized  intangible assets       |       |                  |       |                  |       |   |   |   |   |   |   |   |   |
| Trademarks                           |       | 40,200                |       | —                |       | 40,200 |   | 40,200 |   | — |   | 40,200 |   |
| Total  unamortized intangible assets |       | 40,200                |       | —                |       | 40,200 |   | 40,200 |   | — |   | 40,200 |   |
|                                 |       |                  |       |                  |       |   |   |   |   |   |   |   |   |
| Total intangible  assets             |       | $                     | 110,191    |                  | $          | (7,667 | ) | $ | 102,524 |   | $ | 109,050 |   | $ | (2,864 | ) | $ | 106,186 |   |

 

                Product technology,manufacturing technology and trademarks valued at $108.8 million wereacquired as part of the Jelco acquisition. Intangible asset values acquired aspart of the Jelco transaction were determined by management at the time of theacquisition. Management considered a number of factors, including valuations orappraisals, when making these determinations. Intangible assets are amortized over their respective useful lives.Product and manufacturing technology have estimated useful lives of 9 and20 years, respectively.

 

                Amortization expense was$4.8 million, $2.8 million and $0.0 million for the years endedDecember 31, 2004, 2003 and 2002, respectively. The Company’samortization expense is primarily related to intangible assets acquired in theJelco acquisition and the weighted average remaining useful life is 14.9years.  The following is a schedule forthe estimated amortization as of December 31, 2004 (in thousands):

 

| For the year  ended: |   |   |   |
|----------------------|--------|--------|--------|
| 2005                 |   | $      | 4,881  |   |
| 2006                 |   | $      | 4,881  |   |
| 2007                 |   | $      | 4,846  |   |
| 2008                 |   | $      | 4,814  |   |
| 2009                 |   | $      | 4,793  |   |

 

**6.****             ****INVENTORIES**

 

                Inventories summarized by majorclassification are as follows (in thousands):

 
| ** **                                            | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------|------------|------------------|------------|
| ** **                                            | ** ** | **2004**         | ** ** | **2003** | ** ** |
| Raw materials  and supplies                           |       | $                | 17,397     |   | $ | 16,576 |   |
| Work in progress                                      |       | 10,242           |       | 11,760 |   |
| Finished goods                                        |       | 32,077           |       | 26,026 |   |
| Less: reserve  for obsolete and slow-moving inventory |       | (2,874           | )          | (4,206 | ) |
| Inventories, net                                      |       | $                | 56,842     |   | $ | 50,156 |   |

 

**7.****             ****LONG-TERMDEBT**

 

                Long-term obligations consist ofthe following (in thousands):

 

33

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| ** **                         | ** ** | **December 31,** | ** ** |
|------------------------------------|------------|------------------|------------|
| ** **                         | ** ** | **2004**         | ** ** | **2003** | ** ** |
|                               |       |             |       |   |   |
| Term Loan                          |       | $                | 128,050    |   | $ | 129,350 |   |
| Senior  subordinated notes         |       | 200,000          |       | 200,000 |   |
| Total                              |       | 328,050          |       | 329,350 |   |
| Current portion  of long-term debt |       | 23,400           |       | 1,300 |   |
|                               |       |             |       |   |   |
| Total Long-term  debt              |       | $                | 304,650    |   | $ | 328,050 |   |

 

                Future minimum principalpayments on long-term debt as of December 31, 2004 are as follows (inthousands):

 

| 2005       |   | $       | 23,400  |   |
|------------|--------|---------|---------|--------|
| 2006       |   | 1,300   |    |
| 2007       |   | 1,300   |    |
| 2008       |   | 62,400  |    |
| 2009       |   | 39,650  |    |
| Thereafter |   | 200,000 |    |
| Total      |   | $       | 328,050 |   |

 

 

***Long-Term Debt Agreements—*** As a result of the recapitalization andstock purchase agreement and the Jelco acquisition in 2003, the Company enteredinto new borrowing arrangements and used the proceeds, along with the capitalcontribution from One Equity Partners, to finance the acquisition of the Jelcobusiness and retire existing debt obligations.

 

The Company’s newcredit agreement with several banks and other financial institutions,(collectively, the “Lenders”) provides for senior secured financing of up to$170.0 million consisting of a $130.0 million term loan (“Term Loan”)facility and a $40.0 million revolving credit facility (“Revolver”),including a letter of credit sub-facility of $2.0 million and a swing lineloan sub-facility of $5.0 million. The new credit agreement and associated borrowings commenced onMay 21, 2003.  Substantially all ofthe Company’s assets collateralize the term loan and revolver.

 

Interest on theTerm Loan and the Revolver are designated at the base rate or LIBOR rate plus applicablemargin, respectively.  The interest rateperiods will be at one, two, three, or six months (or subject to availability,nine or twelve months).  The base ratewill be the greater of (1) the prime rate or (2) one-half of 1% overthe weighted average of rates on overnight Federal funds as published by theFederal Reserve Bank of New York. The LIBOR rate will be determined byreference to settlement rates established for deposits in dollars in the Londoninterbank market for a period equal to the interest period of the loan and themaximum reserve percentages established by the Board of Governors of the UnitedStates Federal Reserve to which the Lenders are subject.

 

The Term Loan hadprincipal of $128.1 million and $129.4 million outstanding at December 31,2004 and 2003, respectively.  The TermLoan is due in twenty-four quarterly installments of $0.3 millioncommencing on September 30, 2003 through June 30, 2008, with theremaining principal amount payable in quarterly installments of$30.9 million through March 31, 2009 and the final payment of$30.9 million due on the maturity date of the loan on May 21,2009.  At December 31, 2004 and 2003, theTerm Loan was designated at a LIBOR rate plus applicable margin, totaling 5.41%and 4.19%, respectively.  Beginning withthe fiscal year ending December 31, 2004, the Company will be required tomake loan prepayments, equaling 75% or 50% of the excess cash flows, asdefined, for the fiscal year, provided that the Company meets certain adjusteddebt ratio requirements.  At December 31,2004, $22.1 million (75% of the Company’s excess cash flow) has been reclassedto current obligations based upon this provision.

 

The Company had noobligations outstanding under the Revolver at December 31, 2004 and 2003.

 

Pursuant to theclosing of the Smiths merger on March 21, 2005, the Company repaid all amountsborrowed under the Term Loan.  Forfurther information regarding the Smiths merger, see Note 16.

 

Additionally,Medex, Inc. issued $200.0 million aggregate principal amount of 8 7/8%senior subordinated notes due 2013 (the “Notes”). The Notes accrue interest atthe rate of 8 7/8% per annum and are payablesemi-annually in arrears on May 15 and November 15, commencing onNovember 15, 2003.  The Notes willmature on May 15, 2013 at which time principal is due in full.

 

34

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Medex, Inc. issuedthe Notes which are guaranteed by MedVest Holdings Corporation and Medex, Inc.’sdomestic subsidiaries (see Note 17).

 

Except in connectionwith certain equity offerings, the Notes will not be redeemable at the Company’soption prior to May 15, 2008.  On orafter May 15, 2008, the Company may redeem all or a part of the Notes uponnot less than 30 nor more than 60 days notice, at the redemption prices(expressed as percentages of principal amount) set forth below plus accrued andunpaid interest and liquidated damages, if any, on the Notes redeemed, to theapplicable redemption date, if redeemed during the twelve-month periodbeginning on May 15 of the years indicated below:

 

| **Year**             | ** ** | **Percentage** | ** ** |
|----------------------|------------|----------------|------------|
| 2008                 |       | 104.438        | %          |
| 2009                 |       | 102.958        | %          |
| 2010                 |       | 101.479        | %          |
| 2011 and  thereafter |       | 100.000        | %          |

 

**8.  OPTION PLANS**

 

                At December 31, 2004, theCompany has in effect the 2001, 2002 and 2004 Stock Option Plans (collectivelythe “Plans”). Options granted under the 2001 Plan may be either incentive stockoptions or non-statutory stock options while options granted under the 2002 and2004 Plans are entirely non-statutory stock options. The terms of theoptions granted under the Plans are at the sole discretion of the CompensationCommittee of the Company’s Board of Directors. The 2001 and 2002 Plans providethat the Company may grant options for common and preferred shares (generallyat fair market value at the date of grant) for not more than 750,000 and 2,000,000,respectively, to certain key employees, officers and directors. The 2004 Planprovides that the Company may grant options for not more than 250,000 shares ofcommon stock to certain key employees, officers and directors. Options grantedunder the Plans are generally exercisable one, three or four years after thedate of grant and generally expire after ten years after the date of grant,according to the terms of each agreement. The following table summarizes theactivity of the Plans:

 
| ** **                        | ** ** | **Options** | ** ** | **Weighted Average Exercise Price** | ** ** |
|-----------------------------------|------------|-------------|------------|-------------------------------------|------------|
|                              |       |        |       |                                |       |
| Outstanding at  December 31, 2001 |       | —      |       | $                                   | —     |   |
| Granted                           |       | 1,683,335   |       | 1.60                                |       |
| Outstanding at  December 31, 2002 |       | 1,683,335   |       | 1.60                                |       |
| Granted                           |       | 297,500     |       | 3.20                                |       |
| Exercised                         |       | (2,000      | )          | 1.60                                |       |
| Forfeited                         |       | (49,610     | )          | 2.40                                |       |
| Outstanding at  December 31, 2003 |       | 1,929,225   |       | 1.87                                |       |
| Granted                           |       | 20,740      |       | 28.00                               |       |
| Exercised                         |       | (7,500      | )          | 1.60                                |       |
| Forfeited                         |       | (14,170     | )          | 2.95                                |       |
| Outstanding at  December 31, 2004 |       | 1,928,295   |       | $                                   | 2.12       |   |

 

                The following summarizesinformation regarding stock options outstanding at December 31, 2004:

 
| ** **         | ** ** | **Options Outstanding** | ** ** | **Options Exercisable**                         | ** ** |
|--------------------|------------|-------------------------|------------|-------------------------------------------------|------------|
| **Exercise Price** | ** ** | **Number Outstanding**  | ** ** | **Weighted Average Remaining Contractual Life** | ** ** | **Weighted Average Exercise Price** | ** ** | **Number Outstanding** | ** ** | **Weighted Average Exercise Price** | ** ** |
|               |       |                    |       |                                            |       |   |   |   |   |   |   |
| $                  | 1.60       |                    | 1,615,475  |                                            | 7.34       |   | $ | 1.60 |   | 1,248,000 |   | $ | 1.60 |   |
| $                  | 3.20       |                    | 292,500    |                                            | 8.08       |   | $ | 3.20 |   | 59,350 |   | $ | 3.20 |   |
| $                  | 28.00      |                    | 20,320     |                                            | 9.25       |   | $ | 28.00 |   | — |   | $ | 28.00 |   |
|                    |            |                         |            |                                                 |            |  |  |  |  |  |  |  |  |  |  |

 

                On May 21, 2003, inconnection with the recapitalizations, each option for common stock was convertedto an option to purchase

 

35

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.90shares of preferred stock and .10 shares of common stock. As ofDecember 31, 2004, options to purchase an aggregate of 1,717,177.5 sharesof MedVest preferred stock and 211,117.5 shares of MedVest common stock were issuedand outstanding under the Plans.

 

**9.  EQUITY**

 

                On April 21, 2003, MedVest,OEP MedVest LLC, an affiliate of One Equity Partners, and all of the then existingstockholders of MedVest (other than the ESOP), entered into a recapitalizationagreement pursuant to which One Equity Partners agreed to invest up to$119.5 million to acquire MedVest’s capital stock through a series ofstock purchases from MedVest and its existing stockholders. In connection withthe recapitalization, MedVest made a cash capital contribution of$101.2 million to Medex, Inc.. As of December 31, 2004, One EquityPartners holds through an affiliate 83.3% of MedVest’s capital stock, on afully-diluted basis.

 

                As part of the recapitalization,immediately prior to the closing, MedVest amended its articles of incorporationto create a new class of preferred stock. The preferred stock is non-voting.Upon the liquidation, dissolution or winding up of MedVest, before anydistribution of proceeds to the holders of common shares, the holders ofpreferred shares are entitled to a preferential distribution in cash in anamount equal to $5.643 for each preferred share held by such holder. In addition,each preferred shareholder is entitled to receive his or her pro rata portionof 90% of all remaining proceeds until such holder shall have received anadditional $2.8215 for each preferred share held by such holder. Thereafter,each preferred shareholder is entitled to receive his or her pro rata portionof 10% of all remaining proceeds from such liquidation, dissolution or windingup of MedVest. The preferred shares are not subject to call or mandatoryredemption rights and cannot be converted into common shares.

 

                On May 21, 2003, OEPMedVest LLC purchased 15,151,515 shares of MedVest common stock for anaggregate cash purchase price of $101.2 million. In addition, onMay 21, 2003, OEP MedVest LLC purchased from certain senior executives anaggregate of 1,180,223 shares of MedVest common stock at a purchase price equalto $6.27 per share for an aggregate cash purchase price equal to$7.4 million. Finally, on May 21, 2003, OEP MedVest LLC purchasedfrom certain stockholders other than the senior executives an aggregate of535,000 shares of MedVest common stock at a purchase price equal to $6.27 pershare for an aggregate cash purchase price equal to $3.4 million.

 

                Immediately following thepurchases of MedVest common stock described above, MedVest consummated a1-for-10 reverse stock split of its outstanding common stock. Immediatelythereafter, MedVest declared a stock dividend of nine shares of its newly-createdpreferred stock for every one share of common stock.

 

                In connection with therecapitalization transaction, MedVest and its subsidiaries terminated all ofthe existing employee stock ownership or stock benefit plans, including theMedex ESOP, the Stock Incentive Plan (UK) and the Stock AppreciationParticipation Rights Plan (Germany). Participants in the Medex ESOP had30 days to elect to receive their benefit in cash at a per share valueequal to $6.27 or in shares of MedVest common stock and preferred stock.Participants in the Stock Incentive Plan (UK) and the Stock Appreciation ParticipationRights Plan (Germany) received a cash payment equal to $6.27 per allocable butpreviously unfunded share or stock right. OEP MedVest LLC advanced MedVest thefunds required to make the foregoing cash distributions. The amount advanced byOEP MedVest LLC was extinguished and for each $6.27 extinguished, OEP MedVestLLC received one share of common stock and nine shares of preferred stock. Theamount advanced by OEP MedVest LLC was $7.5 million, the extinguishment ofwhich purchased 118,601 shares of common stock and 1,067,404 shares ofpreferred stock.

 

**10.  LEASE COMMITMENTS**

 

                Medex leases certain machinery,equipment and buildings under long-term non-cancelable operating leases. Futureminimum lease payments for which Medex is currently obligated under thesenon-cancelable operating leases as of December 31, 2004 are as follows (inthousands):

 

| 2005       |   | $     | 4,662  |   |
|------------|--------|-------|--------|--------|
| 2006       |   | 3,833 |   |
| 2007       |   | 2,788 |   |
| 2008       |   | 1,998 |   |
| 2009       |   | 1,509 |   |
| Thereafter |   | 2,229 |   |
| Total      |   | $     | 17,019 |   |

 

                The Company incurred leaseexpense of approximately $4.9 million, $4.0 million and$2.1 million for the years ended

 

36

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December 31,2004, 2003 and 2002, respectively.

 

**11.  DEFINEDCONTRIBUTION PLAN**

 

                Substantially all domesticemployees of the Company are covered by a defined contribution plan sponsoredby the Company. Under the Plan, eligible employees, as defined, can receivematching contributions from the Company. The Company contributed approximately$1.8 million, $1.2 million and $0.5 million to the Plan for the year endedDecember 31, 2004, 2003 and 2002, respectively.

 

                Employees outside the U.S. arecovered by the national benefit plans of Germany, England, Scotland, Italy, andFrance, which are sponsored by the respective local governments. Additionally,employees in the United Kingdom and Italy are eligible to participate in avoluntary pension plan that is funded by both the employee and the Company. TheCompany contributed approximately $0.9 million, $0.4 million and $0.2million to this plan for the year ended December 31, 2004, 2003 and 2002,respectively.

 

**12.  EMPLOYEE STOCKOWNERSHIP PLANS**

 

***                EmployeeStock Ownership Plan—***Effective February 9, 2001 the Companyestablished the Medex Employee Stock Ownership Plan (“ESOP”) and related trust forpurposes of enabling participating employees to share in the benefits of equityownership in the Company. The Company intended to fund the ESOP bycontributions of cash or Company stock or both as determined by the Company’sBoard of Directors. The ESOP also had the ability to obtain one or more loansfor the purpose of acquiring Company stock. The ESOP was intended to qualify asan employee stock ownership plan under Internal Revenue Codesection 4975(e)(7) and as a stock bonus plan under Internal Revenue Codesection 401(a). As a result of the Jelco acquisition, the ESOP wasterminated in 2003.

 

                Stock that was allocated toparticipant’s account vested at the rate of zero percent upon completion of thefirst three vesting years, fifty percent for the fourth vesting year and onehundred percent after five or more vesting years. In addition, participants whoreceived stock pursuant to the ESOP had the right to sell (put) the stock tothe Company at the stock’s then current fair market value.

 

***                ShareAppreciation Plan—***In 2002 the Company established the Medex ShareAppreciation Participation Plan (“Appreciation Plan”). Employees participatedat the discretion of the Board of Directors and were awarded units under theterms of the Appreciation Plan. Upon termination of full-time employment, theCompany was required to repurchase such units at the unit value for thepreceding fiscal year.  As a result ofthe Jelco acquisition, the Share Appreciation Plan was terminated in 2003. Inconnection with the termination of the Appreciation Plan, the Companyrecognized approximately $1.9 million of additional compensation expense.

 

**13.  INCOME TAXES**

 

                Deferred incometaxes reflect the net tax effects of temporary differences between the carryingamounts of assets and liabilities for financial reporting purposes and theamounts used for income tax purposes. 

 

                Thesignificant components of the Company's deferred tax assets and liabilities areas follows (in thousands): 

 

37

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| ** **                                                   | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------|------------|------------------|------------|
| ** **                                                   | ** ** | **2004**         | ** ** | **2003** | ** ** |
| **Domestic:**                                                |       |             |       |   |   |
| Current deferred  tax assets (liabilities):                  |       |             |       |   |   |
| Bad debt  reserves and sales rebates                         |       | $                | 408        |   | $ | 163 |   |
| Inventory  valuation reserves                                |       | 1,657            |       | 955 |   |
| Prepaid expenses                                             |       | (545             | )          | (333 | ) |
| Accrued expenses  and other                                  |       | 2,587            |       | 1,586 |   |
| Accrued  restructuring                                       |       | 17               |       | 897 |   |
| Exchange rate  variance                                      |       | 782              |       | (303 | ) |
| Total deferred  tax assets                                   |       | 4,906            |       | 2,965 |   |
| Long term  deferred tax assets (liabilities):                |       |             |       |   |   |
| Inventory  valuation                                         |       | (131             | )          | — |   |
| Accrued expenses  and other                                  |       | —           |       | 909 |   |
| Exchange rate  variance                                      |       | (652             | )          | — |   |
| Property and  equipment                                      |       | (1,042           | )          | 1,700 |   |
| Intangibles and  goodwill                                    |       | (2,900           | )          | (591 | ) |
| Net operating  losses                                        |       | 2,358            |       | 6,096 |   |
| Contingencies                                                |       | (351             | )          | — |   |
| Total long term  deferred tax assets (liabilities)           |       | (2,718           | )          | 8,114 |   |
| Net domestic  deferred tax assets before valuation allowance |       | 2,188            |       | 11,079 |   |
| Domestic  valuation allowance                                |       | —           |       | (11,079 | ) |
| Domestic  deferred tax assets, net of valuation allowance    |       | 2,188            |       | — |   |
|                                                         |       |             |       |   |   |
| **Foreign:**                                                 |       |             |       |   |   |
| Current deferred  tax assets (liabilities):                  |       |             |       |   |   |
| Inventory  valuation reserves                                |       | 479              |       | — |   |
| Employee related                                             |       | (128             | )          | — |   |
| Other                                                        |       | 51               |       | — |   |
| Net operating  losses                                        |       | 1,073            |       | — |   |
| Total deferred  tax assets                                   |       | 1,475            |       | — |   |
| Long term  deferred tax assets (liabilities):                |       |             |       |   |   |
| Property and equipment                                       |       | 53               |       | — |   |
| Exchange rate  variance                                      |       | (418             | )          | — |   |
| Goodwill                                                     |       | (1,324           | )          | (939 | ) |
| Contingencies                                                |       | 152              |       | — |   |
| Net operating  losses                                        |       | 1,872            |       | 3,174 |   |
| Total long term  deferred tax assets (liabilities)           |       | 335              |       | 2,235 |   |
| Net foreign  deferred tax assets before valuation allowance  |       | 1,810            |       | 2,235 |   |
| Foreign  valuation allowance                                 |       | (551             | )          | (2,121 | ) |
| Foreign deferred  tax assets, net of valuation allowance     |       | 1,259            |       | 114 |   |
| Total                                                        |       | $                | 3,447      |   | $ | 114 |   |

 

                The Company hasestablished a valuation allowance on certain foreign deferred tax assets due tothe uncertainty that these assets will be realized based on the history of taxlosses in the related jurisdictions.  TheCompany expects to be able to utilize the remaining net operating losses recordedas deferred tax assets based on expected future earnings.

 

                The Company's domestic netoperating loss carryforwards for income tax purposes are $8.0 million.

 

38

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If not utilized, these losses will begin to expirein 2021 for federal purposes and at various dates depending on the state wherethe loss was incurred.  Additionally, theuse of losses incurred on or before the recapitalization described inNote 4 are restricted as the Company was deemed to have a "change incontrol" pursuant to Sec. 382 of the Internal Revenue Code.   This restriction will delay the use of someof these losses until years after 2005. 

 

                The foreign netoperating loss carryforwards for income tax purposes generally do not expire. 

 

                TheCompany's income tax expense for the years ended December 31, 2004, 2003and 2002 is as follows (in thousands): 

 
| ** **                        | ** ** | **December 31,** | ** ** |
|-----------------------------------|------------|------------------|------------|
| ** **                        | ** ** | **2004**         | ** ** | **2003** | ** ** | **2002** | ** ** |
|                              |       |             |       |   |   |   |   |
| *Income  Before Income Taxes*     |       |             |       |   |   |   |   |
| Domestic                          |       | $                | 35,841     |   | $ | (1,637 | ) | $ | (2,381 | ) |
| Foreign                           |       | 13,288           |       | (5,289 | ) | 1,533 |   |
|                              |       | $                | 49,129     |   | $ | (6,926 | ) | $ | (848 | ) |
|                              |       |             |       |   |   |   |   |
| *Income  Tax (Benefit) Provision* |       |             |       |   |   |   |   |
| Current:                          |       |             |       |   |   |   |   |
| Federal                           |       | $                | 3,847      |   | $ | — |   | $ | — |   |
| State and local                   |       | 1,176            |       | — |   | 44 |   |
| Foreign                           |       | 2,541            |       | 574 |   | 664 |   |
|                              |       | 7,564            |       | 574 |   | 708 |   |
| Deferred:                         |       |             |       |   |   |   |   |
| Domestic                          |       | (2,188           | )          | — |   | 140 |   |
| Foreign                           |       | (1,145           | )          | (114 | ) | — |   |
|                              |       | (3,333           | )          | (114 | ) | 140 |   |
| Total                             |       | $                | 4,231      |   | $ | 460 |   | $ | 848 |   |

 

                Areconciliation of the difference between the U.S. statutory tax rate and theeffective tax rate is as follows (in thousands): 

 

39

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| ** **                                                      | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------|------------|------------------|------------|
| ** **                                                      | ** ** | **2004**         | ** ** | **2003** | ** ** | **2002** | ** ** |
|                                                            |       |             |       |   |   |   |   |
| Provision  (benefit) for income taxes at federal statutory rate |       | $                | 17,195     |   | $ | (2,424 | ) | $ | (297 | ) |
| State taxes (net  of federal benefit)                           |       | 1,613            |       | — |   | 29 |   |
| Foreign taxes at  rates different than federal                  |       | (1,731           | )          | 127 |   | 126 |   |
| Deemed dividend  from foreign subsidiaries                      |       |             |       | — |   | 880 |   |
| Interest on  contingent payment                                 |       |             |       | — |   | 349 |   |
| Cancellation of  debt income                                    |       |             |       | — |   | 622 |   |
| Basis in assets                                                 |       | 129              |       | — |   | — |   |
| Purchase  accounting                                            |       | (826             | )          | (7,331 | ) | — |   |
| Non-deductible  expenses                                        |       | 521              |       |   |   |   |   |
| Net operating  losses                                           |       |             |       | — |   | (134 | ) |
| Other  comprehensive income                                     |       |             |       | — |   | (564 | ) |
| Other  differences—net                                     |       | (21              | )          | 52 |   | 29 |   |
| Valuation  allowance                                            |       | (12,649          | )          | 10,036 |   | (192 | ) |
| Provision  (benefit) for income taxes                           |       | $                | 4,231      |   | $ | 460 |   | $ | 848 |   |

 

                As of December 31,2004, the Company had approximately $1.8 million of earnings attributable toforeign subsidiaries for which no provision has been recorded for income taxthat could occur upon repatriation.  Itis the intention of management to reinvest indefinitely its foreignsubsidiaries’ undistributed earnings necessary for their continuedoperations.  It is not practicable todetermine the amount of income taxes payable in the event all such foreignearnings are repatriated.

 

                The American JobsCreation Act of 2004, which was signed into law on October 22, 2004, providescorporate taxpayers with an election to claim a deduction equal to 85% of cashdividends in excess of base-period amounts received from controlled corporationsif the dividends are invested in the United States under a properly approveddomestic investment plan.  The Companyhad not evaluated if it has earnings eligible for this deduction or thepotential tax it might incur if those earnings were repatriated pursuant tothis election.

 

**14.****      ****BUSINESSSEGMENTS**

 

                SFAS No. 131, “DisclosuresAbout Segments of an Enterprise and Related Information” established revisedstandards relating to the reporting of financial information about operatingsegments. In accordance with SFAS No. 131, the Company has determined thatit has one reportable segment. However, the Company does operate in fourprimary geographic areas and four classes of product.

 

                Revenues are attributed tospecific geographical areas based on origin of order generation. Geographicinformation for the year ended December 31, 2004, 2003 and 2002, are asfollows:

 

40

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| ** **                     | ** ** | **December 31,**   | ** ** |
|--------------------------------|------------|--------------------|------------|
| ** **                     | ** ** | **2004**           | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                     | ** ** | **(in thousands)** | ** ** |
|                           |       |               |       |   |   |   |   |
| Net Sales                      |       |               |       |   |   |   |   |
| United States                  |       | $                  | 195,247    |   | $ | 125,519 |   | $ | 53,013 |   |
| Europe                         |       | 89,630             |       | 65,511 |   | 40,713 |   |
| Rest of World                  |       | 55,855             |       | 28,080 |   | 7,031 |   |
| Total                          |       | 340,732            |       | 219,110 |   | 100,757 |   |
|                           |       |               |       |   |   |   |   |
| Property, Plant  and Equipment |       |               |       |   |   |   |   |
| United States                  |       | $                  | 66,685     |   | $ | 82,948 |   | $ | 16,751 |   |
| Europe                         |       | 25,753             |       | 23,449 |   | 3,867 |   |
| Rest of World                  |       | 15,180             |       | 9,753 |   | — |   |
| Total                          |       | $                  | 107,618    |   | $ | 116,150 |   | $ | 20,618 |   |

 

                Revenues attributed to producttypes are distinguished as infusion systems, pressure monitoring systems, cathlab packs and accessories and respiratory products.

 

***                InfusionSystems—***Infusion systems consist of a portfolio of products thatfunction together to transport measured doses of fluids and drugs into apatient’s vascular system.

 

***                PressureMonitoring Systems—***Pressure monitoring systems include disposable,semi-disposable and reusable blood pressure transducers that are used tomeasure blood pressures within the body. In addition, the Company designs,manufactures and markets a complete line of pressure infusion bags.

 

***                CathLab Packs and Accessories—***Cath lab packs are pre-packagedtrays that are assembled with single-use products selected by the cardiaccatheterization and radiology laboratory personnel performing diagnostic andinterventional catheterization procedures.

 

***                RespiratoryProducts—***Respiratory products include medical devices used foroxygen administration, anesthesia and ventilator circuits, unit dose solutionsand humidification.

 

                The following sets forth certainfinancial information attributable to the Company’s primary product lines forthe years ended December 31, 2004, 2003 and 2002:

 
| ** **                      | ** ** | **December 31,**   | ** ** |
|---------------------------------|------------|--------------------|------------|
| ** **                      | ** ** | **2004**           | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                      | ** ** | **(in thousands)** | ** ** |
|                            |       |               |       |   |   |   |   |
| Net Sales                       |       |               |       |   |   |   |   |
| Infusion systems                |       | $                  | 273,477    |   | $ | 162,134 |   | $ | 57,126 |   |
| Pressure  monitoring systems    |       | 32,087             |       | 28,127 |   | 23,655 |   |
| Cath lab packs  and accessories |       | 27,756             |       | 26,726 |   | 18,661 |   |
| Respiratory  products           |       | 7,412              |       | 2,123 |   | 1,315 |   |
| Total                           |       | $                  | 340,732    |   | $ | 219,110 |   | $ | 100,757 |   |

 

 

                No end customer accounted forgreater than 10% of net sales for the years ended December 31, 2004, 2003and 2002.

 

**15.  REORGANIZATIONACTIVITIES**

 

                On February 9, 2001, theCompany approved a plan to reorganize its operations in Hilliard, Ohio andAtlanta, Georgia. Operations previously based in Hilliard were consolidatedwith the Dublin, Ohio facility and operations in Atlanta were moved to a newfacility leased in Duluth, Georgia. As a result of reorganizing theseoperations, the Company eliminated certain redundant functions. In addition,the Company approved plans to reorganize its German operations. As of February9, 2001, the Company accrued approximately $0.7 million in estimated costsassociated with these reorganization activities. These costs consisted ofapproximately $0.5 million for

 

41

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employeeseparation and $0.2 million for disposal costs related to certainequipment and facilities. The Company completed the reorganization activitiesduring 2002.

 

                In December 2002, theCompany announced that it would be relocating certain manufacturing operationsin order to reduce costs. As a result of the move, the Company also realignedits current organization structure. The Company recorded a restructuringreserve of approximately $0.5 million in accordance with EITF 94-3, “LiabilityRecognition for Certain Employee Termination Benefits and Other Costs to Exitan Activity (including Certain Costs Incurred in a Restructuring)”. The Companyalso recorded a restructuring reserve of approximately $0.1 million inaccordance with EITF 95-3. The Company completed the restructuring during 2004.

 

                In December 2003, the Companyannounced that it would reorganize its Jelco business (see Note 4). As such,the Company recorded $1.9 million in employee separation costs. TheCompany expects to complete this reorganization in 2005.

 

                The amounts charged against theaccrual for the years ended December 31, 2004, 2003 and 2002 are asfollows (in thousands):

 
| ** **                  | ** ** | **Employee Separation Costs** | ** ** | **Other Exit Costs** | ** ** | **Total** | ** ** |
|-----------------------------|------------|-------------------------------|------------|----------------------|------------|-----------|------------|
|                        |       |                          |       |                 |       |      |       |
| Balance,  December 31, 2001 |       | $                             | 391        |                 | $          | 8         |       | $ | 399 |   |
| Amounts paid                |       | (88                           | )          | 3                    |       | (85       | )          |
| Amounts reversed            |       | (219                          | )          | (11                  | )          | (230      | )          |
| Current period  charges     |       | 585                           |       | —               |       | 585       |       |
| Balance,  December 31, 2002 |       | 669                           |       | —               |       | 669       |       |
| Amounts paid                |       | (208                          | )          | —               |       | (208      | )          |
| Jelco  restructuring costs  |       | 1,936                         |       | —               |       | 1,936     |       |
| Amounts reversed            |       | (64                           | )          | —               |       | (64       | )          |
| Balance,  December 31, 2003 |       | 2,333                         |       | —               |       | 2,333     |       |
| Amounts paid                |       | (1,207                        | )          | —               |       | (1,207    | )          |
| Amounts reversed            |       | (773                          | )          | —               |       | (773      | )          |
| Balance,  December 31, 2004 |       | $                             | 353        |                 | $          | —    |       | $ | 353 |   |

 

                Per the table above, all restructuring reserves reversedin fiscal years 2004 and 2003 were recorded as a component of other income.However, amounts reversed in 2002 were recorded as a reduction of goodwill.

 

                As a result of the Jelcoacquisition in 2003, management decided to close its Costa Rica manufacturingfacility and relocate its operations to Jelco’s Monterrey, Mexico facility. Theclosure of the facility was substantially completed as of December 31,2003. The Costa Rica facility recorded no revenues for the years endedDecember 31, 2002 and 2003 and the Company recognized a pre-tax lossfrom operations of $2.1 million for the year ended December 31, 2003.The Company accounted for these costs in accordance with SFAS No. 146.Additionally, the Company incurred costs of $1.0 million in 2003, relatedto the write down of long-lived assets. These costs were charged to expense during the first quarter of fiscalyear 2003.

 

**16.  SUBSEQUENT EVENT**

 

**               **On December 5, 2004, the Company entered into an Agreement and Plan of Merger withSmiths Group LLC (“Smiths”), a company formed under the laws of England andWales.  Upon consummation of the Merger,Smiths paid approximately $650 million to the Company’s stockholders and optionholders.  In addition, Smiths repaid$128.1 million of the Company’s senior debt and assumed $200.0 million of 8 7/8%senior subordinated notes due 2013. Consummation of the Merger was subject to customary conditions,including antitrust approvals or clearances. The Smiths transaction closed on March 21, 2005.

 

**17.  GUARANTOR SUBSIDIARIES—SUPPLEMENTALCOMBINING FINANCIAL STATEMENTS**

 

On May 21, 2003, Medex, Inc. issued theNotes (see Note 7) which are guaranteed by MedVest Holdings Corporationand each of the Medex’s domestic subsidiaries, Medex Medical, Inc. andMedex Cardio-Pulmonary, Inc. (the “Subsidiary Guarantors”). TheNotes are not guaranteed by Medex’s foreign subsidiaries (the “Non-GuarantorSubsidiaries”).  Pursuant to applicablerules of the Securities and Exchange Commission, Medex is required to presentconsolidating financial information with respect to MedVest, Medex, theSubsidiary Guarantors and the Non-Guarantor Subsidiaries of the Notes.

 

                The following supplementalschedules present the consolidating financial data for the guarantors andnon-guarantors as of and for the years ended December 31, 2004, 2003 and2002.

 

42

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The Notes are guaranteed on a full, unconditional,unsecured, senior subordinated, joint and several bases by MedVest, theSubsidiary Guarantors and any other future domestic restricted subsidiary ofMedex.

 

43

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**MedVest Holdings Corporation**

**Supplemental Combining Balance Sheet**

**As of December 31, 2004**

 
| **(in thousands)**                               | ** ** | ** **  | ** ** | ** ** | ** ** | **Subsidiary** | ** ** | **Non-Guarantor** | ** ** | **Combining**   | ** ** | **MedVest**  | ** ** |
|--------------------------------------------------|------------|-------------|------------|------------|------------|----------------|------------|-------------------|------------|-----------------|------------|--------------|------------|
| ** **                                       | ** ** | **MedVest** | ** ** | **Medex**  | ** ** | **Guarantors** | ** ** | **Subsidiaries**  | ** ** | **Adjustments** | ** ** | **Combined** | ** ** |
| **ASSETS**                                       |       |        |       |       |       |           |       |              |       |            |       |         |       |
|                                             |       |        |       |       |       |           |       |              |       |            |       |         |       |
| CURRENT ASSETS:                                  |       |        |       |       |       |           |       |              |       |            |       |         |       |
| Cash and cash  equivalents                       |       | $           | 25         |       | $          | 33,283         |       | $                 | (16        | )               | $          | 16,771       |       | $ | — |   | $ | 50,063 |   |
| Accounts  receivable, net                        |       | —      |       | 32,825     |       | 302            |       | 23,848            |       | —          |       | 56,975       |       |
| Inventories, net                                 |       | —      |       | 28,939     |       | 979            |       | 26,924            |       | —          |       | 56,842       |       |
| Other current  assets                            |       | —      |       | 9,152      |       | 56             |       | 7,439             |       | —          |       | 16,647       |       |
| Total current  assets                            |       | 25          |       | 104,199    |       | 1,321          |       | 74,982            |       | —          |       | 180,527      |       |
|                                             |       |        |       |       |       |           |       |              |       |            |       |         |       |
| Property, Plant  and Equipment, net              |       | —      |       | 73,633     |       | —         |       | 33,985            |       | —          |       | 107,618      |       |
|                                             |       |        |       |       |       |           |       |              |       |            |       |         |       |
| Goodwill                                         |       | —      |       | 110,804    |       | 361            |       | 14,393            |       | —          |       | 125,558      |       |
| Other intangible  assets, net                    |       | —      |       | 102,482    |       | —         |       | 42                |       | —          |       | 102,524      |       |
| Investment in  subsidiaries                      |       | 103,400     |       | 33,782     |       | —         |       | —            |       | (137,182        | )          | —       |       |
| Other long-term  assets                          |       | —      |       | 11,011     |       | —         |       | 49                |       | —          |       | 11,060       |       |
| TOTAL ASSETS                                     |       | $           | 103,425    |       | $          | 435,911        |       | $                 | 1,682      |            | $          | 123,451      |       | $ | (137,182 | ) | $ | 527,287 |   |
|                                             |       |        |       |       |       |           |       |              |       |            |       |         |       |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**   |       |        |       |       |       |           |       |              |       |            |       |         |       |
|                                             |       |        |       |       |       |           |       |              |       |            |       |         |       |
| CURRENT  LIABILITIES:                            |       |        |       |       |       |           |       |              |       |            |       |         |       |
| Trade accounts  payable                          |       | $           | —     |       | $          | 4,533          |       | $                 | 276        |            | $          | 7,246        |       | $ | — |   | $ | 12,055 |   |
| Salaries and  wages payable                      |       | —      |       | 9,789      |       | (4             | )          | 6,076             |       | —          |       | 15,861       |       |
| Accrued interest                                 |       | —      |       | 3,042      |       | —         |       | —            |       | —          |       | 3,042        |       |
| Accrued expenses  and other liabilities          |       | —      |       | 10,539     |       | 41             |       | 5,093             |       | (194            | )          | 15,479       |       |
| Income taxes  payable                            |       | 47          |       | (1,797     | )          | —         |       | 3,574             |       | —          |       | 1,962        |       |
| Current portion  of long-term debt               |       | —      |       | 23,400     |       | —         |       | —            |       | —          |       | 23,400       |       |
| Total current  liabilities                       |       | 47          |       | 49,506     |       | 313            |       | 21,989            |       | (194            | )          | 71,661       |       |
|                                             |       |        |       |       |       |           |       |              |       |            |       |         |       |
| Long-term debt                                   |       | —      |       | 304,650    |       | —         |       | —            |       | —          |       | 304,650      |       |
| Other long-term  liabilities                     |       | —      |       | 4,005      |       | —         |       | 5,710             |       | (5              | )          | 9,710        |       |
|                                             |       |        |       |       |       |           |       |              |       |            |       |         |       |
| Intercompany  balances                           |       | 11,966      |       | (65,559    | )          | 9,016          |       | 44,760            |       | (183            | )          | —       |       |
|                                             |       |        |       |       |       |           |       |              |       |            |       |         |       |
| SHAREHOLDERS’  EQUITY:                      |       |        |       |       |       |           |       |              |       |            |       |         |       |
| Preferred stock                                  |       | 91,257      |       | (1         | )          | —         |       | —            |       | —          |       | 91,256       |       |
| Common stock                                     |       | 10,141      |       | 103,400    |       | —         |       | 33,782            |       | (137,525        | )          | 9,798        |       |
| Accumulated  other comprehensive income          |       | —      |       | —     |       | —         |       | 9,686             |       | —          |       | 9,686        |       |
| Retained  earnings (deficit)                     |       | (9,986      | )          | 39,910     |       | (7,647         | )          | 7,524             |       | 725             |       | 30,526       |       |
| Total  shareholders’ equity (deficiency)    |       | 91,412      |       | 143,309    |       | (7,647         | )          | 50,992            |       | (136,800        | )          | 141,266      |       |
| TOTAL  LIABILITIES AND SHAREHOLDERS’ EQUITY |       | $           | 103,425    |       | $          | 435,911        |       | $                 | 1,682      |            | $          | 123,451      |       | $ | (137,182 | ) | $ | 527,287 |   |

 

44

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**MedVest Holdings Corporation**

**Supplemental Combining Balance Sheet**

**As of December 31, 2003**

 
| **(in thousands)**                               | ** ** | ** **  | ** ** | ** ** | ** ** | **Subsidiary** | ** ** | **Non-Guarantor** | ** ** | **Combining**   | ** ** | **MedVest**  | ** ** |
|--------------------------------------------------|------------|-------------|------------|------------|------------|----------------|------------|-------------------|------------|-----------------|------------|--------------|------------|
| ** **                                       | ** ** | **MedVest** | ** ** | **Medex**  | ** ** | **Guarantors** | ** ** | **Subsidiaries**  | ** ** | **Adjustments** | ** ** | **Combined** | ** ** |
| **ASSETS**                                       |       |        |       |       |       |           |       |              |       |            |       |         |       |
|                                             |       |        |       |       |       |           |       |              |       |            |       |         |       |
| CURRENT ASSETS:                                  |       |        |       |       |       |           |       |              |       |            |       |         |       |
| Cash and cash  equivalents                       |       | $           | 25         |       | $          | 14,600         |       | $                 | (31        | )               | $          | 9,266        |       | $ | — |   | $ | 23,860 |   |
| Accounts  receivable, net                        |       | —      |       | 14,840     |       | 340            |       | 18,523            |       | —          |       | 33,703       |       |
| Inventories, net                                 |       | —      |       | 24,377     |       | 1,374          |       | 24,405            |       | —          |       | 50,156       |       |
| Other current  assets                            |       | 2,400       |       | 1,069      |       | 20             |       | 3,350             |       | —          |       | 6,839        |       |
| Total current  assets                            |       | 2,425       |       | 54,886     |       | 1,703          |       | 55,544            |       | —          |       | 114,558      |       |
|                                             |       |        |       |       |       |           |       |              |       |            |       |         |       |
| Property, Plant  and Equipment, net              |       | —      |       | 82,706     |       | 242            |       | 33,202            |       | —          |       | 116,150      |       |
|                                             |       |        |       |       |       |           |       |              |       |            |       |         |       |
| Goodwill                                         |       | —      |       | 119,263    |       | 361            |       | 4,680             |       | —          |       | 124,304      |       |
| Other intangible  assets, net                    |       | —      |       | 106,186    |       | —         |       | —            |       | —          |       | 106,186      |       |
| Investment in  subsidiaries                      |       | 103,400     |       | 31,195     |       | —         |       | —            |       | (134,595        | )          | —       |       |
| Other long-term  assets                          |       | —      |       | 12,629     |       | (1             | )          | 356               |       | 2               |       | 12,986       |       |
| TOTAL ASSETS                                     |       | $           | 105,825    |       | $          | 406,865        |       | $                 | 2,305      |            | $          | 93,782       |       | $ | (134,593 | ) | $ | 474,184 |   |
|                                             |       |        |       |       |       |           |       |              |       |            |       |         |       |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**   |       |        |       |       |       |           |       |              |       |            |       |         |       |
|                                             |       |        |       |       |       |           |       |              |       |            |       |         |       |
| CURRENT  LIABILITIES:                            |       |        |       |       |       |           |       |              |       |            |       |         |       |
| Trade accounts  payable                          |       | $           | —     |       | $          | 3,453          |       | $                 | 21         |            | $          | 17,626       |       | $ | — |   | $ | 21,100 |   |
| Salaries and  wages payable                      |       | —      |       | 5,515      |       | 14             |       | 3,449             |       | —          |       | 8,978        |       |
| Accrued  inventory repurchase liability          |       | —      |       | —     |       | —         |       | 3,826             |       | —          |       | 3,826        |       |
| Accrued interest                                 |       | —      |       | 3,762      |       | —         |       | —            |       | —          |       | 3,762        |       |
| Accrued expenses  and other liabilities          |       | 2,400       |       | 8,247      |       | 71             |       | 1,218             |       | —          |       | 11,936       |       |
| Income taxes  payable                            |       | 47          |       | 169        |       | —         |       | 495               |       | —          |       | 711          |       |
| Current portion  of long-term debt               |       | —      |       | 1,300      |       | —         |       | —            |       | —          |       | 1,300        |       |
| Total current  liabilities                       |       | 2,447       |       | 22,446     |       | 106            |       | 26,614            |       | —          |       | 51,613       |       |
|                                             |       |        |       |       |       |           |       |              |       |            |       |         |       |
| Long-term debt                                   |       | —      |       | 328,050    |       | —         |       | —            |       | —          |       | 328,050      |       |
| Other long-term  liabilities                     |       | —      |       | —     |       | —         |       | 3,998             |       | —          |       | 3,998        |       |
|                                             |       |        |       |       |       |           |       |              |       |            |       |         |       |
| Intercompany  balances                           |       | 9,566       |       | (47,824    | )          | 4,313          |       | 34,325            |       | (380            | )          | —       |       |
|                                             |       |        |       |       |       |           |       |              |       |            |       |         |       |
| SHAREHOLDERS’  EQUITY:                      |       |        |       |       |       |           |       |              |       |            |       |         |       |
| Preferred stock                                  |       | 91,257      |       | (1         | )          | —         |       | —            |       | —          |       | 91,256       |       |
| Common stock                                     |       | 10,141      |       | 103,400    |       | —         |       | 31,195            |       | (134,938        | )          | 9,798        |       |
| Accumulated  other comprehensive income          |       | —      |       | —     |       | —         |       | 3,841             |       | —          |       | 3,841        |       |
| Retained  earnings (deficit)                     |       | (7,586      | )          | 794        |       | (2,114         | )          | (6,191            | )          | 725             |       | (14,372      | )          |
| Total  shareholders’ equity (deficiency)    |       | 93,812      |       | 101,950    |       | (2,114         | )          | 10,552            |       | (113,677        | )          | 90,523       |       |
| TOTAL  LIABILITIES AND SHAREHOLDERS’ EQUITY |       | $           | 105,825    |       | $          | 406,865        |       | $                 | 2,305      |            | $          | 93,782       |       | $ | (142,456 | ) | $ | 474,184 |   |
|                                                  |            |             |            |            |            |                |            |                   |            |                 |            |              |            |  |  |  |  |  |  |  |  |

 

45

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**MedVest Holdings Corporation**

**Supplemental Combining Statement of Operations**

**For the year ended December 31, 2004**

 
| **(in  thousands)**                                | ** ** | ** **  | ** ** | ** ** | ** ** | **Subsidiary** | ** ** | **Non-Guarantor** | ** ** | **Combining**   | ** ** | **MedVest**  | ** ** |
|----------------------------------------------------|------------|-------------|------------|------------|------------|----------------|------------|-------------------|------------|-----------------|------------|--------------|------------|
| ** **                                         | ** ** | **MedVest** | ** ** | **Medex**  | ** ** | **Guarantors** | ** ** | **Subsidiaries**  | ** ** | **Adjustments** | ** ** | **Combined** | ** ** |
|                                               |       |        |       |       |       |           |       |              |       |            |       |         |       |
| NET SALES                                          |       | $           | —     |       | $          | 231,639        |       | $                 | 2,371      |            | $          | 166,686      |       | $ | (59,964 | ) | $ | 340,732 |   |
|                                               |       |        |       |       |       |           |       |              |       |            |       |         |       |
| COST OF GOODS  SOLD                                |       | —      |       | 97,082     |       | 4,567          |       | 115,378           |       | (59,964         | )          | 157,063      |       |
|                                               |       |        |       |       |       |           |       |              |       |            |       |         |       |
| GROSS MARGIN                                       |       | —      |       | 134,557    |       | (2,196         | )          | 51,308            |       | —          |       | 183,669      |       |
|                                               |       |        |       |       |       |           |       |              |       |            |       |         |       |
| SELLING, GENERAL  AND ADMINISTRATIVE EXPENSES      |       | 2,400       |       | 67,174     |       | 3,360          |       | 36,422            |       | —          |       | 109,356      |       |
|                                               |       |        |       |       |       |           |       |              |       |            |       |         |       |
| LOSS (GAIN) FROM  OPERATIONS OF ABANDONED FACILITY |       | —      |       | 2,311      |       | —         |       | (2,190            | )          | —          |       | 121          |       |
|                                               |       |        |       |       |       |           |       |              |       |            |       |         |       |
| OPERATING  EARNINGS (LOSS)                         |       | (2,400      | )          | 65,072     |       | (5,556         | )          | 17,076            |       | —          |       | 74,192       |       |
|                                               |       |        |       |       |       |           |       |              |       |            |       |         |       |
| OTHER INCOME  (EXPENSES):                          |       |        |       |       |       |           |       |              |       |            |       |         |       |
| Interest  expense, net                             |       | —      |       | (20,563    | )          | —         |       | (4,113            | )          | —          |       | (24,676      | )          |
| Other                                              |       | —      |       | (736       | )          | 23             |       | 326               |       |            |       | (387         | )          |
| Other income  (expenses), net                      |       | —      |       | (21,299    | )          | 23             |       | (3,787            | )          | —          |       | (25,063      | )          |
|                                               |       |        |       |       |       |           |       |              |       |            |       |         |       |
| INCOME (LOSS)  BEFORE INCOME TAXES                 |       | (2,400      | )          | 43,773     |       | (5,533         | )          | 13,289            |       | —          |       | 49,129       |       |
|                                               |       |        |       |       |       |           |       |              |       |            |       |         |       |
| INCOME TAX  EXPENSE                                |       | —      |       | (2,835     | )          | —         |       | (1,396            | )          |            |       | (4,231       | )          |
|                                               |       |        |       |       |       |           |       |              |       |            |       |         |       |
| NET INCOME  (LOSS)                                 |       | $           | (2,400     | )          | $          | 40,938         |       | $                 | (5,533     | )               | $          | 11,893       |       | $ | — |   | $ | 44,898 |   |

 

46

----

 

**MedVest Holdings Corporation**

**Supplemental Combining Statement of Operations**

**For the year ended December 31, 2003**

 
| **(****in thousands)**                          | ** ** | ** **  | ** ** | ** ** | ** ** | **Subsidiary** | ** ** | **Non-Guarantor** | ** ** | **Combining**   | ** ** | **MedVest**  | ** ** |
|-------------------------------------------------|------------|-------------|------------|------------|------------|----------------|------------|-------------------|------------|-----------------|------------|--------------|------------|
| ** **                                      | ** ** | **MedVest** | ** ** | **Medex**  | ** ** | **Guarantors** | ** ** | **Subsidiaries**  | ** ** | **Adjustments** | ** ** | **Combined** | ** ** |
|                                            |       |        |       |       |       |           |       |              |       |            |       |         |       |
| NET SALES                                       |       | $           | —     |       | $          | 152,954        |       | $                 | 2,184      |            | $          | 101,414      |       | $ | (37,442 | ) | $ | 219,110 |   |
|                                            |       |        |       |       |       |           |       |              |       |            |       |         |       |
| COST OF GOODS  SOLD                             |       | —      |       | 78,262     |       | 2,908          |       | 80,840            |       | (37,442         | )          | 124,568      |       |
|                                            |       |        |       |       |       |           |       |              |       |            |       |         |       |
| GROSS MARGIN                                    |       | —      |       | 74,692     |       | (724           | )          | 20,574            |       | —          |       | 94,542       |       |
|                                            |       |        |       |       |       |           |       |              |       |            |       |         |       |
| SELLING, GENERAL  AND ADMINISTRATIVE EXPENSES   |       | —      |       | 52,278     |       | 1,019          |       | 22,775            |       | —          |       | 76,072       |       |
|                                            |       |        |       |       |       |           |       |              |       |            |       |         |       |
| LOSS FROM  OPERATIONS OF ABANDONED FACILITY     |       | —      |       | —     |       | —         |       | 2,132             |       | —          |       | 2,132        |       |
|                                            |       |        |       |       |       |           |       |              |       |            |       |         |       |
| OPERATING  EARNINGS (LOSS)                      |       | —      |       | 22,414     |       | (1,743         | )          | (4,333            | )          | —          |       | 16,338       |       |
|                                            |       |        |       |       |       |           |       |              |       |            |       |         |       |
| OTHER INCOME  (EXPENSES):                       |       |        |       |       |       |           |       |              |       |            |       |         |       |
| Interest  expense, net                          |       | —      |       | (16,729    | )          | —         |       | (3,511            | )          | —          |       | (20,240      | )          |
| Loss on early extinguishment  of long-term debt |       | —      |       | (3,727     | )          | —         |       | —            |       | —          |       | (3,727       | )          |
| Other                                           |       | (501        | )          | (2,005     | )          | 1              |       | 2,556             |       | 652             |       | 703          |       |
| Other income  (expenses), net                   |       | (501        | )          | (22,461    | )          | 1              |       | (955              | )          | 652             |       | (23,264      | )          |
|                                            |       |        |       |       |       |           |       |              |       |            |       |         |       |
| INCOME (LOSS)  BEFORE INCOME TAXES              |       | (501        | )          | (47        | )          | (1,742         | )          | (5,288            | )          | 652             |       | (6,926       | )          |
|                                            |       |        |       |       |       |           |       |              |       |            |       |         |       |
| INCOME TAX  EXPENSE                             |       | (48         | )          | (100       | )          | (3             | )          | (309              | )          |            |       | (460         | )          |
|                                            |       |        |       |       |       |           |       |              |       |            |       |         |       |
| NET INCOME  (LOSS)                              |       | $           | (549       | )          | $          | (147           | )          | $                 | (1,745     | )               | $          | (5,597       | )          | $ | 652 |   | $ | (7,386 | ) |

 

47

----

 

**MedVest Holdings Corporation**

**Supplemental Combining Statement of Operations**

**For the year ended December 31, 2002**

 
| **(in  thousands)**                             | ** ** | ** **  | ** ** | ** ** | ** ** | **Subsidiary** | ** ** | **Non-Guarantor** | ** ** | **Combining**   | ** ** | **MedVest**  | ** ** |
|-------------------------------------------------|------------|-------------|------------|------------|------------|----------------|------------|-------------------|------------|-----------------|------------|--------------|------------|
| ** **                                      | ** ** | **MedVest** | ** ** | **Medex**  | ** ** | **Guarantors** | ** ** | **Subsidiaries**  | ** ** | **Adjustments** | ** ** | **Combined** | ** ** |
|                                            |       |        |       |       |       |           |       |              |       |            |       |         |       |
| NET SALES                                       |       | $           | —     |       | $          | 64,941         |       | $                 | 1,308      |            | $          | 57,726       |       | $ | (23,218 | ) | $ | 100,757 |   |
|                                            |       |        |       |       |       |           |       |              |       |            |       |         |       |
| COST OF GOODS  SOLD                             |       | —      |       | 37,577     |       | 1,096          |       | 43,549            |       | (23,218         | )          | 59,004       |       |
|                                            |       |        |       |       |       |           |       |              |       |            |       |         |       |
| GROSS MARGIN                                    |       | —      |       | 27,364     |       | 212            |       | 14,177            |       | —          |       | 41,753       |       |
|                                            |       |        |       |       |       |           |       |              |       |            |       |         |       |
| SELLING, GENERAL  AND ADMINISTRATIVE EXPENSES   |       | —      |       | 21,188     |       | 582            |       | 11,619            |       | —          |       | 33,389       |       |
|                                            |       |        |       |       |       |           |       |              |       |            |       |         |       |
| LOSS FROM  OPERATIONS OF ABANDONED FACILITY     |       | —      |       | —     |       | —         |       | 59                |       | —          |       | 59           |       |
|                                            |       |        |       |       |       |           |       |              |       |            |       |         |       |
| OPERATING  EARNINGS (LOSS)                      |       | —      |       | 6,176      |       | (370           | )          | 2,499             |       | —          |       | 8,305        |       |
|                                            |       |        |       |       |       |           |       |              |       |            |       |         |       |
| OTHER INCOME  (EXPENSES):                       |       |        |       |       |       |           |       |              |       |            |       |         |       |
| Interest  expense, net                          |       | —      |       | (6,371     | )          | —         |       | (788              | )          | —          |       | (7,159       | )          |
| Loss on early  extinguishment of long-term debt |       | —      |       | (2,549     | )          | —         |       | —            |       | —          |       | (2,549       | )          |
| Other                                           |       | (1,274      | )          | 1,952      |       | —         |       | (195              | )          | 72              |       | 555          |       |
| Other income  (expenses), net                   |       | (1,274      | )          | (6,968     | )          | —         |       | (983              | )          | 72              |       | (9,153       | )          |
|                                            |       |        |       |       |       |           |       |              |       |            |       |         |       |
| INCOME (LOSS)  BEFORE INCOME TAXES              |       | (1,274      | )          | (792       | )          | (370           | )          | 1,516             |       | 72              |       | (848         | )          |
|                                            |       |        |       |       |       |           |       |              |       |            |       |         |       |
| INCOME TAX  EXPENSE                             |       | —      |       | (747       | )          | —         |       | (101              | )          | —          |       | (848         | )          |
|                                            |       |        |       |       |       |           |       |              |       |            |       |         |       |
| NET INCOME  (LOSS)                              |       | $           | (1,274     | )          | $          | (1,539         | )          | $                 | (370       | )               | $          | 1,415        |       | $ | 72 |   | $ | (1,696 | ) |

 

48

----

 

**MedVestHoldings Corporation**

**SupplementalCombining Statement of Cash Flows**

**Forthe year ended December 31, 2004**

** **
| **(in  thousands)**                                                                       | ** ** | ** **  | ** ** | ** ** | ** ** | **Subsidiary** | ** ** | **Non-Guarantor** | ** ** | **Combining**   | ** ** | **MedVest**  | ** ** |
|-------------------------------------------------------------------------------------------|------------|-------------|------------|------------|------------|----------------|------------|-------------------|------------|-----------------|------------|--------------|------------|
| ** **                                                                                | ** ** | **MedVest** | ** ** | **Medex**  | ** ** | **Guarantors** | ** ** | **Subsidiaries**  | ** ** | **Adjustments** | ** ** | **Combined** | ** ** |
| CASH FLOWS FROM  OPERATING ACTIVITIES:                                                    |       |        |       |       |       |           |       |              |       |            |       |         |       |
| Net income  (loss)                                                                        |       | $           | (2,400     | )          | $          | 40,938         |       | $                 | (5,533     | )               | $          | 11,893       |       | $ | — |   | $ | 44,898 |   |
| Adjustments to  reconcile net income (loss) to net cash provided by operating activities: |       |        |       |       |       |           |       |              |       |            |       |         |       |
| Depreciation                                                                              |       | —      |       | 13,015     |       | —         |       | 7,154             |       | —          |       | 20,169       |       |
| Amortization                                                                              |       | —      |       | 4,803      |       | —         |       | —            |       | —          |       | 4,803        |       |
| Gain on disposal  of assets                                                               |       | —      |       | 104        |       | —         |       | 675               |       | —          |       | 779          |       |
| Changes in  operating assets and liabilities:                                             |       |        |       |       |       |           |       |              |       |            |       |         |       |
| Accounts  receivable, net                                                                 |       | —      |       | (17,985    | )          | 38             |       | (3,527            | )          | —          |       | (21,474      | )          |
| Inventories, net                                                                          |       | —      |       | (4,562     | )          | 394            |       | 730               |       | —          |       | (3,438       | )          |
| Other assets                                                                              |       | 2,400       |       | (2,643     | )          | (37            | )          | 128               |       | —          |       | (152         | )          |
| Trade accounts  payable                                                                   |       | —      |       | 1,080      |       | 254            |       | (10,030           | )          | —          |       | (8,696       | )          |
| Salaries and  wages payable                                                               |       | —      |       | 4,275      |       | (18            | )          | 2,148             |       | —          |       | 6,405        |       |
| Accrued expenses  and other liabilities                                                   |       | —      |       | (16,826    | )          | 4,917          |       | 15,769            |       | —          |       | 3,860        |       |
| Income taxes  payable                                                                     |       | —      |       | (6,873     | )          | —         |       | 392               |       | —          |       | (6,481       | )          |
| Net cash  provided by operating activities                                                |       | —      |       | 15,326     |       | 15             |       | 25,332            |       | —          |       | 40,673       |       |
|                                                                                      |       |        |       |       |       |           |       |              |       |            |       |         |       |
| CASH FLOWS FROM  INVESTING ACTIVITIES:                                                    |       |        |       |       |       |           |       |              |       |            |       |         |       |
| Adjustment to  purchase price of acquisitions                                             |       | —      |       | 8,459      |       | —         |       | (8,063            | )          | —          |       | 396          |       |
| Purchases of  property, plant and equipment                                               |       | —      |       | (4,452     | )          | —         |       | (6,689            | )          | —          |       | (11,141      | )          |
| Proceeds from  sale of assets                                                             |       | —      |       | 650        |       | —         |       | —            |       | —          |       | 650          |       |
| Net cash  provided by/(used in) investing activities                                      |       | —      |       | 4,657      |       | —         |       | (14,752           | )          | —          |       | (10,095      | )          |
|                                                                                      |       |        |       |       |       |           |       |              |       |            |       |         |       |
| CASH FLOWS FROM  FINANCING ACTIVITIES:                                                    |       |        |       |       |       |           |       |              |       |            |       |         |       |
| Principle  payment on long-term debt                                                      |       | —      |       | (1,300     | )          | —         |       | —            |       | —          |       | (1,300       | )          |
| Net cash used in  financing activities                                                    |       | —      |       | (1,300     | )          | —         |       | —            |       | —          |       | (1,300       | )          |
|                                                                                      |       |        |       |       |       |           |       |              |       |            |       |         |       |
| EFFECT OF  EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS                             |       | —      |       | —     |       | —         |       | (3,075            | )          | —          |       | (3,075       | )          |
|                                                                                      |       |        |       |       |       |           |       |              |       |            |       |         |       |
| NET CHANGE IN  CASH AND CASH EQUIVALENTS                                                  |       | —      |       | 18,683     |       | 15             |       | 7,505             |       | —          |       | 26,203       |       |
|                                                                                      |       |        |       |       |       |           |       |              |       |            |       |         |       |
| CASH AND CASH  EQUIVALENTS - Beginning of period                                          |       | 25          |       | 14,600     |       | (31            | )          | 9,266             |       | —          |       | 23,860       |       |
| CASH AND CASH  EQUIVALENTS - End of period                                                |       | $           | 25         |       | $          | 33,283         |       | $                 | (16        | )               | $          | 16,771       |       | $ | — |   | $ | 50,063 |   |

 

49

----

 

**MedVestHoldings Corporation**

**SupplementalCombining Statement of Cash Flows**

**Forthe year ended December 31, 2003**

 
| **(in  thousands)**                                                                       | ** ** | ** **  | ** ** | ** ** | ** ** | **Subsidiary** | ** ** | **Non-Guarantor** | ** ** | **Combining**   | ** ** | **MedVest**  | ** ** |
|-------------------------------------------------------------------------------------------|------------|-------------|------------|------------|------------|----------------|------------|-------------------|------------|-----------------|------------|--------------|------------|
| ** **                                                                                | ** ** | **MedVest** | ** ** | **Medex**  | ** ** | **Guarantors** | ** ** | **Subsidiaries**  | ** ** | **Adjustments** | ** ** | **Combined** | ** ** |
| CASH FLOWS FROM  OPERATING ACTIVITIES:                                                    |       |        |       |       |       |           |       |              |       |            |       |         |       |
| Net income  (loss)                                                                        |       | $           | (549       | )          | $          | (147           | )          | $                 | (1,745     | )               | $          | (5,597       | )          | $ | 652 |   | $ | (7,386 | ) |
| Adjustments to  reconcile net income (loss) to net cash provided by operating activities: |       |        |       |       |       |           |       |              |       |            |       |         |       |
| Depreciation                                                                              |       | —      |       | 11,523     |       | 37             |       | 1,586             |       | —          |       | 13,146       |       |
| Amortization                                                                              |       | —      |       | 2,805      |       | —         |       | —            |       | —          |       | 2,805        |       |
| Loss on  extinguishment of debt                                                           |       | —      |       | 3,727      |       | —         |       | —            |       | —          |       | 3,727        |       |
| Changes in  operating assets and liabilities:                                             |       |        |       |       |       |           |       |              |       |            |       |         |       |
| Accounts  receivable, net                                                                 |       | —      |       | (6,781     | )          | 6              |       | (9,973            | )          | —          |       | (16,748      | )          |
| Inventories, net                                                                          |       | —      |       | 13,516     |       | (346           | )          | (6,946            | )          | —          |       | 6,224        |       |
| Other assets                                                                              |       | 501         |       | 26,792     |       | (16            | )          | (33,938           | )          | —          |       | (6,661       | )          |
| Trade accounts  payable                                                                   |       | —      |       | 1,534      |       | (66            | )          | 13,645            |       | —          |       | 15,113       |       |
| Salaries and  wages payable                                                               |       | —      |       | 2,930      |       | (6             | )          | 670               |       | —          |       | 3,594        |       |
| Accrued expenses  and other liabilities                                                   |       | —      |       | (41,650    | )          | 2,169          |       | 50,977            |       | (652            | )          | 10,844       |       |
| Income taxes  payable                                                                     |       | 48          |       | 70         |       | —         |       | (819              | )          | —          |       | (701         | )          |
| Net cash  provided by operating activities                                                |       | —      |       | 14,319     |       | 33             |       | 9,605             |       | —          |       | 23,957       |       |
|                                                                                      |       |        |       |       |       |           |       |              |       |            |       |         |       |
| CASH FLOWS FROM  INVESTING ACTIVITIES:                                                    |       |        |       |       |       |           |       |              |       |            |       |         |       |
| Acquisition of  business, net of cash acquired                                            |       | —      |       | (339,350   | )          | (54            | )          | 1,220             |       | —          |       | (338,184     | )          |
| Acquisition  costs                                                                        |       | —      |       | (3,462     | )          | —         |       | 1                 |       | —          |       | (3,461       | )          |
| Adjustment to  purchase price of acquisitions                                             |       | —      |       | (54        | )          | —         |       | —            |       | —          |       | (54          | )          |
| Change in  investment in subsidiaries                                                     |       | (103,125    | )          | 103,125    |       | —         |       | —            |       | —          |       | —       |       |
| Purchases of  property, plant and equipment                                               |       | —      |       | (9,884     | )          | (34            | )          | (1,063            | )          | —          |       | (10,981      | )          |
| Net cash  provided by/(used in) investing activities                                      |       | (103,125    | )          | (249,625   | )          | (88            | )          | 158               |       | —          |       | (352,680     | )          |
|                                                                                      |       |        |       |       |       |           |       |              |       |            |       |         |       |
| CASH FLOWS FROM  FINANCING ACTIVITIES:                                                    |       |        |       |       |       |           |       |              |       |            |       |         |       |
| Proceeds from  long-term debt                                                             |       | —      |       | 331,367    |       | —         |       | 30                |       | —          |       | 331,397      |       |
| Proceeds from  sale of stock                                                              |       | 103,150     |       | (25        | )          | —         |       | —            |       | —          |       | 103,125      |       |
| Stock  transaction costs                                                                  |       | —      |       | (4,593     | )          | —         |       | —            |       | —          |       | (4,593       | )          |
| Net payments  from revolving line of credit                                               |       | —      |       | (13,000    | )          | —         |       | —            |       | —          |       | (13,000      | )          |
| Debt issuance  costs                                                                      |       | —      |       | (13,922    | )          | —         |       | —            |       | —          |       | (13,922      | )          |
| Principal  payment on long-term debt                                                      |       | —      |       | (50,317    | )          | —         |       | —            |       | —          |       | (50,317      | )          |
| Net cash  provided by financing activities                                                |       | 103,150     |       | 249,510    |       | —         |       | 30                |       | —          |       | 352,690      |       |
|                                                                                      |       |        |       |       |       |           |       |              |       |            |       |         |       |
| EFFECT OF  EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS                             |       | —      |       | —     |       | —         |       | (1,389            | )          | —          |       | (1,389       | )          |
|                                                                                      |       |        |       |       |       |           |       |              |       |            |       |         |       |
| NET CHANGE IN  CASH AND CASH EQUIVALENTS                                                  |       | 25          |       | 14,204     |       | (55            | )          | 8,404             |       | —          |       | 22,578       |       |
|                                                                                      |       |        |       |       |       |           |       |              |       |            |       |         |       |
| CASH AND CASH  EQUIVALENTS - Beginning of period                                          |       | —      |       | 396        |       | 24             |       | 862               |       | —          |       | 1,282        |       |
| CASH AND CASH  EQUIVALENTS - End of period                                                |       | $           | 25         |       | $          | 14,600         |       | $                 | (31        | )               | $          | 9,266        |       | $ | — |   | $ | 23,860 |   |

 

50

----

 

**MedVestHoldings Corporation**

**SupplementalCombining Statement of Cash Flows**

**Forthe year ended December 31, 2002**

 
| **(in  thousands)**                                                                       | ** ** | ** **  | ** ** | ** ** | ** ** | **Subsidiary** | ** ** | **Non-Guarantor** | ** ** | **Combining**   | ** ** | **MedVest**  | ** ** |
|-------------------------------------------------------------------------------------------|------------|-------------|------------|------------|------------|----------------|------------|-------------------|------------|-----------------|------------|--------------|------------|
| ** **                                                                                | ** ** | **MedVest** | ** ** | **Medex**  | ** ** | **Guarantors** | ** ** | **Subsidiaries**  | ** ** | **Adjustments** | ** ** | **Combined** | ** ** |
| CASH FLOWS FROM  OPERATING ACTIVITIES:                                                    |       |        |       |       |       |           |       |              |       |            |       |         |       |
| Net income  (loss)                                                                        |       | $           | (1,274     | )          | $          | (1,539         | )          | $                 | (370       | )               | $          | 1,415        |       | $ | 72 |   | $ | (1,696 | ) |
| Adjustments to  reconcile net income (loss) to net cash provided by operating activities: |       |        |       |       |       |           |       |              |       |            |       |         |       |
| Depreciation                                                                              |       | —      |       | 2,978      |       | 7              |       | 661               |       | —          |       | 3,646        |       |
| Amortization                                                                              |       | —      |       | 7          |       | —         |       | —            |       | —          |       | 7            |       |
| Accretion of  discounted debt                                                             |       | —      |       | 1,568      |       | —         |       | —            |       | —          |       | 1,568        |       |
| ESOP  compensation earned                                                                 |       | —      |       | 1,548      |       | —         |       | —            |       | —          |       | 1,548        |       |
| Loss on early  extinguishment of long-term debt                                           |       | —      |       | 2,549      |       | —         |       | —            |       | —          |       | 2,549        |       |
| Loss on disposal  of assets                                                               |       | —      |       | 22         |       | —         |       | 61                |       | —          |       | 83           |       |
| Changes in  operating assets and liabilities:                                             |       |        |       |       |       |           |       |              |       |            |       |         |       |
| Accounts  receivable, net                                                                 |       | —      |       | (688       | )          | (346           | )          | (593              | )          | —          |       | (1,627       | )          |
| Inventories, net                                                                          |       | —      |       | (573       | )          | (678           | )          | (728              | )          | —          |       | (1,979       | )          |
| Other assets                                                                              |       | 1,274       |       | (2,044     | )          | (3             | )          | 471               |       | —          |       | (302         | )          |
| Trade accounts  payable                                                                   |       | —      |       | 48         |       | 87             |       | (589              | )          | —          |       | (454         | )          |
| Salaries and  wages payable                                                               |       | —      |       | (4,389     | )          | 20             |       | 125               |       | —          |       | (4,244       | )          |
| Accrued expenses  and other liabilities                                                   |       | —      |       | 749        |       | 2,071          |       | (26               | )          | (72             | )          | 2,722        |       |
| Income taxes  payable                                                                     |       | —      |       | 887        |       | —         |       | (231              | )          | —          |       | 656          |       |
| Net cash  provided by operating activities                                                |       | —      |       | 1,123      |       | 788            |       | 566               |       | —          |       | 2,477        |       |
|                                                                                      |       |        |       |       |       |           |       |              |       |            |       |         |       |
| CASH FLOWS FROM  INVESTING ACTIVITIES:                                                    |       |        |       |       |       |           |       |              |       |            |       |         |       |
| Acquisition of  business, net of cash acquired                                            |       | —      |       | —     |       | (511           | )          | —            |       | —          |       | (511         | )          |
| Acquisition  costs                                                                        |       | —      |       | (195       | )          | —         |       | —            |       | —          |       | (195         | )          |
| Adjustment to  purchase price of acquisitions                                             |       | —      |       | 854        |       | —         |       | —            |       | —          |       | 854          |       |
| Purchases of  property, plant and equipment                                               |       | —      |       | (2,054     | )          | (253           | )          | (866              | )          | —          |       | (3,173       | )          |
| Net cash used in  investing activities                                                    |       | —      |       | (1,395     | )          | (764           | )          | (866              | )          | —          |       | (3,025       | )          |
|                                                                                      |       |        |       |       |       |           |       |              |       |            |       |         |       |
| CASH FLOWS FROM  FINANCING ACTIVITIES:                                                    |       |        |       |       |       |           |       |              |       |            |       |         |       |
| Proceeds from  long-term debt                                                             |       | —      |       | 61,300     |       | —         |       | —            |       | —          |       | 61,300       |       |
| Net payments  from revolving line of credit                                               |       | —      |       | (6,748     | )          | —         |       | —            |       | —          |       | (6,748       | )          |
| Debt issuance  costs                                                                      |       | —      |       | (1,299     | )          | —         |       | —            |       | —          |       | (1,299       | )          |
| Principal  payment on long-term debt                                                      |       | —      |       | (52,725    | )          | —         |       | —            |       | —          |       | (52,725      | )          |
| Repurchase of  common stock                                                               |       | —      |       | (80        | )          | —         |       | —            |       | —          |       | (80          | )          |
| Net cash  provided by financing activities                                                |       | —      |       | 448        |       | —         |       | —            |       | —          |       | 448          |       |
|                                                                                      |       |        |       |       |       |           |       |              |       |            |       |         |       |
| EFFECT OF  EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS                             |       | —      |       | —     |       | —         |       | 130               |       | —          |       | 130          |       |
|                                                                                      |       |        |       |       |       |           |       |              |       |            |       |         |       |
| NET CHANGE IN  CASH AND CASH EQUIVALENTS                                                  |       | —      |       | 176        |       | 24             |       | (170              | )          | —          |       | 30           |       |
|                                                                                      |       |        |       |       |       |           |       |              |       |            |       |         |       |
| CASH AND CASH  EQUIVALENTS - Beginning of period                                          |       | —      |       | 220        |       | —         |       | 1,032             |       | —          |       | 1,252        |       |
| CASH AND CASH  EQUIVALENTS - End of period                                                |       | $           | —     |       | $          | 396            |       | $                 | 24         |            | $          | 862          |       | $ | — |   | $ | 1,282 |   |

 

51

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**ITEM 9. CHANGES IN ANDDISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE**

 

**                                                     **None.

 

**ITEM 9A.CONTROLS AND PROCEDURES**

 

(a)  Evaluation of Disclosure Controls and Procedures

 

                Company management, with the participation of the Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report.  Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures as of the end of the period covered by this report are functioning effectively to provide reasonable assurance that the information required to be disclosed in reports filed under the Securities Exchange Act of 1934 is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to Company management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding disclosure.  A controls system cannot provide absolute assurance, however, that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.

 

(c)  Change in Internal Control over Financial Reporting

 

52

 

                No change in the Company’s internal control over financial reporting occurred during the Company’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

**ITEM 9B. OTHER INFORMATION**

 

                None.

 

 

**PART III**

 

**ITEM 10. DIRECTORS AND EXECUTIVEOFFICERS OF THE REGISTRANT**

 

                The following table sets forth certain informationwith respect to each of the Company’s executive officers and directors as of March22, 2005.

 

** **
| **Name**                   | ** ** | **Age** | ** ** | **Position**                                               |
|----------------------------|------------|---------|------------|------------------------------------------------------------|
|                       |       |    |       |                                                       |
| Dominick A. Arena          |       | 62      |       | President, Chief  Executive Officer and Director           |
| Dr. Georg Landsberg        |       | 50      |       | Senior Vice President  of European Operations and Director |
| Michael I. Dobrovic        |       | 40      |       | Vice President, Chief  Financial Officer and Treasurer     |
| Ralph B. Dickman, Jr.  (1) |       | 56      |       | Vice President,  Operations and Assistant Secretary        |
| Charles J. Jamison         |       | 60      |       | Vice President, General  Counsel and Secretary             |
| Chris Surch                |       | 43      |       | Chairman of the Board                                      |
| Chris Hutchison            |       | 43      |       | Director                                                   |

 

**               ***Dominick A. Arena*has served as the Company’s President andChief Executive Officer since January 2000, and has served as a Director since2001. Mr. Arena joined the operating team of the Company’s predecessor, TheFuron Company (“Furon”), in January 1997 to lead its healthcare business,having served as Furon’s healthcare consultant since December 1995. Followingthe acquisition of Medex by Furon, Mr. Arena served as President of Medex fromJanuary 1997 to July 1998. From August 1998 until his return to Medex inJanuary 2000, Mr. Arena served as a consultant to Furon and as a managingmember of LDSE International LLC, a start-up veterinary company. Previously, hewas the President of three medical device manufacturers: AnaMed Internationalfrom 1993 to 1995; Hudson Respiratory Care, Inc. from 1989 to 1993; andRespiratory Care, Inc. (a subsidiary of Kendall Company) from 1986 to 1989,when it was acquired by Hudson. Mr. Arena has 26 years of industry experience.

 

*Dr.Georg Landsberg*hasserved as the Company’s Senior Vice President of European Operations, withresponsibility for sales and operations in all European countries, since July1997, and has served as a Director since 2001. Before that, he was VicePresident of Sales and Marketing for Europe and General Manager of our Europeanentities. Dr. Landsberg has more than 15 years of experience in the medicalmarket.

 

*MichaelI. Dobrovic*hasbeen the Company’s Chief Financial Officer since December 1999. Before that,Mr. Dobrovic was the Director of Internal Audit for Furon from 1997 to 1999.Before joining Furon, Mr. Dobrovic was Director of Accounting for HarvardIndustries from 1996 to 1997 and held various positions with Price Waterhousefrom 1987 to 1996. While with Price Waterhouse, he spent nearly four years onassignment in Eastern Europe.

 

*RalphB. Dickman, Jr.*hasbeen the Company’s Vice President, Operations since 1998. Mr. Dickman has 29years of industry experience. From 1986 to 1997 Mr. Dickman held severalmanagement positions with IMED, including five years as Vice President ofOperations. From 1974 to 1985, Mr. Dickman was employed with Deseret Medical, acatheter and operating room disposable products manufacture, in variousmanufacturing and human resources positions.

 

(1) EffectiveMarch 22, 2005, Mr. Dickman has retired from the Company.

 

*CharlesJ. Jamison*hasbeen the Company’s Vice President and General Counsel since 2001. Prior tojoining Medex, Mr. Jamison was engaged in the private practice of law inCalifornia for over 23 years.

 

     *Chris Surch* hasbeen recently appointed as Chairman of the Company’s Board following thecompletion of the Smiths merger.  Mr.Surch has been with Smiths in various capacities since 1995, most recently asDirector of Finance, Strategy and Development for Smiths Medical.  Mr. Surch spent 6 years with TI Group plc,prior to its acquisition by Smiths. Prior to his employment with Smiths and TIGroup plc, Mr. Surch spent 11 years with PriceWaterhouseCoopers.

 

53

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*ChrisHutchison* hasrecently been appointed as one of the Company’s Directors following thecompletion of the Smiths merger.  Mr.Hutchison joined Smiths in 1998 as Vice President of Sales and Marketing atDeltec, Inc.  From 2001 to 2003 he wasManaging Director of Graseby Medical, Ltd. In Watford, UK.  Mr. Hutchison served as President of SmithsMedical, ASD, Inc. for the 20 months prior to being named to his currentposition of Senior Vice President of Sales for Smiths Medical Critical Care.

 

Directors of theCompany are elected annually and hold office until the next annual meeting ofshareholders and until their successors are duly elected and qualified.

 

There are nofamily relationships among our directors or executive officers. There are nomaterial proceedings to which any of our directors or executive officers or anyof their associates, is a party adverse to the Company or Holding or any oftheir subsidiaries, or has a material interest adverse to the Company orHolding, or any of their subsidiaries.

 

To our knowledge,none or our directors or executive officers has been convicted in a criminalproceeding during the last five years (excluding traffic violations or similarmisdemeanors), and none of our directors or executive officers was a party toany judicial or administrative proceeding during the last five year (except forany matters that were dismissed without sanction or settlement) that resultedin a judgment, decree or final order enjoining the person from futureviolations of, or prohibiting activities subject to, federal or statesecurities laws, or a finding of any violation of federal or state securitieslaws.

 

**Audit Committee and FinancialExpert**

 

Prior to theSmiths merger, the Company’s audit committee was comprised of Alan L. Heller,Timothy A. Dugan, James G. Connelly III and Harreld N. Kirkpatrick III.  The Board determined that Mr. Heller was an“audit committee financial expert” as defined by the Securities and ExchangeCommission (“SEC”) and was considered to be independent.  As of the Smiths merger and the changes tothe MedVest Board of Directors, a new audit committee has not yet beenappointed.

 

**Financial Code of Ethics**

 

The Company has adopted aFinancial Code of Ethics that applies to its principal executive officer,principal financial officer, controller and persons performing similarfunctions. The Financial Code of Ethics has been filed as an exhibit to thisreport.

 

 

**ITEM 11. EXECUTIVE COMPENSATION**

 

The followingtable sets forth certain compensation information for the Chief ExecutiveOfficer and the Company’s four other executive officers who were the mosthighly compensated for the fiscal year ended December 31, 2004 (together, the “namedexecutive officers”). All of the information in this table reflectscompensation earned by the named executive officers for services rendered to theCompany.

 

**SummaryCompensation Table**

 

54

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| ** **                 | ** ** | **Annual Compensation** | ** ** | **Long-Term  Compensation Awards** | ** ** |
|----------------------------|------------|-------------------------|------------|------------------------------------|------------|
| ** **                 | ** ** | ** **              | ** ** | ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** | **Securities** | ** ** | ** ** | ** ** |
| **Name**                   | ** ** | **Fiscal**              | ** ** | ** **                         | ** ** | ** ** | ** ** | **Other Annual** | ** ** | **Underlying** | ** ** | **All Other** | ** ** |
| **and Principal Position** | ** ** | **Year**                | ** ** | **Salary**                         | ** ** | **Bonus** | ** ** | **Compensation** | ** ** | **Options** | ** ** | **Compensation** | ** ** |
|                       |       |                    |       |                               |       |   |   |   |   |   |   |   |   |
| Dominick A.  Arena         |       | 2004                    |       | $                                  | 359,154    |   | $ | 256,725 |   | $ | 83,068 | (1) | — |   | $ | 48,520 | (6) |
| President, Chief           |       | 2003                    |       | 320,309                            |       | 124,019 |   | 25,742 | (2) | — |   | 1,991,493 | (7)(8) |
| Executive  Officer         |       | 2002                    |       | 263,421                            |       | 102,000 |   | 42,866 | (3) | 330,000 | (4) | 9,654 | (9) |
| Dr. Georg  Landsberg       |       | 2004                    |       | 287,880                            |       | 163,970 |   | 20,577 | (1) | — |   | 390,392 | (6)(8) |
| Senior Vice  President     |       | 2003                    |       | 239,849                            |       | 67,685 |   | 18,197 | (2) | — |   | 926,355 | (7)(8) |
| of European  Operations    |       | 2002                    |       | 194,798                            |       | 51,224 |   | 15,182 | (3) | 165,000 | (5) | 1,652 | (9) |
| Michael I.  Dobrovic       |       | 2004                    |       | 205,231                            |       | 102,690 |   | 25,174 | (1) | — |   | 13,590 | (6) |
| Vice President  and        |       | 2003                    |       | 181,099                            |       | 53,069 |   | 117,111 | (2) | — |   | 1,312,016 | (7)(8) |
| Chief Financial  Officer   |       | 2002                    |       | 175,868                            |       | 41,310 |   | 46,707 | (3) | 165,000 | (5) | 5,758 | (9) |
| Ralph B.  Dickman, Jr.     |       | 2004                    |       | 195,231                            |       | 97,556 |   | 25,174 | (1) | — |   | 28,953 | (6) |
| Vice President             |       | 2003                    |       | 185,210                            |       | 65,788 |   | 113,895 | (2) | — |   | 1,312,051 | (7)(8) |
| Operations                 |       | 2002                    |       | 177,267                            |       | 53,180 |   | 45,698 | (3) | 165,000 | (5) | 6,106 | (9) |
| Charles J. Jamison         |       | 2004                    |       | 205,231                            |       | 102,690 |   | 76,429 | (1) | — |   | 40,534 | (6) |
| Vice President  and        |       | 2003                    |       | 181,099                            |       | 53,069 |   | 26,673 | (2) | — |   | 1,319,213 | (7)(8) |
| General Counsel            |       | 2002                    |       | 144,658                            |       | 41,310 |   | 34,484 | (3) | 165,000 | (5) | 7,163 | (9) |
|                            |            |                         |            |                                    |            |  |  |  |  |  |  |  |  |  |  |  |  |

----

 

(1)                                  Includestransportation allowances, cost of living allowances and reimbursement ofrelocation expenses paid to Messrs. Arena, Landsberg, Dickman, Dobrovicand Jamison in fiscal year 2004:

 
| ** **             | ** ** | **Car Allowance** | ** ** | **Cost of Living** | ** ** | **Relocation** | ** ** |
|------------------------|------------|-------------------|------------|--------------------|------------|----------------|------------|
|                   |       |              |       |               |       |           |       |
| Dominick A.  Arena     |       | $                 | 18,360     |               | $          | —         |       | $ | 64,708 |   |
| Dr. Georg  Landsberg   |       | 20,577            |       | —             |       | —         |       |
| Michael I.  Dobrovic   |       | 16,200            |       | 8,974              |       | —         |       |
| Ralph B.  Dickman, Jr. |       | 16,200            |       | 8,974              |       | —         |       |
| Charles J.  Jamison    |       | 16,200            |       | 8,974              |       | 51,255         |       |
|                        |            |                   |            |                    |            |                |            |  |  |  |

 

(2)                                  Includestransportation allowances, cost of living allowances and reimbursement ofrelocation expenses paid to Messrs. Arena, Landsberg, Dickman, Dobrovicand Jamison in fiscal year 2003:

 
| ** **             | ** ** | **Car Allowance** | ** ** | **Cost of Living** | ** ** | **Relocation** | ** ** |
|------------------------|------------|-------------------|------------|--------------------|------------|----------------|------------|
|                   |       |              |       |               |       |           |       |
| Dominick A.  Arena     |       | $                 | 18,242     |               | $          | —         |       | $ | 7,500 |   |
| Dr. Georg  Landsberg   |       |              | 18,197     |               |       | —         |       |   | — |   |
| Michael I.  Dobrovic   |       |              | 16,096     |               |       | 3,077          |       |   | 97,938 |   |
| Ralph B.  Dickman, Jr. |       |              | 16,096     |               |       | 3,077          |       |   | 94,722 |   |
| Charles J.  Jamison    |       |              | 16,096     |               |       | 3,077          |       |   | 7,500 |   |

 

(3)                                  Includestransportation allowances and reimbursement of relocation expenses paid toMessrs. Arena, Landsberg, Dickman, Dobrovic and Jamison in fiscal year2002:

 
| ** **             | ** ** | **Car Allowance** | ** ** | **Relocation** | ** ** |
|------------------------|------------|-------------------|------------|----------------|------------|
|                   |       |              |       |           |       |
| Dominick A.  Arena     |       | $                 | 18,360     |           | $          | 24,506 |   |
| Dr. Georg  Landsberg   |       |              | 15,182     |           |       | — |   |
| Michael I.  Dobrovic   |       |              | 16,200     |           |       | 30,507 |   |
| Ralph B.  Dickman, Jr. |       |              | 16,200     |           |       | 29,498 |   |
| Charles J.  Jamison    |       |              | 16,200     |           |       | 18,284 |   |

 

55

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(4)                                  Consists of 297,000preferred shares and 33,000 common shares.

 

(5)                                  Consists of 148,500preferred shares and 16,500 common shares.

 

(6)                                  Includes companycontributions to various defined contribution plans for fiscal year 2004 onbehalf of the named executive officers and group term life insurance premiumsattributable to the named executive officers for fiscal year 2004 in thefollowing amounts:

 
| ** **             | ** ** | **Defined  Contribution Plans** | ** ** | **Life Insurance** | ** ** |
|------------------------|------------|---------------------------------|------------|--------------------|------------|
|                   |       |                            |       |               |       |
| Dominick A.  Arena     |       | $                               | 11,226     |               | $          | 37,294 |   |
| Dr. Georg  Landsberg   |       | 2,176                           |       | 7,591              |       |
| Michael I.  Dobrovic   |       | 8,794                           |       | 4,796              |       |
| Ralph B.  Dickman, Jr. |       | 8,762                           |       | 20,191             |       |
| Charles J.  Jamison    |       | 10,498                          |       | 30,036             |       |
|                        |            |                                 |            |                    |            |  |  |

 

(7)                                  Includes companycontributions to various defined contribution plans for fiscal year 2003 onbehalf of the named executive officers and group term life insurance premiumsattributable to the named executive officers for fiscal year 2003 in thefollowing amounts:

 
| ** **             | ** ** | **Defined  Contribution Plans** | ** ** | **Life Insurance** | ** ** |
|------------------------|------------|---------------------------------|------------|--------------------|------------|
|                   |       |                            |       |               |       |
| Dominick A.  Arena     |       | $                               | 7,000      |               | $          | 4,493 |   |
| Dr. Georg  Landsberg   |       |                            | 1,980      |               |       | — |   |
| Michael I.  Dobrovic   |       |                            | 6,670      |               |       | 346 |   |
| Ralph B.  Dickman, Jr. |       |                            | 5,361      |               |       | 1,690 |   |
| Charles J.  Jamison    |       |                            | 6,558      |               |       | 1,655 |   |

 

(8)                                  Messrs. Arena,Landsberg, Dobrovic, Dickman and Jamison each entered into a severance andnon-compete agreement with the Company on May 21, 2003. Included in “AllOther Compensation” for fiscal year 2003 are the first of three installmentpayments pursuant to the severance and non-compete agreements paid to eachnamed executive officer on May 21, 2003 (Mr. Arena, $1,402,500;Mr. Landsberg, $924,375; Mr. Dobrovic, $924,375; Mr. Dickman,$924,375; and Mr. Jamison, $924,375) and the second of three installmentpayments pursuant to the severance and non-compete agreements paid toMessrs. Arena, Dobrovic, Dickman and Jamison on December 30, 2003(Mr. Arena, $577,500 and Messrs. Dobrovic, Dickman and Jamison,$380,625). The second of three installment payments pursuant to the severanceand non-compete agreement to Mr. Landsberg of $380,625 was paid in thefirst quarter of the 2004 fiscal year.

 

(9)                                  Includes companycontributions to various defined contribution plans for fiscal year 2002 onbehalf of the named executive officers and group term life insurance premiumsattributable to the named executive officers for fiscal year 2002 in thefollowing amounts:

 
| ** **             | ** ** | **Defined  Contribution Plans** | ** ** | **Life Insurance** | ** ** |
|------------------------|------------|---------------------------------|------------|--------------------|------------|
|                   |       |                            |       |               |       |
| Dominick A.  Arena     |       | $                               | 5,875      |               | $          | 3,779 |   |
| Dr. Georg  Landsberg   |       |                            | 1,652      |               |       | — |   |
| Michael I.  Dobrovic   |       |                            | 5,500      |               |       | 258 |   |
| Ralph B.  Dickman, Jr. |       |                            | 5,264      |               |       | 842 |   |
| Charles J.  Jamison    |       |                            | 5,929      |               |       | 1,234 |   |

 

 

**Option/SAR Grants in Last Fiscal Year**

 

                During fiscal years endedDecember 31, 2004 and 2003, no options were granted to any of the Company’snamed executive 

 

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officers.

 

**Option Exercises and Fiscal Year-End Values**

 

                During fiscal year endedDecember 31, 2004, none of the Company’s named executive officers exercisedany stock options. The following table sets forth information with respect tothe number of unexercised stock options held by the named executive officers onDecember 31, 2004, and the value of the unexercised in-the-money stockoptions on that date.

 

 
| ** **             | ** ** | **Number of Securities  Underlying Unexercised  Options at  December 31, 2004** | ** ** | **Value of Unexercised  in-the-Money Options at  December 31, 2004** | ** ** |
|------------------------|------------|---------------------------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|
| **Name**               | ** ** | **Exercisable**                                                                 | ** ** | **Unexercisable**                                                    | ** ** | **Exercisable** | ** ** | **Unexercisable** | ** ** |
|                   |       |                                                                            |       |                                                                 |       |   |   |   |   |
| Dominick A.  Arena     |       | 330,000                                                                         |       | —                                                               |       | $ | 9,275,310 |   | $ | — |   |
| Dr. Georg  Landsberg   |       | 165,000                                                                         |       | —                                                               |       | 4,637,655 |   | — |   |
| Michael I.  Dobrovic   |       | 165,000                                                                         |       | —                                                               |       | 4,637,655 |   | — |   |
| Ralph B.  Dickman, Jr. |       | 165,000                                                                         |       | —                                                               |       | 4,637,655 |   | — |   |
| Charles J.  Jamison    |       | 165,000                                                                         |       | —                                                               |       | 4,637,655 |   | — |   |
|                        |            |                                                                                 |            |                                                                      |            |  |  |  |  |  |  |

 

----

 

(1)                                  Consists of optionsexercisable for 297,000 preferred shares and 33,000 common shares at anexercise price of $1.60 per share.  Alloptions expire on April 30, 2012, 10 years from date of grant.

 

(2)                                  Consists of optionsexercisable for 148,500 preferred shares and 16,500 common shares at anexercise price of $1.60 per share.  Alloptions expire on April 30, 2012, 10 years from date of grant.

 

(3)                                  The value ofoutstanding options is determined by the fair market value of common andpreferred stock of $198.88 and $10.91, respectively, per share as of March 21,2005 less the exercise price of $1.60 per share.   Thevalue of outstanding options was determined by the final payment from SmithsMedical Holdco Limited on March 21, 2005.

 

**EmployeeStock Option Plans**

 

                TheCompany maintains a 2001 Stock Option Plan, a 2002 Stock Option Plan and a 2004Stock Option Plan (collectively, the “Stock Option Plans”) to foster andpromote its long-term financial success and increase stockholder value byproviding for the acquisition of an ownership interest in the Company by itsemployees and non-employee directors.

 

                TheStock Option Plans provide for discretionary grants of non-qualified stockoptions and qualified incentive stock options to acquire Company common stockand are administered by the management development committee of the Company’sboard of directors, which determines the option price and exercise period andconditions to exercise of the option at the date of the option grant. As of December31, 2004, options to purchase an aggregate of 1,717,177.5 shares of the Company’sparticipating preferred stock and 211,117.5 shares of the Company’s commonstock were issued and outstanding under the Stock Option Plans.

 

                Unlessotherwise provided in an individual option grant, the Stock Option Plansreserve a right of first refusal in the Company’s favor to repurchase anyshares acquired upon exercise of the option. Furthermore, upon termination ofemployment for any reason, including death, the option holder may exercise anyoutstanding options granted to him or her that are then exercisable. Unlessotherwise specified, the Company may repurchase options upon termination ofemployment for a price equal to the per share fair market value of the Company’scommon stock.

 

**Employment Agreements**

 

                Mr.Dominick Arena has entered into a severance and non-compete agreement with theCompany that provides for the “at will” employment of Mr. Arena as Presidentand Chief Executive Officer. Under the terms of the agreement, Mr. Arena ispaid an annual base salary and is entitled to receive other benefits and anannual year-end performance bonus determined in accordance with Medex’sexisting policies. Mr. Arena has been and will be paid certain retentionbonuses and non-competition fees in an aggregate amount equal to $2,255,000. Ofthe $2,255,000, $1,980,000 has been paid to Mr. Arena as of December 31,2004.  The non-competition,non-solicitation provisions of the agreement restrict Mr. Arena from engagingin competitive activities or hiring any

 

57

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present MedVest employee for a period ofthirty-six months following resignation or termination. In the event that Mr.Arena’s employment is terminated without cause or by Mr. Arena for good reason,Mr. Arena is entitled to a payment equal to two times his annual salary and histarget performance bonus.  In connectionwith the Smiths transaction, Mr. Arena entered into an agreement with Medex andSmiths Medical Holdco Limited dated December 5, 2004 that will amend theexisting severance and non-compete agreement upon closing of the Smithstransaction.  Under the terms of theagreement, Mr. Arena will be entitled to receive an annual base salary of$364,000 and an automobile allowance of $1,600 per month.  Additionally, Mr. Arena agreed to postponereceipt of his remaining non-competition fees, 2004 annual bonus and retentionbonus until December 31, 2005 or upon the earlier termination of his employmentby Medex or by Mr. Arena for good reason. Further, if Mr. Arena continues to be employed by Medex on the one yearanniversary of the closing of the Smiths transaction, Mr. Arena will receive abonus equal to two times his annual salary and his target performancebonus.  However, if prior to receivinghis remaining non-competition fees, 2004 annual bonus or retention bonus, Mr.Arena voluntarily terminates his employment, he has agreed to forego thereceipt of his remaining non-competition fees, 2004 annual bonus and retentionbonus.

 

Dr. Georg Landsberg hasentered into a severance and non-compete agreement with the Company. Theagreement provides for the “at will” employment of Dr. Landsberg as Senior VicePresident, Europe. Under the terms of the agreement, Dr. Landsberg is paid anannual base salary and is entitled to receive other benefits and an annualyear-end performance bonus determined in accordance with the Company’s existingpolicies. Dr. Landsberg has been and will be paid certain retention bonuses andnon-competition fees in an aggregate amount equal to $1,486,250. Of the$1,486,250, $924,375 was paid on May 21, 2003 and $380,625 was paid during thefirst quarter of the 2004 fiscal year. The non-competition, non-solicitationprovisions of the agreement restrict Dr. Landsberg from engaging in competitiveactivities or hiring any present Company employee for a period of twenty-fourmonths following resignation or termination. In the event that Dr. Landsberg’semployment is terminated without cause or by Dr. Landsberg for good reason, Dr.Landsberg is entitled to a payment equal to two times his annual salary and histarget performance bonus.  In connectionwith the Smiths transaction, Mr. Landsberg entered into an agreement with Medexand Smiths Medical Holdco Limited dated December 4, 2004.  Under the terms of the agreement, Mr.Landsberg will be entitled to receive an annual gross salary of Euro 234,000, aone-time bonus up to a maximum of 50% of base salary based on performanceagainst agreed objectives and an annual bonus agreement with a potential bonus,if any, up to a maximum of 50% of base salary based on (i) the performance ofthe business for which Dr. Landsberg is responsible, (ii) the performance ofSmiths Medical and (iii) the successful completion of personal objectivesagreed with Dr. Landsberg.  Additionally,Mr. Landsberg agreed to postpone receipt of his remaining non-competition fees,2004 annual bonus and retention bonus until December 31, 2005 or upon theearlier termination of his employment by Medex or by Mr. Landsberg for goodreason.  Further, if Mr. Landsbergcontinues to be employed by Medex on the one year anniversary of the closing ofthe Smiths transaction, Mr. Landsberg will receive a bonus equal to two timeshis annual salary and his target performance bonus.  However, if prior to receiving his remainingnon-competition fees, 2004 annual bonus or retention bonus, Mr. Landsbergvoluntarily terminates his employment, he has agreed to forego the receipt ofhis remaining non-competition fees, 2004 annual bonus and retention bonus.   Under the agreement, Dr. Landsberg is alsoentitled to certain benefits including a company car, a mobile phone, coverageunder Smiths’ D&O insurance policy and, at Dr. Landsberg’s request, theCompany will make annual contributions of Euro 1,752 on behalf of Dr. Landsbergto an insurance company in accordance with the provisions of a directinsurance.

 

Mr. Michael I. Dobrovic hasentered into a severance and non-compete agreement with the Company. Theagreement provides for the “at will” employment of Mr. Dobrovic as VicePresident and Chief Financial Officer. Under the terms of the agreement, Mr.Dobrovic is paid an annual base salary and is entitled to receive otherbenefits and an annual year-end performance bonus determined in accordance withthe Company’s existing policies. Mr. Dobrovic has been and will be paid certainretention bonuses and non-competition fees in an aggregate amount equal to$1,486,250. Of the $1,486,250, $1,305,000 has been paid to Mr. Dobrovic as ofDecember 31, 2004.  The non-competition,non-solicitation provisions of the agreement restrict Mr. Dobrovic fromengaging in competitive activities or hiring any present Company employee for aperiod of twenty-four months following resignation or termination. In the eventthat Mr. Dobrovic’s employment is terminated without cause or by Mr. Dobrovicfor good reason, Mr. Dobrovic is entitled to a payment equal to two times hisannual salary and his target performance bonus. In connection with the Smithstransaction, Mr. Dobrovic entered into an agreement with Medex and SmithsMedical Holdco Limited dated December 5, 2004 that will amend the existingseverance and non-compete agreement upon closing of the Smithstransaction.  Under the terms of theagreement, Mr. Dobrovic will be entitled to receive an annual base salary of$208,000, an automobile allowance of $1,600 per month and an annual cost ofliving allowance in an amount equal to (i) $6,667 per year from the closing ofthe Smiths transaction until September 1, 2005 and (ii) $3,333 per year fromSeptember 1, 2005 until September 1, 2006. Additionally, Mr. Dobrovic agreed to postpone receipt of his remainingnon-competition fees, 2004 annual bonus and retention bonus until December 31,2005 or upon the earlier termination of his employment by Medex or by Mr.Dobrovic for good reason.  Further, ifMr. Dobrovic continues to be employed by Medex on the one year anniversary ofthe closing of the Smiths transaction, Mr. Dobrovic will receive a bonus equalto two times his annual salary and his target performance bonus.  However, if prior to receiving his remainingnon-competition fees, 2004 annual bonus or retention bonus, Mr. Dobrovicvoluntarily terminates his employment, he has agreed to forego the receipt of hisremaining non-competition fees, 2004 annual bonus and retention bonus.

 

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Mr. Ralph E. Dickman, Jr. hasentered into a severance and non-compete agreement with the Company. Theagreement provides for the “at will” employment of Mr. Dickman as VicePresident, Operations. Under the terms of the agreement, Mr. Dickman is paid anannual base salary and is entitled to receive other benefits and an annualyear-end performance bonus determined in accordance with the Company’s existingpolicies. Mr. Dickman has been and will be paid certain retention bonuses andnon-competition fees in an aggregate amount equal to $1,486,250. Of the$1,486,250, $1,305,000 has been paid to Mr. Dickman as of December 31, 2004.The non-competition, non-solicitation provisions of the agreement restrict Mr.Dickman from engaging in competitive activities or hiring any present Companyemployee for a period of twenty-four months following resignation ortermination. In the event that Mr. Dickman’s employment is terminated withoutcause or by Mr. Dickman for good reason, Mr. Dickman is entitled to a paymentequal to two times his annual salary and his target performance bonus.  In connection with the Smiths transaction,Mr. Dickman entered into an agreement with Medex and Smiths Medical HoldcoLimited dated December 5, 2004 that will amend the existing severance andnon-compete agreement upon closing of the Smiths transaction.  Under the terms of the agreement, Mr. Dickmanwill be entitled to receive an annual base salary of $197,600, an automobileallowance of $1,350 per month and an annual cost of living allowance in anamount equal to (i) $6,667 per year from the closing of the Smiths transactionuntil September 1, 2005 and (ii) $3,333 per year from September 1, 2005 untilSeptember 1, 2006.  Additionally, Mr.Dickman agreed to postpone receipt of his remaining non-competition fees, 2004annual bonus and retention bonus until December 31, 2005 or upon the earliertermination of his employment by Medex or by Mr. Dickman for good reason.  Further, if Mr. Dickman continues to beemployed by Medex on the one year anniversary of the closing of the Smithstransaction, Mr. Dickman will receive a bonus equal to two times his annualsalary and his target performance bonus. However, if prior to receiving his remaining non-competition fees, 2004annual bonus or retention bonus, Mr. Dickman voluntarily terminates hisemployment, he has agreed to forego the receipt of his remainingnon-competition fees, 2004 annual bonus and retention bonus.

 

Mr. Charles J. Jamison hasentered into a severance and non-compete agreement with the Company. Theagreement provides for the “at will” employment of Mr. Jamison as VicePresident, General Counsel. Under the terms of the agreement, Mr. Jamison ispaid an annual base salary and is entitled to receive other benefits and anannual year-end performance bonus determined in accordance with the Company’sexisting policies. Mr. Jamison has been and will be paid certain retentionbonuses and non-competition fees in an aggregate amount equal to $1,486,250. Ofthe $1,486,250, $1,305,000 has been paid to Mr. Jamison as of December 31,2004. The non-competition, non-solicitation provisions of the agreementrestrict Mr. Jamison from engaging in competitive activities or hiring anypresent Company employee for a period of twenty-four months followingresignation or termination. In the event that Mr. Jamison’s employment isterminated without cause or by Mr. Jamison for good reason, Mr. Jamison isentitled to a payment equal to two times his annual salary and his targetperformance bonus.  In connection withthe Smiths transaction, Mr. Jamison entered into an agreement with Medex andSmiths Medical Holdco Limited dated December 5, 2004 that will amend theexisting severance and non-compete agreement upon closing of the Smithstransaction.  Under the terms of theagreement, Mr. Jamison will be entitled to receive an annual base salary of$208,000, an automobile allowance of $1,600 per month and an annual cost ofliving allowance in an amount equal to (i) $6,667 per year from the closing ofthe Smiths transaction until September 1, 2005 and (ii) $3,333 per year fromSeptember 1, 2005 until September 1, 2006. Additionally, Mr. Jamison agreed to postpone receipt of his remainingnon-competition fees, 2004 annual bonus and retention bonus until December 31,2005 or upon the earlier termination of his employment by Medex or by Mr.Jamison for good reason.  Further, if Mr.Jamison continues to be employed by Medex on the one year anniversary of theclosing of the Smiths transaction, Mr. Jamison will receive a bonus equal totwo times his annual salary and his target performance bonus.  However, if prior to receiving his remainingnon-competition fees, 2004 annual bonus or retention bonus, Mr. Jamisonvoluntarily terminates his employment, he has agreed to forego the receipt ofhis remaining non-competition fees, 2004 annual bonus and retention bonus.

 

**Compensation Committee Interlocks andInsider Participation**

 

None of our executive officers serves as a member ofthe Board of Directors or compensation committee of any other company that hasone or more executive officers serving as a member of our Board of Directors orcompensation committee.

 

**Compensation of Directors**

 

For the year ended December31, 2004, the individuals serving on our Board of Directors who were not ouremployees did not receive any compensation for their service as directors.  However, one of our directors as of December31, 2004, Al Heller, received 2,800 stock options.  As of March 21, 2005, the close of the Smithsmerger, Mr. Heller has resigned from the Company’s Board of Directors.  Our directors are reimbursed forout-of-pocket expenses incurred in connection with their duties as directors.

 

**ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT ANDRELATED STOCKHOLDER MATTERS**

 

All of the issued and outstandingcommon stock of Medex is owned by MedVest. The following table sets forthcertain

 

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informationregarding the beneficial ownership of the common stock and preferred stock ofMedVest as of March 10, 2005 (except as indicated below) by:

 

                                                •                                          all persons known byus to own beneficially 5% or more of our outstanding common stock or preferredstock;

 

                                                •                                          each of ourdirectors;

 

                                                •                                          each of the namedexecutive officers in the Summary Compensation Table included in thisprospectus; and

 

                                                •                                          all of our directorsand executive officers as a group.

 

                Unless otherwise indicated, eachstockholder listed below has sole voting and investment power with respect tothe shares of common stock and preferred stock beneficially owned by suchstockholder.

                
| ** **                                                   | ** ** | **Number of**

**Preferred Shares**

**Beneficially Owned (1)** | ** ** | **Number of**

**Common Shares**

**Beneficially Owned (1)** | ** ** | **Percentage**

**of Total (2)** | ** ** |
|--------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|--------------------------------------------------------------|------------|----------------------------------|------------|
|                                                         |       |                                                            |       |                                                         |       |                             |       |
| OEP MedVest LLC                                              |       | 16,247,467.8                                                    | (3)        | 1,805,274.2                                                  | (3)        | 91.4                             | %          |
| c/o One Equity  Partners                                     |       |                                                            |       |                                                         |       |                             |       |
| 55 West Monroe  St, Suite 1600                               |       |                                                            |       |                                                         |       |                             |       |
| Chicago,  Illinois 60670-0610                                |       |                                                            |       |                                                         |       |                             |       |
| Dominick A.  Arena                                           |       | 691,673.4                                                       | (4)        | 76,852.6                                                     | (4)        | 3.8                              | %          |
| Dr. Georg  Landsberg                                         |       | 355,781.7                                                       | (4)        | 39,531.3                                                     | (4)        | 2.0                              | %          |
| Michael I.  Dobrovic                                         |       | 355,781.7                                                       | (4)        | 39,531.3                                                     | (4)        | 2.0                              | %          |
| Ralph B.  Dickman, Jr.                                       |       | 355,781.7                                                       | (4)        | 39,531.3                                                     | (4)        | 2.0                              | %          |
| Charles J.  Jamison                                          |       | 355,781.7                                                       | (4)        | 39,531.3                                                     | (4)        | 2.0                              | %          |
| Timothy A. Dugan                                             |       | 16,247,467.8                                                    | (5)        | 1,805,274.2                                                  | (5)        | 91.4                             | %          |
| James G.  Connelly III (6)                                   |       | —                                                          |       | —                                                       |       | —                           |       |
| Harreld N.  Kirkpatrick III                                  |       | 16,247,467.8                                                    | (5)        | 1,805,274.2                                                  | (5)        | 91.4                             | %          |
| All directors  and executive officers as a group (8 persons) |       | 18,362,268.0                                                    | (7)        | 2,040,252.0                                                  | (7)        | 98.4                             | %          |

 

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(1)                                  “Beneficialownership” generally means any person who, directly or indirectly, has orshares voting or investment power with respect to a security or has the rightto acquire such power within 60 days. Shares of common stock and preferredstock subject to options, warrants or rights that are currently exercisable orexercisable within 60 days of March 10, 2005 are deemed outstanding forcomputing the ownership percentage of the person holding such options, warrantsor rights, but are not deemed outstanding for computing the ownershippercentage of any other person. The amounts and percentages are based upon1,974,870.0 shares of our common stock and 17,773,826.0 shares of our preferredstock outstanding as of March 10, 2005.

 

(2)                                  The percent of classfor common shares and preferred shares for each person in the above table is,in each case, the same as the Percentage of Total.

 

(3)                                  Of the shares thatare reported as beneficially owned, OEP MedVest LLC, has (a) sole power tovote 1,805,274.2 common shares, (b) shared power to vote 0 common shares;(c) sole power to dispose 1,805,274.2 common shares and 16,247,467.8preferred shares and (d) shared power to dispose 0 common shares and 0preferred shares.

 

(4)                                  Includes 297,000preferred shares and 33,000 common shares subject to stock options byMr. Arena which are exercisable or become exercisable within 60 days.Includes 148,500 preferred shares and 16,500 common shares subject to stockoptions by each of Messrs. Landsberg, Dobrovic, Dickman and Jamison whichare exercisable or become exercisable within 60 days.

 

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(5)                                  Includes 1,805,274.2common shares and 16,247,467.8 preferred shares owned by OEP MedVest LLC. OneEquity Partners LLC owns approximately 96.7% of OEP MedVest LLC andMr. Dugan and Mr. Kirkpatrick are each Partners of One EquityPartners LLC and Directors of Medex, Inc. Of the shares that are reportedas beneficially owned, Mr. Dugan and Mr. Kirkpatrick exercise(a) sole power to vote 0 common shares, (b) shared power to vote1,805,274 common shares; (c) sole power to dispose 0 common shares and 0preferred shares and (d) shared power to dispose 1,805,274 common sharesand 16,274,468 preferred shares.

 

(6)                                  Mr. Connellyowns approximately 50% of GCA Critical Care LLC that owns less than 1% of OEPMedVest LLC. Although Mr. Connelly indirectly owns common shares andpreferred shares held by OEP MedVest LLC, Mr. Connelly does not have anypower directly or indirectly to vote or dispose of the common shares orpreferred shares held by OEP MedVest LLC.

 

(7)                                  Includes 891,000preferred shares and 99,000 common shares subject to stock options that arecurrently exercisable or exercisable within 60 days.

 

 
| **EQUITY COMPENSATION PLAN INFORMATION**                    | ** ** |
|-------------------------------------------------------------|------------|
| **Plan  Category**                                          |       | **Number  of Securities to be issued upon exercise of outstanding options, warrants and  rights** | ** ** | **Weighted-average  exercise price of outstanding options, warrants and rights** | ** ** | **Number  of securities remaining available for future issuance under equity  compensation plans (excluding securities reflected in column (a)** |   |
| Equity  compensation plans approved by security holders     |       | 1,928,295 |   | $ | 2.12 |   | 1,062,205 |   |
|                                                        |       |   |   |   |   |   |   |   |
| Equity  compensation plans not approved by security holders |       | — |   | — |   | — |   |
|                                                        |       |   |   |   |   |   |   |
| Total                                                       |       | 1,928,295 |   | $ | 2.12 |   | 1,062,205 |   |

 

**ITEM 13.  CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS**

 

**Stockholders’ Agreement**

 

                In connection with therecapitalization, all of the holders of shares of MedVest common stock andpreferred stock became parties to a new stockholders’ agreement. Thestockholders’ agreement provides, among other things, that the number of thedirectors constituting the MedVest and Medex board of directors will be seven.Each stockholder is obligated to vote its shares to elect three representativesdesignated by OEP MedVest LLC, two representatives designated by thestockholders other than OEP MedVest LLC, one independent outside directordesignated by OEP MedVest LLC (who shall be reasonably acceptable to thenon-OEP MedVest LLC stockholders) and one independent outside directordesignated by the non-OEP MedVest LLC stockholders (who shall be reasonablyacceptable to OEP MedVest LLC). The number of representatives OEP MedVest LLCand the non-OEP MedVest LLC stockholders are entitled to designate is subjectto such holders maintaining a certain minimum percentage of shares held by themas of the recapitalization date.

 

                Under the stockholders’agreement, MedVest is required to obtain the approval of stockholders holdingat least 50% of its outstanding shares of common stock before:

 

                                                •                                          authorizing orissuing any equity securities of MedVest or its subsidiary, other than pursuantto an employee or director stock incentive plan approved by the board;

 

                                                •                                          amending, modifyingor waiving any term of any equity security issued by MedVest;

 

                                                •                                          redeeming orrepurchasing any preferred stock or other equity security of MedVest or itssubsidiaries;

 

                                                •                                          adopting any new, oramending any, employee or director incentive plan providing for the issuance ofequity securities

 

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                                                                                                of MedVest or itssubsidiaries;

 

                                                •                                          approving any saleof MedVest;

 

                                                •                                          voluntarilyliquidating, dissolving or winding up MedVest;

 

                                                •                                          granting any rightsof first offer, first refusal or any similar rights relating to a sale ofMedVest;

 

                                                •                                          engaging (directlyor indirectly) in a new business activity other than a business reasonablyrelated to MedVest’s or its subsidiaries’ existing business;

 

                                                •                                          selling or otherwisedisposing of any material business of MedVest or any subsidiary of MedVest;

 

                                                •                                          except for customarydirector, officer and employee compensation, entering into or amending(directly or indirectly) any borrowing, transaction or agreement with anyaffiliate involving payments by MedVest for such borrowing, transaction oragreement which, when aggregated with all other such payments by MedVest exceed$100,000 in any one year or which individually involve payments by MedVest inexcess of $500,000 during the term of any such borrowing, transaction or agreement;or

 

                                                •                                          making any loans oradvances to any third party, other than (1) travel and entertainmentadvances to employees in the ordinary course of business, (2) notespayable issued to MedVest as part of the purchase price for a disposition ofassets otherwise permitted hereunder, and (3) advances and deposits madein the ordinary course of business.

 

                Notwithstanding the foregoingthe consent of at least one director appointed by the non-OEP MedVest LLCstockholders is required to take any of the actions described in the second tolast bullet point above.

 

                The stockholders’ agreement alsocontains certain rights of first refusal in favor of the non-OEP MedVest LLCstockholders, MedVest and OEP MedVest LLC that will be triggered upon certainproposed transfers of shares of common or preferred stock by the non-OEPMedVest LLC stockholders. The stockholders’ agreement also provides fortag-along rights to stockholders with respect to any proposed sale of at least10% of MedVest’s outstanding stock and drag-along rights with respect to anyproposed sale by stockholders owning at least an aggregate of 50% of the sharesof MedVest’s outstanding common stock. The stockholders’ agreement provideseach stockholder with certain preemptive rights with respect to any proposedissuance of shares of MedVest’s capital stock, options to purchase shares ofMedVest’s capital stock, or any securities or options to purchase securitiesconvertible into, or exercisable or exchangeable for any shares of MedVest’scapital stock.

 

                Under the terms of thestockholders’ agreement, MedVest is permitted, subject to certain conditions,to purchase from any employee investor any or all of the shares of MedVest’sstock owned by such employee upon termination of employment for cause or upon terminationby the employee without good reason. MedVest is obligated to purchase from anyemployee investor any or all of the shares of MedVest’s stock owned by suchemployee upon termination of employment upon the employee’s death ordisability. Finally, under the stockholders’ agreement, MedVest is permitted,and the employee may require MedVest, to purchase the shares of MedVest’s stockowned by such employee upon termination of employment without cause or by theemployee for good reason. The stockholders’ agreement terminates upon aninitial public offering of shares of common stock of MedVest having anaggregate offering value of at least $75 million and that results inMedVest having a deemed market capitalization of at least $300 million.

 

**Registration Rights Agreement**

 

                In connection with the closingof the MedVest recapitalization, MedVest entered into a registration rightsagreement with OEP MedVest LLC and all of the other stockholders of MedVest,pursuant to which MedVest granted certain registration rights to thestockholders, which rights can be exercised after an initial public offering ofshares of common stock of MedVest having an aggregate offering value of atleast $75 million and that results in MedVest having a deemed marketcapitalization of at least $300 million. Specifically, subject to certainconditions and limitations, after a qualified initial public offering, OEPMedVest LLC can request two long-form and unlimited short-form demandregistrations and the non-OEP MedVest LLC stockholders may request onelong-form and unlimited short-form demand registration of their shares ofcommon stock.

 

                Additionally, subject to certainconditions and limitations, MedVest agrees to permit the holders party to theregistration rights agreement to include their shares of MedVest’s common stockin any primary offering pursuant to a registration statement filed with theSecurities and Exchange Commission whenever MedVest’s securities then issuedand outstanding are to be registered under the Securities Act, subject tocompliance with certain notice provisions set forth in the registration rightsagreement. MedVest is able to postpone or

 

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withdrawany such primary registration without obligation to any holder. MedVest isgenerally required to bear all expenses arising from these registrations.MedVest further agrees to indemnify, to the fullest extent permitted by law,each stockholder party to the registration rights agreement and certain oftheir affiliates against all losses, claims, damages, liabilities and expensescaused by any untrue or alleged untrue statement of a material fact containedin any registration statement, any prospectus or preliminary prospectus or anyamendment thereof or supplement thereto, any omission or alleged omission of amaterial fact required to be stated therein or necessary to make the statementstherein not misleading or any violation of federal or state blue sky laws.These registration rights will be subject to conditions and limitations,including the right of the underwriters of an offering to limit the number ofshares of common stock held by the holders with registration rights to beincluded in such registration and a requirement that a certain minimum amountof securities be registered and sold in such registrations.

 

**EmploymentAgreements**

 

The Company hasentered into employment agreements with certain of its named executiveofficers, as described in “Item 11 - Executive Compensation.”

 

**Transactions with Affiliates**

 

Banc One Mezzanine Corporation and Banc One Capital Markets, Inc.are subsidiaries of Bank One Corporation, as are One Equity Partners and theCompany (by virtue of the contemplated equity ownership interest in us by OneEquity Partners).

 

OEP MedVest LLC, an affiliate of each of One Equity Partners, Banc OneCapital Markets, Inc. and Banc One Mezzanine Corporation, owns 83.3% ofMedVest’s capital stock on a fully-diluted basis and has the right toappoint a majority of our board of directors. Banc One CapitalMarkets, Inc. was an initial purchaser in the offering of outstandingnotes, for which it received customary fees, plus reimbursement of certainexpenses, for its services. Banc One Mezzanine Corporation serves asdocumentation agent under the credit facility for which it receives customaryfees, plus reimbursement of certain expenses, for its services. Affiliates ofthis institution also serve as lenders under the credit facility.

 

Gregory Aranaga, Director of Corporate Communications of Medex, Inc., isthe son-in-law of Dominick Arena, one of the Company’s Directors and ourPresident and Chief Executive Officer. In 2004, Mr. Aranaga was paid $127,221,which included a bonus of $26,406, and received options to purchase 200 sharesof common stock.

 

**Management Agreement**

 

In connection with the Jelco acquisition and recapitalization, MedVestentered into a management agreement with One Equity Partners LLC for managementand financial advisory services and oversight to be provided to it and itssubsidiaries. Pursuant to this agreement, MedVest pays an annual management feeof $2.4 million; provided, however, no annual management fee will bepayable until MedVest and its consolidated subsidiaries generate annual EBITDAin excess of $76.0 million; provided, further, that no annual managementfee was payable before December 15, 2003. One Equity Partners alsoreceived a one-time transaction fee of $3.0 million upon consummation ofthe Transactions and annual out-of-pocket expenses.   As of the closing of the Smiths merger onMarch 21, 2005, the management agreement with One Equity Partners LLC has beenterminated.  See Note 16 to theconsolidated financial statements for further details regarding the Smithsmerger.

 

**Consulting Arrangement**

 

On June 14, 2003, the Company engaged Garrett Capital Advisors toprovide general business consulting services to Medex, Inc. at an annualretainer of $150,000. Our director, Mr. Connelly, is the managing partnerof Garrett Capital Advisors. This agreement commenced July 1, 2003 andends June 30, 2006. It is cancelable at any time, by either party, upon90 days written notice.   Pursuantto the closing of the Smiths merger, the agreement with Mr. Connelly has beencancelled and there are no further amounts due under this agreement.  See Note 16 to the consolidated financialstatements for further details regarding the Smiths merger.

 

**ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES**

 

**Audit Fees**

 

Audit fees include fees paid by the Company toDeloitte & Touche LLP related to the annual audit of the Company’sconsolidated financial statements, the review of financial statements includedin the Company’s Quarterly Reports on Form 10-Q, and statutory audits ofvarious international subsidiaries. Audit fees also include fees for services performedby Deloitte & Touche LLP that are closely related to the audit and in manycases could only be provided by the Company’s independent Registered PublicAccounting Firm, such as

 

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comfort letters and consents related to SEC registration statements.The aggregate fees billed to the Company by Deloitte & Touche LLP for auditservices rendered to the Company and its subsidiaries for fiscal 2004 and 2003totaled $0.9 million and $0.2 million, respectively.

 

**Audit-Related Fees**

 

Audit-related services include due diligence services related to mergers and acquisitions, audit-related research and assistance, document production and employee benefit plan audits. The aggregate fees billed to the Company by Deloitte & Touche LLP for audit-related services rendered to the Company and its subsidiaries for fiscal 2004 totaled $0.2 million.  Similar fees for fiscal year 2003 were minimal.

 

**Tax Fees**

 

Tax fees include tax compliance and other tax-related services. The aggregate fees billed to the Company by Deloitte & Touche LLP for tax services rendered to the Company and its subsidiaries for fiscal 2004 and 2003 totaled $0.5 million and $0.2 million, respectively.

 

**All Other Fees**

 

The aggregate fees billed to the Company by Deloitte & Touche LLP for all other services rendered to the Company and its subsidiaries for fiscal 2004 totaled $0.1 million.  Similar fees for fiscal year 2003 were minimal.

 

**Audit Committee Pre-Approval Policies and Procedures**

 

The Audit Committee is responsible for the appointment, compensation and oversight of the work performed by the independent auditors.

 

The Audit Committee annually approves the scope and fee estimates for the quarterly reviews, year-end audit and statutory audits to be performed by the Company’s independent auditors for the next fiscal year. In assessing requests for services by the independent auditor, the Audit Committee considers whether such services are consistent with the auditor’s independence, whether the independent auditor is likely to provide the most effective and efficient service based upon their familiarity with the Company, and whether the service could enhance the Company’s ability to manage or control risk or improve audit quality. In making its recommendation to ratify the appointment of Deloitte and Touche LLP as the Company’s auditor for the current fiscal year, the Audit Committee has considered whether any non-audit services provided by them are compatible with maintaining their independence.

 

64

 

**PART IV**

 

**ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES**

 

(a)           The followingdocuments are filed as part of this Form 10-K.

 
| (1)    | Consolidated Financial Statements                                                                                                                                      |                                                                                                                                                                                         |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                   | Report  of Independent Registered Public Accounting Firm                                                                                                                                     |   |
|   |                                                                                                                                                                   | Consolidated Balance Sheets as of  December 31, 2004 and 2003                                                                                                                           |   |
|   |                                                                                                                                                                   | Consolidated Statements of  Operations for the Years ended December 31, 2004, 2003 and 2002                                                                                                  |   |
|   |                                                                                                                                                                   | Consolidated Statements of  Shareholders’ Equity (Deficiency) for the Years ended December 31, 2004, 2003  and 2002                                                           |   |
|   |                                                                                                                                                                   | Consolidated Statements of  Cash Flows for the Years ended December 31, 2004, 2003 and 2002                                                                                                  |   |
|   |                                                                                                                                                                   | Notes to  Consolidated Financial Statements                                                                                                                                                  |   |
|   |                                                                                                                                                                   |                                                                                                                                                                                         |   |
| (2)    | Financial Statement Schedule:                                                                                                                                          |                                                                                                                                                                                         |
|   |                                                                                                                                                                   | Schedule of Valuation  and Qualifying Accounts                                                                                                                                               |   |
|   |                                                                                                                                                                   | All other financial statement schedules are  omitted because such schedules are not required or the information required has been presented in theaforementioned  financial statements. |   |
| (3)    | The  exhibits listed on the “Index to Exhibits” on pages 67 through 68 are filed  with this Form 10-K or  incorporated by reference as set forth below. |                                                                                                                                                                                         |

 

(b)  The exhibits listed on the “Index to Exhibits”on pages 67 through 68 are filed with this

                Form 10-K or incorporated by reference as set forthbelow.

 

(c)  Additional Financial Statements Schedules

 

                      None.

 

65

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**SIGNATURES**

 

                Pursuantto the requirements of Section 13 or 15(d) of the Securities Exchange Act of1934, as amended, the registrant has duly caused this report to be signed onits behalf by the undersigned, thereunto duly authorized, on April 6, 2005

 
|   | MedVest Holdings Corporation |
|--------|------------------------------|
|   |                         |   |
|   | By:                          | /s/ Dominick A. Arena |   |
|   |                         | A. Arena |
|   |                         | Chief Executive Officer and a Director |

 

 

**POWER OF ATTORNEY AND SIGNATURES**

 

                KNOW ALL PERSONS BY THESE PRESENTS, that each personwhose signature appears below constitutes and appoints Michael I. Dobrovic andCharles J. Jamison, jointly and severally, as his or her true and lawfulattorney-in-fact and agent, acting alone, with full power of substitution andresubstitution for him and in his or her name, place and stead, in any and allcapacities, to sign any or all amendments to this annual report on Form 10-K,and to file the same, with all exhibits thereto, and other documents inconnection therewith, with the Securities and Exchange Commission, grantingunto said attorney-in-fact full power and authority to do and reform each andevery act and thing requisite or necessary to be done, hereby ratifying andconfirming all that said attorney-in-fact and agent, or his or her substituteor substitutes, may lawfully do or cause to be done by virtue hereof.

 

                Pursuant to the requirements of the SecuritiesExchange Act of 1934, this report has been signed below by the followingpersons on behalf of the registrant and in the capacities and on the datesindicated:

 
| **Signature**           | ** ** | **Title**                                                                                | ** ** | **Date**       |   |
|-------------------------|------------|------------------------------------------------------------------------------------------|------------|----------------|--------|
|                    |       |                                                                                     |       |           |   |
| /s/ Dominick A. Arena   |       | Chief Executive Officer and a  Director (Principal Executive Officer)                    |       | March 31, 2005 |   |
| Dominick A. Arena       |       |                                                                                     |       |           |   |
|                    |       |                                                                                     |       |           |   |
| /s/ Michael I. Dobrovic |       | Vice President and Chief  Financial Officer (Principal Accounting and Financial Officer) |       | March 31, 2005 |   |
| Michael I. Dobrovic     |       |                                                                                     |       |           |   |
|                    |       |                                                                                     |       |           |   |
| /s/ Dr. Georg Landsberg |       | Senior Vice President of European Operations

and Director                               |       | March 31, 2005 |   |
| Dr. Georg Landsberg     |       |                                                                                     |       |           |   |
|                    |       |                                                                                     |       |           |   |
| /s/ Chris Surch         |       | Chairman of the Board                                                                    |       | March 31, 2005 |   |
| Chris Surch             |       |                                                                                     |       |           |   |
|                    |       |                                                                                     |       |           |   |
| /s/ Chris Hutchison     |       | Director                                                                                 |       | March 31, 2005 |   |
| Chris Hutchison         |       |                                                                                     |       |           |   |
|                    |       |                                                                                     |       |           |   |

 

66

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**MedVestHoldings Corporation**

**Schedule II — Valuation and Qualifying Accounts**

 

 

 
| ** **                                             | ** ** | **Balance at Beginning of Period** | ** ** | **Charged to costs and expenses** | ** ** | **Charged to other accounts- describe** | ** ** | **Deductions- describe** | ** ** | **Balance at  End of  Period** | ** ** |
|--------------------------------------------------------|------------|------------------------------------|------------|-----------------------------------|------------|-----------------------------------------|------------|--------------------------|------------|--------------------------------|------------|
| **Description**                                        | ** ** | **(in thousands)**                 | ** ** |
| *Year  Ended December 31, 2004*                        |       |                               |       |                              |       |                                    |       |                     |       |                           |       |
| Reserves and  allowances deducted from asset accounts: |       |                               |       |                              |       |                                    |       |                     |       |                           |       |
| Accounts  receivable allowances(1)                     |       | $                                  | 9,581      |                              | $          | 1,181                                   | (3)        | $                        | 46         | (6)                            | $          | (233 | )(7) | $ | 10,575 |   |
| Valuation  allowance on deferred tax assets            |       | 13,200                             |       | —                            |       | —                                  |       | (12,649                  | )(9)       | 551                            |       |
| Inventory  Allowances(2)                               |       | 4,206                              |       | 602                               | (5)        | (416                                    | )(6)       | (1,518                   | )(7)       | 2,874                          |       |
|                                                   |       | $                                  | 26,987     |                              | $          | 1,783                                   |       | $                        | (370       | )                              | $          | (1,751 | ) | $ | 26,649 |   |
|                                                   |       |                               |       |                              |       |                                    |       |                     |       |                           |       |
| *Year  Ended December 31, 2003*                        |       |                               |       |                              |       |                                    |       |                     |       |                           |       |
| Reserves and  allowances deducted from asset accounts: |       |                               |       |                              |       |                                    |       |                     |       |                           |       |
| Accounts  receivable allowances(1)                     |       | $                                  | 819        |                              | $          | 21,925                                  | (3)        | $                        | 60         | (6)                            | $          | (13,223 | )(7) | $ | 9,581 |   |
| Valuation  allowance on deferred tax assets            |       | 3,164                              |       | 10,036                            | (4)        | —                                  |       | —                   |       | 13,200                         |       |
| Inventory  Allowances(2)                               |       | 2,359                              |       | 4,167                             | (5)        | (143                                    | )(6)       | (2,177                   | )(7)       | 4,206                          |       |
|                                                   |       | $                                  | 6,342      |                              | $          | 36,128                                  |       | $                        | (83        | )                              | $          | (15,400 | ) | $ | 26,987 |   |
|                                                   |       |                               |       |                              |       |                                    |       |                     |       |                           |       |
| *Year  Ended December 31, 2002*                        |       |                               |       |                              |       |                                    |       |                     |       |                           |       |
| Reserves and  allowances deducted from asset accounts: |       |                               |       |                              |       |                                    |       |                     |       |                           |       |
| Accounts  receivable allowances(1)                     |       | $                                  | 1,119      |                              | $          | (87                                     | )(3)       | $                        | 43         | (6)                            | $          | (256 | )(7) | $ | 819 |   |
| Valuation  allowance on deferred tax assets            |       | 3,356                              |       | —                            |       | —                                  |       | (192                     | )(8)       | 3,164                          |       |
| Inventory  Allowances(2)                               |       | 2,813                              |       | 38                                | (5)        | 610                                     | (6)        | (1,102                   | )          | 2,359                          |       |
|                                                   |       | $                                  | 7,288      |                              | $          | (49                                     | )          | $                        | 653        |                           | $          | (1,550 | ) | $ | 6,342 |   |
|                                                        |            |                                    |            |                                   |            |                                         |            |                          |            |                                |            |  |  |  |  |  |  |  |  |  |

 

----

 

(1)                                  Accounts receivableallowances represent allowance for doubtful accounts, rebate and sales discountallowances.

 

(2)                                  Inventory allowancesrepresent allowance for obsolescence reserves and physical inventoryadjustments.

 

(3)                                  Provisions foruncollectible accounts are included in S,G,&A expenses. Rebate and salesdiscounts are recorded as a reduction of gross sales.

 

(4)                                  Increase invaluation allowance is recorded as a component of the provision for incometaxes.

 

(5)                                  Provisions forinventory obsolescence and shrinkage are included in the cost of sales.

 

(6)                                  Represents foreigncurrency fluctuation charged to other comprehensive income and other accounts.

 

(7)                                  Actual accounts andinventory written off against the allowance.

 

(8)                                  Reduction invaluation allowance due to utilization of foreign net operating lossespreviously reserved, purchase accounting related adjustments, or write-offof deferred tax assets that are not realizable in future years.

 

(9)                                  Reduction ofdeferred tax valuation allowance due to use of net operating losses and the expectationthat the Company will generate sufficient income in future years to utilizeremaining losses.

 

67

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**Index toExhibits**

 
| **Number** | ** ** | **Description of Exhibit**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| 2.1        |       | Agreement and Plan of Merger dated as of December 5,  2004, by and among Smiths Medical Holdco Limited, Forest Acquisition Corp.,  MedVest Holdings Corporation, Certain Principal Stockholders of the Company  and OEP MedVest LLC, as Representative of the Company Stockholders.                                                                                                                                                                                                                                                                                   |
| 2.2        |       | Purchase  Agreement, dated as of April 2, 2003, by and between Ethicon Endo-Surgery, Inc.  and Medex, Inc. (incorporated by reference to Exhibit 2.1 to the Medex,  Inc.’s registration statement on Form S-4 (Registration No. 333-112848)).                                                                                                                                                                                                                                                                                                     |
| 2.3        |       | Recapitalization  Agreement, dated as of April 21, 2003, by MedVest Holdings Corporation,  OEP MedVest LLC and each of the Persons party thereto listed as Stockholders  (incorporated by reference to Exhibit 2.2 to Medex, Inc.’s registration  statement on Form S-4 (Registration No. 333-112848)).                                                                                                                                                                                                                                                     |
| 3.1        |       | Articles  of Incorporation of MedVest Holdings Corporation, as amended (incorporated by  reference to Exhibit 3.3 to Medex, Inc.’s registration statement on Form S-4  (Registration No. 333-112848)).                                                                                                                                                                                                                                                                                                                                                           |
| 3.2        |       | Code  of Regulations of MedVest Holdings Corporation (incorporated by reference to  Exhibit 3.4 to Medex, Inc.’s registration statement on Form S-4 (Registration  No. 333-112848)).                                                                                                                                                                                                                                                                                                                                                                             |
| 4.1        |       | Form  of Notation of Guarantee of Medex, Inc.’s 8 7/8%  Senior Subordinated Notes due 2013 given by each of MedVest Holdings  Corporation, Medex Medical, Inc. and Medex Cardio-Pulmonary, Inc.  (included in Exhibit 4.2).                                                                                                                                                                                                                                                                                                                            |
| 4.2        |       | Indenture,  dated as of May 21, 2003, by and among Medex, Inc., as issuer,  MedVest Holdings Corporation, as parent guarantor, the subsidiary guarantors  named therein, and The Bank of New York, as trustee (incorporated by  reference to Exhibit 4.3 to Medex, Inc.’s registration statement on Form S-4  (Registration No. 333-112848)).                                                                                                                                                                                                          |
| 10.1       |       | Stockholders  Agreement, dated as of May 21, 2003, by and among MedVest Holdings  Corporation, OEP MedVest LLC and each of the persons party thereto listed as  investors (incorporated by reference to Exhibit 10.1 to Medex, Inc.’s  registration statement on Form S-4 (Registration No. 333-112848)).                                                                                                                                                                                                                                                   |
| 10.2       |       | First  Amendment to MedVest Holdings Corporation Stockholders Agreement, effective  December 31, 2003, by and among MedVest Holdings Corporation, OEP  MedVest, LLC and the stockholders identified therein (incorporated by  reference to Exhibit 10.2 to Medex, Inc.’s registration statement on Form S-4  (Registration No. 333-112848)).                                                                                                                                                                                                                |
| 10.3       |       | Registration  Agreement, dated as of May 21, 2003, by and among MedVest Holdings  Corporation, OEP MedVest LLC and each of the persons party thereto listed as  investors (incorporated by reference to Exhibit 10.3 to Medex, Inc.’s  registration statement on Form S-4 (Registration No. 333-112848)).                                                                                                                                                                                                                                                   |
| 10.4       |       | $170,000,000  Credit Agreement, dated as of May 21, 2003, among Medex, Inc.,  MedVest Holdings Corporation, the domestic subsidiaries of Medex, Inc.,  the lenders party thereto, Wachovia Bank, National Association, Lehman  Commercial Paper Inc., Banc One Mezzanine Corporation, The Huntington  National Bank, LaSalle Bank National Association, Wachovia  Securities, Inc. and Lehman Brothers Inc. (incorporated by reference to  Exhibit 10.4 to Medex, Inc.’s registration statement on Form S-4  (Registration No. 333-112848)). |
| 10.5       |       | First  Amendment to Credit Agreement, dated as of November 7, 2003, by and  among Medex, Inc., MedVest Holdings Corporation, the domestic subsidiaries  of Medex, Inc., the lenders identified therein and Wachovia Bank,  National Association (incorporated by reference to Exhibit 10.5 to Medex,  Inc.’s registration statement on Form S-4 (Registration No. 333-112848)).                                                                                                                                                                   |
| 10.6       |       | Management  Services Agreement, dated as of May 21, 2003, between One Equity  Partners LLC and MedVest Holdings Corporation (incorporated by reference to  Exhibit 10.6 to Medex Inc.’s registration statement on Form S-4 (Registration  No. 333-112848)).                                                                                                                                                                                                                                                                                                 |
| 10.7       |       | Severance  and Non-Compete Agreement, dated as of May 21, 2003, by and  between Medex, Inc. and Dominick A. Arena (incorporated by reference to  Exhibit 10.7 to Medex, Inc.’s registration statement on Form S-4  (Registration No. 333-112848)).                                                                                                                                                                                                                                                                                                     |
| 10.8       |       | Severance  and Non-Compete Agreement, dated as of May 21, 2003, by and  between Medex, Inc. and Dr. Georg Landsberg (incorporated by  reference to Exhibit 10.8 to Medex, Inc.’s registration statement on Form S-4  (Registration No. 333-112848)).                                                                                                                                                                                                                                                                                              |
| 10.9       |       | Severance  and Non-Compete Agreement, dated as of May 21, 2003, by and  between Medex, Inc. and Michael I. Dobrovic (incorporated by reference  to Exhibit 10.9 to Medex, Inc.’s registration statement on Form S-4  (Registration No. 333-112848)).                                                                                                                                                                                                                                                                                                   |
| 10.10      |       | Severance  and Non-Compete Agreement, dated as of May 21, 2003, by and  between Medex, Inc. and Ralph Dickman, Jr. (incorporated by reference to  Exhibit 10.10 to Medex, Inc.’s registration statement                                                                                                                                                                                                                                                                                                                                                |

 

68

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|   |   | on  Form S-4 (Registration No. 333-112848)).                                                                                                                                                                                                                                          |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.11  |   | Severance  and Non-Compete Agreement, dated as of May 21, 2003, by and  between Medex, Inc. and Charles J. Jamison (incorporated by reference to  Exhibit 10.11 to Medex, Inc.’s registration statement on Form S-4  (Registration No. 333-112848)).                   |
| 10.12  |   | Letter  Agreement, dated as of June 14, 2003, between Medex, Inc. and  Garrett Capital Advisors (incorporated by reference to Exhibit 10.12 to  Medex, Inc.’s registration statement on Form S-4 (Registration No.  333-112848)).                                      |
| 10.13  |   | MedVest  Holdings Corporation 2001 Stock Option Plan as amended by the First Amendment  to MedVest Holdings Corporation 2001 Stock Option Plan (incorporated by  reference to Exhibit 10.13 to Medex, Inc.’s registration statement on Form  S-4 (Registration No. 333-112848)). |
| 10.14  |   | MedVest  Holdings Corporation 2002 Stock Option Plan (incorporated by reference to  Exhibit 10.14 to Medex, Inc.’s registration statement on Form S-4  (Registration No. 333-112848)).                                                                                           |
| 10.15  |   | Employment  Agreement, dated as of December 5, 2004, by and among Smiths Medical Holdco  Limited, Medex, Inc. and Dominick A. Arena.                                                                                                                                                  |
| 10.16  |   | Employment  Agreement, dated as of December 5, 2004, by and among Smiths Medical Holdco  Limited, Medex, Inc. and Ralph Dickman.                                                                                                                                                      |
| 10.17  |   | Employment  Agreement, dated as of December 5, 2004, by and among Smiths Medical Holdco  Limited, Medex, Inc. and Michael Dobrovic.                                                                                                                                                   |
| 10.18  |   | Employment  Agreement, dated as of December 5, 2004, by and among Smiths Medical Holdco  Limited, Medex, Inc. and Charles Jamison.                                                                                                                                                    |
| 10.19  |   | Service  Agreement, dated as of December 4, 2004, by and among Medex GmbH and Georg  Landsberg.                                                                                                                                                                                       |
| 14.1   |   | Financial  Code of Ethics.                                                                                                                                                                                                                                                            |
| 21.1   |   | Subsidiaries  of MedVest Holdings Corporation.                                                                                                                                                                                                                                        |
| 23.1   |   | Consent  of Deloitte & Touche LLP.                                                                                                                                                                                                                                           |
| 24.1   |   | Power of Attorney (included on signature page).                                                                                                                                                                                                                                       |
| 31.1   |   | Certification of President and Chief Executive  Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                    |
| 31.2   |   | Certification of Vice President and Chief  Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                               |
| 32.1   |   | Certification of President and Chief Executive  Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                    |
| 32.2   |   | Certification of Vice President and Chief  Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                               |

 

69

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