ADVANCED MEDICAL TECHNOLOGY CORPORATION.
Advanced Medical Technology Corporation (AMT) develops, manufactures, and sells scientific medical instruments, needles and catheters. Their products represent an alternative to traditional surgical procedures, allowing treatment with less risk and trauma and at a lower cost.
2. History.
AMT has experienced extraordinary growth (in excess of 30% per year), fueled by heavy spending on R&D and a rapid expansion of its sales force. Additionally, AMT had large operating losses by rapid expansion into new markets. Sales growth was much larger than available capital. Management met the financial pressures by heavy reliance on short-term credit, by leasing some manufacturing facilities, and by establishing a connection with Biological Labs, Inc., a leading pharmaceutical firm. Biological Labs paid AMT $7 million in exchange for 5% of outstanding shares and the right to purchase an additional 13% of outstanding stock over the next 5 years for $12 million (which was shortly executed after the agreement).
3. Problems There were 3 areas identified with significant problems, caused by rapid growth spending. (Refer to Exhibits A, B, C & D):.
A. Cost Management.
Research and Development (R & D) is too high.
Operating expenses arc too high resulting in negative net earnings.
The company experienced a rapid expansion of their sales force.
B. Asset Management.
The company's inventories in stock were high in costs/volume. .
There was 10-12 weeks average turnaround on the inventory. .
The assets have the wrong mix. .
Quality of fixed-assets is low compared to total assets.
C. Financial Management.
There is a poor banking relationship. .
Cash accounts are too low and overdrawn.
Accounts receivable are too high. .
Days Sales Outstanding are too high. .
Too much focus on short-term credits.
Capital Structure is weak.
4. Alternatives.
There may have been a better long-term solution for increasing cash flow rather than raising short-term debt and risking a business merger with Biological Labs.
