Back to GetFilings.com
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual Report Pursuant to Section 13 or
15(d) of the Securities Exchange Act of
1934.
For the fiscal year ended DECEMBER 31, 1999 or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934.
For the period from __________ to __________
Commission file number 33-26398
ALARIS MEDICAL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 13-3492624
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
10221 WATERIDGE CIRCLE, SAN DIEGO, CALIFORNIA 92121
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (858) 458-7000
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- -------------------
Common Stock, $0.01 par value American Stock Exchange
7 1/4% Convertible Subordinated Debentures due 2002 American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
NONE
-------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months, and (2) has been subject to such
filing requirements for the past 90 days. YES: X NO:
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the shares of the registrant's common stock,
$0.01 par value per share ("Common Stock"), held by nonaffiliates of the
registrant, computed by reference to the price at which such stock was
last sold, on March 2, 2000, was $27,764,201. Solely for purposes of this
calculation, the following persons, who beneficially owned in the
aggregate 49,011,463 shares of Common Stock at March 2, 2000, have been
deemed to be affiliates of the registrant: directors of the registrant,
Executive Officers and known stockholders of the registrant beneficially
owning 5% or more of the outstanding shares of Common Stock.
As of March 2, 2000, the registrant had 59,297,730 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held on May 31, 2000 ("Proxy Statement"), are
incorporated by reference as described in Part III.
================================================================================
PART I
ITEM 1. BUSINESS
BACKGROUND
ALARIS Medical, Inc. ("ALARIS Medical"), operating through its
consolidated subsidiaries, designs, manufactures, distributes and services
intravenous infusion therapy and patient monitoring instruments and related
disposables and accessories, as well as telemedicine, cardiovascular and
pacemaker monitoring equipment. ALARIS Medical was formed by the merger of two
pioneers in infusion systems, IMED Corporation and IVAC Medical Systems, Inc.,
on November 26, 1996. ALARIS Medical and its subsidiaries are collectively
referred to as the "Company." ALARIS Medical (formerly Advanced Medical, Inc.)
was incorporated on September 28, 1988 under the laws of the State of Delaware.
On July 17, 1998, pursuant to an agreement with ALARIS Medical, ALARIS
Medical Systems, Instromedix ("Instromedix"), and the shareholders of
Instromedix as of June 24, 1998, ALARIS Medical Systems acquired all of the
outstanding common stock of Instromedix, a telemedicine, cardiovascular and
pacemaker monitoring company, and subsequently merged Instromedix with and into
itself.
OVERVIEW
The Company is a leading provider of infusion systems and related
technologies to the United States hospital market, with the largest installed
base of pump delivery lines ("channels"). The Company is also a leader in the
International infusion systems market. Based on installed base of infusion
pumps, the Company has a number one or two market position in seven Western
European countries, the number three market position in three others, the
largest installed base of infusion pumps in Australia and Canada and a
developing position in Latin America and Asia. The Company's infusion systems,
which are used to deliver one or more fluids, primarily pharmaceuticals or
nutritionals to patients, consist of single and multi-channel infusion pumps and
dedicated and non-dedicated disposable administration sets (i.e. plastic tubing
and pump interfaces). In addition, the Company is a leading provider of patient
monitoring products that measure and monitor temperature, pulse, pulse oximetry
and blood pressure, with the largest installed base of hospital thermometry
systems in the United States. Through the acquisition of Instromedix, the
Company now produces and sells arrhythmia-event recorders and pacemaker monitors
targeted for the alternate site market.
ALARIS has defined three strategic business units: North America, which
includes the United States and Canada; Instromedix, and International, which
includes all other international operations, including Europe, Asia, Australia
and Latin America.
The North American and International operating units manufacture and
market intravenous infusion therapy devices and patient monitoring products,
primarily using a direct sales force for product distribution. The International
unit also utilizes product distributors in areas where the Company does not have
a direct sales force. Distributor sales accounted for 11.3% of International
sales in 1999. The Instromedix business segment designs, manufactures and sells
cardiology products such as arrhythmia-event recorders and pacemaker monitors.
Instromedix products are targeted to the alternate-site market and are primarily
distributed through a direct sales force. Instromedix sales represented
approximately 3% of the Company's sales in 1999. Service of the Company's
products represented approximately 5% of the Company's sales in 1999.
-------------------------
The Company has registered or applied to register the following
trademarks: AccuSlide-Registered Trademark-, Advantis-TM-, ALARIS-Registered
Trademark-, ALARIS Medical Systems-TM-, Asena-TM-, Cardio Magic-Registered
Trademark-, CarryAll-Registered Trademark-, Core.Check-Registered Trademark-,
DigiStat-TM-, Gemini-Registered Trademark-, Gemini PC-1-Registered
Trademark-, Gemini PC-2-Registered Trademark-, Gemini PC-2TX-Registered
Trademark-, Gemini PC-4-Registered Trademark-, HeartCard-Registered
Trademark-, IMED-Registered Trademark-, Instromedix-Registered Trademark-,
IVAC-Registered Trademark-, IVAC Medical Systems-TM-, King of Hearts
Express-Registered Trademark-, LifeSigns-TM-, LifeSigns Commander-TM-,
LifeSigns Shuttle-TM-, Medley, MedSystem III-Registered Trademark-, Patient
Solutions, Inc.-Registered Trademark-, PCAM, ReadyMED-Registered Trademark-,
RhythmCard-Registered Trademark-, Signature Edition-Registered Trademark-,
SmartSite-Registered Trademark-, TeleLab-Registered Trademark-,
Turbo.Temp-TM-, VersaSafe-Registered Trademark-, VITAL.CHECK-Registered
Trademark-
2
The Company sells a full range of products through the worldwide direct
sales force consisting of over 250 salespersons and through more than 150
distributors to over 5,000 hospitals worldwide. Sales to customers located in
and outside of North America accounted for approximately 68.9% and 31.1%,
respectively, of the Company's sales for the year ended 1999. For the year ended
December 31, 1999, the Company had sales of approximately $402.0 million.
INFUSION SYSTEMS. The Company offers a wide variety of infusion pumps
designed to meet the varying price and technological requirements of its diverse
customer base. These infusion pumps include the Gemini series, consisting of
single, dual and four channel infusion pumps designed for use in all hospital
settings by customers with sophisticated technological requirements; the
Signature Edition Family, a versatile, user-friendly single and dual channel
infusion pump for use in critical and general medical and surgical settings; the
MedSystem III instrument (the "MS III"), a compact, lightweight, programmable
three channel infusion pump targeted for the hospital critical care setting and
transport applications. A single channel pump has only one fluid delivery line
to the patient, while a multi-channel pump has two or more fluid delivery lines.
Multi-channel pumps are used to service only a single patient. Generally, where
more than one fluid delivery line is required for a patient, purchasing a
multi-channel pump is less costly than purchasing an equivalent number of single
channel pumps. In addition, the Company offers the ReadyMED ambulatory infusion
pump ("ReadyMED"), which is compact, lightweight and disposable for use in the
alternate-site market, as well as a broad range of syringe infusion pumps for
use primarily outside the United States.
The Company also manufactures and sells dedicated disposable
administration sets which are required to be used with the Company's large
volume infusion pumps. Since the useful lives of the Company's infusion pumps
typically range between seven to ten years, the Company's industry-leading
installed base allows it to generate predictable and recurring revenues from
sales of disposable administration sets. For the year ended December 31, 1999,
the Company sold approximately 75.2 million disposable administration sets
representing sales of $244.4 million or 60.8% of sales. Disposable
administration sets sales for 1999 for the North America and International
business units were $168.6 million and $75.8 million, respectively. Many of the
Company's disposable administration sets offer protection features designed to
prevent the unregulated flow of fluids into a patient's blood stream ("free
flow"). In addition, the Company also has several enhancements to its disposable
administration sets, including needle-free access systems that are designed to
reduce the risk to health care providers of diseases, such as AIDS and
hepatitis, that may be transmitted through accidental needlesticks and, in the
case of the SmartSite needle-free system, to eliminate patient exposure to latex
which can cause severe allergic or anaphylactic shock reactions. These features
continue to provide the Company's customers with the latest cost-effective
technology for the Company's installed base of infusion pumps. For the year
ended December 31, 1999, the Company's infusion systems sales (pumps and
disposables) were $331.9 million, representing approximately 83% of sales.
PATIENT MONITORING PRODUCTS. The Company's patient monitoring products
compete in discrete market niches, each with different competitive dynamics. The
Company primarily operates in the United States, Canada and Western Europe in
two patient monitoring products markets: (i) hospital thermometry systems and
(ii) stand-alone, non-invasive, multi-parameter instruments used to measure and
monitor a combination of vital signs. For the year ended December 31, 1999, the
Company's patient monitoring product sales were approximately $34.5 million,
representing approximately 9% of the Company's total sales. Patient monitoring
sales for North America and International for 1999 were $30.1 million and $4.4
million, respectively.
The Company's principal thermometry instruments, the electronic
thermometer and the infrared tympanic thermometer, are both widely used in
hospitals and alternate site settings. The Company believes it is the second
largest participant in the United States infrared thermometry market. The
Company's large base of installed hospital thermometry instruments allows it
to generate predictable and recurring revenues from sales of related
dedicated disposable probe covers. In 1999, the Company manufactured and sold
over 637 million dedicated disposable probe covers into its worldwide
installed base. In addition, the Company
3
participates in the hospital market of stand-alone, non-invasive,
multi-parameter instruments through its Vital.Check product line, which
measures and monitors a combination of temperature, pulse, blood pressure and
pulse oximetry.
TELEMEDICINE, CARDIOVASCULAR AND PACEMAKER MONITORING PRODUCTS. The
Company's telemedicine, cardiovascular and pacemaker monitoring products are
sold by the Instromedix business unit and are utilized in a variety of
remote-care settings, primarily at the patient's home, workplace or a
physician's office. As the trend to treat patients in locations outside of
the traditional hospital setting accelerates due to cost pressures and
availability of new technology, the ability to provide remote diagnostic and
telemedicine capabilities are becoming increasingly important to both the
caregiver and patient. Instromedix' products and services include the
LifeSigns system, which is a multi-parameter monitoring system that records
12-Lead electrocardiograms ("ECG"), pulse oximetry and blood pressure data
and digitally transmits this information to a computer-based receiver. This
system is now used clinically in a variety of patient care models and the
Company is supporting several studies designed to assess the cost-saving
utility of the LifeSigns System. Instromedix' arrhythmia event recorders
allow patients with intermittent symptoms to record their ECG at the time the
symptom occurs. These devices are portable or wearable devices, and are used
to monitor, record and subsequently transmit ECG cardiac events via a
standard or wireless telephone link to a care-giver's location. Instromedix
also produces pacemaker monitors which provide patients with the ability to
have their pacemaker function assessed over the phone, providing a convenient
and cost effective alternative to frequent physician office visits. It also
provides a telemonitoring laboratory service, which offers 24 hour/7 day
cardiac arrhythmia monitoring to physicians and hospitals. Instromedix'
products are distributed through both direct and OEM sales channels, which
include major cardiac pacing companies in the United States.
INDUSTRY
GENERAL. In the United States, the Company sells its products
primarily in two markets: the hospital market and the alternate-site market.
The United States hospital market consists of approximately 5,300 hospitals
with a total of approximately 900,000 licensed beds. Within this market, cost
containment measures both imposed and proposed by federal and state
regulators and private payors, combined with increased utilization review and
case management, have led to greater financial pressure on hospitals. In
response to these cost-containment pressures, hospitals and other potential
customers for the Company's products are increasingly combining into group
purchasing organizations ("GPOs") which may be large and which monitor
compliance with exclusive purchase commitments. GPOs may enter into exclusive
purchase commitments with as few as one or two providers of infusion systems
and/or patient monitoring products, for a period of several years. These
trends have, in turn, led to downward pricing pressure on manufacturers of
medical products, including the Company, and greater use of care settings
outside the hospital (i.e., the alternate-site setting) for treatment. See
"--Marketing and Sales."
The alternate-site market encompasses all health care provided
outside the hospital and comprises primarily home health care, freestanding
clinics, skilled nursing facilities and long-term care facilities. The market
for infusion systems used in the alternate site has experienced a greater
growth rate than that of the hospital market. This growth is primarily
attributable to advances in technology that have facilitated the provision of
care outside of the hospital, an increased number of illnesses and diseases
considered to be treatable with home infusion therapy and increased
acceptance by the medical community of, and patient preference for,
non-hospital treatment.
The Company also sells its products internationally. The Western
European infusion therapy market, which includes infusion pumps, controllers,
and disposable intravenous sets, is believed to be in excess of $400 million
annually. Unlike the U.S. market, syringe pumps represent a significant share
of total infusion pump placements in the international market. The Company
expects the trend toward utilization of syringe pumps to continue as
hospitals favor the lower cost associated with syringe pumps and focus on
administering
4
pharmaceuticals and nutritionals to patients in higher concentrations. The
majority of revenues in the international market are derived from hospitals
since the alternate-site market is in a developmental stage.
The Company believes that as the worldwide infusion systems and
patient monitoring markets continue to mature, providers of goods and
services in these markets will need to increase the scale of their operations
and broaden the scope of their product lines in order to leverage worldwide
sales, service and research and development infrastructures. These trends are
driving industry consolidation both in the United States and internationally
which, in turn, provide opportunities for leading suppliers to increase
market share and participate in strategic alliances, joint ventures and
acquisitions.
INFUSION SYSTEMS. Intravenous infusion therapy generally involves the
delivery of one or more fluids, primarily pharmaceuticals or nutritionals, to a
patient through an infusion line inserted into the circulatory system. Over the
past 20 years, as both the reliance on intravenous drug therapy and the potency
of the drugs administered have increased, the need for extremely precise
administration and monitoring of intravenous fluids has risen significantly.
Infusion systems are differentiated based on a number of
characteristics including size, weight, number of delivery channels,
programmability, mechanism of infusion, cost and service. One of the key
differences among infusion systems is the level of control that such systems
afford to both medical staffs and patients.
Infusion pumps are volumetric devices that regulate flow by
electronically measuring a specific volume of a fluid. Infusion pumps administer
precise, volumetrically measured quantities of fluids over a wide range of
infusion rates by using positive pressure to overcome the resistance of the
infusion tubing and the back pressure generated by the patient's circulatory
system. Syringe pumps operate by gradually depressing the plunger on a standard
disposable syringe, thereby delivering a more concentrated dose of medication at
a very precise rate of accuracy. Disposable pumps are single use products
designed for use primarily in alternate-site settings.
The infusion systems sold in the markets in which the Company competes
consist of single and multi-channel infusion pumps and disposable administration
sets. As treatment regimens have become more complex and as the critically ill
constitute an increasing percentage of hospital patients, the average hospital
patient now requires a greater number of intravenous lines and more potent
therapeutics, thereby creating a greater need for technologically-advanced
infusion systems.
All infusion pumps require the use of disposable administration sets. A
set consists of a plastic interface and tubing and may have a variety of
features such as volume control, pumping segments or cassette pumping systems
for more accurate delivery, clamps for flow regulation and multiple ports for
injecting medication and delivery of more than one solution. Almost all of these
sets, including those manufactured by the Company, are compatible only with
their particular manufacturer's line of infusion systems. The introduction,
however, of the SmartSite needle-free system has provided the Company with an
opportunity to aggressively compete in the gravity extension set segment of the
market with innovative, cost-effective needle-free gravity sets.
PATIENT MONITORING PRODUCTS. The Company's patient monitoring products
compete in discrete market niches, each with different competitive dynamics. The
Company primarily operates in the United States, Canada and Western Europe in
two patient monitoring product markets: (i) hospital thermometry systems and
(ii) stand-alone, non-invasive, multi-parameter instruments used to measure and
monitor a combination of vital signs.
The two major instrument types in the hospital thermometry market are
electronic and infrared devices. The Company offers electronic and infrared
instruments but does not compete in the smaller glass thermometry market. As
with the infusion therapy market, the hospital thermometry market has disposable
5
products that are used in conjunction with instruments and, consequently, the
existence of an installed base is important for generating ongoing disposable
product sales.
PRODUCTS AND SERVICES
The Company manufactures and markets both single and multi-channel
infusion pumps and disposable administration sets. The Company's infusion
pumps include large volume infusion pumps such as its Gemini series,
Signature Edition Family, MedSystem III, Advantis and syringe infusion pumps
such as P1000, P3000, PCAM, P6000, P7000 and Asena, which are sold primarily
in Western Europe, and disposable pumps such as the ReadyMED for use in the
alternate-site setting. The Company's large volume infusion pumps require the
use of higher margin dedicated disposable administration sets. The Company
also sells non-dedicated disposable administration sets, including several
needle-free devices, for use in many infusion applications. The Company also
manufactures and markets hospital thermometry instruments and related
disposable probe covers, and stand-alone, non-invasive, multi-parameter
instruments which measure and monitor a combination of temperature, pulse and
blood pressure and other vital signs. Additionally, the Company manufactures
and markets telemedicine, cardiovascular and pacemaker monitoring products
through the Instromedix division. The table below summarizes the key features
and market introduction dates with respect to the Company's products.
PRODUCT DESCRIPTION STATUS
- -------------------------------------- ----------------------------------------- ------------------------------
INFUSION SYSTEMS
LARGE VOLUME INFUSION PUMPS
SIGNATURE EDITION GOLD Single and dual channel pumps; Introduced in first quarter of
incorporates intuitive user 1999 in the U.S. and in third
interface and advanced software quarter of 1999
capabilities, for critical and internationally. (Successor
general care and alternate site use. to Signature Edition Classic
which was marketed since 1995.)
GEMINI Single, dual and four channel pumps Marketed since 1987.
with programmable drug delivery for
use in all hospital settings.
570 SERIES Single channel pump; for general care Marketed since 1990.
use in the United States, and
general and critical care use in
Europe.
597/598 SERIES Single channel, multi-pump Marketed internationally since
configuration of reduced size and 1993.
weight; used frequently for
delivery of nutritional products;
sold in Europe; for general care
and alternate site use.
6
PRODUCT DESCRIPTION STATUS
- -------------------------------------- ----------------------------------------- ------------------------------
MEDSYSTEM III Three channel pump; smallest and Originally introduced in late
lightest multi-channel pump 1980s by Siemens Infusion
available; for operating room, Systems, Ltd as MiniMed;
critical care and emergency acquired by the Company in
transport use. 1993. Introduced in Europe in
1998.
ADVANTIS DL Large volume infusion pump for Licensed technology in 1998
price-conscious consumers, and introduced in Europe in
primarily in emerging November 1998.
international markets.
SYRINGE INFUSION PUMPS
ASENA GS, GH Compact, lighter syringe pump with Introduced internationally in
modular mounting design which will the third quarter of 1999.
connect to a docking station
capable of displaying all infusion
information centrally. Designed
for the international market.
P1000, P2000, P3000, P4000 Syringe pump for critical and Various models introduced
non-critical care use outside the between late 1980s and early
United States. 1990s.
P7000 Syringe pump with advanced features Marketed in Europe since 1996.
for critical, non-critical and
neonatal care use in markets
outside the United States.
P6000 Syringe pump using the P7000 Marketed in Europe since 1997.
technology platform designed for
the price-conscious consumer in
markets outside the United States;
for critical and non-critical care
use.
P6000 TCI Specialty P6000 iteration designed Marketed in Europe since 1998.
for anesthesia applications in the
operating room international
market. Includes the Zeneca TCI
module.
P6000 TIVA Specialty P6000 iteration designed Marketed in Europe since 1998.
for anesthesia applications in the
operating room international
market. Includes multiple drug
concentration programs.
7
PRODUCT DESCRIPTION STATUS
- -------------------------------------- ----------------------------------------- ------------------------------
PCAM PUMP Syringe pump used in markets Marketed internationally since
(PATIENT CONTROLLED ANALGESIA) outside the United States that 1995.
allows patients to control the
delivery of pain medication.
AMBULATORY PUMPS
READYMED Compact, lightweight, disposable 100 mL marketed in U.S. since
ambulatory infusion pump designed July 1992 and 50 mL and 250 mL
for alternate site use. marketed in U.S. since 1993.
RHYTHMIC Family of lightweight, self-contained Technology licensed in second
portable pumps for PCA, half of 1997. Marketed since
intermittent and continuous use at September 1998.
home in markets outside the United
States.
DISPOSABLE ADMINISTRATION SETS Dedicated and non-dedicated Marketed worldwide.
administration sets for use with
each of the Company's existing
infusion pumps.
NEEDLE-FREE ACCESS PRODUCTS
SMARTSITE Complete needle-free, capless, Marketed since 1996.
latex-free infusion system intended
to increase safety of patients and
health care workers.
VERSASAFE Needle-free infusion system component Marketed since 1994 through a
utilizing a blunt, plastic cannula license agreement.
combined with a split-septum "Y"
site.
PATIENT MONITORING
THERMOMETRY SYSTEMS
TURBO.TEMP Fast electronic thermometer; for Marketed since 1999.
general hospital and alternate-site
use.
TEMP-PLUS II Electronic thermometer for general Marketed since mid-1980s.
hospital and alternate site use.
CORE.CHECK Infrared tympanic thermometer; for Marketed since 1991.
general hospital and alternate site
use.
DISPOSABLE PROBE COVERS Proprietary covers for use with each Marketed since late 1980s.
of the Company's existing
thermometers.
8
PRODUCT DESCRIPTION STATUS
- -------------------------------------- ----------------------------------------- ------------------------------
OTHER PATIENT MONITORING PRODUCTS
VITAL.CHECK (MODEL 4200) Continuous monitoring device that Marketed in the United States
rapidly measures pulse, blood since late 1980s.
pressure and temperature.
VITAL.CHECK (MODEL 4400) Multi-parameter non-invasive patient Marketed in the United States
monitor providing blood pressure, since 1997 through an
pulse oximetry and temperature exclusive license agreement.
monitoring.
LIFESIGNS HOME HEALTH CARE TELEMEDICINE SYSTEM
LIFESIGNS SHUTTLE One-pound, portable, patient-worn Marketed since the fourth
vital signs monitor; program-mable quarter of 1997.
to record up to 20 vital sign
recordings, including up to 12
leads of electrocardiograph data
and blood-oxygen saturation.
LIFESIGNS COMMANDER Docking station used by patients to Marketed since the fourth
allow simultaneous data quarter of 1997.`
transmission from the LifeSigns
Shuttle to the LifeSigns Central
Station and voice interaction
between the home health care
provider and the patient; also
provides non-invasive blood
pressure measurements.
LIFESIGNS CENTRAL STATION Computerized patient management Marketed since the fourth
system operating in conjunction quarter of 1997.
with the LifeSigns Shuttle and the
LifeSigns Commander to allow remote
monitoring of patient vital signs;
contains a patient database and
displays medical profiles on-screen
for expedient review and analysis
by the home health care provider.
9
PRODUCT DESCRIPTION STATUS
- -------------------------------------- ----------------------------------------- ------------------------------
CARDIOVASCULAR MONITORING PRODUCTS
KING OF HEARTS EXPRESS II Pager-sized, patient-activated Introduced in the first
looping memory cardiac event and quarter of 1999.
electrocardiograph recorder, using
1-3 leads of ECG. Capable of
recording up to 18 minutes of
cardiac events, which can be
subsequently transmitted over a
telephone line. Automatically
records rhythms above or below user
programmable heart rates.
KING OF HEARTS EXPRESS/ Pager-sized, patient-activated Marketed since 1992.
KING OF HEARTS EXPRESS 3X looping memory cardiac event and
electrocardiograph recorder; capable
of recording up to 5 minutes of
cardiac events, which can be
subsequently transmitted over a
telephone line.
HEARTCARD / RHYTHYMCARD Credit card-sized, patient-activated Marketed since 1995.
cardiac event recorder; capable of
recording up to three cardiac
events which can be subsequently
transmitted over a telephone line.
PACEMAKER MONITORS
CARRYALL TRANSMITTER Portable transmitter for recommended Marketed since 1995.
pacemaker follow-up; used in a
patient's home to avoid unnecessary
visits to physician's office.
ALARIS INFUSION SYSTEMS
LARGE VOLUME INFUSION PUMPS. The Company's large volume infusion pumps
are either single or multi-channel and are used in both the general care and
critical care settings. The Signature Edition Gold family of infusion pumps
includes a single channel and dual channel pump, incorporates intuitive user
interface and advanced software capabilities, and is designed for use primarily
in hospitals. The Signature Edition Gold line of infusion pumps features
cost-effectiveness, ease of use, reliability and innovative features, such as:
patented AccuSlide flow regulator, designed to minimize the chance of free flow,
precision flow designed to improve flow continuity and minimize hemodynamic
changes, and Advanced Infusion Management (AIM), designed to provide unique
early warning assessment tools for enhanced intravenous site management. Other
standard features include an easy-to-use drug library, which provides dose
and/or rate calculation, multi-step, which allows the clinicians to pre-program
up to 9 steps for drug delivery, and patented "learn-teach" communication link
capability for biomedical engineers.
10
The Gemini infusion pump series, which consists of single, dual and
four channel pumps, is based on a flexible hardware and software technology
platform. This technology platform has enabled the Company over time to offer
incremental feature enhancements based on evolving customer needs. The Gemini
series currently offers the following features: free flow protection (which
the Company pioneered); independent channel operation; ability to switch from
pump to controller mode without changing the disposable administration set;
programmable to automatically taper-up and taper-down infusion rates to
facilitate delivery of complex drug-dosing regimens; capability to operate in
either micro mode (0.1 to 99.9 mL/hr) for use with neonatal patients, among
others, or macro mode (1 to 999 mL/hr) for use with adult patients; drug dose
calculation; pressure monitoring; pressure history and volume/time dosing;
and nuisance alarm (alarms with no clinical significance) reduction.
The MedSystems III (MS III) instrument is a compact, lightweight,
programmable, three channel, infusion pump used primarily in the critical
care market and transport applications. The MS III predecessor product line
was acquired from Siemens Infusion Systems, Ltd. in September 1993. Since
that time, significant resources have been invested in the MS III pump. The
Company believes that as a result of such investment, the MS III is one of
the smallest, most versatile and most technologically advanced multi-channel
pumps currently on the market.
In May 1998 the Company acquired a license to manufacture, market and
sell the Advantis large volume infusion pump, which is marketed primarily for
price-conscious consumers in emerging international markets. The Company plans
to market and sell the pump through existing distribution channels throughout
the world including the U.S. alternate site market.
The Company is also in the process of developing the Medley Patient
Care System, a modular system, which can be configured as a one-to-four
channel infusion device, including sensitive monitoring capabilities. The
Medley Patient Care System will incorporate advanced programming capabilities
in a small configuration that is simpler to operate. A modular,
building-block design is intended to allow the user to configure the various
features of the modular infusion pump to unique therapy regimens and is
expected to result in better asset utilization.
SYRINGE PUMPS. The Company offers syringe pumps, which are
small-volume fluid delivery systems used in neonatal care, oncology,
anesthesia, critical care and labor and delivery. While these infusion pumps
represent a relatively small portion of the industry installed base in the
United States, such pumps are widely used in Europe, where they constitute
approximately 60% of the infusion pump market. Syringe pumps are more widely
used in Europe because of the general practice of European doctors to
administer medications in smaller volumes of fluid. The Company believes that
it is one of the two largest suppliers of syringe pumps in Western Europe,
with a number one or number two installed base market share in seven
countries and the number three installed base market position in three others.
The Company's PCAM patient controlled analgesia infusion pump allows
patients to control the delivery of pain medication. Designed for general
care settings, the PCAM syringe infusion pump is one of the most advanced
patient controlled analgesia infusion pumps on the European market today,
with pre-programmed and user programmable drug delivery protocols,
comprehensive patient history logging and an ergonomically designed handset
with status indicator.
The Company's syringe pump product line also includes the P7000
syringe pump which has been available internationally since 1996 and the
P6000 syringe pump which was introduced to the European Market during the
second quarter of 1997. The Company has received a 510(k) premarket
notification clearance ("510(k)") of the P7000 syringe pump with the United
States Food and Drug Administration (the "FDA"). Designed for critical,
non-critical and neonatal care settings, the P7000 offers several advanced
features, including an automatic dose rate calculator; a pre-programmable
drug menu; a range of pre-programmed infusion administration protocols; and
an automatic pressure reduction capability in response to
11
administration set occlusions. The P6000 syringe pump, which is based on the
P7000 syringe pump technology platform, is designed for use in critical and
non-critical care settings by the price conscious consumer.
In the third quarter of 1999, the Company introduced the ASENA
syringe pumps, representing the first component of the ASENA Patient Care
System. One of the components of the ASENA Patient Care System is the DOCStat
docking station. The station features a unique mounting system, known as
Medical Device Interface, which allows a syringe pump to be mounted to a
pole, rectangular bar or docking station without adaptors. The Company plans
to market the DigiStat patient data management software which will gather and
display data from each instrument on one monitor.
AMBULATORY PUMPS. The ReadyMED pump is a compact, lightweight
disposable pump for the intravenous administration of antibiotics in the
alternate-site market. The ReadyMED is designed to offer a number of
advantages over drug delivery systems currently in use for this purpose.
Traditional systems require the patient to attach a small intravenous bag and
tubing set, through which the antibiotics are administered, to a catheter
placed in the patient's circulatory system. Since traditional systems are
gravity driven, the bag must remain on an intravenous solution pole during
infusion, thereby restricting the patient's movement. The ReadyMED, available
in multiple sizes, provides a rapid, safe, ease-of-use delivery method for
the home patient. In addition, since the ReadyMED pump is small and uses
positive pressure, the patient is able to carry the device in a pocket or
wear it on a belt. The Company sells the ReadyMED pump through its
alternate-site sales force and distribution network.
The Company introduced the Rythmic family of pumps in September of
1998, a range of portable volumetric pumps specifically designed to provide
long-term infusions associated with cancer chemotherapy, post operative and
chronic pain control, antibiotic infusions and other IV medications.
DISPOSABLE ADMINISTRATION SETS. Disposable administration sets consist
of a plastic pump interface and tubing and have a variety of features, such as
volume control, pumping segments or cassette pumping systems for more accurate
delivery, clamps for flow regulation and multiple entry ports for injecting
medication and delivery of more than one application. Components such as
burettes and filters may also be added for critical drugs or special infusion.
In addition, most of the Company's disposable administration sets offer
protection features designed to prevent free flow. Each of the Company's current
large volume infusion pumps uses only dedicated disposable administration sets
designed by the Company for that particular pump.
NEEDLE-FREE ACCESS PRODUCTS. There is increasing pressure by regulatory
agencies, such as the Occupational Safety and Health Administration ("OSHA") and
the FDA, for more stringent control of needles in hospitals. OSHA requires that
hospitals must put in place systems to reduce the potential for accidental
needlesticks. The FDA recommends using needle-free systems or protected needle
systems to replace hypodermic needles for accessing intravenous lines. The
Company's needle-free access products are designed to permit access to the
Company's disposable administration sets without the use of needles, thus
reducing the potential for accidental needlesticks. The SmartSite needle-free
system offers a fully integrated, cost effective design and eliminates the need
for separate caps and additional cannula components. The SmartSite needle-free
system is latex-free and therefore reduces the risk of exposure of patients and
health care workers to latex which can cause severe allergic or anaphylactic
shock reactions. The VersaSafe system utilizes a blunt, plastic cannula combined
with a split-septum "Y" site. The Company has a non-exclusive license, which
expires in May 2003, to the VersaSafe system which was a cooperative development
effort. The Company's needle-free access products have received strong interest
from customers and provide the Company with an opportunity for incremental
revenues in what has previously been perceived as a commodity market.
12
ALARIS PATIENT MONITORING PRODUCTS
Patient monitoring instruments are used to measure temperature, pulse,
blood pressure, and other vital signs. Instruments sold in this market have
varying levels of technological sophistication and are used in a variety of
diagnostic and health care settings. The Company competes in two key niches:
hospital thermometry systems and stand-alone, non-invasive, multi-parameter
patient monitoring products.
THERMOMETRY. The Company is a leader in hospital thermometry
systems, which consist of thermometers and disposable probe covers, and
maintains a strong position in both the United States and Western Europe. The
Company's primary product is an electronic thermometer which is widely used
in hospitals and alternate-site settings. In 1999, the Company launched the
Turbo Temp thermometer, an improved cost-effective and technologically
advanced electronic thermometer designed to provide a faster temperature
reading. The Company also manufactures and markets the Core.Check system, a
thermometer that measures temperature by detecting the emission of infrared
energy in the ear. In the infrared market, the Company believes it is the
second largest participant. The only disposable probe covers which can be
used with the Company's thermometry instruments are those manufactured by the
Company.
OTHER PATIENT MONITORING PRODUCTS. The Company also produces
stand-alone, non-invasive, multi-parameter patient monitoring products which
measure a combination of pulse, pulse-oximetry, temperature and blood pressure.
In January 1997, the Company entered into an agreement with Criticare
Systems, Inc., ("Criticare") a manufacturer of patient monitoring systems and
non-invasive sensors for use in the hospital and alternate-site markets. Under
this agreement, the Company obtained exclusive distribution rights to certain of
these monitoring systems in the United States hospital market and in all
Canadian markets. The Vital.Check 4400 family provides non-invasive blood
pressure, pulse oximetry and temperature monitoring, using the Company's
electronic thermometry technology.
TELEMEDICINE, CARDIOVASCULAR AND PACEMAKER MONITORING PRODUCTS
The LifeSigns system is a multi-parameter monitoring system that
records 12-Lead ECG, pulse oximetry, and blood pressure data. This information
is digitally transmitted to a computer-based receiver. This system is now used
clinically in a variety of patient care models and the Company is supporting
several studies designed to assess the cost-saving utility of the LifeSigns
System. While the LifeSigns System revenues were not significant in 1999, the
market response to the system has been favorable and the system may provide
future sales growth for the Company.
Instromedix created the product segment of cardiac event recording,
where patients with intermittent symptoms can record their ECG at the time the
symptom occurred. In 1999, the King of Hearts Express II was launched. This
sophisticated new product introduced additional diagnostic capabilities and
on-board intelligence that appeal to cardiologists that specialize in the
treatment of arrhythmia. Sales of cardiac event recorders generate approximately
40% of Instromedix revenues.
Instromedix maintains a strong market position in transtelephonic
pacemaker monitors. The CarryAll product family provides customers with the
ability to have their pacemaker function assessed over the phone, providing a
convenient and cost effective alternative to frequent physician office visits.
These product revenues represent over 35% of Instromedix revenues.
CUSTOMER SERVICE
The Company provides repair service for its products at its facilities
in San Diego or on-site at the customer's facilities through third-party
contractors. Customers may elect to enter into service agreements or
13
to receive service on a time and materials basis. The Company also trains
customers as to the use of its products and maintains a technical support
help-line to answer customers' questions. In addition, the Company maintains
its parts inventory at levels which enable it to deliver critical supplies
immediately and minimize back-ordered products. The Company believes that the
availability of such services is important for maintaining strong customer
relations.
MARKETING AND SALES
The Company has historically focused its sales efforts on the
hospital market. In response to the industry shift toward health care
delivery outside of the hospital, the Company has expanded its selling
efforts and products to the alternate-site market. The Company's sales
strategy emphasizes increasing instrument placements and the number of units
installed in order to increase sales of its proprietary disposable
administration sets and probe covers. Sales representatives work closely with
on-site primary decision makers, which include physicians, pharmacists,
nurses, materials managers, biomedical staff and administrators. The Company
has over 5,000 hospital customers worldwide and sells its products through a
combined direct sales force consisting of over 250 salespersons and through
more than 150 distributors.
The Company's domestic marketing efforts are supported by a staff of
nurses and pharmacists who consult with customers, providing ongoing clinical
support in the evaluation, installation and use of the Company's products. The
Company believes its sales force in the United States and internationally plays
a key role in the effective introduction of new products.
The Company has a strong business portfolio of key infusion device and
patient monitoring contracts with group purchasing organizations as set forth
below:
PURCHASING ORGANIZATION DRUG INFUSION THERMOMETRY NEEDLE-FREE
----------------------- ------------- ----------- -----------
(YEAR IN WHICH CONTRACT EXPIRES)
AmeriNet............................................. 2003 2002 2003
Health Trust (Columbia / HCA)........................ - 2004 -
HSCA................................................. 2002 2002 2002
Magnet............................................... 2003 2003 2003
MedEcon.............................................. 2003 2003 2003
Novation (VHA/UHC)................................... 2000 - 2000
Premier.............................................. 2002 2002 -
In-Source (Purchase Connection)...................... 2005 2005 2005
Tenet Healthcare..................................... 2007 - 2007
US Government / DOD.................................. 2000 2000 2003
No single account is material to the business or operations of the
Company.
INTERNATIONAL OPERATIONS
The Company markets products in approximately 120 countries through its
direct sales force and distributors. The primary markets for the Company's
products outside the United States are Western Europe, Canada and Australia. The
Company also has a developing position in Asia and Latin America. The principal
products sold by the Company outside the United States are large volume and
syringe infusion pumps and related disposable administration sets. The Company
has manufacturing operations in England and Mexico. The Company has also
contracted with a number of foreign manufacturers to provide certain of its
sourcing needs. The following table sets forth, for each period presented, the
approximate amount of sales made to customers by each business unit over the
last three fiscal years:
14
1999 1998 1997
-------- -------- ---------
(DOLLARS IN MILLIONS)
North America........................................ $ 263.5 $ 246.7 $ 240.5
International........................................ 124.8 125.0 118.6
Instromedix.......................................... 13.7 8.4 -
--------- -------- ---------
Total Sales..................................... $ 402.0 $ 380.1 $ 359.1
========= ======== =========
The Company believes that sales of products to customers outside of
the United States represent a significant potential source of growth. Foreign
operations are subject to special risks that can materially affect the sales,
profits and cash flows of the Company, including currency exchange rate
devaluations and fluctuations, the impact of inflation, exchange controls,
labor unrest, political instability, export duties and quotas, domestic and
international customs and tariffs, unexpected changes in regulatory
environments, potentially adverse tax consequences and other risks. Changes
in certain exchange rates could have an adverse effect on the Company's
ability to meet interest and principal obligations with respect to its United
States dollar-denominated debt and could also have a material adverse effect
on the business, financial condition, results of operations or prospects of
the Company.
MANUFACTURING
The Company is focusing on low-cost manufacturing and manufactures its
products at plants in San Diego, California; Creedmoor, North Carolina; Tijuana,
Mexico; and Hampshire, England. In the second quarter of 1999, the Company
relocated the Instromedix operations, including manufacturing of Instromedix
products, from Hillsboro, Oregon to San Diego. The San Diego facility is the
primary manufacturing facility for infusion pumps, patient monitoring
instruments and cardiac monitoring products, and also houses a service operation
for installed infusion pumps and patient monitoring instruments. The Creedmoor
facility houses a portion of the current disposables operations and is a
distribution center for North American disposable finished products. Product
release from sterilization is done in San Diego and Creedmoor. The Tijuana
facilities primarily focus on the manual assembly of disposables, and the
Hampshire facility focuses on the manufacturing of syringe pumps and Advantis
which are sold primarily to the international market. Disposable products for
international markets are currently supported through a number of foreign
manufacturers.
The Company has designed and implemented an integrated network of
quality systems, including control procedures that are planned and executed by
technically-trained professionals. Through these systems, the Company has
established written specifications for raw materials, packaging, labels,
sterilization and overall manufacturing process control. A substantial number of
raw materials require certificates of analysis to help ensure that finished
products conform to specifications. In addition, the Company regularly tests
components and products at various stages of the manufacturing process to ensure
compliance with applicable specifications.
The Company purchases raw materials worldwide in the ordinary course of
business from numerous suppliers. The vast majority of these materials are
generally available and the Company has not experienced any serious shortages or
material delays in obtaining these materials. In some situations, the Company
has long-term supply contracts, although the Company purchases a significant
amount of its requirements of certain raw materials by purchase order. Although
the Company is generally not dependent upon any single source of supply, it
relies upon a limited number of suppliers for circuit boards and other parts
which are used in certain of its infusion systems. The loss of any such supplier
would result in a temporary interruption in the manufacturing of the Company's
products. The Company believes, however, that these materials are available as
needed from alternative sources.
15
RESEARCH AND DEVELOPMENT
The Company believes that a well-targeted research and development
program constitutes an essential part of the Company's activities and is an
integral part of its future success. The Company is actively engaged in
research and development programs to develop and improve products. These
activities are performed in the United States and, to a lesser extent, in the
United Kingdom. For the year ended December 31, 1999, the Company expended
approximately $23.8 million on in-house research and development.
Substantially all of such amount was dedicated to the development of new
products.
The Company intends to focus a significant portion of its research and
development efforts on the development of new products. The Company is currently
developing several new products and product line extensions.
PATENTS, TRADEMARKS AND PROPRIETARY RIGHTS
The Company relies heavily on patented and other proprietary
technology. The Company believes its issued and pending patents are important to
its competitive position. There can be no assurance that patent applications
submitted by the Company or its licensors will result in patents being issued or
that, if issued, such patents and patents already issued will afford protection
against competitors with similar technology. In addition, there can be no
assurance that any patents issued to or licensed by the Company will not be
infringed or designed around by others, that others will not obtain patents that
the Company will need to license or design around, that the Company's products
will not inadvertently infringe the patents of others, or that others will not
manufacture and distribute similar products upon expiration of such patents.
There can also be no assurance that key patents of the Company will not be
invalidated or that the Company or its licensors will have adequate funds to
finance the high costs of prosecuting or defending patent validity or
infringement issues.
The Company's policy is to secure patent protection for significant
inventions. The Company holds approximately 249 unexpired patents in the United
States and approximately 420 unexpired patents in foreign countries, principally
in Europe, Canada, Japan and Australia. The Company has 25 additional
applications pending or in preparation in the United States and 178 foreign
applications pending. Within the next ten years, approximately 161 of the
Company's United States patents and approximately 292 of the Company's foreign
patents will expire. Due to ongoing development activities, the Company does not
believe that the expiration of any such patents will, individually or in the
aggregate, have a material adverse effect on the business, financial condition,
results of operations, or prospects of the Company.
The patent positions of medical device firms, including the Company,
are uncertain and involve complex legal and factual questions for which certain
legal principles are unresolved. The coverage claimed in a patent application
can be significantly reduced before a patent is issued. In addition, patent law
has recently been revised to give effect to international accords to which the
United States has become a party. Pursuant to such accords, the patent term has
been changed from 17 years from date of grant to 20 years from date of filing
and certain provisions favoring United States inventors over foreign inventors
have been eliminated.
The United States patent code was recently amended. As a result,
certain statutory remedies for patent infringement are no longer available for a
medical practitioner's otherwise infringing performance of a medical activity.
As defined in the United States patent code, a patent may not be enforced
against a medical practitioner's performance, or the performance by a related
health care entity of a "medical activity" which is defined as the performance
of a medical or surgical procedure on a body. However, a "medical activity" does
not include "the use of a patented machine, manufacture or composition of matter
in violation of such patent." Hence, remedies are still available against
manufacturers and distributors. The aforesaid amendment does not apply to
patents issued before September 30, 1996.
16
The Company sells its products under a variety of trademarks, some
of which are considered by the Company to be of importance to warrant
registration in the United States and various foreign countries in which the
Company does business. The Company also relies on trade secrets, unpatented
know-how and continuing technological advancement to maintain its competitive
position. It is the Company's practice to enter into confidentiality
agreements with key technical employees and consultants. There can be no
assurance that these measures will prevent the unauthorized disclosure or use
of the Company's trade secrets and know-how or that others may not
independently develop similar trade secrets or know-how or obtain access to
the Company's trade secrets, know-how or proprietary technology. In addition,
the Company from time to time seeks copyright protection for the software
used in certain of its products.
COMPETITION
The Company faces substantial competition in all of its markets.
Many of the Company's competitors have greater financial, research and
development and marketing resources than the Company. Some of the Company's
principal competitors are able to offer volume discounts based on bundled
purchases of a broad range of their medical equipment and supplies. The
Company seeks to improve its competitive position in this area by developing
or licensing technologically superior products. The Company expects the trend
toward volume discounts to continue in the future. The Company believes that
the competitive factors most important in its markets are quality of products
and services, technological innovation and price.
The primary markets for the Company's products are relatively mature
and highly competitive. Major competitors in this market include Baxter
International, Inc., Abbott Laboratories, Inc. and McGaw, Inc. The Company's
success is therefore dependent on the development of new infusion
technologies and products and the development of other markets for its
products. The Company's older infusion therapy product lines have experienced
declining sales and market share recently, primarily due to competitors who
offer volume discounts based on bundled purchases of a broader range of
medical equipment and supplies, as well as to the aging of the Company's core
products. The Company's introduction of new products may offset future
declines in sales and market share. There can be no assurance, however, that
new products will be successfully completed or marketed for sale, will not
necessitate upgrades or technical adjustments after market introduction, can
be manufactured in sufficient volumes to satisfy demand, or will offset
declines in sales and market share experienced with respect to existing
products. See "--Products and Services."
The European infusion systems market is much more regionalized and
fragmented, with a few strong competitors in each regional market. Major
competitors encountered in several markets include Graseby, Fresenius and B.
Braun Melsungen AG. The Company is among the leaders in a number of Western
European markets, with a number one or number two installed base market share in
seven countries and the number three installed base market share in three
others. The Western European countries in which the Company has a number one or
number two installed base market share are France, Norway, Sweden, the United
Kingdom, Belgium, the Netherlands and Spain.
The patient monitoring products market is fragmented by product type.
The Company's key competitor in the United States electronic thermometer market
is Welch Allyn, Inc. (f/k/a Diatek, Inc.) and its key competitor in the infrared
thermometer market is Sherwood Medical Company (d/b/a Sherwood, Davis & Geck)
("Sherwood").
The Instromedix business unit faces substantial competition in each of
its market segments. Key competitors in the cardiac event recorder segment
include Cor-Digital/CardGuard, Universal Medical, MicroMedical, Aerotel and
PaceArt. In the pacemaker monitor subsegment, the major competitor is Universal
Medical. In the telemedicine area, the major competitors include Advanced
Medical Devices, Health Hero and American Telecare.
17
GOVERNMENT REGULATION
PRODUCT REGULATION. The research, development, testing, production
and marketing of the Company's products are subject to extensive governmental
regulation in the United States at the federal, state and local levels, and
in certain other countries. Non-compliance with applicable requirements may
result in recall or seizure of products, total or partial suspension of
production, refusal of the government to allow clinical testing or commercial
distribution of products, civil penalties or fines and criminal prosecution
and/or repairing the device and/or refunding the purchase price.
The United States Food and Drug Administration ("FDA") regulates the
development, production, distribution and promotion of medical devices in the
United States. Virtually all of the products being developed, manufactured
and sold by the Company in the United States (and products likely to be
developed, manufactured or sold in the foreseeable future) are subject to
regulation as medical devices by the FDA. Pursuant to the Federal Food, Drug,
and Cosmetic Act (the "FDC Act"), a medical device is classified as a Class
I, Class II or Class III device. Class I devices are subject to general
controls, including registration, device listing, recordkeeping requirements,
labeling requirements, "Quality Systems Regulation" ("QSR" as defined in FDA
Quality System regulations), prohibitions on adulteration and misbranding,
reporting of certain adverse events ("MDR") and in some instances, FDA
marketing submissions. In addition to general controls, Class II devices may
be subject to special controls that include a 510(k) notification and could
include performance standards, postmarket surveillance, patient registries,
guidelines, recommendations and other actions as the FDA deems necessary to
provide reasonable assurance of safety and effectiveness. New Class III
devices must meet the most stringent regulatory requirements and must be
approved by the FDA before they can be marketed. Such premarket approval can
involve extensive preclinical and clinical testing to prove safety and
effectiveness of the devices.
Virtually all of the Company's products are Class II devices. Unless
otherwise exempt, all Class II and Class III medical devices introduced to the
market since 1976 are required by the FDA, as a condition of marketing, to
secure a 510(k) or a Premarket Approval Application ("PMA"). A medical device
will be cleared by the FDA under a 510(k) if it is found to be substantially
equivalent to another legally marketed medical device that was on the U.S.
market prior to May 28, 1976 or to a device that has previously received a
510(k) and is lawfully on the U.S. market ("predicate device"). In general, if a
product is not substantially equivalent to a predicate device, and not otherwise
exempt, the FDA must first reclassify the device or approve a PMA before it can
be marketed. An approved PMA indicates that the FDA has determined the product
has been demonstrated, through the submission of clinical data and manufacturing
and other information, to be safe and effective for its labeled indications. The
PMA process typically takes more than a year from submission and requires the
submission of significant quantities of clinical data and supporting
information. The process of obtaining a 510(k) clearance currently takes, on
average, approximately six months from the date of submission. However, the
review process for a particular product may be shorter or substantially longer
depending upon the circumstances. Moreover, there can be no assurance that a
510(k) will be cleared. The 510(k) must include submission of supporting
information, including labeling, and may be required to contain safety and
efficacy data. Product modifications intended to be made to a cleared device or
new product claims also may require submission and clearance of a new 510(k)
application or submission and approval of a PMA, before the modified product can
be distributed in interstate commerce. Although there can be no assurance, the
Company believes that its proposed products under development will qualify for a
clearance or approval.
The FDA conducts investigations regarding the safety or effectiveness
of medical devices in connection with applications for clearances or approvals.
If after a result of such investigation, the FDA determined that the Company's
application was inadequate or non-compliant, that determination could impair the
Company's ability to market a particular device or cause the Company to need to
generate additional data to support submissions for such clearance or approval.
Future products developed by the Company may require FDA clearance through
either the 510(k), PMA, new drug approval application
18
procedures or abbreviated new drug approval application procedures. There can
be no assurance that marketing clearances or approvals will be obtained on a
timely basis or at all. Delays in receiving such clearances or approvals
could have a material adverse effect on the Company.
The FDA also regulates the commencement and conduct of any clinical
investigations required by the agency in order to determine the safety and
effectiveness of devices. This specifically includes investigations of
devices not cleared or approved for marketing, and investigations involving
new intended uses of previously cleared or approved devices. Clinical
investigations are regulated by the FDA under the investigational device
exemption ("IDE") regulations. The IDE regulations include significant
requirements that must be met, including patient informed consent, criteria
for selection of study investigators and monitors, review and approval of
research protocols, reporting obligations to the FDA, recordkeeping and
prohibitions against commercialization of investigational devices. A sponsor
must obtain FDA approval of an IDE before starting the investigation, unless
the device is found to be a non-significant risk device by the sponsor and
each institutional review board ("IRB") that reviews the study. The FDA,
however, has the authority to determine that a study designated as involving
a non-significant risk device by the sponsor and IRBs involves a significant
risk device and an IDE application must be submitted and approved before the
study can resume. In addition, a study of a non-significant risk device must
still comply with certain provisions of the IDE regulations, and meet other
regulatory requirements. The violation of the IDE regulations can result in a
variety of sanctions, such as warning letters, prohibition against additional
clinical research, the refusal to accept data and criminal prosecution.
Devices manufactured by the Company in the United States are exported
by the Company to other countries. Such devices, if not approved or cleared for
sale in the United States, are subject to the FDA export requirements, and
cannot be commercially distributed in the United States.
The Company's products are subject to varying degrees of government
regulation in the countries in which the Company has operations, and the
general trend is toward regulation of increasing stringency. The degree of
government regulation affecting the Company varies considerably among
countries, ranging from stringent design, testing, manufacturing, approval
requirements, and post-approval requirements to more simple registration. In
general the Company has not encountered material delays or unusual regulatory
impediments in marketing its products internationally. The Company has
received ISO 9001 or ISO 9002 certification for all of its manufacturing
facilities regarding the quality of its manufacturing systems, a requirement
for doing business in EC countries. Establishment of new uniform regulations
for the European Economic Area, the transition rule for which ended on June
16, 1998, subjects the Company to a single extensive regulatory scheme for
all of the participating countries. The EU Medical Device Directive requires
that medical devices marketed in participating countries have a "CE" mark
affixed to the device certifying compliance with the applicable medical
device requirements. The Company has been granted approval to affix the CE
mark, pursuant to the EC Medical Device Directives, on substantially all of
its products. CE marking does not necessarily preclude, however, additional
restrictions on marketing in any individual country in the EC. The Company is
required to classify its medical devices into one of four classes; meet
certain essential requirements generally relating to device design,
construction, labeling, manufacture and other standards; certify, for Class I
devices, or in the case of a medium or high risk device, obtain certification
from a recognized non-governmental body (notified body) that its device
conforms to the applicable requirements. In addition, other regulatory
requirements apply, including but not limited to registration, vigilance or
adverse event reporting, recordkeeping, and labeling and promotional
restrictions. Companies and medical devices in the EU are also subject to
enforcement actions, including administrative, civil and criminal penalties.
Certain countries require the Company to obtain clearances for its
products prior to marketing the products in those countries. In addition,
certain countries impose product specifications, standards or other
requirements which differ from or are in addition to those mandated in the
United States. The EC and certain countries are in the process of developing
new modes of regulating medical products which may result in
19
lengthening the time required to obtain permission to market new products.
These changes could have a material adverse effect on the Company's ability
to market its products in such countries and would hinder or delay the
successful implementation of the Company's planned international expansion.
The Company is registered as a medical device manufacturer with the
FDA. In addition, the Company lists all of its devices with the FDA. The
Company also has a Medical Device Manufacturing License from the State of
California Department of Health Services, which is renewed annually, and the
Company is subject to the regulatory requirements of that state as well as
other states in which the Company does business. The FDA inspects the Company
periodically to determine whether the Company is in compliance with the FDC
Act and regulations, including regulations relating to MDR reporting, product
labeling and promotion, and medical device QSRs governing design,
manufacturing, testing, quality control, product packaging and storage
practices. California conducts similar inspections related to the same
requirements. Other states may also conduct inspections of aspects of the
Company's business particular to that state. An inspection may result in a
determination that the Company is not in compliance with certain FDA or state
requirements, may require the Company to undertake corrective action, and
could result in legal action against the Company and its products, including
actions such as those described herein. These revised regulations include new
requirements such as design control, which may increase the cost of
regulatory compliance for the Company. The MDR regulations promulgated by the
FDA require the Company to provide information to the FDA on certain
malfunctions, as well as serious injuries or deaths which may have been
associated with the use of a product. The EC Medical Device Directives also
require reporting of serious injuries or deaths which may be associated with
the use of a medical device to the competent authority in the country where
the incident occurred.
A determination that the Company is in material violation of the FDC
Act or such FDA regulations could lead to the issuance of warning letters,
imposition of civil or criminal sanctions against the Company, its officers
and employees, including fines, recalls, repair, replacement or refund to the
user of the cost of such products and could result in the Company losing its
ability to contract with government agencies. In addition, if the FDA
believes any of the Company's products violate the law and present a
potential health hazard, the FDA could seek to detain and seize products, to
require the Company to cease distribution and to notify users to stop using
the product. The FDA could also refuse to issue or renew certificates to
export the Company's products to foreign countries. Such actions could also
result in an inability of the Company to obtain additional clearances or
approvals to market its devices.
In October 1999, the Company received a warning letter from the FDA
related to earlier inspections. These FDA inspections noted several areas of
non-compliance with FDA regulatory requirements. The letter stated that to
resolve this matter, the Company is required until October 2001 to submit to
the FDA periodic certifications as to its state of compliance based on the
outcome of inspections conducted by outside regulatory consultants employed
by the Company for this purpose. In addition, product approvals, clearances
and certificates for device exports, including renewals, will not be provided
until the FDA is satisfied with the Company's corrective action. The FDA has
informed the Company that the corrective action plan it submitted in response
to the warning letter is adequate. The Company believes that it has the
resources necessary to complete the corrective action plan, but is not able
to determine if, or when the FDA will be satisfied with the Company's actions.
Since 1995, the Company has on fourteen occasions initiated product
recalls or issued safety alerts regarding its products regulated by the FDA.
In each case this was done because the products were found not to meet the
Company's specifications. Of the fourteen recalls, three are closed and
notice to that effect has been received from the FDA. The Company has
submitted to the FDA a request for closure related to four of the five
recalls but has not received notice back from the FDA. The remaining seven
are still active. None of the recalls materially interfered with the
Company's operations and all such affected product lines continued to be
marketed by the Company, with the exception of the Model 599 Series infusion
pump, for which the Company continues to sell administration sets and
replacement parts only.
20
In the first quarter of 1997 the Company identified and in March
1998 initiated a voluntary recall of approximately 50,000 of its Gemini model
PC-1 and PC-2 infusion pumps because failure of specific electrical
components.
In the second quarter of 1998, the Company initiated a voluntary
recall of its Signature Edition infusion pumps to correct a malfunction of an
electronic line filter component. Further, in the third quarter of 1998, the
Company initiated a voluntary safety alert regarding the Signature Edition
infusion pumps advising to check for the proper installation of a spring in
the pumping mechanism assembly.
In the third quarter of 1998, the Company initiated a voluntary
recall of its Gemini PC-4 pumps to correct certain electro-mechanical
problems which may cause one or more channels of the device to audibly and
visibly alarm and temporarily cease operation. In the third quarter of 1999,
the Company initiated a voluntary recall of its Gemini PC-4 pumps to correct
certain software problems which may cause all channels of the device to
audibly and visibly alarm and temporarily cease operation. In the second
quarter of 1999, the Company also initiated a mandatory field upgrade of the
Gemini PC-2T CE (220V) product, distributed only in certain countries outside
the U.S. for failure to audibly alarm when a certain type of failure occurs.
In the second quarter of 1999 the Company initiated a voluntary recall
of a certain version of its MedSystem III infusion pump to replace a capacitor
used on the pumps' power supply board. Failure of this capacitor may cause the
pump to cease operation without an alarm notifying the user.
Additionally, in the second quarter of 1999, the Company initiated
three voluntary recalls of certain versions of its P series syringe pumps,
which are manufactured in the United Kingdom and sold outside the United
States, primarily in Europe. These voluntary recalls relate to software and
hardware upgrades of the P series syringe pumps.
The costs incurred related to the Company's recall activities have
historically been significant. These costs include labor and materials, as well
as travel and lodging for repair technicians. Estimates to complete are often
quite difficult to determine due to uncertainty surrounding how many affected
units are still in service and how many units customers will fix without Company
assistance. Due to these difficulties in estimating costs, it is possible that
the actual costs to complete each individual recall could differ significantly
from management's current estimates to complete. Although, there can be no
assurances, the Company believes it has adequate reserves to cover the remaining
estimated aggregate costs related to these active recalls.
ANTI-REMUNERATION LAWS. The sale of the Company's products is subject
to the illegal remuneration/"anti-kickback" provisions of the Social Security
Act of 1935, as amended (the "Social Security Act"), which prohibits knowingly
and willfully the offering, receiving or paying of any remuneration, whether
directly or indirectly, in return for inducing the purchase of items or
services, or patient referrals to providers of services, for which payment may
be made in whole or in part by Medicare, Medicaid or other federally funded
health care programs. Violations of the statute are punishable by civil and
criminal penalties and the exclusion of the provider from future participation
in other federally funded health care programs. The Social Security Act contains
exceptions to these prohibitions for, among other things, properly reported
discounts, rebates and payments of certain administrative fees to GPOs. Because
of the breadth of the statutory prohibitions, the lack of court decisions or
other authority addressing the types of arrangements that are permissible under
the law and the narrowness of statutory exceptions, the Secretary of Health and
Human Services published regulations creating "safe harbors" identifying certain
practices that will not be treated as violating the "anti-kickback" provisions
of the Social Security Act. While failure to satisfy all of the criteria for a
safe harbor does not necessarily mean that an arrangement is unlawful, engaging
in a business practice for which there is a safe harbor may be regarded as
suspect if the practice fails to meet each of the prescribed criteria of the
appropriate safe harbor. The enumerated safe harbors
21
include safe harbors which implement, and further refine, the statutory
exceptions for discounts and payments to GPOs. Because the Company sells some
of its products to customers at prices below list price and in various
combinations, the Company is engaged in giving discounts within the meaning
of the Social Security Act. The regulations require sellers to fully and
accurately report all discounts and inform buyers of their obligations to
report such discounts. The Company also pays administrative fees to certain
purchasing agents within the meaning of the Social Security Act. In order to
qualify for the GPO safe harbor, certain requirements must be met including
disclosure of the existence of the GPO fee arrangement to GPO members and
that members are neither wholly owned by the GPO nor subsidiaries of a parent
corporation that wholly owns the GPO. Certain of the Company's discounts and
arrangements with purchasing agents may not meet all the requirements of the
appropriate safe harbors.
Several states also have statutes or regulations prohibiting financial
relationships with referral sources that are not limited to services for which
Medicare, Medicaid or other state or federal health care program payment may be
made. A finding of non-compliance with these anti-remuneration laws by federal
or state regulatory officials, including non-compliance with appropriate safe
harbors, could have a material adverse effect on the Company.
COVERAGE AND REIMBURSEMENT. The Company's products are purchased or
leased by health care providers or suppliers which submit claims for
reimbursement for such products to third-party payors such as Medicare,
Medicaid and private health insurers. Although the Company has no knowledge
that third-party payors will adopt measures that would limit coverage of, or
reimbursement for, its products, any such measures that were applied to the
Company's products could have a material adverse effect on the Company.
ENVIRONMENTAL MATTERS. The Company is subject to regulation by OSHA,
the Environmental Protection Agency ("EPA") and their respective state and
local counterparts, and under extensive and changing foreign, federal, state
and local environmental standards, including those governing the handling and
disposal of solid and hazardous wastes, discharges to the air and water, and
the remediation of contamination associated with releases of hazardous
substances. Such standards are imposed by, among other statutes, the Toxic
Substances Control Act, the Clean Air Act, the Federal Water Pollution
Control Act, the Resource Conservation and Recovery Act and the Comprehensive
Environmental Response, Compensation and Liability Act ("CERCLA"). Although
there can be no assurances, the Company believes that it is currently in
material compliance with current environmental standards. Nevertheless, the
Company uses hazardous substances in its day-to-day operations and, as is the
case with manufacturers in general, if a release of hazardous substances
occurs on or from the Company's properties, the Company may be held liable
and may be required to pay the cost of remedying the condition. The amount of
any such liability could be material.
The Company has made, and will continue to make, expenditures to
comply with current and future environmental standards. Although no material
capital or operating expenditures relating to environmental controls are
anticipated, there can be no assurance that changes in, additions to, or
differing interpretations of statutory and regulatory requirements will not
require material expenditures in the future.
The Company is subject to liability under CERCLA and analogous state
laws for the investigation and remediation of environmental contamination at
properties owned and/or operated by it and at off-site locations where it has
arranged for the disposal of hazardous substances. Courts have determined
that liability under CERCLA is, in most cases, joint and several, meaning
that any responsible party could be held liable for all costs necessary for
investigating and remediating a release or threatened release of hazardous
substances. As a practical matter, liability at most CERCLA (and similar)
sites is shared among all the solvent "potentially responsible parties"
("PRPs"). The most relevant factors in determining the probable liability of
a party at a CERCLA site usually are the cost of the investigation and
remediation, the relative amount of hazardous substances contributed by the
party to the site and the number of solvent PRPs.
22
The Company was involved in two such matters; one, at the Seaboard
Chemical site in Jamestown, North Carolina, and another at the Caldwell
Systems, Inc. site in Lenoir, North Carolina. In relation to the Seaboard
Chemical site, the Company has entered into a DE MICROMIS administrative
order on consent with the North Carolina Department of Environment, Health
and Natural Resources and a group of PRPs, settling its liability for past
and future response costs associated with the site. Under the consent order,
the Company received a release from further liability associated with the
site, a covenant not to sue by the other PRPs entering into the consent
order, and protection under CERCLA against contribution actions for matters
addressed by the consent order. Protection from further liability is
conditioned on the absence of information indicating that the Company
disposed of a greater quantity of hazardous substances at the site than
currently known.
In relation to the Caldwell Systems site, the Company has entered
into a DE MINIMIS administrative order on consent with the EPA and a group of
PRPs, settling its potential liability for past and future response costs
associated with the site. Under the consent order, the Company received a
covenant not to sue by the EPA and by other PRPs entering into the consent
order, and protection under CERCLA against contribution actions for matters
addressed by the consent order. Protection from further liability is
conditioned on the absence of information indicating that the Company
disposed of a greater quantity of hazardous substances at the site than
currently known.
In 1997, the Company received a Notice of Intent to Sue from a
citizen's group which claimed that the Company had violated California's Safe
Drinking Water and Toxic Enforcement Act of 1986 ("Proposition 65") in the
warning it provided with respect to DEHP, a plasticizer used in certain of
the Company's IV sets. Proposition 65 requires, among other things, that
warnings be given in connection with the exposure of consumers to products
containing certain listed substances. The Company entered into a settlement
agreement, pursuant to which the Company received a release and covenant not
to sue from the group.
EMPLOYEES
As of January 31, 2000, the Company employed 2,919 people, including
1,073 in the United States. The Company has not experienced any work
stoppages related to employment matters other than in connection with a
contract dispute with Cal Pacifico.
Cal Pacifico was the operator of the Company's two maquiladora
assembly plants in Tijuana, Mexico. For over eight years, the Company
assembled disposable administration sets at these two plants, which utilized
more than 1,200 workers employed by Cal Pacifico, under a contract with Cal
Pacifico. A dispute originated in April 1997 when the Company, in accordance
with the terms of such contract, informed Cal Pacifico that it would be
terminating its contractual arrangements effective August 1, 1997. Cal
Pacifico objected to such notification and proposed the systematic
termination of the workforce. In response to such objection, the Company on
June 6, 1997 hired substantially all of the workers at the plants directly.
On June 11, 1997, Cal Pacifico locked the Company's administrative personnel
and production employees out of the plants and would not allow the Company
access to its production equipment or inventory. On June 26, 1997, the
Company entered into a settlement agreement with Cal Pacifico. As a result of
the settlement agreement, the assembly plants resumed full operations on June
27, 1997. The Company now directly operates these plants with no assistance
from or interaction with Cal Pacifico.
ALARIS Medical's operations are supported by persons employed by
ALARIS Medical Systems and its subsidiaries. The Company's principal
executive offices are located at 10221 Wateridge Circle, San Diego,
California 92121.
23
EXECUTIVE OFFICERS OF THE REGISTRANT
DAVID L. SCHLOTTERBECK, age 52, became a Director, the President and
the Chief Executive Officer of ALARIS Medical and ALARIS Medical Systems on
November 1, 1999. Mr. Schlotterbeck joined ALARIS Medical Systems on April
19, 1999, as President and Chief Operating Officer. Previously, Mr.
Schlotterbeck was President and Chief Operating Officer of Pacific Scientific
Company, a former NYSE-traded company prior to its acquisition by Danaher
Corporation in March 1998. He was President and COO of Pacific Scientific, an
international manufacturer of motion control, process measurement and safety
products, from 1997 to March 1998. From 1995 to 1997, he was President and
CEO of Vitalcom, Inc., a medical network manufacturer. From 1991 to 1994, Mr.
Schlotterbeck was Executive Vice President and COO for Nellcor, Inc., a
medical device manufacturer subsequently acquired by Mallinckrodt, Inc. Mr.
Schlotterbeck is a graduate of the General Motors Institute with a B.S. in
electrical engineering. He holds an M.S. in electrical engineering from
Purdue University, and completed the Executive Institute at Stanford
University in 1984.
WILLIAM C. BOPP, age 56, became Senior Vice President and Chief
Financial Officer of each ALARIS Medical and ALARIS Medical Systems on
November 1, 1999. Mr. Bopp joined the companies on March 22, 1999 as Vice
President and Chief Financial Officer. Prior to joining ALARIS, he was
executive vice president and chief financial officer of C.R. Bard, Inc. since
1995. Since 1980, Mr. Bopp held positions of increasing responsibility with
Bard, a $1.2 billion developer, manufacturer and marketer of health care
products, including vascular, urological and oncological and interventional
products. In addition to his most recent position, from 1995 until 1999, Mr.
Bopp also served as a member of the board of directors of Bard. He is a
graduate of Harvard College, Cambridge, MA, and completed his M.B.A.,
Finance, from the Harvard Business School.
JOHN A. DE GROOT, age 44, became Senior Vice President and General
Counsel of each of ALARIS Medical and ALARIS Medical Systems on November 1,
1999. In March 1997 he became the Secretary of ALARIS Medical and ALARIS Medical
Systems. Mr. de Groot became a Vice President and General Counsel of ALARIS
Medical Systems as of November 1996. Prior thereto, Mr. de Groot served as a
Vice President and General Counsel of IVAC Holdings, Inc. and IVAC Medical
Systems since April 1995. From January 1991 to December 1996, Mr. de Groot was a
partner in the law firm of Brobeck, Phleger & Harrison LLP, a firm he had been
associated with since March 1987. Mr. de Groot holds a B.B.A. and Juris Doctor
from the University of Notre Dame.
ANTHONY B. SEMEDO, age 48, became Vice President of Corporate
Development in January 1998. From November 1996 until February 1998, Mr.
Semedo served as Vice President of Research, Development and Engineering of
ALARIS Medical Systems. Prior thereto, Mr. Semedo served as Vice President of
Research and Development of IVAC Medical Systems since February 1995. From
September 1994 to February 1995, Mr. Semedo served as Vice President of
Quality of IVAC Medical Systems. From August 1992 to September 1994, Mr.
Semedo served as the Business Development Manager of the cardiovascular
business and the Quality Assurance Manager of the medical devices and
diagnostics division of Eli Lilly and Company. Eli Lilly and Company are
engaged in the discovery, development, manufacture and sale of products, and
the provision of services in the life sciences industry. Mr. Semedo holds a
B.S. degree in Engineering from the University of Massachusetts, Lowell
Campus.
RICHARD M. MIRANDO, age 56, became Vice President and General
Manager of Instromedix on August 2, 1999. He was previously Vice President of
Operations of ALARIS Medical Systems, a position he assumed as of November
1996. Prior thereto, Mr. Mirando served as Vice President and General Manager
of International Business of IVAC Medical Systems since January 1995. From
1978 to January 1995, Mr. Mirando held various positions, including Marketing
Manager, Director of Market Planning and Research, Director of Sales,
Executive Director of International Operations, Vice President Sales and
Marketing-Fluid Delivery Division, Vice President-Corporate Accounts and
Pricing, and Vice President-Corporate Quality/Service Business Unit, with
IVAC Medical Systems. Mr. Mirando holds an M.B.A. and a B.S. degree,
Industrial Engineering, from Northeastern University.
24
HENK VAN ROSSEM, age 57, became Vice President and General Manager,
International of ALARIS Medical Systems in January 1997. Prior thereto, Mr.
van Rossem held various international marketing and sales positions with
Mallinckrodt Group, Inc. since 1984. Prior to Mallinckrodt, he worked in
marketing and sales promotions for Philips-Duphar health Products. Mr. van
Rossem attended the Amsterdam School of Business Administration, where he
graduated with a degree in Marketing. He later completed the NSEAD Executive
Management Program in France.
JAKE ST. PHILIP, age 47, became Vice President and General Manager,
North America, as of July 1998. He previously served as Vice President of
Sales, North America of ALARIS Medical Systems as of November 1996. Prior
thereto, Mr. St. Philip served as Vice President of Sales, North America of
IVAC Medical Systems since June 1994. From 1981 to June 1994, Mr. St. Philip
held various sales and marketing positions with IVAC Medical Systems.
Additional prior experience includes sales positions with Johnson & Johnson
and M&M/Mars. Mr. St. Philip holds a B.S. degree in Marketing from the
University of New Orleans.
JOERGEN LYNGSGAARD, age 56, became Vice President of Operations,
ALARIS Medical Systems, on August 23, 1999. Prior to joining ALARIS Medical,
he was senior director, product development of Mallinckrodt, Inc.'s Carlsbad,
CA division, formerly known as Nellcor Puritan Bennett. Mr. Lyngsgaard joined
Nellcor in 1993 and was responsible for product development of patient
monitors. Nellcor Puritan Bennett was acquired in July 1997 by Mallinckrodt.
From 1991 to 1993, he was vice president, product engineering for Harman
Electronics, an audio automotive original equipment manufacturer. From 1987
to 1991, Mr. Lyngsgaard was vice president and general manager of Horiba
Automation Division, responsible for development, production and installation
of complex custom-specified pollution monitoring systems used worldwide in
automotive and industrial applications. His prior experience includes
positions of increasing responsibility with Calcomp, Beckman Instruments,
Ford Motor Company and Uniroyal Tire Company. Mr. Lyngsgaard holds a B.S. in
Electrical Engineering from Soenderborg Teknikum, Denmark, and a M.S. in
Electrical Engineering from the University of Detroit. He completed his M.B.A
from Cal State Fullerton and attended post-graduate coursework at Stanford
University.
SALLY M. GRIGORIEV, age 41, is the Vice President of Quality and
Regulatory Affairs for ALARIS Medical Systems. Prior to joining IVAC Medical
Systems in January 1995, she served as the Vice President of Quality and
Regulatory Affairs at U.S. Medical Instruments, Inc. and Block Medical, Inc.
respectively. While at Block Medical, she established and implemented all
quality and regulatory systems. Ms. Grigoriev held various management positions
at IMED Corporation from 1982 to 1990, including Principal Manufacturing
Engineer, Quality Engineering Manager, Manufacturing Engineering Manager, and
Quality Assurance Manager. Ms. Grigoriev holds a B.S. degree, Chemical
Engineering, from the University of California, Santa Barbara.
L. JAMES RUNCHEY, age 43, is the Vice President of Human Resources for
ALARIS Medical Systems. He joined IVAC Medical Systems in May 1995. Prior to
IVAC, Mr. Runchey served as Vice President of Human Resources and Administration
for Magma Power Company from 1988 to 1995, where he was responsible for all
aspects of Human Resources management, facilities, safety and training.
Mr. Runchey holds a B.S. degree in Management from San Diego State University.
There are no family relationships among the above executive officers.
25
ITEM 2. PROPERTIES
The Company has long-term leases on substantially all of its major
facilities. The Company maintains an instrument manufacturing facility in San
Diego, California where infusion pumps and patient monitoring instruments for
both the North America and International business units are manufactured.
Arrhythmic event recorders and pacemaker monitors are also manufactured in
the San Diego facility for the Instromedix division. The Company also
maintains a facility in Hampshire, England where syringe pumps and the
Advantis pump, products marketed for countries outside of the United States,
are manufactured. Disposable administration set manufacturing facilities for
the North America and International business units are located in Creedmoor,
North Carolina and Tijuana, Mexico. The disposable manufacturing facility in
Creedmoor, North Carolina is owned by the Company. The disposable
manufacturing facilities in Tijuana, Mexico are maintained under short term
lease agreements.
The Company's principal International sales offices are maintained
under long-term leases in England, Germany, Spain, France, Sweden, Belgium,
The Netherlands, Italy, Norway, South Africa, New Zealand and Australia. The
North American sales office for Canada is also maintained under a long-term
lease.
The Company's principal offices are located in San Diego, California
and its International headquarters are located in Hampshire, England. These
facilities are maintained under long-term lease arrangements.
ITEM 3. LEGAL PROCEEDINGS
The Company was a defendant in a lawsuit filed in June 1996 by
Sherwood, a unit of Tyco Healthcare Group ("Tyco"), against IVAC Medical
Systems. The lawsuit was filed in the United States District Court for the
Southern District of California, alleging infringement of two Sherwood
patents by reason of certain activities including the sale by IVAC Medical
Systems of disposable probe covers for use with the Company's infrared
tympanic thermometers. On August 31, 1999 the Company entered into an
agreement under which Tyco granted ALARIS Medical Systems a paid-up license
to certain patents and settled the patent infringement lawsuit. In connection
with this agreement, the Company made a one-time payment of $4.0 million
during the third quarter of 1999. ALARIS Medical Systems will not be required
to pay any future royalties on patents covered by the agreement.
The Company was a defendant in a lawsuit filed on April 20, 1998 and
served on October 28, 1998, by Becton Dickinson and Company ("Becton")
against ALARIS Medical Systems, Inc., which alleged infringement of a patent
licensed to Becton by reason of certain activities, including the sale of the
Company's SmartSite-registered trademark- needle-free system. Becton had
requested a permanent injunction enjoining the Company from infringing the
patent in suit. In addition, the Company filed a lawsuit on December 4, 1998
against Becton. The lawsuit alleged infringement of two patents, one owned by
the Company and one licensed to the Company, by reason of certain activities,
including the sale of Becton's Atrium needle-free valve. On October 13, 1999,
the Company entered into an agreement with Becton which grants between the
two companies paid-up licenses to certain patents and settled the patent
infringement lawsuits. In connection with this agreement, the Company paid a
total of $6.7 million during the fourth quarter of 1999. The Company will not
be required to pay any future royalties on patents covered by the agreement.
In January 2000, the Company was notified that Amaris Software
Entwicklungsgesellschaft mbH ("Amaris Software"), a German company, contends
that the Company's use of the trademark "ALARIS" infringes Amaris Software's
registered trademark "Amaris" that is the subject of a German trademark
registration.
26
The Company has denied that the two marks are confusingly similar and
contends that the Company's intended use of the trademark "ALARIS" is only with
medical goods and services, which are outside Amaris Software's registration.
The Company believes it has sufficient defenses to all claims by Amaris
Software. However, there can be no assurance that the Company will successfully
defend all claims made by Amaris Software.
The Company is also involved in a number of legal proceedings arising
in the ordinary course of its business, none of which is expected to have a
material adverse effect on the Company's business, financial condition, results
of operations or cash flows of the Company. The Company maintains insurance
coverage against claims in an amount which it believes to be adequate.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCK-HOLDER
MATTERS
The Common Stock was listed and traded on the NASDAQ National Market
under the symbol ALRS through September 14, 1999. Beginning September 15, 1999,
the Common Stock listing and trading was moved to the American Stock Exchange
(AMEX) under the symbol AMI. The following table sets forth the high and low
reported sale prices for the Common Stock as reported by the stock exchanges for
the quarters indicated, based on daily closing prices.
HIGH LOW
---- ---
1999:
Fourth Quarter............................................. 3-1/8 1-3/8
Third Quarter.............................................. 4-27/32 2-5/16
Second Quarter............................................. 5-1/16 2-3/4
First Quarter.............................................. 6-1/2 3-1/8
1998:
Fourth Quarter............................................. 7-1/2 3
Third Quarter.............................................. 6-15/16 3-1/4
Second Quarter............................................. 7-11/32 4-1/2
First Quarter.............................................. 5-9/16 4-1/8
At March 1, 2000 there were 477 holders of record of the Common Stock.
ALARIS Medical has not paid any dividends on the Common Stock since its
organization, and it is not contemplated that it will pay any dividends on the
Common Stock in the foreseeable future. ALARIS Medical is prohibited from
declaring and paying dividends on the Common Stock under its bank credit
facility. In addition, the bank credit facility limits ALARIS Medical System's
ability to declare and pay dividends and to make other distributions and
payments to ALARIS Medical. See "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital Resources."
27
ITEM 6. SELECTED FINANCIAL DATA
The following selected historical consolidated financial data of ALARIS
Medical at December 31, 1999, 1998, 1997, 1996 and 1995 and for the years then
ended, have been derived from ALARIS Medical's annual financial statements
including the consolidated balance sheet at December 31, 1999 and 1998 and the
related consolidated statement of operations for the three-year period ended
December 31, 1999 and notes thereto which appear elsewhere herein.
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------
1999 1998 1997 1996 (1) 1995 (1)
--------- ---------- ---------- ---------- ----------
(DOLLAR AND SHARE AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Sales.................................... $ 401,978 $ 380,068 $ 359,077 $ 136,371 $ 112,551
Cost of sales............................ 208,739 191,232 188,340 78,616 63,219
--------- ---------- ---------- ---------- ----------
Gross margin............................. 193,239 188,836 170,737 57,755 49,332
Total operating expenses (2)............. (174,096) (165,150) (142,806) (105,614) (34,614)
Lease interest income (3)................ 4,425 4,599 4,559 2,501 2,333
--------- ---------- ---------- ---------- ----------
Income (loss) from operations............ 23,568 28,285 32,490 (45,358) 17,051
Interest income.......................... 1,377 1,134 532 1,193 192
Interest expense......................... (54,922) (48,658) (44,413) (13,393) (8,153)
Debt conversion expense (5).............. - - - (10,000) -
Other (expense) income, net.............. (1,649) (1,100) (1,535) 1,222 313
---------- ---------- ---------- ---------- ----------
(Loss) income before income taxes,
minority interests and extraordinary
item ................................. (31,626) (20,339) (12,926) (66,336) 9,403
Benefit (provision) for income taxes .... 3,200 (4,100) 3,300 730 9,374
Minority interests in consolidated
subsidiaries.......................... - - - - (6,500)
--------- ---------- ---------- ---------- ----------
(Loss) income before extraordinary
item.................................. (28,426) (24,439) (9,626) (65,606) 12,277
Dividends and accretion on mandatorily
redeemable preferred stock............ - - - 962 650
--------- ---------- ---------- ---------- ----------
(Loss) income applicable to common
stock before extraordinary item....... $ (28,426) $ (24,439) $ (9,626) $ (66,568) $ 11,627
========= ========== ========== ========== ==========
(Loss) income per common share before
extraordinary item assuming
no dilution (4)....................... $ (.48) $ (.42) $ (.16) $ (3.27) $ .75
======== ========= ========== ========== ==========
(Loss) income per common share before
extraordinary item assuming
dilution (4).......................... $ (.48) $ (.42) $ (.16) $ (3.27) $ .38
======== ========= ========== ========== ==========
Weighted average common shares
outstanding assuming no dilution (4).. 58,815 58,710 58,644 20,343 15,506
========= ========== ========== ========== ==========
Weighted average common shares
outstanding assuming dilution (4)..... 58,815 58,710 58,644 20,343 33,236
========= ========== ========== ========== ==========
28
DECEMBER 31,
-------------------------------------------------------------------
1999 1998 1997 1996 (1) 1995 (1)
--------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents................ $ 23,559 $ 29,500 $ 6,984 $ 12,084 $ 1,862
Working capital.......................... 126,759 146,660 84,047 87,785 31,938
Total assets ........................... 606,790 651,033 565,297 593,382 169,630
Short-term debt (5)...................... 13,769 15,423 14,559 3,963 322
Long-term debt (5)....................... 527,082 530,867 431,571 436,130 86,789
Mandatorily redeemable equity securities. - - - - 7,217
Stockholders' (deficit) equity .......... (20,951) 8,369 31,949 46,053 31,532
ADJUSTED EBITDA (6) ........................ $ 87,610 $ 94,942 $ 89,287 $ 27,775 $ 24,626
Inventory purchase price allocation
adjustment (7)........................... - (274) (1,607) (4,014) -
Restructuring, integration and other
non-recurring charges.................... (26,589) (1,901) (20,902) (15,277) -
Purchased in-process research and
development.............................. - (28,334) - (44,000) -
Depreciation and amortization (8)........... (37,453) (36,148) (34,288) (9,842) (7,575)
Interest income............................. 1,377 1,134 532 1,193 192
Interest expense............................ (54,922) (48,658) (44,413) (13,393) (8,153)
Debt conversion expense (5)................. - - - (10,000) -
Other, net.................................. (1,649) (1,100) (1,535) 1,222 313
Benefit (provision) for income taxes........ 3,200 (4,100) 3,300 730 9,374
Minority interests in consolidated
subsidiaries............................. - - - - (6,500)
Extraordinary (loss) gain (5)............... - - - (1,630) 15,177
--------- ---------- ---------- ---------- ----------
Net (loss) income........................ $ (28,426) $ (24,439) $ (9,626) $ (67,236) $ 27,454
========= ========== ========== ========== ==========
- ---------------------------------
(1) ALARIS Medical was formed as a result of the merger of IMED Corporation and
IVAC Medical Systems, Inc. in November 1996 ("the Merger"). As a result of
the Merger, the Balance Sheet Data for 1995 and the Statement of Operations
Data for 1995 and 1996 are not comparable to the Balance Sheet and
Statement of Operations Data for subsequent years.
(2) Operating expenses for the years ended December 31, 1999, 1998, 1997 and
1996 include restructuring, integration and other non-recurring charges of
$26,589, $1,901, $20,902 and $15,277, respectively. In 1996 ALARIS Medical
restructured its operations. During 1997, the Company incurred significant
restructuring, integration and other non-recurring expense resulting from
the 1996 Merger. During 1998, the Company incurred integration costs and
other non-recurring expenses resulting from the acquisitions of Instromedix
and Patient Solutions. In 1999, the Company incurred integration charges
related to the consolidation of the Instromedix operation into its San
Diego, California facilities.
Additionally, in 1996, the Company recorded $44,000 of purchased in-process
research and development in connection with the Merger. In 1998, in
connection with the acquisitions and licensing of Instromedix, Caesarea and
Patient Solutions, the Company recorded $28,334 of purchased in-process
research and development. In 1999 the Company wrote-off $19,172 of goodwill
and other intangible assets related to the Instromedix business unit. Also
included in 1999 operating expenses are charges of $2,838 related to two
patent license agreements. For further discussion see Notes 2 and 9 to the
Consolidated Financial Statements.
(3) Lease interest income consists of interest income associated with contracts
or agreements pursuant to which a third party acquires infusion pumps under
sales-type leases.
(4) As required by the Statement of Financial Accounting Standards No. 128,
"Earnings per Share" ("SFAS 128"), effective for periods ending after
December 15, 1995, all prior-period earnings per share data have been
restated
29
to conform with the provisions of the Statement. As a result, prior
period numbers presented may not agree with the earnings per share data
previously reported.
(5) In 1996, the Company entered into a $250,000 credit facility and also
issued $200,000 of 9 3/4% senior subordinated notes due 2006. Additionally,
convertible promissory notes in the aggregate principal amount of $37,500
were exchanged for 29,416 shares of common stock, including 3,333 shares
issued as an inducement to convert, which resulted in $10,000 of debt
conversion expense. ALARIS Medical also redeemed the remaining $21,924
principal amount of its 15% subordinated debentures due 1999 and recorded
an extraordinary loss on extinguishment of debt of $1,630 as a result of
this transaction. On July 28, 1998, ALARIS Medical completed the sale of
$109,892 of 11-1/8% Senior Discount Notes (the "Senior Discount Notes"),
due 2008, receiving net proceeds of $106,321. A portion of the net proceeds
of the sale of the notes was also used to repay certain borrowings under
the bank credit facility. For further discussion, see Note 4 to the
Consolidated Financial Statements.
(6) Adjusted EBITDA represents income from operations before restructuring,
integration and other non-recurring charges, non-cash purchase accounting
charges and depreciation and amortization. Adjusted EBITDA does not
represent net income or cash flows from operations, as these terms are
defined under generally accepted accounting principles, and should not be
considered as an alternative to net income as an indicator of the Company's
operating performance or to cash flows as a measure of liquidity. ALARIS
Medical has included information concerning Adjusted EBITDA herein because
it understands that such information is used by certain investors as one
measure of an issuer's historical ability to service debt. Integration and
other one-time non-recurring charges are excluded from Adjusted EBITDA as
ALARIS Medical believes that the inclusion of these items would not be
helpful to an investor's understanding of ALARIS Medical's ability to
service debt. ALARIS Medical's computation of Adjusted EBITDA may not be
comparable to similar titled measures of other companies.
(7) Amounts in 1996 and 1997 represent that portion of the purchase accounting
adjustments made to adjust acquired inventory to its estimated fair value
on the acquisition date. This adjustment to inventory was subsequently
charged to cost of sales during December 1996 and the first quarter of
1997. The 1998 amount represents that portion of the purchase accounting
adjustments made to adjust the 1998 acquired inventories to the estimated
fair value on the acquisition dates which was subsequently charged to cost
of sales.
(8) Depreciation and amortization excludes amortization of debt discount and
issuance costs included in interest expense of $3,324, $3,199, $3,125,
$1,332 and $521 for the years ended December 31, 1999, 1998, 1997, 1996 and
1995, respectively.
30
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THE FOLLOWING SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED
FINANCIAL STATEMENTS OF ALARIS MEDICAL AND THE RELATED NOTES THERETO INCLUDED
ELSEWHERE IN THIS ANNUAL REPORT.
OVERVIEW
ALARIS Medical is a holding company for ALARIS Medical Systems. ALARIS
Medical also identifies and evaluates potential acquisitions and investments,
and performs various corporate functions. As a holding company, ALARIS Medical
currently has no revenues to fund its operating and interest expense and relies
on its existing cash, cash generated from operations of ALARIS Medical Systems
and external borrowings to meet its obligations. Capitalized terms used but not
defined herein have the meaning ascribed to them in the Notes to the
Consolidated Financial Statements.
The Company is a leading provider of infusion systems and related
technologies to the United States hospital market, with the largest installed
base of pump delivery lines ("channels"). The Company is also a leader in the
international infusion systems market. Based on installed base of infusion
pumps, the Company has a number one or two market position in seven Western
European countries, the number three market position in three countries, the
largest installed base of infusion pumps in Australia and Canada and a
developing position in Latin America and Asia. The Company's infusion systems,
which are used to deliver one or more fluids, primarily pharmaceuticals or
nutritionals, to patients, consist of single and multi-channel infusion pumps
and dedicated and non-dedicated disposable administration sets (i.e., plastic
tubing and pump interfaces). In addition, the Company is a leading provider of
patient monitoring products that measure and monitor temperature, pulse, pulse
oximetry and blood pressure, with the largest installed base of hospital
thermometry systems in the United States. Through its July 17, 1998 acquisition
of Instromedix, the Company also designs, manufactures and sells cardiology
products such as arrhythmia-event recorders and pacemaker monitors.
The Company sells a full range of products through a worldwide direct
sales force consisting of over 250 sales persons and through more than 150
distributors to over 5,000 hospitals worldwide. Sales by the Company's
International business unit represented 31.1% of the Company's total sales for
the year ended December 31, 1999. For the year ended December 31, 1999, the
Company had sales of $402.0 million and Adjusted EBITDA of $87.6 million.
In recent years, the Company's results of operations have been affected
by the cost containment pressures applicable to health care providers. In
particular, in order to reduce costs, certain hospitals have adopted a protocol
increasing the maximum time between disposable administration set changes from
every 24 hours to as much as every 72 hours. Notwithstanding this change in
protocol, unit sales volume of the Company's disposable administration sets
increased in every year since 1993, primarily as a result of the growth in its
worldwide installed base of infusion pumps. However, uncertainty remains with
regard to future changes within the healthcare industry. The trend towards
managed care and economically motivated buyers in the U.S. may result in
continued pressure on selling prices of products and compression on gross
margins. The U.S. marketplace is increasingly characterized by consolidation
among healthcare providers and purchasers of medical products. The Company's
profitability is affected by the increasing use of Group Purchasing
Organizations ("GPOs") which are better able to negotiate favorable pricing from
providers of infusion systems, such as the Company, and which insure compliance
with exclusive buying arrangements for their members. These buying arrangements,
in certain situations, also may result in the GPO requiring removal of the
Company's existing infusion pumps. The Company expects that such GPOs will
become increasingly more common and may have an adverse effect on the Company's
future profitability. Finally, the enactment of national health care reform or
other legislation affecting payment mechanisms and health
31
care delivery could affect the Company's future results of operations. It is
impossible to predict the extent to which the Company may be affected by any
such change in legislation.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, selected
financial information expressed as a percentage of sales.
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1999 1998 1997
---------- ---------- ---------
(% OF SALES) (% OF SALES) (% OF SALES)
Sales ....................................................... 100.0% 100.0% 100.0%
Cost of sales.................................................. 51.9 50.3 52.5
---------- ---------- ---------
Gross margin................................................... 48.1 49.7 47.5
Selling and marketing expenses................................. 19.3 19.0 18.3
General and administrative expenses............................ 11.5 11.2 10.9
Research and development expenses.............................. 5.9 5.3 4.7
Purchased in-process research and
development................................................. - 7.5 -
Restructuring, integration and other
non-recurring charges....................................... 6.6 .5 5.8
Lease interest income.......................................... 1.1 1.2 1.2
---------- ---------- ---------
Income from operations........................................ 5.9 7.4 9.0
Interest income................................................ .3 .3 .1
Interest expense............................................... (13.7) (12.8) (12.4)
Other, net..................................................... (.4) (.2) (.3)
----------- ---------- ---------
Loss before income taxes....................................... (7.9) (5.3) (3.6)
(Benefit from) provision for income taxes...................... (.8) 1.1 (.9)
----------- ---------- ---------
Net loss....................................................... (7.1%) (6.4%) (2.7%)
========== ========== =========
Other Data:
Adjusted EBITDA............................................ 21.8% 25.0% 24.9%
========== ========== =========
The following table summarizes sales to customers by each business
unit:
YEAR ENDED DECEMBER 31, (A)
-----------------------------------------------
1999 1998 1997
---------- ---------- ---------
(IN MILLIONS)
North America sales............................................ $ 263.5 $ 246.7 $ 240.5
International sales............................................ 124.8 125.0 118.6
Instromedix sales.............................................. 13.7 8.4 -
---------- ---------- ---------
Total sales................................................ $ 402.0 $ 380.1 $ 359.1
========== ========== =========
(A) The Company's sales results are reported consistent with the Company's
three strategic business units: North America, International, and
Instromedix.
32
YEAR ENDED DECEMBER 31, 1999 COMPARED WITH YEAR ENDED DECEMBER 31, 1998
SALES. Sales increased $21.9 million, or 6%, during 1999 compared with
1998. During 1999 compared with 1998, North America sales increased $16.8
million, or 7%. International sales decreased $0.2 million and Instromedix sales
increased $5.3 million. In 1999 the Company recorded sales for Instromedix for a
full year, compared with five and one-half months of sales in 1998. The majority
of the Company's international sales are denominated in foreign currency. Due to
a stronger U.S. dollar in 1999 compared with the actual foreign currency
exchange rates in effect during 1998, translation of 1999 international sales
were adversely impacted by $4.0 million. Using constant exchange rates,
International sales increased 3% due primarily to increased volume of disposable
administration sets. The increase in North America sales in 1999 is primarily
due to an increase in drug infusion disposable administration set revenue of
$11.3 million and drug infusion instrument revenue of $5.8 million. The increase
in drug infusion disposable administration set revenue is due primarily to an
increase in volume of the Company's SmartSite needle-free system administration
sets.
GROSS MARGIN. Gross margin increased $4.4 million or 2% during 1999
compared with 1998. The gross margin percentage decreased from 49.7% in 1998 to
48.1% in 1999 due in part to a one-time charge of $2.5 million during the second
quarter of 1999 associated with disposable manufacturing issues as well as a $1
million charge during the fourth quarter of 1999 to write-down slow moving and
potentially obsolete inventory. Additionally, despite lower manufacturing costs
due to increased volume, gross margin percentages declined on drug infusion
instruments due to lower average selling prices in 1999 compared with 1998.
SELLING AND MARKETING EXPENSE. Selling and marketing expenses increased
$5.3 million, or 7%, during 1999 compared with 1998. As a percentage of sales,
selling and marketing expenses increased from 19.0% in 1998 to 19.3% in 1999.
This increase is primarily due to management consulting fees associated with
developing product strategies and planning upcoming product introductions,
higher compensation and clinical consultants costs associated with the increase
in North America sales, and a full year of Instromedix selling and marketing
expenses in 1999 compared with five and one-half months of Instromedix expense
in the prior year.
GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expense
increased $3.6 million, or 8%, during 1999 compared with 1998. As a percentage
of sales, general and administrative expense increased from 11.2% for 1998 to
11.5% for 1999. This increase is primarily due to a full year of Instromedix
spending in 1999 compared with five and one-half months in the prior year,
increased activity associated with now concluded patent litigation and an
increase in information technology costs for the Company's new domestic
operating system implemented in late 1998. Instromedix added approximately $2.1
million of general and administrative cost in 1999 over 1998, including $1.2
million of intangible asset amortization.
RESEARCH AND DEVELOPMENT EXPENSE. Research and development expense
increased approximately $3.7 million, or 19%, during 1999 primarily due to a
full year of Instromedix spending versus five and one-half months in the prior
year and increased activities associated with the later development stages of
various domestic and international engineering projects for infusion systems,
electronic thermometry and disposable administration sets.
PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT. During 1998, the Company
recorded $28.3 million in purchased in-process research and development
write-offs as a result of certain business acquisitions. In conjunction with the
Instromedix acquisition, the assets and liabilities of Instromedix were adjusted
to their estimated fair values. As a result of this process, the Company
incurred a one-time $22.8 million write-off related to the value assigned to the
acquired in-process research and development of Instromedix projects for which
technological feasibility had not been established and for which there was no
33
alternative future use. Such amount was determined with the assistance of a
third party appraiser based upon the present value of estimated future cash
flow contributions from the identified projects.
During the second quarter of 1998, the Company acquired the net
assets of Patient Solutions, Inc. ("PSI"). PSI was a wholly owned subsidiary
of Invacare Corporation and was focused on the development of an ambulatory
pump for use in the alternate-site market. In connection with the PSI
acquisition and the technology license agreement with Caesarea during the
second quarter of 1998, the Company incurred a one-time $5.5 million
write-off related to the value assigned to the acquired in-process research
and development of the projects for which technological feasibility had not
been established and for which there was no alternative future use. During
the fourth quarter of 1999, as a result of the decision to discontinue work
on the technology acquired from PSI, the Company recorded a charge to
operations of approximately $0.9 million to write-off the remaining assets
acquired from PSI.
Pursuant to the technology license agreement, the Company acquired
certain volumetric infusion pump technology from Caesarea. Caesarea is
conducting research and development on this in-process technology in order to
create a large volume infusion pump marketed primarily to consumers in emerging
international markets. The Company is required to make certain milestone
payments up to an aggregate of $4.0 million to Caesarea upon the attainment of
certain developmental milestones, which primarily relate to different product
releases. During 1999 and 1998, upon reaching such milestones, the Company made
payments to Caesarea of $2.8 million and $0.8 million, respectively, and certain
products using the purchased in-process technology were released during 1999.
INTEGRATION AND OTHER NON-RECURRING CHARGES. Integration and other
non-recurring charges for 1999 includes a third quarter charge of $2.8 million
related to two patent license agreements related to patent infringement lawsuits
(see Note 14 to the accompanying Consolidated Financial Statements).
Also included in 1999 are $4.6 million in integration charges related
to the July 1998 Instromedix acquisition. In connection with the Instromedix
acquisition, management, with the assistance of consultants, performed a review
of the operating activities of the acquired company in order to assess how to
integrate and leverage the Instromedix operations with ALARIS Medical Systems.
As a result of this assessment, in February 1999, the Company announced its
plans to consolidate the operations of Instromedix into its San Diego,
California facilities. In connection with these relocation and integration
activities, the Company incurred $4.6 million in costs, including severance and
related termination benefits of $1.1 million, consulting and retention bonuses
of $0.8 million, personnel relocation costs of $0.9 million, asset dispositions
of $0.5 million, lease termination costs of $0.5 million and $0.8 million in
other related costs. During 1998, the Company incurred $1.9 million in costs
associated with the Instromedix acquisition, primarily in consulting fees and
retention bonuses of $1.6 million and $0.3 million in other related costs.
In connection with fourth quarter management changes and the
development and completion of certain strategic plans for the Company as a
whole, management determined that the estimated future cash flows from the
Instromedix business unit would likely not be sufficient to recover the carrying
value of certain of its intangible assets. As a result, the carrying value of
all remaining goodwill and other intangible assets, except for $14.3 million of
completed technology, were written-off during the fourth quarter resulting in a
pretax charge of $19.2 million ($17.7 million net of taxes). (See Note 9 to the
accompanying Consolidated Financial Statements).
LEASE INTEREST INCOME. Lease interest income during both periods
consists of interest income associated with contracts or agreements pursuant to
which a third party acquired infusion pumps under sales-type leases. Lease
interest income decreased $0.2 million in 1999 compared with 1998 due to a
decrease in the amount outstanding under such leases.
34
INCOME FROM OPERATIONS. Income from operations decreased $4.7
million during 1999 compared with 1998 primarily due to the patent license
agreements charges, the $2.5 million charge to cost of sales resulting from
manufacturing issues related to infusion disposable products, and the
non-recurring Instromedix intangible and integration write-offs which were
partially offset by 1998 non-recurring charges. After excluding the
non-recurring charges from 1999 and 1998, income from operations for 1999 is
$52.7 million compared with $58.5 million in 1998. The decrease in 1999 over
1998 is primarily due to increases in operating expenses discussed above,
which were partially offset by higher gross margin dollars.
ADJUSTED EBITDA. Adjusted EBITDA decreased $7.3 million, or 8%,
during 1999 compared with 1998. As a percentage of sales, Adjusted EBITDA
decreased from 25.0%, or $94.9 million, for 1998 to 21.8%, or $87.6 million,
for 1999 due to the reasons discussed above. Adjusted EBITDA represents
income from operations before restructuring, integration and other
non-recurring, non-cash purchase accounting charges and depreciation and
amortization. Adjusted EBITDA does not represent net income or cash flows
from operations, as these terms are defined under generally accepted
accounting principles, and should not be considered as an alternative to net
income as an indicator of the Company's operating performance or to cash
flows as a measure of liquidity. The Company has included information
concerning Adjusted EBITDA herein because it understands that such
information is used by certain investors as one measure of an issuer's
historical ability to service debt. Integration and other one-time
non-recurring charges are excluded from Adjusted EBITDA as the Company
believes that the inclusion of these items would not be helpful to an
investor's understanding of the Company's ability to service debt. The
Company's computation of Adjusted EBITDA may not be comparable to similar
titled measures of other companies.
INTEREST EXPENSE. Interest expense increased $6.3 million, or 13%,
during 1999 primarily due to additional financing obtained to fund the
Instromedix acquisition. In connection with the Instromedix acquisition, in
July 1998 the Company increased its outstanding bank term debt $30.0 million
and completed the sale of $109.9 million 11 1/8% Senior Discount Notes, due
2008. In 1999 the Company recorded a full year of interest expense for the
additional financing, compared with five and one-half months of interest in
1998. The increase from Senior Discount Notes was partially offset by a
decrease in interest expense on other long-term debt due to a decrease in the
amount outstanding in 1999 compared with 1998, as well as lower interest
expense on the Credit Facility in 1999 compared with 1998. (See Liquidity and
Capital Resources.)
INTEREST INCOME. Interest income increased approximately $0.2
million during 1999 compared with 1998 due to earnings from the remaining
cash proceeds from the Senior Discount Notes which were issued in July 1998
to fund the Instromedix acquisition.
OTHER EXPENSE. Other expense increased $0.5 million during 1999
compared with 1998, primarily due to an increase in foreign exchange loss of
approximately $0.8 million during 1999 compared with 1998.
YEAR ENDED DECEMBER 31, 1998 COMPARED WITH YEAR ENDED DECEMBER 31, 1997
SALES. Sales increased $21.0 million, or 5.9%, during 1998 compared
with 1997. During 1998 compared with 1997, North America sales increased $6.2
million, or 2.5%, while International sales increased $6.4 million, or 5.4%.
Sales generated by Instromedix for 1998 were $8.4 million. The increase in
International sales is primarily due to an increase in volume of drug
infusion instruments and disposable administration sets. The majority of the
Company's international sales are denominated in foreign currency. Due to a
stronger U.S. dollar in 1998 compared with the actual foreign currency
exchange rates in effect during 1997, translation of 1998 international sales
were adversely impacted by $2.8 million. The increase in North America sales
in 1998 compared with 1997 is primarily due to an increase in drug infusion
disposable administration set revenue and patient monitoring instrument
revenues. The increase in drug infusion disposable administration set revenue
is due primarily to an increase in volume of the Company's SmartSite
needle-free system administration sets.
35
GROSS MARGIN. The gross margin percentage increased from 47.5% in
1997 to 49.7% in 1998 due in part to $4.1 million of non-recurring costs
included in 1997 cost of sales. Exclusive of $1.6 million of non-recurring
purchase accounting inventory adjustments and $2.5 million related to a
voluntary recall of certain infusion pumps charged to cost of sales during
1997, the gross margin percentage for 1997 was 48.7%. The improvement over
1997 is due to overall lower warranty costs as well as higher margins on
North America and International disposable administration sets and
instruments due to the benefits realized from ongoing cost reduction programs
and purchasing synergies.
SELLING AND MARKETING EXPENSE. Selling and marketing expenses increased
$6.4 million, or 9.7%, during 1998 compared with 1997. As a percentage of sales,
selling and marketing expenses increased from 18.3% in 1997 to 19.0% in 1998.
North America expenses increased by $1.1 million, or 2.7% in 1998 which is
consistent with the growth in North American sales. International expenses
increased $3.1 million, or 12.4%, from 1997 due to compensation and distribution
costs related to the increase in sales. This increase was also due to investment
in direct operations in Italy and Norway during late 1997 and early 1998,
respectively. In addition, selling and marketing expenses increased $2.2 million
from 1997 to 1998 due to the addition of Instromedix in 1998.
GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expense
increased $3.4 million, or 8.7%, during 1998 compared with 1997. As a percentage
of sales, general and administrative expense increased from 10.9% for 1997 to
11.2% for 1998. North America general and administrative expenses increased $0.5
million, or 1.5%, during 1998 compared to 1997 due to higher compensation
expense and related employee costs, and increased spending for business
development activities in 1998. During 1998 compared with 1997, International
expenses increased by $1.1 million, or 14.4%, as a result of an increase in the
investment in direct operations in Europe. Instromedix added approximately $1.8
million of general and administrative cost in 1998, including $1.0 million of
intangible asset amortization.
RESEARCH AND DEVELOPMENT EXPENSE. Research and development expense
increased approximately $3.2 million, or 18.9%, during 1998 primarily due to
additional research and development related to projects associated with the
recently acquired Instromedix and Patient Solutions, as well as increased
activities associated with the later development stages of various engineering
projects for infusion systems and disposable administration sets.
PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT. During 1998, the Company
recorded $28.3 million in purchased in-process research and development
write-offs as a result of certain business acquisitions. In conjunction with the
Instromedix acquisition, the assets and liabilities of Instromedix were adjusted
to their estimated fair values. As a result of this process, the Company
incurred a one-time $22.8 million write-off related to the value assigned to the
acquired in-process research and development of Instromedix projects for which
technological feasibility had not been established and for which there was no
alternative future use. Such amount was determined with the assistance of a
third party appraiser based upon the present value of estimated future cash flow
contributions from the identified projects.
The Company is using the Instromedix purchased in-process research and
development to create new cardiac disease diagnosis, monitoring and management
products which will become part of the arrhythmia event recorder and LifeSigns
systems product suites over the next several years. The nature of the efforts
required to develop the purchased in-process technology into commercially viable
products principally relate to designing, prototyping, verification and testing
activities that are necessary to establish that the product can be produced to
meet its design specifications, including functions, features and technical
performance requirements. The Company expects to incur a total of approximately
$4.0 million to complete the projects, of which $0.5 million was incurred in
1998 and approximately $2.0 million and $1.5 million are expected to be incurred
during 1999 and 2000, respectively. The Company completed the development and
released the new arrhythmia event recorder during the first quarter of 1999
using the purchased in-process technology. The LifeSigns systems product suite
development is expected to be complete and the product released during 2000. The
Company expects that the purchased in-process research and development for this
36
product will be successfully developed, but there can be no assurance that
commercial viability of the products will be achieved.
During the second quarter of 1998, the Company acquired the net
assets of Patient Solutions, Inc. ("PSI"). PSI was a wholly owned subsidiary
of Invacare Corporation and was focused on the development of an ambulatory
pump for use in the alternate-site market. In connection with the PSI
acquisition and the technology license agreement with Caesarea during the
second quarter of 1998, the Company incurred a one-time $5.5 million
write-off related to the value assigned to the acquired in-process research
and development of the projects for which technological feasibility had not
been established and for which there was no alternative future use.
RESTRUCTURING, INTEGRATION AND OTHER NON-RECURRING CHARGES. In
connection with the Instromedix acquisition, management, with the assistance
of consultants, performed a review of the operating activities of the
acquired company and assessed how to integrate and leverage the Instromedix
operations with ALARIS. During 1998, the Company incurred $1.9 million in
costs associated with this integration, primarily in consulting fees of $1.0
million, retention bonuses of $0.5 million, legal fees of $0.1 million and
$0.3 million in other related costs.
The Company incurred $20.9 million in costs to integrate the IMED
and IVAC operations during 1997. These costs are in addition to restructuring
and integration charges of $15.3 million recorded in the fourth quarter of
1996. The 1997 expense consisted primarily of information systems conversion
costs of $4.8 million, the write-off of a product distribution and license
agreement with a third party developer of an ambulatory and alternate-site
infusion pump of $4.5 million, maquiladora contract dispute settlement and
related costs of $4.1 million (see Note 9 to the Consolidated Financial
Statements), the write-off of drug infusion instrument tooling associated
with the redesign effort on a product in development of $1.7 million,
facilities moving expenses and Company name change costs of $1.6 million,
management consulting fees of $1.4 million, severance of $1.3 million and
other integration costs of $1.5 million. The Company reviewed its products
and related research and development activities and market opportunities in
order to focus on projects that will provide greater competitive advantage
and stockholder return. That review resulted in the termination of the
aforesaid product distribution and license agreement. The $4.5 million charge
related to such termination includes a $4.3 million non-cash charge
representing the write-off of the intangible asset associated with such
agreement.
LEASE INTEREST INCOME. Lease interest income during both periods
consists of interest income associated with contracts or agreements pursuant
to which a third party acquired infusion pumps under sales-type leases. Lease
interest income remained constant from 1997 to 1998.
INCOME FROM OPERATIONS. Income from operations decreased $4.2
million during 1998 compared with 1997 primarily due to non-recurring charges
related to the write-off of $28.3 million in purchased in-process research
and development charges in connection with acquisitions and $1.9 million in
integration and other non-recurring charges related to the Instromedix
acquisition. The 1997 income from operations includes acquisition and
integration charges of charges of $20.9 million in 1997 related to the
IVAC/IMED merger. After excluding such charges from 1997 and 1998, the
adjusted income from operations is $53.4 million in 1997 compared with $58.5
million in 1998. The increase in 1998 over 1997 is due primarily to improved
sales and gross margins.
ADJUSTED EBITDA. Adjusted EBITDA increased $5.7 million, or 6.3%,
during 1998. As a percentage of sales, Adjusted EBITDA increased from 24.9%,
or $89.3 million, for 1997 to 25.0%, or $94.9 million, for 1998 due to the
reasons discussed above. Adjusted EBITDA represents income from operations
before restructuring, integration and other non-recurring charges, non-cash
purchase accounting charges and depreciation and amortization. Adjusted
EBITDA does not represent net income or cash flows from operations, as these
terms are defined under generally accepted accounting principles, and should
not be
37
considered as an alternative to net income as an indicator of the Company's
operating performance or to cash flows as a measure of liquidity. The Company
has included information concerning Adjusted EBITDA herein because it
understands that such information is used by certain investors as one measure
of an issuer's historical ability to service debt. Integration and other
one-time non-recurring charges are excluded from Adjusted EBITDA as the
Company believes that the inclusion of these items would not be helpful to an
investor's understanding of the Company's ability to service debt. The
Company's computation of Adjusted EBITDA may not be comparable to similar
titled measures of other companies.
INTEREST EXPENSE. Interest expense increased $4.2 million, or 9.6%,
during 1998 primarily due to additional financing obtained to fund the
Instromedix acquisition. In connection with the Instromedix acquisition, in
July the Company increased its outstanding bank term debt $30.0 million and
completed the sale of $109.9 million 11 1/8% Senior Discount Notes, due 2008.
In connection with the Merger in 1996, the Company entered into a bank credit
facility consisting of term loans and a revolving credit facility (the
"Credit Facility") which was amended in the first quarter of 1998. As a
result of this amendment, interest expense on the Credit Facility decreased,
partially offsetting the increase in interest expense related to the Senior
Discount Notes. (See Liquidity and Capital Resources.)
INTEREST INCOME. Interest income increased approximately $0.6 million
during 1998 compared with 1997 due to earnings from the remaining cash proceeds
from the Senior Discount Notes which were issued in July 1998 to fund the
Instromedix acquisition.
OTHER INCOME (EXPENSE). Other income decreased $0.4 million during 1998
compared with 1997, partially due to a decrease in foreign exchange loss of
approximately $0.7 million during 1998 compared with 1997.
LIQUIDITY AND CAPITAL RESOURCES
Management currently believes that sufficient cash will be available
through ALARIS Medical Systems, based upon current operations, to satisfy debt
service and other corporate expenses of ALARIS Medical in the foreseeable
future. In November 1996, ALARIS Medical Systems entered into a bank credit
facility consisting of term loans and a revolving credit facility (the "Credit
Facility"). The Credit Facility permits ALARIS Medical Systems to transfer to
ALARIS Medical up to $1.5 million annually to fund ALARIS Medical's operating
expenses and additional amounts sufficient to meet interest payment
requirements.
The Company expects to continue to meet its short-term and long-term
liquidity needs, including capital expenditure requirements with cash flow from
operations of ALARIS Medical Systems. In addition to operating expenses, the
Company's primary future use of funds, on a short-term and long-term basis, will
continue to be fund capital expenditures and to pay debt service on outstanding
indebtedness.
Net cash provided by operating activities for the year ended December
31, 1999 was $51.1 million compared with $24.9 million provided by operating
activities in 1998. Net cash used in investing activities for the year ended
December 31, 1999 and 1998 was $38.0 million and $86.4 million, respectively.
Net cash used in investing activities included $7.8 million in payments related
to patent license agreements in 1999 (see Note 14 to the Condensed Consolidated
Financial Statements), $59.8 million for business acquisitions in 1998 and $25.9
million and $24.6 million in net capital expenditures for the years ended
December 31, 1999 and 1998, respectively. Net cash used by financing activities
for the year ended December 31, 1999 was $18.9 million which was primarily
composed of principal payments on long-term debt. Net cash provided by financing
activities for the year ended December 31, 1998 was $84.0 million which
primarily composed of proceeds from the issuance of notes payable of $109.9
million and proceeds from the term loan borrowing of $30.0 million offset by net
repayments under the revolving credit facility of $25.2 million and principal
payments on long-term debt of $25.3 million.
38
At December 31, 1999, the Company's outstanding indebtedness was
$540.9 million, which includes $195.9 million of bank term debt under the
Credit Facility, $200.0 million of Senior Subordinated Notes due 2006 (the
"Notes"), which were issued in connection with the Merger and $128.3 million
(including accretion) of Senior Discount Notes due 2008 which were issued to
fund the Instromedix acquisition in July 1998. The bank debt bears interest
at floating rates based, at the Company's option, on Eurodollar or prime
rates. During the second quarter of 1997, the Company entered into an
interest rate protection agreement covering approximately 50% of its term
loan borrowings through February 1, 2000. Such agreement fixed the interest
rate charged on such borrowings resulting in a weighted average interest rate
of 9.7% on the Credit Facility borrowings as of December 31, 1999. As a
result of the expiration of the Company's interest rate protection agreement,
all of the Credit Facility borrowings are subject to interest rate risk. A
10% increase (approximately one percentage point) in the applicable interest
rate, would result in a $1.9 million annual increase in interest expense.
Included in total consolidated debt, at December 31, 1999, ALARIS Medical had
outstanding $16.2 million of 7 1/4% Convertible Debentures (the "Convertible
Debentures").
In July 1998, in connection with the Instromedix acquisition, the
Company amended the Credit Facility. The amendment provided for the banks'
consent to the Instromedix acquisition and increased the revolving credit
facility to $60.0 million. The amended Credit Facility also provided the Company
an additional $30.0 million under the Tranche D term debt. The Company used
$30.0 million term debt borrowing, along with approximately $2.0 million from
the revolving credit line, to fund the initial payments required upon closing
the Instromedix acquisition. Subsequent to closing the Instromedix acquisition,
ALARIS Medical completed the sale of $109.9 million of 11-1/8% Senior Discount
Notes, due 2008, receiving net proceeds of approximately $106.3 million.
Interest accruing on these notes is added to the outstanding principal balance
through July 31, 2003. Interest accruing subsequent to July 31, 2003 is payable
in cash semi-annually in arrears on February 1 and August 1, commencing February
1, 2004. Upon receipt of the net proceeds from the Senior Discount Notes, ALARIS
Medical paid its remaining obligations of approximately $22.7 million to the
Instromedix shareholders and contributed the remaining net proceeds of
approximately $81.7 million to ALARIS Medical Systems, as required under the
amended Credit Facility. ALARIS Medical Systems then repaid the amount
outstanding under its revolving credit line.
As a result of the Company's significant indebtedness, the Company
expects to incur significant interest expense in future periods. The Company
believes that its existing cash and cash provided by operations will be
sufficient to meet its interest expense obligations.
Annual principal amortization of the Company's indebtedness is $13.8
million, $22.1 million and $45.1 million for 2000, 2001 and 2002, respectively.
The Convertible Debentures provide for semi-annual interest payments of
approximately $0.6 million and mature on January 15, 2002. The Notes and the
Credit Facility permit ALARIS Medical Systems to fund interest payments on the
Convertible Debentures and to make limited distributions to ALARIS Medical to
fund operating expenses and to pay income taxes; provided that, with respect to
the Credit Facility, there exists no default or event of default under the
Credit Facility. The Credit Facility requires the Company, under most
circumstances, to obtain consent from its bank group to allow ALARIS Medical to
repay the Convertible Debentures at maturity. The Notes allow distributions to
ALARIS Medical to fund the repayment of the Convertible Debentures at maturity
if certain performance measures are met. Although there can be no assurances,
the Company anticipates that its bank group will consent to, and its operating
performance will meet the performance measures required to, repay the
Convertible Debentures at maturity.
During 1999, the Company made cash payments of approximately $4.7
million related to Instromedix integration costs of which approximately $0.8
million was accrued at December 31, 1998. These integration activities
primarily related to the assessment and review of Instromedix operating
activities and strategy. In February 1999, as a result of this assessment,
the Company announced its plans to consolidate the operations of Instromedix
into its San Diego, California facilities. In connection with these
relocation and
39
integration activities, the Company incurred nonrecurring charges of
approximately $4.6 million before related income tax benefits in 1999. Of
this charge, approximately $0.6 million is accrued at December 31, 1999.
During 1998, the Company accrued approximately $1.9 million for integration
costs related to Instromedix and made cash payments of approximately $1.0
million for such accrued Instromedix integration costs. Additionally, during
1998, the Company made cash payments of approximately $1.7 million related to
merger and integration costs accrued at December 31, 1997.
As described in Note 14 to the Consolidated Financial Statements, the
Company has entered into two patent license agreements. In connection with these
agreements, the Company made a payment of $4.0 million during the third quarter
of 1999 and a payment of $6.7 million in the fourth quarter of 1999. No future
payments are required under these agreements.
The Company made capital expenditures of approximately $26.1 million
and $25.1 million during the year ended December 31, 1999 and 1998,
respectively.
The Company believes that, on both a short-term and long-term basis,
based on current levels of performance, it will generate cash flow from
operations, together with its existing cash, sufficient to fund its operations,
make planned capital expenditures and make principal amortization and interest
payments under the Credit Facility and interest payments on the 9 3/4% Notes.
However, on a long-term basis, the Company may not generate sufficient cash flow
from operations to repay the 9 3/4% Notes at maturity in the amount of $200.0
million, to make scheduled payments on the Senior Discount Notes or to repay the
Senior Discount Notes in the amount of $189.0 million at maturity. Accordingly,
the Company may have to refinance the 9 3/4% Notes and the Senior Discount Notes
at or prior to maturity or sell assets or raise equity capital to repay such
debt. Based on current interest rates and debt outstanding as of December 31,
1999, over the next twelve months, the Company is required to make principal and
interest payments under its Credit Facility in the amount of $31.9 million and
interest payments on the 9 3/4% Notes and the Convertible Debentures in the
amount of $19.5 million and $1.2 million, respectively. In addition, the
Company's ability to fund its operations, to make planned capital expenditures
and to make scheduled principal and interest payments will be dependent on the
Company's future operating performance, which is itself dependent on a number of
factors, many of which the Company cannot control, including conditions
affecting the Company's foreign operations, prevailing economic conditions,
availability of other sources of liquidity, and financial, business, regulatory
and other factors affecting the Company's business and operations.
YEAR 2000 RISK
The Year 2000 problem arose from the use of a two-digit field to
identify years in computer programs, e.g., 85=1985, and the assumption of a
single century, the 1900s. The Company developed and implemented a comprehensive
program to address Year 2000 issues pertaining to both information technology
(IT) and non-IT systems. The Company has completed an assessment and it is not
currently aware of any material Year 2000 issues related to third parties,
including suppliers, with whom the Company conducts business or in its non-IT
systems. Due to the Company's inability to control third party, including
supplier, compliance with Year 2000 issues, there can be no assurances that such
Year 2000 issues will not have a material adverse effect on the financial
condition, results of operations or cash flows of the Company.
In addition to routine capital expenditures, and in connection with
prior acquisitions, the Company made significant expenditures for the
acquisition of enterprise-wide information system software and hardware and
the related design, testing and implementation. The manufacturer represented
that the new system is Year 2000 compliant. The Company successfully
converted all of its domestic business processes to the new system by
September 1998. The Company converted its international business unit
headquarters as well as its international manufacturing and central
distribution center to the new system in October of 1999. The balance of the
Company's sales offices will be converted to the new system early in 2000.
The International system is also designed to properly process transactions
denominated in the euro currency.
40
Euro currency is a new monetary unit which certain European countries can
begin using in 1999. As of this date, the Company has not observed any
significant Year 2000-related problems with its information systems.
The Company launched Year 2000 internet websites for its customers that
included a complete list of the Company's electronic medical products, detailed
and updated information regarding the status of the products and other
information regarding the Company's Year 2000 program. Certain of the Company's
products contain software in which the record keeping capabilities are affected
beyond the Year 2000. Products affected by the Year 2000 issue have been
identified and information regarding user interventions and software upgrades
has been provided. The Company believes that these issues will not interfere
with the primary functions of the products involved, nor will they affect the
safety of patients. As of this date, the Company has not observed any
significant Year 2000-related problems interfering with the primary functions of
its products or affecting the safety of patients. However, there can be no
assurance in regard to the foregoing nor can there be any assurance that the
Company will not be subject to legal claims for damages arising from products
that are not Year 2000 compliant.
During the fiscal years 1998, 1997 and 1996 the Company made combined
capital and operating expenditures of approximately $13.9 million related to the
new enterprise-wide information system, and expenditures of $5.1 million for the
year ended December 31, 1999. The significant phases of the project will be
completed in 2000 with anticipated additional expenditures of approximately $0.9
million.
Infusion instrument sales are typically higher in the fourth quarter
due to sales compensation plans which reward the achievement of annual quotas
and the seasonal characteristics of the industry, including hospital purchasing
patterns. First quarter sales are traditionally not as strong as the fourth
quarter. The Company anticipates that this trend will continue but is unable to
predict the effect, if any, from health care reform, increased competitive
pressures and Year 2000 issues. Approximately 34% and 33% of the Company's sales
of drug infusion instruments occurred during the fourth quarters of 1999 and
1998, respectively.
Although the Company has dedicated substantial resources towards
attaining Year 2000 readiness, there is no assurance it has been successful in
its efforts to identify and address all Year 2000 issues. Even if the Company
acted in a timely manner to complete all of its assessments; identify, develop
and implement remediation and contingency plans believed to be adequate some
problems may not have been identified or corrected in time to prevent material
adverse consequences to the Company. The discussion above regarding estimated
completion dates, costs, risks and other forward-looking statements regarding
Year 2000 is based on the Company's best estimates given information that is
currently available and is subject to change. As the Company continues to
progress with its Year 2000 initiatives, it may discover that actual results
will differ materially from these estimates. The information provided above
constitutes a "Year 2000 Readiness Disclosure" for purposes of the Year 2000
Information and Readiness Disclosure Act.
BACKLOG
The backlog of orders, believed to be firm, at December 31, 1999 and
1998 was $8.3 million and $5.8 million, respectively.
FOREIGN OPERATIONS
The Company has significant foreign operations and, as a result, is
subject to various risks, including without limitation, foreign currency
risks. This risk has not materially changed during 1999. The Company has not
entered into foreign currency contracts for purposes of hedging or
speculation. Due to changes in foreign currency exchange rates during 1999
and 1998, primarily a strengthening of the U.S. dollar, the Company's
functional currency, against many European currencies, the Company recognized
a foreign
41
currency transaction loss of approximately $1.1 million and $0.3 million
during 1999 and 1998, respectively. For the year ended December 31, 1999 and
the year ended December 31, 1998, approximately 33% and 32% of the Company's
sales and 24% of the Company's operating expenses were denominated in
currencies other than the Company's functional currency in each year. These
foreign currencies are primarily those of Western Europe, Canada and
Australia. Additionally, substantially all of the receivablesand payables of
the Company's foreign subsidiaries are denominated in currencies other than
the Company's functional currency. As part of a comprehensive approach to
risk management, the Company is presently evaluating alternatives to address
this risk.
HEALTH CARE REFORM
Heightened public awareness and concerns regarding the growth in
overall health care expenditures in the United States may result in the
enactment of legislation affecting payment mechanisms and health care
delivery. Legislation which imposes limits on the number and type of medical
procedures which may be performed or which has the effect of restricting a
provider's ability to select specific devices or products for use in
administrating medical care may adversely impact the demand for the Company's
products. In addition, legislation which imposes restrictions on the price
which may be charged for medical products may adversely affect the Company's
results of operations. It is not possible to predict the extent to which the
Company or the health care industry in general may be adversely affected by
the aforementioned in the future.
FORWARD-LOOKING STATEMENTS
Forward-Looking Statements in this report are made pursuant to the
Safe Harbor Provisions of the Private Securities Litigation Reform Act of
1995. Persons reading this report are cautioned that such forward-looking
statements involve risks and uncertainties, including, without limitation,
the effect of legislative and regulatory changes effecting the health care
industry; the potential of increased levels of competition; technological
changes; the dependence of the Company upon the success of new products and
ongoing research and development efforts; the effect of the Year 2000 risk;
restrictions contained in the instruments governing the Company's
indebtedness; the significant leverage to which the Company is subject; and
other matters referred to in this report.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information is set forth under the subcaption "Liquidity and
Capital Resources" contained under the caption "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included in Item 7.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statements are set forth on pages F-1 through F-40 of
this Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
42
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding Directors is incorporated by reference to the
section entitled "Election of Directors" in the ALARIS Medical, Inc. Proxy
Statement to be filed with the Securities and Exchange Commission in
connection with the Annual Meeting of Stockholders to be held on May 31, 2000
(the "Proxy Statement"). Information regarding Executive Officers is set
forth in Item 1 of Part I of this Report under the caption "Executive
Officers of the Registrant."
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference
in the Company's Proxy Statement under the heading "Executive Compensation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required by this Item is incorporated by reference
in the Company's Proxy Statement under the heading "Security Ownership of
Certain Beneficial Owners and Management."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference
in the Company's Proxy Statement under the heading "Certain Relationships and
Related Transactions."
43
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report.
1. FINANCIAL STATEMENTS:
The following financial statements of ALARIS Medical, Inc. and its
subsidiaries are included on pages F-1 through F-40:
Report of Independent Accountants
Consolidated Balance Sheet at December 31, 1999 and 1998
Consolidated Statement of Operations for the years ended
December 31, 1999, 1998 and 1997
Consolidated Statement of Cash Flows for the years ended
December 31, 1999, 1998 and 1997
Consolidated Statement of Stockholders' Equity for the period from
December 31, 1996 to December 31, 1999
Notes to Consolidated Financial Statements
2. FINANCIAL STATEMENT SCHEDULES:
Schedule II--Valuation and Qualifying Accounts and Reserves for the
three years ended December 31, 1999
Schedule III--Condensed Financial Information of ALARIS Medical, Inc.
as of December 31, 1999 and 1998 and for the three years ended
December 31, 1999.
All other schedules have been omitted because they are inapplicable,
not required or the required information is included in the financial
statements or notes thereto.
3. EXHIBITS:
EXHIBIT NO. DESCRIPTION OF EXHIBIT
----------- ----------------------
1.0 -- Purchase Agreement July 28, 1998 among ALARIS
Medical, Inc., ALARIS Medical Systems, Inc., IVAC
Overseas Holdings, Inc., ALARIS Release Corporation,
Bear, Stearns & Co., Inc., BT Alex. Brown
Incorporated and Donaldson, Lufkin & Jenrette
Securities Corporation. (Incorporated by reference to
the Registration Statement on Form S-4 of ALARIS
Medical, Inc. dated December 24, 1998.)
2.1 -- Agreement and Plan of Merger dated June 24, 1998 by
and among ALARIS Medical, Inc., ALARIS Medical
Systems, Inc., Herbert J. and Shirley L. Semler,
Instromedix, Inc. and the shareholders of
Instromedix, Inc. (Incorporated by reference to
Exhibit 2 (a) to The Company's report on Form 8-K
dated July 30, 1998.)
44
EXHIBIT NO. DESCRIPTION OF EXHIBIT
----------- ----------------------
2.2 -- Agreement to Purchase Selected Assets dated May 18,
1998 among ALARIS Medical Systems, Inc., Invacare
Corporation and Patient Solutions, Inc. (Incorporated
by reference to Exhibit 2.1 (a) to ALARIS Medical's
Form 10-Q for the quarterly period ended June 30,
1998).
3.1 -- Certificate of Incorporation of Advanced Medical,
Inc. and form of Certificate of Incorporation of
Advanced Medical, Inc., as amended. (Incorporated by
reference to Exhibit 3.1(a) to the Prospectus/Joint
Proxy Statement, dated March 3, 1989, of Fidata
Corporation, Advanced Medical, Inc. and Controlled
Therapeutics Corporation included and forming part of
the Registration Statement on Form S-4 of Advanced
Medical, Inc. (the "Prospectus/Joint Proxy
Statement")).
3.2 -- By-Laws of Advanced Medical, Inc., as amended.
(Incorporated by reference to Exhibit 3.1(b) to the
Prospectus/Joint Proxy Statement.)
3.3 -- Amendments to Articles First and Fourth of the
Restated Certificate of Incorporation of Advanced
Medical, Inc. (Incorporated by reference to Exhibits
A and B to Advanced Medical Inc.'s Proxy Statement,
dated August 15, 1990, for its Special Meeting of
Stockholders held on September 7, 1990).
3.4 -- Amendment to Article Fourth of the Restated
Certificate of Incorporation of Advanced Medical,
Inc. (Incorporated by reference to Annex III to
Advanced Medical Inc.'s Proxy Statement, dated July
25, 1994, for its Special Meeting of Stockholders
held on August 11, 1994).
4.1 -- Indenture dated as of November 26, 1996 among IMED
Corporation, IMED International Trading Corp. and
United States Trust Company of New York, as trustee
(including form of Notes) (Incorporated by reference
to Exhibit 10.2 to the AM December 8-K).
4.2 -- Indenture Assumption Agreement dated as of November
26, 1996 between IVAC Holdings, Inc. and United
States Trust Company of New York, as trustee.*
4.3 -- Supplemental Indenture dated as of November 26, 1996
between IVAC Overseas Holdings, Inc. and United
States Trust Company of New York, as trustee.*
4.4 -- Indenture to U.S. Trust Company of California, N.A.,
Trustee, dated January 30, 1992. (Incorporated by
reference to Exhibit 4.26 to the Company's Annual
Report on Form 10-K for the year ended December 31,
1991).
4.5 -- Indenture dated as of July 28, 1998 among ALARIS
Medical, Inc. ALARIS Medical Systems, Inc. and United
States Trust Company of Texas, N.A., as trustee
(including form of Notes). (Incorporated by reference
to the Registration Statement on Form S-4 of ALARIS
Medical, Inc. dated December 24, 1998).
4.6 -- Registration Rights Agreement dated as of July 28,
1998 among ALARIS Medical, Inc., ALARIS Medical
Systems, Inc., IVAC Overseas Holdings, Inc. ALARIS
Release Corporation, Bear, Stearns & Co., Inc., BT
Alex. Brown Incorporated and Donaldson, Lufkin and
Jenrette Securities Corporation. (Incorporated by
reference to the Registration Statement on Form S-4
of ALARIS Medical, Inc. dated December 24, 1998).
10.1 -- Credit Agreement dated as of November 26, 1996 among
Advanced Medical, Inc., IMED Corporation, Various
Lending Institutions, Bankers Trust Company, Banque
Paribas and Donaldson, Lufkin & Jenrette Securities
Corporation (Incorporated by reference to Exhibit
10.1 to the AM December 8-K).
45
EXHIBIT NO. DESCRIPTION OF EXHIBIT
----------- ----------------------
10.2 -- Employment Agreement dated as of August 23, 1996
among William J. Mercer, IMED Corporation and
Advanced Medical, Inc. (Incorporated by reference to
Exhibit 10.4 to the AM December 8-K).
10.3 -- Advanced Medical, Inc.'s Third Amended and Restated
1988 Stock Option Plan (Incorporated by reference to
Annex IV to Advanced Medical, Inc.'s Proxy Statement
dated July 25, 1994 for its Special Meeting of
Stockholders held on August 11, 1994 (the "AM August
1994 Proxy Statement")).
10.4 -- Advanced Medical, Inc.'s Second Amended and Restated
1990 Non-Qualified Stock Option Plan for Non-Employee
Directors (Incorporated by reference to Annex V to
the AM August 1994 Proxy Statement).
10.5 -- Amendment and Waiver No. 1 to Credit Agreement dated
as of March 28, 1997. (Filed as an exhibit to
Amendment No. 2 to the Registration Statement on Form
S-4 (333-18687) of ALARIS Medical Systems, IVAC
Overseas and IMED Trading dated May 28, 1997.)
10.6 -- ALARIS Medical, Inc. 1996 Stock Option Plan
(Incorporated by reference to Exhibit A to ALARIS
Medical, Inc.'s Proxy Statement dated May 5, 1997 for
its Annual Meeting of Stockholders (the "ALARIS Proxy
Statement")).
10.7 -- ALARIS Medical, Inc. Third Amended and Restated 1990
Non-Qualified Stock Option Plan for Non-Employee
Directors (Incorporated by reference to Exhibit B to
the ALARIS Proxy Statement).
10.8 -- Amendment No.2 to Credit Agreement dated as of August
12, 1997. (Filed as an exhibit to Amendment No. 6 to
the Registration Statement on Form S-4 (333-18687) of
ALARIS Medical Systems, IVAC Overseas and IMED
Trading dated August 19, 1997.)
10.9 -- Amendment No. 3 and Consent to the Bank Credit
Agreement dated as of March 4, 1998. (Incorporated by
reference to Exhibit 10.1 to the Company's Report on
Form 10-Q for the quarter ended March 31, 1998).
10.10 -- Agreement dated May 7, 1998 among ALARIS Medical
Systems, Inc. and Caesarea Medical Electronics
Limited. (Incorporated by reference to Exhibit
10.1(a) to the Company's Report on Form 10-Q for the
quarter ended June 30, 1998).
10.11 -- Amendment No. 4 and Consent to the Bank Credit
Agreement dated as of July 7, 1998. (Incorporated by
reference to Exhibit 10.1 to the Company's Report on
Form 10-Q for the quarter ended March 31, 1998).
10.12 -- Settlement and license agreement by and among Tyco
Healthcare Group, L.P. and ALARIS Medical Systems,
Inc. dated August 31, 1999.
10.13 -- Settlement and license agreement by and among Becton,
Dickinson and Company and ALARIS Medical Systems,
Inc. dated October 13, 1999.
10.14 -- Amendment No. 5 to the Bank Credit Agreement dated as
of October 29, 1999, among ALARIS Medical, Inc.,
ALARIS Medical Systems, Inc., the financial
institutions party to the Credit Agreement, Bankers
Trust Company and Banque Paribas.
10.15 -- Amendment No. 6 to the Bank Credit Agreement dated as
of February 11, 2000, among ALARIS Medical, Inc.,
ALARIS Medical Systems, Inc., the financial
institutions party to the Credit Agreement, Bankers
Trust Company and Banque Paribas.
46
EXHIBIT NO. DESCRIPTION OF EXHIBIT
----------- ----------------------
10.16 -- Addendum to Employment Letter dated April 13, 1999 by
and between David Schlotterbeck and ALARIS Medical,
Inc., and ALARIS Medical Systems, Inc.
21 -- List of Subsidiaries of ALARIS Medical, Inc.
23 -- Consent of PricewaterhouseCoopers LLP.
27 -- Financial Data Schedule.
- --------------------------
* Filed as an exhibit to the Registration Statement on Form S-4 (333-18687)
of the Company, IVAC Overseas Holdings, Inc. and IMED International Trading
Corp. dated December 24, 1996.
(b) Report on Form 8-K.
None.
47
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of San
Diego, State of California, on March 13, 2000.
ALARIS MEDICAL, INC.
By: /s/ DAVID L. SCHLOTTERBECK
----------------------------------------------------
Name: David L. Schlotterbeck
Title: President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
NAME TITLE(S)
---- --------
/s/ JEFFRY M. PICOWER Director and Chairman of the Board
- -------------------------------------
Jeffry M. Picower
/s/ DAVID L. SCHLOTTERBECK Director, President and Chief Executive Officer
- -------------------------------------
David L. Schlotterbeck
/s/ WILLIAM C. BOPP Sr. Vice President and Chief Financial Officer
- ------------------------------------- (Principal Financial and Accounting Officer)
William C. Bopp
/s/ NORMAN M. DEAN Director
- -------------------------------------
Norman M. Dean
/s/ HENRY GREEN Director
- -------------------------------------
Henry Green
/s/ RICHARD B. KELSKY Director
- -------------------------------------
Richard B. Kelsky
48
ALARIS MEDICAL, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
1. FINANCIAL STATEMENTS:
PAGE
----
Report of Independent Accountants.......................................................... F-2
Consolidated Balance Sheet at December 31, 1999 and 1998................................... F-3
Consolidated Statement of Operations for the years ended December 31, 1999,
1998 and 1997........................................................................... F-4
Consolidated Statement of Cash Flows for the years ended December 31, 1999,
1998 and 1997........................................................................... F-5
Consolidated Statement of Stockholders' Equity for the period from
December 31, 1996 to December 31, 1999.................................................. F-6
Notes to Consolidated Financial Statements................................................. F-7
2. FINANCIAL STATEMENT SCHEDULES:
Schedule II--Valuation and Qualifying Accounts and Reserves for the
three years ended December 31, 1999.....................................................F-36
Schedule III--Condensed Financial Information of ALARIS Medical, Inc.
as of December 31, 1999 and 1998 and for the three years ended
December 31, 1999.......................................................................F-37
F-1
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
ALARIS Medical, Inc.
In our opinion, the consolidated financial statements listed in the
index appearing under Item 14(a)(1) on page 44 present fairly, in all material
respects, the financial position of ALARIS Medical, Inc. and its subsidiaries at
December 31, 1999 and 1998, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1999 in
conformity with accounting principles generally accepted in the United States.
In addition, in our opinion, the financial statement schedules listed in the
index appearing under Item 14(a)(2) on page 44 present fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements. These financial statements and
financial statement schedules are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements and financial statement schedules based on our audits. We conducted
our audits of these statements in accordance with auditing standards generally
accepted in the United States, which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
San Diego, California
February 18, 2000
F-2
ALARIS MEDICAL, INC
CONSOLIDATED BALANCE SHEET
(DOLLAR AND SHARE AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
ASSETS
DECEMBER 31,
1999 1998
---------- ----------
Current assets:
Cash.................................................................................. $ 23,559 $ 29,500
Receivables, net...................................................................... 84,889 102,295
Inventories........................................................................... 76,769 79,485
Prepaid expenses and other current assets............................................. 25,086 25,246
---------- ----------
Total current assets.............................................................. 210,303 236,526
Net investment in sales-type leases, less current portion................................. 24,407 19,111
Property, plant and equipment, net........................................................ 68,480 61,990
Other non-current assets.................................................................. 28,157 22,388
Intangible assets, net.................................................................... 275,443 311,018
---------- ----------
$ 606,790 $ 651,033
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt..................................................... $ 13,769 $ 15,423
Accounts payable...................................................................... 25,169 22,103
Accrued expenses and other current liabilities........................................ 44,606 52,340
---------- ----------
Total current liabilities......................................................... 83,544 89,866
---------- ----------
Long-term debt............................................................................ 527,082 530,867
Other non-current liabilities............................................................. 17,115 21,931
---------- ----------
Total non-current liabilities..................................................... 544,197 552,798
---------- ----------
Contingent liabilities and commitments (Notes 8 and 14)
Stockholders' equity:
Common stock, authorized 75,000 shares at $.01 par value; issued and
outstanding - 59,295 and 59,221 shares at
December 31, 1999 and 1998, respectively........................................... 593 592
Capital in excess of par value........................................................ 148,991 148,762
Accumulated deficit................................................................... (164,195) (135,769)
Treasury stock........................................................................ (2,027) (2,027)
Accumulated other comprehensive loss.................................................. (4,313) (3,189)
---------- ----------
Total stockholders' (deficit) equity.............................................. (20,951) 8,369
---------- ----------
$ 606,790 $ 651,033
========== ==========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED
FINANCIAL STATEMENTS.
F-3
ALARIS MEDICAL, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31,
-----------------------------------------
1999 1998 1997
----------- ---------- ----------
Sales ..................................................................... $ 401,978 $ 380,068 $ 359,077
Cost of sales................................................................ 208,739 191,232 188,340
----------- ---------- ----------
Gross margin............................................................. 193,239 188,836 170,737
----------- ---------- ----------
Selling and marketing expenses............................................... 77,510 72,202 65,797
General and administrative expenses.......................................... 46,228 42,654 39,231
Research and development expenses............................................ 23,769 20,059 16,876
Purchased in-process research and development................................ - 28,334 -
Restructuring, integration and other non-recurring charges................... 26,589 1,901 20,902
----------- ---------- ----------
Total operating expenses................................................. 174,096 165,150 142,806
----------- ---------- ----------
Lease interest income........................................................ 4,425 4,599 4,559
----------- ---------- ----------
Income from operations................................................... 23,568 28,285 32,490
Other income (expenses):
Interest income............................................................ 1,377 1,134 532
Interest expense........................................................... (54,922) (48,658) (44,413)
Other, net................................................................. (1,649) (1,100) (1,535)
----------- ---------- ----------
Total other expense...................................................... (55,194) (48,624) (45,416)
----------- ---------- ----------
Loss before income taxes..................................................... (31,626) (20,339) (12,926)
(Benefit from) provision for income taxes.................................... (3,200) 4,100 (3,300)
----------- ---------- ----------
Net loss .................................................................... (28,426) (24,439) (9,626)
----------- ---------- ----------
Net loss attributable to common stock........................................ $ (28,426) $ (24,439) $ (9,626)
=========== ========== ==========
Loss per common share assuming no dilution:
Net loss per common share assuming no dilution....................... $ (.48) $ (.42) $ (.16)
=========== ========== ==========
Loss per common share assuming dilution:
Net loss per common share assuming dilution.......................... $ (.48) $ (.42) $ (.16)
=========== ========== ==========
Weighted average common shares outstanding assuming no dilution.............. 58,815 58,710 58,644
=========== ========== ==========
Weighted average common shares outstanding assuming dilution................. 58,815 58,710 58,644
=========== ========== ==========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED
FINANCIAL STATEMENTS.
F-4
ALARIS MEDICAL, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31,
--------------------------------------
1999 1998 1997
---------- ---------- ---------
Cash flows from operating activities:
Net loss ...................................................................... $ (28,426) $ (24,439) $ (9,626)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization................................................ 37,453 36,148 34,288
Net loss on disposal/write-off of property, plant and equipment
and intangible assets....................................................... 20,990 824 6,735
Debt discount and issue costs amortization................................... 3,324 3,199 3,125
Accretion of bond interest................................................... 13,159 5,201 -
Purchased in-process research and development................................ - 28,334 -
Inventory purchase price allocation adjustment............................... - 274 1,607
(Increase) decrease in assets:
Receivables................................................................. 17,306 (14,959) 1,509
Inventories................................................................. 2,616 (13,763) (4,681)
Prepaid expenses and other current assets................................... 93 (1,141) (1,773)
Net investment in sales-type leases, non-current portion.................... (5,296) 11,293 (3,128)
Other non-current assets.................................................... (633) (3,023) 698
Increase (decrease) in liabilities:
Accounts payable............................................................ 2,966 (3,294) (1,548)
Accrued expenses, restructuring and integration costs and other current
liabilities................................................................ (7,675) (1,944) (11,305)
Other non-current liabilities............................................... (4,814) 2,161 (5,622)
---------- ---------- ---------
Net cash provided by operating activities........................................ 51,063 24,871 10,279
---------- ---------- ---------
Cash flows from investing activities:
Capital expenditures........................................................... (26,070) (25,055) (19,843)
Patents, trademarks and other.................................................. (1,114) (1,221) (526)
Payments for product licenses and distribution rights.......................... (10,941) (750) -
Proceeds from disposal of property, plant and equipment........................ 157 451 89
Acquisition of business, net of cash acquired (Note 2)......................... - (59,842) -
Net decrease in restricted cash and investments................................ - - 2,332
Return of capital investment................................................... - - 148
---------- ---------- ---------
Net cash used in investing activities............................................ (37,968) (86,417) (17,800)
---------- ---------- ---------
Cash flows from financing activities:
Principal payments on long-term debt and capital lease obligations............. (19,096) (20,437) (4,248)
Proceeds from issuance of notes payable and long-term debt..................... - 109,892 -
Principal payments on acquired debt............................................ - (4,822) -
Proceeds from revolving credit facility........................................ - 34,800 34,300
Repayments of revolving credit facility........................................ - (60,000) (24,300)
Proceeds from term loan borrowing.............................................. - 30,000 -
Proceeds from exercise of stock options........................................ 198 275 241
Debt issuance costs............................................................ - (5,682) (919)
Repurchase of common stock..................................................... - - (1,293)
---------- ---------- ---------
Net cash (used in) provided by financing activities.............................. (18,898) 84,026 3,781
---------- ---------- ---------
Effect of exchange rate changes on cash.......................................... (138) 36 (1,360)
---------- ---------- ---------
Net (decrease) increase in cash ................................................. (5,941) 22,516 (5,100)
Cash at beginning of year........................................................ 29,500 6,984 12,084
---------- ---------- ---------
Cash at end of year.............................................................. $ 23,559 $ 29,500 $ 6,984
========== ========== =========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED
FINANCIAL STATEMENTS.
F-5
ALARIS MEDICAL, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(DOLLAR AND SHARE AMOUNTS IN THOUSANDS)
ACCUMULATED
OTHER OTHER
COMPRE- COMPRE-
CAPITAL IN HENSIVE HENSIVE
COMMON STOCK EXCESS OF ACCUMULATED TREASURY STOCK INCOME INCOME
SHARES AMOUNT PAR VALUE DEFICIT SHARES AMOUNT (LOSS) TOTAL (LOSS)
------ ------ --------- ---------- ------ ------ ------ --------- --------
Balance at December 31, 1996....... 58,977 $ 589 $ 147,840 $ (101,704) 83 $ (734) $ 62 $ 46,053
Comprehensive loss
Net loss for the year........... (9,626) (9,626) $ (9,626)
Equity adjustment from foreign
currency translation........... (3,688) (3,688) (3,688)
--------
Comprehensive loss................. $(13,314)
========
Exercise of stock options.......... 125 2 239 241
Tax benefit from exercise of
stock options................... 262 262
Purchase of treasury stock......... 370 (1,293) (1,293)
------ ------ --------- ---------- ------ ------ ------ --------
Balance at December 31, 1997....... 59,102 591 148,341 (111,330) 453 (2,027) (3,626) 31,949
Comprehensive loss
Net loss for the year........... (24,439) (24,439) $(24,439)
Equity adjustment from foreign
currency translation........... 437 437 437
--------
Comprehensive loss................. $(24,002)
========
Exercise of stock options.......... 119 1 274 275
Tax benefit from exercise of
stock options................... 147 147
------ ------ --------- ---------- ------ ------- ------- --------
Balance at December 31, 1998....... 59,221 592 148,762 (135,769) 453 (2,027) (3,189) 8,369
Comprehensive loss
Net loss for the year........... (28,426) (28,426) $(28,426)
Equity adjustment from foreign
currency translation........... (1,124) (1,124) (1,124)
--------
Comprehensive loss................. $(29,550)
========
Exercise of stock options.......... 74 1 197 198
Tax benefit from exercise of
stock options................... 32 32
------ ------ --------- ---------- ------ ------- ------- --------
Balance at December 31, 1999....... 59,295 $ 593 $ 148,991 $ (164,195) 453 $(2,027) $(4,313) $(20,951)
====== ====== ========= ========== ====== ======= ======= ========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED
FINANCIAL STATEMENTS.
F-6
ALARIS MEDICAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 1 - BUSINESS, ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY:
ALARIS Medical, Inc. ("ALARIS Medical"), operating through its
consolidated subsidiaries, designs, manufactures, distributes and services
intravenous infusion therapy and patient monitoring instruments and related
disposables and accessories, as well as telemedicine, cardiovascular and
pacemaker monitoring equipment. ALARIS Medical was formed by the merger of two
pioneers in infusion systems, IMED Corporation ("IMED") and IVAC Medical
Systems, Inc. ("IVAC"), on November 26, 1996. ALARIS Medical (formerly Advanced
Medical, Inc.) was incorporated on September 28, 1988 under the laws of the
State of Delaware. The acquisition was accounted for as a purchase. ALARIS
Medical and its subsidiaries are collectively referred to as the "Company."
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
CONSOLIDATION:
The financial statements include the accounts of ALARIS Medical and its
greater than 50 percent-owned subsidiaries. All intercompany accounts and
transactions have been eliminated in consolidation.
USE OF ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
REVENUE RECOGNITION:
Revenue is recorded upon product shipment, net of an allowance for
estimated returns. Service revenue is recognized when services are rendered.
Additionally, the Company leases instruments to customers under non-cancelable
sales-type capital leases and operating lease contracts with terms ranging
generally from 1 to 6 years. The Company sells instruments via long-term
financing arrangements to a number of customers under agreements which allow
customers to acquire instruments with no initial payment. The sales price for
the instruments is recovered via surcharges applied to minimum purchase
commitments of related disposables. The term of the financing is generally three
to five years, with interest at rates of 9% to 15%. Unearned finance revenue is
calculated using the inherent rate of interest on each agreement, the expected
disposable shipment period and the principal balance financed and is recognized
as disposables are shipped using a reducing principal balance method which
approximates the interest method. Contract provisions include liquidated damage
clauses which are sufficient to recover the sales price of the instruments in
the event of customer cancellation.
CONCENTRATIONS OF CREDIT RISK:
The Company provides a variety of financing arrangements for its
customers. The majority of the Company's accounts receivable are from hospitals
throughout the United States and Europe with credit terms
F-7
ALARIS MEDICAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 1 - BUSINESS, ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
of generally 30 days. The Company maintains adequate reserves for potential
credit losses and such losses have been within management's estimates.
INVENTORIES:
Inventories are stated at the lower of cost, determined by the
first-in, first-out (FIFO) method, or market.
PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment is stated at cost. The Company
capitalizes costs of computer software developed or obtained for internal use.
Capitalization begins when it is probable that the project will be completed,
funding for the project has been committed and the project conceptual
formulation and design is complete. Capitalization ceases when the project is
substantially complete and ready for use. Depreciation and amortization is
provided using the straight-line method based upon the following estimated
useful lives of the assets or lease terms, if shorter, for leasehold
improvements, capitalized software, capital leases and instrument operating
leases:
Building and leasehold improvements................................... 3 to 10 years
Machinery and equipment............................................... 3 to 10 years
Information technology................................................ 3 to 10 years
Furniture and fixtures................................................ 4 to 10 years
Instruments on operating lease contracts.............................. 1 to 8 years
Capital leases........................................................ 3 to 5 years
CAPITALIZED PATENT AND TRADEMARK COSTS:
The Company capitalizes patent issuance cost and trademark registration
costs. These costs are amortized using the straight line method over seven
years, the estimated period of benefit. At December 31, 1999 and 1998, the
unamortized capitalized patent costs are $2,146 and $1,336, respectively.
INTANGIBLE ASSETS:
The Company has recorded goodwill for the excess purchase price over
the estimated fair values of tangible and intangible assets acquired and
liabilities assumed resulting from acquisitions. The excess purchase price over
the estimated fair value of the net assets acquired has been assigned to
goodwill. Additionally, the Company has recorded intangible assets related to
purchases of patents, completed technology and product distribution rights.
F-8
ALARIS MEDICAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 1 - BUSINESS, ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
Intangible assets are amortized as follows:
Patents............................................. Straight-line 12 years (weighted average)
Workforce........................................... Straight-line 14 years
Product licensing and distribution fee.............. Straight-line 15-18 years
Trademarks.......................................... Straight-line 30 years
Goodwill............................................ Straight-line 30-35 years
IMPAIRMENT OF LONG-LIVED ASSETS:
The Company assesses potential impairments of long-lived assets and
certain identifiable intangibles including goodwill, on an exception basis, when
there is evidence that events or changes in circumstances may have made recovery
of an asset's carrying value unlikely. An impairment loss is recognized when the
sum of the expected, undiscounted future net cash flows is less than the
carrying amount of the asset.
DEBT ISSUE COSTS:
Debt issue costs aggregating $15,178 and $18,468 at December 31, 1999
and 1998, respectively, are amortized using the interest method, or
straight-line when the results are not materially different from the interest
method, over the respective terms of the debt agreements and are included in
other non-current assets.
FOREIGN CURRENCY TRANSLATION:
The accounts of foreign subsidiaries which use local currencies as
functional currencies are translated into U.S. dollars using year-end exchange
rates for assets and liabilities, historical exchange rates for equity and
weighted average exchange rates during the period for revenues and expenses. The
gains or losses resulting from translations are excluded from results of
operations and accumulated as a separate component of other comprehensive income
(loss).
RESEARCH AND DEVELOPMENT COSTS:
Research and development costs are expensed as incurred.
SOFTWARE PRODUCTION COSTS:
Some of the Company's products include embedded software which is
essential to the products' functionality. The Company capitalizes software
production costs when the project reaches technological feasibility and ceases
capitalization when the project is ready for release. Software production costs
are amortized using the straight-line method over a maximum of ten years or the
expected life of the product, whichever is less. Amortization will begin when
the product is available for general release to the customer. Unamortized
capitalized software costs at December 31, 1999 and 1998 were $630 and $0,
respectively.
F-9
ALARIS MEDICAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 1 - BUSINESS, ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS:
The carrying amount of the Company's financial instruments, including
cash, trade receivables and payables, approximates their fair value due to their
short-term maturities. The fair values of the Company's long-term lease
receivables are estimated by discounting future cash flows using discount rates
that reflect the risk associated with similar types of loans. The fair value of
the Company's long-term debt is estimated based on comparison with similar
issues or current rates offered to the Company for debt of the same remaining
maturities and the quoted market price for the debentures. The estimated fair
values of both the Company's long-term lease receivables and long-term bank debt
approximate their carrying values. The carrying values and fair values of the
Company's debentures at December 31, 1999 and 1998, were as follows:
DECEMBER 31, 1999 DECEMBER 31, 1998
------------------------- --------------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
----------- ----------- ----------- -----------
Debentures:
7.25% convertible subordinated notes due 2002 ............ $ 16,152 $ 8,000 $ 16,152 $ 14,000
9.75% senior subordinated notes due 2006.................. 200,000 172,000 200,000 203,000
11.125% Senior Discount Notes due 2008.................... 128,252 77,000 115,092 103,000
INCOME TAXES:
The Company and its domestic subsidiaries file a consolidated Federal
income tax return. Domestic subsidiaries file income tax returns in multiple
states on either a stand-alone or combined basis. Foreign subsidiaries file
income tax returns in their respective local jurisdictions.
The Company recognizes deferred tax assets and liabilities based on the
expected future tax consequences of events that have been included in the
financial statements and tax returns in different periods. Under this method,
deferred tax liabilities and assets are determined based on the difference
between the financial statement and tax bases of assets and liabilities using
enacted tax rates in effect for the year in which the differences are expected
to reverse. The Company provides a reserve against its net deferred assets when,
in the opinion of management, it is more likely than not that such assets will
not be realized.
STOCK-BASED COMPENSATION:
The Company measures compensation expense for its stock-based employee
compensation plans using the intrinsic value method and provides pro forma
disclosures of net income (loss) per share as if the fair value-based method had
been applied in measuring compensation expense.
NET INCOME (LOSS) PER COMMON SHARE:
The Company's net income (loss) per common share assuming no dilution
is computed using the weighted average number of common shares outstanding. The
Company's net income (loss) per common share assuming dilution is computed using
the weighted average number of common shares outstanding plus dilutive potential
common shares using the treasury stock method at the average market price during
the reporting period (Note 10).
F-10
ALARIS MEDICAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 1 - BUSINESS, ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
RECLASSIFICATIONS:
Certain prior year amounts have been reclassified to conform to the
current year presentation.
SEGMENT INFORMATION:
In 1998, the Company adopted Statement of Financial Accounting
Standards No. 131 ("FAS 131"), "Disclosures about Segments of an Enterprise and
Related Information." FAS 131 supersedes FAS 14, "Financial Reporting for
Segments of a Business Enterprise," replacing the "industry segment" approach
with the "management" approach. The management approach designates the internal
organization that is used by management for making operating decisions and
assessing performance as the source of the Company's reportable segments. FAS
131 also requires disclosures about products and services, geographic areas, and
major customers. The adoption of FAS 131 does not affect results of operations
or financial position but did affect the disclosure of segment information (Note
12).
COMPREHENSIVE INCOME:
In addition to net income, the Company reports comprehensive income and
its components including foreign currency translation items and unrealized gains
from securities available for sale currently recorded to stockholders' equity.
Comprehensive income is displayed in the Consolidated Statement of Stockholders'
Equity and includes items not currently included in net income.
Comprehensive income does not have an impact on the Company's results of
operations.
DERIVATIVES:
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133 "Accounting for Derivative Instruments
and Hedging Activities" ("FAS 133") which the Company is required to adopt
January 1, 2001. This statement will require the Company to record all
derivatives on the balance sheet at fair value, and to record most changes to
the value of derivatives in income as the change occurs. Upon adoption of FAS
133 all existing derivatives must be recognized on the balance sheet at fair
value. FAS 133 also has extensive disclosure requirements. The adoption of FAS
133 is not expected to have a material impact on the financial position and
results of operations of the Company.
NOTE 2 -- ACQUISITIONS AND LICENSES
On July 17, 1998, pursuant to an agreement with ALARIS Medical, ALARIS
Medical Systems, Instromedix ("Instromedix") and its shareholders dated June 24,
1998, ALARIS Medical Systems acquired all of the outstanding common stock of
Instromedix and subsequently merged Instromedix with and into itself. The total
consideration for the Instromedix acquisition included approximately (i) $51,000
in cash, subject to certain adjustments, (ii) the assumption of indebtedness of
Instromedix of approximately $5,500 and (iii) the payment of certain seller
transaction expenses in the amount of $1,000. The acquisition payment was funded
with $30,000 of ALARIS Medical Systems' bank term debt and proceeds from an
ALARIS Medical debt offering. On July 28, 1998, ALARIS Medical completed the
sale of $109,892 of 11-1/8% Senior Discount Notes (the "Senior Discount Notes"),
due 2008, receiving net proceeds of $106,321.
F-11
ALARIS MEDICAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 2 -- ACQUISITIONS AND LICENSES (CONTINUED)
A portion of the net proceeds of the sale of the notes was also used to repay
certain borrowings under a bank credit facility.
The acquisition was accounted for as a purchase, whereby the purchase
price, including related expenses, was allocated to identified assets and
liabilities, based upon their respective fair values. The allocation included
acquired in-process research and development of $22,800, which was immediately
written-off, and other identifiable intangible assets of $21,130, which were
being amortized over their estimated weighted-average useful lives of ten years.
The other identifiable intangible assets of $21,130 included: completed
technology of $16,700, representing current product technology as opposed to
product under development; customer base of $3,390, representing the value of
existing customer accounts; assembled workforce of $770, representing core
engineers, sales and technical service forces and executives; and trademarks of
$270. The excess of the purchase price over the value of identified assets and
liabilities, in the amount of $18,012, was recorded as goodwill and was being
amortized over its estimated life of ten years. In the fourth quarter of 1999,
the Company wrote-off the remaining carrying value of the Instromedix goodwill
and certain other Instromedix intangible assets. (See Note 9.)
The Company is using the Instromedix purchased in-process research and
development to create new cardiac disease diagnosis, monitoring and management
products which will become part of the arrhythmia event recorders and LifeSigns
system product suites over the next several years. The nature of the efforts
required to develop the purchased in-process technology into commercially viable
products principally relate to designing, prototyping, verification and testing
activities that are necessary to establish that the product can be produced to
meet its design specifications, including functions, features and technical
performance requirements. The Company expects to incur a total of approximately
$4,000 to complete the projects, of which approximately $600 and $500 was
incurred in 1999 and 1998, respectively, and approximately $900 and $2,000 are
expected to be incurred during 2000 and 2001, respectively. The Company
completed the development and released the arrhythmia event recorder during the
first quarter of 1999, using the purchased in-process technology. The LifeSigns
system product suite development is expected to be complete and the product
released during 2001. The Company expects that the purchased in-process research
and development will be successfully developed, but there can be no assurance
that commercial viability of the products will be achieved.
In 1998, the Securities and Exchange Commission (the "SEC") issued a
letter to the American Institute of Certified Public Accountants SEC Regulations
Committee encouraging them to develop additional guidelines in determining
in-process research and development ("IPR&D") charges related to acquisitions
accounted for under the purchase method of accounting. The SEC also indicated
its suggested practices in determining such charges. Prior to this letter, the
Company had completed its accounting for the Instromedix acquisition on a basis
consistent with that used for acquisitions in prior years and included the
aforementioned $22,800 IPR&D charge in its third quarter 1998 operating results.
The Company utilized the services of a third-party valuation firm in order to
determine the appropriate allocation of the Instromedix purchase price to the
acquired identifiable intangible assets. The Company's third quarter operating
results were included in the Company's Amended Form S-4 Registration Statement
filed with the SEC during the fourth quarter of 1998. Such registration
statement was reviewed by the SEC and declared effective in January 1999. The
Company believes that a significant portion of the Instromedix value was related
to technology under development at the time the transaction was consummated and
is consistent with the economic substance from the buyer's perspective. As a
result, the Company elected not to retroactively apply different valuation
methods to its determination of the Instromedix acquired IPR&D. However,
F-12
ALARIS MEDICAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 2 -- ACQUISITIONS AND LICENSES (CONTINUED)
although the SEC previously reviewed the Company's 1998 third quarter operating
results, made inquiries into the accounting for the Instromedix acquisition and
requested and was provided the underlying appraisal, there can be no assurance
that the SEC will not require the Company to utilize different valuation methods
and retroactively apply such results.
During the second quarter of 1998, the Company acquired the net assets
of Patient Solutions, Inc. ("PSI") for $5,250. PSI was a wholly owned subsidiary
of Invacare Corporation and was focused on the development of an ambulatory pump
for use in the alternate-site market. The transaction was accounted for as a
purchase with the net assets acquired recorded at their estimated fair values.
The rights to the pump under development were valued at $4,421 and were recorded
as a non-recurring charge included in purchased in-process research and
development. The nature of the efforts required to develop the purchased
in-process technology into a commercially viable product principally relate to
designing, prototyping, verification and testing activities that are necessary
to establish that the product can be produced to meet its design specifications,
including functions, features and technical performance requirements. During the
fourth quarter of 1999, the Company discontinued development of the product and
recorded a charge to operations of approximately $900 to write-off the remaining
assets acquired from PSI.
Also during the second quarter of 1998, the Company licensed technology
from Caesarea Medical Electronics Limited ("Caesarea") for a pole mounted
volumetric infusion pump being designed for developing international markets. At
the time of license, the development of the applications and functionality
required by the Company had not reached technological feasibility and no
alternative uses were identified. As a result, the initial license payment and
related expenses of approximately $1,200 were recorded as purchased in-process
research and development during the second quarter of 1998. Under the terms of
the license agreement, the Company is obligated to pay additional consideration
up to an aggregate of $4,000 to Caesarea upon timely completion of certain
development milestones, which primarily relate to different product releases. In
December 1998, upon completion of the first milestone, the Company paid $750 to
Caesarea. During 1999, upon completion of additional milestones, the Company
made payments of $2,750. Due to the completed technology obtained at each
milestone, the Company capitalized such payments and plans to capitalize future
license fees and amortize such costs over the eighteen year license period.
Products using the purchased in-process technology were released during 1999 and
the Company anticipates that additional releases will take place in 2000.
F-13
ALARIS MEDICAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 3 - COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS
DECEMBER 31,
-------------------------
1999 1998
---------- ----------
RECEIVABLES:
Trade receivables................................................................... $ 77,813 $ 88,493
Allowance for doubtful accounts..................................................... (3,119) (2,946)
---------- ----------
74,694 85,547
Current portion of net investment in sales-type leases (Note 8)..................... 10,195 16,748
---------- ----------
$ 84,889 $ 102,295
========== ==========
INVENTORIES:
Raw materials....................................................................... $ 34,960 $ 35,024
Work-in-process..................................................................... 6,156 5,719
Finished goods...................................................................... 35,653 38,742
---------- ----------
$ 76,769 $ 79,485
========== ==========
PREPAID EXPENSES AND OTHER CURRENT ASSETS:
Deferred income tax asset........................................................... $ 21,671 $ 20,757
Other............................................................................... 3,415 4,489
---------- ----------
$ 25,086 $ 25,246
========== ==========
PROPERTY, PLANT AND EQUIPMENT:
Land................................................................................ $ 640 $ 640
Building and leasehold improvements................................................. 16,628 14,799
Machinery and equipment............................................................. 46,447 39,464
Information technology.............................................................. 26,490 18,537
Furniture and fixtures.............................................................. 7,157 5,786
Instruments under operating lease contracts......................................... 25,629 22,683
Construction-in-process............................................................. 8,038 10,511
---------- ----------
131,029 112,420
Accumulated depreciation and amortization........................................... (62,549) (50,430)
---------- ----------
$ 68,480 $ 61,990
========== ==========
Depreciation expense was $17,788, $18,906 and $17,417 for 1999, 1998
and 1997, respectively, including $1,023, $300 and $0 of depreciation on
capitalized computer software in 1999, 1998 and 1997, respectively.
DECEMBER 31,
-------------------------
1999 1998
---------- ----------
OTHER NON-CURRENT ASSETS:
Capitalized patent issuance and trademark registration costs........................ $ 2,146 $ 1,336
Patent license agreements........................................................... 7,618 -
Debt issue costs.................................................................... 15,178 18,468
Other............................................................................... 3,215 2,584
---------- ----------
$ 28,157 $ 22,388
========== ==========
F-14
ALARIS MEDICAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 3 - COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS (CONTINUED)
DECEMBER 31,
---------------------------
1999 1998
------------ -----------
INTANGIBLE ASSETS:
Goodwill........................................................................... $ 180,159 $ 198,543
Patents and completed technology................................................... 45,646 45,646
Product licensing and distribution fees............................................ 7,337 4,587
Supply agreements.................................................................. 10,758 10,758
Trademarks......................................................................... 90,000 90,270
Workforce.......................................................................... 7,100 7,870
Customer base...................................................................... - 3,390
------------ -----------
341,000 361,064
Accumulated amortization........................................................... (65,557) (50,046)
------------ -----------
$ 275,443 $ 311,018
============ ===========
Amortization expense of intangible assets was $19,665, $17,242 and
$16,871 during 1999, 1998 and 1997, respectively.
DECEMBER 31,
-------------------------
1999 1998
---------- ----------
ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES:
Compensation........................................................................ $ 15,623 $ 12,912
Warranty............................................................................ 11,072 13,848
Interest............................................................................ 5,033 6,045
Other............................................................................... 12,878 19,535
---------- ----------
$ 44,606 $ 52,340
========== ==========
OTHER NON-CURRENT LIABILITIES:
Deferred income tax liability....................................................... $ 9,793 $ 14,321
Deferred revenue.................................................................... 4,442 3,568
Warranty............................................................................ 1,079 3,560
Other............................................................................... 1,801 482
---------- ----------
$ 17,115 $ 21,931
========== ==========
F-15
ALARIS MEDICAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 4 - NOTES PAYABLE AND LONG-TERM DEBT
Long-term debt consists of the following:
DECEMBER 31,
------------------------------
1999 1998
------------ ------------
Bank credit facility
Term loan facilities ........................................................... $ 195,875 $ 211,262
9.75% senior subordinated notes due 2006............................................ 200,000 200,000
11.125% Senior Discount Notes due 2008.............................................. 128,252 115,092
7.25% convertible subordinated debentures due 2002.................................. 16,152 16,152
Other............................................................................... 572 3,784
------------ ------------
540,851 546,290
Current portion................................................................. (13,769) (15,423)
------------ ------------
Long-term debt...................................................................... $ 527,082 $ 530,867
============ ============
BANK CREDIT FACILITY:
In 1996, the Company entered into a $250,000 bank credit facility (the
"Credit Facility") with a syndicate of financial institutions which consisted of
$200,000 of term loans ($75,000 Tranche A Term Loans maturing in 2002, $42,500
Tranche B Term Loans maturing in 2003, $42,500 Tranche C Term Loans maturing in
2004 and $40,000 Tranche D Term Loans maturing in 2005) and a $50,000 revolving
credit facility maturing in 2002. In July 1998, in connection with the
Instromedix acquisition, the Company amended the Credit Facility ("The Credit
Facility Amendment"). The Credit Facility Amendment, among other things,
increased the revolving credit facility to $60,000 and provided the Company an
additional $30,000 under the Tranche D term debt. The Company used the $30,000
term debt borrowing, along with approximately $2,000 from the revolving credit
line, to fund the initial payments required upon closing the Instromedix
acquisition. No principal balance was outstanding under the revolving credit
facility as of December 31, 1999.
Effective December 1999, the Credit Facility was amended and interest
rates increased to a Eurodollar rate plus 3.0% for the revolving credit facility
and Tranche A loans and a Eurodollar rate plus 3.5% for Tranches B, C and D.
Such total rates were 9.2% and 9.7%, respectively, as of December 31, 1999.
During the second quarter of 1997, the Company entered into an interest rate
protection agreement covering approximately 50% of its term loan borrowings to
reduce the impact of changes in interest rates on its floating rate long-term
debt. As of December 31, 1999, the Company had outstanding an interest rate
protection agreement with commercial banks, having a total notional principal
amount of $85,775. That agreement effectively changed the Company's interest
rate exposure on its floating rate debt through February 1, 2000 and resulted in
a weighted average interest rate of 9.7% on the Credit Facility borrowings at
December 31, 1999. The Credit Facility contains various operating and financial
covenants, as well as certain covenants relating to reporting requirements. As
of December 31, 1999, the Company was in compliance with all such covenants.
SENIOR SUBORDINATED NOTES:
In 1996, the Company issued $200,000 of senior subordinated notes due
2006 (the "Notes"). The Notes bear interest at a rate of 9.75% per annum, which
is payable semi-annually on June 1 and December
F-16
ALARIS MEDICAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 4 - NOTES PAYABLE AND LONG-TERM DEBT (CONTINUED)
1 of each year, commencing June 1, 1997. The Company is not required to make
mandatory redemption or sinking fund payments with respect to the Notes prior to
maturity. The Notes are redeemable at the option of the Company, in whole or in
part, at any time on or after December 1, 2001 at the price of 104.875% with the
redemption price declining thereafter. On or after December 1, 2004, the
redemption price is 100% of the note's face (par) value. In the event of a
change of control, as defined in the indenture, holders of the Notes will have
the right to require the Company to purchase their Notes in cash in an amount
equal to 101% of the principal amount thereof, plus accrued and unpaid interest,
if any, to the date of repurchase. The Notes are subject to certain restrictive
and reporting covenants.
SENIOR DISCOUNT NOTES:
On July 28, 1998, subsequent to closing the Instromedix acquisition,
the Company issued $189,000 of Senior Discount Notes at a discount from their
principal amount at maturity to generate gross proceeds to the Company of
$109,892. Upon receipt of net proceeds of $106,321, the Company paid its
remaining obligations of approximately $22,700 to the Instromedix shareholders
and contributed the remaining net proceeds of approximately $81,700, after
issuance costs, to ALARIS Medical Systems, as required under the Credit Facility
Amendment. ALARIS Medical Systems then repaid $27,500 outstanding under its
revolving credit facility.
The Senior Discount Notes bear interest at a rate of 11-1/8% per annum.
Interest accruing on these notes is added to the outstanding principal balance
through July 31, 2003. Interest accruing beginning August 1, 2003 is payable in
cash semi-annually in arrears on February 1 and August 1, commencing February 1,
2004. The notes will mature on August 1, 2008. The notes are senior in right of
payment to all subordinated indebtedness of ALARIS Medical. The Senior Discount
Notes rank PARI PASSU in right of payment with all existing and future
indebtedness of ALARIS Medical, they are effectively subordinated to the ALARIS
Medical bank credit facility guarantee. On or prior to August 1, 2001, under
certain conditions ALARIS Medical has the option to redeem a portion of the
notes at 111.125% of the then accreted value. On or subsequent to August 1,
2001, the Company may redeem the notes at 105.6% of the then accreted value with
the redemption price declining each year thereafter. Effective August 1, 2006,
the redemption price is 100.0% of the then outstanding accreted value. In the
event of a change of control, as defined in the indenture, holders of the Senior
Discount Notes will have the right to require the Company to purchase their
notes in cash in an amount equal to 101% of the principal amount thereof, plus
accrued and unpaid interest, if any, to the date of repurchase. The Senior
Discount Notes are subject to certain restrictive and reporting covenants.
DEBENTURES:
At December 31, 1999, the Company had outstanding $16,125 of 7.25%
convertible subordinated debentures due 2002 (the "Convertible Debentures"). The
Convertible Debentures are convertible at the option of the holder into common
stock of the Company at any time prior to maturity at a conversion price of
$18.14 per share, subject to adjustment in certain events. The Convertible
Debentures mature on January 15, 2002, with interest payable semi-annually on
each January 15 and July 15. The Convertible Debentures are redeemable at the
option of the Company, in whole or in part, at any time on or after January 15,
2000 at the price of 101.45%. On or after January 15, 2001, the redemption price
is 100.725% of the Convertible
F-17
ALARIS MEDICAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 4 - NOTES PAYABLE AND LONG-TERM DEBT (CONTINUED)
Debentures face (par) value. Holders may require the Company to repurchase the
Convertible Debentures, in whole or in part, in certain circumstances involving
a change in control of the Company. The Convertible Debentures are subordinate
to all existing or future senior indebtedness of the Company, and are also
effectively subordinated to liabilities of the Company's subsidiaries. The
indenture does not restrict the incurrence of senior indebtedness or other
indebtedness by the Company or any subsidiary.
Maturities of long-term debt during the years subsequent to December
31, 1999 are as follows:
2000................................................. $ 13,769
2001................................................. 22,134
2002................................................. 45,056
2003................................................. 32,112
2004................................................. 38,103
Thereafter........................................... 389,677
-----------
$ 540,851
NOTE 5 - INCOME TAXES
The (benefit from) provision for income taxes comprises the following:
YEAR ENDED DECEMBER 31,
--------------------------------------
1999 1998 1997
---------- ---------- ----------
Current:
Federal............................................... $ 334 $ 472 $ -
State................................................. 342 361 94
Foreign............................................... 1,205 3,008 4,511
---------- ---------- ----------
Total Current...................................... 1,881 3,841 4,605
---------- ---------- ----------
Deferred:
Federal............................................... (3,276) 126 (6,984)
State................................................. (1,173) 34 (745)
Foreign............................................... (632) 99 (176)
---------- ---------- ----------
Total Deferred..................................... (5,081) 259 (7,905)
---------- ---------- ----------
(Benefit from) provision for income taxes.......... $ (3,200) $ 4,100 $ (3,300)
========== ========== ==========
F-18
ALARIS MEDICAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 5 - INCOME TAXES (CONTINUED)
The principal items accounting for the differences in income taxes
computed at the U.S. statutory rate (35%) and the effective income tax rate
comprise the following:
YEAR ENDED DECEMBER 31,
---------------------------------------
1999 1998 1997
---------- ---------- ----------
Taxes computed at statutory rate........................................ $ (11,069) $ (7,119) $ (4,395)
State income taxes, net of federal benefit.............................. (540) 257 (492)
Effect of foreign operations............................................ 1,269 1,391 649
Amortization and write-off of non-deductible intangible assets.......... 8,031 2,299 1,944
Federal tax credits..................................................... (625) (473) (513)
Acquired in-process research and development............................ - 7,980 -
Other, net.............................................................. (266) (235) (493)
---------- ---------- ----------
(Benefit from) provision for income taxes............................... $ (3,200) $ 4,100 $ (3,300)
========== ========== ==========
The components of the net deferred tax assets included in the
Consolidated Balance Sheet as of December 31, 1999 and 1998 are as follows:
1999 1998
---------- ----------
Deferred tax assets:
Net operating loss carryforwards.................................................. $ 8,903 $ 13,013
Accrued liabilities and reserves.................................................. 27,213 21,526
Unearned income................................................................... 1,863 3,311
Credit carryforwards.............................................................. 7,186 6,097
Inventory......................................................................... 4,116 3,246
Miscellaneous..................................................................... 537 1,010
---------- ----------
49,818 48,203
Valuation allowance............................................................... (2,029) (2,029)
---------- ----------
Total deferred tax assets......................................................... 47,789 46,174
Deferred tax liabilities:
Intangible assets................................................................. 34,246 38,455
Property, plant and equipment..................................................... 1,665 302
Miscellaneous..................................................................... - 981
---------- ----------
Net deferred tax assets............................................................... $ 11,878 $ 6,436
========== ==========
As of December 31, 1999, the Company had federal and state net
operating loss carryforwards of approximately $25,155 and $2,173 respectively.
Additionally, as of December 31, 1999, the Company had a foreign tax credit
carryforward and an alternative minimum tax credit carryforward of approximately
$3,692 and $1,291 respectively, for federal tax purposes and research and
development tax credits of approximately $1,814 and $423 for federal and state
purposes, respectively. The federal and state net operating loss carryforwards
expire from 2000 to 2012. The foreign tax credit expires from 2001 to 2004 and
the research and development tax credits expire from 2005 to 2011.
F-19
ALARIS MEDICAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 5 - INCOME TAXES (CONTINUED)
As a result of certain changes in the Company's stock ownership
which occurred during 1996, portions of the above described carryforwards are
subject to annual income offset limitations on a prospective basis.
Accordingly, approximately $1,730 of the federal net operating loss
carryforward, approximately $552 of the federal alternative minimum tax
credit carryforward and approximately $1,814 and $294 of the respective
federal and state research and development credits are subject to a general
annual income offset limitation of approximately $4,000. Additionally,
certain built-in gains recognized by the Company will increase the annual
utilization rate of the net operating losses. The Company also possesses
certain unrealized built-in losses which will be subject to the annual
utilization limitation when recognized.
NOTE 6 - STOCK OPTION PLANS
The Company maintains several stock option plans under which
incentive stock options may be granted to key employees of the Company and
non-qualified stock options may be granted to key employees, directors,
officers, independent contractors and consultants.
The exercise price for incentive stock options generally may not be
less than the underlying stock's fair market value at the grant date. The
exercise price for non-qualified stock options granted to non-directors will
not be less than the par value of a share of common stock, as determined by a
committee appointed by the Board of Directors ("the Committee"). The exercise
price for non-qualified stock options granted to directors may not be less
than the underlying stock's fair market value at the grant date.
Options granted to non-directors generally vest and become
exercisable as determined by the Committee. Options granted to directors
generally vest and become exercisable over a three-year period. Options
granted to non-directors generally expire upon the earlier of the termination
of the optionee's employment, with vested options expiring one year after
termination of employment, or ten years from the grant date. Options granted
to directors generally expire upon the earlier of the date the optionee is no
longer a director or five years from the grant date.
In December 1999, the Company's Board of Directors approved an
amendment to increase the number of options available for grant under the
Company's 1996 Stock Option plan from 5,500 options to 9,500 options, subject
to stockholder approval. Additionally, the 1996 plan was amended to allow for
the issuance of up to 2,800 of the total 9,500 options, to certain key
employees of the Company. These non-qualified options expire 10 years after
grant and vest seven years after their grant date, or earlier, in percentages
determined by the Committee, if and when certain target market prices for the
Company's common stock, as determined by the Committee, are achieved. The
Board of Directors granted 2,136 of such options in December 1999, subject to
stockholder approval, at an exercise price of $2.00 per share. The vesting
for these specific options granted is the earlier of December 23, 2006 or at
the time market value of the Company's common stock reaches $7.00, $9.00 and
$11.00 per share, these options will vest at 30%, 60% and 100%, respectively.
F-20
ALARIS MEDICAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 6 - STOCK OPTION PLANS (CONTINUED)
STOCK OPTION ACTIVITY:
Activity for 1999, 1998 and 1997 with respect to these plans is as
follows:
SHARES OPTION
UNDERLYING PRICE PER
OPTIONS SHARE
---------- -----------------
Outstanding at December 31, 1996.............................................. 3,628 $ 1.81 - $ 6.93
Granted.................................................................... 936 $ 3.19 - $ 6.22
Exercised.................................................................. (125) $ 1.81 - $ 3.69
Canceled................................................................... (479) $ 1.81 - $ 4.16
----------
Outstanding at December 31, 1997.............................................. 3,960 $ 1.81 - $ 6.93
Granted.................................................................... 468 $ 3.66 - $ 6.75
Exercised.................................................................. (119) $ 1.81 - $ 3.81
Canceled................................................................... (307) $ 1.81 - $ 6.93
----------
Outstanding at December 31, 1998.............................................. 4,002 $ 1.81 - $ 6.93
Granted.................................................................... 4,734 $ 1.78 - $ 4.78
Exercised.................................................................. (74) $ 1.81 - $ 3.69
Canceled................................................................... (695) $ 1.81 - $ 6.47
----------
Outstanding at December 31, 1999.............................................. 7,967 $ 1.78 - $ 6.75
==========
At December 31, 1999, options for 3,011 shares were exercisable at
$1.78-$6.75 under the plans and 3,083 shares were available for future grant.
Additionally, as of December 31, 1999, 11,050 shares of common stock were
reserved for issuance pursuant to the Company's stock option plans, with 4,000
of these shares subject to stockholder approval.
If the Company had elected to recognize compensation expense based upon
the fair value at the grant date for awards under these plans, the Company's
reported net loss would be increased to the pro forma amounts indicated below:
DECEMBER 31,
-----------------------------------------
1999 1998 1997
---------- ----------- -----------
Net loss:
As reported....................................... $ (28,426) $ (24,439) $ (9,626)
Pro forma......................................... $ (30,532) $ (26,053) $ (11,836)
These pro forma amounts may not be representative of future
disclosures since the estimated fair value of stock options is amortized to
expense over the vesting period and additional options may be granted in
future years. The fair value for these options was estimated at the date of
grant using the Black-Scholes option pricing model with the following
weighted average assumptions for the years ended December 31, 1999, 1998 and
1997, respectively; dividend yields of 0%, expected volatility of 164%, 186%
and 164%, risk free interest rates of 5.2%, 4.6% and 5.8%, and expected lives
ranging from 3 to 7 years.
F-21
ALARIS MEDICAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 6 - STOCK OPTION PLANS (CONTINUED)
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because ALARIS Medical's employee stock options have characteristics
significantly different from those of traded options, and because changes in
subjective input assumptions can materially affect the fair value estimates, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock based compensation plans.
The following table summarizes information about employee stock-based
compensation plans outstanding at December 31, 1999:
OPTIONS OUTSTANDING AND EXERCISABLE BY PRICE RANGE AS OF DECEMBER 31, 1999
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE-YEARS PRICE EXERCISABLE PRICE
------------- ----------- ---------- -------- ----------- --------
$1.78 - $1.88 687 7.89 $1.84 233 $1.82
$2.00 - $2.00 2,153 9.98 $2.00 0 0
$2.09 - $2.81 193 6.09 $2.61 119 $2.63
$2.88 - $3.00 1,681 6.92 $3.00 1,424 $3.00
$3.09 - $3.25 1,726 8.61 $3.21 635 $3.17
$3.27 - $6.75 1,527 8.28 $4.09 600 $4.16
------------- ----------- ---------- -------- ----------- --------
$1.78 - $6.75 7,967 8.46 $2.87 3,011 $3.16
============= =========== ========== ======== =========== ========
NOTE 7 - BENEFIT PLANS
PENSION PLANS:
The Company had a defined benefit pension plan (the "Plan") which
covered substantially all of its U.S. employees as of December 31, 1993. On
December 1, 1993, the Company's Board of Directors approved amendments to the
Plan provisions which include, among other matters, cessation of benefit
accruals after December 1, 1993. All earned benefits as of that date were
preserved and the Company will continue to contribute to the Plan as
necessary to fund earned benefits. No contributions to the Plan were required
during 1999, 1998 or 1997 due to the prepaid position of the Plan during
those years.
The following table sets forth the change in the benefit obligation and
the change in the Plan assets during the years ended December 31, 1999 and 1998
and the Plan's estimated funded status and amounts recognized in the Company's
balance sheet as of December 31, 1999 and 1998:
F-22
ALARIS MEDICAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 7 - BENEFIT PLANS (CONTINUED)
DECEMBER 31,
------------------------
1999 1998
---------- ----------
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation at beginning of year............................................. $ 12,248 $ 11,442
Service cost........................................................................ 294 253
Interest cost....................................................................... 806 754
Benefits paid....................................................................... (212) (201)
Actuarial gain...................................................................... (2,571) -
---------- ----------
Benefit obligation at end of year................................................... $ 10,565 $ 12,248
========== ==========
CHANGE IN PLAN ASSETS:
Fair value of Plan assets at beginning of year...................................... $ 18,390 $ 15,838
Actual return on Plan assets........................................................ 842 2,753
Benefits paid....................................................................... (212) (201)
---------- ----------
Fair value of Plan assets at end of year............................................ $ 19,020 $ 18,390
========== ==========
Funded status....................................................................... $ 8,455 $ 6,142
Unrecognized actuarial gain......................................................... (6,474) (4,941)
---------- ----------
Prepaid benefit cost................................................................ $ 1,981 $ 1,201
========== ==========
The components of net periodic benefit gain for the years ended
December 31, 1999, 1998 and 1997 are as follows:
DECEMBER 31,
---------------------------------------
1999 1998 1997
---------- ---------- ----------
Service cost ............................................................ $ 294 $ 253 $ 210
Interest cost ............................................................ 806 754 725
Expected return on Plan assets............................................ (1,645) (1,417) (1,166)
Recognized actuarial gain................................................. (234) (156) (113)
---------- ---------- ----------
Net periodic benefit gain................................................. $ (779) $ (566) $ (344)
========== ========== ==========
Assumptions used in the accounting are as follows:
Discount rates........................................................ 8.00% 6.64% 6.64%
Rates of increase in compensation levels.............................. NA NA NA
Expected long-term rates of return on assets.......................... 9.00% 9.00% 9.00%
F-23
ALARIS MEDICAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 8 - LEASES
LEASE RECEIVABLES:
The Company leases instruments to customers under capital and operating
lease contracts with terms ranging generally from 1 to 6 years. Certain capital
lease agreements obligate the lessee to purchase a specified annual minimum of
disposable sets and payment of liquidating damages if the agreement is
terminated by the lessee. Anticipated future minimum amounts due under operating
leases and capital lease receivables as of December 31, 1999 are as follows:
OPERATING CAPITAL
YEAR ENDING DECEMBER 31: LEASES LEASES
------------------------ ---------- ----------
2000................................................................................ $ 526 $ 15,686
2001................................................................................ 64 11,332
2002................................................................................ 47 9,294
2003................................................................................ - 6,339
2004................................................................................ - 3,863
Thereafter.......................................................................... - 3,041
---------- ----------
Total minimum lease receivables..................................................... $ 637 $ 49,555
========== ==========
The net investment in sales-type leases consists of the following:
DECEMBER 31,
-------------------------
1999 1998
---------- ----------
Minimum lease payments.............................................................. $ 49,555 $ 51,443
Unguaranteed residual value of leased equipment..................................... 270 411
Unearned interest income............................................................ (13,464) (13,552)
Allowance for uncollectible lease receivables....................................... (1,759) (2,443)
---------- ----------
Net investment in sales-type leases................................................. 34,602 35,859
Current portion..................................................................... (10,195) (16,748)
---------- ----------
Net investment in sales-type leases, less current portion........................... $ 24,407 $ 19,111
========== ==========
F-24
ALARIS MEDICAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 8 - LEASES (CONTINUED)
LEASE COMMITMENTS:
The Company leases buildings and equipment under non-cancelable
operating and capital leases with terms ranging from approximately 2 to 13
years. Scheduled future minimum lease commitments as of December 31, 1999 are as
follows:
OPERATING CAPITAL
YEAR ENDING DECEMBER 31: LEASES LEASES
------------------------ ---------- ----------
2000................................................................................ $ 5,367 $ 298
2001................................................................................ 5,472 271
2002................................................................................ 5,110 41
2003................................................................................ 4,533 -
2004................................................................................ 4,493 -
Thereafter.......................................................................... 10,373 -
---------- ----------
$ 35,348 610
==========
Lease amounts representing interest................................................. (38)
----------
Capital lease obligation............................................................ 572
Less current portion................................................................ (268)
----------
$ 304
==========
Rental expense was $6,023, $5,451 and $4,722 during 1999, 1998 and
1997, respectively.
F-25
ALARIS MEDICAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 9 - RESTRUCTURING, INTEGRATION AND OTHER NON-RECURRING CHARGES
The following summarizes the significant components of the Company's
1999, 1998 and 1997 restructuring, integration and other non-recurring charges
included in the Consolidated Statement of Operations:
YEAR ENDED DECEMBER 31,
-------------------------------
1999 1998 1997
------ ------ -------
(IN MILLIONS)
RESTRUCTURING
Severance and related benefits............................................... $ - $ - $ 1.3
------ ------ -------
Total restructuring charges............................................... - - 1.3
INTEGRATION
Information systems conversion costs......................................... .1 - 4.8
Personnel relocation......................................................... .9 - -
Severance.................................................................... 1.1 - -
Lease termination............................................................ .5 - -
Asset disposition............................................................ .5 - -
Facilities moving expenses and Company name change........................... .1 - 1.6
Consulting and bonuses....................................................... .8 1.6 1.4
Other........................................................................ .6 .3 1.5
------ ------ -------
Total integration charges................................................. 4.6 1.9 9.3
OTHER NON-RECURRING CHARGES
Write-off of product distribution license.................................... - - 4.5
Maquiladora settlement and related costs..................................... - - 4.1
Patent license agreement charge.............................................. 2.8 - -
Write-off of certain Instromedix intangible assets........................... 19.2 - -
Write-off of instrument tooling.............................................. - - 1.7
------ ------ -------
Total restructuring, integration and other non-recurring charges.......... $ 26.6 $ 1.9 $ 20.9
====== ====== =======
During the third quarter of 1999, the Company recorded a charge of
$2,838 for two patent license agreements related to patent infringement lawsuits
(Note 14).
In connection with fourth quarter management changes and the
development and completion of certain strategic plans for the Company as a
whole, management determined that the estimated future cash flows from the
Instromedix business unit would likely not be sufficient to recover the carrying
value of certain of its intangible assets. The Company calculated the present
value of expected future cash flows to determine the fair value of the business
unit, using a discount rate representing the Company's weighted average cost of
capital. The evaluation resulted in a $19,172 ($17,658 net of tax) write-off of
Instromedix' goodwill and other intangible assets, except for $14,264 of
completed technology. The underlying factors contributing to the decline in
expected financial results included changes in the Company's strategic focus in
the marketplace resulting from an assessment by an outside consulting firm as
well as internal management. As a result of this assessment, decisions were made
that realigned the Company's operations. This reflects the Company's belief that
directing future strategic investments toward its core and emerging business
will offer better opportunities for realizing higher rates of return than its
Instromedix business unit.
F-26
ALARIS MEDICAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 9 - RESTRUCTURING, INTEGRATION AND OTHER NON-RECURRING CHARGES
(CONTINUED)
In 1997, the Company reviewed its products and related research and
development activities and market opportunities in order to focus on projects
that will provide greater competitive advantage and stockholder return. That
review resulted in the termination and write-off of a product distribution and
license agreement with a third party developer of an ambulatory and alternate
site infusion pump. The $4,500 charge related to such termination is included in
the 1997 non-recurring charges and includes a $4,300 non-cash charge
representing the intangible asset that had been recorded associated with such
agreement.
On June 26, 1997, the Company entered into a settlement agreement which
resolved its contract dispute with Cal Pacifico of California and affiliated
entities (collectively, "Cal Pacifico"), the operator of the Company's two
maquiladora assembly plants in Tijuana, Mexico. For over eight years, the
Company has assembled disposable administration sets at these two plants, which
utilized more than 1,200 workers employed by Cal Pacifico, under a contract with
Cal Pacifico. The dispute originated in April 1997 when the Company, in
accordance with the terms of such contract, informed Cal Pacifico that it would
be terminating its contractual arrangements effective August 1, 1997. Cal
Pacifico objected to such notification and proposed the systematic termination
of the work force. In response to such objection, the Company on June 6, 1997
hired substantially all of the workers at the plants directly. On June 11, 1997,
Cal Pacifico locked the Company's administrative personnel and production
employees out of the plants and would not allow the Company access to its
production equipment or inventory. As a result of the settlement agreement, the
assembly plants resumed full operations on June 27, 1997 and Cal Pacifico
provided the Company with assistance as it transitioned into the direct
operation of such plants. The Company began operating these plants directly
during the third quarter of 1997.
The Company recorded a non-recurring charge of $4,100 during the
quarter ended June 30, 1997 relating to the settlement with Cal Pacifico and the
legal fees and other costs associated therewith. The individual costs included
within such non-recurring charge consist of approximately $2,700 of settlement
and legal fees and approximately $1,400 of idle labor costs and start-up costs
incurred in connection with the implementation of interim assembly plans during
the contract dispute.
In 1996, management performed a review of the operating activities of
both IMED and IVAC Medical Systems, Inc. in order to reduce costs and maximize
synergies. Management identified duplicative costs to eliminate and developed
and implemented plans to consolidate and integrate the companies' operations
including product strategies, manufacturing, service centers, research and
development, marketing and other administrative functions. As a result, the
Company recorded restructuring and integration charges related to the
implementation of these plans of approximately $20,902 in 1997.
In connection with the Instromedix acquisition, management, with the
assistance of consultants, performed a review of the operating activities of the
acquired company and assessed how to best integrate and leverage the Instromedix
operations with ALARIS Medical. During 1998, the Company incurred $1,901 in
costs associated with this integration. In June 1999, the Company relocated the
Instromedix operations, including manufacturing of Instromedix products, to San
Diego. In connection with these relocation and integration activities, the
Company incurred $4,579 in costs in 1999.
F-27
ALARIS MEDICAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 9 - RESTRUCTURING, INTEGRATION AND OTHER NON-RECURRING CHARGES
(CONTINUED)
The Company paid approximately $4,700, $2,700 and $27,000 during 1999,
1998, and 1997, respectively, for restructuring and integration activities. The
Company has approximately $600 accrued related to restructuring and integration
costs at December 31, 1999. The Company anticipates that the majority of the
remaining accrued integration costs will be paid during 2000.
NOTE 10 - LOSS PER SHARE
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------
1999 1998 1997
---------- ---------- ---------
BASIC LOSS PER SHARE
Net loss available to common stockholder........................... $ (28,426) $ (24,439) $ (9,626)
========== ========== =========
Weighted average common shares outstanding
during the period............................................... 58,815 58,710 58,644
========== ========== =========
Basic loss per share............................................... $ (0.48) $ (0.42) $ (0.16)
========= ========== =========
Net loss per common share assuming no dilution and dilution are the
same for 1999, 1998 and 1997 as the Company experienced a net loss for the years
ended December 31, 1999, 1998 and 1997. The Company's 7.25% Convertible
Debentures were not included in the calculation of diluted earnings per share in
1999, 1998 and 1997 as they are antidilutive. For each of the years presented,
the $16,152 of Convertible Debentures, if converted at an exercise price of
$18.14 per share, would result in an increase of 890 common shares and an
increase of $703, net of taxes, to net income, due to the reduction in interest
expense. Options outstanding at December 31, 1999, 1998 and 1997 were not
included in the computation of diluted earnings per share because the Company
reported losses for these years and the effect would be antidilutive. Had such
options been included, the weighted average shares would have increased by 567,
1,507 and 1,361 for 1999, 1998 and 1997, respectively.
NOTE 11 - PARENT GUARANTOR OF SUBSIDIARY DEBT
All obligations of ALARIS Medical Systems under the Credit Facility
(Note 4) are guaranteed by ALARIS Medical and each existing and subsequently
formed or acquired domestic subsidiary of ALARIS Medical. Summarized financial
information of ALARIS Medical Systems, the issuer of the Credit Facility, at
December 31, 1999 and 1998 and for the years ended December 31, 1999, 1998 and
1997 is as follows:
F-28
ALARIS MEDICAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 11 - PARENT GUARANTOR OF SUBSIDIARY DEBT (CONTINUED)
DECEMBER 31,
---------------------------
1999 1998
----------- -----------
CONDENSED BALANCE SHEET
Current assets.................................................................... $ 210,185 $ 236,470
Non-current assets................................................................ 390,541 407,907
----------- -----------
$ 600,726 $ 644,377
=========== ===========
Current liabilities............................................................... $ 82,242 $ 88,326
Long-term debt and other non-current liabilities.................................. 417,363 432,933
----------- -----------
499,605 521,259
----------- -----------
Total common stock and other stockholder's equity................................. 101,121 123,118
----------- -----------
$ 600,726 $ 644,377
=========== ===========
YEAR ENDED DECEMBER 31,
------------------------------------------
1999 1998 1997
----------- ----------- -----------
CONDENSED STATEMENT OF OPERATIONS
Sales...... ....................................................... $ 401,978 $ 380,068 $ 359,077
Cost of sales...................................................... 208,739 191,232 188,340
----------- ----------- -----------
Gross margin....................................................... 193,239 188,836 170,737
Total operating expense............................................ (172,507) (163,448) (139,950)
Lease interest income.............................................. 4,425 4,599 4,559
----------- ----------- -----------
Income from operations............................................. 25,157 29,987 35,346
Total other expense................................................ 40,225 41,786 44,274
Provision for (benefit from) income taxes.......................... 3,400 7,400 (1,900)
----------- ----------- -----------
Net loss ......................................................... $ (18,468) $ (19,199) $ (7,028)
=========== =========== ===========
NOTE 12 - SEGMENT INFORMATION
In 1998, the Company adopted FAS 131. The prior year's segment
information has been conformed to present the Company's three reportable
segments in accordance with the new standard - (1) North America, (2)
International and (3) Instromedix.
The accounting policies of the segments are the same as those described
in the "Summary of Significant Accounting Policies" (Note 1). Segment data does
not include intersegment revenues, or charges allocating corporate-headquarters
costs to each of its operating segments. The Company evaluates the performance
of its segments and allocates resources to them based on operating income and
adjusted earnings before interest, taxes, depreciation, and amortization
(EBITDA). Adjusted EBITDA represents income from operations before
restructuring, integration and other non-recurring charges, non-cash purchase
accounting charges and depreciation and amortization. Adjusted EBITDA does not
represent net income or cash flows from operations, as these terms are defined
under generally accepted accounting principles, and should not be considered as
an alternative to net income as an indicator of the Company's operating
performance or to cash flows as a measure of liquidity.
F-29
ALARIS MEDICAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 12 - SEGMENT INFORMATION (CONTINUED)
The Company is organized primarily based on geographic location with
the United States and Canada drug infusion and patient monitoring business
representing the North American Segment. All other international operations
including Europe, Asia, Australia and Latin America represent the International
segment. The acquisition of Instromedix in 1998 resulted in a third separate
operating segment.
The table below presents information about reported segments for the
years ended December 31:
NORTH SHARED
AMERICA INTERNATIONAL INSTROMEDIX SERVICES (A) TOTAL
----------- ------------- ----------- ----------- -----------
1999
Sales ......................... $ 263,431 $ 124,823 $ 13,724 $ - $ 401,978
Operating Income (Loss) ....... 47,784 27,957 (27,825) (24,348) 23,568
Adjusted EBITDA................ 61,671 33,951 409 (8,421) 87,610
1998
Sales ......................... $ 246,631 $ 125,007 $ 8,430 $ - $ 380,068
Operating Income (Loss) ....... 44,844 29,272 (26,149) (19,682) 28,285
Adjusted EBITDA................ 65,194 35,732 710 (6,694) 94,942
1997
Sales ......................... $ 240,514 $ 118,563 $ - $ - $ 359,077
Operating Income (Loss)........ 45,445 29,008 - (41,963) 32,490
Adjusted EBITDA................ 62,588 33,207 - (6,508) 89,287
Reconciliation of total segment adjusted EBITDA to consolidated income
before taxes:
1999 1998 1997
----------- ----------- -----------
ADJUSTED EBITDA
Total adjusted EBITDA for reportable segments.................. $ 87,610 $ 94,942 $ 89,287
Depreciation and amortization.................................. (37,453) (36,148) (34,288)
Net interest................................................... (53,545) (47,524) (43,881)
Purchased in-process research and development.................. - (28,334) -
Restructuring, integration and other non-recurring charges..... (26,589) (2,175) (22,509)
Other reconciling items........................................ (1,649) (1,100) (1,535)
------------ ------------ -----------
Consolidated loss before income taxes....................... $ (31,626) $ (20,339) $ (12,926)
=========== =========== ===========
(A) Shared services includes amortization of intangibles and certain legal,
business development and executive costs.
F-30
ALARIS MEDICAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 12 - SEGMENT INFORMATION (CONTINUED)
SALES
--------------------------------------------
1999 1998 1997
----------- ----------- -----------
PRODUCT LINE INFORMATION
Drug Infusion.................................................. $ 331,872 $ 315,617 $ 306,212
Patient Monitoring............................................. 34,455 34,865 33,410
Service........................................................ 21,927 21,156 19,455
Instromedix.................................................... 13,724 8,430 -
----------- ----------- -----------
$ 401,978 $ 380,068 $ 359,077
=========== =========== ===========
SALES LONG-LIVED ASSETS
------------------------------------------ ----------------------------
1999 1998 1997 1999 1998
----------- ----------- ----------- ----------- -----------
GEOGRAPHICAL INFORMATION
United States..................... $ 262,929 $ 242,603 $ 227,002 $ 374,677 $ 399,591
International (A)................. 139,049 137,465 132,075 21,810 14,916
----------- ----------- ----------- ----------- -----------
$ 401,978 $ 380,068 $ 359,077 $ 396,487 $ 414,507
=========== =========== =========== =========== ===========
(A) Includes Canadian sales which are included in the North America unit for
segment reporting purposes.
NOTE 13 - CASH FLOW INFORMATION
Federal, state and foreign income taxes paid during 1999, 1998 and 1997
totaled $4,852, $4,550 and $3,884, respectively. Interest paid during 1999, 1998
and 1997 totaled $39,365, $38,044 and $40,576, respectively.
Capital lease obligations of $461 were incurred in 1999 when the
Company entered into various capital leases for new computer equipment.
NOTE 14- CONTINGENCIES AND LITIGATION
GOVERNMENT REGULATION
The United States Food and Drug Administration (the "FDA"), pursuant to
the Federal Food, Drug, and Cosmetic Act (the "FDC Act"), regulates the
introduction of medical devices into commerce, as well as testing manufacturing
procedures, labeling, adverse event reporting and record-keeping with respect to
such products. The process of obtaining market clearances from the FDA for new
products can be time-consuming and expensive and there can be no assurance that
such clearances will be granted or that FDA review will not involve delays
adversely affecting the marketing and sale of products. Enforcement of the FDC
Act depends heavily on administrative interpretation and there can be no
assurance that interpretations made by the FDA or other regulatory bodies will
not have a material adverse effect on the business, financial condition, results
of operations or cash flows. The FDA and state agencies routinely inspect the
Company to determine whether the Company is in compliance with various
requirements relating to manufacturing practices, testing, quality control,
complaint handling, medical device reporting and product labeling. Such
inspections can result in such agencies requiring the Company to take certain
corrective actions for non-complying conditions observed during the inspections.
F-31
ALARIS MEDICAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 14- CONTINGENCIES AND LITIGATION (CONTINUED)
A determination that the Company is in material violation of the FDC
Act or such FDA regulations could lead to the issuance of warning letters,
imposition of civil or criminal sanctions against the Company, its officers
and employees, including fines, recalls, repair, replacement or refund to the
user of the cost of such products and could result in the Company losing its
ability to contract with government agencies. In addition, if the FDA
believes any of the Company's products violate the law and present a
potential health hazard, the FDA could seek to detain and seize products, to
require the Company to cease distribution and to notify users to stop using
the product. The FDA could also refuse to issue or renew certificates to
export the Company's products to foreign countries. Such actions could also
result in an inability of the Company to obtain additional clearances or
approvals to market its devices.
In October 1999, the Company received a warning letter from the FDA
related to earlier inspections. These FDA inspections noted several areas of
non-compliance with FDA regulatory requirements. The letter stated that to
resolve this matter, the Company is required until October 2001 to submit to
the FDA periodic certifications as to its state of compliance based on the
outcome of inspections conducted by outside regulatory consultants employed
by the Company for this purpose. In addition, product approvals, clearances
and certificates for device exports, including renewals, will not be provided
until the FDA is satisfied with the Company's corrective action. The FDA has
informed the Company that the corrective action plan it submitted in response
to the warning letter is adequate. The Company believes that it has the
resources necessary to complete the corrective action plan, but is not able
to determine if, or when the FDA will be satisfied with the Company's actions.
Since 1995, the Company has on fourteen occasions initiated product
recalls or issued safety alerts regarding its products regulated by the FDA.
In each case this was done because the products were found not to meet the
Company's specifications. Of the fourteen recalls, three are closed and
notice to that effect has been received from the FDA. The Company has
submitted to the FDA a request for closure related to four of the recalls but
has not received notice back from the FDA. The remaining seven are still
active. Additionally, the Company has three active recalls related to its
products manufactured and sold outside the United States. None of the recalls
materially interfered with the Company's operations and all such affected
product lines continued to be marketed by the Company, with the exception of
the Model 599 Series infusion pump, for which the Company continues to sell
administration sets and replacement parts only.
The costs incurred related to the Company's recall activities have
historically been significant. These costs include labor and materials, as well
as travel and lodging for repair technicians. Estimates to complete are often
quite difficult to determine due to uncertainty surrounding how many effected
units are still in service and how many units customers will fix without Company
assistance. Due to these difficulties in estimating costs, it is possible that
the actual costs to complete each individual recall could differ significantly
from management's current estimates to complete. Although, there can be no
assurances, the Company believes it has adequate reserves to cover the remaining
estimated aggregate costs related to these active recalls.
LITIGATION
The Company was a defendant in a lawsuit filed in June 1996 by Sherwood
Medical Company ("Sherwood"), a unit of Tyco Healthcare Group ("Tyco"), against
IVAC which alleged infringement of two patents by reason of certain activities
including the sale by IVAC of disposable probe covers for use with the Company's
infrared tympanic thermometer. On August 31, 1999 the Company entered into an
agreement
F-32
ALARIS MEDICAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 14- CONTINGENCIES AND LITIGATION (CONTINUED)
under which Tyco granted ALARIS Medical Systems a paid-up license to certain
patents. This agreement also settled the patent infringement lawsuit filed in
1996 by Sherwood. In connection with this agreement, the Company made a
one-time payment of $3,950 during the third quarter of 1999. ALARIS Medical
Systems will not be required to pay any future royalties on patents covered
by the agreement.
The Company was a defendant in a lawsuit filed on April 20, 1998 and
served on October 28, 1998, by Becton, Dickinson and Company ("Becton") against
ALARIS Medical Systems, Inc., which alleged infringement of a patent licensed to
Becton by reason of certain activities, including the sale of the Company's
SmartSite needle-free system. Becton had requested a permanent injunction
enjoining the Company from infringing the patent in suit. In addition, the
Company filed a lawsuit on December 4, 1998 against Becton. The lawsuit alleged
infringement of two patents, one owned by the Company and one licensed to the
Company, by reason of certain activities, including the sale of Becton's Atrium
needle free valve. On October 13, 1999 the Company entered into an agreement
with Becton which grants between the two companies paid-up licenses to certain
patents. The agreement also settled the patent infringement lawsuits filed in
1998 by the two companies. In connection with this agreement, the Company paid a
total of $6,700 during the fourth quarter of 1999. The Company will not be
required to pay any future royalties on patents covered by the agreement.
The two agreements resulted in a charge in 1999 of $2,838 included in
integration and other non-recurring costs with the remainder of the license
payments capitalized as acquired technology.
UNITED STATES CUSTOMS SERVICE MATTER
During the years 1988 through 1995, Cal Pacifico acted as the Company's
United States customs broker and importer of record with respect to the
importation into the United States of finished products ("Finished Products")
assembled at the Company's two maquiladora assembly plants in Tijuana, Mexico.
In May 1995, Cal Pacifico received a pre-penalty notice from the United States
Customs Service ("Customs") to the effect that Customs intended to assess
additional duties and substantial penalties against Cal Pacifico for its alleged
failure, during the years 1988 through 1992, to comply with certain documentary
requirements regarding the importation of goods on behalf of its clients,
including the Company. Customs recently assessed additional duties with respect
to Cal Pacifico's importation of goods on behalf of its clients, including the
importation of the Company's Finished Products, for the years 1993 and 1994, and
it is anticipated that Customs will issue a pre-penalty notice to Cal Pacifico
in respect to these years as well (collectively with the amounts referred to in
the immediately preceding sentence, the "Disputed Amounts"). The Company has
been advised by its special Customs counsel that, under applicable law, no
person, by fraud, gross negligence or negligence, may (i) import merchandise
into the commerce of the United States by means of any material and false
document, statement or act, or any material omission, or (ii) aid or abet any
other person to import merchandise in such manner. No proceeding has been
initiated by Customs against the Company in respect of the matters which are the
subject of the proceeding against Cal Pacifico. Since Cal Pacifico was the
Company's United States customs broker and importer of record during each of the
foregoing years, the Company believes that it is unlikely that Customs will
assess against the Company any portion of the Disputed Amounts.
Cal Pacifico is contesting Customs' assessment of the Disputed Amounts.
Cal Pacifico's challenge to the assessment of the Disputed Amounts is in its
preliminary stages. Given the present posture of Cal
F-33
ALARIS MEDICAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 14 - CONTINGENCIES AND LITIGATION (CONTINUED)
Pacifico's challenge, and the inherent uncertainty of contested matters such as
this, it is not possible for the Company to express an opinion as to the
likelihood that Cal Pacifico will prevail on its challenge. Cal Pacifico or
Customs has not informed the Company as to the specific amount of the Disputed
Amounts.
Cal Pacifico has advised the Company that, should Cal Pacifico's
challenge to the assessment of the Disputed Amounts prove to be unsuccessful, it
will seek recovery from the Company, through arbitration, for any portion of the
Disputed Amounts which it is required to pay to Customs. As part of the
settlement agreement which resolved the Company's contract dispute with Cal
Pacifico during the second quarter of 1997, the Company paid Cal Pacifico $550,
which is to be applied toward Cal Pacifico's payment of Disputed Amounts. The
$550 payment by the Company is to be credited toward any portion of the Disputed
Amounts which the arbitrator determines the Company owes to Cal Pacifico. The
actual amount so determined by the arbitrator may be less or greater than $550.
Although the ultimate outcome of such an arbitration proceeding cannot be
guaranteed, the Company believes that it has meritorious defenses to claims with
respect to Disputed Amounts which Cal Pacifico might raise against the Company.
These defenses would be based, among other factors, on the contractual
relationship between the Company and Cal Pacifico (including a defense with
respect to the availability of indemnification under the agreements between Cal
Pacifico and the Company), the conduct of Cal Pacifico with respect to both the
Company and Customs, and the compliance obligations of Cal Pacifico under
applicable customs laws. Inasmuch as Cal Pacifico's challenge before Customs is
still pending and any claim against the Company for indemnification would be
based on Cal Pacifico's ultimate lack of success in that challenge, and inasmuch
as any arbitration proceeding by which Cal Pacifico might seek indemnification
has not been filed nor has Cal Pacifico committed itself to the theories under
which it might seek indemnification or the recovery of damages from the Company,
it is not possible for the Company to express an opinion at this time as to the
likelihood of an unfavorable outcome in such a proceeding.
OTHER
The Company is also a defendant in various actions, claims, and legal
proceedings arising from its normal business operations. Management believes
they have meritorious defenses and intends to vigorously defend against all
allegations and claims. As the ultimate outcome of these matters is uncertain,
no contingent liabilities or provisions have been recorded in the accompanying
financial statements for such matters. However, in management's opinion, based
on discussions with legal counsel, liabilities arising from such matters, if
any, will not have a material adverse effect on the business, financial
condition, results of operations or cash flows.
F-34
ALARIS MEDICAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 15 - SUMMARIZED QUARTERLY DATA (UNAUDITED)
The following financial information reflects all normal recurring
adjustments which are, in the opinion of management, necessary for a fair
statement of the results of the interim periods. Summarized quarterly data for
fiscal 1999 and 1998 is as follows:
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
----------- ----------- ----------- -----------
1999
Sales ............................................ $ 93,436 $ 99,615 $ 93,991 $ 114,936
Gross margin ..................................... 47,802 44,652 48,337 52,448
Income (loss) from operations..................... 9,565 6,946 10,487 (3,430)
Net loss.......................................... (725) (7,422) (2,406) (17,873)
Loss per common share
assuming no dilution (1)....................... $ (.01) $ (.13) $ (.04) $ (.30)
========== =========== =========== ==========
Loss per common share
assuming dilution (1).......................... $ (.01) $ (.13) $ (.04) $ (.30)
========== =========== =========== ==========
1998
Sales ............................................ $ 86,971 $ 90,683 $ 94,227 $ 108,187
Gross margin ..................................... 42,117 44,184 47,555 54,980
Income (loss) from operations..................... 11,908 8,310 (8,692) 16,759
Net income (loss)................................. 207 (1,968) (22,981) 303
(Loss) income per common share
assuming no dilution (1)....................... $ - $ (.03) $ (.39) $ .01
========== =========== =========== ==========
(Loss) income per common share
assuming dilution (1).......................... $ - $ (.03) $ (.39) $ .01
========== =========== =========== ==========
- --------------------------------
(1) Income (loss) per share are computed independently for each of the quarters
presented. Therefore, the sum of the quarterly net income (loss) per share will
not necessarily equal the total for the year.
F-35
ALARIS MEDICAL, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE THREE YEARS ENDED DECEMBER 31, 1999
- --------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
ADDITIONS ADDITIONS
BALANCE AT CHARGED TO CHARGED BALANCE AT
BEGINNING COSTS AND TO OTHER END OF
OF PERIOD EXPENSES ACCOUNTS(1) DEDUCTIONS(2) PERIOD
---------- ---------- ----------- ------------- ----------
Deducted from receivables
Allowance for doubtful accounts:
Year ended December 31, 1999............. $ 2,946 $ 264 $ - $ (91) $ 3,119
Year ended December 31, 1998............. 3,259 (75) 245 (483) 2,946
Year ended December 31, 1997............. 4,085 810 - (1,636) 3,259
- -------------------------
(1) Represents amount of allowance for doubtful accounts assigned to accounts
receivables acquired in the Instromedix acquisition during the year ended
December 31, 1998.
(2) Represents accounts written-off as uncollectible, net of collections on
accounts previously written-off.
F-36
ALARIS MEDICAL, INC.
SCHEDULE III - CONDENSED FINANCIAL INFORMATION OF ALARIS MEDICAL, INC.
CONDENSED BALANCE SHEET
- --------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
ASSETS
DECEMBER 31,
--------------------------
1999 1998
---------- ----------
Current assets:
Cash................................................................................. $ 20 $ 32
Receivables, prepaid expenses and other current assets............................... 98 1,045
---------- ----------
Total current assets................................................................. 118 1,077
Investments in and net advances from subsidiaries........................................ 101,121 125,633
Other investments, at cost............................................................... 26 26
Intangible assets, net................................................................... 1,534 1,594
Other non-current assets................................................................. 21,957 12,979
---------- ----------
$ 124,756 $ 141,309
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable..................................................................... $ 22 $ 99
Accrued expenses and other current liabilities....................................... 1,281 1,597
---------- ----------
Total current liabilities............................................................ 1,303 1,696
---------- ----------
Long-term debt........................................................................... 144,404 131,244
---------- ----------
Contingent liabilities and commitments (Note 5)
Stockholders' equity:
Common stock......................................................................... 593 592
Capital in excess of par value....................................................... 148,991 148,762
Accumulated deficit.................................................................. (164,195) (135,769)
Treasury stock....................................................................... (2,027) (2,027)
Accumulated other comprehensive loss................................................. (4,313) (3,189)
---------- ----------
(20,951) 8,369
---------- ----------
$ 124,756 $ 141,309
========== ==========
F-37
ALARIS MEDICAL, INC.
SCHEDULE III - CONDENSED FINANCIAL INFORMATION OF ALARIS MEDICAL, INC.
CONDENSED STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31,
-------------------------------------------
1999 1998 1997
----------- ----------- -----------
General and administrative expense.................................... $ (1,589) $ (1,702) $ (1,716)
Restructuring, integration and other non-recurring charges............ - - (1,135)
Interest income....................................................... 4 6 89
Interest expense...................................................... (14,973) (6,844) (1,290)
Equity in earnings (loss) of unconsolidated subsidiaries.............. (18,468) (19,199) (6,974)
----------- ----------- -----------
Loss before income taxes.............................................. (35,026) (27,739) (11,026)
Income tax benefit.................................................... 6,600 3,300 1,400
----------- ----------- -----------
Net loss.............................................................. (28,426) (24,439) (9,626)
Accumulated deficit at beginning of year.............................. (135,769) (111,330) (101,704)
----------- ----------- -----------
Accumulated deficit at end of year.................................... $ (164,195) $(135,769) $ (111,330)
=========== ======== ===========
F-38
ALARIS MEDICAL, INC.
SCHEDULE III - CONDENSED FINANCIAL INFORMATION OF ALARIS MEDICAL, INC.
CONDENSED STATEMENT OF CASH FLOWS
- --------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31,
---------------------------------------
1999 1998 1997
---------- ---------- -----------
Net cash used in operating activities..................................... $ (2,647) $ (25,958) $ (4,918)
---------- ---------- -----------
Cash flows from investing activities:
Dividends from ALARIS Medical Systems................................. 2,437 2,216 2,215
Net decrease in restricted cash....................................... - - 2,332
Return of capital investment.......................................... - - 148
Capital contribution to ALARIS Medical Systems........................ - (81,671) (1,595)
---------- ---------- -----------
Net cash provided by (used in) investing activities....................... 2,437 (79,455) 3,100
---------- ---------- -----------
Cash flows from financing activities:
Proceeds from issuance of long-term debt.............................. - 109,892 -
Proceeds from exercise of stock options............................... 198 275 241
Debt issuance costs................................................... - (4,788) -
Repurchase of common stock............................................ - - (1,293)
---------- ---------- -----------
Net cash provided by (used in) financing activities....................... 198 105,379 (1,052)
---------- ---------- -----------
Net decrease in cash...................................................... (12) (34) (2,870)
Cash at beginning of year................................................. 32 66 2,936
---------- ---------- -----------
Cash at end of year....................................................... $ 20 $ 32 $ 66
========== ========== ===========
F-39
ALARIS MEDICAL, INC.
SCHEDULE III - CONDENSED FINANCIAL INFORMATION OF ALARIS MEDICAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
NOTE 1--STATEMENT OF ACCOUNTING POLICY:
The accompanying condensed financial statements have been prepared by
ALARIS Medical pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to those rules and
regulations. It is therefore suggested that these condensed financial statements
be read in conjunction with the Consolidated Financial Statements and notes
thereto.
NOTE 2--INVESTMENTS IN AND NET ADVANCES FROM SUBSIDIARIES:
ALARIS Medical accounts for its investments in subsidiaries using the
equity method. Under the equity method, investments are carried at cost,
adjusted for ALARIS Medical's proportionate share of their undistributed
earnings or losses. At December 31, 1999 and 1998, investments in and net
advances from subsidiaries is comprised of ALARIS Medical Systems common
ownership interest and advances of $101,121 and $125,633 respectively.
NOTE 3--LONG-TERM DEBT:
The terms and maturities of ALARIS Medical's long-term debt are
described in Note 4 to the Consolidated Financial Statements.
NOTE 4--CASH FLOW INFORMATION:
During 1999 and 1998, ALARIS Medical Systems made dividend payments of
$2,437 and $2,216, respectively, to ALARIS Medical.
NOTE 5--CONTINGENCIES AND LITIGATION:
Contingencies and litigation are described in Note 14 to the
Consolidated Financial Statements.
F-40