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, 2000 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 333-18687
ALARIS MEDICAL SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 13-3800335
(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:
NONE
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. [ ]
No common stock is held by nonaffiliates of the registrant.
As of April 2, 2001, the registrant had 1,000 shares of common stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of ALARIS Medical, Inc.'s Proxy Statement for the Annual Meeting of
Stockholders to be held on May 23, 2001 ("Proxy Statement"), are incorporated by
reference as described in Part III.
- --------------------------------------------------------------------------------
PART I
ITEM 1. BUSINESS
BACKGROUND
ALARIS Medical Systems, Inc. ("ALARIS Medical Systems"), designs,
manufactures, distributes and services intravenous infusion therapy and patient
monitoring instruments and related disposables and accessories. ALARIS Medical
Systems was formed by the merger of two pioneers in infusion systems, IMED
Corporation and IVAC Medical Systems, Inc. on November 26, 1996. ALARIS Medical
Systems, a wholly-owned subsidiary of ALARIS Medical, Inc. ("Holdings"),
formerly Advanced Medical, Inc., was incorporated on October, 14 1988 under the
laws of the State of Delaware. ALARIS Medical Systems and its subsidiaries are
collectively referred to as the "Company."
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 its 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.
ALARIS Medical Systems has defined two strategic business units: North
America, which includes the United States and Canada; 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 10.4% of International
sales in 2000. Service of the Company's products represented approximately 5% of
the Company's sales in 2000.
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 68.6% and 31.4%,
respectively, of the Company's sales for the year ended 2000. For the year ended
December 31, 2000, the Company had sales of approximately $378.9 million.
- --------------------------------------------------------------------------------
The Company has registered or applied to register the following trademarks:
AccuSlide(R), ALARIS(R), ALARIS Medical Systems(R), Asena(TM), COREoCHECK(R),
Gemini(R), Gemini PC-1(R), Gemini PC-2(R), Gemini PC-2TX(R), Gemini PC-4(R),
Guardrails(TM), IMED(R), IVAC(R), MEDLEY(TM), MedSystem III(R), Patient
Solutions, Inc.(R), PCAM(R), Profiles(TM), ReadyMED(R), Signature Edition(R),
SmartSite(R), TURBOoTEMP(TM), VersaSafe(R), VITALoCHECK(R)
2
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
patient 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, 2000,
the Company sold approximately 79.0 million dedicated and non-dedicated
disposable administration sets representing sales of $237.1 million or 62.6% of
sales. Disposable administration sets sales for 2000 for the North America and
International business units were $165.6 million and $71.5 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 needleless 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, 2000, the Company's infusion systems
sales (pumps and disposables) were $326.2 million, representing approximately
86.1% 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, 2000, the
Company's patient monitoring product sales were approximately $31.1 million,
representing approximately 8% of the Company's total sales. Patient monitoring
sales for North America and International for 2000 were $27.0 million and $4.1
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 2000, the Company sold over 583 million dedicated
disposable probe covers into its worldwide installed base. In addition, the
Company participates in the hospital market of stand-alone, non-invasive,
multi-parameter instruments through its VITALoCHECK product line, which measures
and monitors a combination of temperature, pulse, blood pressure and pulse
oximetry.
3
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 5,000 hospitals with a total of
approximately 950,000 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, many hospitals and other potential customers for the
Company's products participate in 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. Historically, this has 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
pharmaceuticals and nutritionals to patients in higher concentrations. The
majority of revenues in the international market are derived from hospitals; 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.
4
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 needleless 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
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, and syringe infusion pumps such as P1000, P3000, PCAM,
P6000, P7000 and Asena GS, GH and CC, 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 needleless
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. 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 to
general care and alternate site use. Signature Edition Classic which
was marketed since 1995.)
5
PRODUCT DESCRIPTION STATUS
- -------------------------------------- ---------------------------------------- --------------------------------
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.
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.
SYRINGE INFUSION PUMPS
ASENA Compact, lighter syringe pump with First model introduced
modular mounting design which will internationally in the third
connect to a docking station quarter of 1999.
capable of displaying all infusion
information centrally. Designed
for the international market.
P1000, P2000, P3000 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.
6
PRODUCT DESCRIPTION STATUS
- -------------------------------------- ----------------------------------------- ---------------------------------
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.
PCAM PUMP Syringe pump used in markets outside Marketed internationally
(PATIENT CONTROLLED ANALGESIA) the United States that allows since 1995.
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.
Not available in international
markets.
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 needleless, 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 o TEMP Fast electronic thermometer; for Marketed since 1999. Not
general hospital and alternate-site available in international
use. markets.
TEMPO o PLUS II Electronic thermometer for general Marketed since mid-1980s.
hospital and alternate site use.
COREO o 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.
7
PRODUCT DESCRIPTION STATUS
- -------------------------------------- ----------------------------------------- ---------------------------------
OTHER PATIENT MONITORING PRODUCTS
VITAL o CHECK (MODEL 4200) Continuous monitoring device that Marketed in the United States
rapidly measures pulse, blood since late 1980s.
pressure and temperature.
VITAL o 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.
AUDITORY EVOKED POTENTIAL (AEP) Non-invasive monitoring device that Marketed since late 2000
MONITOR performs fast extraction of AEP through a global exclusive
signals, delivering near real-time license agreement; introduced
measurements of the level of in Europe under the A-Line
consciousness during general brand in January 2001.
anesthesia and IV sedation in all
areas of the hospital.
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.
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;
programmability 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 patient 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.
8
The Company has developed the MEDLEY Patient Care System, a modular
system, which can currently be configured as a one-to-four channel infusion
device, including sensitive monitoring capabilities. Over time, additional
modules and capabilities are planned. The MEDLEY Patient Care System
incorporates 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. Limited
market introduction is expected in 2001.
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.
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.
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 in the United States.
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.
9
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 needleless access products are designed to permit access to the
Company's disposable administration sets without the use of needles, thus
reducing the potential for accidental needlesticks. The SmartSite needleless
system offers a fully integrated, cost-effective design and eliminates the need
for separate caps and additional cannula components. The SmartSite needleless
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.
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 TURBOoTEMP
thermometer; an improved cost-effective and technologically advanced electronic
thermometer designed to provide a faster temperature reading. The Company also
manufactures and markets the COREoCHECK 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 VITALoCHECK 4400 family provides non-invasive blood
pressure, pulse oximetry and temperature monitoring, using the Company's
electronic thermometry technology.
In December 2000, under the A-Line brand name, the Company introduced a
non-invasive monitoring device used to measure the level of consciousness during
general anesthesia and to assess the effects of anesthetics on brain activity.
Using Auditory Evoked Potential ("AEP") signals, the monitor performs fast
extraction of AEP signals, delivering near real-time measurements of the level
of consciousness during general anesthesia and intravenous sedation. Level of
consciousness monitoring enables anesthesiologists to directly assess the
effects of anesthetics on brain activity. The Company's technology consists of a
monitor that analyzes the brain's EEGs or brain waves and disposable sensors
used to collect the data. The practice of level of consciousness monitoring is
designed to improve the
10
practice of anesthesiology by allowing for the minimal use of drugs, which
should result in faster wake up times, reduced recovery time and reductions in
the side effects associated with anesthesia. This is the first commercially
available monitor for measuring the level of consciousness utilizing the AEP
technology.
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 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. The Company believes that the availability of such service
helps maintain strong customer relations.
MARKETING AND SALES
The Company has historically focused its sales efforts on the hospital
market, which is still its primary 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)....................................... 2005 - 2005
Premier.............................................. 2004 2001 2004
In-Source (Purchase Connection)...................... 2005 2005 2005
Tenet Healthcare..................................... 2007 - 2007
Tenet Buy Power...................................... 2004 - 2004
US Government / DOD.................................. 2006 2006 2006
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
11
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:
2000 1999 1998
------------ -------- ---------
(DOLLARS IN MILLIONS)
North America............................. $ 259.8 $ 265.7 $ 248.7
International............................. 119.1 124.2 125.1
--------- -------- ---------
Total Sales.......................... $ 378.9 $ 389.9 $ 373.8
========= ======== =========
The Company believes that sales of products to customers outside of the
United States represent a 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. The San Diego facility is the primary
manufacturing facility for infusion pumps and patient monitoring instruments and
also houses a service operation for installed infusion pumps and patient
monitoring instruments. The Creedmoor facility manufactures high volume, high
automation sub-assemblies and SmartSite needleless components 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 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 although the Company has not experienced any serious
shortages or material delays in obtaining these materials it has, on occasion,
experienced temporary delays for certain materials due to supplier shortages. 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.
12
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, 2000, the Company expended approximately $21.6
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 221 unexpired patents in the United
States and approximately 402 unexpired patents in foreign countries, principally
in Europe, Canada, Japan and Australia. The Company has 23 additional
applications pending or in preparation in the United States and 180 foreign
applications pending. Within the next ten years, approximately 140 of the
Company's United States patents and approximately 253 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. Pursuant to
international accords, the term of United States patents is 20 years from date
of filing and certain provisions formerly favoring United States inventors over
foreign inventors have been eliminated.
Under United States patent code, 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.
The Company sells its products under a variety of trademarks, some of
which are considered by the Company to be of sufficient importance to warrant
registration in the United States and various
13
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. In the United States, major competitors 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 Belgium, France, the Netherlands,
Norway, Sweden, Spain, and the United Kingdom.
The patient monitoring products market is fragmented by product type.
The Company's key competitors in the United States market are Welch Allyn, Inc.
in electronic thermometer and Sherwood Davis & Geck in infrared thermometer.
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.
14
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 510(k) clearance 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 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 as 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 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
15
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 uniform regulations for the European Economic Area, the
transition rule for which ended on June 16, 1998, subjected 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 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
16
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. The FDA's QSR 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 of the San Diego-based manufacturing facility.
The letter stated that the Company would be required 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.
On April 29, 2000, the Company's president and chief executive officer, David L.
Schlotterbeck, certified to the FDA that, to the best of his knowledge, the
Company had initiated or completed all corrections called for in the report
issued by the independent consultant. On July 10, 2000, the Company received
correspondence from the FDA indicating that the certification adequately
addressed the FDA's concerns and stated that the Company will be required to
submit one additional certification scheduled for submission to the FDA in April
2001. In this connection, in August 2000 the FDA completed an inspection of the
Company's San Diego-based manufacturing facility. The Company received
correspondence from the FDA indicating that ALARIS' response actions adequately
addressed their concerns.
Between 1997 and 1999, the Company on nine occasions initiated product
recalls or issued safety alerts which FDA still considers active 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. The Company has submitted
to the FDA a request for closure related to all nine of the recalls but has not
received notice of closure from the FDA. Notice of closure of two additional
recalls was received from the FDA during 2000.
The Company has four active field corrections related to its products
manufactured and sold outside the United States. 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. In the first
quarter of 2000, the Company stopped shipment of a large volume pump recently
introduced in the international markets for redesign of its air-in-line sensing
capability. The Company plans to introduce the redesigned product into
international markets and provide a field correction for existing units.
17
None of the recalls or field corrections materially interfered with the
Company's operations and all such affected product lines continued or will
continue to be marketed by the Company.
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 of the costs to complete
the recalls and safety alerts 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 or safety alert could differ significantly from
management's current estimates to complete such recalls or safety alerts.
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 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.
18
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"). 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.
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 February 28, 2001, the Company employed 2,597 people, including
772 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
19
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 Systems' 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.
EXECUTIVE OFFICERS OF THE REGISTRANT
DAVID L. SCHLOTTERBECK, age 53, became a Director, the President and
the Chief Executive Officer of Holdings 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 57, became Senior Vice President and Chief
Financial Officer of each Holdings 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.
JAKE ST. PHILIP, age 48, 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.
FREDERIC DENEROLLE, age 41, became Vice President and General Manager
of the International Business Unit for ALARIS Medical Systems in January 2001.
Prior to joining the Company, Mr. Denerolle held leadership positions in
well-known International medical device companies. He was most recently the
executive vice president/general manager of Fresenius' Infusion Technology
Division. Mr. Denerolle is a graduate in Business Administration from Ecole
Superieure de Commerce de Nantes, which includes MBA course work at Bowling
Green State University.
SALLY M. GRIGORIEV, age 42, became the Vice President of Operations in
December 2000. She previously served as 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
20
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.
WILLIAM H. MURPHY, age 48, became Vice President, Quality and
Regulatory Affairs for ALARIS Medical Systems in December 2000. He previously
served as director of regulatory affairs. Prior to Holdings, he held senior
leadership positions at other leading medical device manufacturers including the
Kendall Company, Hudson RCI and Nellcor Puritan Bennett. Mr. Murphy holds a B.S.
degree from Augusta College.
There are no family relationships among the above executive officers.
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. The
Company also maintains a facility in Hampshire, England where syringe pumps and
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 Tijuana, Mexico and high volume,
high automation sub-assemblies and SmartSite needleless components are
manufactured in Creedmoor, North Carolina. 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
On December 5, 2000, the Company filed a lawsuit in the United States
District Court for the Southern District of California, seeking unspecified
damages and equitable relief from Filtertek Inc. ("Filtertek") alleging, among
other things, that Filtertek's needle-free system (the "Filtertek System")
infringes a patent relating to needle free technology (the "Medex Patent")
licensed by Medex, Inc. ("Medex") to the Company on an exclusive basis and
seeking, as well, a declaration that the Company's needle-free system (the
"System") does not infringe a certain Filtertek patent (the "Filtertek Patent")
relating to the Filtertek System or, if it does, that the Filtertek Patent is
invalid.
On March 9, 2001, Filtertek filed a lawsuit in the United States
District Court for the Northern District of Illinois, Western Division, seeking
unspecified damages and equitable relief from the Company and Medex, alleging
that the System violates the Filtertek Patent, and seeking, as well, a
declaration, against Medex only, that the Filtertek System does not infringe the
Medex Patent.
The Company believes that it has meritorious defenses to all Filtertek
claims and intends to defend itself vigorously. However, there can be no
assurance that such defenses will successfully defeat all of such claims. The
failure to do so could have a material adverse effect on the Company's
operations, financial condition and cash flows.
21
In February 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. In related proceedings, Amaris Software also filed an opposition
in the German trademark office on August 30, 1998 against the Company's
application for registration of its trademark ALARIS in Germany and an
opposition in the Office for Harmonization of the Internal Market ("OHIM") in
August 1998 against the Company's application for a European Community trademark
registration for ALARIS. The Company prevailed in the opposition at the OHIM but
the German opposition is still pending.
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
ALARIS Medical Systems is a wholly-owned subsidiary of Holdings. There
is no established public trading market for ALARIS Medical Systems' common
stock. In addition, the Company's bank credit facility limits ALARIS Medical
System's ability to declare and pay dividends and to make other distributions
and payments to Holdings. See "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital Resources."
ITEM 6. SELECTED FINANCIAL DATA
The following selected historical consolidated financial data of ALARIS
Medical Systems at December 31, 2000, 1999, 1998, 1997 and 1996, and for the
years then ended, have been derived from ALARIS Medical Systems' annual
financial statements including the consolidated balance sheet at December 31,
2000 and 1999 and the related consolidated statement of operations for the
three-year period ended December 31, 2000 and notes thereto which appear
elsewhere herein. Certain prior period amounts have been reclassified to conform
to current period presentation. (Notes 1 and 3 to the Consolidated Financial
Statements.)
22
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------
2000 1999 1998 1997 (2) 1996 (1)(2)
----------- ----------- ----------- ----------- -----------
(DOLLAR AMOUNTS IN THOUSANDS)
STATEMENT OF OPERATIONS DATA:
Sales...................................... $ 378,948 $ 389,927 $ 373,795 $ 359,077 $ 136,371
Cost of sales.............................. 202,964 199,923 186,077 188,340 78,642
----------- ----------- ----------- ----------- -----------
Gross margin............................... 175,984 190,004 187,718 170,737 57,729
Selling and marketing expense.............. 72,340 75,749 72,155 65,797 22,273
General and administrative expense......... 37,891 40,702 39,120 37,510 13,434
Research and development expense........... 21,570 22,134 19,236 16,876 8,854
Purchased in-process research
and development ......................... - - 5,534 - 44,000
Restructuring, integration, and
other non-recurring charges ............. 7,048 2,887 139 19,767 15,277
----------- ----------- ----------- ----------- -----------
Total operating expenses .................. 138,849 141,472 136,184 139,950 103,838
Lease interest income (3).................. 5,095 4,425 4,599 4,559 2,501
----------- ----------- ----------- ----------- -----------
Income (loss) from operations.............. 42,230 52,957 56,133 35,346 (43,608)
Interest income............................ 1,313 1,373 1,129 433 184
Interest expense........................... (41,543) (39,903) (41,767) (43,123) (6,303)
Other (expense) income, net................ (140) (1,668) (1,116) (1,584) 323
----------- ----------- ----------- ----------- -----------
Income (loss) before income taxes.......... 1,860 12,759 14,379 (8,928) (49,404)
Provision (benefit) for income taxes ...... 3,200 7,600 8,400 (1,900) 1,270
----------- ----------- ----------- ----------- -----------
(Loss) income from continuing operations... (1,340) 5,159 5,979 (7,028) (50,674)
Loss from discontinued operations
(net of tax)............................. (1,308) (23,627) (25,178) - -
Gain on disposal of discontinued operation
(net of tax)............................. 1,839 - - - -
----------- ----------- ----------- ----------- -----------
Net loss................................... $ (809) $ (18,468) $ (19,199) $ (7,028) $ (50,674)
=========== =========== =========== =========== ===========
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------
2000 1999 1998 1997 (2) 1996 (1)(2)
----------- ----------- ----------- ----------- -----------
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents.................. $ 30,618 $ 23,539 $ 29,468 $ 6,918 $ 9,148
Working capital............................ 118,814 127,943 148,144 85,084 84,469
Total assets ............................. 564,456 600,726 644,377 563,106 586,141
Short-term debt (4)........................ 19,871 13,769 15,423 14,559 -
Long-term debt (4)......................... 344,905 382,678 399,623 415,419 423,941
Stockholder's equity....................... 95,056 101,121 123,118 38,947 50,021
ADJUSTED EBITDA (5) ........................... $ 81,197 $ 88,704 $ 95,873 $ 90,948 $ 29,023
Discontinued operations........................ 531 (23,627) (25,178) - -
Inventory purchase price
allocation adjustment (6).................. - - (40) (1,607) (4,014)
Restructuring, integration and
other non-recurring charges................ (7,048) (2,887) (139) (19,767) (15,277)
Purchased in-process research
and development............................ - - (5,534) - (44,000)
Depreciation and amortization (7).............. (31,919) (32,860) (34,027) (34,228) (9,340)
Interest income................................ 1,313 1,373 1,129 433 184
Interest expense............................... (41,543) (39,903) (41,767) (43,123) (6,303)
Other, net..................................... (140) (1,668) (1,116) (1,584) 323
(Provision for) benefit from income taxes...... (3,200) (7,600) (8,400) 1,900 (1,270)
----------- ----------- ----------- ----------- -----------
Net loss....................................... $ (809) $ (18,468) $ (19,199) $ (7,028) $ (50,674)
=========== =========== =========== =========== ===========
23
- --------------------------------
(1) ALARIS Medical Systems 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 Statement of Operations Data for 1996 is not
comparable to the Statement of Operations Data for subsequent years.
(2) Beginning fourth quarter of 2000, the Company is required to classify
shipping and handling revenues in sales. The Company has included such
costs in sales for the year ended December 31, 2000 and has conformed 1999
and 1998 Statements of Operations Data to the current period presentation.
Shipping and handling revenues were not segregated in earlier periods,
therefore, 1997 and 1996 Statements of Operations Data is not comparable to
later periods. (See Note 1 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) In 1996, in connection with the Merger, the Company entered into a $250,000
credit facility and also issued $200,000 of 9 3/4% senior subordinated
notes due 2006.
(5) 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 Systems 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 Systems believes that the inclusion of
these items would not be helpful to an investor's understanding of ALARIS
Medical Systems' ability to service debt. ALARIS Medical Systems'
computation of Adjusted EBITDA may not be comparable to similar titled
measures of other companies.
(6) 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.
(7) Depreciation and amortization excludes amortization of debt discount and
issuance costs included in interest expense of $3,114, $2,730, $2,889,
$3,012, $1,113 and $248 for the years ended December 31, 2000, 1999, 1998,
1997 and 1996, respectively.
(8) During the third quarter of 2000, the Company sold the assets and certain
liabilities of its Instromedix division to Card Guard Technologies, Inc.,
which had been acquired in 1998. Losses for discontinued operations for
2000, 1999 and 1998 are net of applicable income tax benefits of $872,
$4,200 and $1,000, respectively. Discontinued operations for 1999 include a
pretax charge of $19,200 resulting from the write-off of goodwill and other
intangible assets and approximately $4,600 in integration charges.
Discontinued operations in 1998 include a charge of $22,800 in write-offs
related to in-process research and development. (See Note 3 to the
Consolidated Financial Statements.)
24
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 SYSTEMS AND THE RELATED NOTES THERETO
INCLUDED ELSEWHERE IN THIS ANNUAL REPORT. CERTAIN PRIOR PERIOD AMOUNTS HAVE BEEN
RECLASSIFIED TO CONFORM TO CURRENT PERIOD PRESENTATION. (NOTES 1 AND 3 TO THE
CONSOLIDATED FINANCIAL STATEMENTS.)
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 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.
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 31.4% of the Company's total sales for
the year ended December 31, 2000. For the year ended December 31, 2000, the
Company had sales of $378.9 million and Adjusted EBITDA of $81.2 million.
Historically, the Company's results of operations have been affected by
the cost containment pressures applicable to health care providers.
Notwithstanding cost containment pressures, 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 characterized by
consolidation among healthcare providers and purchasers of medical products. The
Company's profitability is affected by the 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. As a result, GPOs 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 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. Certain prior period
amounts have been reclassified to conform to current period presentation. (Notes
1 and 3 to the Consolidated Financial Statements.)
25
YEAR ENDED DECEMBER 31,
--------------------------------------------------
2000 1999 1998
---------- ---------- ---------
(% OF SALES) (% OF SALES) (% OF SALES)
Sales ....................................................... 100.0% 100.0% 100.0%
Cost of sales.................................................. 53.6 51.3 49.8
---------- ---------- ---------
Gross margin................................................... 46.4 48.7 50.2
Selling and marketing expenses................................. 19.1 19.4 19.3
General and administrative expenses............................ 10.0 10.4 10.5
Research and development expenses.............................. 5.7 5.7 5.1
Purchased in-process research and
development................................................. - - 1.5
Restructuring, integration and other
non-recurring charges....................................... 1.9 .7 -
Lease interest income.......................................... (1.4) (1.1) (1.2)
---------- ---------- ---------
Income from continuing operations............................. 11.1 13.6 15.0
Interest income................................................ .3 .3 .3
Interest expense............................................... (11.0) (10.2) (11.2)
Other, net..................................................... - (.4) (.3)
---------- ----------- ---------
Income from continuing operations before income taxes.......... .4 3.3 3.8
Provision for income taxes..................................... .8 1.9 2.2
---------- ---------- ---------
Net (loss) income from continuing operations loss.............. (.4) 1.4 1.6
---------- ---------- ---------
Loss from discontinued operations.............................. (.3) (6.1) (6.7)
Gain on disposal of discontinued operations.................... .5 - -
---------- ---------- ---------
Net loss....................................................... (.2)% (4.7)% (5.1)%
========== ========== =========
Other Data:
Adjusted EBITDA............................................ 21.4% 22.7% 25.6%
========== ========== =========
The following table summarizes sales to customers by each business
unit:
YEAR ENDED DECEMBER 31, (A)
--------------------------------------------------
2000 1999 1998
---------- ---------- ------------
(IN MILLIONS)
North America sales............................................ $ 259.8 $ 265.7 $ 248.7
International sales............................................ 119.1 124.2 125.1
---------- ---------- ---------
Total sales................................................ $ 378.9 $ 389.9 $ 373.8
========== ========== =========
(A) The Company's sales results are reported consistent with the Company's two
strategic business units: North America and International.
YEAR ENDED DECEMBER 31, 2000 COMPARED WITH YEAR ENDED DECEMBER 31, 1999
SALES. Sales decreased $11.0 million, or 3%, during 2000 compared
with 1999. North America sales decreased $5.8 million, or 2.2% and
International sales decreased $5.2 million or 4.2%. The decrease in North
America sales in 2000 is primarily due to a decrease in drug infusion
disposable administration set revenue of $3.0 million and patient monitoring
26
instruments and disposable revenue of $3.1 million, partially offset by an
increase in drug infusion instrument revenue of $1.1 million. Disposable set
revenue was lower than a year ago in major markets worldwide. The Company
estimates that about $3 million of its dedicated disposable sets were purchased
in 1999 as safety stock in anticipation of possible Y2K problems at year-end.
The Company believes that most of this customer inventory was worked-off in the
first quarter of 2000 resulting in 1999 shipments and revenues that otherwise
would have been shipped and recorded in 2000. The majority of the Company's
international sales are denominated in foreign currency. Due to a stronger U.S.
dollar in 2000 compared with the actual foreign currency exchange rates in
effect during 1999, translation of 2000 international sales were adversely
impacted by $10.0 million. Using constant exchange rates, International sales
increased 4% due primarily to unit growth in syringe pumps and large volume
pumps.
GROSS MARGIN. Gross margin decreased $14.0 million or 7% during 2000
compared with 1999. The gross margin percentage decreased from 48.7% in 1999 to
46.4% in 2000 due to changes in product mix and unfavorable manufacturing
variances. Contributing to the margin decrease in 2000 was the overall worldwide
mix of increased instrument sales and lower disposables sales, lower
international sales which typically carry higher margins than U.S. sales and a
stronger U.S. dollar.
SELLING AND MARKETING EXPENSE. Selling and marketing expenses decreased
$3.4 million, or 5%, during 2000 compared with 1999 due to lower sales and the
favorable effect on international expenses of a strong U.S. dollar.
Additionally, the 1999 results included costs of approximately $2.1 million that
were not repeated in 2000 for management consulting fees associated with
developing and validating product strategies. As a percentage of sales, selling
and marketing expenses decreased from 19.4% in 1999 to 19.1% in 2000.
GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expense
decreased $2.8 million, or 7%, during 2000 compared with 1999. This decrease is
primarily due to lower amortization expense in 2000 resulting from certain
intangible assets becoming fully amortized. These decreases were partially
offset by increased information technology costs for the Company's new
International operating system implemented in late 1999 and higher medical
benefits costs than in the prior year. As a percentage of sales, general and
administrative expense decreased from 10.4% for 1999 to 10.0% for 2000.
RESEARCH AND DEVELOPMENT EXPENSE. Research and development expense
decreased approximately $0.6 million, or 3%, during 2000. As a percentage of
sales, research and development spending remained consistent with the prior
year.
RESTRUCTURING, INTEGRATION AND OTHER NON-RECURRING CHARGES.
Restructuring, integration and other non-recurring charges increased $4.2
million during 2000 compared with the prior year. The 2000 costs represent
restructuring activities the Company initiated which totaled approximately $7.0
million. These actions are intended to save approximately $6 million per year
when fully implemented and involve facilities in Creedmoor, N.C., Basingstoke,
England and San Diego. The primary focus of this activity is in the Creedmoor
manufacturing operation. This plant is being restructured to include disposables
engineering, automated manufacturing of selected products and distribution
operations. Manual assembly operations will be relocated to the Company's
facilities in Tijuana, Mexico, and certain operations will be outsourced.
Additionally, the Basingstoke and San Diego operations are being matched to the
mix of requirements resulting from current and future product line
rationalization efforts. The restructuring and other non-recurring charges of
$7.0 million taken during the current period were composed of severance ($5.3
million), fixed asset write-offs ($1.0 million), termination of a product
distribution agreement ($0.6 million) and closure of a foreign sales office
($0.1 million).
27
Integration and other non-recurring charges for 1999 includes a third
quarter charge of $2.8 million for two patent license agreements related to
patent infringement lawsuits (see Note 14 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 increased $0.7 million in 2000 compared with 1999 due to
increased sales activity associated with such leases.
INCOME FROM OPERATIONS. Income from operations decreased $10.7 million
during 2000 compared with 1999 primarily due to lower sales and gross margins
and restructuring charges, which were partially offset by lower operating
spending.
INTEREST EXPENSE. Interest expense increased $1.6 million, or 4%,
during 2000 primarily due to higher interest rates in 2000 on the Company's
outstanding debt. Additionally, in conjunction with an $18.1 million debt
repayment following the sale of Instromedix, the Company recorded a
corresponding reduction of debt issuance costs, resulting in a $0.4 million
interest expense charge in the current period.
OTHER EXPENSE. Other expense decreased $1.5 million during 2000
compared with 1999, primarily due to the favorable resolution of two tradename
disputes resulting in payments to ALARIS Medical Systems of approximately $2.8
million during 2000. This income was partially offset by increases of $1.4
million in foreign currency transaction losses resulting from the strengthening
of the U.S. dollar in 2000 compared with the actual foreign currency exchange
rates in effect during 1999.
DISCONTINUED OPERATIONS. During the third quarter of 2000, the Company
sold its Instromedix division to Card Guard Technologies, Inc., resulting in a
gain of $1.8 million, net of applicable taxes. For the year ended December 31,
2000, operating losses of $1.3 million (net of tax) for the Instromedix division
are included in discontinued operations. Discontinued operations in 1999
included a pretax charge of $19.2 million resulting from the write-off of
goodwill and other intangible assets related to the Instromedix business unit
and $4.6 million in integration charges related to the consolidation of
Instromedix into the San Diego facility (see Note 3 to the accompanying
Consolidated Financial Statements).
ADJUSTED EBITDA. Adjusted EBITDA decreased $7.5 million, or 8%, during
2000 compared with 1999. As a percentage of sales, Adjusted EBITDA decreased
from 22.7%, or $88.7 million, for 1999 to 21.4%, or $81.2 million, for 2000 due
to lower sales and gross margins and restructuring charges, which were partially
offset by lower operating spending. 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. Restructuring, 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.
28
YEAR ENDED DECEMBER 31, 1999 COMPARED WITH YEAR ENDED DECEMBER 31, 1998
SALES. Sales increased $16.1 million, or 4%, during 1999 compared with
1998. North America sales increased $17.0 million, or 7% and International sales
decreased $0.9 million or 1%. 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 $2.3 million or 1% during 1999
compared with 1998. The gross margin percentage decreased from 50.2% in 1998 to
48.7% 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
$3.6 million, or 5%, during 1999 compared with 1998. As a percentage of sales,
selling and marketing expenses increased from 19.3% in 1998 to 19.4% 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.
GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expense
increased $1.6 million, or 4%, during 1999 compared with 1998. The increase is
due to 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. As a percentage of sales, general and administrative
expense decreased from 10.5% for 1998 to 10.4% for 1999.
RESEARCH AND DEVELOPMENT EXPENSE. Research and development expense
increased approximately $2.9 million, or 15%, during 1999 primarily due to
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 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
29
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).
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.
INCOME FROM OPERATIONS. Income from operations decreased $3.2 million
during 1999 compared with 1998 primarily due to the patent license agreements
charges and the $2.5 million charge to cost of sales resulting from
manufacturing issues related to infusion disposable products 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
$55.8 million compared with $61.8 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.
INTEREST EXPENSE. Interest expense decreased $1.9 million, or 4%,
during 1999 primarily due to a decrease in the amount of long-term debt
outstanding in 1999 compared with 1998, as well as lower interest expense on the
bank credit facility in 1999 compared with 1998.
INTEREST INCOME. Interest income increased approximately $0.2 million
during 1999 compared with 1998 due to earnings from higher cash balances.
OTHER EXPENSE. Other expense increased $0.6 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.
DISCONTINUED OPERATIONS. During the third quarter of 2000, the Company
sold its Instromedix division to Card Guard Technologies, Inc. Operating losses
of $23.6 million (net of tax) and $25.2 million (net of tax) for the Instromedix
division are included in discontinued operations for 1999 and 1998,
respectively. Discontinued operations in 1999 included a pretax charge of $19.2
million resulting from the write-off of goodwill and other intangible assets
related to the Instromedix business unit and $4.6 million in integration charges
related to the consolidation of Instromedix into the San Diego facility.
Discontinued operations in 1998 included a charge of $22.8 million in write-offs
related to in-process research and development.
ADJUSTED EBITDA. Adjusted EBITDA decreased $7.2 million, or 8%, during
1999 compared with 1998. As a percentage of sales, Adjusted EBITDA decreased
from 25.6%, or $95.9 million, for 1998 to 22.7%, or $88.7 million, for 1999 due
primarily to patent license agreement charges and the $2.5 million charge to
cost of sales described 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
30
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.
LIQUIDITY AND CAPITAL RESOURCES
ALARIS Medical Systems expects to continue to meet its liquidity needs
during 2001, including capital expenditure requirements, with cash flow from
operations. ALARIS Medical Systems will continue to use its funds primarily for
operating expenses, including planned expenditures for new research and
development programs, capital expenditures and scheduled payments on outstanding
indebtedness.
At December 31, 2000, the Company had outstanding indebtedness of
$364.8 million. ALARIS Medical Systems has a credit facility with a group of
banks and other lenders consisting of term loans and a revolving credit
facility (the "Credit Facility"). Indebtedness under the Credit Facility
bears interest at floating rates based, at the Company's option, on
Eurodollar or prime rates. The indebtedness under the Credit Facility is
secured by substantially all of the assets of ALARIS Medical Systems and is
guaranteed by Holdings. At December 31, 2000, outstanding indebtedness under
the Credit Facility was $164.8 million. In addition to indebtedness under the
Credit Facility, at December 31, 2000, ALARIS Medical Systems also had
outstanding $200 million of 9-3/4% Senior Subordinated Notes due 2006 (the
"Notes").
The Company projected not meeting certain 2001 financial covenants
contained in the Credit Facility agreement. As a result, in April 2001 the
Company obtained an amendment (the Amendment) to the terms of the Credit
Facility. The Amendment included the following: (i) a provision providing for
changes to certain financial performance covenants for each applicable period
from March 31, 2001 through December 31 2003, (ii) a provision providing for
increases to the interest rates on each of the debt tranches (See Note 5 to
the Consolidated Financial Statements), (iii) a provision providing for a
decrease in the line of credit from $60 million to $20 million, and (iv) a
provision allowing ALARIS Medical Systems to borrow (as part of the Credit
Agreement or otherwise) up to an additional $15 million from a lender it must
first locate and to use the funds so borrowed for repurchase of Holdings' 7
1/4% Convertible Subordinated Debentures due January 15, 2002 (the
"Convertible Debentures"). The $15 million is the maximum that can be
borrowed by ALARIS Medical Systems under the terms of the Notes and used for
this purpose. The changes to the financial performance covenants were
developed based on the Company's strategic plans and were designed to allow
the Company access to the $20 million credit line.
The Credit Facility and the indenture governing the Notes (the
"Notes Indenture") permit ALARIS Medical Systems to fund interest payments on
the Convertible Debentures (in the case of the Credit Facility, so long as
there exists no default or event of default thereunder). However, both the
Credit Facility and the Notes Indenture prohibit ALARIS Medical Systems from
making those distributions to Holdings which would enable it to fund such
repayment, unless ALARIS Medical Systems has achieved certain financial
performance targets. Since management does not believe that ALARIS Medical
Systems will meet such tests, it is exploring various alternatives under
which those repayment obligations could be satisfied. For example, management
has had preliminary discussions with the administrative agent under the
Credit Facility and has been informed that certain lenders have expressed
interest in lending the allowed $15 million to ALARIS Medical Systems as part
of the Credit Agreement. Management believes that the terms provided in the
Amendment for this borrowing should be sufficient to obtain this borrowing.
However, since no lender has yet actually agreed to do so, there can be no
assurance that ALARIS Medical Systems will be able to borrow the $15 million
it is seeking. In any event, a default by Holdings on all or any portion of
its $16.2 million outstanding principal payment obligations under the
Convertible Debentures, whether as a result of Holdings' failure to obtain
the funds necessary to purchase, or repay, all outstanding Convertible
Debentures, or otherwise,
31
would likely result in an event of default under, and possible acceleration of
the obligations under, the Credit Facility and the Notes.
Management believes that if the Company can successfully arrange for
the repayment or purchase of the Convertible Debentures at, or prior to,
maturity, it will generate cash flow from operations, together with its
existing cash, sufficient, on both a long and short term basis, to fund its
operations, make planned capital expenditures and make scheduled principal
amortization and interest payments under the Credit Facility and interest
payments on the Notes. However, on a long-term basis, the Company may not
generate sufficient cash flow from operations to make scheduled interest
payments on behalf of Holdings on its outstanding $142.9 million (including
accretion) of 11 1/8% Senior Discount Notes due 2008 (the "Senior Discount
Notes") beginning in 2004, repay the Notes at maturity in 2006, or to repay
the Senior Discount Notes at maturity in 2008. Accordingly, the Company may
have to seek to refinance the Notes and Holdings may have to seek to
refinance Senior Discount Notes at or prior to maturity or sell assets or
raise equity capital to service its indebtedness in the long term. There can
be no assurance that either company would be successful in such efforts.
Based on current interest rates and debt outstanding as of December 31, 2000,
the Company is required over the next twelve months, to make principal and
interest payments under its Credit Facility in the amount of $35.0 million
and interest payments on the Notes in the amount of $19.5 million. Annual
principal amortization of the Company's indebtedness is $19.9 million, $26.1
million and $29.0 million for 2001, 2002 and 2003, respectively. In addition,
the Company's ability to fund its operations, to make planned capital
expenditures, to make scheduled principal and interest payments and to meet
the financial performance covenants in the amended Credit Facility will
depend 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.
Net cash provided by operating activities for the year ended December
31, 2000 was $41.9 million compared with $53.7 million provided by operating
activities in 1999. Net cash used in investing activities for the year ended
December 31, 2000 and 1999 was $0.4 million and $38.0 million, respectively. Net
cash used in investing activities included net proceeds from the sale of
Instromedix of $17.5 million in 2000, and $7.8 million in payments related to
patent license agreements in 1999 (see Note 15 to the Condensed Consolidated
Financial Statements). Cash used in investing activities also includes $14.9
million and $25.9 million in net capital expenditures for the years ended
December 31, 2000 and 1999, respectively. Net cash used by financing activities
for the year ended December 31, 2000 and 1999 was $34.3 million and $21.5
million, respectively and was primarily composed of principal payments on
long-term debt. In August 2000, in connection with the sale of Instromedix, the
Company made a payment of $18.1 million under the Credit Facility, reducing the
outstanding balance to $167.8 million from $185.9 million.
During 2000, the Company made cash payments of $4.2 million for
restructuring activities initiated in 2000. These actions are intended to save
approximately $6 million per year when fully implemented and involve facilities
in Creedmoor, N.C., Basingstoke, England and San Diego. The primary focus of
this activity is in the Creedmoor manufacturing operation. This plant is being
restructured to include disposables engineering, automated manufacturing of
selected products and distribution operations. Manual assembly operations will
be relocated to the Company's facilities in Tijuana, Mexico, and certain
operations will be outsourced. Additionally, the Basingstoke and San Diego
operations are being matched to the mix of requirements resulting from current
and future product line rationalization efforts. Approximately $1 million of the
total estimated restructuring charge was non-cash. The majority of the
restructuring charges are expected to be paid in 2001. At December 31, 2000,
$1.8 million was accrued for such restructuring costs.
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.
32
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 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 was accrued at December 31,
1999. Cash payments of $0.4 million were made in 2000 related to these
activities and the remaining accrual of $0.2 million is expected to be paid
during 2001.
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 $14.9 million
and $26.1 million during the year ended December 31, 2000 and 1999,
respectively. During the fiscal years 1996 through 1999, the Company made
combined capital and operating expenditures of approximately $19.0 million
related to the new enterprise-wide information system. The project was completed
in 2000 with additional spending of approximately $0.5 million.
SEASONALITY
Infusion instrument sales are typically higher in the fourth quarter
due to sales compensation plans which reward the achievement of annual quotas
and the seasonal characteristics of the industry, including hospital
purchasing patterns. First quarter sales are traditionally not as strong as
the fourth quarter. The Company anticipates that this trend will continue but
is unable to predict the effect, if any, from health care reform, increased
competitive pressures. Approximately 31% and 34% of the Company's sales of
drug infusion instruments occurred during the fourth quarters of 2000 and
1999, respectively.
BACKLOG
The backlog of orders, believed to be firm, at December 31, 2000 and
1999 was $13.8 million and $8.2 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 2000. Due to changes in foreign
currency exchange rates during 2000 and 1999, primarily a strengthening of the
U.S. dollar, the Company's functional currency, against many European
currencies, the Company recognized a foreign currency transaction loss of
approximately $2.5 million and $1.1 million during 2000 and 1999, respectively.
For the year ended December 31, 2000 and the year ended December 31, 1999,
approximately 34% and 34% of the Company's sales and 33% and 29% of the
Company's operating expenses were denominated in currencies other than the
Company's functional currency. These foreign currencies are primarily those of
Western Europe, Canada and Australia. Additionally, substantially all of the
receivables and payables of the Company's foreign subsidiaries are denominated
in currencies other than the Company's functional currency. As of December 31,
2000 the Company had not entered into foreign currency contracts for purposes of
hedging or speculation. Beginning 2001, the Company will enter into certain
contracts to manage the risk of foreign currency fluctuations. (See "Foreign
Exchange Risk Management.")
33
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; 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
DERIVATIVE FINANCIAL INSTRUMENTS
The Company addresses certain financial exposures through a controlled
program of risk management that includes the use of derivative financial
instruments. As of December 31, 2000, the Company had completed the preparatory
steps to initiate a foreign exchange risk management program commencing with the
upcoming fiscal period. Under the program, the Company will utilize foreign
currency forward and option contracts to reduce the effect of foreign exchange
rate fluctuations.
Consistent with its action in 1997 to reduce the effect of interest
rate volatility as described in preceding paragraphs, the Company continued its
use of interest rate swap derivatives during 2000. The swap agreement entered
into in 1997 expired in 2000 and a new swap agreement was entered into during
the second quarter of 2000 with a term extending through January of 2002. The
Company categorizes these instruments as entered into for purposes other than
trading.
FOREIGN EXCHANGE RISK MANAGEMENT
As part of the plan to manage the risk of foreign currency
fluctuations, the Company anticipates entering into forward exchange contracts
to hedge purchases, receivables and payables denominated in foreign currencies
for periods consistent with identified exposures. The purpose of the hedging is
to minimize the effect of foreign currency exchange rates on cashflows the
Company receives from its foreign subsidiaries. All foreign currency contracts
are denominated in the currencies of major industrial countries and are with
large financial institutions rated as investment grade by a major rating agency.
Gains and losses related to qualifying hedges of these exposures are deferred
and recognized in operating income when the underlying hedged transaction
occurs. The Company also enters into foreign currency options to hedge
anticipated transactions where there is a high probability that anticipated
exposures will materialize. Any gains realized on such options that qualify as
hedges are deferred and recognized in operating income when the underlying
hedged transaction occurs. Premiums on foreign currency options are amortized
over the period being hedged. Foreign currency transactions that would not
qualify as
34
hedges would be marked to market on a current basis with gains and losses
recognized through income and reflected in foreign exchange gains and losses. In
addition, any previously deferred gains and losses on hedges which are
terminated prior to the transaction date would be recognized in current income
when the hedge is terminated.
As a matter of policy, the Company will only enter into contracts with
counterparties that have at least an investment grade or equivalent credit
rating. The counterparties to these contracts are major financial institutions.
The Company does not have significant exposure to any one counterparty.
Management believes the risk of loss related to counterparty default is remote
and in any event, would not be material. The contracts will have varying
maturities with none exceeding twelve months. Costs associated with entering
into contracts are not expected to be material to our financial results. The
Company does not utilize derivative instruments for trading or speculative
purposes. At December 31, 2000, there were no outstanding foreign currency
option or forward contracts.
INTEREST RATE RISK MANAGEMENT
During the second quarter of 1997, the Company entered into an interest
rate protection agreement ("swap") covering approximately 50% of its term loan
borrowings through February 1, 2000. The swap fixed the interest rate charged on
Credit Facility term borrowings resulting in a weighted average interest rate of
9.7% as of December 31, 1999. During the second quarter of 2000, the Company
entered into a new swap with a notional amount of $100.0 million, expiring in
February of 2002. The new swap effectively changed the Company's interest rate
exposure on its floating rate Credit Facility term debt, resulting in a weighted
average interest rate as of December 31, 2000 of 10.5%. A 10% increase
(approximately one percentage point) in the applicable interest rate would
result in a $0.3 million annual increase in interest expense.
As noted, the company enters into interest rate protection agreements ("swaps")
to convert a portion of floating rate credit facility term debt to fixed rate.
The present swap is an instrument that exchanges floating rate for fixed rate
interest rate payments through January of 2002. Amounts currently due to or from
the swap are recorded in interest expense in the period in which they accrue.
The agreement affects interest payments for $100 million of principal of the
outstanding credit facility term debt.
MARKET RISK
The Company will incur option premium cost in connection with its
foreign currency hedging activities. The option premium cost represents the
entire risk associated with these derivatives. Option premium costs are
amortized over the life of the option contract.
The Company has not incurred any direct cost in connection with the
swap agreement. However, since entering into the agreement, the fair value of
the swap has become negative. At December 31, 2000 the negative market value of
the swap is $1.6 million. Should the Company terminate the swap in advance of
expiration, the cost to the Company could be material.
EURO TRANSITION
On January 1, 1999, the eleven member countries of the European Union
began the transition to a common currency, the "Euro". The conversion rates
between the Euro and the participating nations' currencies were fixed
irrevocably as of January 1, 1999 with the participating national currencies to
be removed from circulation between January 1 and June 30, 2002 and replaced by
Euro notes and coinage. The Company is currently evaluating the effect of this
transition and at the present time, management does not believe the Euro
transition will have a materially adverse impact on its business.
35
ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 133, " Accounting for Derivative Instruments and Hedging Activities".
This statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. SFAS No. 133 is effective for the
Company's fiscal quarter beginning January 1, 2001 (date of transition) and will
not require retroactive restatement of prior period financial statements. SFAS
No. 133 requires the recognition of all derivative instruments as either assets
or liabilities in the statement of financial position measured at fair value.
Generally, increases or decreases in the fair value of derivative instruments
will be recognized as gains or losses in earnings in the period of change. If
certain conditions are met, where the derivative instrument has been designated
as a fair value hedge, the hedged item may also be marked to market through
earnings, thus creating an offset. If the derivative is designated and qualifies
as a cash flow hedge, the changes in the fair value of the derivative instrument
may be recorded on the balance sheet as other comprehensive income.
The new accounting standard has not significantly affected the
Company's approach to managing interest rate and foreign currency risk. The
Company plans to hedge against these exposures using forward exchange contracts,
foreign currency options, interest rate swaps and options. These contracts have
been designated as hedges of anticipated future cashflows and accordingly, will
be marked to market through other comprehensive income (balance sheet
adjustment) until such time as the related anticipated transactions affect
earnings.
No foreign exchange hedging instruments were outstanding during 2000.
The interest rate protection agreement entered into in 2000 had a negative
market value of $1.6 million at December 31, 2000, which would be the cost for
the company to terminate the swap as of that date. Under SFAS No. 133, a
derivative designated as a hedge must meet an effectiveness test. If a hedged
liability contains provisions permitting pre-payment, the effectiveness test
must be based on the "long method". ALARIS uses the long method effectiveness
test and has determined the swap is a highly effective hedge. Consequently,
changes in the swap fair value will be reflected on the balance sheet as other
comprehensive income.
Additional information on market risk 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-32 of
this Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
36
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 ALARIS Medical Inc.'s Proxy
Statement to be filed with the Securities and Exchange Commission in connection
with the Annual Meeting of Stockholders to be held on May 23, 2001 (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
ALARIS Medical, Inc.'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
ALARIS Medical Inc.'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
ALARIS Medical Inc.'s Proxy Statement under the heading "Certain Relationships
and Related Transactions."
37
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 Systems, Inc. and
its subsidiaries are included on pages F-1 - F-32.
Report of Independent Accountants
Consolidated Balance Sheet at December 31, 2000 and 1999
Consolidated Statement of Operations for the years ended December 31,
2000, 1999 and 1998
Consolidated Statement of Cash Flows for the years ended December 31,
2000, 1999 and 1998
Consolidated Statement of Stockholder's Equity for the period from
December 31, 1997 to December 31, 2000
Notes to Consolidated Financial Statements
2. FINANCIAL STATEMENT SCHEDULES:
Schedule II--Valuation and Qualifying Accounts and Reserves for the
three years ended December 31, 2000
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
- ----------- ----------------------
2.3 -- Asset Purchase Agreement by and among ALARIS Medical, Inc.,
ALARIS Medical Systems, Inc., Card Guard Scientific Survival
Ltd. And Card Guard Technologies, Inc. (Registrant agrees to
furnish supplementally to the Commission upon request a copy
of all omitted schedules and exhibits to the Asset Purchase
Agreement.) Incorporated by reference to Exhibit 2(a) to
ALARIS Medical's Form 8-K dated September 15, 2000 (August 31,
2000).
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")).
38
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ----------- ----------------------
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).
3.5 -- ALARIS Medical, Inc. By-Laws (as amended through April 17,
2000). (Incorporated by reference to Exhibit 3.5 to ALARIS
Medical's Form 10-Q for the quarterly period ended March 31,
2000.)
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).
10.1 -- Credit Agreement dated as of November 26, 1996 among
Advanced Medical, Inc., IMED Corporation, Various Lending
Institutions, Bankers Trust Company, Banque Paribas and
Donaldson, Lufkin & Jenrette Securities Corporation
(Incorporated by reference to Exhibit 10.1 to the AM December
8-K).
10.3 -- 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.)
39
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ----------- ----------------------
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).
10.11 -- 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. Incorporated by reference to the Company's
Annual Report on Form 10-K for the year ended
December 31, 1999.
10.13 -- Settlement and license agreement by and among Becton,
Dickinson and Company and ALARIS Medical Systems, Inc. dated
October 13, 1999.Incorporated by reference to the Company's
Annual Report on Form 10-K for the year ended
December 31, 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.
Incorporated by reference to the Company's Annual Report
on Form 10-K for the year ended December 31, 1999.
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.
Incorporated by reference to the Company's Annual Report
on Form 10-K for the year ended December 31, 1999.
10.16 -- Addendum to Employment Letter dated April 13, 1999 by and
between David Schlotterbeck and ALARIS Medical, Inc., and
ALARIS Medical Systems, Inc. Incorporated by reference
to the Company's Annual Report on Form 10-K for the year
ended December 31, 1999.
10.17 -- Change in Control Agreement, dated April 20, 2000 between
ALARIS Medical, Inc. and William C. Bopp. The Company has
entered into identical agreements with each of the following:
David L. Schlotterbeck, Sally M. Grigoriev, Anthony B. Semedo
and Jake St. Philip. (Incorporated by reference to Exhibit
10.17 to ALARIS Medical's Form 10-Q for the quarterly period
ended March 31, 2000.)
10.19 -- Amendment to ALARIS Medical, Inc.'s 1996 Stock Option Plan
(incorporated by reference to the Company's Proxy Statement
dated April 26, 2000).
10.20 -- Amendment to ALARIS Medical, Inc.'s Third Amended and
Restated 1990 Nonqualified Stock Option Plan for Non-Employee
Directors (incorporated by reference to the Company's Proxy
Statement dated April 26, 2000).
10.21 -- Amendment No. 7 and Consent to the Bank Credit Agreement
dated as of August 28, 2000, among ALARIS Medical, Inc.,
ALARIS Medical Systems, Inc., the financial institutions party
to the Credit Agreement, Bankers Trust Company and Banque
Paribas. (Incorporated by reference to Exhibit 10.21 to the
Company's report on Form 10-Q/A for the Quarter ended
September 30, 2000.)
40
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ----------- ----------------------
10.22 -- Amendment No. 8 and Consent to the Bank Credit Agreement
dated as of April 13, 2001, among ALARIS Medical, Inc., ALARIS
Medical Systems, Inc., the financial institutions party to the
Credit Agreement, Bankers Trust Company and Banque Paribas.
(ALARIS Medical Inc.'s Annual Report on Form 10-K for the year
ended December 31, 2000.)
21 -- List of Subsidiaries of ALARIS Medical, Inc.
- --------------------------
* 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.
41
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of San
Diego, State of California, on April 16, 2001.
ALARIS MEDICAL SYSTEMS, 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/ NORMAN M. DEAN Director and Chairman of the Board
- ---------------------------------------
Norman M. Dean
/s/ DAVID L. SCHLOTTERBECK Director, President and Chief
- --------------------------------------- Executive Officer
David L. Schlotterbeck
/s/ WILLIAM C. BOPP Sr. Vice President and Chief
- --------------------------------------- Financial Officer,
William C. Bopp Treasurer
(Principal Financial and Accounting
Officer)
/s/ HANK BROWN Director
- ---------------------------------------
Hank Brown
/s/ HENRY GREEN Director
- ---------------------------------------
Henry Green
/s/ BARRY SHALOV Director
- ---------------------------------------
Barry Shalov
/s/ WILLIAM TUMBER Director
- ---------------------------------------
William Tumber
42
ALARIS MEDICAL SYSTEMS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. FINANCIAL STATEMENTS:
PAGE
----
Report of Independent Accountants.......................................................... F-2
Consolidated Balance Sheet at December 31, 2000 and 1999................................... F-3
Consolidated Statement of Operations for the years ended December 31, 2000,
1999 and 1998........................................................................... F-4
Consolidated Statement of Cash Flows for the years ended December 31, 2000,
1999 and 1998........................................................................... F-5
Consolidated Statement of Stockholder's Equity for the period from
December 31, 1997 to December 31, 2000.................................................. 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, 2000.....................................................F-32
F-1
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of ALARIS Medical Systems, Inc.:
In our opinion, the consolidated financial statements listed in the
index appearing under Item 14(a)(1) on page 38 present fairly, in all material
respects, the financial position of ALARIS Medical Systems, Inc. and its
subsidiaries at December 31, 2000 and 1999, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 2000 in conformity with accounting principles generally accepted in the
United States of America. In addition, in our opinion, the financial statement
schedules listed in the index appearing under Item 14(a)(2) on page 38 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 of America, 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 our opinion.
As discussed in Note 5 to the consolidated financial statements,
$16,125,000 of 7.25% convertible subordinated debentures of Alaris Medical, Inc.
mature on January 15, 2002.
PricewaterhouseCoopers LLP
San Diego, CA
April 13, 2001
F-2
ALARIS MEDICAL SYSTEMS, INC.
CONSOLIDATED BALANCE SHEET
- --------------------------------------------------------------------------------
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
ASSETS
DECEMBER 31,
-----------------------------
2000 1999
----------- -----------
Current assets:
Cash................................................................................ $ 30,618 $ 23,539
Receivables, net.................................................................... 79,786 84,885
Inventories......................................................................... 62,324 76,769
Prepaid expenses and other current assets........................................... 32,945 24,992
----------- -----------
Total current assets............................................................ 205,673 210,185
Net investment in sales-type leases, less current portion............................... 25,920 24,407
Property, plant and equipment, net...................................................... 59,988 68,480
Other non-current assets................................................................ 24,546 23,745
Intangible assets, net.................................................................. 248,329 273,909
----------- -----------
$ 564,456 $ 600,726
=========== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current portion of long-term debt................................................... $ 19,871 $ 13,769
Accounts payable.................................................................... 22,052 25,147
Accrued expenses and other current liabilities...................................... 44,936 43,326
----------- -----------
Total current liabilities....................................................... 86,859 82,242
----------- -----------
Long-term debt.......................................................................... 344,905 382,678
Other non-current liabilities........................................................... 37,636 34,685
----------- -----------
Total non-current liabilities................................................... 382,541 417,363
----------- -----------
Contingent liabilities and commitments (Notes 9 and 14)
Common stock and other stockholder's equity:
Common stock and capital in excess of par value, authorized 3,000 common
shares at $.01 par value; 1,000 issued and outstanding
at December 31, 2000 and 1999.................................................... 203,684 203,684
Accumulated deficit................................................................. (101,089) (98,250)
Accumulated other comprehensive loss................................................ (7,539) (4,313)
----------- -----------
Total stockholder's equity...................................................... 95,056 101,121
----------- -----------
$ 564,456 $ 600,726
=========== ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
F-3
ALARIS MEDICAL SYSTEMS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31,
-----------------------------------------
2000 1999 1998
----------- ---------- ----------
Sales ..................................................................... $ 378,948 $ 389,927 $ 373,795
Cost of sales................................................................ 202,964 199,923 186,077
----------- ---------- ----------
Gross margin............................................................. 175,984 190,004 187,718
----------- ---------- ----------
Selling and marketing expenses............................................... 72,340 75,749 72,155
General and administrative expenses.......................................... 37,891 40,702 39,120
Research and development expenses............................................ 21,570 22,134 19,236
Purchased in-process research and development................................ - - 5,534
Restructuring, integration, and other non-recurring charges.................. 7,048 2,887 139
----------- ---------- ----------
Total operating expenses................................................. 138,849 141,472 136,184
----------- ---------- ----------
Lease interest income........................................................ 5,095 4,425 4,599
----------- ---------- ----------
Income from operations................................................... 42,230 52,957 56,133
Other income (expenses):
Interest income........................................................ 1,313 1,373 1,129
Interest expense....................................................... (41,543) (39,903) (41,767)
Other, net............................................................. (140) (1,668) (1,116)
----------- ---------- ----------
Total other expense...................................................... (40,370) (40,198) (41,754)
----------- ---------- ----------
Income before income taxes................................................... 1,860 12,759 14,379
Provision for income taxes................................................... 3,200 7,600 8,400
----------- ---------- ----------
(Loss) income from continuing operations..................................... (1,340) 5,159 5,979
----------- ---------- ----------
Discontinued operations:
Loss from operations of discontinued
business [net of applicable income tax benefits of
($872), ($4,200) and ($1,000), respectively].......................... (1,308) (23,627) (25,178)
Gain on disposal of business
[net of applicable income tax expense of $1,226]...................... 1,839 - -
----------- ---------- ----------
Total income (loss) from discontinued operations............................. 531 (23,627) (25,178)
----------- ---------- ----------
Net loss..................................................................... $ (809) $ (18,468) $ (19,199)
=========== ========== ==========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
F-4
ALARIS MEDICAL SYSTEMS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
- --------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31,
-------------------------------------------
2000 1999 1998
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss...................................................................... $ (809) $ (18,468) $ (19,199)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Depreciation and amortization............................................... 33,182 37,393 36,088
Net loss on disposal/write-off of property, plant and equipment and
intangibles............................................................... 1,726 20,990 824
Debt discount and issue costs amortization.................................. 3,114 2,730 2,889
Purchased in-process research and development............................... - - 28,334
Gain on sale of Instromedix................................................. (1,839) - -
(Increase) decrease in assets:
Receivables............................................................... 2,638 17,309 (14,959)
Inventories............................................................... 14,131 2,616 (13,763)
Prepaid expenses and other current assets................................. (4,802) (469) (1,059)
Net investment in sales-type leases, non-current portion.................. (1,513) (5,296) 11,293
Other non-current assets.................................................. (2,136) - (3,025)
Increase (decrease) in liabilities:
Accounts payable.......................................................... (2,960) 3,043 (3,278)
Accrued expenses, restructuring and integration costs and other
current liabilities...................................................... (7,024) (7,514) (2,181)
Other non-current liabilities............................................. 8,210 1,376 5,533
---------- ---------- ---------
Net cash provided by operating activities........................................ 41,918 53,710 27,497
---------- ---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures.......................................................... (14,945) (26,070) (25,055)
Patents, trademarks and other................................................. (1,093) (1,114) (1,221)
Payments for product licenses and distribution rights......................... (1,940) (10,941) (750)
Proceeds from disposal of property, plant and equipment....................... 48 157 451
Acquisition of business, net of cash acquired (Note 2)........................ - - (36,510)
Net proceeds from sale of discontinued business (Note 3)...................... 17,516 - -
---------- ---------- ---------
Net cash used in investing activities............................................ (414) (37,968) (63,085)
---------- ---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt and capital lease obligations............ (31,652) (19,096) (20,437)
Principal payments on acquired debt........................................... - - (4,822)
Proceeds from revolving credit facility....................................... - - 34,800
Repayments of revolving credit facility....................................... - - (60,000)
Proceeds from term loan borrowing............................................. - - 30,000
Dividends to Holdings......................................................... (2,030) (2,437) (2,216)
Capital contributions......................................................... - - 81,671
Deferred financing costs...................................................... (650) - (894)
---------- ---------- ---------
Net cash (used in) provided by financing activities.............................. (34,332) (21,533) 58,102
---------- ---------- ---------
Effect of exchange rate changes on cash.......................................... (93) (138) 36
---------- ---------- ---------
Net increase (decrease) in cash ................................................. 7,079 (5,929) 22,550
Cash at beginning of period...................................................... 23,539 29,468 6,918
---------- ---------- ---------
Cash at end of period............................................................ $ 30,618 $ 23,539 $ 29,468
========== ========== =========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
F-5
ALARIS MEDICAL SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
- --------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
ACCUMULATED
COMMON STOCK OTHER
AND CAPITAL COMPRE- COMPRE-
IN EXCESS OF PAR VALUE HENSIVE TOTAL HENSIVE
---------------------- ACCUMULATED INCOME STOCKHOLDER'S INCOME
SHARES AMOUNT DEFICIT (LOSS) EQUITY (LOSS)
------------ ------- --------------- ------------- -------------- --------------
Balance at December 31, 1997................... 1,000 $98,503 $(55,930) $ (3,626) $ 38,947
Comprehensive loss
Net loss for the year....................... - - (19,199) - (19,199) $ (19,199)
Equity adjustment from foreign currency
translation............................... - - - 437 437 437
----------
Comprehensive loss............................. $ (18,762)
Tax benefit from exercise of ALARIS ==========
Medical stock options....................... - 147 - - 147
Capital contribution from Holdings............. - 105,002 - - 105,002
Dividends to Holdings.......................... - - (2,216) - (2,216)
------ -------- --------- -------- ---------
Balance at December 31, 1998................... 1,000 203,652 (77,345) (3,189) 123,118
Comprehensive loss
Net loss for the year....................... - - (18,468) - (18,468) $ (18,468)
Equity adjustment from foreign currency
translation............................... - - - (1,124) (1,124) (1,124)
----------
Comprehensive loss............................. $ (19,592)
Tax benefit from exercise of ALARIS ==========
Medical stock options....................... - 32 - - 32
Dividends to Holdings.......................... - - (2,437) - (2,437)
------ -------- ---------- -------- ----------
Balance at December 31, 1999................... 1,000 203,684 (98,250) (4,313) 101,121
Comprehensive loss
Net loss for the year....................... - - (809) - (809) $ (809)
Equity adjustment from foreign currency
translation............................... - - - (3,226) (3,226) (3,226)
----------
Comprehensive loss............................. - - - - - $ (4,035)
Dividends to Holdings.......................... - - (2,030) - (2,030) ==========
------ -------- ---------- -------- ---------
Balance at December 31, 2000................... 1,000 $203,684 $ (101,089) $ (7,539) $ 95,056
====== ======== ========== ======== =========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
F-6
ALARIS MEDICAL SYSTEMS, 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 Systems, Inc. ("ALARIS Medical Systems"), designs,
manufactures, distributes and services intravenous infusion therapy and patient
monitoring instruments and related disposables and accessories. ALARIS Medical
Systems was formed by the merger of two pioneers in infusion systems, IMED
Corporation ("IMED") and IVAC Medical Systems ("IVAC"), Inc. on November 26,
1996. ALARIS Medical Systems, a wholly-owned subsidiary of ALARIS Medical, Inc.
("Holdings"), formerly Advanced Medical, Inc., was incorporated on October, 14
1988 under the laws of the State of Delaware. ALARIS Medical Systems 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 Systems
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 passage of title and transfer of risk of loss,
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 of generally 30 days.
The Company maintains adequate reserves for potential credit losses and such
losses have been within management's estimates.
F-7
NOTE 1 - BUSINESS, ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
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 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, 2000 and 1999, the
unamortized capitalized patent costs are $2,627 and $2,146, 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.
Intangible assets are amortized as follows:
Patents............................................. Straight-line 9 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
F-8
NOTE 1 - BUSINESS, ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
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 $8,375 and $10,839 at December 31, 2000
and 1999, 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
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, 2000 and 1999 were $1,890 and $630,
respectively.
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 the Company's long-term lease
receivables approximate their carrying values. There is no quoted market
value for the bank debt which would enable the Company to determine the fair
value. However, the Company believes the estimated fair value of the
long-term bank debt approximates its carrying value. The estimated fair value
of the Company's $200,000 senior subordinated notes was $80,000 and $172,000
at December 31, 2000 and 1999, respectively.
F-9
NOTE 1 - BUSINESS, ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
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) as if the fair value-based method had
been applied in measuring compensation expense.
RECLASSIFICATIONS:
Certain prior year period amounts have been reclassified to conform to the
current period presentation. Due to the sale of the Instromedix division in the
third quarter of 2000 (Note 3), the operating results of the Instromedix
division have been reclassified to discontinued operations in the consolidated
statements of operations. This reclassification also affects the International
business segment, since sales and expenses related to international sales of
Instromedix products were historically included in the International business
unit. All prior period segment information has been restated to exclude
Instromedix results.
SEGMENT INFORMATION:
The Company uses the management approach to report segment information.
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. The Company also discloses segment
information about products and services, geographic areas, and major customers.
(Note 12)
F-10
NOTE 1 - BUSINESS, ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
COMPREHENSIVE INCOME:
In addition to net income, the Company reports comprehensive income and
its components including foreign currency translation items 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.
SHIPPING AND HANDLING FEES AND COSTS:
In July 2000, The Financial Accounting Standards Board Emerging Issues
Task Force ("EITF") reached a consensus that amounts billed to customers for
shipping and handling costs should be included in sales. The classification of
shipping and handling costs is considered an accounting policy decision that
should be disclosed. If shipping and handling costs are significant and not
included in cost of sales, companies should disclose both the amount of such
costs and which line item on the income statement includes that amount. The
Company is required to apply the consensus beginning fourth quarter 2000. The
Company has historically included most amounts billed to customers for shipping
and handling as a reduction of selling and marketing expense where such expenses
are included. The Company has conformed prior period financials to reflect
shipping and handling reimbursement in sales. The Company also records cost for
shipping and handling revenue in selling and marketing expense. Shipping and
handling costs for customer sales for the year ended December 31, 2000 was
$6,916. Shipping and handling costs for customer sales for prior years is not
available.
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. Under FAS 133 reporting, the Company's interest rate swap will be
presented at fair value on the balance sheet. At December 31, 2000 the fair
value of the swap was negative $1.6 million, which would be presented as a
non-current liability under FAS 133 with the initial offsetting charge included
in other comprehensive income. As it relates to the swap, the adoption of FAS
133 will not have an impact on the results of operations of the Company. FAS 133
also has extensive disclosure requirements. (See Liquidity and Capital
Resources.)
NOTE 2 -- ACQUISITIONS AND LICENSES
On July 17, 1998, pursuant to an agreement with Holdings, 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 was approximately $58 million.
F-11
NOTE 2 -- ACQUISITIONS AND LICENSES (CONTINUED)
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 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. In the third quarter of 2000,
the Company sold the assets and certain liabilities of Instromedix to Card Guard
Technologies, Inc. (Note 3).
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 and 2000, upon completion of additional milestones, the
Company made payments of $2,750 and $250, respectively. 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 2001.
NOTE 3 - SALE OF INSTROMEDIX
On August 31, 2000, pursuant to an Asset Purchase Agreement dated as of
August 17, 2000, the Company sold the assets and certain liabilities of its
Instromedix division to Card Guard Technologies, Inc. ("Buyer") for $30,000 in
cash ("the Sale").
F-12
NOTE 3 - SALE OF INSTROMEDIX (CONTINUED)
The Asset Purchase Agreement and the other agreements executed in
connection with the sale provide that the Company will assist Buyer in setting
up a fully independent headquarters and manufacturing facility in San Diego,
California. Pursuant to these agreements, $5,000 of the $30,000 purchase price
was placed in escrow. The Company received such escrowed amount, after certain
offsets, upon completion of its obligations under the agreements in the first
quarter of 2001. The Company will recognize the gain associated with this
contingent amount in 2001. During this transition period, the Company continued
to manufacture Instromedix products for Buyer.
The total after tax gain to be recorded related to the Sale is
estimated at approximately $5,600, with $1,839 recorded during the quarter
ended September 30, 2000. The remainder of the gain will be recorded in 2001.
The amount of gain to be recorded at such time is dependent upon the actual
costs incurred by the Company to complete the transition activities and the
amount actually received from the escrow.
Approximately $18,000 of the net cash proceeds from the Sale (after
taxes and other estimated costs) was used to repay indebtedness under the ALARIS
Medical Systems credit facility.
As a result of the Sale, the Company has reclassified its historically
reported consolidated statements of operations to exclude the Instromedix
results from continuing operations and report such operating results as
discontinued operations. The gain on the sale and the Instromedix year 2000
operating results through the sale date have been reported as discontinued
operations in the period ended December 31, 2000. For the years ended December
31, 2000, 1999 and 1998, Instromedix sales included in discontinued operations
were $8,672, $14,386 and $8,430, respectively.
NOTE 4 - COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS
DECEMBER 31,
2000 1999
---------- ----------
RECEIVABLES:
Trade receivables................................................................... $ 72,868 $ 77,809
Allowance for doubtful accounts..................................................... (2,331) (3,119)
----------- -----------
70,537 74,690
Current portion of net investment in sales-type leases (Note 9)..................... 9,249 10,195
---------- ----------
$ 79,786 $ 84,885
========== ==========
INVENTORIES:
Raw materials....................................................................... $ 28,078 $ 34,960
Work-in-process..................................................................... 6,985 6,156
Finished goods...................................................................... 27,261 35,653
---------- ----------
$ 62,324 $ 76,769
========== ==========
PREPAID EXPENSES AND OTHER CURRENT ASSETS:
Deferred income tax asset........................................................... $ 24,823 $ 21,577
Other............................................................................... 8,122 3,415
---------- ----------
$ 32,945 $ 24,992
========== ==========
F-13
NOTE 4 - COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS (CONTINUED)
PROPERTY, PLANT AND EQUIPMENT:
Land................................................................................ $ 640 $ 640
Building and leasehold improvements................................................. 16,802 16,628
Machinery and equipment............................................................. 45,800 46,447
Information technology.............................................................. 28,209 26,490
Furniture and fixtures.............................................................. 7,182 7,121
Instruments under operating lease contracts......................................... 26,385 25,629
Construction-in-process............................................................. 8,905 8,038
---------- ----------
133,923 130,993
Accumulated depreciation and amortization........................................... (73,935) (62,513)
---------- ----------
$ 59,988 $ 68,480
========== ==========
Depreciation expense was $18,767, $17,168 and $18,638 for 2000, 1999
and 1998, respectively, including $1,422, $1,023 and $300 of depreciation on
capitalized computer software in 2000, 1999 and 1998, respectively.
DECEMBER 31,
-------------------------
2000 1999
---------- -----------
OTHER NON-CURRENT ASSETS:
Capitalized patent issuance and trademark registration costs........................ $ 2,627 $ 2,146
Patent license agreements........................................................... 8,270 7,618
Debt issue costs.................................................................... 8,375 10,839
Other............................................................................... 5,274 3,142
---------- -----------
$ 24,546 $ 23,745
========== ===========
DECEMBER 31,
-------------------------
1999 1999
---------- ----------
INTANGIBLE ASSETS:
Goodwill............................................................................ $ 178,445 $ 178,445
Patents and completed technology.................................................... 28,946 45,646
Product licensing and distribution fees............................................. 7,587 7,337
Supply agreements................................................................... 10,758 10,758
Trademarks.......................................................................... 90,000 90,000
Workforce........................................................................... 7,100 7,100
---------- ----------
322,836 339,286
Accumulated amortization............................................................ (74,507) (65,377)
---------- ----------
$ 248,329 $ 273,909
========== ===========
Amortization expense of intangible assets was $13,152, $15,692 and
$15,388 during 2000, 1999 and 1998, respectively.
F-14
NOTE 4 - COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS (CONTINUED)
DECEMBER 31,
-------------------------
1999 1999
---------- ----------
ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES:
Compensation........................................................................ $ 15,100 $ 15,623
Warranty............................................................................ 7,895 11,072
Deferred revenue from sale of Instromedix (Note 3).................................. 7,500 -
Interest............................................................................ 3,168 4,421
Other............................................................................... 11,273 12,210
---------- ----------
$ 44,936 $ 43,326
========== ==========
OTHER NON-CURRENT LIABILITIES:
Deferred income tax liability....................................................... $ 21,547 $ 27,363
Deferred revenue.................................................................... 5,408 4,442
Warranty............................................................................ 685 1,078
Payable to Holdings (Note 11)....................................................... 5,226 -
Other............................................................................... 4,770 1,802
---------- ----------
$ 37,636 $ 34,685
========== ==========
NOTE 5 - NOTES PAYABLE AND LONG-TERM DEBT
Long-term debt consists of the following:
DECEMBER 31,
----------------------------
2000 1999
------------ -----------
Bank credit facility
Tranche A....................................................................... $ 37,014 $ 53,400
Tranche B....................................................................... 34,892 38,950
Tranche C....................................................................... 34,892 38,950
Tranche D....................................................................... 57,850 64,575
------------ -----------
Total term loans .......................................................... 164,648 195,875
9.75% senior subordinated notes due 2006.............................................. 200,000 200,000
Other................................................................................. 128 572
------------ -----------
364,776 396,447
Current portion................................................................... (19,871) (13,769)
------------ -----------
Long-term debt........................................................................ $ 344,905 $ 382,678
============ ===========
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 (Tranches A, B,C and D) and a $50,000 credit line
maturing in 2002. In July 1998, in connection with the Instromedix acquisition,
the Company amended the Credit Facility to, among other things, increase the
revolving credit facility to $60,000 and provide 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, 2000. The Credit Facility contains various operating and financial
covenants, as well as certain covenants relating to reporting requirements. As
of December 31, 2000, the Company was in compliance with all such covenants.
F-15
NOTE 5 - NOTES PAYABLE AND LONG-TERM DEBT (CONTINUED)
The Company projected not meeting certain 2001 financial covenants
contained in the Credit Facility agreement. As a result, in April 2001 the
Company obtained an amendment (the Amendment) to the terms of the Credit
Facility. The Amendment included the following: (i) a provision providing for
changes to certain financial performance covenants for each applicable period
from March 31, 2001 through December 31 2003, (ii) a provision providing for
increases to the interest rates on each of the debt tranches, (iii) a
provision providing for a decrease in the line of credit from $60,000 to
$20,000 and (iv) a provision allowing ALARIS Medical Systems to borrow (as
part of the Credit Agreement or otherwise) up to an additional $15,000 from a
lender it must first locate and to use the funds so borrowed to repurchase
Convertible Debentures (as defined below). The $15,000 is the maximum that
can be borrowed by ALARIS Medical Systems under the terms of the Notes (as
defined below) and used for this purpose. The changes to the financial
performance covenants were developed based on the Company's strategic plans
and were designed to allow the Company access to the $20,000 credit line.
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 9.8% and 10.3%, respectively, as of December 31, 2000. As
of December 31, 1999, the Company had a swap outstanding with commercial banks
for a total notional principal amount of $85,775. That agreement effectively
changed the Company's interest rate exposure on its floating rate debt through
the agreements expiration in February, 2000. During the second quarter of 2000,
the Company entered into a new swap agreement with a notional amount of
$100,000, expiring in February of 2002. The new agreement effectively fixed the
interest rate on $100,000 of the Company's floating rate Credit Facility debt,
resulting in a weighted average interest rate as of December 31, 2000, of 10.5%
on all Credit Facility debt.
As a result of the Amendment in April 2001, the interest rates under
the Credit Facility were increased, and now include paid-in-kind interest (PIK),
to the following rates effective April 1, 2000: Credit line and Tranche A
borrowings - Eurodollar rates plus 6.50% including 2.00% PIK, Tranche B
borrowings - Eurodollar rates plus 7.50% including 3.00% PIK, Tranche C
borrowings - Eurodollar rates plus 8.00% including 3.50% PIK, and Tranche D
borrowings - Eurodollar rates plus 8.25% including 3.75% PIK. The PIK interest
is deferred in payment and added to the outstanding principal quarterly. Payment
of PIK interest is required with the final principal payment on each tranche
borrowing.
All obligations of the Company under the Credit Facility are guaranteed
by Holdings and each existing and subsequently formed or acquired domestic
subsidiary of Holdings.
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 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.
F-16
NOTE 5 - NOTES PAYABLE AND LONG-TERM DEBT (CONTINUED)
CONVERTIBLE DEBENTURES OF PARENT COMPANY:
At December 31, 2000, Holdings 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 Holdings 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%. From January 15, 2001 through January 14, 2002,
the redemption price is 100.725% of the Convertible Debentures face (par) value.
Holders may require Holdings 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 Holdings' subsidiaries. The indenture does not restrict the
incurrence of senior indebtedness or other indebtedness by Holdings or any
subsidiary.
The Credit Facility and the indenture governing the Notes (the
"Notes Indenture") permit ALARIS Medical Systems to fund interest payments on
the Convertible Debentures (in the case of the Credit Facility, so long as
there exists no default or event of default thereunder). However, both the
Credit Facility and the Notes Indenture prohibit ALARIS Medical Systems from
making those distributions to Holdings which would enable it to fund such
repayment, unless ALARIS Medical Systems has achieved certain financial
performance targets. Since management does not believe that ALARIS Medical
Systems will meet such tests, it is exploring various alternatives under
which those repayment obligations could be satisfied. For example, management
has had preliminary discussions with the administrative agent under the
Credit Facility and has been informed that certain lenders have expressed
interest in lending the allowed $15,000 to ALARIS Medical Systems as part of
the Credit Agreement. Management believes that the terms provided in the
Amendment for this borrowing should be sufficient to obtain this borrowing.
However, since no lender has yet actually agreed to do so, there can be no
assurance that ALARIS Medical Systems will be able to borrow the $15,000 it
is seeking. In any event, a default by Holdings on all or any portion of its
$16,125 outstanding principal payment obligations under the Convertible
Debentures, whether as a result of Holdings' or the Company's ]failure to
obtain the funds necessary to purchase, or repay, all outstanding Convertible
Debentures, or otherwise, would likely result in an event of default under,
and possible acceleration of the obligations under, the Credit Facility and
the Notes.
Maturities of long-term debt during the years subsequent to
December 31, 2000 are as follows:
2000.................................... $ 19,871
2001.................................... 26,059
2002.................................... 28,991
2003.................................... 34,400
2004.................................... 55,455
Thereafter.............................. 200,000
-----------
$ 364,776
===========
The Company's ability to fund its operations, to make planned
capital expenditures, to make scheduled principal and interest payments and
to meet the financial performance covenants in the amended Credit Facility
will depend 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.
F-17
NOTE 6 - INCOME TAXES
The provision for (benefit from) income taxes comprises the following:
YEAR ENDED DECEMBER 31,
--------------------------------------
2000 1999 1998
---------- ---------- ----------
CONTINUING OPERATIONS:
Current:
Federal............................................... $ 5,335 $ 3,163 $ 1,067
State................................................. -- 935 501
Foreign............................................... 175 1,205 3,008
---------- ---------- ----------
Total Current...................................... 5,510 5,303 4,576
---------- ---------- ----------
Deferred:
Federal............................................... (1,249) 3,350 3,273
State................................................. 96 (421) 452
Foreign............................................... (1,157) (632) 99
---------- ---------- ----------
Total Deferred..................................... (2,310) 2,297 3,824
---------- ---------- ----------
Provision for (benefit from) income taxes
For continuing operations...................... $ 3,200 $ 7,600 $ 8,400
========== ========== ==========
DISCONTINUED OPERATIONS:
YEAR ENDED DECEMBER 31,
--------------------------------------
2000 1999 1998
---------- ---------- ----------
Current:
Federal............................................... $ 4,999 $ (2,766) $ (531)
State................................................. 1,060 (589) (111)
---------- ---------- ----------
Total Current...................................... 6,059 (3,355) (642)
---------- ---------- ----------
Deferred:
Federal............................................... (4,707) (697) (295)
State................................................. (998) (148) (63)
---------- ---------- ----------
Total Deferred..................................... (5,705) (845) (358)
---------- ---------- ----------
Provision for (benefit from) income taxes
For discontinued operations.................... $ 354 $ (4,200) $ (1,000)
========== ========== ==========
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,
---------------------------------------
2000 1999 1998
---------- ---------- ----------
Taxes computed at statutory rate........................................ $ 651 $ 4,465 $ 5,033
State income taxes, net of federal benefit.............................. 62 334 619
Effect of foreign operations............................................ 481 1,269 1,391
Amortization and write-off of non-deductible intangible assets.......... 1,995 1,955 1,964
Federal tax credits..................................................... - (625) (473)
Acquired in-process research and development............................ - - -
Other, net.............................................................. 11 202 (134)
---------- ---------- ----------
Provision for (benefit from) income taxes............................... $ 3,200 $ 7,600 $ 8,400
========== ========== ==========
F-18
NOTE 6 - INCOME TAXES (CONTINUED)
The components of the net deferred tax assets included in the Consolidated
Balance Sheet as of December 31, 2000 and 1999 are as follows:
2000 1999
---------- ----------
Deferred tax assets:
Net operating loss carryforwards................................................... $ 1,400 $ 637
Accrued liabilities and reserves................................................... 23,647 20,151
Unearned income.................................................................... 1,387 1,863
Credit carryforwards............................................................... 6,137 4,993
Inventory.......................................................................... 5,928 4,116
Miscellaneous...................................................................... 482 392
---------- ----------
38,981 32,152
Valuation allowance................................................................ (2,029) (2,029)
---------- ----------
Total deferred tax assets.......................................................... 36,952 30,123
Deferred tax liabilities:
Intangible assets.................................................................. 32,090 34,246
Property, plant and equipment...................................................... 1,586 1,663
Miscellaneous...................................................................... - -
---------- ----------
Net deferred tax assets............................................................... $ 3,276 $ (5,786)
========== ==========
As of December 31, 2000, the Company had a foreign tax credit
carryforward of approximately $4,190 for federal tax purposes and research and
development tax credits of approximately $114 and $702 for federal and state
purposes, respectively. The federal and state net operating loss carryforwards
expire from 2001 to 2012. The foreign tax credit expires from 2001 to 2005 and
the research and development tax credits expire from 2009 to 2011.
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 $114 and $294 of the respective federal and state research and
development credits are subject to a general annual income offset limitation of
approximately $3,700. 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 7 - STOCK OPTION PLANS
The Company maintains several stock option plans under which incentive
stock options may be granted to key employees of the Company and non-qualified
stock options may be granted to key employees, directors, officers, independent
contractors and consultants.
F-19
NOTE 7 - STOCK OPTION PLANS (CONTINUED)
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.
During 2000, the Company's stockholders 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. 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 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. At December 31, 2000, 2,376 of such options were
outstanding.
STOCK OPTION ACTIVITY:
Activity for 2000, 1999 and 1998 with respect to these plans is as
follows:
SHARES OPTION
UNDERLYING PRICE PER
OPTIONS SHARE
---------- -----------------
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
Granted.................................................................... 1,325 $ 0.41 - $ 2.81
Exercised.................................................................. (1) $ 1.81 - $ 1.81
Canceled................................................................... (1,666) $ 1.31 - $ 6.75
------
Outstanding at December 31, 2000.............................................. 7,625 $ 0.41 - $ 6.75
======
F-20
NOTE 7 - STOCK OPTION PLANS (CONTINUED)
At December 31, 2000, options for 3,488 shares were exercisable at
$0.41-$6.75 under the plans and 2,709 shares were available for future grant.
Additionally, as of December 31, 2000, 10,334 shares of common stock were
reserved for issuance pursuant to the Company's stock option plans.
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,
----------------------------------------------
2000 1999 1998
--------------- ------------ ----------------
Net loss:
As reported....................................... $ (809) $ (18,468) $ (19,199)
Pro forma......................................... $ (2,494) $ (20,574) $ (20,813)
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, 2000, 1999 and 1998, respectively;
dividend yields of 0%, expected volatility of 85%, 164% and 186%, risk free
interest rates of 5.2%, 5.2% and 4.6%, and expected lives ranging from 3 to 7
years.
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 Holdings' 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, 2000:
OPTIONS OUTSTANDING AND EXERCISABLE BY PRICE RANGE AS OF DECEMBER 31, 2000
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE-YEARS PRICE EXERCISABLE PRICE
--------------------- ----------- ---------------- -------------- ----------- ----------------
$0.41 - $1.88 1,420 8.19 $1.52 397 $1.81
$1.91 - $1.91 227 9.28 $1.91 19 $1.91
$1.97 - $2.00 1,678 8.98 $2.00 1 $1.97
$2.00 - $2.81 335 6.99 $2.40 174 $2.55
$2.81 - $3.00 1,303 6.11 $2.99 1,231 $3.00
$3.09 - $6.75 2,662 7.48 $3.57 1,666 $3.57
------------- ---------- -------- -------- -------- -------
$0.41 - $6.75 7,625 7.74 $2.64 3,488 $3.11
============= ========== ======== ======= ======== =======
F-21
NOTE 8 - BENEFIT PLANS
PENSION PLANS:
The Company had a defined benefit pension plan (the "Plan") which
covered substantially all of its U.S. employees as of December 31, 1993. On
December 1, 1993, the Company's Board of Directors approved amendments to the
Plan provisions which include, among other matters, cessation of benefit
accruals after December 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 2000,
1999 or 1998 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, 2000 and 1999
and the Plan's estimated funded status and amounts recognized in the Company's
balance sheet as of December 31, 2000 and 1999:
DECEMBER 31,
------------------------
2000 1999
---------- ----------
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation at beginning of year............................................. $ 10,565 $ 12,248
Service cost........................................................................ 308 294
Interest cost....................................................................... 836 806
Benefits paid....................................................................... (253) (212)
Actuarial loss...................................................................... (271) (2,571)
---------- ----------
Benefit obligation at end of year................................................... $ 11,185 $ 10,565
========== ==========
CHANGE IN PLAN ASSETS:
Fair value of Plan assets at beginning of year...................................... $ 19,020 $ 18,390
Actual return on Plan assets........................................................ 535 842
Benefits paid....................................................................... (253) (212)
---------- ----------
Fair value of Plan assets at end of year............................................ $ 19,302 $ 19,020
========== ==========
Funded status....................................................................... $ 8,117 $ 8,455
Unrecognized actuarial gain......................................................... (5,222) (6,474)
---------- ----------
Prepaid benefit cost................................................................ $ 2,895 $ 1,981
========== ==========
The components of net periodic benefit gain for the years ended
December 31, 2000, 1999 and 1998 are as follows:
DECEMBER 31,
---------------------------------------
2000 1999 1998
---------- ---------- ----------
Service cost ............................................................ $ 308 $ 294 $ 253
Interest cost ............................................................ 836 806 754
Expected return on Plan assets............................................ (1,702) (1,645) (1,417)
Recognized actuarial gain................................................. (357) (234) (156)
---------- ---------- ----------
Net periodic benefit gain................................................. $ (915) $ (779) $ (566)
========== ========== ==========
Assumptions used in the accounting are as follows:
Discount rates........................................................ 8.00% 8.00% 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-22
NOTE 9 - LEASES
LEASE RECEIVABLES:
The Company leases instruments to customers under capital and operating
lease contracts with terms ranging generally from 1 to 6 years. Certain capital
lease agreements obligate the lessee to purchase a specified annual minimum of
disposable sets and payment of liquidating damages if the agreement is
terminated by the lessee. Anticipated future minimum amounts due under operating
leases and capital lease receivables as of December 31, 2000 are as follows:
OPERATING CAPITAL
YEAR ENDING DECEMBER 31: LEASES LEASES
------------------------ ---------- ----------
2001................................................................................ $ 162 $ 14,840
2002................................................................................ 106 12,109
2003................................................................................ 32 9,182
2004................................................................................ - 7,062
2005................................................................................ - 4,538
Thereafter.......................................................................... - 2,975
---------- ----------
Total............................................................................... $ 300 $ 50,706
========== ==========
The net investment in sales-type leases consists of the following:
DECEMBER 31,
------------------------
2000 1999
---------- ----------
Minimum lease payments.............................................................. $ 50,706 $ 49,555
Unguaranteed residual value of leased equipment..................................... 140 270
Unearned interest income............................................................ (14,422) (13,464)
Allowance for uncollectible lease receivables....................................... (1,255) (1,759)
---------- ----------
Net investment in sales-type leases................................................. 35,169 34,602
Current portion..................................................................... (9,249) (10,195)
---------- ----------
Net investment in sales-type leases, less current portion........................... $ 25,920 $ 24,407
========== ==========
LEASE COMMITMENTS:
The Company leases buildings and equipment under non-cancelable
operating leases with terms ranging from approximately 2 to 13 years. Scheduled
future minimum lease commitments as of December 31, 2000 are as follows:
OPERATING
YEAR ENDING DECEMBER 31: LEASES
------------------------ ----------
2001................................................................................ $ 5,713
2002................................................................................ 5,352
2003................................................................................ 4,529
2004................................................................................ 4,493
2005................................................................................ 4,440
Thereafter.......................................................................... 5,932
----------
$ 30,459
==========
Rental expense was $6,103, $6,023 and $5,451 during 2000, 1999 and
1998, respectively.
F-23
NOTE 10 - RESTRUCTURING, INTEGRATION AND OTHER NON-RECURRING CHARGES
The following summarizes the significant components of the Company's
2000, 1999 and 1998 restructuring, integration and other non-recurring charges
included in the Consolidated Statement of Operations:
YEAR ENDED DECEMBER 31,
2000 1999 1998
--------- --------- ---------
RESTRUCTURING
Severance and related benefits............................................... $ 5,306 $ - $ -
Termination of product distribution agreement................................ 601 - -
Fixed asset write-off........................................................ 1,024 - -
Closure of foreign sales office.............................................. 117 - -
--------- --------- ---------
Total restructuring charges............................................... 7,048 - -
INTEGRATION
Other........................................................................ - 49 139
--------- --------- ---------
Total integration charges................................................. - 49 139
OTHER NON-RECURRING CHARGES
Patent license agreement charge.............................................. - 2,838 -
--------- --------- ---------
Total restructuring, integration and other non-recurring charges.......... $ 7,048 $ 2,887 $ 139
========= ========= =========
During the second quarter of 2000, the Company announced plans for
restructuring activities which are anticipated to save approximately $6,000 per
year when fully implemented and involve facilities in Creedmoor, N.C.,
Basingstoke, England and San Diego. The primary focus of this activity is in the
Creedmoor manufacturing operation. This plant is being restructured to include
disposables engineering, automated manufacturing of selected products and
distribution operations. Manual assembly operations will be relocated to the
Company's facilities in Tijuana, Mexico, and certain operations will be
outsourced. Additionally, the Basingstoke and San Diego operations are being
matched to the mix of requirements resulting from current and future product
line rationalization efforts.
During the year ended December 31, 2000, the Company recorded a charge
related to these activities of $7,048 included in restructuring and other
non-recurring charges. Of this charge, $5,306 related to employee termination
benefits, $601 related to termination of a product distribution agreement
(including legal expenses), $117 related to the closure of a foreign sales
office and $1,024 related to non-cash charges for fixed asset write-offs. The
restructuring plans call for 154 manufacturing employees and 13 sales and
administrative employees to be terminated. As of December 31, 2000,
approximately $3,700 of employee termination costs have been paid to 150
employees. Additionally, approximately $400 has been paid for termination of a
product distribution agreement and related legal costs year-to-date. The
remaining restructuring accrual for these activities of $1,836 is comprised of
approximately $1,600 for severance and related employee costs and $200 for
termination of a product distribution agreement. The remaining restructuring
charges are expected to be paid during the first quarter of 2001.
F-24
NOTE 10 - RESTRUCTURING, INTEGRATION AND OTHER NON-RECURRING CHARGES (CONTINUED)
During 1999 the Company recorded a charge of $2,838 for two patent
license agreements related to patent infringement lawsuits (Note 14).
The Company paid approximately $4,200, $2,900 and $100 during 2000,
1999, and 1998, respectively, for restructuring and integration activities.
NOTE 11 - RELATED PARTY ARRANGEMENTS
Pursuant to ALARIS Medical Systems' tax sharing agreement with
Holdings, for Federal income tax purposes, ALARIS Medical Systems is required
to calculate its current income tax liability on a stand-alone basis as if it
were not included in the Holdings consolidated income tax return. The
resulting tax liability is payable to Holdings. The pro-forma income taxes
recorded on ALARIS Medical Systems on a stand alone basis for the years ended
December 31, 2000 and 1999 are $5,226 and $0, respectively, and are recorded
in other non-current liabilities as a payable to Holdings. Such amounts
eliminate in the consolidated financial statements.
NOTE 12 - SEGMENT INFORMATION
The Company segment performance is based on results of two business
segments - North America and International. Due to the sale of the Instromedix
division, the prior year's segment information has been conformed to present the
Company's two reportable segments from continuing operations - North America and
International.
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.
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.
F-25
NOTE 12 - SEGMENT INFORMATION (CONTINUED)
The table below presents information about reported segments for the
years ended December 31:
NORTH
AMERICA INTERNATIONAL TOTAL
----------- ------------- ------------
2000
Sales ......................................................... $ 259,864 $ 119,084 $ 378,948
Income from operations ........................................ 25,805 16,425 42,230
Adjusted EBITDA................................................ 54,927 26,270 81,197
1999
Sales ......................................................... $ 265,672 $ 124,255 $ 389,927
Income from operations ........................................ 25,025 27,932 52,957
Adjusted EBITDA................................................ 54,779 33,925 88,704
1998
Sales ......................................................... $ 248,661 $ 125,134 $ 373,795
Income from operations ........................................ 26,863 29,270 56,133
Adjusted EBITDA................................................ 60,141 35,732 95,873
Reconciliation of total segment adjusted EBITDA to consolidated income
from continuing operations before taxes:
2000 1999 1998
----------- ----------- -----------
ADJUSTED EBITDA
Total adjusted EBITDA for reportable segments.................. $ 81,197 $ 88,704 $ 95,873
Depreciation and amortization.................................. (31,919) (32,860) (34,027)
Net interest................................................... (40,230) (38,530) (40,638)
Purchased in-process research and development.................. - - (5,534)
Restructuring, integration and other non-recurring charges..... (7,048) (2,887) (179)
Other reconciling items........................................ (140) (1,668) (1,116)
----------- ----------- -----------
Consolidated income from continuing operations
before income taxes....................................... $ 1,860 $ 12,759 $ 14,379
=========== =========== ===========
SALES
--------------------------------------------
2000 1999 1998
----------- ----------- -----------
PRODUCT LINE INFORMATION
Drug Infusion.................................................. $ 326,141 $ 332,662 $ 315,617
Patient Monitoring............................................. 31,088 34,455 34,865
Service........................................................ 19,427 20,475 21,156
Shipping and handling (B)...................................... 2,292 2,335 2,157
----------- ----------- -----------
$ 378,948 $ 389,927 $ 373,795
=========== =========== ===========
SALES LONG-LIVED ASSETS
------------------------------------------ ----------------------------
2000 1999 1998 2000 1999
----------- ----------- ----------- ----------- -----------
GEOGRAPHICAL INFORMATION
United States..................... $ 246,289 $ 251,333 $ 236,438 $ 340,095 $ 368,731
International (A)................. 132,659 138,594 137,357 18,688 21,810
----------- ----------- ----------- ----------- -----------
$ 378,948 $ 389,927 $ 373,795 $ 358,783 $ 390,541
=========== =========== =========== =========== ===========
F-26
NOTE 12 - SEGMENT INFORMATION (CONTINUED)
(A) Includes Canadian sales which are included in the North America unit
for segment reporting purposes.
(B) Beginning fourth quarter of 2000, shipping and handling charges are
required to be included in Sales (Note 1). Prior period information has
been reclassified to conform to the change in reporting requirements
for 2000. Segment information for 2000, 1999 and 1998, each include
shipping and handling revenue for the respective 12-month period.
NOTE 13 - CASH FLOW INFORMATION
Federal, state and foreign income taxes paid during 2000, 1999 and 1998
totaled $8,335, $4,852 and $5,433, respectively. Interest paid during 2000, 1999
and 1998 totaled $39,730, $38,195 and $36,872, 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.
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.
F-27
NOTE 14- CONTINGENCIES AND LITIGATION (CONTINUED)
In October 1999, the Company received a warning letter from the FDA
related to earlier inspections of the San Diego based manufacturing facility.
The letter stated that, the Company would be required 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. On April 29, 2000 the Company's president and chief executive
officer, David L. Schlotterbeck, certified to the FDA that, to the best of
his knowledge, the Company has initiated or completed all corrections called
for in the report issued by the independent consultant. On July 10, 2000, the
Company received correspondence from the FDA indicating that the
certification adequately addresses the FDA's concerns. In this connection, in
August 2000 the FDA completed an inspection of the Company's San Diego based
manufacturing facility. The Company will submit one additional certification
to the FDA in April 2001.
Between 1997 and 1999, the Company on nine occasions initiated
product recalls or issued safety alerts which FDA still considers active
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. The
Company has submitted to the FDA a request for closure related to all nine of
the recalls but has not received notice of closure from the FDA. Notice of
closure of two additional recalls was received from the FDA during 2000.
The Company has four active field corrections related to its
products manufactured and sold outside the United States. 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. In the first quarter of 2000, the Company stopped shipment of
a large volume pump recently introduced in the international markets for
redesign of its air-in-line sensing capability. The Company plans to
introduce the redesigned product into international markets and provide a
field correction for existing units.
None of the recalls or field corrections materially interfered with the
Company's operations and all such affected product lines continued or will
continue to be marketed by the Company.
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 of the costs to
complete the recalls and safety alerts 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 or safety alert could differ significantly
from management's current estimates to complete such recalls or safety
alerts. 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.
F-28
NOTE 14- CONTINGENCIES AND LITIGATION (CONTINUED)
LITIGATION
On December 5, 2000, the Company filed a lawsuit in the United States
District Court for the Southern District of California, seeking unspecified
damages and equitable relief from Filtertek Inc. ("Filtertek") alleging, among
other things, that Filtertek's needle-free system (the "Filtertek System")
infringes a patent relating to needle free technology (the "Medex Patent")
licensed by Medex, Inc. ("Medex") to the Company on an exclusive basis and
seeking, as well, a declaration that the Company's needle-free system (the
"System") does not infringe a certain Filtertek patent (the "Filtertek Patent")
relating to the Filtertek System or, if it does, that the Filtertek Patent is
invalid.
On March 9, 2001, Filtertek filed a lawsuit in the United States
District Court for the Northern District of Illinois, Western Division, seeking
unspecified damages and equitable relief from the Company and Medex, alleging
that the System violates the Filtertek Patent, and seeking, as well, a
declaration, against Medex only, that the Filtertek System does not infringe the
Medex Patent.
The Company believes that it has meritorious defenses to all Filtertek
claims and intends to defend itself vigorously. However, there can be no
assurance that such defenses will successfully defeat all of such claims. The
failure to do so could have a material adverse effect on the Company's
operations, financial condition and cash flows.
The Company was a defendant in a lawsuit filed in April, 1998, by
Becton, Dickinson and Company ("Becton") against ALARIS Medical Systems, Inc.,
which alleged infringement of a patent licensed to Becton relating to the sale
of the Company's SmartSite needleless system. In addition, the Company filed a
lawsuit in December 1998 against Becton. The lawsuit alleged infringement of two
patents, one owned by the Company and one licensed to the Company, relating to
Becton's Atrium needle free valve. On October 13, 1999 the Company and Becton
entered into a settlement agreement. 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 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 alleged infringement of two patents relating to disposable probe covers for
use with the Company's infrared tympanic thermometer. On August 31, 1999 the
Company and Tyco entered into a settlement agreement. 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 two agreements resulted in a charge in 1999 of $2,838 included in
restructuring, integration and other non-recurring costs with the remainder of
the license payments capitalized as acquired technology.
F-29
NOTE 14- CONTINGENCIES AND LITIGATION (CONTINUED)
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.
Given the present posture of Cal 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.
F-30
NOTE 14- CONTINGENCIES AND LITIGATION (CONTINUED)
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-31
ALARIS MEDICAL SYSTEMS, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE THREE YEARS ENDED DECEMBER 31, 2000
- --------------------------------------------------------------------------------
(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, 2000............. $ 3,119 $ 450 $ $ (1,238) $ 2,331
Year ended December 31, 1999............. 2,946 264 - (91) 3,119
Year ended December 31, 1998............. 3,259 (75) 245 (483) 2,946
- -------------------------
(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-32
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION OF EXHIBIT
----------- ----------------------
21 List of Subsidiaries of ALARIS Medical Systems, Inc.