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, 1997 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 (619) 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 March 23, 1998, the registrant had 1,000 shares of common stock
outstanding.
==============================================================================
PART I
ITEM 1. BUSINESS
Background
ALARIS Medical Systems, Inc. ("ALARIS Medical Systems") designs,
manufactures, distributes and services intravenous infusion therapy and
periodic patient monitoring instruments and related disposables and
accessories. On November 26, 1996, IMED Corporation ("IMED"), then a
wholly-owned subsidiary of Advanced Medical, Inc., ("Advanced Medical")
acquired all of the outstanding stock of IVAC Holdings, Inc. ("IVAC
Holdings") and its subsidiaries including IVAC Medical Systems, Inc. In
connection with the acquisition, IMED and IVAC Medical Systems, Inc. were
merged into IVAC Holdings (the "Merger"), which then changed its name to
ALARIS Medical Systems, Inc. Additionally, Advanced Medical changed its name
to ALARIS Medical, Inc. ("ALARIS Medical"). The acquisition was accounted for
as a purchase. ALARIS Medical Systems and its subsidiaries are collectively
referred to as the "Company." ALARIS Medical Systems was incorporated on
October 14, 1994 under the laws of the State of Delaware.
Overview
The Company is a leading provider of infusion systems and related
technologies to the United States hospital market, with the largest installed
base of pump delivery lines ("channels"). In addition, the Company is a
leader in the international infusion systems market. The Company, based on
installed base of infusion pumps, has a number one or two market position in
eleven Western European countries, the number three market position in
Germany and Italy, the largest installed base of infusion pumps in Australia
and Canada, and a developing position in Latin America and Asia. The
Company's infusion systems, which are used to deliver fluids, generally
pharmaceuticals or nutritionals, accurately and safely to patients, consist
of single and multi-channel infusion pumps and controllers, and proprietary
and non-proprietary disposable administration sets (plastic tubing and pump
interfaces). In addition, the Company is a leading provider of patient
monitoring products that measure and monitor temperature, pulse and blood
pressure, with the largest installed base of hospital thermometry systems in
the United States.
The Company sells a full range of products through a direct sales
force consisting of over 200 salespersons and through more than 150
distributors to over 5,000 hospitals worldwide. The Company's United States
sales and sales to customers located outside the United States accounted for
approximately 63% and 37%, respectively, of the Company's sales for 1997. For
the year ended December 31, 1997, the Company had sales of approximately
$359.1 million.
Infusion Systems. The Company offers a wide variety of infusion pumps
designed to meet the varying price and technological requirements of its
broad array of customers. These infusion pumps include the Gemini series,
consisting of single, dual and four channel infusion pumps designed for use
in all hospital settings by customers with sophisticated technological
requirements; the Signature Edition system, a versatile, user-friendly single
and dual channel infusion pump for use in general medical and surgical
settings; the MedSystem III instrument ("MS III"), a compact, lightweight,
programmable three channel infusion pump targeted for the hospital critical
care and transport applications; and the 560/570 Series,
------------------------
The Company has registered or applied to register the following
trademarks: IMED-Registered Trademark-, Accuset-Registered Trademark-,
Graviset-Registered Trademark-, Microset-Registered Trademark-,
Flo-Stop-Registered Trademark-, Gemini-Registered Trademark-, Gemini
PC-1-Registered Trademark-, Gemini PC-2-Registered Trademark-, Gemini
PC-4-Registered Trademark-, Gemini PC-2TX-Registered Trademark-,
Autotaper-Registered Trademark-, Versataper-Registered Trademark-,
ReadyMED-Registered Trademark-, VersaSafe-Registered Trademark-,
IVAC-Registered Trademark-, IVAC MEDICAL SYSTEMS-TM-, CORE-CHECK-Registered
Trademark-, DYNAMIC MONITORING-TM-, MEDSYSTEM III-Registered Trademark-,
PCAM-TM-, SIGNATURE EDITION-TM-, TEMP-PLUS-Registered Trademark-,
VITAL-CHECK-Registered Trademark-, ACCUSLIDE-TM-, and Smart-Site-TM-
SAFSITE-Registered Trademark- is a registered trademark of B. Braun, Inc.
2
consisting of single channel infusion pumps designed for the price-conscious
customer. In addition, the Company offers the ReadyMED ambulatory infusion
pump ("ReadyMED"), which is compact, lightweight and disposable, for use in
the alternate site market and a variety of syringe infusion pumps for use
primarily outside the United States.
The Company manufactures higher margin proprietary disposable
administration sets which can only be used with the Company's large volume
infusion pumps. Since the useful life of the Company's infusion pumps is
typically seven to ten years, the Company's industry-leading installed base
allows it to generate stable, predictable and recurring revenues from sales
of disposable administration sets. The Company's disposable administration
sets offer protection features designed to prevent the unregulated flow of
fluids into a patient's blood stream ("free flow"). In addition, the Company
has introduced 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
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,
1997, the Company's infusion systems sales were $306.2 million, representing
approximately 85% of the Company's total sales.
Patient Monitoring Products. The patient monitoring products market
consists of discrete market niches, each of which has different competitive
dynamics. The Company primarily operates in the United States, Canada and
Western Europe in two market niches of the patient monitoring products
market: (i) hospital thermometry systems and (ii) stand-alone, non-invasive,
multi-parameter patient monitoring products which measure a combination of
pulse, temperature and blood pressure. The Company's large base of installed
hospital thermometry instruments allows it to generate stable, predictable
and recurring revenues from sales of related disposable probe covers. In
1997, the Company manufactured and sold over 595 million proprietary
disposable probe covers. For the year ended December 31, 1997, the Company's
patient monitoring products sales were $33.4 million, representing
approximately 9% of the Company's total sales.
At December 31, 1996, the Company's installed base of thermometry
instruments constituted approximately 42% of the United States hospital
electronic and infrared thermometry market, making the Company the largest
provider of hospital thermometry systems in the United States. The Company's
principal thermometry instruments are the TEMP-PLUS II electronic thermometer
and the CORE-CHECK infrared thermometer, both of which are widely used in
hospitals and alternate site settings. The Company is also the second largest
participant in the United States infrared thermometry market, the fastest
growing segment of the hospital thermometry market, and, at December 31,
1996, had approximately 31% of the United States hospital installed base. In
addition, the Company's hospital installed base of stand-alone, non-invasive,
multi-parameter patient monitoring products, which measure a combination of
pulse, temperature and blood pressure, is the second largest in this market
niche in the United States.
Industry
General. Cost containment measures both imposed and proposed by
federal and state regulators and private payors, combined with increased
utilization review and case management, have led to greater financial
pressure on hospitals. In response to these cost-containment pressures,
hospitals and other potential customers for the Company's products are
increasingly combining into group purchasing organizations ("GPOs") which may
be large and which effectively police compliance with exclusive purchase
commitments. GPOs may enter into exclusive purchase commitments with as few
as one or two providers of infusion systems and/or vital signs measurement
products, for a period of several years. See "-Marketing and Sales." These
trends have, in turn, led to downward pricing pressure on manufacturers of
medical products, including the Company, and greater use of alternate sites
for treatment. Growth in the alternate site market is also attributable to
advances in technology that have facilitated the provision of care outside of
the hospital, an increased number of illnesses and diseases considered to be
treatable with home infusion
3
therapy and increased acceptance by the medical community of, and patient
preference for, non-hospital treatment. As both the complexity of infusion
therapy treatments and the potency of drugs administered have increased, the
demand for technologically-advanced infusion systems has risen significantly.
In the patient monitoring products markets, similar trends of cost reduction
of health care delivery and technological innovation have resulted in the
creation of a number of new products and product areas, such as infrared
thermometry products, pulse oximetry and multi-parameter patient monitoring
products.
The Company believes that as the infusion system and patient
monitoring products markets continue to mature, providers of goods and
services in these markets will need to increase the scale of their operations
and broaden the scope of their product lines in order to leverage worldwide
sales, service and research and development infrastructures. These trends are
driving industry consolidation which, in turn, provides opportunities for
leading suppliers to increase market share and participate in strategic
alliances, joint ventures and acquisitions.
The United States hospital market consists of approximately 5,300
hospitals with a total of approximately 900,000 licensed beds and can be
divided into three major areas: critical care (e.g., adult, pediatric and
neonatal intensive care units), specialty units (e.g., oncology, ob/gyn,
coronary care and emergency room/trauma) and general medical/surgical. The
alternate site market encompasses all health care provided outside a hospital
and is comprised primarily of home health care, freestanding clinics, skilled
nursing facilities and long-term care facilities.
Infusion Systems. Intravenous infusion therapy generally involves the
delivery of one or more fluids, primarily pharmaceuticals or nutritionals, to
a patient through an infusion line inserted into the circulatory system. Over
the past 20 years, as both the reliance on intravenous drug therapy and the
potency of the drugs administered have increased, the need for extremely
precise administration and monitoring of intravenous fluids has risen
significantly.
Infusion systems are differentiated on a number of characteristics
including size, weight, number of delivery channels, programmability,
mechanism of infusion, cost and service. One of the key differences among
infusion systems is the level of control that such systems afford to both
medical staffs and patients. Infusion systems are generally designed for
either critical care or general care use, with the latter group being used
both in hospitals and at alternate site facilities.
The United States infusion therapy market had sales of approximately
$1.5 billion in 1996 and has grown at an estimated compound annual growth
rate of approximately 3.8% from 1992 to 1996. There are two principal markets
for infusion systems: the hospital market and the alternate site market.
These markets had sales in the United States of approximately $1.1 billion
and $360 million, respectively, in 1996, and estimated annual compound growth
rates of approximately 1.6% and 12%, respectively, from 1992 to 1996.
Infusion systems include three major delivery technologies:
pumps/controllers, disposable ambulatory pumps and gravity delivery products.
In 1996, these three segments had sales in the United States of approximately
$800 million, $80 million and $350 million, respectively. While the Company
competes in the pumps/controllers and disposable pumps segments, it has never
competed in gravity delivery products because of the commodity nature of this
market.
Controllers typically are nonvolumetric devices that regulate flow by
electronically counting drops rather than by measuring a specific volume of
fluid. The Company does not currently market a traditional controller, but
some of its infusion pumps can be used in a controller mode. Infusion pumps
use positive pressure to overcome the resistance in the infusion tubing and
the back pressure generated by the patient's circulatory system. Infusion
pumps administer precise, volumetrically measured quantities of fluids more
accurately and over a wider range of infusion rates than controllers. For
this reason, infusion pumps are used more frequently than controllers to
administer expensive, critical or potent therapeutics. Syringe pumps operate
by gradually depressing the plunger on a standard disposable syringe, thereby
delivering a more
4
concentrated dose of medication at a very precise rate of accuracy.
Disposable pumps are single-use products designed for use primarily in
general care settings.
Historically, controllers have held a major share of the installed base
of infusion instruments, principally because they were significantly less
expensive than infusion pumps. As infusion pump prices declined and their
technological capabilities increased, the purchasing trend has been toward
infusion pumps. As of the end of 1996, infusion pumps represented
approximately 98%, and controllers represented approximately 2%, of the
installed base of infusion instruments in the United States hospital market
and less than 1% of the infusion instruments sold in 1996 were controllers.
The infusion systems sold in the markets in which the Company competes
consist of single and multi-channel infusion pumps and disposable
administration sets. As treatment regimens have become more complex and as
the critically ill constitute an increasing percentage of hospital patients,
the average hospital patient now requires a greater number of intravenous
lines and more potent therapeutics, thereby creating a greater need for
technologically-advanced infusion systems. As a result, United States sales
of channels relating to multi-channel infusion pumps have increased from
approximately 28% of total United States channels sold in 1991 to
approximately 39% of total United States channels sold in 1996.
All infusion pumps and controllers require the use of disposable
administration sets. A set consists of a plastic interface and tubing and may
have a variety of features such as volume control, pumping segments or
cassette pumping systems for more accurate delivery, clamps for flow
regulation and multiple ports for injecting medication and delivery of more
than one solution. Components such as burettes and filters may also be added
for critical drugs or special infusion. Almost all of these sets, including
those manufactured by the Company, are compatible only with their particular
manufacturer's line of infusion systems. Since these disposable
administration sets tend to have significantly higher margins than infusion
pumps, the establishment of an extensive installed base, such as the
Company's, is important for generating ongoing disposable administration set
sales and enhancing overall margins.
Patient Monitoring Products. Patient monitoring products are used to
measure and monitor pulse, temperature, blood pressure and respiration rate.
Products sold in this market have varying levels of technological
sophistication and are used in a variety of diagnostic and health care
settings. The patient monitoring products market consists of discrete market
niches, each of which has different competitive dynamics. The Company
competes in two niches - hospital thermometry systems, and stand-alone,
non-invasive, multi-parameter patient monitoring products which measure a
combination of pulse, temperature and blood pressure. In the United States,
these two market niches had sales of approximately $55.0 million and $140.0
million, respectively, in 1996.
The three major instrument types in the hospital thermometry market are
glass, electronic and infrared devices, which in 1996 accounted for
approximately 5%, 65% and 30%, respectively, of the United States hospital
market installed base. The Company offers electronic and infrared instruments
but does not compete in the glass thermometry market. Over the last several
years, there has been a shift toward increased use of infrared instruments
due primarily to their ease of use. While infrared thermometers constituted
only approximately 31% of the installed base in the United States in 1996,
sales of these products accounted for approximately 41% of total market sales
in 1996.
As with the infusion therapy market, the hospital thermometry market
has higher margin disposable products that are used in concert with
instruments and, consequently, the existence of an installed base is
important for generating ongoing disposable product sales and enhancing
overall margins.
Products and Services
The Company manufactures and markets both single and multi-channel
infusion pumps and disposable administration sets. The Company's infusion
pumps include large volume infusion pumps such as its Gemini series, the
Signature Edition system, MS III and 560/570 Seriespumps, syringe infusion
pumps
5
such as P1000, P3000, PCAM and P7000, which are sold primarily in Western
Europe, and the ReadyMED system. The Company's large volume infusion pumps
require the use of higher margin proprietary disposable administration sets.
The Company also sells non-proprietary disposable administration sets for use
with syringe infusion pumps manufactured by the Company and others.
Furthermore, the Company manufactures and markets hospital thermometry
instruments and related disposable probe covers, and stand-alone,
non-invasive, multi-parameter instruments which measure and monitor
temperature, pulse and blood pressure. In the United States hospital
electronic and infrared thermometry market, the Company had an installed base
market share of approximately 42% in 1996 and was the second largest supplier
of hospital thermometry products in the infrared market. In its niche of
stand-alone, non-invasive, multi-parameter instruments, the Company had an
installed base market share of approximately 14% in the United States in 1996.
The table set forth below summarizes the key features, actual or
estimated market introduction dates and predecessor product line information
with respect to the Company's product line and products in development.
Product Description Status
- --------------------- ------------------------------------------ --------------------------------
Large Volume Infusion
Pumps
Signature Edition Single and dual channel pump; incorporates Selectively marketed since
(Model 7100/7200) intuitive user interface; for critical and September 1995; full commercial
general care use availability in the United States
achieved in the first quarter of
1996; introduced in Europe during
the second half of 1997
Signature Edition GP Single channel pump using the Signature Edition Market introduction in 1997
(Model 7000) technology platform designed for the price-
conscious consumer; intended to be marketed
in the United States for general care and
alternate site markets
Gemini PC-1 Single channel instrument with pump and controller Marketed since 1988
capability; for use in all hospital settings
Gemini PC-2T Dual channel instrument with pump and controller Marketed since 1987
capability; for use in all hospital settings
Gemini PC-2TX Dual channel instrument with pump and controller Marketed since May 1994
capability; programmable drug delivery/dose
calculations and pressure history; for use in all
hospital settings
6
Product Description Status
- --------------------- ------------------------------------------ --------------------------------
Gemini PC-4 Four channel instrument with pump and controller Marketed since December 1992
capability; programmable drug delivery/dose
calculations and pressure history; for use in
critical care settings
Modular Infusion Pump Compact, flexible, lightweight modular infusion Market introduction planned for 1999
pump with an adjustable hardware and software
platform with advanced programming capabilities;
for use in all hospital and alternate site
settings
560/570 Series Single channel pump with largest installed base On market since 1983 and 1990,
worldwide; for general care use in the United respectively
States, and general and critical care use in
Europe
597/598 Series Single channel, multi-pump configuration of reduced On market in Europe since 1993
size and weight; used frequently for delivery of
nutritional products; sold in Europe; for general
care and alternate site use
MS III Three channel pump; smallest and lightest Originally introduced in late
multi-channel pump available on the United States 1980s by Siemens Infusion
market; for critical care use Systems, Ltd. as MiniMed;
reengineered since its
acquisition in 1993
Syringe Infusion Pumps
P1000, P2000, P3000, Preferred method of delivery in many markets Various models introduced between
P4000 outside the United States; for critical and late 1980s and early 1990s
non-critical care use
P7000 Syringe pump with advanced features for critical, Introduced to European market
non-critical and neonatal care use in markets during second quarter of 1996
outside the United States
P6000 Syringe pump using the P7000 technology platform Introduced to European market
designed for the price-conscious consumer in during the second half of 1997
markets outside the United States; for critical
and non-critical care use
P6000-TIVA Syringe pump designed for critical and non-critical Introduced during third quarter
care use 1997
P6000-TCI Syringe pump that incorporates Diprifusor module Introduced during fourth quarter
from Zeneca 1997
7
Product Description Status
- --------------------- ------------------------------------------ --------------------------------
PCAM (Patient Syringe pump used in markets outside the United Introduced internationally in
Controlled Analgesia States that allows patients to control the delivery first quarter of 1995
Pump) of pain medication
Ambulatory Pumps
ReadyMED Compact, disposable, lightweight ambulatory 100 mL marketed since July 1992
infusion pump designed for alternate site use and 50 mL and 250 mL introduced
in 1993
Rythmic Family of lightweight, self-contained portable Agreement with Micrel signed in
pumps for PCA, intermittent and continuous use second half of 1997, 1998
at home in international markets launch planned
Disposable Proprietary and non-proprietary administration On market and in development
Administration sets for use with each of the Company's existing
Sets and proposed infusion pumps
Needle-Free Access Products
SmartSite System Needle-free, capless, latex-free infusion system Introduced in 1996
component intended to increase safety of patients
and health care workers
VersaSafe Infusion system component utilizing a blunt cannula Marketed since 1994 through a
device combined with a split-septum "Y" site non-exclusive license
Patient Monitoring:
Thermometry Systems
TEMP-PLUS II Electronic thermometer; for general hospital and On market since mid-1980s
(Model 2080) alternate site use
TEMP-PLUS III Electronic thermometer; a 7-to-10-second version of Market introduction planned for
the Model 2080; intended for general hospital use 1998
CORE-CHECK Infrared tympanic thermometer that saves time, On market since 1991
(Model 2090) reduces patient interruption and lowers risk of
infection; for general hospital use
8
Product Description Status
- --------------------- ------------------------------------------ --------------------------------
Disposable Probe Proprietary covers for use with each of the On market since mid-1980s
Covers Company's existing and proposed thermometers
Other Patient Monitoring Products
VITAL-CHECK Continuous monitoring model that rapidly measures On market in the United States
(Model 4200) pulse, blood pressure and temperature; for general since late 1980s
hospital use
VITAL-CHECK Multiparameter non-invasive patient monitor Introduced during fourth quarter
(Model 4400) providing blood pressure, pulse oximetry of 1997
and temperature monitoring
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 large volume infusion pumps consist of volumetric
piston cassette pumps, which regulate the flow of fluid through a
syringe-like mechanism, and peristaltic pumps, which regulate fluid flow by
means of a multi-finger-like mechanism that alternately compresses sections
of the tubing contained in the pumping chamber. Peristaltic pumps represent
the largest portion of the Company's installed base of infusion pumps. The
Company discontinued manufacturing piston cassette pumps in the first quarter
of 1995.
The Signature Edition line of peristaltic infusion pumps includes a
single channel and dual channel pump. The Signature Edition line of infusion
pumps is designed for use primarily in hospitals. The Signature Edition line
of infusion pumps features include cost-effectiveness, ease of use,
reliability and innovative features, such as new safety features designed to
minimize the chance of free flow.
The Gemini peristaltic infusion pump series, which consists of single,
dual and four channel pumps, is based on a flexible hardware and software
technology platform. This technology platform has enabled the Company over
time to offer incremental feature enhancements based on evolving customer
needs. The Gemini series currently offers the following features: free flow
protection (which the Company pioneered); independent channel operation;
ability to switch from pump to controller mode without changing the
disposable administration set; programmable to automatically taper-up and
taper-down infusion rates to facilitate delivery of complex drug-dosing
regimens; capability to operate in either micro mode (0.1 to 99.9 mL/hr) for
use with neonatal patients, among others, or macro mode (1 to 999 mL/hr) for
use with adult patients; drug dose calculation; pressure monitoring; pressure
history and volume/time dosing; and nuisance alarm (alarms with no clinical
significance) reduction. The Gemini PC-1 infusion pump is currently subject
to a voluntary recall initiated by the Company. See "-Government Regulation -
Product Regulation."
The MedSystem III instrument is a compact, lightweight, programmable,
three channel, peristaltic infusion pump used primarily in the critical care
market. The MedSystem III predecessor product line was acquired from Siemens
Infusion Systems, Ltd. in September 1993. Since such time, significant
resources have been invested to reengineer the MedSystem III pump. The
Company believes that as a result of this reengineering, the MedSystem III
system is one of the smallest, most versatile and most technologically
advanced multi-channel pumps currently on the market.
The 560/570 Series and the 597/598 Series are single channel
peristaltic infusion pumps that offer cost-effective solutions for drug
delivery in the general care setting. The Company believes that the 560/570
Series has the largest installed base of any individual infusion pump
worldwide.
9
During the fourth quarter of 1993, the Company commenced designing a
modular infusion pump, which can operate in a one to four channel mode, as
the basis for its next generation of infusion pumps. In addition to all of
the features available on the Gemini series, the modular infusion pump is
being designed to incorporate advanced programming capabilities in a smaller
infusion pump that is simpler to operate. A modular, building-block design is
intended to allow the user to configure the various features of the modular
infusion pump to specific situations resulting in lower cost operation and
greater asset utilization.
Syringe Pumps. The Company offers syringe pumps, which are small-volume
fluid delivery systems used in neonatal care, oncology, anesthesia, critical
care and labor and delivery. While these infusion pumps represent a
relatively small portion of the industry installed base in the United States,
such pumps are widely used in Europe, where they constitute approximately 60%
of the infusion pump market. Syringe pumps are more widely used in Europe
because of the general practice of European doctors to administer medications
in smaller volumes of fluid. The Company believes that it is one of the two
largest suppliers of syringe pumps in Western Europe, with a number one or
number two installed base market share in eleven countries and the number
three installed base market share in Germany and Italy. The Company is
currently evaluating customer interest and regulatory requirements in the
United States for syringe pumps.
In 1995, the Company introduced the PCAM patient controlled analgesia
infusion pump that allows patients to control the delivery of pain
medication. Designed for general care settings, the PCAM infusion pump is one
of the most advanced patient controlled analgesia infusion pumps on the
European market today, with pre-programmed and user programmable drug
delivery protocols, comprehensive patient history logging and an
ergonomically designed handset with status indicator.
The Company continued to expand its syringe pump product line by
introducing the P7000 syringe pump to the international market during the
second quarter of 1996 and the P6000 syringe pump to the European Market
during the second quarter of 1997. Designed for critical, non-critical and
neonatal care settings, the P7000 offers several advanced features, including
an automatic dose rate calculator; a pre-programmable drug menu; a range of
pre-programmed infusion administration protocols; and an automatic pressure
reduction capability in response to administration set occlusions. The P6000
syringe pump, which is based on the P7000 syringe pump technology platform,
is designed for use in critical and non-critical care settings by the price
conscious consumer.
The Company has initiated a voluntary safety alert of its P1000, P2000,
P3000 and P4000 syringe pumps. These syringe pumps are marketed
internationally. See "-Government Regulation-Product Regulation."
Ambulatory Pumps. The ReadyMED pump is a disposable, compact,
ambulatory pump for the intravenous administration of antibiotics. ReadyMED
is designed to offer a number of advantages over systems currently in use for
this purpose. Traditional systems require the patient to attach a small bag
and tubing set, through which the antibiotics are administered, to a catheter
placed in the patient's circulatory system. The patient must eliminate all
air from the system and set a manual rate adjustment clamp, a process that
generally must be repeated every four to six hours. Since traditional systems
are gravity driven, the bag must remain on an intravenous solution pole
during infusion, thereby restricting the patient's movement. The ReadyMED
pump is pre-filled (in 50 mL, 100 mL and 250 mL sizes) and pre-primed,
allowing infusion to be initiated when the patient simply opens a clamp. In
addition, since 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. In
March 1992, the Company entered into a five-year agreement with McGaw, Inc.
("McGaw") pursuant to which McGaw obtained the exclusive right to distribute
the 50 mL, 100 mL and 250 mL sizes of the ReadyMED pump in the United States
and Puerto Rican alternate site markets. The Company and McGaw amended their
distribution agreement during 1997, extending its term until March 31, 1998,
and converting McGaw's exclusive distribution right into a non-exclusive
distribution right. Effective April 1998, the Company will initiate direct
sales of ReadyMED through its alternate site sales force and distribution
network.
10
Disposable Administration Sets. The Company estimates that it has
approximately 212,000 single and multi-channel large volume infusion pumps
installed in the United States, each of which uses proprietary disposable
administration sets designed and manufactured only by the Company. Disposable
administration sets consist of a plastic pump interface and tubing and have a
variety of features, such as volume control, pumping segments or cassette
pumping systems for more accurate delivery, clamps for flow regulation and
multiple entry ports for injecting medication and delivery of more than one
solution. Components such as burettes and filters may also be added for
critical drugs or special infusion. In addition, many of the Company's
disposable administration sets offer protection features designed to prevent
free flow. Each of the Company's current and proposed large volume infusion
pumps uses only disposable administration sets designed by the Company for
that particular pump.
Needle-Free Access Products. There is increasing pressure by regulatory
agencies, such as the Occupational Safety and Health Administration ("OSHA")
and the FDA, for more stringent control of needles in hospitals. OSHA
requires that hospitals must put in place systems to reduce the potential for
accidental needlesticks. The FDA recommends using needle-free systems or
protected needle systems to replace hypodermic needles for accessing
intravenous lines. The Company's needle-free access products are designed to
permit access to the Company's disposable administration sets without the use
of needles, thus reducing the potential for accidental needlesticks. The
VersaSafe system utilizes a blunt cannula device combined with a split-septum
"Y" site. The Company has a non-exclusive license, which expires in April
2000, to the VersaSafe system which was a cooperative development effort of
IMED, Elcam Plastic of Israel and Medical Associates Network. The Company's
SmartSite Needle-Free System, introduced in the third quarter of 1996, is a
component which is compatible with standard luer or luer-locking syringes and
disposable administration sets, thereby allowing users to integrate the
Needle-Free System into existing care practices. The Company's latest
needle-free access product, the SmartSite System, offers a fully integrated
design and eliminates the need for separate caps to maintain an infection
control barrier. The SmartSite System is latex-free and therefore reduces the
risk of exposure of patients and health care workers to latex which can cause
severe allergic or anaphylactic shock reactions. The Company's needle-free
access products have received strong interest from customers and provide the
Company with an opportunity to increase revenues in what has previously been
a commodity market.
Patient Monitoring Products. Patient monitoring instruments are used to
measure pulse, temperature and blood pressure. Products 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
believes that in 1997 its installed base comprised approximately 42% of the
United States hospital electronic and infrared thermometry market, thereby
making the Company the largest provider of hospital thermometry systems in
the United States. The Company's primary product is an electronic thermometer
which is widely used in hospitals and alternate site settings. The Company is
currently developing the TEMP-PLUS III instrument (formerly known as the
"Fast" 2080), an improved cost-effective and technologically-advanced
electronic thermometer designed to provide a temperature reading in
seven-to-ten seconds. The Company also manufactures and markets the
CORE-CHECK system, a thermometer that measures temperature by detecting the
emission of infrared energy in the ear. In the infrared market, the fastest
growing segment of the industry's market, the Company is currently the second
largest domestic participant, with a United States hospital installed base
market share of approximately 31% at December 31, 1996. The only disposable
probe covers which can be used with the Company's thermometry instruments are
those manufactured by the Company.
11
Other Patient Monitoring Products. The Company also produces
stand-alone, non-invasive, multi-parameter patient monitoring products which
measure a combination of pulse, temperature and blood pressure. The Company's
hospital installed base of these instruments is the second largest in the
United States.
In January 1997, the Company entered into two agreements with Criticare
Systems, Inc., a manufacturer of patient monitoring systems and non-invasive
sensors for use in the hospital and alternate site markets. Under these
agreements, Criticare Systems, Inc. obtained the right to use the Company's
electronic thermometry technology in certain monitoring systems to be
manufactured and distributed by both Criticare Systems, Inc. and the Company.
The Company also obtained exclusive distribution rights to certain of these
monitoring systems in the United States hospital market and in all Canadian
markets. The first of these exclusive systems is the Vital-Check 4400, which
provides non-invasive blood pressure, pulse oximetry and temperature
monitoring.
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. In addition, the Company
maintains its parts inventory at levels which enable it to deliver critical
supplies immediately and minimize back-ordered products. The Company believes
that the availability of such services is important for maintaining strong
customer relations.
Marketing and Sales
The Company has historically focused its sales efforts on the hospital
market. In response to the industry shift toward health care delivery outside
of the hospital, the Company has recently begun to expand its selling efforts
and products to the alternate site market. The Company's sales strategy
emphasizes increasing instrument placements and the number of units installed
in order to increase sales of its proprietary disposable administration sets
and probe covers. Sales representatives work closely with on-site primary
decision makers, which include physicians, pharmacists, nurses, materials
managers, biomedical staff and administrators. The Company has over 5,000
hospital customers worldwide.
The Company has contracts with ten GPOs. GPOs have emerged in response
to cost containment pressures and health care reform. GPOs often enter into
exclusive purchase commitments with as few as one or two providers of
infusion systems and/or vital signs measurement products for a period of
several years. If the Company is not one of the selected providers, it may be
precluded from making sales to members of a GPO for several years and, in
certain situations, the GPO may require removal of the Company's existing
installed infusion pumps, which would result in a loss of the related
disposable administration set sales. Even if the Company is one of the
selected providers, the Company may be at a disadvantage relative to other
selected providers which are able to offer volume discounts based on
"bundled" purchases or a broader range of medical equipment and supplies.
Further, the Company may be required to commit to pricing which has a
material adverse effect on net sales and profit margins. See "-Competition."
In January 1997, the Company entered into a five-year sole-source
supply contract with Premier Purchasing Partners, L.P. ("Premier"), an
affiliate of Premier, Inc., the nation's largest healthcare alliance GPO, for
tympanic and electronic thermometry instruments and related disposable probe
covers. Under this agreement, Premier agreed to purchase 80% of its needs for
such products from the Company. In addition, in March 1997, the Company
entered into a dual source supply agreement with Premier for the purchase of
large volume infusion pumps and associated disposable administration sets.
The dual source agreement is for a five year period with a two-year renewal
option. Premier had previously signed a seven-year supply contract with
Baxter International, Inc. covering a number of hospital supplies, including
a dual source award for large volume infusion pumps and disposable
administration sets.
12
In December 1997, the Company and Tenet Healthcare Corporation entered
into a ten-year, sole-source agreement for intravenous infusion pumps and
associated IV disposables. In addition, ALARIS Medical is named as one of two
approved sources by Tenet for needleless IV tubing sets and components, which
are included in the $100 million Tenet expects to spend on IV-related
equipment over the term of the contract.
No single account is material to the business or operations of the
Company.
The Company sells its products through a combined direct sales force
consisting of over 200 salespersons and through more than 150 distributors.
The Company's domestic marketing efforts are supported by a staff of nurses
and pharmacists who consult with customers providing ongoing clinical support
in the evaluation, installation and use of the Company's products. The
Company believes its sales force in the United States and internationally
plays a key role in the effective introduction of new products.
International Operations
The Company markets products in approximately 120 countries through its
direct sales force, affiliates and distributors. The primary markets for the
Company's products outside the United States are Western Europe, Canada and
Australia. The Company also has a developing position in Asia and Latin
America. The principal products sold by the Company outside the United States
are large volume and syringe infusion pumps and related disposable
administration sets. The Company has manufacturing operations in England and
Mexico. The Company has also contracted with a number of foreign
manufacturers to provide certain of its sourcing needs. The following table
sets forth, on a pro forma basis as if the Merger had occurred at the
beginning of each period presented, the approximate amount of sales made to
customers in each of the geographic locations set forth below over the last
three fiscal years:
1995 1996 1997
------ ------ ------
(dollars in millions)
United States..................... $238.3 $224.6 $227.0
International..................... 114.4 121.7 132.1
------ ------ ------
Total sales..................... $352.7 $346.3 $359.1
The Company believes that sales of products to customers outside of the
United States represents a significant potential source of growth. As part of
its operating strategy, the Company intends to selectively pursue
international expansion opportunities, particularly in Europe, Japan,
Southeast Asia and Latin America.
Foreign operations are subject to special risks that can materially
affect the sales, profits and cash flows of the Company, including currency
exchange rate devaluations and fluctuations, the impact of inflation,
exchange controls, labor unrest, political instability, export duties and
quotas, domestic and international customs and tariffs, unexpected changes in
regulatory environments, potentially adverse tax consequences and other
risks. Changes in certain exchange rates could have an adverse effect on the
Company's ability to meet interest and principal obligations with respect to
its United States dollar-denominated debt and could also have a material
adverse effect on the Company.
Manufacturing
The Company manufactures its products at plants in San Diego,
California; Creedmoor, North Carolina; Tijuana, Mexico; and Hampshire,
England. The San Diego facilities are the primary manufacturing facilities
for infusion pumps and vital signs measurement instruments and also house a
service operation for installed infusion pumps and vital signs measurement
instruments. The Creedmoor, North Carolina facility houses a portion of the
current disposables operations and is a distribution center for North
American disposable finished products. Product release from sterilization is
done in San Diego,
13
California and Creedmoor, North Carolina. The Tijuana facilities primarily
focus on the manual assembly of disposables, and the England facility focuses
on the manufacturing of syringe pumps. Disposable products for international
markets are currently supported through a number of foreign manufacturers.
The Company has designed and implemented an integrated network of
quality systems, including control procedures that are planned and executed
by technically-trained professionals. These systems result in establishing
written specifications for raw materials, packaging, labels, sterilization
and overall manufacturing process control. A substantial number of raw
materials require certificates of analysis to help ensure that finished
products conform to specifications. In addition, the Company regularly tests
components and products at various stages of the manufacturing process to
ensure compliance with applicable specifications.
The Company purchases raw materials worldwide in the ordinary course of
business from numerous suppliers. The vast majority of these materials are
generally available and the Company has not experienced any serious shortages
or material delays in obtaining these materials. In some situations, the
Company has long-term supply contracts, although the Company purchases a
significant amount of its requirements of certain raw materials by purchase
order. Although the Company is generally not dependent upon any single source
of supply, it relies upon a limited number of suppliers for PC boards and
other parts which are used in certain of its infusion systems. The loss of
any such supplier would result in a temporary interruption in the
manufacturing of the Company's products. The Company believes, however, that
these materials are available as needed from alternative sources.
The Company has identified the reduction of production and operating
costs as a key component of its operating strategy. As part of this strategy,
the Company has reduced overall head count through termination and attrition.
The Company continues to focus on the following programs: (i) consolidating
supply sources and (ii) design improvements.
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, 1997, the Company expended
approximately $16.9 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
14
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 212 unexpired patents in the
United States and approximately 385 unexpired patents in foreign countries,
principally in Europe, Canada, Japan and Australia. Additional applications
are pending or in preparation. Within the next ten years, approximately 122
of the Company's United States patents and approximately 168 of the Company's
foreign patents will expire. The Company does not believe that the expiration
of any such patents will, individually or in the aggregate, have a material
adverse effect on the Company's results of operations, business or financial
condition.
The patent positions of medical device firms, including the Company,
are uncertain and involve complex legal and factual questions for which
certain legal principles are unresolved. The coverage claimed in a patent
application can be significantly reduced before a patent is issued. In
addition, patent law has recently been revised to give effect to
international accords to which the United States has become a party. Pursuant
to such accords, the patent term has been changed from 17 years from date of
grant to 20 years from date of filing and certain provisions favoring United
States inventors over foreign inventors have been eliminated.
The United States patent code was recently amended. As a result,
certain statutory remedies for patent infringement are no longer available
for a medical practitioner's otherwise infringing performance of a medical
activity. As defined in the United States patent code, medical activity does
not include "the use of a patented machine, manufacture or composition of
matter in violation of such patent." The aforesaid amendment does not apply
to patents issued before September 30, 1996. Legislation which would have
prohibited the issuance of patents directed to surgical and medical
procedures did not pass in the 104th Congress and no such legislation
presently is pending.
The Company sells its products under a variety of trademarks, some of
which are considered by the Company to be of importance to warrant
registration in the United States and various foreign countries in which the
Company does business. The Company also relies on trade secrets, unpatented
know-how and continuing technological advancement to maintain its competitive
position. It is the Company's practice to enter into confidentiality
agreements with key technical employees and consultants. There can be no
assurance that these measures will prevent the unauthorized disclosure or use
of the Company's trade secrets and know-how or that others may not
independently develop similar trade secrets or know-how or obtain access to
the Company's trade secrets, know-how or proprietary technology. In addition,
the Company from time to time seeks copyright protection for the software
used in certain of its products.
Competition
The Company faces substantial competition in all of its markets. Many
of the Company's competitors have greater financial, research and development
and marketing resources than the Company. Some of the Company's principal
competitors are able to offer volume discounts based on "bundled" purchases
of a broad range of their medical equipment and supplies. The Company intends
to improve its competitive position in this area by seeking acquisitions that
will allow or enhance its own "bundles" of devices and instruments. The
Company expects the trend toward volume discounts to continue in the future.
The Company believes that the competitive factors most important in its
markets are quality of products and services, technological innovation and
price.
The primary markets for the Company's products are relatively mature
and highly competitive. The Company's success is therefore dependent on the
development of new infusion technologies and the development of other markets
for its products. The Company's older infusion therapy and thermometry
product lines have experienced declining sales and market share recently,
primarily due to competitors who
15
offer volume discounts based on "bundled" purchases of a broader range of
medical equipment and supplies, as well as to the aging of the Company's core
products. The Company's introduction of new products may offset future
declines in sales and market share. There can be no assurance, however, that
new products will be successfully completed or marketed for sale, will not
necessitate upgrades or technical adjustments after market introduction, can
be manufactured in sufficient volumes to satisfy demand, or will offset
declines in sales and market share experienced with respect to existing
products. See "-Products and Services." Moreover, there can be no assurance
that the Company's efforts to take advantage of opportunities it perceives in
the alternate site and international markets will be successful. In addition,
although the pace of technological change in the Company's industry
historically has been relatively slow, the Company is unable to predict the
pace of such change in the future. There can be no assurance that
technological change will not place one or more of the Company's existing or
proposed products at a significant competitive disadvantage. Additionally, to
the extent the Company does not successfully reposition existing products for
sale to different markets, the introduction of new products by the Company
will reduce sales of such existing products.
At December 31, 1996, on a pro forma basis, the Company had a market
share of approximately 40% of the installed base of infusion pump channels in
the United States. Major competitors in this market include Baxter
International, Inc., Abbott Laboratories, Inc. and McGaw, which in the
aggregate had a market share of approximately 55% of the installed base of
infusion pump channels in the United States at December 31, 1997.
The European infusion systems market is much more regionalized and
fragmented, with a few strong competitors in each regional market. Major
competitors encountered in several markets include Graseby, Fresenius and B.
Braun Melsungen AG. The Company is among the leaders in a number of Western
European markets, with a number one or number two installed base market share
in eleven countries and the number three installed base market share in
Germany and Italy. The Western European countries in which the Company has a
number one or number two installed base market share are France, Denmark,
Finland, Norway, Sweden, the United Kingdom, Belgium, the Netherlands,
Luxembourg, Spain and Portugal.
The vital signs measurement products market is fragmented by product
type. The Company's key competitor in the United States electronic
thermometer market is Diatek and its key competitor in the infrared
thermometer market is Sherwood Medical Company.
Government Regulation
Product Regulation. The research, development, testing, production and
marketing of the Company's products are subject to extensive governmental
regulation in the United States at the federal, state and local levels, and
in certain other countries. Non-compliance with applicable requirements may
result in recall or seizure of products, total or partial suspension of
production, refusal of the government to allow clinical testing or commercial
distribution of products, civil penalties or fines and criminal prosecution.
The FDA regulates the development, production, distribution and
promotion of medical devices in the United States. Virtually all of the
products being developed, manufactured and sold by the Company 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 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" (as defined in FDA Quality System
regulations) ("QSR"), prohibitions on adulteration and misbranding, and
reporting of certain adverse events ("MDR"). In addition to general controls,
Class II devices may be subject to special controls that could include
performance standards, postmarket
16
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. The
Company is not currently developing, manufacturing or distributing any Class
III devices, although it may do so in the future. Unless otherwise exempt,
all medical devices introduced to the market since 1976 are required by the
FDA, as a condition of marketing, to secure a 510(k) premarket notification
clearance ("510(k)") or a Premarket Approval Application ("PMA"). A product
will be cleared by the FDA under a 510(k) if it is found to be substantially
equivalent in terms of safety, effectiveness and intended use to another
legally marketed medical device that was on the market prior to May 28, 1976
or to a product that has previously received a 510(k) and is lawfully on the
market. In general, if a product is not substantially equivalent to such a
medical device, and not otherwise exempt, the FDA must first approve a PMA
before it can be marketed. An approved PMA indicates that the FDA has
determined the product has been proven, through the submission of clinical
data and manufacturing and other information, to be safe and effective for
its labeled indications. The PMA process typically takes more than a year
from submission and requires the submission of significant quantities of
clinical data and supporting information. The process of obtaining a 510(k)
currently takes, on average, approximately six months from the date of
submission. However, the review process for a particular product may be
shorter or substantially longer depending upon the circumstances. Moreover,
there can be no assurance that a 510(k) will be cleared. The 510(k) must
include submission of supporting information, including design details and
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, during which time the modified product
cannot be distributed in interstate commerce. Although there can be no
assurance, the Company believes that its proposed products under development
will qualify for the 510(k) procedure.
As part of its normal course of business, the FDA regularly conducts
investigations regarding the safety or efficacy of medical products,
including those manufactured by the Company, which may result in the
Company's inability to market a particular device or cause the Company to
need to generate additional data to support submissions for market clearance.
Future products developed by the Company may require FDA clearance through
either the 510(k), PMA, new drug approval application procedures or
abbreviated new drug approval application procedures. There can be no
assurance that marketing clearances or approvals will be obtained on a timely
basis or at all. Delays in receiving such clearances or approvals could have
a material adverse effect on the Company.
The FDA also regulates the commencement and conduct of clinical
investigations to determine the safety and effectiveness of devices,
including investigations of devices not cleared or approved for marketing,
and investigations involving new intended uses of previously cleared or
approved devices. Clinical investigations are regulated by the FDA under the
investigational device exemption ("IDE") regulations. The IDE regulations
include significant requirements that must be met, including informed patient
consent, criteria for selection of study investigators and monitors, review
and approval of research protocols, reporting obligations to the FDA,
recordkeeping and prohibitions against commercialization of investigational
devices. A sponsor must obtain FDA approval of an IDE before starting the
investigation, unless the device is found to be a non-significant risk device
by the sponsor and each institutional review board ("IRB") that reviews the
study. The FDA, however, has the authority to determine that a study
designated as involving a non-significant risk device by the sponsor and IRBs
involves a significant risk device and an IDE application must be submitted
and approved before the study can resume. In addition, a study of a
non-significant risk device must still comply with certain provisions of the
IDE regulations, and meet other regulatory requirements. The violation of the
IDE regulations can result in a variety of sanctions,
17
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 for sale in
the United States, are subject to the FDA export requirements, including
restriction on distribution in the United States.
The Company has received ISO 9000 certification for all of its
facilities regarding the quality of its manufacturing systems, a requirement
for doing business in EC countries. The Company has been granted approval to
affix the CE mark, pursuant to the EC Medical Device Directives, on certain
of its products. Approval to affix the CE mark to a product does not
necessarily preclude, however, additional restrictions on marketing in any
individual country in the EC.
Certain countries require the Company to obtain clearances for its
products prior to marketing the products in those countries. In addition,
certain countries impose product specifications, standards or other
requirements which differ from or are in addition to those mandated in the
United States. The EC and certain other countries are in the process of
developing new modes of regulating medical products which may result in
lengthening the time required to obtain permission to market new products.
These changes could have a material adverse effect on the Company's ability
to market its products in such countries and would hinder or delay the
successful implementation of the Company's planned international expansion.
The Company is registered as a medical device manufacturer with the FDA
and certain state agencies. These agencies inspect the Company periodically
to determine whether the Company is in compliance with the FDC Act and
regulations, including regulations relating to MDR reporting, product
labeling and promotion, and medical device GMPs governing design,
manufacturing, testing, quality control, product packaging and storage
practices. The FDA has recently revised the GMP regulations. These revised
regulations include new requirements such as design control, which may
increase the cost of regulatory compliance for the Company. The MDR
regulations promulgated by the FDA require the Company to provide information
to the FDA on certain malfunctions, as well as serious injuries or deaths
which may have been associated with the use of a product. The EC Medical
Device Directives also require reporting of serious injuries or deaths which
may be associated with the use of a medical device to the competent authority
in the country where the incident occurred.
A determination that the Company is in material violation of the FDC
Act or such FDA regulations could lead to the issuance of warning letters,
imposition of civil or criminal sanctions against the Company, its officers
and employees, including fines, recalls, repair, replacement or refund to the
user of the cost of such products. In addition, if the FDA believes any of
the Company's products violate the law and present a potential health hazard,
the FDA could seek to detain and seize products, to require the Company to
cease distribution and to notify users to stop using the product. The FDA
could also seek criminal sanctions or seek to close some or all of the
Company's manufacturing facilities. Such actions could also result in an
inability of the Company to obtain additional market clearances. Since 1992,
the Company has on sixteen occasions removed products from the market that
were found not to meet performance standards. None of such recalls materially
interfered with the Company's operations and all such affected product lines,
except the 599 Series infusion pumps (as noted below), were subsequently
returned to the market. One such product recall, a recent voluntary recall
related to the Company's Signature Edition infusion pumps, has not yet been
terminated or otherwise closed by the FDA and the FDA could take further
regulatory action against the Company, including actions such as those
described above. The Signature Edition infusion pumps were recalled because
of an unacceptable level of malfunction alarms due to less than expected
reliability of their pressure monitoring systems. The user of these pumps is
notified of such malfunction alarms by both a continuous audible signal and a
visual message. The Company has completed the upgrade and replacement, at no
charge to its customers, the current pressure monitoring system contained in
certain of the infusion pumps included within the Signature Edition product
line. This recall was completed at the
18
end of the second quarter of 1997. In addition, a voluntary recall of
approximately 645 Gemini PC-1 infusion pumps (limited to distribution outside
the United States) was initiated by the Company in June 1996. At this time,
the Company has completed required modifications.
In the first quarter of 1998 the Company will initiate a voluntary
field correction of approximately 50,000 of its Gemini model PC-1 and PC-2
infusion pumps because failure of specific electrical components on the power
regulator printed circuit board may result in improper regulation of the
battery charge voltage, which can cause the battery to overheat. Such
overheating could result in product failure and discharge of hydrogen gas
which may accumulate within the instrument's case. As an interim measure, the
Company has advised its customers of simple precautions that can be taken to
minimize the potential for an adverse incident pending completion of the
field correction. The Company is not aware of any injuries sustained in known
battery overcharging incidents.
As a result, the Company recorded a charge of $2.5 million to cost of
sales during the first quarter of 1997. Based on management's current
understanding of these incidents, the Company believes it has adequately
accrued for this matter. However, since the Company's analysis of this matter
is preliminary, there can be no assurances that it can be resolved for an
amount consistent with management's estimated cost.
In addition, the Company has initiated a voluntary safety alert of its
599 Series infusion pumps, which it discontinued selling in March 1997. This
safety alert advises customers to inspect and, if necessary, make an
adjustment to the infusion pump in order to prevent misloading of disposable
administration sets. The Company has initiated a product recall of certain MS
III disposable administration sets affecting 44,000 units. This recall
advises the user to return the affected product for replacement. The sets
were recalled due to a low level assembly defect which could result in
reverse flow.
The Company's manufacturing facilities in San Diego have been licensed
by the State of California Department of Health Services, Food and Drug
Branch, under the applicable GMP and other regulations.
Anti-Remuneration Laws. The sale of the Company's products is subject
to the illegal remuneration/"anti-kickback" provisions of the Social Security
Act of 1935, as amended (the "Social Security Act"), which prohibits
knowingly and willfully the offering, receiving or paying of any
remuneration, whether directly or indirectly, in return for inducing the
purchase of items or services, or patient referrals to providers of services,
for which payment may be made in whole or in part by Medicare, Medicaid or
similar state programs. Violations of the statute are punishable by civil and
criminal penalties and exclusion of the provider from future participation in
the Medicare and Medicaid programs. The Social Security Act contains
exceptions to these prohibitions for, among other things, properly reported
discounts and payment of certain administrative fees to GPOs. Because of the
breadth of the statutory prohibitions, the lack of court decisions or other
authority addressing the types of arrangements that are permissible under the
law and the narrowness of statutory exceptions, the Secretary of Health and
Human Services published regulations creating "safe harbors" identifying
certain practices that will not be treated as violating the "anti-kickback"
provisions of the Social Security Act. While failure to satisfy all of the
criteria for a safe harbor does not necessarily mean that an arrangement is
unlawful, engaging in a business practice for which there is a safe harbor
may be regarded as suspect if the practice fails to meet each of the
prescribed criteria of the appropriate safe harbor. The enumerated safe
harbors include safe harbors which implement, and further refine, the
statutory exceptions for discounts and payments to GPOs. Because the Company
sells some of its products to customers at prices below list price and in
various combinations, the Company is engaged in giving discounts within the
meaning of the Social Security Act. The regulations require sellers to fully
and accurately report all discounts and inform buyers of their obligations to
report such discounts. The Company also pays administrative fees to certain
purchasing agents within the meaning of the Social Security Act. In order to
qualify for the GPO safe harbor, certain requirements must be met including
disclosure of the existence of the GPO fee arrangement to GPO members and
that members are neither wholly owned by the
19
GPO nor subsidiaries of a parent corporation that wholly owns the GPO.
Certain of the Company's discounts and arrangements with purchasing agents
may not meet all the requirements of the appropriate safe harbors.
Several states also have statutes or regulations prohibiting financial
relationships with referral sources that are not limited to services for
which Medicare, Medicaid or other state health care program payment may be
made. A finding of non-compliance with these anti-remuneration laws by
federal or state regulatory officials, including non-compliance with
appropriate safe harbors, could have a material adverse effect on the Company.
Coverage and Reimbursement. The Company's products are purchased or
leased by health care providers or suppliers which submit claims for
reimbursement for such products to third-party payors such as Medicare,
Medicaid and private health insurers. Although the Company has no knowledge
that third-party payors will adopt measures that would limit coverage of, or
reimbursement for, its products, any such measures that were applied to the
Company's products could have a material adverse effect on the Company.
Health Care Reform. Because the cost of health care delivery has been
steadily rising and because the cost of a significant portion of medical care
in the United States and other countries is typically funded by governmental
insurance programs, there have been a number of government initiatives to
reduce health care costs. Congress and various state legislatures currently
are proposing changes in law and regulation that could effect major
restructuring of the health care industry. Although many of these proposals
may seek to maintain or expand access to health care services, the common
objective of the proposed legislation is to achieve cost containment in the
health care sector. Changes in governmental support of health care services,
the methods by which such services are delivered, the prices for such
services or the regulations governing such services or mandated benefits may
all have a material adverse effect on the Company. Even if the ultimate
impact of any such changes on net sales is positive, no assurance can be
given that the costs of complying with possible new requirements would not
have a negative impact on the Company's future earnings. No assurance can be
given that any such legislation will not have a material adverse effect on
the Company.
Environmental Matters. The Company is subject to regulation by OSHA,
the Environmental Protection Agency and their state and local counterparts,
and under extensive and changing foreign, federal, state and local
environmental standards, including those governing the handling and disposal
of solid and hazardous wastes, discharges to the air and water, and the
remediation of contamination associated with releases of hazardous
substances. Such standards are imposed by, among other statutes, the Toxic
Substances Control Act, the Clean Air Act, the Federal Water Pollution
Control Act, the Resource Conservation and Recovery Act and the Comprehensive
Environmental Response, Compensation and Liability Act ("CERCLA"). Although
there can be no assurances, the Company believes that it is currently in
material compliance with current environmental standards. Nevertheless, the
Company uses hazardous substances in its day-to-day operations and, as is the
case with manufacturers in general, if a release of hazardous substances
occurs on or from the Company's properties, the Company may be held liable
and may be required to pay the cost of remedying the condition. The amount of
any such liability could be material.
The Company has made, and will continue to make, expenditures to comply
with current and future environmental standards. Although no material capital
or operating expenditures relating to environmental controls are anticipated,
there can be no assurance that changes in, additions to or differing
interpretations of, statutory and regulatory requirements will not require
material expenditures in the future.
The Company is subject to liability under CERCLA and analogous state
laws for the investigation and remediation of environmental contamination at
properties owned and/or operated by it and at off-site locations where it has
arranged for the disposal of hazardous substances. Courts have determined
that liability under CERCLA is, in most cases, joint and several, meaning
that any responsible party could be
20
held liable for all costs necessary for investigating and remediating a
release or threatened release of hazardous substances. As a practical matter,
liability at most CERCLA (and similar) sites is shared among all the solvent
"potentially responsible parties" ("PRPs"). The most relevant factors in
determining the probable liability of a party at a CERCLA site usually are
the cost of the investigation and remediation, the relative amount of
hazardous substances contributed by the party to the site and the number of
solvent PRPs.
The Company is currently involved in two such matters; one, at the
Seaboard Chemical site in Jamestown, North Carolina, and another at the
Caldwell Systems, Inc., site in Lenoir, North Carolina. In relation to the
Seaboard Chemical site, the Company has entered into a de micromis
administrative order on consent with the North Carolina Department of
Environment, Health and Natural Resources and a group of PRPs, settling its
liability for past and future response costs associated with the site. Under
the consent order, the Company receives a release from further liability
associated with the site, a covenant not to sue by the other PRPs entering
into the consent order, and protection under CERCLA against contribution
actions for matters addressed by the consent order. Protection from further
liability is conditioned on the absence of information indicating that the
Company disposed of a greater quantity of hazardous substances at the site
than currently known. Although there can be no assurance that such further
information does not exist, the Company believes the amount of its liability
at this site will be de minimis.
In relation to the Caldwell Systems site, the Company has agreed to
enter into a de micromis administrative order on consent with the US
Environmental Protection Agency (US EPA) and a group of PRPs, settling its
potential liability for past and future response costs associated with the
site. Under the consent order, the Company will receive a covenant not to sue
by the US EPA and by other PRPs entering into the consent order, and
protection under CERCLA against contribution actions for matters addressed by
the consent order.
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, 1998, the Company employed 2,588 people including
1,018 in the United States.
ALARIS Medical's operations are supported by persons employed by ALARIS
Medical Systems and its subsidiaries. The Company's principal executive
offices are located at 10221 Wateridge Circle, San Diego, California 92121.
21
ITEM 2. PROPERTIES
The Company has long-term leases on substantially all of its major
facilities. The Company maintains its primary instrument manufacturing
facilities in San Diego, California and Hampshire, England. Disposable
administration set manufacturing facilities are located in Creedmoor, North
Carolina and Tijuana, Mexico. The disposable manufacturing facility in
Creedmoor, North Carolina is owned by the Company. The disposable
manufacturing facilities in Tijuana, Mexico are maintained under one year
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, Canada and Australia.
The Company's principal offices are located in San Diego, California
and its international headquarters are located in Hampshire, England. These
facilities are maintained under long-term lease arrangements.
ITEM 3. LEGAL PROCEEDINGS
The Company is a defendant in a lawsuit filed in June 1996 by Sherwood
Medical Company ("Sherwood") against IVAC. The lawsuit, which is pending in
the United States District Court for the Southern District of California,
alleges infringement of two Sherwood patents by reason of certain activities
including the sale by IVAC of disposable probe covers for use with infrared
tympanic thermometers. The lawsuit seeks injunctive relief, treble damages
and the recovery of costs and attorney fees. The discovery phase of the
lawsuit has recently commenced. The Company is currently unable to quantify
its exposure in the lawsuit. The Company believes it has sufficient defenses
to all claims by Sherwood, including the defenses of noninfringement and
invalidity. However, there can be no assurance that the Company will
successfully defend all claims made by Sherwood and the failure of the
Company to successfully prevail in this lawsuit could have a material adverse
effect on the Company's operations, business and financial condition.
The Company is a defendant in a qui tam lawsuit filed by a former IMED
employee in the United States District Court for the Northern District of
Illinois. On November 15, 1996, an amended complaint was filed which alleges
fraud in the inducement, breach of employment contract, common law fraud and
violations of the Federal False Claims Act and Medicare Fraud and Abuse Act.
To date, the United States has declined to intervene in this action. The
Company believes it has sufficient defenses to all claims by the plaintiff.
However, there can be no assurance that the Company will successfully defend
all claims made in this lawsuit and the failure of the Company to prevail in
this lawsuit could have a material adverse effect on the Company's
operations, financial condition and cash flows.
The Company is also involved in a number of legal proceedings arising
in the ordinary course of its business, none of which is expected to have a
material adverse effect on the Company's operations, business or financial
condition. The Company maintains insurance coverage against claims in an
amount which it believes to be adequate.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
22
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 ALARIS Medical.
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 ALARIS Medical. See "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of
Operations-Liquidity and Capital Resources."
23
ITEM 6. SELECTED FINANCIAL DATA
The following selected historical consolidated financial data of ALARIS
Medical Systems at December 31, 1993, 1994, 1995, 1996 and 1997, and for the
years then ended, have been derived from ALARIS Medical Systems' annual
financial statements including the consolidated balance sheet at December 31,
1996 and 1997 and the related consolidated statement of operations for the
three-year period ended December 31, 1997 and notes thereto which appear
elsewhere herein.
Year Ended December 31,
-----------------------------------------------------
1993 1994 1995 1996 1997
--------- ---------- --------- -------- --------
(Dollar amounts in thousands)
Statement of Operations Data:
Sales.............................. $ 119,858 $ 112,122 $ 112,551 $ 136,371 $ 359,077
Cost of sales...................... 72,197 65,641 63,270 78,642 188,340
--------- --------- --------- --------- ---------
Gross margin....................... 47,661 46,481 49,281 57,729 170,737
Selling and marketing expense...... 18,882 16,850 16,567 22,273 65,797
General and administrative expense. 10,409 8,726 8,893 13,434 37,510
Research and development expense... 8,630 6,345 7,386 8,854 16,876
Purchased in-process research
and development (1)............... - - - 44,000 -
Restructuring, integration, and
other non-recurring charges (1)... 8,442 - - 15,277 19,767
--------- --------- --------- --------- ---------
Total operating expenses (1)....... (46,363) (31,921) (32,846) (103,838) (139,950)
Lease interest income (2).......... 2,627 2,449 2,333 2,501 4,559
--------- --------- --------- --------- ---------
Income (loss) from operations...... 3,925 17,009 18,768 (43,608) 35,346
Interest income.................... 33 12 28 184 433
Interest expense................... (4,159) (2,805) (2,052) (6,303) (43,123)
Other (expense) income, net........ (176) (261) (379) 323 (1,584)
--------- --------- --------- --------- ---------
(Loss) income before income taxes
and cumulative effect of change
in accounting principle........... (377) 13,955 16,365 (49,404) (8,928)
Provision (benefit) for income
taxes............................. 1,863 8,310 8,099 1,270 (1,900)
(Loss) income before cumulative
effect of change in accounting
principle......................... (2,240) 5,645 8,266 (50,674) (7,028)
Cumulative effect of change in
accounting principle (3).......... 768 - - - -
--------- --------- --------- --------- ---------
Net (loss) income.................. $ (1,472) $ 5,645 $ 8,266 $ (50,674) $(7,028)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
24
Year Ended December 31,
-----------------------------------------------------
1993 1994 1995 1996 1997
--------- ---------- --------- -------- --------
(in thousands)
Balance Sheet Data:
Cash............................... $ 981 $ 1,124 $ 436 $ 9,148 $ 6,918
Working (deficit) capital.......... (310) 30,189 25,753 84,469 85,084
Total assets....................... 130,602 122,983 122,597 586,141 563,106
Short-term debt (4)................ 16,690 - - - 14,559
Long-term debt (4)................. 19,017 19,647 11,353 423,941 415,419
Stockholder's equity............... 28,514 32,929 32,477 50,021 38,947
Adjusted EBITDA (5)................... $ 20,720 $ 23,715 $ 25,310 $ 29,023 $ 90,948
Inventory purchase price
allocation adjustment (6).......... - - - (4,014) (1,607)
Restructuring, integration and
other non-recurring charges........ (8,442) - - (15,277) (19,767)
Purchased in-process research
and development.................... - - - (44,000) -
Depreciation and amortization (7)..... (8,353) (6,706) (6,542) (9,340) (34,228)
Interest income....................... 33 12 28 184 433
Interest expense...................... (4,159) (2,805) (2,052) (6,303) (43,123)
Other, net............................ (176) (261) (379) 323 (1,584)
(Provision) benefit for income taxes.. (1,863) (8,310) (8,099) (1,270) 1,900
Cumulative effect of change in
accounting principle............... 768 - - - -
--------- ---------- --------- -------- --------
Net (loss) income..................... $ (1,472) $ 5,645 $ 8,266 $(50,674) $ (7,028)
--------- ---------- --------- -------- --------
--------- ---------- --------- -------- --------
________________________________
(1) In 1993 and 1996 ALARIS Medical Systems restructured its operations.
During 1997, the Company incurred significant non-recurring integration
and other non-recurring expense resulting from the Merger. Operating
expenses for the years ended December 31, 1993, 1996 and 1997 include
restructuring, integration and other non-recurring charges of $8,442,
$15,277 and $19,767, respectively. Additionally, in 1996, the Company
recorded $44,000 of purchased in-process research and development in
connection with the Merger.
(2) Lease interest income consists of interest income associated with
contracts or agreements pursuant to which a third party acquires infusion
pumps under sales-type leases.
(3) Reflects the adoption on January 1, 1993 of Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes."
(4) 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. Restructuring 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.
25
(6) Amount represents that portion of the purchase accounting adjustments
made to adjust the acquired IVAC inventory to its estimated fair value
on the Merger date which was charged to cost of sales during December 1996
and the first quarter of 1997.
(7) Depreciation and amortization excludes amortization of debt discount and
issuance costs included in interest expense of $314, $263, $248, $1,113
and $3,012 for the years ended December 31, 1993, 1994, 1995, 1996 and
1997, respectively.
26
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, Inc. and the related notes
thereto included elsewhere in this Annual Report.
Overview
As a result of the Merger on November 26, 1996, the operating results
reported for the year ended December 31, 1997 are not comparable to 1995 or
1996. The 1995 operating results and cash flows represent those of IMED. The
1996 operating results and cash flows include those of IVAC from November 27,
1996 through December 31, 1996.
The Company sells and services infusion systems primarily in the United
States, Western Europe, Canada, Australia, Latin America and the Middle East.
The Company generates revenues from the sale and/or lease of infusion pumps
and sales of associated proprietary disposable administration sets.
Additionally, as a result of the Merger, the Company now generates revenue
from the sale of patient monitoring products.
In recent years, the Company's results of operations have been affected
by the cost containment pressures applicable to health care providers. In
particular, in order to reduce costs, certain hospitals have adopted a
protocol increasing the maximum time between disposable administration set
changes from every 24 hours to as much as every 72 hours. Notwithstanding
this change in protocol, unit sales volume of the Company's disposable
administration sets increased in every year since 1993, primarily as a result
of the growth in its installed base of infusion pumps. However, uncertainty
remains with regard to future changes within the healthcare industry. The
trend towards managed care and economically motivated buyers in the U.S. may
result in continued pressure on selling prices of products and compression on
gross margins. The U.S. marketplace is increasingly characterized by
consolidation among healthcare providers and purchasers of medical products.
The Company's profitability is affected by the increasing use of Group
Purchasing Organizations ("GPOs") which are better able to negotiate
favorable pricing from providers of infusion systems, such as the Company,
and which police compliance with exclusive buying arrangements for their
members. These buying arrangements, in certain situations, also may result in
the GPO requiring removal of the Company's existing infusion pumps. The
Company expects that such GPOs will become increasingly more common and may
have an adverse effect on the Company's future profitability. Finally, the
enactment of national health care reform or other legislation affecting
payment mechanisms and health care delivery would affect the Company's future
results of operations. Although the final form of any such legislation is not
known, it is likely that any such legislation may impose limits on the number
and type of medical procedures which may be performed and may restrict a
provider's ability to select specific devices or products for use in
administering care which, in turn, could adversely impact demand and/or
pricing for the Company's infusion systems. It is impossible to predict the
extent to which the Company may be affected by any such change in legislation.
27
Results of Operations
The following table sets forth, for the periods indicated, selected
financial information expressed as a percentage of sales, as well as pro
forma year ended 1996 operating results in thousands of dollars. The pro
forma data is based on the historical operating results of ALARIS Medical
Systems, adjusted to give effect to the Merger as if it occurred on January
1, 1996. The data excludes non-recurring charges related to the Merger, as
well as the operating results of River Medical, Inc., a subsidiary of IVAC
which was divested prior to the consummation of the Merger.
The pro forma financial data is not necessarily indicative of the
Company's results of operations that might have occurred had such
transactions been completed at the beginning of the period specified, and do
not purport to represent what the Company's consolidated results of
operations might be for any future period.
Year Ended December 31,
-----------------------------------------------------------
As reported As reported Pro forma Pro forma As reported
1995 1996 1996 1996 1997
----------- ----------- --------- --------- -----------
(% of sales) (% of sales) (in thousands) (% of sales)
Sales.............................. 100.0% 100.0% $346,348 100.0% 100%
Cost of sales...................... 56.2 57.7 184,768 53.3 52.5
----- ----- -------- ----- -----
Gross margin....................... 43.8 42.3 161,580 46.7 47.5
Selling and marketing expenses..... 14.7 16.3 65,385 18.9 18.3
General and administrative
expenses.......................... 7.9 9.8 38,215 11.0 10.4
Research and development expenses.. 6.6 6.5 18,142 5.2 4.7
Purchased in-process research and
development....................... - 32.3 - - -
Restructuring, integration and other
non-recurring charges............. - 11.2 - - 5.5
Lease interest income.............. 2.1 1.8 4,601 1.2 1.2
----- ----- -------- ----- -----
Income (loss) from operations...... 16.7 (32.0) 44,439 12.8 9.8
Interest income.................... - .1 233 .1 .1
Interest expense................... (1.8) (4.6) (40,384) (11.6) (12.0)
Other, net......................... (.4) .3 110 - (.4)
----- ----- -------- ----- -----
Income (loss) before income taxes.. 14.5 (36.2) 4,398 1.3 (2.5)
Provision for (benefit from)
income taxes...................... 7.2 .9 4,100 1.2 (.5)
----- ----- -------- ----- -----
Net income (loss).................. 7.3% (37.1%) $ 298 .1% (2.0%)
----- ----- -------- ----- -----
----- ----- -------- ----- -----
Other Data:
Adjusted EBITDA................. 22.5% 21.3% $ 77,675 22.4% 25.3%
28
The following table summarizes sales to customers located in the United
States and international locations:
Year ended December 31,
---------------------------------------------------
As reported As reported Pro forma As reported
1995 1996 1996 1997
----------- ----------- --------- -----------
(in millions)
U.S. sales........................... $ 92.2 $ 100.2 $ 224.6 $ 227.0
International sales.................. 20.4 36.2 121.7 132.1
------- ------- ------- -------
Total sales....................... $ 112.6 $ 136.4 $ 346.3 $ 359.1
------- ------- ------- -------
------- ------- ------- -------
Year ended December 31, 1997 Compared to Year Ended December 31, 1996
Sales. Sales increased $222.7 million during 1997 as compared to 1996
due to the Merger. On a pro forma basis, sales increased $12.7 million, or
3.7%, during 1997 as compared to 1996. United States sales increased $2.4
million, or 1.1%, on a pro forma basis while international sales increased
$10.4 million, or 8.5%, on a pro forma basis. The increase in international
sales is primarily due to an increase in volume of drug infusion instruments
and disposable administration sets as well as the August 1996 repurchase of
IMED product European distribution rights from Pharmacia & Upjohn, Inc. which
has resulted in higher average selling prices for these products in 1997. The
majority of the Company's international sales are denominated in foreign
currency. Due to a stronger U.S. dollar in 1997 as compared to the actual
foreign currency exchange rates in effect during 1996, translation of 1997
international sales were adversely impacted by $7.1 million. The increase in
U.S. sales in 1997 as compared to 1996, on a pro forma basis, is primarily
due to an increase in drug infusion disposable administration set revenue.
Such increase is due to an increase in volume of the Company's SmartSite
Needle-Free System administration sets.
Gross Margin. The gross margin percentage increased from 42.3% in 1996
to 47.5% in 1997 primarily due to supplier price concessions resulting from
the Merger and favorable international margins due in part to the repurchase
of European distribution rights from Pharmacia & Upjohn, Inc. These were
partially offset by increased amortization expense resulting from the IVAC
purchase price allocated to certain intangible assets, $1.6 million of
non-recurring purchase accounting inventory adjustments, as well as $2.5
million related to a voluntary field correction of certain Gemini PC-1 and
PC-2 infusion pumps charged to cost of sales during 1997. The pro forma gross
margin percentage for 1996 was 46.7% compared to 48.7% for 1997, exclusive of
the purchase accounting inventory adjustment and product field correction
charges.
Selling and Marketing Expense. Selling and marketing expense increased
$43.5 million during 1997 primarily due to the Merger. On a pro forma basis,
selling and marketing expense increased approximately $0.4 million, or 0.6%,
during 1997. As a percentage of sales, on a pro forma basis, selling and
marketing expense decreased from 18.9% in 1996 to 18.3% in 1997. Domestic
expense decreased by $2.3 million, or 5.6%, from 1996 due to Merger-related
synergies. The decrease in domestic selling and marketing expense was more
than offset by increased international expenses of $2.7 million, or 10.9%,
due to increased international sales and associated increase in European
direct operations.
General and Administrative Expense. General and administrative expense
increased $24.1 million during 1997 primarily due to the Merger. On a pro
forma basis, general and administrative expense decreased by $0.7 million, or
1.8%, during 1997. As a percentage of sales, on a pro forma basis, general
and administrative expense decreased from 11.0% for 1996 to 10.4% for 1997
due to an increase in sales, as well as Merger-related synergies, including
lower labor and facilities expenses. International expenses increased by $0.6
million, or 9.1% as a result of an increase in the investment in direct
operations in Europe.
29
Research and Development Expense. Research and development expense
increased approximately $8.0 million during 1997 primarily due to the Merger.
On a pro forma basis, research and development expense decreased from $18.1
million, or 5.2% of sales, for 1996 to $16.9 million, or 4.7% of sales for
1997, primarily due to synergies realized in the Merger and realignment and
prioritization of research and development projects.
Purchased In-process Research and Development. In connection with the
Merger, the assets and liabilities of IVAC were adjusted to their estimated
fair values. As a result of this process, the Company incurred a one-time
$44.0 million write-off during 1996 related to the value assigned to the
acquired in-process research and development of IVAC projects for which
technological feasibility had not been established and for which there was no
alternative future use. Such amount was determined with the assistance of a
third party appraiser based upon the present value of estimated future cash
flow contributions from the identified projects. The Company has continued to
invest in the development necessary to obtain technological feasibility of
these projects. The project, which represents the most significant portion of
the acquired in-process research and development charge, is an improved cost
effective and technologically advanced electronic thermometer.
Restructuring, Integration and Other Non-recurring Charges. The Company
incurred $19.8 million in integration costs and other non-recurring expense
during 1997. These costs are in addition to restructuring and integration
charges of $15.3 million recorded in the fourth quarter of 1996. The 1997
expense consists primarily of information systems conversion costs of $4.8
million, the write-off of a product distribution and license agreement with a
third party developer of an ambulatory and alternate site infusion pump of
$4.5 million, maquiladora contract dispute settlement and related costs of
$4.1 million (see Note 10 to the Consolidated Financial Statements), the
write-off of drug infusion instrument tooling associated with the redesign
effort on a product in development of $1.7 million, facilities moving
expenses and Company name change costs of $1.6 million, management consulting
fees of $1.4 million, severance of $.2 million and other integration costs of
$1.5 million. The Company has reviewed its products and related research and
development activities and market opportunities in order to focus on projects
that will provide greater competitive advantage and stockholder return. That
review resulted in the termination of the aforesaid product distribution and
license agreement. The $4.5 million charge related to such termination
includes a $4.3 million non-cash charge representing the intangible asset
that had been recorded associated with such agreement.
Lease Interest Income. Lease interest income during both periods
consists of interest income associated with contracts or agreements pursuant
to which a third party acquired infusion pumps under sales-type leases. Lease
interest income increased $2.1 million or 82.3% for 1997 as compared to 1996
primarily due to the Merger. On a pro forma basis, lease interest income
decreased approximately 0.9% from 1996 to 1997.
Income (Loss) from Operations. Income from operations increased $79.0
million during 1997 primarily due to the 1996 operating results including
significant non-recurring purchase accounting charges. Additionally, due to
the Merger being completed on November 26, 1996, the 1996 operating results
include only one month of operating profit from the acquired business while
1997 includes a full year of profit contribution. This increase was partially
offset by expenses related to the field correction on the Gemini pumps in the
first quarter and the maquiladora business interruption in the second
quarter. On a pro forma basis, operating income decreased $9.1 million from
$44.4 million in 1996 to $35.3 million in 1997 primarily due to the $19.8
million of integration costs discussed above, offset by a $9.2 million
improvement in gross profit.
Adjusted EBITDA. Adjusted EBITDA increased $61.9 million during 1997
primarily due to the Merger. On a pro forma basis, as a percentage of sales,
Adjusted EBITDA increased from 22.4%, or $77.7 million, for 1996 to 25.3%, or
$90.9 million, for 1997 due to the reasons discussed above. Excluding the
$2.5 million charge to cost of sales during the first quarter of 1997,
Adjusted EBITDA would have increased to $93.4 million, an increase of $15.8
million or approximately 20.3%, as compared to pro forma 1996. Adjusted
EBITDA represents income from operations before non-recurring non-cash
purchase accounting charges, restructuring charges, integration charges and
depreciation and amortization. Adjusted EBITDA does not represent net income
or cash flows from operations, as these terms are defined under generally
accepted accounting principles, and should not be considered as an
alternative to net income or to cash flows as an indicator of 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 investors as a measure of an
issuer's historical ability to service debt. Restructuring 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.
30
Interest Expense. Interest expense increased $36.8 million during 1997
primarily due to the Merger. In addition to interest on approximately $404.0
million of borrowings to finance the Merger and related debt refinancings,
higher interest expense was incurred in 1997 due to IMED's $11.0 million
purchase of the European distribution rights for IMED products in August
1996. This increase in interest expense was offset by reductions in interest
on $37.5 million of ALARIS Medical convertible debt which was converted to
common stock in connection with the Merger, as well as the redemption of
$21.9 million of ALARIS Medical 15% subordinated debentures in December 1996.
On a pro forma basis, interest expense increased $2.7 million due to
additional borrowings under the Company's revolving credit facility (see
Liquidity and Capital Resources). The additional borrowings were used to pay
for restructuring and integration costs associated with the Merger.
Other (Expense) Income. Other income decreased $1.9 million during 1997
as compared to 1996, partially due to a foreign exchange loss of
approximately $1.0 million during 1997 as compared to foreign exchange gain
of approximately $.5 million during 1996.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Sales. Sales increased approximately $23.8 million or 21.2% due to the
inclusion of IVAC's sales for December 1996. Excluding IVAC sales, total IMED
only sales increased approximately $0.4 million during 1996 as compared to
1995. United States sales decreased approximately $4.5 million or 4.9% during
1996 as compared to 1995. Within the United States infusion therapy business,
sales decreased for 1996, as compared to 1995, primarily due to (i) a
decrease of $2.4 million related to the volume of infusion pump shipments
primarily attributable to several large transactions during 1995 and (ii) a
decline of $1.9 million related to reduced average selling price of IMED's
infusion pumps and disposable administration sets, offset in part by an
increase of $.2 million related to volume of disposable administration set
sales. Sales to customers located outside of the United States increased $5.0
million, or 24.5%, from $20.4 million for 1995 to $25.4 million for 1996
primarily as a result of increased instrument and disposable administration
set pricing of approximately $3.5 million primarily resulting from the
repurchase of the IMED product European distribution rights from Pharmacia &
Upjohn, Inc. in August 1996. This resulted in the Company realizing higher
sales prices than when the products were sold directly to Pharmacia & Upjohn,
Inc. Related to the Pharmacia & Upjohn, Inc. repurchase, IMED established
IMED Ltd., a wholly-owned subsidiary, to distribute its products throughout
Europe. As a result, the consolidated 1996 operating results include
approximately $2.3 million of start-up and operating expenses which were not
present in prior years. Additionally, sales to customers outside the United
States increased approximately $1.6 million related to higher volume of
disposable administration sets resulting from IMED's growing installed base
in Canada, Australia, Latin America and the Far East.
Gross Margin. Gross margin increased $8.4 million or 17.1% from 1995 to
1996 primarily due to the Merger. Additionally, 1996 gross margin was reduced
by $4.0 million due to that portion of the
31
purchase accounting adjustments made to adjust the acquired IVAC inventory to
its estimated fair value on the Merger date which was charged to cost of
sales during December 1996. Excluding the Merger, IMED only gross margin
increased $1.4 million from $49.3 million for 1995 to $50.7 million for 1996
due primarily to the decrease in cost of sales discussed below. Despite the
decline in average selling prices of infusion pumps and disposable
administration sets discussed above, IMED only gross margin, as a percentage
of IMED only sales, increased from 43.8% for 1995 to 44.8% for 1996 primarily
as a result of reductions in the manufacturing cost of disposable
administration sets caused by (i) increased outsourcing of molded parts and
components; (ii) negotiated price reductions from suppliers; and (iii) the
favorable effects of increased manufacturing volume. Gross margin also
increased for 1996, compared to 1995, as a result of lower unit cost for
inventory at December 31, 1995 that were sold during 1996 compared to the
unit cost for inventory at December 31, 1994 that were sold during 1995.
Selling and Marketing. Selling and marketing expense increased $5.7
million or 34.4% during 1996 as compared to 1995 primarily due to the Merger.
Exclusive of the Merger, as a percentage of IMED only sales, selling and
marketing expense increased from 14.7% for 1995 to 15.9% for 1996. IMED only
selling and marketing expense increased from $16.6 million for 1995 to $18.0
million for 1996 primarily due to the recognition of selling and marketing
expense by IMED Ltd. in 1996 as a result of IMED's repurchase of the European
distribution rights for IMED products from Pharmacia & Upjohn, Inc. Also
contributing to this increase were compensation and relocation expenses for
selling and marketing management personnel hired during 1996.
General and Administrative. General and administrative expense
increased $4.5 million or 51.1% during 1996 as compared to 1995 primarily due
to the Merger. Exclusive of the Merger, general and administrative expense
increased from $8.9 million for 1995 to $10.7 million for 1996 as a result of
recruitment and relocation expenses of development personnel and increased
management compensation. General and administrative expense also increased
for 1996, compared to 1995, due to the recognition of general and
administrative expenses by IMED Ltd. in 1996. As a percentage of IMED only
sales, IMED only general and administrative expense increased from 7.9% for
1995 to 9.5% for 1996 primarily as a result of the increase in general and
administrative expenses discussed above.
Research and Development. Research and development expense increased
$1.5 million or 19.9% during 1996 as compared to 1995 primarily due to the
Merger. IMED only research and development expense increased from $7.4
million for 1995 to $7.8 million for 1996 primarily as a result of the timing
of certain expenses associated with the development of a new modular infusion
system. Due to the increase in IMED only research and development costs,
research and development expense, as a percentage of sales, increased from
6.6% for 1995 to 6.9% for 1996.
Purchased Research and Development. In connection with the Merger, the
assets and liabilities of IVAC were adjusted to their estimated fair values.
As a result of this process, the Company incurred a one-time $44.0 million
write-off during 1996 related to the value assigned to the acquired
in-process research and development of IVAC projects for which technological
feasibility had not been established and for which there was no alternative
future use. Such amount was determined with the assistance of a third party
appraiser based upon the present value of estimated future cash flow
contributions from the identified projects. The Company has continued to
invest in the development necessary to obtain technological feasibility of
these projects. The project, which represents the most significant portion of
the acquired in-process research and development charge, is an improved cost
effective and technologically advanced electronic thermometer.
Restructuring, Integration and Other Non-recurring Costs. In connection
with the Merger, management performed an extensive review of the operating
activities of both IMED and IVAC in order to reduce costs and maximize
synergies. Management identified duplicative costs to eliminate and developed
and implemented plans to consolidate and integrate the companies' operations
including product strategies,
32
manufacturing, service centers, research and development, marketing and other
administrative functions. As a result, the Company recorded a non-recurring
charge related to the implementation of these plans in the amount of $15.3
million in 1996. The charge includes $10.6 million of restructuring expense
with the following significant components: severance and benefits - $4.4
million, cost to vacate facilities - $3.4 million, write-off unused
furniture, fixtures and equipment - $1.5 million, distributor termination
costs - $0.8 million and $0.5 million of miscellaneous other restructuring
charges. Integration costs of $4.7 million were also included in the 1996
charge and relate primarily to consulting services and employee sign-on
bonuses incurred in connection with forming the new combined company.
Estimated dealer termination costs, as well as severance and benefits
costs related to the acquired company's personnel in the amount of $2.8
million were also accrued at the acquisition date. In accordance with
generally accepted accounting principles, such items effectively increased
the amount of goodwill recorded in connection with the Merger and were not
included in the $15.3 million restructuring and integration expense included
in the Consolidated Statement of Operations for the year ended December 31,
1996. At December 31, 1996, the Company had approximately $15.1 million
accrued related to restructuring costs, primarily all of which was paid
during 1997.
As a result of the Merger, approximately 225 employees from all
functional areas were given notice of termination in December 1996.
Approximately 125 of such terminations were effective December 31, 1996 while
the additional 100 employees were phased-out during the first half of 1997.
Due to excess capacity at the manufacturing facilities of both
companies, the Company consolidated IMED's instrument manufacturing
operations into the existing IVAC facility. This consolidation was completed
in December 1996. In addition, as a result of the employee terminations
described above, management decided to consolidate the headquarters of IMED
into IVAC's existing headquarters. This consolidation was substantially
completed during the first quarter of 1997.
Lease Interest Income. Lease interest income during both periods
consists of interest income associated with contracts or agreements pursuant
to which a third party acquired infusion pumps under sales-type leases. Lease
interest income increased $0.2 million or 7.2% for 1996 as compared to 1995
primarily due to the Merger.
Income (Loss) from Operations. Income from operations decreased from
$18.8 million for 1995 to a loss of $43.6 million for 1996 primarily due to
the Merger and resulting purchase accounting adjustments which more than
offset the IVAC only operating income generated in December 1996. Excluding
the impact of the Merger on the 1996 operating results, consolidated ALARIS
Medical operating income decreased $2.3 million or 12.1% from $18.8 million
in 1995 to $16.5 million in 1996 due to the reasons discussed above.
Adjusted EBITDA. For the reasons discussed above excluding the impact
of the Merger, as a percentage of sales, Adjusted EBITDA decreased from
22.5%, or $25.3 million, for 1995 to 21.3%, or $29.0 million, for 1996.
Adjusted EBITDA represents income from operations before non-recurring
non-cash purchase accounting charges, restructuring charges and
depreciation and amortization. Adjusted EBITDA does not represent net income
or cash flows from operations, as these terms are defined under generally
accepted accounting principles, and should not be considered as an
alternative to net income or to cash flows as an indicator of 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 investors as a measure of an
issuer's historical ability to service debt. Restructuring 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.
33
Interest Expense. Interest expense increased $4.3 million from $2.1
million during 1995 to $6.3 million during 1996. The increase in interest
expense was due to the increase in debt obtained to finance the Merger. Also
contributing to the increase was the interest on approximately $11.0 million
of borrowings made by IMED in August 1996 related to the repurchase of the
European distribution rights for IMED products.
Liquidity and Capital Resources
The Company expects to continue to meet its liquidity needs, including
capital expenditure requirements with cash flow from operations and
borrowings under the credit facility. In addition to operating expenses, the
Company's primary future use of funds will be to fund capital expenditures
and strategic acquisitions and to pay debt service on outstanding
indebtedness. Additionally, the Company's credit facility permits it to
transfer to ALARIS Medical up to $1.5 million annually to fund ALARIS
Medical's operating expenses and additional amounts sufficient to meet annual
interest expense requirements of approximately $1.2 million.
During 1997, the Company made cash payments of approximately $12.2
million related to merger and integration costs accrued at December 31, 1996,
as well as payments of approximately $13.8 million for integration costs
expensed during 1997.
At December 31, 1997, the Company's outstanding indebtedness was $429.9
million, which includes $198.8 million of bank term debt under the credit
facility and $200.0 million of Senior Subordinated Notes due 2006 (the
"Notes"), which were issued in connection with the Merger. The bank debt
bears interest at floating rates based, at the Company's option, on
Eurodollar or prime rates. During the second quarter of 1997, the Company
entered into an interest rate protection agreement covering 50% of its term
loan borrowings. Such agreement fixed the interest rate charged on such
borrowings resulting in a weighted average fixed rate of 9.6% on the
principal balance covered. As a result, a one percent increase in the rate of
interest charged on indebtedness outstanding under the credit facility at
December 31, 1997 would result in additional annual interest expense of
approximately $1.0 million. During March, 1998 the credit facility was
amended and the interest rates on the bank debt reduced. As a result, the
weighted average interest rate, including the effect of the interest rate
protection agreement, was reduced to 8.5% based on the amounts outstanding at
the time of the amendment. The Company incurred fees of approximately $.4
million related to such interest rate reductions.
In connection with obtaining the Merger financing, the Company also
obtained a $50.0 million revolving credit line as part of the credit
facility. At December 31, 1997, $25.2 million in borrowings and $0.5 million
under letters of credit were outstanding under this line of credit and $24.3
million was available.
In connection with the Merger, the Company assumed IVAC's obligations
to Siemens Infusion Systems Ltd. (SIS). These obligations relate to the
payment of additional purchase consideration related to the acquisition of
the MiniMed product line (the predecessor product line to MS III). The
Company's remaining obligation to SIS is the greater of $3.0 million per year
or 8% of the prior year's MS III sales in 1998 and 1999. The Company made the
minimum 1997 payment of $3.0 million during the first quarter of 1997.
As a result of the Company's significant indebtedness, the Company
expects to incur significant interest expense in future periods. The Company
believes that cash provided by operations will be sufficient to meet its
interest expense obligations.
Annual amortization of the Company's indebtedness is $14.6 million,
$15.6 million and $13.7 million for 1998, 1999 and 2000, respectively.
34
Although the Company is not a guarantor of ALARIS Medical's debt,
ALARIS Medical has no significant operations other than the operations of the
Company and is dependent upon the Company to fund its debt service
requirements and other operating expenses. At December 31, 1997, ALARIS
Medical had $16.2 million of outstanding Convertible Debentures. The
Convertible Debentures provide for semi-annual interest payments of
approximately $0.6 million and mature on January 15, 2002. The Notes and the
New Credit Facility permit the Company to fund interest payments on the
Convertible Debentures and to make limited distributions to ALARIS Medical to
fund operating expenses and to pay income taxes; provided that, with respect
to the New Credit Facility, there exists no default or event of default under
the New Credit Facility. The Notes and the New Credit Facility, however,
restricts distributions to ALARIS Medical to fund the repayment of the
Convertible Notes at maturity.
The Company made capital expenditures of approximately $19.8 million
during the year ended December 31, 1997, of which approximately $5.7 million
was related to the consolidation of the IMED and IVAC facilities. The Company
anticipates capital expenditures of approximately $25.0 million during 1998.
In addition to routine capital expenditures, the Company has made a
total of approximately $6.0 million of capital and operating expenditures
during 1997 and expects to make approximately $5.8 million and $.3 million
during 1998 and 1999, respectively, for the acquisition and implementation of
a new enterprise-wide information system.
During the first quarter of 1998 the Company created a corporate
development function to assess product and company acquisitions, distribution
alliances and joint ventures which would expand Company technologies into
unserved markets. While there can be no assurances that the Company will
complete any acquisitions, depending on the value of potential acquisitions,
the Company might fund such transactions through a variety of sources,
including existing or new debt facilities or through capital contributions
from the sale of ALARIS Medical from the sale of equity and/or debt
securities.
The Company believes that it will generate sufficient cash flow from
operations to fund its operations, make planned capital expenditures and make
required payments of principal and interest under its credit facility and
interest on the Notes; however, the Company may not generate sufficient cash
flow from operations to repay the Notes at maturity. Accordingly, the Company
may have to refinance the Notes at or prior to maturity or sell assets or
raise equity capital to repay the principal amount of the Notes. In addition,
the Company's ability to fund its operations, to make planned capital
expenditures and to make scheduled principal and interest payments will be
dependent on the Company's future operating performance, which is itself
dependent on a number of factors, many of which the Company cannot control,
including conditions affecting the Company's foreign operations, prevailing
economic conditions, availability of other sources of liquidity, and
financial, business, regulatory and other factors affecting the Company's
business and operations.
Seasonality
Infusion 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 and
increased competitive pressures.
Backlog
The backlog of orders, believed to be firm, at December 31, 1996 and
1997 was $8.5 million and $2.7 million, respectively.
35
Foreign Operations
As a result of the Merger, the Company has significant foreign
operations. Accordingly, the Company is subject to various risks, including
without limitation, foreign currency risks. Historically, the Company has not
entered into foreign currency contracts to hedge such exposure and such risk.
Due to changes in foreign currency exchange rates during 1997, primarily a
strengthening of the U.S. dollar against many European currencies, the
Company recognized a foreign currency transaction loss of approximately $1.0
million during 1997. The Company will evaluate hedging programs during 1998
to limit the exposure to the Company resulting from changes in foreign
currency exchange rates.
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.
36
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholder of
ALARIS Medical Systems, Inc.
In our opinion, the consolidated financial statements listed in the
index appearing under Item 14(a)(1) and (2) on page 78 present fairly, in all
material respects, the financial position of ALARIS Medical Systems, Inc. and
its subsidiaries at December 31, 1996 and 1997, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1997, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
San Diego, California
March 2, 1998
37
ALARIS MEDICAL SYSTEMS, INC.
CONSOLIDATED BALANCE SHEET
- ------------------------------------------------------------------------------
(Dollar amounts in thousands, except per share data)
ASSETS
December 31,
-----------------------
1996 1997
---------- ---------
Current assets:
Cash............................................... $ 9,148 $ 6,918
Receivables, net................................... 87,874 83,406
Inventories........................................ 58,976 61,666
Prepaid expenses and other current assets.......... 22,126 23,319
-------- --------
Total current assets............................. 178,124 175,309
Net investment in sales-type leases, less current
portion.............................................. 27,276 30,404
Property, plant and equipment, net.................... 56,628 55,365
Other non-current assets.............................. 17,310 15,749
Intangible assets, net................................ 306,803 286,279
-------- --------
$586,141 $563,106
-------- --------
-------- --------
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Current portion of long-term debt.................. $ 3,963 $ 14,559
Accounts payable................................... 25,808 23,927
Accrued expenses and other current liabilities..... 48,786 50,059
Accrued restructuring and integration costs........ 15,098 1,680
-------- --------
Total current liabilities........................ 93,655 90,225
-------- --------
Long-term debt........................................ 419,978 415,419
Other non-current liabilities......................... 22,487 18,515
-------- --------
Total non-current liabilities.................... 442,465 433,934
-------- --------
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, 1996
and 1997.......................................... 96,646 98,503
Accumulated deficit................................ (46,687) (55,930)
Equity adjustment from foreign currency translation 62 (3,626)
-------- --------
Total stockholder's equity....................... 50,021 38,947
-------- --------
$586,141 $563,106
-------- --------
-------- --------
The accompanying notes are integral part of these consolidated financial
statements.
38
ALARIS MEDICAL SYSTEMS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
- ------------------------------------------------------------------------------
(Dollars in thousands)
Year ended December 31,
---------------------------------
1995 1996 1997
---------- ---------- --------
Sales................................... $112,551 $136,371 $359,077
Cost of sales........................... 63,270 78,642 188,340
-------- -------- --------
Gross margin......................... 49,281 57,729 170,737
-------- -------- --------
Selling and marketing expense........... 16,567 22,273 65,797
General and administrative expense...... 8,893 13,434 37,510
Research and development expense........ 7,386 8,854 16,876
Purchased in-process research and
development............................ - 44,000 -
Restructuring, integration, and other
non-recurring charges.................. - 15,277 19,767
-------- -------- --------
Total operating expense.............. 32,846 103,838 139,950
-------- -------- --------
Lease interest income................... 2,333 2,501 4,559
-------- -------- --------
Income (loss) from operations........ 18,768 (43,608) 35,346
Other income (expense):
Interest expense.................... (2,052) (6,303) (43,123)
Interest income..................... 28 184 433
Other, net.......................... (379) 323 (1,584)
-------- -------- --------
Total other expense.................. (2,403) (5,796) (44,274)
-------- -------- --------
Income (loss) before income taxes....... 16,365 (49,404) (8,928)
Provision for (benefit from) income
taxes.................................. 8,099 1,270 (1,900)
-------- -------- --------
Net income (loss)....................... 8,266 (50,674) (7,028)
Dividends on mandatorily redeemable
preferred stock and adjustment of common
stock warrant to redemption amount..... (8,058) (589) -
-------- -------- --------
Net income (loss) attributable to
common stock........................... $ 208 $ (51,263) $ (7,028)
-------- -------- --------
-------- -------- --------
The accompanying notes are an integral part of these consolidated financial
statements.
39
ALARIS MEDICAL SYSTEMS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
- ------------------------------------------------------------------------------
(Dollars in thousands)
Year ended December 31,
---------------------------------
1995 1996 1997
---------- ---------- --------
Cash flows from operating activities:
Net income (loss)........................... $ 8,266 $ (50,674) $ (7,028)
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization.............. 6,790 10,453 34,228
Net loss on disposal/write-off of property,
plant and equipment and intangibles....... 370 234 6,735
Debt discount and issue costs amortization. - 657 3,012
Purchased in-process research and development - 44,000 -
Inventory purchase price allocation
adjustment................................ - 4,014 1,607
Non-cash restructuring charges............. - 1,616 -
(Increase) decrease in assets:
Receivables............................... (2,101) (2,935) 1,503
Inventories............................... 4,518 (1,223) (4,681)
Prepaid expenses and other current assets. (625) 79 (1,026)
Net investment in sales-type leases....... (458) 1,830 (3,128)
Other non-current assets.................. 105 66 (96)
Increase (decrease) in liabilities, net of
effects of the Merger:
Accounts payable.......................... (537) 2,981 (1,659)
Accrued expenses, restructuring and
integration costs and other current
liabilities.............................. 2,262 5,533 (10,824)
Amounts due related parties............... 6,210 840 250
Other non-current liabilities............. (776) (795) (4,222)
------- ------- -------
Net cash provided by operating activities..... 24,024 16,676 14,671
------- ------- -------
Cash flows from investing activities:
Capital expenditures........................ (4,803) (9,502) (19,843)
Payments for product distribution rights.... (3,402) (12,556) -
Proceeds from disposal of property, plant
and equipment.............................. 17 106 89
Acquisition of business, net of cash
acquired (Note 2).......................... - (219,459) -
------- --------- --------
Net cash used in investing activities......... (8,188) (241,411) (19,754)
------- --------- --------
Cash flows from financing activities:
Principal payments on long-term debt........ (530) (140) (4,248)
Proceeds from issuances of long term debt... - 400,000 -
Net (repayments) proceeds under former
revolving credit facilities................ (7,764) 10,006 -
Proceeds from revolving credit facility..... - 15,200 34,300
Repayments of revolving credit facility..... - - (24,300)
Dividends on preferred stock................ (6,684) (4,067) -
Redemption of preferred stock............... (880) (3,350) -
Dividends to ALARIS Medical................. - - (2,215)
Capital contributions....................... - 19,588 1,595
Debt issuance costs......................... (10) (16,888) (919)
Debt refinanced in merger................... - (186,607) -
------- --------- ---------
Net cash (used in) provided by financing
activities................................... (15,868) 233,742 4,213
------- --------- ---------
Effect of exchange rate changes on cash....... (656) (295) (1,360)
------- --------- ---------
Net (decrease) increase in cash .............. (688) 8,712 (2,230)
Cash at beginning of period................... 1,124 436 9,148
------- --------- ---------
Cash at end of period......................... $ 436 $ 9,148 $ 6,918
------- --------- --------
------- --------- --------
The accompanying notes are an integral part of these consolidated financial
statements.
40
ALARIS MEDICAL SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
- ------------------------------------------------------------------------------
(Dollars in thousands)
Equity
Common Stock Adjustment
And Capital Retained From
In Excess of Par Value Earnings Foreign Total
---------------------- (Accumulated) Currency Stockholder's
Shares Amount Deficit Translation Equity
---------- ---------- ------------- ------------ --------------
Balance at December 31, 1994........... 900 $24,398 $ 7,841 $ 690 $32,929
Accrual of dividends on mandatorily
redeemable preferred stock........... - - (1,558) - (1,558)
Adjustment of common stock warrant to
redemption amount.................... - - (6,500) - (6,500)
Equity adjustment from foreign currency
translation.......................... - - - (660) (660)
Net income for the year................ - - 8,266 - 8,266
------ -------- --------- -------- ----------
Balance at December 31, 1995........... 900 24,398 8,049 30 32,477
------ -------- --------- -------- ----------
Dividends on mandatorily redeemable
preferred stock...................... - - (589) - (589)
Cancellation of stock warrants......... - 11,500 - - 11,500
Non-cash capital contribution from
Advanced Medical..................... - 41,160 - - 41,160
Dividends to Advanced Medical.......... - - (3,473) - (3,473)
Capital contribution from Advanced
Medical.............................. - 19,588 - - 19,588
Shares issued due to merger............ 100 - - - -
Equity adjustment from foreign currency
translation.......................... - - - 32 32
Net loss for the year.................. - - (50,674) - (50,674)
------ -------- --------- -------- ----------
Balance at December 31, 1996........... 1,000 $96,646 $(46,687) $ 62 $ 50,021
------ -------- --------- -------- ----------
Tax benefit from exercise of ALARIS
Medical options...................... - 262 - - 262
Capital contribution from ALARIS
Medical............................... - 1,595 - - 1,595
Dividends to ALARIS Medical............ - - (2,215) - (2,215)
Equity adjustment from foreign currency
translation.......................... - - - (3,688) (3,688)
Net loss for the year.................. - - (7,028) - (7,028)
------ -------- --------- -------- ----------
Balance at December 31, 1997........... 1,000 $98,503 $(55,930) $(3,626) $ 38,947
------ -------- --------- -------- ----------
------ -------- --------- -------- ----------
The accompanying notes are an integral part of these consolidated financial
statements.
41
ALARIS MEDICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
(Amounts in thousands, except per share data)
NOTE 1 - BUSINESS AND ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
The Company:
ALARIS Medical Systems, Inc. ("ALARIS Medical Systems"), formerly IMED
Corporation ("IMED"), designs, manufactures, distributes and services
intravenous infusion therapy and patient monitoring instruments and related
disposables and accessories. On November 26, 1996, IMED, then a wholly-owned
subsidiary of ALARIS Medical, Inc. ("ALARIS Medical"), formerly Advanced
Medical, Inc. ("Advanced Medical"), acquired all of the outstanding stock of
IVAC Holdings, Inc. ("IVAC Holdings") and its subsidiaries including IVAC
Medical Systems, Inc. (Note 2). In connection with the acquisition, IMED and
IVAC Medical Systems, Inc. were merged into IVAC Holdings (the "Merger"),
which then changed its name to ALARIS Medical Systems, Inc. The acquisition
was accounted for as a purchase. The accompanying balance sheet as of
December 31, 1996 reflects the assets, liabilities and stockholder's equity
of the merged entity. The accompanying statements of operations, of cash
flows and of stockholder's equity for the year ended December 31, 1996
include the operations and cash flows of IMED up to the date of the
acquisition and the operations and cash flows of the merged entity subsequent
to the acquisitoin date. The comparative historical information for the year
ended December 31, 1995 represents the financial position, results of
operations and cash flows of IMED. 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 significant
intercompany accounts and transactions have been eliminated in consolidation.
Use of estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue recognition:
Revenue is recorded upon product shipment, net of an allowance for
estimated returns, or service delivery. Additionally, the Company leases
instruments to customers under non-cancelable sales-type capital leases and
operating lease contracts with terms ranging generally from 1 to 6 years. The
Company sells instruments via long-term financing arrangements to a number of
customers under agreements which allow customers to acquire instruments with
no initial payment. The sales price for the instruments is recovered via
surcharges applied to minimum purchase commitments of related disposables.
The term of the financing is generally three to five years, with interest at
rates of 9% to 15%. Unearned finance revenue is calculated using the inherent
rate of interest on each agreement, the expected disposable shipment period
and the principal balance financed and is recognized as disposables are
shipped using a reducing principal balance method
42
ALARIS MEDICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
(Amounts in thousands, except per share data)
NOTE 1 - BUSINESS AND ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
(Continued)
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.
Inventories:
Inventories are stated at the lower of cost, determined by the
first-in, first-out (FIFO) method, or market. Cost of inventory acquired in
the Merger was determined based on an allocation of the purchase price to all
assets and liabilities including inventory, as determined by an independent
appraisal, at the date of acquisition (Note 2).
Property, plant and equipment:
Property, plant and equipment is stated at cost. Depreciation and
amortization is provided using the straight-line method based upon the
following estimated useful lives of the assets or lease terms, if shorter,
for leasehold improvements and instrument operating leases:
Building and leasehold improvements................. 3 to 10 years
Machinery and equipment............................. 3 to 10 years
Furniture and fixtures.............................. 4 to 8 years
Instruments on operating lease contracts............ 1 to 6 years
Intangible assets:
The Company has recorded goodwill for the excess purchase price over
the estimated fair values of tangible and intangible assets acquired and
liabilities assumed resulting from acquisitions. In connection with the
Merger, a portion of the purchase price was allocated to various identifiable
intangible assets, including patents, trademarks, workforce and supply
agreements, based on their fair values at the date of acquisition. The excess
purchase price over the estimated fair value of the net assets acquired has
been assigned to goodwill. Additionally, the Company has recorded intangible
assets related to purchases of patents and product distribution rights.
43
ALARIS MEDICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
(Amounts in thousands, except per share data)
NOTE 1 - BUSINESS AND ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
(Continued)
Intangible assets are amortized as follows:
Supply agreements......................... Straight-line 3 years
Patents................................... Straight-line 13 years (weighted average)
Workforce................................. Straight-line 14 years
Product distribution license fee.......... Straight-line 15 years
Trademarks................................ Straight-line 30 years
Goodwill.................................. Straight-line 30 to 35 years
Impairment of long-lived assets:
The Company investigates potential impairments of long-lived assets and
certain identifiable intangibles including goodwill, on an exception basis,
when there is evidence that events or changes in circumstances may have made
recovery of an asset's carrying value unlikely. An impairment loss is
recognized when the sum of the expected, undiscounted future net cash flows
is less than the carrying amount of the asset. The Company has not identified
any such losses.
Debt issue costs:
Debt issue costs aggregating $16,936 and $15,279 at December 31, 1996
and 1997, respectively, are amortized using the interest method over the
respective terms of the debt agreements and are included in other non-current
assets.
Foreign currency translation:
The accounts of foreign subsidiaries which use local currencies as
functional currencies are translated into U.S. dollars using year-end
exchange rates for assets and liabilities, historical exchange rates for
equity and weighted average exchange rates during the period for revenues and
expenses. The gains or losses resulting from translations are excluded from
results of operations and accumulated as a separate component of
stockholder's equity.
Research and development costs:
Research and development costs are expensed as incurred.
Fair value of financial instruments:
The carrying amount of the Company's financial instruments, including
cash, trade receivables and payables, approximates their fair value due to
their short-term maturities. The fair values of the Company's long-term lease
receivables are estimated by discounting future cash flows using discount
rates that reflect the risk associated with similar types of loans. The fair
value of the Company's long-term debt is estimated based on comparison with
similar issues or current rates offered to the Company for debt of the same
remaining
44
ALARIS MEDICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
(Amounts in thousands, except per share data)
NOTE 1 - BUSINESS AND ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
(Continued)
maturities and the quoted market price for the debentures. The estimated fair
values of both the Company's long-term lease receivables and long-term debt,
approximate their carrying values.
Income taxes:
The Company is included in ALARIS Medical's consolidated Federal income
tax return. The Company files 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 based on their separate taxable
income. The Company provides for deferred income taxes on undistributed
earnings of its foreign subsidiaries.
The Company recognizes deferred tax assets and liabilities based on the
expected future tax consequences of events that have been included in the
financial statements and tax returns in different periods. Under this method,
deferred tax liabilities and assets are determined based on the difference
between the financial statement and tax bases of assets and liabilities using
enacted tax rates in effect for the year in which the differences are
expected to reverse. The Company provides a reserve against its net deferred
assets when, in the opinion of management, it is more likely than not that
such assets will not be realized.
Stock-based compensation:
During the year ended December 31, 1996, the Company adopted Statement
of Financial Accounting Standard No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). The Company has continued to measure compensation
expense for its stock-based employee compensation plans using the intrinsic
value method prescribed by APB Opinion No. 25, "Accounting for Stock Issued
to Employees," and has included disclosure of the pro forma effects of SFAS
123 in Note 7 to these Consolidated Financial Statements.
Reclassifications:
Certain prior year amounts have been reclassified to conform to the
classifications used in 1997.
Comprehensive income:
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130 ("FAS 130"), "Reporting
Comprehensive Income," which the Company is required to adopt for 1998. This
statement will require the Company to report in the financial statements, in
addition to net income, comprehensive income and its components including
foreign currency translation items currently recorded to stockholder's
equity. Upon adoption of FAS 130, the Company is also required to reclassify
financial statements for earlier periods provided for comparative purposes.
The adoption of FAS 130 will not have an impact on the Company's consolidated
financial statements but will require display of comprehensive income
including items not currently included.
45
ALARIS MEDICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
(Amounts in thousands, except per share data)
NOTE 2 - THE MERGER
On November 26, 1996, IMED acquired all of the outstanding stock of
IVAC Holdings and its subsidiaries including IVAC Medical Systems, Inc., in
exchange for $390,000 plus acquired cash of $7,225 less total debt assumed
aggregating $173,314 plus related expenses. The Merger was financed with
$204,200 in bank debt and $200,000 in senior subordinated notes. Subsequent
to the acquisition, IVAC Medical Systems, Inc. and IMED were merged into IVAC
Holdings, which subsequently changed its name to ALARIS Medical Systems, Inc.
In connection with the Merger, ALARIS Medical contributed $19,588 to IMED
(the "Capital Contribution").
The acquisition was accounted for as a purchase, whereby the purchase
price, including related expenses, was allocated to identified assets,
including intangible assets, purchased research and development and
liabilities based upon their respective fair values. The excess of the
purchase price over the value of identified assets and liabilities, in the
amount of $132,482, was recorded as goodwill and is being amortized over its
estimated life of thirty years.
The following unaudited pro forma financial information presents the
operations of the Company, as if the Merger had been consummated on January
1, of the respective year, excluding certain one time non-recurring charges
related to the Merger.
Year Ended December 31,
-------------------------------
1995 1996
-------------- -----------
Sales:
As reported................... $ 112,551 $ 136,371
Pro forma..................... $ 352,728 $ 346,348
Income (loss) before extraordinary item:
As reported................... $ 8,266 $ (50,674)
Pro forma..................... $ (40,334) $ (150)
46
ALARIS MEDICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
(Amounts in thousands, except per share data)
NOTE 3 - COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS
December 31,
----------------------
1996 1997
--------- ---------
Receivables:
Trade receivables.............................. $ 75,164 $ 73,282
Allowance for doubtful accounts................ (4,085) (3,259)
-------- --------
71,079 70,023
Current portion of net investment in sales-type
leases (Note 9)............................... 16,795 13,383
-------- --------
$ 87,874 $ 83,406
-------- --------
-------- --------
Inventories:
Raw materials.................................. $ 24,711 $ 24,144
Work-in-process................................ 9,622 8,363
Finished goods................................. 24,643 29,159
-------- --------
$ 58,976 $ 61,666
-------- --------
-------- --------
Prepaid expenses and other current assets:
Deferred income tax asset...................... $ 16,174 $ 19,108
Other.......................................... 5,952 4,211
-------- --------
$ 22,126 $ 23,319
-------- --------
-------- --------
Property, plant and equipment:
Land........................................... $ 640 $ 640
Building and leasehold improvements............ 10,073 14,000
Machinery and equipment........................ 32,194 39,987
Furniture and fixtures......................... 5,215 5,365
Instruments under operating lease contracts.... 17,245 20,338
Construction-in-process........................ 8,102 9,138
-------- --------
73,469 89,468
Accumulated depreciation and amortization....... (16,841) (34,103)
-------- --------
$ 56,628 $ 55,365
-------- --------
-------- --------
47
ALARIS MEDICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
(Amounts in thousands, except per share data)
NOTE 3 - COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS (Continued)
Depreciation expense was $4,204, $5,826 and $17,417 for 1995, 1996 and
1997, respectively.
December 31,
---------------------
1996 1997
--------- ---------
Other non-current assets:
Debt issue costs............................... $ 16,936 $ 15,279
Other.......................................... 374 470
-------- ---------
$ 17,310 $ 15,749
-------- ---------
-------- ---------
Intangible assets:
Goodwill....................................... $178,165 $ 178,667
Patents........................................ 28,661 28,661
Product distribution license fee............... 8,742 3,837
Supply agreements.............................. 10,758 10,758
Trademarks..................................... 90,000 90,000
Workforce...................................... 7,100 7,100
-------- ---------
323,426 319,023
Accumulated amortization....................... (16,623) (32,744)
-------- ---------
$306,803 $ 286,279
-------- ---------
-------- ---------
Supply agreements represent non-cancelable customer commitments to
purchase specified quantities of disposable administration sets and probe
covers at contracted prices.
Amortization expense was $2,338, $4,168 and $16,811 during 1995, 1996
and 1997, respectively.
Accrued expenses and other current liabilities:
Income taxes payable.......................... $ 2,647 $ 2,721
Compensation.................................. 8,096 13,556
Warranty...................................... 16,676 12,855
Interest...................................... 3,357 3,463
Other......................................... 18,010 17,464
------- -------
$48,786 $50,059
------- -------
------- -------
Other non-current liabilities:
Deferred income tax liability................. $15,550 $12,290
Warranty...................................... 1,385 6,225
Other......................................... 5,552 -
------- -------
$22,487 $18,515
------- -------
------- -------
48
ALARIS MEDICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
(Amounts in thousands, except per share data)
NOTE 4 - NOTES PAYABLE AND LONG-TERM DEBT
Long-term debt consists of the following:
December 31,
-----------------------
1996 1997
----------- ----------
Bank credit facility
Term loan facilities .................... $200,000 $198,750
Revolving credit facilities ............. 15,200 25,200
9.75% Senior Subordinated Notes due 2006... 200,000 200,000
Other...................................... 8,741 6,028
-------- --------
423,941 429,978
Current portion.......................... (3,963) (14,559)
-------- --------
Long-term debt............................. $419,978 $415,419
-------- --------
-------- --------
Bank credit facility:
In connection with the Merger, the Company entered into a $250,000 bank
credit facility (the "Facility") with a syndicate of financial institutions
which consists of $200,000 of term loans ($75,000 Tranche A Term Loans
maturing in 2002, $42,500 Tranche B Term Loans maturing in 2003, $42,500
Tranche C Term Loans maturing in 2004 and $40,000 Tranche D Term Loans
maturing in 2005) and a $50,000 revolving credit facility maturing in 2002 of
which $25,200 in principal was outstanding at December 31, 1997. Available
funds under the revolving credit facility ($24,300 at December 31, 1997) are
based on the difference between $50,000 and the amounts of outstanding
letters of credit ($500 at December 31, 1997) and borrowings issued under the
revolving credit facility.
During 1997, Tranche A, B, C and D term loans bore interest at a
Eurodollar rate plus 2.5%, 3.0%, 3.5% and 3.75%, respectively. Such total
rates were 8.4%, 8.9%, 9.4% and 9.7%, respectively, at December 31, 1997.
Borrowings under the revolving credit facility bear interest at the same rate
as Tranche A. The Company has an interest rate protection agreement to reduce
the impact of changes in interest rates on its floating rate long-term debt.
At December 31, 1997, the Company had outstanding an interest rate protection
agreement with commercial banks, having a total notional principal amount of
$98,075. That agreement effectively changed the Company's interest rate
exposure on its floating rate debt and resulted in a weighted average
interest rate of 9.6% on the principal balance covered.
Effective March 1998, the Facility was amended and interest rates
decreased to a Eurodollar rate plus 2.25% for the revolving credit facility
and Tranche A loans and a Eurodollar rate plus 2.5% for Tranches B, C and D.
All obligations of the Company under the Facility are guaranteed by
ALARIS Medical and each existing and subsequently formed or acquired domestic
subsidiary of ALARIS Medical.
The Facility contains various operating and financial covenants, as
well as certain covenants relating to reporting requirements. As of December
31, 1996 and December 31, 1997 the Company was in compliance with all such
covenants.
49
ALARIS MEDICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
(Amounts in thousands, except per share data)
NOTE 4 - NOTES PAYABLE AND LONG-TERM DEBT (Continued)
Senior subordinated notes:
In connection with the Merger, on November 19, 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
redemption prices set forth in the indenture plus accrued and unpaid interest
to the date of redemption. In the event of a change of control, as defined in
the indenture, holders 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.
Other debt:
Other debt primarily consists of consideration owed to Siemens Infusion
Systems, Ltd. ("SIS") resulting from IVAC Medical Systems, Inc.'s acquisition
of the MiniMed product line from SIS in 1993. In accordance with the
acquisition agreement, the Company's remaining obligation to SIS is $3,000
per year or 8% of the prior year's product sales in 1998 and 1999. The
original liability was discounted at an imputed interest rate of 7% and
recorded as debt. The unamortized discount, which is amortized using the
interest method over the term of the payments, is $303 at December 31, 1997.
Maturities of long-term debt during the years subsequent to December
31, 1997 are as follows:
1998............................................ $ 14,559
1999............................................ 15,569
2000............................................ 13,650
2001............................................ 21,650
2002............................................ 54,225
Thereafter...................................... 310,325
--------
$429,978
--------
--------
50
ALARIS MEDICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
(Amounts in thousands, except per share data)
NOTE 5 - MANDATORILY REDEEMABLE EQUITY SECURITIES
Mandatorily redeemable preferred stock:
At December 31, 1995 the Company had 1,212 shares of $0.01 par value
mandatorily redeemable preferred stock ("12% Preferred Stock") outstanding,
all of which were owned by Advanced Medical. The 12% Preferred Stock had a
stated value of $10,000 per share. During 1995 and 1996, the Company redeemed
88 and 335 shares, respectively, of its 12% Preferred Stock from Advanced
Medical for $880 and $3,350, respectively. In June 1996, Advanced Medical
contributed to the Company $8,776 representing the outstanding par value and
accrued dividends on all the remaining outstanding shares of the Company's
12% Preferred Stock. The preferred shares were then canceled. The Company
made dividend payments to Advanced Medical of $6,684 and $4,067 during 1995
and 1996, respectively, related to the 12% Preferred Stock.
Common stock warrant:
In connection with an Advanced Medical revolving credit facility, IMED
issued a warrant allowing the lender to purchase up to 10% of IMED's common
stock on a fully-diluted basis for nominal consideration, subject to
adjustment as provided in the loan agreement, and exercisable at any time
until August 12, 2004. On an annual basis, IMED adjusted the carrying value
of the warrant based on its estimated fair value. In June 1996, Advanced
Medical purchased the warrant for $12,500. The warrant acquired by Advanced
Medical was then canceled.
51
ALARIS MEDICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
(Amounts in thousands, except per share data)
NOTE 6 - INCOME TAXES
The provision for income taxes comprises the following:
Year ended December 31,
----------------------------------
1995 1996 1997
---------- ---------- ----------
Current:
Federal........................ $ 6,239 $ - $ -
State.......................... 1,741 529 84
Foreign........................ 157 1,000 4,740
--------- ------- -------
Total Current................. 8,137 1,529 4,824
--------- ------- -------
Deferred:
Federal........................ (519) 421 (5,793)
State.......................... 474 (612) (755)
Foreign........................ 7 (68) (176)
--------- ------- -------
Total Deferred................ (38) (259) (6,724)
--------- ------- -------
Provision for (benefit from)
income taxes.............. $ 8,099 $ 1,270 $(1,900)
--------- ------- -------
--------- ------- -------
The principal items accounting for the differences in income taxes
computed at the U.S. statutory rate (34%) and the effective income tax rate
comprise the following:
Year ended December 31,
----------------------------------
1995 1996 1997
----------- ---------- ---------
Taxes computed at statutory rate........ $ 5,564 $(16,797) $ (3,036)
State income taxes, net of federal
benefit................................ 1,462 (55) (498)
Effect of foreign operations............ 105 3,516 649
Amortization of non-deductible intangible
assets................................. 442 574 1,944
Federal tax credits..................... - (2,196) (513)
Acquired in-process research and
development............................ - 14,960 -
Items affected by valuation allowance... - 1,029 -
Other, net ............................. 526 239 (446)
------- ------- --------
Provision for (benefit from) income
taxes.................................. $ 8,099 $ 1,270 $ (1,900)
------- ------- --------
52
ALARIS MEDICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
(Amounts in thousands, except per share data)
NOTE 6 - INCOME TAXES (Continued)
The components of the net deferred tax assets included in other assets
as of December 31, 1996 and 1997 are as follows:
1996 1997
---------- ----------
Deferred tax assets:
Net operating loss carryforwards................ $ 13,056 $ 14,212
Accrued liabilities and reserves................ 19,943 18,949
Unearned income................................. 1,979 2,126
Credit carryforwards............................ 2,432 2,904
Inventory....................................... 2,450 2,771
Property, plant and equipment................... 18 926
Miscellaneous................................... 213 643
-------- --------
40,091 42,531
Valuation allowance............................. (1,029) (1,029)
-------- --------
Total deferred tax assets....................... 39,062 41,502
Deferred tax liabilities:
Intangible assets............................... 36,979 33,973
Miscellaneous................................... 1,459 711
------- -------
Net deferred tax assets........................... $ 624 $ 6,818
------- -------
------- -------
As of December 31, 1997, the Company had federal and state net
operating loss carryforwards of approximately $39,185 and $19,254,
respectively. Additionally, as of December 31, 1997, the Company had a
foreign tax credit carryforward of approximately $2,595 for federal tax
purposes and research and development tax credits of approximately $114 and
$294 for federal and state purposes, respectively. The federal and state net
operating loss carryforwards expire from 1999 to 2012. The foreign tax credit
expires from 2001 to 2002 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 $26,051 and $4,478 of the respective federal and
state net operating loss carryforwards and 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.
53
ARLIS MEDICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
(Amounts in thousands, except per share data)
NOTE 7--STOCK OPTION PLANS
ALARIS Medical maintains several stock option plans under which incentive
stock options may be granted to key employees of the Company and nonqualified
stock options may be granted to key employees, directors, officers,
independent contractors and consultants.
The exercise price for incentive stock options generally may not be less
than the underlying stock's fair market value at the grant date. The exercise
price for non-qualified stock options granted to non-directors will not be
less than the par value of a share of common stock, as determined by a
committee appointed by the ALARIS Medical's 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.
Stock option activity:
Activity for 1995, 1996 and 1997 with respect to these plans is as follows:
Shares Option
Underlying Price Per
Options Share
------------ --------------
Outstanding at December 31, 1994.................. 328 $4.47 - $ 16.94
Granted.......................................... 1,270 $1.81 - $ 3.03
Canceled......................................... (505) $1.81 - $ 16.94
------------
Outstanding at December 31,1995................... 1,093 $1.81 - $ 6.93
Granted.......................................... 2,861 $2.28 - $ 3.78
Exercised........................................ (14) $1.81 - $ 1.81
Canceled......................................... (312) $1.81 - $ 3.47
------------
Outstanding at December 31,1996................... 3,628 $1.81 - $ 6.93
Granted.......................................... 936 $3.19 - $ 6.22
Exercised........................................ (125) $1.81 - $ 3.69
Canceled......................................... (479) $1.81 - $ 4.16
------------
Outstanding at December 31, 1997.................. 3,960
------------
------------
At December 31, 1997, options for 1,244 shares were exercisable at
$1.81-$6.93 under the plans and 731 shares were available for future grant.
Additionally, as of December 31, 1997, 4,691 shares of common stock were
reserved for issuance pursuant to the ALARIS Medical's stock option plans.
54
ARLIS MEDICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
(Amounts in thousands, except per share data)
NOTE 7--STOCK OPTION PLANS (Continued)
The Company adopted Financial Accounting Standard No. 123, "Accounting for
Stock-Based Compensation" (SFAS 123) during the year ended December 31, 1996.
In accordance with the provisions of SFAS 123, the Company applied APB
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations in accounting for its plans and does not recognize
compensation expense for its stock-based compensation plans other than for
options granted to non-employees. If the Company had elected to recognize
compensation expense based upon the fair value at the grant date for awards
under these plans consistent with the methodology prescribed by SFAS 123, the
Company's net income or loss would be reduced/increased to the pro forma
amounts indicated below:
December 31,
-------------------------------
1995 1996 1997
------- --------- -------
Net income (loss):
As reported................................................ $ 8,266 $ (50,674) $ (7,028)
Pro forma.................................................. $ 7,787 $ (51,673) $ (9,238)
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, 1995, 1996 and 1997,
respectively; dividend yields of 0%, expected volatility of 183%, 180% and
164%, risk free interest rates of 6.5%, 6.2% and 5.8%, and expected lives
ranging from 2 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 ALARIS Medical's employee stock options have
characteristics significantly different from those of traded options, and
because changes in subjective input assumptions can materially affect the
fair value estimates, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its
employee stock based compensation plans.
The following table summarizes information about employee stock-based
compensation plans outstanding at December 31, 1997:
OPTIONS OUTSTANDING AND EXERCISABLE BY PRICE RANGE AS OF DECEMBER 31, 1997
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life-Years Price Exercisable Price
- ---------------- -------------- -------------- ----------- ------------ -------------
$1.81 - $2.94 752 7.16 $2.12 293 $2.05
$3.00 - $3.09 2,288 10.63 $3.02 845 $3.02
$3.19 - $3.69 812 9.64 $3.52 216 $3.56
$3.75 - $6.09 102 3.76 $4.03 10 $3.87
$6.13 - $6.93 6 3.78 $6.26 - $6.93
- ---------------- -------------- -------------- ----------- ------------ -------------
$1.81 - $6.93 3,960 9.58 $2.98 1,364 $2.90
- ---------------- -------------- -------------- ----------- ------------ -------------
- ---------------- -------------- -------------- ----------- ------------ -------------
55
ARLIS MEDICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
(Amounts in thousands, except per share data)
NOTE 8--BENEFIT PLANS
Pension plans:
ALARIS Medical 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 ALARIS Medical'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 1995, 1996 or 1997 due to the prepaid position of the Plan during
those years.
The following table sets forth the Plan's estimated funded status and
amounts recognized in the Company's balance sheet:
December 31,
----------------------
1996 1997
---------- ---------
Actuarial present value of benefit obligation:
Vested benefit obligation........................................................ $ 9,733 $ 11,425
---------- ---------
---------- ---------
Accumulated benefit obligation.................................................... $ 9,822 $ 11,442
---------- ---------
---------- ---------
Projected benefit obligation for service rendered to date......................... $ 9,822 $ 11,442
Plan assets at fair value, consisting of equity and fixed income mutual funds..... 13,053 15,838
---------- ---------
Plan assets greater than projected benefit obligation............................. 3,231 4,396
Unrecognized net gain............................................................. (2,940) (3,761)
---------- ---------
Prepaid pension cost.............................................................. $ 291 $ 635
---------- ---------
---------- ---------
The components of net periodic pension cost (benefit) are as follows:
December 31,
-------------------------
1995 1996 1997
------- ------- -------
Service cost during the period.......................................................... $ 146 $ 181 $ 210
Interest cost on projected benefit obligation........................................... 608 706 725
Actual return on Plan assets............................................................ (2,494) (1,896) (2,970)
Amortization and deferred amounts....................................................... 1,666 886 1,691
------- ------- -------
Net periodic pension cost (benefit)..................................................... $ (74) $ (123) $ (344)
------- ------- -------
------- ------- -------
Assumptions used in the accounting are as follows:
Discount rates......................................................................... 6.82% 7.45% 6.64%
Rates of increase in compensation levels............................................... N/A N/A N/A
Expected long-term rates of return on assets........................................... 9.00% 9.00% 9.00%
56
ARLIS MEDICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
(Amounts in thousands, except per share data)
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, 1997
are as follows:
Operating Capital
Year Ending December 31,: Leases Leases
------------------------ --------- ---------
1998........................................... $ 1,785 $ 22,549
1999........................................... 837 14,829
2000........................................... 369 9,553
2001........................................... 37 5,946
2002........................................... 28 3,776
Thereafter..................................... - 2,398
--------- ---------
Total minimum lease receivables................ $ 3,056 $ 59,051
--------- ---------
--------- ---------
The net investment in sales-type leases consists of the following:
December 31,
--------------------
1996 1997
-------- --------
Minimum lease payments............................................ $ 56,534 $ 59,051
Unguaranteed residual value of leased equipment................... 789 753
Unearned interest income.......................................... (10,750) (14,136)
Allowance for uncollectible lease receivables..................... (2,502) (1,881)
-------- --------
Net investment in sales-type leases............................... 44,071 43,787
Current portion................................................... (16,795) (13,383)
-------- --------
Net investment in sales-type leases, less current portion......... $ 27,276 $ 30,404
-------- --------
-------- --------
Lease commitments:
The Company leases buildings and equipment under non-cancelable operating
leases with terms ranging from 2 to 10 years. Scheduled future minimum lease
commitments as of December 31, 1997 are as follows:
Year Ending December 31,:
- ------------------------------
1998.................................... $ 3,769
1999.................................... 4,230
2000.................................... 4,250
2001.................................... 4,300
2002.................................... 4,263
Thereafter.............................. 15,343
--------
$ 36,155
--------
--------
Rental expense was $3,138, $3,468 and $4,722 during 1995, 1996 and 1997,
respectively.
57
ALARIS MEDICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
(Amounts in thousands, except per share data)
NOTE 10 - RESTRUCTURING, INTEGRATION AND OTHER NON-RECURRING CHARGES
In connection with the Merger, management performed a review of the
operating activities of both IMED and IVAC Medical Systems, Inc. in order to
reduce costs and maximize synergies. Management identified duplicative costs
to eliminate and developed and implemented plans to consolidate and integrate
the companies' operations including product strategies, manufacturing,
service centers, research and development, marketing and other administrative
functions. As a result, the Company has recorded non-recurring charges
related to the implementation of these plans in the amount of approximately
$15,300 and $19,800 in 1996 and 1997, respectively.
The following summarizes the significant components of the Company's
1996 and 1997 restructuring, integration and other non-recurring charges
included in the Consolidated Statement of Operations:
Year Ended December 31,
------------------------
1996 1997
---------- ---------
(in millions)
Restructuring
Severance and related benefits.............................................................. $ 4.4 $ .2
Cost to vacate facilities................................................................... 3.4 -
Write-off unused furniture, fixtures and equipment.......................................... 1.5 -
Distributor terminations.................................................................... .8 -
Other....................................................................................... .5 -
---------- ---------
Total restructuring...................................................................... 10.6 .2
Integration and other non-recurring charges
Information systems conversion costs........................................................ - 4.8
Write-off of product distribution license................................................... - 4.5
Maquiladora settlement and related costs.................................................... - 4.1
Write-off of instrument tooling............................................................. - 1.7
Facilities moving expenses and Company name change.......................................... - 1.6
Consulting and bonuses...................................................................... 4.7 1.4
Other....................................................................................... - 1.5
---------- ---------
Total restructuring, integration and other non-recurring charges....................... $ 15.3 $ 19.8
---------- ---------
---------- ---------
The Company has reviewed its products and related research and
development activities and market opportunities in order to focus on projects
that will provide greater competitive advantage and stockholder return. That
review resulted in the termination and write-off of a product distribution
and license agreement with a third party developer of an ambulatory and
alternate site infusion pump. The $4,500 charge related to such termination
is included in the 1997 integration cost and includes a $4,300 non-cash
charge representing the intangible asset that had been recorded associated
with such agreement.
On June 26, 1997, the Company entered into a settlement agreement which
resolved its contract dispute with Cal Pacifico of California and affiliated
entities (collectively, "Cal Pacifico"), the operator of the Company's two
maquiladora assembly plants in Tijuana, Mexico. For over eight years, the
Company has assembled disposable administration sets at these two plants,
which utilized more than 1,200 workers employed by Cal Pacifico, under a
contract with Cal Pacifico. The dispute originated in April 1997 when the
Company, in accordance with the terms of such contract, informed Cal Pacifico
that it would be terminating its contractual arrangements effective August 1,
1997. Cal Pacifico objected to such
58
ALARIS MEDICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
(Amounts in thousands, except per share data)
NOTE 10 - RESTRUCTURING CHARGES (Continued)
notification and proposed the systematic termination of the work force. In
response to such objection, the Company on June 6, 1997 hired substantially
all of the workers at the plants directly. On June 11, 1997, Cal Pacifico
locked the Company's administrative personnel and production employees out of
the plants and would not allow the Company access to its production equipment
or inventory. As a result of the settlement agreement, the assembly plants
resumed full operations on June 27, 1997 and Cal Pacifico provided the
Company with assistance as it transitioned into the direct operation of such
plants. The Company began operating these plants directly during the third
quarter of 1997.
The Company recorded a non-recurring charge of $4,100 during the
quarter ended June 30, 1997 relating to this settlement and the legal fees
and other costs associated therewith. The individual costs included within
such non-recurring charge consist of approximately $2,700 of settlement and
legal fees and approximately $1,400 of idle labor costs and start-up costs
incurred in connection with the implementation of the interim assembly plans
discussed below.
In addition to restructuring and integration costs included in the
Consolidated Statement of Operations, estimated dealer termination costs as
well as severance and benefits costs related to the acquired company's
personnel in the amount of approximately $2,800 were also accrued at the
acquisition date. In accordance with generally accepted accounting
principles, such items effectively increased the amount of goodwill recorded
in connection with the Merger and were not included in the approximately
$15,300 restructuring and integration expense included in the consolidated
statement of operations for the year ended December 31, 1996.
In connection with the Company's restructuring plans, in December 1996
management provided termination notifications to 225 employees from all
functional areas of the Company. Accrued restructuring costs at December 31,
1996 includes approximately $4,400 of employee termination costs which were
charged to the 1996 consolidated operating results and approximately $1,800
of employee termination costs which were recorded in purchase accounting.
The Company paid approximately $260 and $26,000 during 1996 and 1997,
respectively, for restructuring and integration activites. The Company has
approximately $15,100 and $1,700 accrued related to restructuring and
integration costs at December 31, 1996 and 1997, respectively. The Company
anticipates that the remaining accrued restructuring and integration costs
will be paid during 1998.
NOTE 11 - RELATED PARTY ARRANGEMENTS
In October 1991, the Company entered into a marketing, distribution and
development arrangement with Pharmacia and Upjohn, Inc. ("Pharmacia") (the
"Pharmacia Transaction"), pursuant to which Pharmacia obtained the exclusive
right to market and distribute IMED's infusion products in a territory that
included most of Europe. During 1996, the Company entered into an agreement
with Pharmacia to reacquire for approximately $11,000 the European
distribution rights to IMED's intravenous infusion pumps and related
disposable administration sets and certain related assets. The purchase price
was allocated between the tangible assets and the distribution fee based upon
their estimated fair values. The amount allocated to the
59
NOTE 11 - RELATED PARTY ARRANGEMENTS (Continued)
distribution fee has been capitalized net of the unamortized deferred revenue
resulting from the 1991 sale of the aforesaid European distribution rights to
Pharmacia which was being amortized over the 15-year term of the original
distribution agreement. The net distribution fee is being amortized over
approximately 10 years, which represents the remaining term of the original
distribution agreement.
Effective June 30, 1996, ALARIS Medical made non-cash contributions
totaling $41,160 to IMED. Included in this capital contribution was $2,885,
representing ALARIS Medical's net carrying value of certain patents which up
to June 30, 1996 had been licensed to IMED for $1,100 per year. Amounts
accrued to ALARIS Medical under this license, as well as other intercompany
charges due to ALARIS Medical totaling $9,399 were contributed to IMED.
Additionally, ALARIS Medical contributed $8,776 representing the outstanding
par value and accrued dividends on all outstanding shares of IMED's 12%
preferred stock, all of which were owned by ALARIS Medical. The preferred
shares were then canceled.
Included in the $41,160 non-cash contribution are tax payments due from
IMED to ALARIS Medical. Pursuant to IMED's tax sharing agreement with ALARIS
Medical, for Federal and California income tax purposes, IMED was required to
calculate its current income tax liability on a stand-alone basis as if it
were not included in the ALARIS Medical consolidated income tax return. The
resulting tax liability was payable to ALARIS Medical. Due to restrictions on
payments from IMED to ALARIS Medical contained in the GECC revolving credit
facility agreement, income tax payments to ALARIS Medical were limited to
actual tax liabilities of the ALARIS Medical consolidated group. Due to
losses incurred at the ALARIS Medical level which have served to reduce the
consolidated taxable income, the income tax liabilities recorded by IMED on a
stand-alone basis have been significantly greater than the amounts actually
paid to ALARIS Medical. As of June 30, 1996 ALARIS Medical agreed to
contribute to IMED's stockholder's equity, income tax payments due from IMED
but which could not be paid pursuant to the GECC revolving credit facility.
As a result of this agreement, approximately $20,100 was credited to IMED's
capital in excess of par and the corresponding income tax liabilities were
eliminated from the IMED consolidated balance sheet. Such liabilities
amounted to approximately $18,900 at December 31, 1995 and were included in
non-current liabilities as amounts due to related parties at December 31,
1995.
During November 1996, in connection with the Merger, ALARIS Medical
contributed $19,588 to IMED.
During June 1997, ALARIS Medical made a cash contribution of $3,052 to
ALARIS Medical Systems, of which $1,458 paid off intercompany charges due to
ALARIS Medical Systems and $1,595 was contributed to capital.
60
ALARIS MEDICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
(Amounts in thousands, except per share data)
NOTE 12 - GEOGRAPHIC INFORMATION
The Company operates primarily in four geographic locations: United
States, Europe, Canada and Australia. United States sales to unaffiliated
customers include export sales to customers located outside of the United
States of $10,643, $11,677 and $25,197 for the years ended December 31, 1995,
1996 and 1997, respectively.
Year ended December 31,
------------------------------
1995 1996 1997
-------- -------- ---------
Sales to unaffiliated customers:
United States.................................................................. $ 102,830 $ 111,877 $ 252,199
Europe ........................................................................ - 11,394 82,259
Canada ........................................................................ 3,880 5,377 13,512
Australia...................................................................... 5,841 7,723 11,107
-------- -------- ---------
Sales as reported in the accompanying statement of operations................ $ 112,551 $ 136,371 $ 359,077
-------- -------- ---------
-------- -------- ---------
Intergeographic sales:
United States.................................................................. $ 6,973 $ 17,133 $ 64,404
Europe ........................................................................ - 2,891 12,924
-------- -------- ---------
Total intergeographic sales.................................................. $ 6,973 $ 20,024 $ 77,328
-------- -------- ----------
-------- -------- ----------
Income (loss) before income taxes:
United States.................................................................. $ 16,650 $ (45,023) $ 8,448
Europe ........................................................................ - (1,582) 19,994
Canada ........................................................................ (194) (248) 841
Australia...................................................................... 1,123 1,253 5,006
Eliminations and adjustments................................................... 1,189 1,992 1,057
-------- -------- ----------
Income (loss) from operations................................................ 18,768 (43,608) 35,346
Interest expense............................................................. (2,052) (6,303) (43,123)
Interest income.............................................................. 28 184 433
Other, net................................................................... (379) 323 (1,584)
-------- -------- -----------
Income (loss) before income taxes............................................ $ 16,365 $ (49,404) $ (8,928)
-------- -------- -----------
-------- -------- -----------
December 31,
--------------
1996 1997
--------- -----------
Identifiable assets:
United States................................................................ $ 546,088 $ 544,211
Europe....................................................................... 52,826 34,539
Canada....................................................................... 5,855 1,644
Australia.................................................................... 6,405 6,475
Eliminations and adjustments................................................. (25,033) (23,763)
--------- -----------
Total assets as reported in the accompanying balance sheet................. $ 586,141 $ 563,106
--------- -----------
--------- -----------
61
ALARIS MEDICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
(Amounts in thousands, except per share data)
NOTE 13 - CASH FLOW INFORMATION
Federal, state and foreign income taxes paid during 1995, 1996 and 1997
totaled $1,487, $3,592 and $3,785, respectively. Interest paid during 1995,
1996 and 1997 totaled $1,765, $1,865 and $39,990, respectively.
NOTE 14 - CONTINGENCIES AND LITIGATION
Field Correction
The Company has initiated a voluntary field correction of approximately
50,000 of its Gemini model PC-1 and PC-2 infusion pumps because failure of
specific electrical components on the power regulator printed circuit board
may result in improper regulation of the battery charge voltage, which can
cause the battery to overheat. Such overheating could result in product
failure and discharge of hydrogen gas which may accumulate within the
instrument's case. As an interim measure, the Company has advised its
customers of simple precautions that can be taken to minimize the potential
for an adverse incident pending completion of the field correction. The
Company is not aware of any injuries sustained in known battery overcharging
incidents.
As a result of this decision, the Company recorded a charge of $2,500
to cost of sales during the first quarter of 1997. Based on management's
current understanding of these incidents, the Company believes it has
adequately accrued for this matter. However, since the Company's analysis of
this matter is preliminary, there can be no assurances that it can be
resolved for an amount consistent with management's estimated cost.
Litigation
The Company is a defendant in a lawsuit filed in June 1996 by Sherwood
Medical, Inc. against IVAC which alleges infringement of two patents by
reason of certain activities including the sale by IVAC of disposable probe
covers for use with the Company's infrared tympanic thermometer. The lawsuit
seeks injunctive relief, treble damages and the recovery of costs and
attorney fees. The Company believes it has sufficient defenses to all claims,
including the defenses of noninfringement and invalidity and intends to
vigorously defend this action. However, there can be no assurance that the
Company will successfully defend all claims made by Sherwood and the failure
of the Company to successfully prevail in this lawsuit could have a material
adverse effect on the Company's operations, financial condition and cash
flows.
The Company is a defendant in a qui tam lawsuit filed by a former IMED
employee in the United States District Court for the Northern District of
Illinois. On November 15, 1996, an amended complaint was filed which alleges
fraud in the inducement, breach of employment contract, common law fraud and
violations of the Federal False Claims Act and Medicare Fraud and Abuse Act.
To date, the United States has declined to intervene in this action. The
Company believes it has sufficient defenses to all claims by the plaintiff.
However, there can be no assurance that the Company will successfully defend
all claims made in this lawsuit and the failure of the Company to prevail in
this lawsuit could have a material adverse effect on the Company's
operations, financial condition and cash flows.
62
ALARIS MEDICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
(Amounts in thousands, except per share data)
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 of these years as well
(collectively with the amounts referred to in the immediately preceding
sentence, the "Disputed Amounts"). The Company has been advised by its
special Customs counsel that, under applicable law, no person, by fraud,
gross negligence or negligence, may (i) import merchandise into the commerce
of the United States by means of any material and false document, statement
or act, or any material omission, or (ii) aid or abet any other person to
import merchandise in such manner. No proceeding has been initiated by
Customs against the Company in respect of the matters which are the subject
of the proceeding against Cal Pacifico. Since Cal Pacifico was the Company's
United States customs broker and importer of record during each of the
foregoing years, the Company believes that it is unlikely that Customs will
assess against the Company any portion of the Disputed Amounts.
Cal Pacifico is contesting Customs, assessment of the Disputed Amounts.
Cal Pacifico's challenge to the assessment of the Disputed Amounts is in its
preliminary stages. Given the present posture of Cal 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. The Company has not been informed by
Cal Pacifico or Customs 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, 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
63
ALARIS MEDICAL SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
(Amounts in thousands, except per share data)
NOTE 14 - CONTINGENCIES AND LITIGATION (Continued)
Pacifico and the Company), the conduct of Cal Pacifico with respect to both
the Company and Customs, and the compliance obligations of Cal Pacifico under
applicable customs laws. Inasmuch as Cal Pacifico's challenge before Customs
is still pending and any claim against the Company for indemnification would
be based on Cal Pacifico's ultimate lack of success in that challenge, and
inasmuch as any arbitration proceeding by which Cal Pacifico might seek
indemnification has not been filed nor has Cal Pacifico committed itself to
the theories under which it might seek indemnification or the recovery of
damages from the Company, it is not possible for the Company to express an
opinion at this time as to the likelihood of an unfavorable outcome in such a
proceeding.
Other
The Company is also a defendant in various actions, claims, and legal
proceedings arising from its normal business operations. Management believes
they have meritorious defenses and intends to vigorously defend against all
allegations and claims. As the ultimate outcome of these matters is
uncertain, no contingent liabilities or provisions have been recorded in the
accompanying financial statements for such matters. However, in management's
opinion, based on discussions with legal counsel, liabilities arising from
such matters, if any, will not have a material adverse effect on consolidated
financial position, results of operations or cash flows.
64
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors and Key Executive Officers
The following table sets forth certain information with respect to the
Directors and certain key executive officers of the Company at March 23, 1998:
Name Age Position
- ---- --- ----------------------------------
ALARIS Medical and ALARIS Medical Systems:
Jeffry M. Picower............................................ 55 Director, Chairman of the Board
William J. Mercer............................................ 49 Director, President and Chief Executive Officer
Douglas C. Jeffries.......................................... 41 Vice President and Chief Financial Officer
Norman M. Dean(1)(2)......................................... 77 Director
Henry Green.................................................. 55 Director
Richard B. Kelsky(2)......................................... 42 Director
ALARIS Medical Systems:
John A. de Groot(3).......................................... 42 Vice President, Secretary and General Counsel
Jake St. Philip.............................................. 45 Vice President of Sales-North America
Richard M. Mirando........................................... 54 Vice President of Operations
Henk van Rossem.............................................. 54 Vice President and General Manager for Europe,
Africa and the Middle East
__________________________
(1) Member of Audit Committee
(2) Member of Compensation Committee
(3) Mr. de Groot is also Secretary of ALARIS Medical, Inc.
Jeffry M. Picower-Mr. Picower became a Director and the Chairman of the
Board of ALARIS Medical Systems upon consummation of the Merger. Prior
thereto, Mr. Picower served as a Director of IMED since March 1993 and the
Chairman of the Board of IMED since May 1993. Mr. Picower served at ALARIS
Medical as Chief Executive Officer from September 1993 until the consummation
of the Merger and Co-Chairman of the Board from March 1993 to May 1993. Mr.
Picower has served at ALARIS Medical as Chairman of the Board since May 1993
and a Director since March 1993. He was also a Director, Vice President and
Assistant Treasurer of ALARIS Medical from September 1988 to March 1989 and
Vice Chairman from December 1988 to June 1989. Since 1984, Mr. Picower has
been Chairman of the Board and Chief Executive Officer of Monroe Systems for
Business, Inc. ("Monroe"), a worldwide office equipment, distribution and
service organization. Mr. Picower has been a Director of Physician Computer
Network, Inc. ("PCN") since January 1994 and Chairman of the Board since June
1994. PCN, a corporation whose principal shareholder is Mr. Picower, operates
a computer network linking its office-based physician members to health care
organizations.
65
William J. Mercer-Mr. Mercer became a Director, the President and the
Chief Executive Officer of each of ALARIS Medical Systems and ALARIS Medical
upon consummation of the Merger. Mr. Mercer served as the Chief Financial
Officer of the Company from March 1997 until August 1997. Prior to the
Merger, Mr. Mercer served as President, Chief Executive Officer and a
Director of IVAC Medical Systems and President and a Director of IVAC
Holdings since May 1995, and Chief Executive Officer of IVAC Holdings since
January 1996. Prior to joining IVAC Medical Systems, Mr. Mercer held various
positions at Mallinckrodt Group Inc. for 17 years, most recently as Senior
Vice President. Mallinckrodt Group, Inc. is an international company serving
specialty markets in human healthcare and pharmaceutical chemicals.
Douglas C. Jeffries-Mr. Jeffries became a Vice President and the Chief
Financial Officer of ALARIS Medical and ALARIS Medical Systems in August
1997. Prior thereto, Mr. Jeffries served as Vice President of Finance and
Chief Financial Officer of Pyxis Corporation, a manufacturer of point-of-use
dispensing systems for pharmaceuticals and medical supplies, since August
1996. From February 1994 through July 1996, Mr. Jeffries was Vice President,
Management Information Systems, at Cardinal Health, Inc., a national health
care service provider. From June 1992 through January 1994, Mr. Jeffries
served as Corporate Controller of Whitmire Distribution, Inc., a wholesale
pharmaceutical distributor.
Norman M. Dean-Mr. Dean became a Director of ALARIS Medical Systems
upon consummation of the Merger. Prior thereto, Mr. Dean served as a Director
of IMED since April 1990. He has been a Director of ALARIS Medical since
March 1989. Mr. Dean has been a Director and President of Foothills Financial
Corporation, a venture capital company, since January 1985 and Chairman of
the Board of Miller Diversified Corp., a commercial cattle feeder, since May
1990.
Henry Green-Mr. Green became a Director of ALARIS Medical Systems upon
consummation of the Merger. Prior thereto, Mr. Green served as a Director of
IMED since September 1991. Mr. Green was President and Chief Operating
Officer of ALARIS Medical from September 1990 to March 1993 and has been a
Director of ALARIS Medical since 1991. Mr. Green was employed by PCN in March
1993 and served as President and Chief Executive Officer of PCN until
December 1997. Mr. Green has been a Director of PCN since July 1993.
Richard B. Kelsky-Mr. Kelsky became a Director of ALARIS Medical
Systems upon consummation of the Merger. Prior thereto, Mr. Kelsky served as
a Director of IMED since April 1990. He has served as a Director of ALARIS
Medical since June 1989. Mr. Kelsky is a Director of Monroe and from 1984 to
1996 served as Vice President and General Counsel of Monroe and has served as
Vice Chairman of Monroe since 1996. Mr. Kelsky has served as a Director of
PCN since January 1992.
John A. de Groot-Mr. de Groot became a Vice President and General
Counsel of ALARIS Medical Systems upon consummation of the Merger. Mr. de
Groot became the Secretary of ALARIS Medical and ALARIS Medical Systems in
March 1997. Prior to the Merger, Mr. de Groot served as a Vice President and
General Counsel of IVAC Holdings and IVAC Medical Systems since April 1995.
From January 1991 to December 1996, Mr. de Groot was a partner in the law
firm of Brobeck, Phleger & Harrison LLP, a firm he had been associated with
since March 1987.
Jake St. Philip-Mr. St. Philip became Vice President of Sales-North
America of ALARIS Medical Systems upon consummation of the Merger. Prior
thereto, Mr. St. Philip served as Vice President of Sales-North America of
IVAC Medical Systems since June 1994. From 1981 to June 1994, Mr. St. Philip
held various sales and marketing positions with IVAC Medical Systems.
Richard M. Mirando-Mr. Mirando became Vice President of Operations of
ALARIS Medical Systems upon consummation of the Merger. Prior thereto, Mr.
Mirando served as Vice President and General Manager of International
Business of IVAC Medical Systems since January 1995. From 1978 to January
1995, Mr. Mirando held various positions, including Marketing Manager,
Director of Market Planning and Research, Director of Sales, Executive
Director of International Operations, Vice President Sales and
Marketing-Fluid
66
Delivery Division, Vice President-Corporate Accounts and Pricing, and Vice
President-Corporate Quality/ Service Business Unit, with IVAC Medical Systems.
Henk van Rossem-Mr. van Rossem became ALARIS Medical System's Vice
President and General Manager for Europe, Africa and the Middle East in
January 1997. Prior thereto, Mr. van Rossem held various international
marketing and sales positions with Mallinckrodt Group, Inc. since 1984. Mr.
van Rossem's last position with Mallinckrodt Group, Inc. was Vice President
and General Manager of the European nuclear medicine division.
There are no family relationships among the above Directors and
executive officers.
Board of Directors
The Board of Directors of the Company consists of five members.
Directors serve for terms of one year and until their successors are duly
elected and have qualified. The members of the Board of Directors of ALARIS
Medical Systems also serve as and constitute all of the members of the Board
of Directors of ALARIS Medical.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as amended, is
not applicable to the Company because the Company does not have any
registered equity securities.
67
ITEM 11. EXECUTIVE COMPENSATION
The following table summarizes certain information regarding
compensation paid or accrued by the Company or IVAC Medical Systems to or on
behalf of the Company's Chief Executive Officer, each of the four most highly
compensated executive officers of the Company, other than the Chief Executive
Officer, whose total annual salary and bonus for the years ended December 31,
1997, 1996 and 1995 exceeded $100,000 (collectively, the "Named Executive
officers") and Joseph W. Kuhn:
SUMMARY COMPENSATION TABLE
Annual Compensation Long-Term Compensation
--------------------------- --------------------------
Other All
Annual Securities Other
Year Salary Bonus Compensation Underlying Compensation
Name and Principal Position (1) ($)(2) ($)(3) ($)(4) Options ($)
- --------------------------- ---- ------ ------ ------------- ---------- -------------
William J. Mercer 1997 400,008 360,000 - - 6,366
President and Chief Executive 1996 319,334 312,965 - 600,000 2,998,298
Officer
John A. de Groot 1997 200,004 87,395 - - 3,559
Vice President, Secretary and 1996 131,254 125,232 - 180,000 384,108
General Counsel
Richard M. Mirando 1997 197,316 71,047 - - 4,750
Vice President of Operations 1996 181,319 92,401 13,216 180,000 625,939
Henk van Rossem 1997 200,823 75,594 17,923 180,000 44,078
Vice President and General 1996 - - - - -
Manager for Europe, Africa
and the Middle East
Jake St. Philip 1997 167,127 71,358 - - 20,484
Vice President of Sales - 1996 144,894 111,425 - 180,000 607,734
North America
Joseph W. Kuhn(5) 1997 41,668 - 2,227 - 1,118,878
1996 226,348 139,236 12,519 175,000 3,413
1995 175,000 60,000 9,250 125,000 2,053
__________________________
(1) Compensation data is not presented for the Named Executives for 1995 as
none were employed by the Company prior to November 26, 1996.
(2) 1996 "Salary" amounts for the Named Executives consists
of salaries paid by IVAC Medical Systems through November 1996
and salaries paid by ALARIS Medical Systems for December 1996.
1997 salaries were paid by ALARIS Medical Systems or its
subsidiaries.
(3) 1996 "Bonus" amounts for the Named Executives represents amounts earned
in their respective positions with IVAC Medical Systems prior to the
Merger but paid by ALARIS Medical Systems.
(4) Amounts represent automobile allowances paid by the Company.
(5) Mr. Kuhn resigned his position as the Company's Executive
Vice President and Chief Financial Officer in March of 1997.
Prior to the Merger, Mr. Kuhn served as President, Treasurer
and Secretary of IMED and President, Chief Financial Officer,
Treasurer and Secretary of ALARIS Medical.
68
Stock
Company Option Total
Retirement Relocation Cancelation Other
Name Year Contributions(1) Payments(2) Payment(3) Other Compensation
- ---- ----- --------------- ----------- ----------- ----- ------------
William J. Mercer 1997 4,750 - - 1,616(4) 6,366
1996 4,120 271,980 2,722,198 - 2,998,298
John de Groot 1997 3,559 - - - 3,559
1996 3,000 - 381,108 - 384,108
Richard M. Mirando 1997 4,750 - - - 4,750
1996 5,440 23,202 597,297 - 625,939
Henk van Rossem 1997 17,568 26,510 - - 44,078
1996 - - - - -
Jake St. Philip 1997 4,750 - - 15,733(5) 20,483
1996 4,346 4,504 598,884 - 607,734
Joseph W. Kuhn 1997 878 - - 1,118,000(6) 1,118,878
1996 3,413 - - - 3,413
1995 2,053 - - - 2,053
__________________________
(1) Represents contributions made by the Company (and by IVAC
Medical Systems prior to the Merger) to match pre-tax elective
deferral contributions made by the Named Executives and Mr. Kuhn
to retirement plans.
(2) Represents relocation and temporary living expenses paid by
IVAC Medical Systems and the Company.
(3) Represents stock option cancelation payments paid by the
Company in connection with the Merger for unexercised stock options
previously granted under the IVAC Holdings 1995 stock option plan.
(4) Represents life insurance premium paid by the Company.
(5) Represents the fair value of noncash awards grossed-up to
cover applicable state and federal income taxes.
(6) Represents separation amount paid to Mr. Kuhn in connection
with his resignation in March 1997 for various matters, including
amount paid for cancelation of then outstanding stock options.
Employment Agreements
In August 1996, Mr. Mercer entered into an employment agreement whereby
he became employed full time by the Company upon consummation of the Merger.
The agreement is for a term of five years, subject to automatic renewal for
successive one-year periods and to earlier termination as provided therein.
The agreement provides for, among other things, a base salary of $400,000,
certain annual and additional bonuses beginning in the Company's 1997 fiscal
year in an aggregate amount up to 100% of Mr. Mercer's base annual salary in
each such year, options to purchase an aggregate of 600,000 shares of Common
Stock, and, in the event Mr. Mercer's employment is terminated by the Company
without cause or disability (as defined in the agreement), or by Mr. Mercer
for good reason (as defined in the agreement), severance payments in an
amount equal to Mr. Mercer's base salary annually until the end of the
employment term. The agreement also contains certain confidentiality,
non-solicitation and non-competition provisions.
Severance Plan
The Company has in place a severance plan which provides officers of
the Company with a lump sum payment equal to one year's base salary in the
event of termination prior to November 26, 1998, if for other than cause.
69
Stock-Based Benefit Plans
1988 Stock Option Plan. The Third Amended and Restated 1988 Stock
Option Plan of ALARIS Medical (the "1988 Option Plan") was approved by the
Board of Directors of ALARIS Medical and became effective on June 28, 1994.
Under the 1988 Option Plan, incentive stock options with respect to shares of
Common Stock ("ISOs"), as provided in Section 422 of the Internal Revenue
Code, may be granted to key employees of ALARIS Medical and its subsidiaries
(including the Company), and non-qualified stock options with respect to
shares of Common Stock ("NQSOs") may be granted to key employees, Directors
(except Directors eligible to participate in the Directors Plan), and
officers of ALARIS Medical, its subsidiaries (including the Company) and
affiliates, as well as independent contractors and consultants performing
services for such entities. The maximum aggregate number of shares of Common
Stock that may be issued under the 1988 Option Plan is 1,700,200. The number
of shares of Common Stock which remain available for issuance under the 1988
Option Plan is 1,504,544, of which 707,471 are subject to currently
outstanding options. The number of shares of Common Stock available under the
1988 Option Plan will be reduced on a share-for-share basis in respect of
each share issued other than under the 1988 Option Plan to persons eligible
to participate in the 1988 Option Plan. In the event of a change in the
capitalization of ALARIS Medical which affects the Common Stock, the 1988
Committee (as defined) may make proportionate adjustments to the number of
shares of Common Stock for which options may be granted and the number and
exercise price of shares of Common Stock subject to outstanding options.
Options may not be granted under the 1988 Option Plan on or after December
27, 1998.
The 1988 Option Plan provides for administration by a committee
appointed by the Board of Directors of ALARIS Medical (the "1988 Committee").
No member of the 1988 Committee is eligible to receive options under the 1988
Option Plan. The 1988 Committee has authority, subject to the terms of the
1988 Option Plan, to determine the individuals to whom options may be
granted, the exercise price and number of shares of Common Stock subject to
each option, whether the options granted to employees are to be ISOs, the
time or times during which all or a portion of each option may be exercised
and certain other provisions of each option.
Pursuant to the 1988 Option Plan, the purchase price of shares of
Common Stock subject to ISOs must be not less than the fair market value of
the Common Stock at the date of the grant; provided that the purchase price
of shares subject to ISOs granted to any optionee who owns shares possessing
more than 10% of the combined voting power of ALARIS Medical or any parent or
subsidiary of ALARIS Medical ("Ten Percent Shareholder") must be not less
than 110% of the fair market value of the Common Stock at the date of the
grant. With respect to NQSOs, the purchase price of shares will be determined
by the 1988 Committee at the time of the grant, but will not be less than the
par value of a share of Common Stock. The maximum term of an option may not
exceed 10 years from the date of grant, except with respect to ISOs granted
to Ten Percent Shareholders which must expire within five years of the date
of grant. Options granted vest and become exercisable as determined by the
1988 Committee. The 1988 Committee will limit the grant so that no more than
250,000 shares of Common Stock (subject to certain adjustments) may be
awarded to any one employee in any calendar year. During the lifetime of an
optionee, his or her options may be exercised only by such optionee. Options
are not transferable other than by will or by the laws of descent and
distribution.
Payment of the purchase price for the shares of Common Stock to be
received upon exercise of an option may be made in cash, in shares of Common
Stock or in any combination thereof. In addition, the 1988 Committee may,
pursuant to the terms of the stock option agreement between the optionee and
ALARIS Medical, provide for payment of the purchase price by promissory note
or by any other form of consideration permitted by law.
Options granted to participants under the 1988 Option Plan are subject
to forfeiture under certain circumstances in the event an optionee is no
longer employed by or performing services for ALARIS Medical or the Company.
In the event an optionee is terminated for cause, all unexercised options
held by such optionee
70
(whether or not vested) expire upon such termination. If an optionee is no
longer an officer, Director or employee other than as the result of having
been terminated for cause, all unvested options expire at such time and all
vested options expire twelve months thereafter, unless by their terms such
options expire sooner.
In the event of a change of control, as defined in the 1988 Option
Plan, unless otherwise determined by the 1988 Committee at the time of grant
or by amendment (with the holder's consent) of such grant, all options not
vested on or prior to the effective time of any such change of control shall
immediately vest as of such effective time.
1996 Stock Option Plan. The 1996 Stock Option Plan of ALARIS Medical
(the "1996 Option Plan") was approved by the Board of Directors of ALARIS
Medical and became effective on November 26, 1996, subject to approval by the
stockholders of ALARIS Medical, which was obtained at a meeting held on June
11, 1997. Under the 1996 Option Plan, ISOs with respect to shares of Common
Stock may be granted to key employees of ALARIS Medical and its subsidiaries,
and NQSOs with respect to shares of Common Stock may be granted to key
employees, Directors (except Directors eligible to participate in the
Directors Plan), and officers of ALARIS Medical, its subsidiaries and
affiliates, as well as independent contractors and consultants performing
services for such entities. The maximum aggregate number of shares of Common
Stock that may be issued under the 1996 Option Plan is 4,000,000. The number
of shares of Common Stock which remain available for issuance under the 1996
Option Plan is 3,997,950, of which 3,165,192 are subject to currently
outstanding options. The number of shares of Common Stock available under the
1996 Option Plan will be reduced on a share-for-share basis in respect of
each share issued other than under the 1996 Option Plan to persons eligible
to participate in the 1996 Option Plan. In the event of a change in the
capitalization of ALARIS Medical which affects the Common Stock, the 1996
Committee (as defined) may make proportionate adjustments to the number of
shares of Common Stock for which options may be granted and the number and
exercise price of shares of Common Stock subject to outstanding options.
Options may not be granted under the 1996 Option Plan on or after November
26, 2006.
The 1996 Option Plan provides for administration by a committee
appointed by the Board of Directors of ALARIS Medical (the "1996 Committee"),
consisting of not less than a sufficient number of non-employee directors (as
such term is defined in Rule 16b-3 under the Exchange Act) who are also
"outside directors" (within the meaning of Section 162(m) of the Code) so as
to qualify the 1996 Committee to administer the 1996 Option Plan as
contemplated by Rule 16b-3 and Section 162(m), respectively. No member of the
1996 Committee is eligible to receive options under the 1996 Option plan. The
1996 Committee has authority, subject to the terms of the 1996 Option Plan,
to determine the individuals to whom options may be granted, the exercise
price and number of shares of Common Stock subject to each option, whether
the options granted to employees are to be ISOs, the time or times during
which all or a portion of each option may be exercised and certain other
provisions of each option.
Pursuant to the 1996 Option Plan, the purchase price of shares of
Common Stock subject to ISOs must be not less than the fair market value of
the Common Stock at the date of the grant; provided that the purchase price
of shares subject to ISOs granted to any optionee who owns shares possessing
more than 10% of the combined voting power of ALARIS Medical or any parent or
subsidiary of ALARIS Medical ("Ten Percent Shareholder") must be not less
than 110% of the fair market value of the Common Stock at the date of the
grant. With respect to NQSOs, the purchase price of shares will be determined
by the 1996 Committee at the time of the grant, but will not be less than the
par value of a share of Common Stock. The maximum term of an option may not
exceed 10 years from the date of grant, except with respect to ISOs granted
to Ten Percent Shareholders which must expire within five years of the date
of grant. Options granted vest and become exercisable as determined by the
1996 Committee. Under the 1996 Option Plan, no more than 600,000 shares of
Common Stock (subject to certain adjustments) may be awarded to any one
employee in any calendar year. During the lifetime of an optionee, his or her
options may be exercised only by such optionee or by his or her guardian or
legal representative, except that the 1996 Committee may permit a NQSO to be
transferred to and exercised by one or more transferees of an optionee during
such optionee's lifetime. Options are not transferable
71
other than (i) as provided in the immediately preceding sentence; (ii) by
will; (iii) by the laws of descent and distribution; or (iv) to a beneficiary
upon the death of the optionee.
Payment of the purchase price for the shares of Common Stock to be
received upon exercise of an option may be made in cash, in shares of Common
Stock or in any combination thereof. In addition, the 1996 Committee may,
pursuant to the terms of the stock option agreement between the optionee and
ALARIS Medical, provide for payment of the purchase price by promissory note
or by any other form of consideration permitted by law.
Options granted to participants under the 1996 Option Plan are subject
to forfeiture under certain circumstances in the event an optionee is no
longer employed by or performing services for the Company. Unless otherwise
provided by the 1996 Committee in the optionee's stock option agreement, in
the event the employment of an optionee who is an officer or employee is
terminated for cause, or in the event the services of an optionee who is a
consultant or independent contractor are terminated for cause, all
unexercised options held by such optionee on the date of such termination
(whether or not vested) will expire immediately. If an optionee who is a
Director (but not an officer or employee) is removed from the Board of
Directors for cause, all unexercised options held by such optionee on the
date of such removal (whether or not vested) will expire immediately.
Unless otherwise provided by the 1996 Committee in the optionee's stock
option agreement, in the event an optionee is no longer a Director, officer,
employee, consultant or independent contractor, other than as a result of
having been terminated for cause, all options which remain unvested on the
date the optionee ceases to be a Director, officer, employee, consultant or
independent contractor, as the case may be, will expire immediately, and all
options which have vested prior to such date will expire twelve months
thereafter unless by their terms they expire sooner.
In the event of a change of control, as defined in the 1996 Option
Plan, unless otherwise determined by the 1996 Committee at the time of grant
or by amendment (with the holder's consent) of such grant, all options not
vested on or prior to the effective time of any such change of control shall
immediately vest prior to such effective time. Unless otherwise determined by
the 1996 Committee in an optionee's stock option agreement or at the time of
the change of control, in the event of a change of control, all unexercised
options held by such optionee shall terminate and cease to be outstanding
immediately following the change of control.
72
The following table sets forth certain information with respect to
stock options granted during 1997 to the Named Executive Officers pursuant to
the 1988 Option Plan and the 1996 Option Plan.
OPTION GRANTS IN 1997
Potential Realizable Value
Number of Percent of at Assumed Annual Rate
Securities Total Options Exercise of Stock Appreciation for
Underlying Granted to of Base the Option Termr
Options Employees Price Expiration --------------------------
Granted in 1997 ($/Share) Date 5%($) 10%($)
--------- ----------- ---------- ----------- ------------- ------------
Henk van Rossem 36,001 3.8% 3.19 7-24-06 54,832 131,333
Henk van Rossem 143,999 15.4% 3.19 7-24-10 365,582 982,302
AGGREGATED OPTION EXERCISES IN FISCAL YEAR 1997
AND OPTION VALUES AS OF DECEMBER 31, 1997
Value of Unexercised
Number of Securities in-the-Money
Share Underlying Unexercised Options at 12/31/97
Acquired Value Options at 12/31/97 ($) (1)
on Realized ----------------------------- -----------------------------
Exercise $ Exercisable Unexercisable Exercisable Unexercisable
-------- --------- ------------ ------------- ----------- --------------
William J. Mercer - - 200,000 400,000 375,000 750,000
John A. de Groot - - 63,667 116,333 119,376 218,124
Richard M. Mirando - - 63,667 116,333 119,376 218,124
Henk van Rossem - - 45,001 134,999 75,962 227,878
Jake St. Philip - - 63,667 116,333 119,376 218,124
__________________________
(1) Calculated based on the excess of the closing price of ALARIS
Medical's common stock on December 31, 1997 ($4.875) as reported in
the NASDAQ National Market Issues published in The Wall Street
Journal over the option exercise price.
Directors Plan. Certain Directors of the Company will be eligible to
participate in the Second Amended and Restated 1990 Non-Qualified Stock
Option Plan for Non-Employee Directors of ALARIS Medical (the "Directors
Plan"). The Directors Plan was approved by the Board of Directors and became
effective on June 28, 1994. Directors who are eligible participants in the
Directors Plan are not eligible to receive awards under the 1988 Option Plan
and the 1996 Option Plan. An aggregate of 250,000 shares of Common Stock may
be issued under the Directors Plan. The number of shares of Common Stock
which remained available for issuance under the Directors Plan was 238,800,
of which 87,000 are subject to currently outstanding options. The number of
shares of Common Stock available under the Directors Plan will be reduced on
a share-for-share basis in respect of each share issued other than under the
Directors Plan to persons eligible to participate in the Directors Plan. In
the event of a change in the capitalization of ALARIS Medical which affects
the Common Stock, the committee of the Board of Directors of ALARIS Medical
which administers the Directors Plan (the "Plan Committee") may make
proportionate adjustments to the number of shares of Common Stock for which
NQSOs may be granted and to the number and exercise price of shares of Common
Stock subject to outstanding NQSOs. NQSOs may not be granted under the
Directors Plan on or after September 7, 2000.
The Plan Committee consists of at least two individuals who are not
eligible to participate in the Directors Plan. The Plan Committee has the
authority to administer all aspects of the Directors Plan other than
73
(i) the grant of NQSOs; (ii) the number of shares of Common Stock subject to
NQSOs; (iii) the rate at which options granted thereunder vest and become
first exercisable; and (iv) the price at which each share covered by a NQSO
may be purchased, all of which are determined automatically under the
Directors Plan.
On September 10, 1990, initial grants of NQSOs covering 12,000 shares
of Common Stock were made automatically under the Directors Plan to each of
ALARIS Medical's non-employee Directors. An initial grant of NQSOs covering
12,000 shares of Common Stock also will be made automatically to any person
who becomes an eligible participant after September 10, 1990, on the business
day following such person's election to the Board of Directors of the Company
or ALARIS Medical. During the term of the Directors Plan, additional grants
of NQSOs covering 12,000 shares of Common Stock will be made to each
participant in the Directors Plan every three years on the anniversary of
such person's initial NQSO grant. The NQSOs granted under the Directors Plan
will vest and become exercisable at the rate of 4,000 shares for every
twelve-month period of continuous service on the Board of Directors, provided
that the optionee is still a member of the Board of Directors on that date.
For purposes of vesting, participants will receive credit for any period of
continuous service prior to September 7, 1990. The term of each NQSO is five
years from the date of grant. During the lifetime of an optionee, his or her
NQSOs may be exercised only by the optionee and the NQSOs are not
transferable other than by will or by the laws of descent and distribution.
NQSOs granted under the Directors Plan which have not yet vested are subject
to termination if the optionee ceases to be a Director or becomes an employee
of ALARIS Medical and all NQSOs which have vested expire twelve months after
such change in status, unless by their terms such NQSOs expire sooner. In the
event that an optionee is removed from the Board of Directors for cause, all
unexercised NQSOs, whether or not vested, expire upon such removal.
The purchase price of shares of Common Stock subject to NQSOs is the
fair market value of the Common Stock on the date of the grant. Payment for
the shares of Common Stock to be received by a optionee upon exercise of a
NQSO may be in cash or in shares of Common Stock. In addition, the Plan
Committee may provide in such optionee's stock option agreement for payment
of the purchase price by promissory note or any other form of consideration
permitted by law.
In the event of a change of control, as defined in the Directors Plan,
all NQSOs not vested on or prior to the effective time of any such change in
control shall immediately vest as of such effective time.
In May 1997, the Board of Directors of ALARIS Medical approved, subject
to approval by the stockholders of ALARIS Medical, which was obtained on June
11, 1997, the amendment and restatement of the Directors Plan. The Directors
Plan was amended and restated in order to (i) maintain ALARIS Medical's
ability to attract and reward its Directors by increasing the number of
shares of common stock subject to each automatic award under the Directors
Plan formula from 12,000 to 15,000; (ii) make automatic awards under the
Directors Plan available to any Director who does not receive a salary as an
officer of ALARIS Medical or the Company; and (iii) conform the Directors
Plan to corresponding provisions in the newly adopted 1996 Option Plan and
changes in applicable law.
Compensation of Directors
Members of the Board of Directors who are not employees of the Company
are paid $10,000 per annum by ALARIS Medical. This compensation is for
serving as a Director of both ALARIS Medical and ALARIS Medical Systems. In
addition, every three years such Directors will receive options to purchase
15,000 shares of Common Stock pursuant to the Directors Plan, which options
will vest at a rate of 5,000 shares per annum. See "-Stock-Based Benefit
Plans-Directors Plan." Travel and accommodation expenses of Directors
incurred in connection with meetings are reimbursed by the Company. All of
the Directors are covered by ALARIS Medical's director's liability insurance
policy.
74
In 1996, Mr. Dean was granted an option on 10,000 shares of Common
Stock in consideration for service on a special committee of the Board of
Directors of ALARIS Medical. See "Item 12. Security Ownership of Certain
Beneficial Owners and Management."
On March 15, 1996, Mr. Green's consulting agreement with ALARIS Medical
expired. The consulting agreement, which had a three-year term, provided for
the payment to Mr. Green of consulting fees in the amount of $100,000 per
annum. On March 16, 1996, Mr. Green became eligible to receive the aforesaid
non-employee annual Director compensation of $10,000 and an option to
purchase 12,000 shares of Common Stock under the Directors Plan.
On June 11, 1997, Mr. Picower was granted an option on 15,000 shares of
Common Stock pursuant to the Directors Plan. The options vest at the rate of
5,000 shares per year for three years beginning June 1998.
Compensation Committee Interlocks and Insider Participation
There are no reportable compensation committee interlocks or insider
participation transactions.
In connection with the Merger, Mr. Mercer entered into a new employment
agreement with the Company. See "-Employment Agreements."
75
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
All of the outstanding capital stock of the Company is owned by ALARIS
Medical. The following table sets forth, at March 23, 1998, information
regarding the beneficial ownership of Common Stock by (i) all persons known
by ALARIS Medical who own beneficially more than 5% of the outstanding Common
Stock; (ii) each Director of ALARIS Medical; (iii) each of the Named
Executive Officers; and (iv) all Directors and the Named Executive Officers
as a group. Unless otherwise stated, ALARIS Medical believes that the
beneficial owners of the shares listed below have sole investment and voting
power with respect to such shares. In addition, unless otherwise indicated,
each such person's business address is 10221 Wateridge Circle, San Diego,
California 92121.
Shares
Beneficially Percentage
Owned of Total (1)
---------------- --------------
Jeffry M. Picower......................................................... 46,643,209 (2) 78.3%
South Ocean Blvd.
Palm Beach, FL 33480
William J. Mercer......................................................... 356,200 (3) *
Norman M. Dean............................................................ 24,500 (4) *
Henry Green............................................................... 9,000 (5) *
Richard B. Kelsky......................................................... 98,100 (6) *
Jake St. Philip........................................................... 63,667 (7) *
Richard M. Mirando........................................................ 73,667 (8) *
John A. de Groot.......................................................... 68,667 (9) *
Henk van Rossem........................................................... 45,001 (10) *
All Directors and Named Executive Offices as a group...................... 47,382,011 (11) 79.5%
(9 individuals)
_________________________
* Less than 1%
(1) Calculated in accordance with Rule 13d-3(d)(1) under the Securities
Exchange Act of 1934, as amended. At March 23, 1998, ALARIS Medical had
59,122,035 shares of Common Stock outstanding.
(2) Includes (i) 20,079,477 shares of Common Stock owned by
Decisions; (ii) 2,489,463 shares of Common Stock owned by JA
Special Partnership Limited ("JA Special"); and (iii) 24,074,269
shares of Common Stock owned by JD Partnership, L.P. ("JD
Partnership"). Does not include an option to purchase 15,000 shares
of Common Stock granted under the Directors Plan that vests over
time. Mr. Picower is the sole stockholder and sole Director of
Decisions, which is the sole general partner of JD Partnership, and
the sole general partner of JA Special. As a result, Mr. Picower
shares or has the sole power to vote or direct the vote of and to
dispose or direct the disposition of such shares of Common Stock
and may be deemed to be the beneficial owner of such shares.
(3) Includes (i) 156,200 shares of Common Stock owned by the
William J. Mercer Trust, of which Mr. Mercer is the trustee and
a beneficiary, and (ii) currently exercisable option on 200,000
shares of Common Stock granted upon consummation of the Merger
under the 1996 Option Plan. In addition, pursuant to an
employment agreement with the Company, Mr. Mercer has been
granted under the 1996 Option Plan an additional option on
400,000 shares of Common Stock that vests over time. See
"Management-Employment Agreements."
(4) Includes currently exercisable option on 16,000 shares of
Common Stock under the Directors Plan, and currently
exercisable option on 4,500 shares of Common Stock granted in
consideration for service on a special committee of the Board
of Directors. Does not include (i) option on an additional
8,000 shares of Common Stock granted under the Directors Plan
that vests over time and (ii) option on 5,500 shares of Common
Stock granted in consideration for service on a special
committee of the Board of Directors of ALARIS Medical that
vests over time.
(5) Does not include an option to purchase 8,000 of Common Stock
granted under the Directors Plan that vests over time.
76
(6) Includes currently exercisable option on 16,000 shares of
Common Stock granted under the Directors Plan. Does not include
option on an additional 8,000 shares of Common Stock granted
under the Directors Plan that vests over time.
(7) Represents currently exercisable option on 63,667 shares of
Common Stock granted under the 1996 Option Plan. Does not
include option of 116,333 shares of Common Stock granted under
the 1996 Option Plan that vests over time.
(8) Includes (i) 10,000 shares of Common Stock owned by Richard M.
Mirando, and (ii) a currently excercisable option on 63,667
shares of Common Stock granted under the 1996 Option Plan. Does
not include option of 116,333 shares of Common Stock granted
under the 1996 Option Plan that vests over time.
(9) Includes (i) 5,000 shares of Common Stock owned by John A. de
Groot, and (ii) a currently excercisable option on 63,667
shares of Common Stock granted under the 1996 Option Plan. Does
not include option of 116,333 shares of Common Stock granted
under the 1996 Option Plan that vests over time.
(10) Includes currently exercisable option on 45,001 shares of
Common Stock granted under the 1996 Option Plan. Does not
include option on an additional 134,999 shares of Common Stock
granted under the 1996 Option Plan that vests over time.
(11) Includes currently exercisable options on 440,502 shares of
Common Stock granted under the 1996 Option Plan and 36,000
shares of Common Stock granted under the Directors Plan.
Possible Changes in Control
All of the Company's outstanding equity securities have been pledged by
ALARIS Medical to secure the Company's obligations under the ALARIS Medical
System's bank credit facility. The bank credit facility contains certain
events of default after expiration of applicable grace periods, including
failure to make payments under the bank credit facility; breach of
representations and warranties; breach of covenants; default under other
agreements or conditions relating to indebtedness; certain events of
insolvency or bankruptcy with respect to the Company or certain subsidiaries;
certain ERISA violations; invalidity or disaffirmance of any guarantee or
pledge agreement; certain judgments and certain events relating to changes in
control of ALARIS Medical Systems and ALARIS Medical. In the event of a
default under the bank credit facility, the lenders thereunder have certain
rights as secured creditors under the terms of the bank credit facility to
vote and to sell or otherwise dispose of such pledged shares.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
77
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 in Part II, Item 8 of this report, on the
following pages:
Page
----
Report of Independent Accountants......................................................................... 37
Consolidated Balance Sheet at December 31, 1996 and 1997.................................................. 38
Consolidated Statement of Operations for the years ended December 31, 1995,
1996 and 1997............................................................................................ 39
Consolidated Statement of Cash Flows for the years ended December 31, 1995,
1996 and 1997............................................................................................ 40
Consolidated Statement of Stockholders' Equity (Deficit) for the period from
December 31, 1994 to December 31, 1997................................................................... 41
Notes to Consolidated Financial Statements................................................................ 42
2. Financial Statement Schedules:
Schedule II-Valuation and Qualifying Accounts and Reserves for the
three years ended December 31, 1997
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
- ------------- -----------------------
3.1 - Amended and Restated Certificate of Incorporation of the Company.*
3.2 - Certificate of Amendment to the Amended and Restated Certificate of Incorporation of the Company.**
3.3 - Amended and Restated By-Laws of the Company.*
4.1 - Indenture dated as of November 26, 1996 among IMED Corporation, IMED International Trading Corp. and
United States Trust Company of New York, as trustee (including form of Notes) (Incorporated by
reference to Exhibit 10.2 to the AM December 8-K).
4.2 - Indenture Assumption Agreement dated as of November 26, 1996 between IVAC Holdings, Inc. and United
States Trust Company of New York, as trustee.*
4.3 - Supplemental Indenture dated as of November 26, 1996 between IVAC Overseas Holdings, Inc. and United
States Trust Company of New York, as trustee.*
4.4 - Registration Rights Agreement dated as of November 26, 1996 among IMED Corporation, IMED
International Trading Corp., Donaldson, Lufkin and Jenrette Securities Corporation, BT Securities
Corporation, Bear, Stearns & Co. Inc. and Paribas Corporation.*
78
Exhibit No. Description of Exhibit
- ------------- -----------------------
4.5 - Registration Rights Assumption Agreement dated as of November 26, 1996 between IVAC Holdings, Inc.
and IVAC Overseas Holdings, Inc.*
10.1 - Credit Agreement dated as of November 26, 1996 among Advanced Medical, Inc., IMED Corporation,
Various Lending Institutions, Bankers Trust Company, Banque Paribas and Donaldson, Lufkin & Jenrette
Securities Corporation (Incorporated by reference to Exhibit 10.1 to the AM December 8-K).
10.2 - Employment Agreement dated as of August 23, 1996 among William J. Mercer, IMED Corporation and
Advanced Medical, Inc. (Incorporated by reference to Exhibit 10.4 to the AM December 8-K).
10.3 - Employment Agreement dated as of August 23, 1996 among Joseph W. Kuhn, IMED Corporation and Advanced
Medical, Inc. (Incorporated by reference to Exhibit 10.5 to the AM December 8-K).
10.4 - Advanced Medical, Inc.'s Third Amended and Restated 1988 Stock Option Plan (Incorporated by
reference to Annex IV to Advanced Medical, Inc.'s Proxy Statement dated July 25, 1994 for its
Special Meeting of Stockholders held on August 11, 1994 (the "AM August 1994 Proxy Statement")).
10.5 - Advanced Medical, Inc.'s Second Amended and Restated 1990 Non-Qualified Stock Option Plan for
Non-Employee Directors (Incorporated by reference to Annex V to the AM August 1994 Proxy Statement).
10.6 - Form of Indemnification Agreements between IVAC Holdings, Inc. and certain of its directors and
officers (Incorporated by reference to Exhibit 10.2 to IVAC Medical System, Inc.'s Report on Form
10-Q for the quarter ended June 30, 1996).
10.7 - Wateridge Plaza Office Building Lease Agreement dated as of December 1, 1995 between California
Public Employees' Retirement System and IVAC Corporation (Incorporated by reference to Exhibit 10.12
to IVAC Medical Systems, Inc.'s Report on Form 10-K for the year ended December 31, 1995 (the "IVAC
1995 Form 10-K")).
10.8 - Activity Road Lease Agreement dated as of October 25, 1995 between Rancho Bernardo Corporate Center
Ltd. and IVAC Corporation (Incorporated by reference to Exhibit 10.13 to the IVAC 1995 Form 10-K).
10.9 - Kenamar Court Lease Agreement dated as of January 24, 1996 between Brentcrest Properties, Inc. and
IVAC Corporation (Incorporated by reference to Exhibit 10.14 of the IVAC 1995 Form 10-K).
10.10 - Development and Exclusive Distribution Agreement dated May 8, 1995 between Debiotech SA and IMED
Corporation (Incorporated by reference to Exhibit 10.7 of Amendment No. 2 dated January 31, 1996 to
Advanced Medical, Inc.'s Report on Form 10-Q for the quarter ended September 30, 1995).
10.11 - Asset Transfer Agreement dated June 26, 1996 among IMED Ltd., IMED Corporation, Pharmacia AB and
Pharmacia & Upjohn Limited with respect to the acquisition of certain European assets (Incorporated
by reference to Exhibit 10.28 to Advanced Medical, Inc.'s Report on Form 10-Q for the quarter ended
June 30, 1996 (the "AM June 1996 Form 10-Q")).
10.12 - Assignment Agreement dated June 26, 1996 among IMED Corporation, IMED International Trading Corp.,
Advanced Medical, Inc. and Pharmacia, AB with respect to the acquisition of European distribution
rights (Incorporated by reference to Exhibit 10.29 to the AM June 1996 Form 10-Q).
79
Exhibit No. Description of Exhibit
- ------------- -----------------------
10.13 - Amendment and Waiver No. 1 to Credit Agreement dated as of March 28, 1997. (Filed as an exhibit to
Amendment No. 2 to the Registration Statement on Form S-4 (333-18687) of ALARIS Medical Systems,
IVAC Overseas and IMED Trading dated May 28, 1997.)
10.14 - 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")).
10.15 - 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).
10.16 - 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.)
10.17 - Confidential Settlement Agreement and Mutual General Release of all Claims, dated May 11, 1993 by
and among Richard L. Grounsell, IMED Corporation, Warner-Lambert Company, Donald O'Neill, John
Sifers, Michael Scharing, Dan Kelly and Bud Humphrey. (Incorporated by reference to Exhibit 19.1 to
the Company's Report on Form 10-Q for the quarter ended March 31, 1993.)
21 - List of Subsidiaries of ALARIS Medical Systems, Inc.
27 - Financial Data Schedule.
________________________
* Filed as an exhibit to the Registration Statement on Form S-4 (333-18687)
of the Company, IVAC Overseas Holdings, Inc. and IMED International
Trading Corp. dated December 24, 1996.
** Filed as an exhibit to Amendment No. 2 to the Registration Statement on
Form S-4 (333-18687) of ALARIS Medical Systems, Inc., IVAC Overseas
Holdings, Inc. and IMED International Trading Corp. dated May 28, 1997.
(b) Report on Form 8-K.
None.
80
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
San Diego, State of California, on March 30, 1998.
Alaris Medical SYSTEMS, Inc.
By: /s/ William J. Mercer
----------------------------------------------
Name: William J. Mercer
Title: President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Name Title(s)
- ----- -------
/s/ Jeffry M. Picower Director and Chairman of the Board
- ---------------------------------
Jeffry M. Picower
/s/ William J. Mercer Director, President, and Chief Executive Officer
- ---------------------------------
William J. Mercer
/s/ Douglas C. Jeffries Vice President and Chief Financial Officer
- --------------------------------- (Principal Financal and Accounting Officer)
Douglas C. Jeffries
/s/ Norman M. Dean Director
- ---------------------------------
Norman M. Dean
/s/ Henry Green Director
- ---------------------------------
Henry Green
/s/ Richard B. kelsky Director
- ---------------------------------
Richard B. Kelsky
81
ALARIS MEDICAL SYSTEMS, INC. AND SUBSIDIARIES
Schedule II - Valuation and Qualifying Accounts and Reserves
For the Three Years Ended December 31, 1997
- -------------------------------------------------------------------------------
(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, 1995................ $ 855 $ 100 -- $ (80) $ 875
Year ended December 31, 1996................ 875 100 $ 3,320 (210) 4,085
Year ended December 31, 1997................ 4,085 810 -- (1,636) 3,259
_________________________
(1) Represents amount of allowance for doubtful accounts assigned to accounts
receivables acquired in the Merger.
(2) Represents accounts written-off as uncollectible, net of collections on
accounts previously written-off.
S-II-1
EXHIBIT INDEX
Exhibit No. Description of Exhibit
21 List of Subsidiaries of ALARIS Medical Systems, Inc
27 Financial Data Schedule
Exhibit 27 has been omitted from this copy of ALARIS Medical Systems,
Inc.'s Annual Report on Form 10-K for the year ended December 31, 1997.