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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 33-26398
ALARIS MEDICAL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 13-3492624
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
10221 WATERIDGE CIRCLE, SAN DIEGO, CALIFORNIA 92121
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (619) 458-7000
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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Common Stock, $0.01 par value NASDAQ
7 1/4% Convertible Subordinated Debentures American Stock Exchange
due 2002
Securities registered pursuant to Section 12(g) of the Act:
NONE
---------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, and (2) has been subject to such filing requirements
for the past 90 days. YES: X NO:
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. / /
The aggregate market value of the shares of the registrant's common stock,
$0.01 par value per share ("Common Stock"), held by nonaffiliates of the
registrant, computed by reference to the price at which such stock was last
sold, on March 23, 1998, was $61,082,630. Solely for purposes of this
calculation, the following persons, who beneficially owned in the aggregate
47,382,011 shares of Common Stock at March 23, 1998, have been deemed to be
affiliates of the registrant: directors of the registrant, the Named
Executive Officers (as defined) and known stockholders of the registrant
beneficially owning 5% or more of the outstanding shares of Common Stock.
As of March 23, 1998, the registrant had 59,122,035 shares of Common Stock
outstanding.
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PART I
ITEM 1. BUSINESS
BACKGROUND
ALARIS Medical, Inc. ("ALARIS Medical"), formerly Advanced Medical,
Inc., operating through its consolidated subsidiaries, 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. ("ALARIS Medical
Systems"). The acquisition was accounted for as a purchase. ALARIS Medical
and its subsidiaries are collectively referred to as the "Company." ALARIS
Medical was incorporated on September 28, 1988 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
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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
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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
general care use commercial 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 Market introduction in
(MODEL 7000) Edition technology platform designed for 1997
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 Marketed since 1988
controller capability; for use in all
hospital settings
GEMINI PC-2T Dual channel instrument with pump and Marketed since 1987
controller capability; for use in all
hospital settings
GEMINI PC-2TX Dual channel instrument with pump and Marketed since May 1994
controller capability; programmable drug
delivery/dose calculations and pressure
history; for use in all hospital settings
6
PRODUCT DESCRIPTION STATUS
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GEMINI PC-4 Four channel instrument with pump and Marketed since December
controller capability; programmable drug 1992
delivery/dose calculations and pressure
history; for use in critical care settings
MODULAR INFUSION PUMP Compact, flexible, lightweight modular Market introduction
infusion pump with an adjustable planned for 1999
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 On market since 1983 and
base worldwide; for general care use in the 1990, respectively
United States, and general and critical care
use in Europe
597/598 SERIES Single channel, multi-pump configuration On market in Euroope since
of reduced size and weight; used 1993
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
multi-channel pump available on the late 1980s by Siemens
United States market; for critical care use Infusion Systems, Ltd. as
MiniMed; reengineered
since its acquisition in
1993
SYRINGE INFUSION PUMPS
P1000, P2000, P3000, Preferred method of delivery in many Various models introduced
P4000 markets outside the United States; for between late 1980s and
critical and non-critical care use early 1990s
P7000 Syringe pump with advanced features for Introduced to European
critical, non-critical and neonatal care use market during second
in markets outside the United States quarter of 1996
P6000 Syringe pump using the P7000 technology Introduced to European
platform designed for the price-conscious market during the second
consumer in markets outside the United half of 1997
States; for critical and non-critical
care use
P6000-TIVA Syringe pump designed for critical and non- Introduced during third
critical care use quarter 1997
P6000-TCI Syringe pump that incorporates Diprifusor Introduced during fourth
module from Zeneca quarter 1997
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PRODUCT DESCRIPTION STATUS
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PCAM (PATIENT Syringe pump used in markets outside the Introduced internationally
CONTROLLED ANALGESIA United States that allows patients to in first quarter of 1995
PUMP) control the delivery of pain medication
AMBULATORY PUMPS
READYMED Compact, disposable, lightweight 100 mL marketed since
ambulatory infusion pump designed for July 1992 and 50 mL and
alternate site use 250 mL introduced in 1993
RYTHMIC Family of lightweight, self-contained Agreement with Micrel
portable pumps for PCA, intermittent and signed in second half of
continuous use at home in international 1997, 1998 launch
markets planned
DISPOSABLE Proprietary and non-proprietary On market and in
ADMINISTRATION administration sets for use with each of the development
SETS Company's existing and proposed infusion
pumps
NEEDLE-FREE ACCESS
PRODUCTS
SMARTSITE SYSTEM Needle-free, capless, latex-free infusion Introduced in 1996
system component intended to increase
safety of patients and health care workers
VERSASAFE Infusion system component utilizing a blunt Marketed since 1994
cannula device combined with a split- through a non-exclusive
septum "Y" site license
PATIENT MONITORING:
THERMOMETRY SYSTEMS
TEMP-PLUS II Electronic thermometer; for general hospital On market since mid-
(MODEL 2080) and alternate site use 1980s
TEMP-PLUS III Electronic thermometer; a 7-to-10-second Market introduction
version of the Model 2080; intended for planned for 1998
CORE-CHECK Infrared tympanic thermometer that saves On market since 1991
(MODEL 2090) time, patient interruption and
lowers risk of infection; for general
hospital use
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PRODUCT DESCRIPTION STATUS
- ----------------------- ------------------------------------------- -----------------------------
DISPOSABLE PROBE Proprietary covers for use with each of the On market since mid-
COVERS Company's existing and proposed 1980s
thermometers
OTHER PATIENT MONITORING
PRODUCTS
VITAL-CHECK Continuous monitoring model that rapidly On market in the United
(MODEL 4200) measures pulse, blood pressure and States since late 1980s
temperature; for general hospital use
VITAL-CHECK Multiparameter non-invasive patient Introduced during fourth
(MODEL 4400) monitor providing blood pressure, pulse quarter of 1997
oximetry 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
The Common Stock was listed and traded on the American Stock Exchange
under the symbol ALRS through June 9, 1997. Beginning June 10, 1997, the
Common Stock listing and trading was moved to NASDAQ. The following table
sets forth the high and low reported sale prices for the Common Stock as
reported by the stock exchanges for the quarters indicated.
HIGH LOW
------ -------
1996:
First Quarter . . . . . . . . . . . . . . . . . . . . 3-1/8 2-1/4
Second Quarter. . . . . . . . . . . . . . . . . . . . 3-1/16 2-1/8
Third Quarter . . . . . . . . . . . . . . . . . . . . 4-1/16 2-1/16
Fourth Quarter. . . . . . . . . . . . . . . . . . . . 3-7/8 2-11/16
1997:
First Quarter . . . . . . . . . . . . . . . . . . . . 5-3/4 3-11/16
Second Quarter. . . . . . . . . . . . . . . . . . . . 4-7/8 2-7/8
Third Quarter . . . . . . . . . . . . . . . . . . . . 4-3/4 3-1/16
Fourth Quarter. . . . . . . . . . . . . . . . . . . . 6-3/4 4-1/8
At March 23, 1998, there were 515 holders of record of the Common Stock.
ALARIS Medical has not paid any dividends on the Common Stock since its
organization, and it is not contemplated that it will pay any dividends on
the Common Stock in the foreseeable future. ALARIS Medical is prohibited from
declaring and paying dividends on the Common Stock under the bank credit
facility entered into in connection with the Merger. In addition, the bank
credit facility limits ALARIS Medical System's ability to declare and pay
dividends and to make other distributions and payments to ALARIS Medical. See
"Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources."
23
ITEM 6. SELECTED FINANCIAL DATA
The following selected historical consolidated financial data of ALARIS
Medical at December 31, 1993, 1994, 1995, 1996 and 1997, and for the years
then ended, have been derived from ALARIS Medical's 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 AND SHARE AMOUNTS IN THOUSANDS,
EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Sales. . . . . . . . . . . . . . . . . . . . . . . . . $119,858 $112,122 $112,551 $136,371 $359,077
Cost of sales. . . . . . . . . . . . . . . . . . . . . 72,209 65,590 63,219 78,616 188,340
-------- -------- -------- -------- --------
Gross margin . . . . . . . . . . . . . . . . . . . . . 47,649 46,532 49,332 57,755 170,737
Total operating expenses (1) . . . . . . . . . . . . . (51,057) (33,941) (34,614) (105,614) (142,806)
Lease interest income (2). . . . . . . . . . . . . . . 2,627 2,449 2,333 2,501 4,559
-------- -------- -------- -------- --------
Income (loss) from operations. . . . . . . . . . . . . (781) 15,040 17,051 (45,358) 32,490
Interest income. . . . . . . . . . . . . . . . . . . . 140 77 192 1,193 532
Interest expense . . . . . . . . . . . . . . . . . . . (10,880) (8,690) (8,153) (13,393) (44,413)
Debt conversion expense (6). . . . . . . . . . . . . . - - - (10,000) -
Other (expense) income, net. . . . . . . . . . . . . . 6,004 1,136 313 1,222 (1,535)
-------- -------- -------- -------- --------
Income (loss) before income taxes,
minority interests, extraordinary
item and cumulative effect of change
in accounting principle (3). . . . . . . . . . . . . (5,517) 7,563 9,403 (66,336) (12,926)
Provision (benefit) for income taxes . . . . . . . . . 926 1,886 (9,374) (730) (3,300)
Minority interests in consolidated
subsidiaries . . . . . . . . . . . . . . . . . . . . 3,755 - (6,500) - -
-------- -------- -------- -------- --------
Income (loss) before extraordinary
item and cumulative effect of change
in accounting principle. . . . . . . . . . . . . . . (2,688) 5,677 12,277 (65,606) (9,626)
Dividends and accretion on mandatorily
redeemable preferred stock . . . . . . . . . . . . . 1,387 874 650 962 -
-------- -------- -------- -------- --------
Income (loss) applicable to common
stock before extraordinary item and
cumulative effect of change in
accounting principle . . . . . . . . . . . . . . . . $ (4,075) $ 4,803 $ 11,627 $(66,568) $ (9,626)
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Income (loss) per common share before
extraordinary item and cumulative
effect of change in accounting
principle assuming no dilution (4) . . . . . . . . . $ (.29) $ .34 $ .75 $ (3.27) $ (.16)
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Income (loss) per common share before
extraordinary item and cumulative
effect of change in accounting
principle assuming dilution (4). . . . . . . . . . . $ (.29) $ .23 $ .38 $ (3.27) $ (.16)
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Weighted average common shares
outstanding assuming no dilution (4) . . . . . . . . 14,073 14,069 15,506 20,343 58,644
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
Weighted average common shares
outstanding assuming dilution (4). . . . . . . . . . 14,073 24,304 33,236 20,343 58,644
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
24
DECEMBER 31,
------------------------------------------------------
1993 1994 1995 1996 1997
--------- --------- -------- --------- --------
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents. . . . . . . . . . . . . . . $ 1,762 $ 1,340 $ 1,862 $ 12,084 $ 6,984
Working capital (deficit). . . . . . . . . . . . . . . (2,833) 29,576 31,938 87,785 84,047
Total assets . . . . . . . . . . . . . . . . . . . . 142,891 132,124 169,630 593,382 565,297
Short-term debt (5) (6). . . . . . . . . . . . . . . . 35,815 1,214 322 3,963 14,559
Long-term debt . . . . . . . . . . . . . . . . . . . . 70,999 91,803 86,789 436,130 431,571
Mandatorily redeemable equity securities . . . . . . . 6,478 6,567 7,217 - -
Stockholders' (deficit) equity (3) (6) (7) . . . . . . (8,274) (2,238) 31,532 46,053 31,949
ADJUSTED EBITDA (8) . . . . . . . . . . . . . . . . . . . $ 18,420 $ 22,851 $ 24,626 $ 27,775 $ 89,287
Inventory purchase price allocation
adjustment (9). . . . . . . . . . . . . . . . . . . . . - - - (4,014) (1,607)
Restructuring, integration and other
non-recurring charges . . . . . . . . . . . . . . . . . (9,352) - - (15,277) (20,902)
Purchased in-process research and
development . . . . . . . . . . . . . . . . . . . . . . - - - (44,000) -
Depreciation and amortization (10). . . . . . . . . . . . (9,849) (7,811) (7,575) (9,842) (34,288)
Interest income . . . . . . . . . . . . . . . . . . . . . 140 77 192 1,193 532
Interest expense. . . . . . . . . . . . . . . . . . . . . (10,880) (8,690) (8,153) (13,393) (44,413)
Debt conversion expense . . . . . . . . . . . . . . . . . - - - (10,000) -
Other, net. . . . . . . . . . . . . . . . . . . . . . . . 6,004 1,136 313 1,222 (1,535)
(Provision) benefit for income taxes. . . . . . . . . . . (926) (1,886) 9,374 730 3,300
Minority interests in consolidated
subsidiaries. . . . . . . . . . . . . . . . . . . . . . 3,755 - (6,500) - -
Extraordinary gain (loss) . . . . . . . . . . . . . . . . - - 15,177 (1,630) -
Cumulative effect of change in
accounting principle . . . . . . . . . . . . . . . . . 3,985 - - - -
--------- -------- --------- -------- --------
Net income (loss) . . . . . . . . . . . . . . . . . . . . $ 1,297 $ 5,677 $ 27,454 $(67,236) $ (9,626)
--------- -------- --------- -------- --------
--------- -------- --------- -------- --------
- ------------
(1) In 1993 and 1996 ALARIS Medical 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 $9,352, $15,277 and $20,902,
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) In 1995, ALARIS Medical completed exchanges wherein $43,848 of ALARIS
Medical's 7 1/4% convertible subordinated debentures were exchanged for an
aggregate of $21,924 of the Company's 15% subordinated debentures and 2,062
shares of ALARIS Medical's common stock. As a result of these transactions
ALARIS Medical's long term debt was reduced $21,924 and ALARIS Medical
recorded an extraordinary gain on extinguishment of debt of $15,177. For
further discussion, see Note 4 to the Consolidated Financial Statements.
(4) In February, 1997 the Financial Accounting Standards Board issued the
Statement of Financial Accounting Standards No. 128, "Earnings per Share"
("SFAS 128") which specifies the computation, presentation, and disclosure
requirements for earnings per share. The statement is effective for all
periods ending after December 15, 1997 and requires all prior-period
earnings per share data to be restated to conform with the provisions of
the Statement. As a result of the application of this statement, prior
period numbers presented may not agree with the earnings per share data
previously reported.
25
(5) On December 4, 1995, ALARIS Medical issued a $25,000 secured promissory
note which was converted to common stock during 1996 in connection with
the Merger.
(6) 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. Additionally, convertible promissory notes in the aggregate principal
amount of $37,500 were exchanged for 29,416 shares of Common Stock,
including 3,333 shares issued as an inducement to convert, which resulted
in $10,000 of debt conversion expense. ALARIS Medical also redeemed the
remaining $21,924 principal amount of its 15% subordinated debentures due
1999 and recorded an extraordinary loss on extinguishment of debt of $1,630
as a result of this transaction. For further discussion, see Note 4 to the
Consolidated Financial Statements.
(7) ALARIS Medical has never paid dividends on the Common Stock.
(8) Adjusted EBITDA represents income from operations before restructuring,
integration and other non-recurring charges, non-cash purchase accounting
charges and depreciation and amortization. Adjusted EBITDA does not
represent net income or cash flows from operations, as these terms are
defined under generally accepted accounting principles, and should not be
considered as an alternative to net income as an indicator of the Company's
operating performance or to cash flows as a measure of liquidity. ALARIS
Medical has included information concerning Adjusted EBITDA herein because
it understands that such information is used by certain investors as one
measure of an issuer's historical ability to service debt. Restructuring
and other one-time non-recurring charges are excluded from Adjusted EBITDA
as ALARIS Medical believes that the inclusion of these items would not be
helpful to an investor's understanding of ALARIS Medical's ability to
service debt. ALARIS Medical's computation of Adjusted EBITDA may not be
comparable to similar titled measures of other companies.
(9) 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.
(10) Depreciation and amortization excludes amortization of debt discount and
issuance costs included in interest expense of $732, $681, $521, $1,332 and
$3,125 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 AND THE RELATED NOTES THERETO INCLUDED
ELSEWHERE IN THIS ANNUAL REPORT.
OVERVIEW
ALARIS Medical is a holding company for ALARIS Medical Systems. ALARIS
Medical also identifies and evaluates potential acquisitions and investments,
and performs various corporate functions. As a holding company, ALARIS
Medical currently has no revenues to fund its operating and interest expense
and relies on its existing cash, cash generated from operations of ALARIS
Medical Systems and external borrowings to meet its obligations. Capitalized
terms used but not defined herein have the meaning ascribed to them in the
Notes to the Consolidated Financial Statements.
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 Advanced
Medical and 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 Advanced Medical
and IVAC Holdings, Inc., 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 57.6 184,742 53.3 52.5
------ ------ -------- ----- ----
Gross margin. . . . . . . . . . . . . . . . . . 43.8 42.4 161,606 46.7 47.5
Selling and marketing expenses. . . . . . . . . 14.7 16.3 65,385 18.9 18.3
General and administrative expenses . . . . . . 9.5 11.2 39,985 11.5 10.9
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 - - 5.8
Lease interest income . . . . . . . . . . . . . 2.1 1.8 4,601 1.2 1.2
------ ------ -------- ----- ----
Income (loss) from operations . . . . . . . . . 15.1 (33.3) 42,695 12.3 9.0
Interest income . . . . . . . . . . . . . . . . .2 .9 363 .1 .1
Interest expense. . . . . . . . . . . . . . . . (7.2) (9.8) (41,692) (12.0) (12.4)
Debt conversion expense . . . . . . . . . . . . - (7.3) - - -
Other, net. . . . . . . . . . . . . . . . . . . .3 .9 1,009 .3 (.3)
------ ------ -------- ----- ----
Income (loss) before income taxes, minority
interests and extraordinary item . . . . . . 8.4 (48.6) 2,375 .7 (3.6)
Provision for (benefit from) income taxes . . . (8.3) (.5) 3,250 .9 (.9)
Income (loss) before minority interests
and extraordinary item . . . . . . . . . . . 16.7% (48.1%) $ (875) (.2%) (2.7%)
------ ------ -------- ----- ----
------ ------ -------- ----- ----
OTHER DATA:
Adjusted EBITDA . . . . . . . . . . . . . . 21.9% 20.4% $ 75,883 21.9% 24.9%
29
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 42.4% 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 $24.0 million during 1997 primarily due to the Merger. On a pro forma
basis, general and administrative expense decreased by $0.8 million, or 1.9%,
during 1997. As a percentage of sales, on a pro forma basis, general and
administrative expense decreased from 11.5% for 1996 to 10.9% for 1997 due to an
increase in sales, as well as Merger-related synergies at ALARIS Medical
Systems, 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 $20.9 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 9 to the Consolidated Financial Statements), the write-off of
drug infusion instrument tooling associated with the redesign effort on a
product in development of $1.7 million, facilities moving expenses and Company
name change costs of $1.6 million, management consulting fees of $1.4 million,
severance of $1.3 million and other integration costs of $1.5 million. The
Company 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 $77.8
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 $10.2 million from $42.7 million in
1996 to $32.5 million in 1997 primarily due to the $20.9 million of integration
costs discussed above, offset by a $9.1 million improvement in gross profit.
30
ADJUSTED EBITDA. Adjusted EBITDA increased $61.5 million during 1997
primarily due to the Merger. On a pro forma basis, as a percentage of sales,
Adjusted EBITDA increased from 21.9%, or $75.9 million, for 1996 to 24.9%, or
$89.3 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 $91.8 million, an increase of $15.9 million or
approximately 21.0%, 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.
INTEREST EXPENSE. Interest expense increased $31.0 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 convertible debt which was converted to common stock in connection
with the Merger, as well as the redemption of $21.9 million of 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.
INTEREST INCOME. Interest income decreased approximately $0.7 million
during 1997 as compared to 1996 due to the liquidation of interest earning
restricted cash balances during 1996.
DEBT CONVERSION EXPENSE. In connection with the Merger, $37.5 million of
convertible notes payable to Decisions were converted to Common Stock. In order
to induce conversion, 3,333,333 shares of Common Stock were issued to Decisions.
As a result, during 1996 ALARIS Medical recorded a non-cash charge of
$10.0 million based upon the fair value of the shares issued.
OTHER (EXPENSE) INCOME. Other income decreased $2.8 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. Also, during 1996, ALARIS Medical sold its investment
in the common stock of Alteon, Inc. for approximately $2.4 million and realized
a gain of approximately $0.7 million.
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 a (i) decrease in the
volume of infusion pump shipments primarily attributable to several large
transactions during 1995 and (ii) decline in the average selling price of IMED's
infusion pumps and disposable administration sets, offset in part by an increase
in unit 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 unit volume of disposable administration sets resulting from IMED's
growing installed base in Canada, Australia, Latin America and the Far East.
Also contributing to the growth in international sales was IMED's repurchase of
the European distribution rights for its products in August 1996. This
repurchase resulted in higher end-user sales prices being recognized than
charged to the European distributor in 1995.
30
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 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 42.7% during 1996 as compared to 1995 primarily due to the
Merger. Exclusive of the Merger, general and administrative expense increased
from $10.7 million for 1995 to $12.5 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.
32
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, 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. 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 $17.1
million for 1995 to a loss of $45.3 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 13.5% from $17.1 million in 1995 to $14.8
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 21.9%, or
$24.6 million, for 1995 to 20.3%, or $22.9 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 $5.2 million from $8.2
million during 1995 to $13.4 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, as well as interest on $25.0 million of
convertible notes payable to Decisions Incorporated ("Decisions") which was
borrowed in December 1995 and converted to Common Stock in November 1996 in
connection with the Merger.
INTEREST INCOME. Interest income increased approximately $1.0 million
during 1996 as compared to 1995 due to the interest earned on the proceeds of
the $25.0 million borrowed from Decisions in December 1995. Approximately $12.5
million of such proceeds was utilized in June 1996 to fund the purchase of a
warrant which entitled the holder to purchase up to 10% of IMED's common stock.
The remaining proceeds were utilized in November 1996 in connection with the
Merger.
DEBT CONVERSION EXPENSE. In connection with the Merger, $37.5 million of
convertible notes payable to Decisions were converted to Common Stock. In order
to induce conversion, 3.3 million shares of Common Stock were issued to
Decisions. As a result, during 1996 ALARIS Medical recorded a non-cash charge of
$10.0 million based upon the fair value of the shares issued.
OTHER INCOME. During 1996, ALARIS Medical sold its investment in the
common stock of Alteon, Inc. for approximately $2.4 million and realized a gain
of approximately $0.7 million.
LIQUIDITY AND CAPITAL RESOURCES
Management currently believes that sufficient cash will be available
through ALARIS Medical Systems, based upon current operations, to satisfy debt
service and other corporate expenses of ALARIS Medical in the foreseeable
future. In particular, ALARIS Medical Systems' credit facility permits ALARIS
Medical Systems to transfer to ALARIS Medical up to $1.5 million annually to
fund ALARIS Medical's operating expenses and additional amounts sufficient to
meet interest expense requirements.
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.
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 $15.0 million for integration costs expensed during
1997.
At December 31, 1997, the Company's outstanding indebtedness was $446.1
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. Included in total
consolidated debt, at December 31, 1997, ALARIS Medical had outstanding $16.2
million of 71/4% Convertible Debentures.
34
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.
The Convertible Debentures provide for semi-annual interest payments of
approximately $0.6 million and mature on January 15, 2002. The Notes and the
credit facility permit ALARIS Medical Systems to fund interest payments on the
Convertible Debentures and to make limited distributions to ALARIS Medical to
fund operating expenses and to pay income taxes; provided that, with respect to
the credit facility, there exists no default or event of default under the
credit facility. The Notes and the credit facility, however, restrict
distributions to ALARIS Medical to fund the repayment of the Convertible
Debentures 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 the sale of equity 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.
35
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.
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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
ALARIS Medical, Inc.
In our opinion, the consolidated financial statements listed in the
index appearing under Item 14(a)(1) and (2) on page 82 present fairly, in all
material respects, the financial position of ALARIS Medical, 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, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
- -------------------------------------------------------------------------------
(DOLLAR AND SHARE AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
ASSETS
DECEMBER 31,
--------------------
1996 1997
--------- --------
Current assets:
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . $ 12,084 $ 6,984
Restricted cash and investment securities. . . . . . . . 2,332 -
Receivables, net . . . . . . . . . . . . . . . . . . . . 87,880 83,406
Inventories. . . . . . . . . . . . . . . . . . . . . . . 58,976 61,666
Prepaid expenses and other current assets. . . . . . . . 21,582 23,260
--------- ---------
Total current assets . . . . . . . . . . . . . . . . . 182,854 175,316
--------- ---------
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. . . . . . . . . . . . . . . . . . 18,107 16,279
Intangible assets, net. . . . . . . . . . . . . . . . . . . 308,517 287,933
--------- ---------
$ 593,382 $ 565,297
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt. . . . . . . . . . . . $ 3,963 $ 14,559
Accounts payable . . . . . . . . . . . . . . . . . . . . 25,812 24,042
Accrued expenses and other current liabilities . . . . . 50,196 50,988
Accrued restructuring and integration costs. . . . . . . 15,098 1,680
--------- ---------
Total current liabilities. . . . . . . . . . . . . . . 95,069 91,269
--------- ---------
Long-term debt. . . . . . . . . . . . . . . . . . . . . . . 436,130 431,571
Other non-current liabilities . . . . . . . . . . . . . . . 16,130 10,508
--------- ---------
Total non-current liabilities. . . . . . . . . . . . . 452,260 442,079
--------- ---------
Contingent liabilities and commitments (Notes 8 and 15)
Stockholders' equity:
Preferred stock, authorized 6,000 shares at $.001 par
value, issued and outstanding - none . . . . . . . . .
Common stock, authorized 75,000 shares at $.01 par
value; issued and outstanding - 58,977 and 59,102
shares at December 31, 1996 and 1997, respectively . . 589 591
Capital in excess of par value . . . . . . . . . . . . . 147,840 148,341
Accumulated deficit. . . . . . . . . . . . . . . . . . . (101,704) (111,330)
Treasury stock . . . . . . . . . . . . . . . . . . . . . (734) (2,027)
Equity adjustment for foreign currency translation . . . 62 (3,626)
--------- ---------
Total stockholders' equity . . . . . . . . . . . . . . 46,053 31,949
--------- ---------
$ 593,382 $ 565,297
--------- ---------
--------- ---------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED
FINANCIAL STATEMENTS.
38
ALARIS MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
- -------------------------------------------------------------------------------
(DOLLAR AND SHARE AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31,
1995 1996 1997
---------- ---------- ----------
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 112,551 $ 136,371 $ 359,077
Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . . 63,219 78,616 188,340
---------- ---------- ----------
Gross margin . . . . . . . . . . . . . . . . . . . . . . . . . 49,332 57,755 170,737
---------- ---------- ----------
Selling and marketing expenses. . . . . . . . . . . . . . . . . . . 16,567 22,273 65,797
General and administrative expenses . . . . . . . . . . . . . . . . 10,661 15,210 39,231
Research and development expenses . . . . . . . . . . . . . . . . . 7,386 8,854 16,876
Purchased in-process research and development . . . . . . . . . . . - 44,000 -
Restructuring, integration and other non-recurring charges. . . . . - 15,277 20,902
---------- ---------- ----------
Total operating expenses . . . . . . . . . . . . . . . . . . . 34,614 105,614 142,806
---------- ---------- ----------
Lease interest income . . . . . . . . . . . . . . . . . . . . . . . 2,333 2,501 4,559
---------- ---------- ----------
Income (loss) from operations. . . . . . . . . . . . . . . . . 17,051 (45,358) 32,490
Other income (expenses):
Interest income . . . . . . . . . . . . . . . . . . . . . . . . . 192 1,193 532
Interest expense. . . . . . . . . . . . . . . . . . . . . . . . . (8,153) (13,393) (44,413)
Debt conversion expense . . . . . . . . . . . . . . . . . . . . . - (10,000) -
Other, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . 313 1,222 (1,535)
---------- ---------- ----------
Total other expense. . . . . . . . . . . . . . . . . . . . . . (7,648) (20,978) (45,416)
---------- ---------- ----------
Income (loss) before income taxes, minority interests and
extraordinary item. . . . . . . . . . . . . . . . . . . . . . . . 9,403 (66,336) (12,926)
Benefit from income taxes . . . . . . . . . . . . . . . . . . . . . (9,374) (730) (3,300)
---------- ---------- ----------
Income (loss) before minority interests and extraordinary item. . . 18,777 (65,606) (9,626)
Minority interests in consolidated subsidiaries . . . . . . . . . . (6,500) - -
---------- ----------- ----------
Income (loss) before extraordinary item . . . . . . . . . . . . . . 12,277 (65,606) (9,626)
Extraordinary item - gain (loss) on early retirement
of debt, net of taxes . . . . . . . . . . . . . . . . . . . . . . . 15,177 (1,630) -
---------- ---------- ----------
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . 27,454 (67,236) (9,626)
Dividends on mandatorily redeemable preferred stock . . . . . . . . 650 962 -
---------- ---------- ----------
Net income (loss) attributable to common stock. . . . . . . . . . . $ 26,804 $ (68,198) $ (9,626)
---------- ---------- ----------
---------- ---------- ----------
Income (loss) per common share assuming no dilution:
Income (loss) before extraordinary item. . . . . . . . . . . . $ .75 $ (3.27) $ (.16)
Extraordinary item . . . . . . . . . . . . . . . . . . . . . . .98 (.08) -
---------- ---------- ----------
Net income (loss) per common share assuming no dilution. . . . $ 1.73 $ (3.35) $ (.16)
---------- ---------- ----------
Income (loss) per common share assuming dilution:
Income (loss) before extraordinary item. . . . . . . . . . . . $ .38 $ (3.27) $ (.16)
Extraordinary item . . . . . . . . . . . . . . . . . . . . . . .46 (.08) -
---------- ---------- ----------
Net income (loss) per common share assuming dilution . . . . . $ .84 $ (3.35) $ (.16)
---------- ---------- ----------
---------- ---------- ----------
Weighted average common shares outstanding assuming no dilution . . 15,506 20,343 58,644
---------- ---------- ----------
---------- ---------- ----------
Weighted average common shares outstanding assuming dilution. . . . 33,236 20,343 58,644
---------- ---------- ----------
---------- ---------- ----------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED
FINANCIAL STATEMENT
39
ALARIS MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
- -------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31,
-----------------------------------
1995 1996 1997
-------- --------- ---------
Cash flows from operating activities:
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . $ 27,454 $ (67,236) $ (9,626)
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization. . . . . . . . . . . . . . . . . . 7,575 10,499 34,288
Net (gain) loss on disposal/write-off of property, plant
and equipment and intangible assets. . . . . . . . . . . . . . (176) (452) 6,735
Minority interests in consolidated subsidiaries. . . . . . . . . 6,500 - -
Extraordinary (gain) loss - early retirement of debt,
net of taxes . . . . . . . . . . . . . . . . . . . . . . . . . (15,177) 1,630 -
Debt conversion expense. . . . . . . . . . . . . . . . . . . . . - 10,000 -
Debt discount and issue costs amortization . . . . . . . . . . . 521 1,332 3,125
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, net of effects of the Merger:
Receivables. . . . . . . . . . . . . . . . . . . . . . . . . . (2,096) (2,932) 1,509
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . 4,518 (1,223) (4,681)
Prepaid expenses and other current assets. . . . . . . . . . . (1,511) 578 (1,773)
Net investment in sales-type leases. . . . . . . . . . . . . . (458) 1,830 (3,128)
Other non-current assets . . . . . . . . . . . . . . . . . . . (10,718) 7,872 172
Increase (decrease) in liabilities, net of effects of the Merger:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . (546) 2,975 (1,548)
Accrued expenses, restructuring and integration
costs and other current liabilities. . . . . . . . . . . . . . 2,900 1,536 (11,305)
Other non-current liabilities. . . . . . . . . . . . . . . . . (313) (8,324) (5,622)
-------- --------- ---------
Net cash provided by operating activities . . . . . . . . . . . . 18,473 7,715 9,753
-------- --------- ---------
Cash flows from investing activities:
Net (increase) decrease in restricted cash and investments . . (25,486) 24,886 2,332
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
Proceeds from sale of investments. . . . . . . . . . . . . . . 859 2,374 -
Acquisition of business, net of cash acquired (Note 2) . . . . - (219,459) -
Return of capital investment . . . . . . . . . . . . . . . . . - - 148
-------- --------- ---------
Net cash used in investing activities. . . . . . . . . . . . . . . (32,815) (214,151) (17,274)
-------- --------- ---------
Cash flows from financing activities:
Principal payments on long-term debt . . . . . . . . . . . . . (1,218) (322) (4,248)
Proceeds from issuance of notes payable and long-term debt . . 25,000 400,000 -
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)
Proceeds from issuance of common stock . . . . . . . . . . . . - 40,024 -
Proceeds from exercise of stock options. . . . . . . . . . . . - - 241
Debt issuance costs. . . . . . . . . . . . . . . . . . . . . . (498) (16,888) (919)
Debt repaid in Merger. . . . . . . . . . . . . . . . . . . . . - (210,723) -
Redemption of preferred stock including related dividends. . . - (7,844) -
Purchase of common stock warrant . . . . . . . . . . . . . . . - (12,500) -
Repurchase of common stock . . . . . . . . . . . . . . . . . . - - (1,293)
-------- --------- ---------
Net cash provided by financing activities. . . . . . . . . . . . . 15,520 216,953 3,781
-------- --------- ---------
Effect of exchange rate changes on cash. . . . . . . . . . . . . . (656) (295) (1,360)
-------- --------- ---------
Net increase (decrease) in cash . . . . . . . . . . . . . . . . . . 522 10,222 (5,100)
Cash at beginning of year . . . . . . . . . . . . . . . . . . . . . 1,340 1,862 12,084
-------- --------- ---------
Cash at end of year . . . . . . . . . . . . . . . . . . . . . . . .$ 1,862 $ 12,084 $ 6,984
-------- --------- ---------
-------- --------- ---------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED
FINANCIAL STATEMENTS.
40
ALARIS MEDICAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
- -------------------------------------------------------------------------------
(DOLLAR AND SHARE AMOUNTS IN THOUSANDS)
UNREALIZED
HOLDING EQUITY
GAINS ADJUSTMENT
FROM FROM
COMMON STOCK CAPITAL IN TREASURY STOCK SECURITIES FOREIGN
----------------- EXCESS OF ACCUMULATED --------------- AVAILABLE CURRENCY
SHARES AMOUNT PAR VALUE DEFICIT SHARES AMOUNT FOR SALE TRANSLATION TOTAL
-------- ------- ---------- ----------- -------- ------ ---------- ----------- ------
Balance at December 31, 1994. . . . 14,152 $ 142 $ 58,703 $ (61,922) 83 $ (734) $ 883 $ 690 $ (2,238)
Issuance of common stock. . . . . . 2,062 20 4,912 4,932
Dividends on mandatorily
redeemable preferred stock. . . . (650) (650)
Increase in unrealized gains from
securities available for sale,
net of tax. . . . . . . . . . . . 2,694 2,694
Equity adjustment from foreign
currency translation. . . . . . . (660) (660)
Net income for the year . . . . . . 27,454 27,454
-------- ----- -------- -------- ---- ----- ------ ------ --------
Balance at December 31, 1995. . . . 16,214 162 62,965 (34,468) 83 (734) 3,577 30 31,532
Issuance of common stock upon
conversion of notes payable . . . 29,416 294 47,206 47,500
Issuance of common stock. . . . . . 13,333 133 39,867 40,000
Dividends on mandatorily
redeemable preferred stock. . . . (962) (962)
Decrease in unrealized gain on
securities available for sale,
net of tax. . . . . . . . . . . . (3,577) (3,577)
Purchase of common stock warrant. . (1,000) (1,000)
Exercise of stock options . . . . . 14 24 24
Equity adjustment from foreign
currency translation. . . . . . . (260) 32 (228)
Net loss for the year . . . . . . . (67,236) (67,236)
-------- ----- -------- -------- ---- ----- ------ ------ --------
Balance at December 31, 1996. . . . 58,977 589 147,840 (101,704) 83 (734) - 62 46,053
Exercise of stock options . . . . . 125 2 239 241
Tax benefit from exercise of
options . . . . . . . . . . . . . 262 262
Purchase of treasury stock. . . . . 370 (1,293) (1,293)
Equity adjustment from foreign
currency translation. . . . . . . (3,688) (3,688)
Net loss for the year . . . . . . . (9,626) (9,626)
-------- ----- -------- -------- ---- ----- ------ ------ --------
Balance at December 31, 1997. . . . 59,102 $ 591 $148,341 $(111,330) 453 $(2,027) $ - $(3,626) $ 31,949
-------- ----- -------- -------- ---- ----- ------ ------ --------
-------- ----- -------- -------- ---- ----- ------ ------ --------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED
FINANCIAL STATEMENTS.
41
ALARIS MEDICAL, INC. AND SUBSIDIARIES
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, Inc. ("ALARIS Medical"), formerly Advanced Medical,
Inc., operating through its consolidated subsidiaries, designs, manufactures,
distributes and services intravenous infusion therapy and 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. (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. ("ALARIS Medical
Systems"). The acquisition was accounted for as a purchase. The
accompanying balance sheet as of December 31, 1996 reflects the assets,
liabilities and stockholders' equity of ALARIS Medical and its subsidiaries,
including the merged entity. The accompanying statements of operations, of
cash flows and of stockholders' equity for the year ended December 31, 1996
include the operations and cash flows of IVAC Holdings subsequent to the
acquisition date. ALARIS Medical and its subsidiaries are collectively
referred to as the "Company."
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
CONSOLIDATION:
The financial statements include the accounts of ALARIS Medical and its
greater than 50 percent-owned subsidiaries. All 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, INC. AND SUBSIDIARIES
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 cancelation.
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, INC. AND SUBSIDIARIES
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 $17,504 and $15,734 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
stockholders' 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, INC. AND SUBSIDIARIES
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,
with the exception of the debentures, approximate their carrying values. The
carrying value of the debentures was $16,152 at December 31, 1996 and 1997
and the fair value was approximately $12,800 and $14,900 at December 31, 1996
and 1997, respectively.
INCOME TAXES:
The Company and its domestic subsidiaries file a consolidated Federal
income tax return. Domestic subsidiaries file income tax returns in multiple
states on either a stand-alone or combined basis. Foreign subsidiaries file
income tax returns in their respective local jurisdictions.
The Company recognizes deferred tax assets and liabilities based on the
expected future tax consequences of events that have been included in the
financial statements and tax returns in different periods. Under this method,
deferred tax liabilities and assets are determined based on the difference
between the financial statement and tax bases of assets and liabilities using
enacted tax rates in effect for the year in which the differences are
expected to reverse. The Company provides a reserve against its net deferred
assets when, in the opinion of management, it is more likely than not that
such assets will not be realized.
STOCK-BASED COMPENSATION:
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.
NET INCOME (LOSS) PER COMMON SHARE:
The Company's net income (loss) per common share assuming no dilution is
computed using the weighted average number of common shares outstanding. The
Company's net income (loss) per common share assuming dilution is computed
using the weighted average number of common shares outstanding plus dilutive
potential common shares using the treasury stock method at the average market
price during the reporting period (Note 10).
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
45
ALARIS MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 1 - BUSINESS AND ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
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 stockholders' 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.
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 Capital Contribution was funded in
part through the sale to Decisions Incorporated ("Decisions"), a corporation
wholly owned by ALARIS Medical's principal stockholder, of 13,333 shares of
its common stock for aggregate proceeds of $40,000 (the "Decisions
Contribution"). The balance of the Capital Contribution was funded with
existing cash balances of ALARIS Medical. The portion of the net proceeds of
the Decisions Contribution not applied to make the Capital Contribution was
used by ALARIS Medical to redeem $21,924 principal amount of its 15%
subordinated debentures due 1999 (Note 4) and fund the redemption of ALARIS
Medical's outstanding preferred stock. In connection with the Decisions
Contribution, Decisions exchanged an aggregate of $37,500 in principal amount
of convertible promissory notes previously issued by ALARIS Medical for
29,416 shares of ALARIS Medical common stock, including 3,333 shares of
ALARIS Medical common stock issued as an inducement to convert (Note 4).
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.
46
ALARIS MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 2 - THE MERGER (CONTINUED)
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 . . . . . . . . . . . . . . . . . . . . . . $ 12,277 $ (65,606)
Pro forma . . . . . . . . . . . . . . . . . . . . . . . $ (38,372) $ (1,364)
NOTE 3 - COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS
DECEMBER 31,
----------------------
1996 1997
---------- ---------
RECEIVABLES:
Trade receivables. . . . . . . . . . . . . . . . . . . . . $ 75,170 $ 73,282
Allowance for doubtful accounts. . . . . . . . . . . . . . (4,085) (3,259)
---------- ----------
71,085 70,023
Current portion of net investment in sales-type leases
(Note 8) . . . . . . . . . . . . . . . . . . . . . . . . 16,795 13,383
---------- ----------
$ 87,880 $ 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. . . . . . . . . . . . . . . . . $ 16,201 $ 19,135
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . 5,381 4,125
---------- ----------
$ 21,582 $ 23,260
---------- ----------
---------- ----------
PROPERTY, PLANT AND EQUIPMENT:
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 640 $ 640
Building and leasehold improvements. . . . . . . . . . . . 10,073 14,000
Machinery and equipment. . . . . . . . . . . . . . . . . . 32,230 39,987
Furniture and fixtures . . . . . . . . . . . . . . . . . . 5,215 5,401
Instruments under operating lease contracts. . . . . . . . 17,245 20,338
Construction-in-process. . . . . . . . . . . . . . . . . . 8,102 9,138
---------- ----------
73,505 89,504
Accumulated depreciation and amortization. . . . . . . . . (16,877) (34,139)
---------- ----------
$ 56,628 $ 55,365
---------- ----------
---------- ----------
47
ALARIS MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 3 - COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS (CONTINUED)
Depreciation expense was $4,211, $5,827 and $17,417 for 1995, 1996 and
1997, respectively.
DECEMBER 31,
---------------------
1996 1997
--------- ---------
OTHER NON-CURRENT ASSETS:
Debt issue costs . . . . . . . . . . . . . . . . . . . . . . . $ 17,504 $ 15,734
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . 603 545
--------- ---------
$ 18,107 $ 16,279
--------- ---------
--------- ---------
INTANGIBLE ASSETS:
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 179,879 $ 180,381
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
--------- ---------
. . . . . . . . . . . . . . . . . . . . . . . . . . 325,140 320,737
Accumulated amortization . . . . . . . . . . . . . . . . . . . (16,623) (32,804)
--------- ---------
$ 308,517 $ 287,933
--------- ---------
--------- ---------
Supply agreements represent non-cancelable customer commitments to
purchase specified quantities of disposable administration sets and probe
covers at contracted prices.
Amortization expense was $3,364, $4,672 and $16,871 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,907 4,000
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,870 17,856
--------- ---------
$ 50,196 $ 50,988
--------- ---------
--------- ---------
OTHER NON-CURRENT LIABILITIES:
Deferred income tax liability. . . . . . . . . . . . . . . . . $ 8,943 $ 4,283
Warranty . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,039 6,225
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,148 -
--------- ---------
$ 16,130 $ 10,508
--------- ---------
--------- ---------
48
ALARIS MEDICAL, INC. AND SUBSIDIARIES
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
7.25% Convertible Subordinated Debentures
due 2002 . . . . . . . . . . . . . . . . . . . . 16,152 16,152
Other. . . . . . . . . . . . . . . . . . . . . . . 8,741 6,028
---------- ---------
440,093 446,130
Current portion . . . . . . . . . . . . . . . (3,963) (14,559)
---------- ---------
Long-term debt . . . . . . . . . . . . . . . . . . $ 436,130 $ 431,571
---------- ---------
---------- ---------
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.
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, INC. AND SUBSIDIARIES
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.
DEBENTURES:
At December 31, 1994, the Company had outstanding 7.25% convertible
subordinated debentures due 2002 ("7.25% Debentures") in the principal amount
of $60,000. The 7.25% Debentures are convertible at the option of the holder
into common stock of the Company at any time prior to maturity, unless
previously redeemed or repurchased, at a conversion price of $18.14 per
share, subject to adjustment in certain events. The 7.25% Debentures mature
on January 15, 2002, with interest payable semi-annually on each January 15
and July 15. The 7.25% Debentures are redeemable in whole or in part at the
option of the Company at any time on or after January 15, 1993, at the
redemption prices set forth in the indenture, together with accrued and
unpaid interest. Holders may require the Company to repurchase the 7.25%
Debentures, in whole or in part, in certain circumstances involving a change
in control of the Company. The 7.25% Debentures are subordinate to all
existing or future senior indebtedness of the Company, and are also
effectively subordinated to liabilities of the Company's subsidiaries. The
indenture does not restrict the incurrence of senior indebtedness or other
indebtedness by the Company or any subsidiary.
On March 31, 1995, the Company completed an exchange (the "Exchange")
wherein $28,245, or approximately 47%, in principal amount of the 7.25%
Debentures ("Old Debentures") were exchanged for an aggregate of $14,123 in
principal amount of newly created subordinated debentures ("First
Debentures") and 1,340 shares of the Company's common stock ("Common Stock").
As a result of this transaction, the Company recognized an extraordinary gain
on the extinguishment of debt of $8,807 (net of the write-off of unamortized
debt issue costs of $1,343 related to the Old Debentures and net of $705, the
taxes applicable to the Exchange).
On May 19, 1995, the Company completed a second exchange ("Second
Exchange") wherein $15,603 of Old Debentures were exchanged for an aggregate
of $7,801 of newly created 15% Subordinated Debentures due 1999 ("New
Debentures") and 733 shares of Common Stock. In addition, the Company
accepted for exchange all of the First Debentures and Common Stock from the
Exchange for an aggregate of $14,123 of New Debentures and 1,328 shares of
Common Stock. As a result of these transactions, the Company recognized an
extraordinary gain on the extinguishment of debt of $6,370 (net of the
write-off of unamortized debt issue costs of $727 related to the Old
Debentures and net of $362, the taxes applicable to the Second Exchange).
50
ALARIS MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 4 - NOTES PAYABLE AND LONG-TERM DEBT (CONTINUED)
In connection with the Merger, the Company redeemed the remaining
$21,924 principal amount of New Debentures plus a 10% premium. As a result of
this transaction, the Company recognized an extraordinary loss for the year
ended December 31, 1996, on the extinguishment of debt of $1,630, net of
income tax benefit of $878.
REFINANCINGS:
During 1994 and 1995, the Company borrowed an aggregate of $37,500 from
Decisions (the "Decisions Notes"). The Decisions Notes bore interest at 7% to
9%, were due January 4, 2001 and were used for various corporate purposes
including the repayment of other debt and acquisition of the remaining
minority interest in IMED. The Decisions Notes were convertible, at the
option of the holder, into an aggregate of up to 26,083 shares of Common
Stock, at prices ranging from $0.62 to $2.625 per share, subject to certain
anti-dilution protection. Proceeds from $25,000 of the Decisions Notes were
restricted in their use.
In connection with the Merger, the Decisions Notes in the aggregate
principal amount of $37,500 were exchanged for 29,416 shares of ALARIS
Medical common stock, including 3,333 shares issued as an inducement to
convert. The Company recognized $10,000 of debt conversion expense during the
year ended December 31, 1996 in connection with the shares issued as an
inducement to convert.
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....................... 70,377
Thereafter................. 310,325
--------
$446,130
--------
--------
51
ALARIS MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 5 - INCOME TAXES
The provision for income taxes comprises the following:
YEAR ENDED DECEMBER 31,
-----------------------------------
1995 1996 1997
-------- -------- --------
Current:
Federal . . . . . . . . . . . . . . . . . . . $ 221 $ - $ -
State . . . . . . . . . . . . . . . . . . . . 1,524 609 94
Foreign . . . . . . . . . . . . . . . . . . . 157 1,000 4,511
-------- -------- --------
Total Current . . . . . . . . . . . . . . . 1,902 1,609 4,605
-------- -------- --------
Deferred:
Federal . . . . . . . . . . . . . . . . . . . (9,132) (1,964) (6,984)
State . . . . . . . . . . . . . . . . . . . . (2,613) (307) (745)
Foreign . . . . . . . . . . . . . . . . . . . 469 (68) (176)
-------- -------- --------
Total Deferred . . . . . . . . . . . . . . (11,276) (2,339) (7,905)
-------- -------- --------
Provision (benefit) for income taxes . . . $ (9,374) $ (730) $(3,300)
-------- -------- --------
-------- -------- --------
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 . . . . . . . . . . . . . $ 3,197 $ (22,554) $ (4,395)
State income taxes, net of federal benefit . . . . . . . . 1,018 199 (492)
Effect of foreign operations . . . . . . . . . . . . . . . 105 3,516 649
Amortization of non-deductible intangible assets . . . . . 442 574 1,944
Federal tax credits. . . . . . . . . . . . . . . . . . . . - (2,343) (513)
Debt conversion expense. . . . . . . . . . . . . . . . . . - 3,400 -
Acquired in-process research and development . . . . . . . - 14,960 -
Items affected by valuation allowance. . . . . . . . . . . (14,136) 1,243 -
Other, net . . . . . . . . . . . . . . . . . . . . . . . . - 275 (493)
-------- ---------- ----------
Provision for income taxes before extraordinary item . . . (9,374) (730) (3,300)
-------- ---------- ----------
Extraordinary item:
Taxes computed at statutory rate . . . . . . . . . . . . . 5,523 (853) -
State income taxes, net of federal benefit . . . . . . . . 488 (25) -
Items affected by valuation allowance. . . . . . . . . . . (4,944) - -
-------- ---------- ----------
1,067 (878) -
-------- ---------- ----------
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . $(8,307) $ (1,608) $ (3,300)
-------- ---------- ----------
-------- ---------- ----------
52
ALARIS MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 5 - 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. . . . . . . . $ 17,431 $ 20,074
Accrued liabilities and reserves. . . . . . . . 20,783 19,019
Unearned income . . . . . . . . . . . . . . . . 1,979 2,126
Credit carryforwards. . . . . . . . . . . . . . 4,699 5,156
Inventory . . . . . . . . . . . . . . . . . . . 1,713 2,771
Property, plant and equipment . . . . . . . . . - 926
Miscellaneous . . . . . . . . . . . . . . . . . 850 1,157
--------- ---------
47,455 51,229
Valuation allowance . . . . . . . . . . . . . . (1,673) (1,427)
--------- ---------
Total deferred tax assets . . . . . . . . . . . 45,782 49,802
Deferred tax liabilities:
Property, plant and equipment . . . . . . . . . 86 -
Intangible assets . . . . . . . . . . . . . . . 36,979 33,973
Miscellaneous . . . . . . . . . . . . . . . . . 1,459 977
--------- ---------
Net deferred tax assets . . . . . . . . . . . . . $ 7,258 $ 14,852
--------- ---------
--------- ---------
As of December 31, 1997, the Company had federal and state net operating
loss carryforwards of approximately $56,284 and $20,291, respectively.
Additionally, as of December 31, 1997, the Company had a foreign tax credit
carryforward and an alternative minimum tax credit carryforward of approximately
$2,595 and $552, respectively, for federal tax purposes and research and
development tax credits of approximately $1,814 and $294 for federal and state
purposes, respectively. The federal and state net operating loss carryforwards
expire from 1998 to 2012. The foreign tax credit expires from 2001 to 2002 and
the research and development tax credits expire from 2005 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 $28,689 and $4,985 of the respective federal and state net
operating loss carryforwards, approximately $552 of the federal alternative
minimum tax credit carryforward and approximately $1,659 and $294 of the
respective federal and state research and development credits are subject to a
general annual income offset limitation of approximately $4,000. Additionally,
certain built-in gains recognized by the Company will increase the annual
utilization rate of the net operating losses. The Company also possesses certain
unrealized built-in losses which will be subject to the annual utilization
limitation when recognized.
53
ALARIS MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 6 - STOCK OPTION PLANS
The Company maintains several stock option plans under which incentive
stock options may be granted to key employees of the Company and 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 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 Company's stock option plans.
54
ALARIS MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 6 - 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. . . . . . . . . . . . . . . $ 27,454 $ (67,236) $ (9,626)
Pro forma. . . . . . . . . . . . . . . . $ 26,975 $ (68,235) $ (11,836)
These pro forma amounts may not be representative of future disclosures
since the estimated fair value of stock options is amortized to expense over
the vesting period and additional options may be granted in future years.
The fair value for these options was estimated at the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions for the years ended December 31, 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
ALARIS MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 7 - BENEFIT PLANS
PENSION PLANS:
The Company had a defined benefit pension plan (the "Plan") which covered
substantially all of its U.S. employees as of December 31, 1993. On December 1,
1993, the Company's Board of Directors approved amendments to the Plan
provisions which include, among other matters, cessation of benefit accruals
after December 1, 1993. All earned benefits as of that date were preserved and
the Company will continue to contribute to the Plan as necessary to fund earned
benefits. No contributions to the Plan were required during 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
ALARIS MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 8 - LEASES
LEASE RECEIVABLES:
The Company leases instruments to customers under capital and operating
lease contracts with terms ranging generally from 1 to 6 years. Certain capital
lease agreements obligate the lessee to purchase a specified annual minimum of
disposable sets and payment of liquidating damages if the agreement is
terminated by the lessee. Anticipated future minimum amounts due under operating
leases and capital lease receivables as of December 31, 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 $3,149, $3,474 and $4,722 during 1995, 1996 and 1997,
respectively.
57
ALARIS MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 9 - 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 $20,900
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 $ 1.3
Cost to vacate facilities........................... 3.4 -
Write-off unused furniture, fixtures and equipment.. 1.5 -
Distributor terminations............................ .8 -
Other............................................... .5 -
------ ------
Total restructuring.............................. 10.6 1.3
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 $ 20.9
------ ------
------ ------
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
58
ALARIS MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 9 - RESTRUCTURING CHARGES (CONTINUED)
the Company, in accordance with the terms of such contract, informed Cal
Pacifico that it would be terminating its contractual arrangements effective
August 1, 1997. Cal Pacifico objected to such notification and proposed the
systematic termination of the work force. In response to such objection, the
Company on June 6, 1997 hired substantially all of the workers at the plants
directly. On June 11, 1997, Cal Pacifico locked the Company's administrative
personnel and production employees out of the plants and would not allow the
Company access to its production equipment or inventory. As a result of the
settlement agreement, the assembly plants resumed full operations on June 27,
1997 and Cal Pacifico provided the Company with assistance as it transitioned
into the direct operation of such plants. The Company began operating these
plants directly during the third quarter of 1997.
The Company recorded a non-recurring charge of $4,100 during the quarter
ended June 30, 1997 relating to 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 $27,000 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.
59
ALARIS MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 10 - EARNINGS PER SHARE
In February, 1997 the Financial Accounting Standards Board issued the
Statement of Financial Accounting Standards No. 128, "Earnings per Share"
("SFAS 128") which specifies the computation, presentation, and disclosure
requirements for earnings per share. The earnings per share information
contained in these financial statements, including those presented for prior
periods, conform with SFAS 128.
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------
1995 1996 1997
-------- --------- ---------
BASIC EARNINGS PER SHARE
Income (loss) before extraordinary item...................... $ 12,277 $ (65,606) $ (9,626)
Less: dividends and accretion on mandatorily redeemable
preferred stock............................................ (650) (962) -
-------- --------- ---------
Income available to common stockholders before
extraordinary item......................................... 11,627 (66,568) (9,626)
Extraordinary item........................................... 15,177 (1,630) -
-------- --------- ---------
Net income (loss) available to common stockholder............ $ 26,804 $ (68,198) $ (9,626)
-------- --------- ---------
-------- --------- ---------
Weighted average common shares outstanding during
the period................................................. 15,506 20,343 58,644
Basic earnings per share before extraordinary item........... $ 0.75 $ (3.27) $ (0.16)
Extraordinary item........................................... 0.98 (0.08) -
-------- --------- ---------
Basic earnings per share..................................... $ 1.73 $ (3.35) $ (0.16)
-------- --------- ---------
-------- --------- ---------
DILUTED EARNINGS PER SHARE
Income available to common stockholders before
extraordinary item......................................... $ 11,627
Plus convertible preferred dividends......................... 320
Plus the after-tax interest associated with convertible debt. 684
--------
Income available to common stockholders plus assumed
conversions before extraordinary item...................... 12,631
Extraordinary item........................................... 15,177
--------
Net income available to common stockholder assuming dilution. $ 27,808
--------
--------
Weighted average common shares outstanding during the period 15,506
Common stock options........................................ 249
Convertible preferred stock................................. 205
Convertible securities...................................... 17,276
--------
Weighted average common shares outstanding during the
period, including dilutive potential common shares........ 33,236
--------
--------
Earnings per share before extraordinary items,
assuming dilution........................................ $ 0.38
Extraordinary item......................................... 0.46
--------
Earnings per share assuming dilution....................... $ 0.84
--------
--------
1995
The Company's convertible securities in 1995 consist of convertible
promissory notes issued to Decisions. Since conversion was assumed from the
beginning of the period or date of issuance, if later, net income
attributable to common stock for the year ended December 31, 1995 has been
increased by $684 for the interest expense (net of tax) on the convertible
promissory notes.
60
ALARIS MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 10 - EARNINGS PER SHARE (CONTINUED)
Convertible preferred stock in 1995 consists of 333 shares of
mandatorily redeemable convertible preferred stock issued to a stockholder or
entities controlled by the stockholder. The conversion was assumed as of the
beginning of the period at a conversion rate of 0.617, resulting in an
increase of 205 common shares.
The Company's 7.25% Debentures were not included in the calculation of
diluted earnings per share in 1995 as they are antidilutive. The $16,152 of
convertible debentures, if converted at an exercise price of $18.14 per
share, would result in an increase of 890 common shares and an increase of
$703, net of taxes, to net income, due to the reduction in interest expense.
1996
Net loss per common share assuming no dilution and dilution are the same
for 1996, as the Company experienced a net loss for the year ended December
31, 1996. Potential common shares for 1996, if converted, would include the
convertible preferred stock and convertible debentures described in 1995 EPS.
Options outstanding at December 31, 1996 were not included in the computation
of diluted EPS because income before extraordinary item was a loss and the
effect would be antidilutive. Had such options been included, the weighted
average shares would have increased by 370.
1997
Net loss per common share assuming no dilution and dilution are the same
for 1997, as the Company experienced a net loss for the year ended December
31, 1997. The 7.25% convertible debentures were excluded due to their
antidilutive nature. Options outstanding at December 31, 1997 were not
included in the computation of diluted EPS because income before
extraordinary item was a loss and the effect would be antidilutive. Had such
options been included, the weighted average shares would have increased by
1,361.
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 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.
In June 1996, ALARIS Medical purchased GECC's warrant to acquire common
shares equal to 10% of IMED's common stock, on a fully diluted basis, for
$12,500. The warrant acquired by ALARIS Medical was then canceled.
61
ALARIS MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 11 - RELATED PARTY ARRANGEMENTS (CONTINUED)
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 1994 and 1995, the Company issued the Decisions Notes. During
November 1996, in connection with the Merger, the Decisions Notes in the
aggregate principal amount of $37,500 were exchanged for 29,416 shares of ALARIS
Medical common stock, including 3,333 shares issued as an inducement to convert.
Additionally, Decisions was issued 13,333 shares of ALARIS Medical common stock
for aggregate proceeds of $40,000.
During June 1997, ALARIS Medical made a cash contribution of $3,052 to
ALARIS Medical Systems, of which $1,457 paid off intercompany charges due to
ALARIS Medical Systems and $1,595 was contributed to capital.
62
ALARIS MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 12 - PARENT GUARANTOR OF SUBSIDIARY DEBT
All obligations of ALARIS Medical Systems under the Facility (Note 4) are
guaranteed by ALARIS Medical and each existing and subsequently formed or
acquired domestic subsidiary of ALARIS Medical. Summarized financial information
of ALARIS Medical Systems, the issuer of the Facility, at December 31, 1996 and
1997 and for the years ended December 31, 1995, 1996 and 1997 is as follows:
DECEMBER 31,
-----------------
1996 1997
-------- --------
CONDENSED BALANCE SHEET
Current assets........................................... $178,124 $175,309
Non-current assets....................................... 408,017 387,797
-------- --------
$586,141 $563,106
-------- --------
-------- --------
Current liabilities...................................... $ 93,655 $ 90,225
Long-term debt and other non-current liabilities......... 442,465 433,934
-------- --------
536,120 524,159
-------- --------
Total common stock and other stockholder's equity........ 50,021 38,947
-------- --------
$586,141 $563,106
-------- --------
-------- --------
YEAR ENDED DECEMBER 31,
------------------------------------
1995 1996 1997
-------- -------- --------
CONDENSED STATEMENT OF OPERATIONS
Sales........................................ $112,551 $136,371 $359,077
Cost of sales................................ 63,270 78,642 188,340
-------- -------- --------
Gross margin................................. 49,281 57,729 170,737
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
Total other expense.......................... 2,403 5,796 44,274
Provision for (benefit from) income taxes.... 8,099 1,270 (1,900)
-------- -------- --------
Net income (loss)............................ $ 8,266 $(50,674) $ (7,028)
-------- -------- --------
-------- -------- --------
63
ALARIS MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 13 - 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..................................... $ 16,143 $(44,740) $ 6,611
Europe............................................ - (1,686) 19,994
Canada............................................ (194) (248) 841
Australia......................................... 1,123 1,253 5,006
Eliminations and adjustments...................... (21) 63 38
-------- -------- --------
Income (loss) from operations..................... 17,051 (45,358) 32,490
Interest expense.................................. (8,153) (13,393) (44,413)
Interest income................................... 192 1,193 532
Debt conversion expense........................... - (10,000) -
Other, net........................................ 313 1,222 (1,535)
-------- -------- --------
Income (loss) before income taxes. . . . . . . . .$ 9,403 $(66,336) $(12,926)
-------- -------- --------
-------- -------- --------
DECEMBER 31,
--------------------
1996 1997
-------- --------
IDENTIFIABLE ASSETS:
United States.................................................. $552,168 $619,903
Europe......................................................... 52,826 34,539
Canada......................................................... 5,855 1,644
Australia...................................................... 6,405 6,475
Eliminations and adjustments................................... (23,872) (97,264)
-------- --------
Total assets as reported in the accompanying balance sheet.. $593,382 $565,297
-------- --------
-------- --------
64
ALARIS MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 14 - CASH FLOW INFORMATION
Federal, state and foreign income taxes paid during 1995, 1996 and 1997
totaled $1,726, $3,592 and $3,884, respectively. Interest paid during 1995,
1996 and 1997 totaled $6,097, $8,960 and $40,576, respectively.
The Company sold 80,000 shares for $859 and 433 shares for $2,374 of its
Alteon common stock during 1995 and 1996, respectively. These sales resulted in
realized gains of $546 and $686 for the years ended December 31, 1995 and 1996,
respectively.
In connection with the Merger, the Company redeemed all outstanding shares
of its 10% Preferred Stock and Convertible Preferred Stock, plus accrued and
unpaid dividends for $7,844.
NOTE 15 - 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
65
ALARIS MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 15 - CONTINGENCIES AND LITIGATION (CONTINUED)
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.
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
66
ALARIS MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 15 - CONTINGENCIES AND LITIGATION (CONTINUED)
proceeding cannot be guaranteed, the Company believes that it has meritorious
defenses to claims with respect to Disputed Amounts which Cal Pacifico might
raise against the Company. These defenses would be based, among other factors,
on the contractual relationship between the Company and Cal Pacifico (including
a defense with respect to the availability of indemnification under the
agreements between Cal Pacifico and the Company), the conduct of Cal Pacifico
with respect to both the Company and Customs, and the compliance obligations of
Cal Pacifico under applicable customs laws. Inasmuch as Cal Pacifico's challenge
before Customs is still pending and any claim against the Company for
indemnification would be based on Cal Pacifico's ultimate lack of success in
that challenge, and inasmuch as any arbitration proceeding by which Cal Pacifico
might seek indemnification has not been filed nor has Cal Pacifico committed
itself to the theories under which it might seek indemnification or the recovery
of damages from the Company, it is not possible for the Company to express an
opinion at this time as to the likelihood of an unfavorable outcome in such a
proceeding.
OTHER
The Company is also a defendant in various actions, claims, and legal
proceedings arising from its normal business operations. Management believes
they have meritorious defenses and intends to vigorously defend against all
allegations and claims. As the ultimate outcome of these matters is uncertain,
no contingent liabilities or provisions have been recorded in the accompanying
financial statements for such matters. However, in management's opinion, based
on discussions with legal counsel, liabilities arising from such matters, if
any, will not have a material adverse effect on consolidated financial position,
results of operations or cash flows.
67
ALARIS MEDICAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 16 - SUMMARIZED QUARTERLY DATA (UNAUDITED)
The following financial information reflects all normal recurring
adjustments which are, in the opinion of management, necessary for a fair
statement of the results of the interim periods. Summarized quarterly data for
fiscal 1997 and 1996 is as follows:
IN THOUSANDS, EXCEPT PER SHARE DATA 1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
- ----------------------------------- ----------- ----------- ----------- -----------
1997
Sales....................................... $ 81,995 $ 88,072 $ 86,830 $ 102,180
Gross margin................................ 35,025 40,711 44,430 50,571
Income (loss) from operations............... 3,718 (725) 14,260 15,237
Net (loss) income........................... (4,315) (7,002) 1,094 597
(Loss) income per common share assuming
no dilution (1).......................... $ (.07) $ (.12) $ .02 $ .01
--------- --------- --------- ---------
--------- --------- --------- ---------
(Loss) income per common share assuming
dilution (1)............................. $ (.07) $ (.12) $ .02 $ .01
--------- --------- --------- ---------
--------- --------- --------- ---------
1996
Sales....................................... $ 25,875 $ 28,216 $ 27,679 $ 54,601
Gross margin................................ 11,980 12,460 12,599 20,716
Income (loss) from operations............... 3,595 3,849 4,002 (56,804)
Income (loss) before extraordinary item..... 859 1,150 779 (68,394)
Extraordinary item--loss on early
retirement of debt, net of taxes......... - - - (1,630)
--------- --------- --------- ---------
Net income (loss) 859 1,150 779 (70,024)
Income (loss) per common share assuming
no dilution (1):
Income (loss) before extraordinary item.. $ .04 $ .06 $ .04 $ (2.09)
Extraordinary item....................... - - - (.05)
--------- --------- --------- ---------
Net income (loss)..................... $ .04 $ .06 $ .04 $ (2.14)
--------- --------- --------- ---------
--------- --------- --------- ---------
Income (loss) per common share assuming
dilution (1):
Income (loss) before extraordinary item.. $ .03 $ .03 $ .03 $ (2.09)
Extraordinary item....................... - - - (.05)
--------- --------- --------- ---------
Net income (loss)..................... $ .03 $ .03 $ .03 $ (2.14)
--------- --------- --------- ---------
--------- --------- --------- ---------
________________________________
(1) Income (loss) per share are computed independently for each of the quarters presented. Therefore,
the sum of the quarterly net income (loss) per share will not necessarily equal the total for the year.
68
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.
69
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
70
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 also serve as
and constitute all of the members of the Board of Directors of ALARIS Medical
Systems.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
ALARIS Medical's executive officers, Directors and persons who beneficially own
more than 10% of a registered class of ALARIS Medical's equity securities to
file reports of ownership and changes in ownership with the Securities and
Exchange Commission. Such individuals are required by regulations promulgated
by the Securities and Exchange Commission to furnish ALARIS Medical with copies
of all Section 16(a) reports that they file. Based solely on review of the
copies of such reports furnished to ALARIS Medical, or written representations
that no reports were required, ALARIS Medical believes that during 1997, all of
its executive officers, Directors and greater-than-10% beneficial owners
complied with the Section 16(a) filing requirements applicable to them, except
that Mr. Mirando filed one Form 4 approximately nine months late disclosing two
transactions involving the purchase of shares of Common Stock.
71
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.
72
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.
73
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
74
(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
75
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.
76
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
PERCENT OF POTENTIAL REALIZABLE
TOTAL VALUE AT
NUMBER OF OPTIONS ASSUMED ANNUAL RATE OF
SECURITIES GRANTED EXERCISE STOCK APPRECIATION FOR
UNDERLYING TO OF BASE THE OPTION TERM
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
SHARES 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
77
(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. 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.
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."
78
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."
For further information regarding certain relationships and related
transactions, see "Item 13. Certain Relationships and Related Transactions."
79
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
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
(9 individuals).................. 47,382,011(11) 79.5%
- ------------
* 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.
80
(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 ALARIS Medical System'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.
81
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report.
1. FINANCIAL STATEMENTS:
The following financial statements of ALARIS Medical, Inc. and its
subsidiaries are included 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
Schedule III--Condensed Financial Information of ALARIS Medical, Inc.
as of December 31, 1996 and 1997 and 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 -- Certificate of Incorporation of Advanced Medical, Inc. and form
of Certificate of Incorporation of Advanced Medical, Inc., as
amended. (Incorporated by reference to Exhibit 3.1(a) to the
Prospectus/Joint Proxy Statement, dated March 3, 1989, of Fidata
Corporation, Advanced Medical, Inc. and Controlled Therapeutics
Corporation included and forming part of the Registration
Statement on Form S-4 of Advanced Medical, Inc. (the
"Prospectus/Joint Proxy Statement")).
3.2 -- By-Laws of Advanced Medical, Inc., as amended. (Incorporated by
reference to Exhibit 3.1(b) to the Prospectus/Joint Proxy
Statement.)
3.3 -- Amendments to Articles First and Fourth of the Restated
Certificate of Incorporation of Advanced Medical, Inc.
(Incorporated by reference to Exhibits A and B to Advanced
Medical Inc.'s Proxy Statement, dated August 15, 1990, for its
Special Meeting of Stockholders held on September 7, 1990).
82
3.4 -- Amendment to Article Fourth of the Restated Certificate of
Incorporation of Advanced Medical, Inc. (Incorporated by
reference to Annex III to Advanced Medical Inc.'s Proxy
Statement, dated July 25, 1994, for its Special Meeting of
Stockholders held on August 11, 1994).
4.1 -- Indenture dated as of November 26, 1996 among IMED Corporation,
IMED International Trading Corp. and United States Trust Company
of New York, as trustee (including form of Notes) (Incorporated
by reference to Exhibit 10.2 to the AM December 8-K).
4.2 -- Indenture Assumption Agreement dated as of November 26, 1996
between IVAC Holdings, Inc. and United States Trust Company of
New York, as trustee.*
4.3 -- Supplemental Indenture dated as of November 26, 1996 between
IVAC Overseas Holdings, Inc. and United States Trust Company of
New York, as trustee.*
4.4 -- 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.*
4.5 -- Registration Rights Assumption Agreement dated as of November 26,
1996 between IVAC Holdings, Inc. and IVAC Overseas Holdings, Inc.*
4.6 -- Indenture to U.S. Trust Company of California, N.A., Trustee,
dated January 30, 1992. (Incorporated by reference to Exhibit
4.26 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1991).
4.7 -- Modification Agreement dated February 3, 1995 by and between
Advanced Medical, Inc. and Decisions Incorporated. (Incorporated
by reference to Exhibit 4.11 to Advanced Medical Inc.'s Annual
Report on Form 10-K for the year ended December 31, 1994 (the
"1994 10-K")).
4.8 -- Exchange Agreement dated February 3, 1995 by and among Advanced
Medical, Inc. and Fidelity Convertible Securities Fund and
Fidelity Select Healthcare Fund. (Incorporated by reference to
Advanced Medical Inc.'s 1994 10-K).
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
83
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).
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.)
10.18 -- Consulting Agreement dated March 15, 1993 between Henry Green
and Advanced Medical, Inc. (Incorporated by reference to Exhibit
10.89 to Advanced Medical, Inc.'s Annual Report on Form 10-K for
the year ended December 31, 1992).
21 -- List of Subsidiaries of ALARIS Medical, Inc.
84
23 -- Consent of Price Waterhouse LLP.
27 -- Financial Data Schedule.
- ------------
* Filed as an exhibit to the Registration Statement on Form S-4 (333-18687)
of the Company, IVAC Overseas Holdings, Inc. and IMED International Trading
Corp. dated December 24, 1996.
(b) Report on Form 8-K.
None.
85
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, 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
Douglas C. Jeffries Accounting Officer)
/s/ NORMAN M. DEAN Director
- -------------------------------------
Norman M. Dean
/s/ HENRY GREEN Director
- -------------------------------------
Henry Green
/s/ RICHARD B. KELSKY Director
- -------------------------------------
Richard B. Kelsky
86
ALARIS MEDICAL, 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
ALARIS MEDICAL, INC. AND SUBSIDIARIES
SCHEDULE III - CONDENSED FINANCIAL INFORMATION OF ALARIS MEDICAL, INC.
CONDENSED BALANCE SHEET
- -------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
ASSETS
DECEMBER 31,
------------------------
1996 1997
--------- ---------
Current assets:
Cash................................................... $ 2,936 $ 66
Receivables, prepaid expenses and other current assets. 767 962
--------- ---------
Total current assets................................... 3,703 1,028
Investments in and net advances from subsidiaries........ 54,538 42,862
Other investments, at cost............................... 174 26
Intangible assets, net................................... 1,714 1,654
Other non-current assets................................. 3,850 3,731
--------- ---------
$ 63,979 $ 49,301
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable..................................... $ 4 $ 115
Accrued expenses and other current liabilities....... 1,770 1,085
--------- ---------
Total current liabilities............................ 1,774 1,200
--------- ---------
--------- ---------
Long-term debt.......................................... 16,152 16,152
--------- ---------
Contingent liabilities and commitments (Note 6)
Stockholders' equity:
Common stock......................................... 589 591
Capital in excess of par value....................... 147,840 148,341
Accumulated deficit.................................. (101,704) (111,330)
Treasury stock....................................... (734) (2,027)
Other equity......................................... 62 (3,626)
--------- ---------
46,053 31,949
--------- ---------
$ 63,979 $ 49,301
--------- ---------
--------- ---------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED
FINANCIAL STATEMENTS.
S-III-1
ALARIS MEDICAL, INC. AND SUBSIDIARIES
SCHEDULE III - CONDENSED FINANCIAL INFORMATION OF ALARIS MEDICAL, INC.
CONDENSED STATEMENT OF OPERATIONS
- -------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31,
----------------------------------
1995 1996 1997
-------- --------- ---------
General and administrative expense........................... $ 2,209 $ 2,278 $ 1,716
Restructuring, integration and other non-recurring charges... - - 1,135
Other income (expense):
Interest income........................................... 108 950 89
Interest expense.......................................... (6,044) (7,087) (1,290)
Debt conversion expense................................... - (10,000) -
Equity in earnings (loss) of unconsolidated subsidiaries.. 19,766 (49,933) (6,974)
Other, net................................................ 656 716 -
-------- --------- ---------
14,486 (65,354) (8,175)
Income (loss) before income taxes and extraordinary item..... 12,277 (67,632) (11,026)
Income tax benefit........................................... - 2,026 1,400
-------- --------- ---------
Income (loss) before extraordinary item...................... 12,277 (65,606) (9,626)
Extraordinary item:
Gain (loss) on early retirement of debt, net of taxes..... 15,177 (1,630) -
-------- --------- ---------
Net income (loss)............................................ 27,454 (67,236) (9,626)
Accumulated deficit at beginning of year..................... (61,922) (34,468) (101,704)
-------- --------- ---------
Accumulated deficit at end of year........................... $(34,468) $(101,704) $(111,330)
-------- --------- ---------
-------- --------- ---------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED
FINANCIAL STATEMENTS.
S-III-2
ALARIS MEDICAL, INC. AND SUBSIDIARIES
SCHEDULE III - CONDENSED FINANCIAL INFORMATION OF ALARIS MEDICAL, INC.
CONDENSED STATEMENT OF CASH FLOWS
- ------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31,
----------------------------------
1995 1996 1997
-------- -------- -------
Net cash used in operating activities........................ $ (6,743) $ (9,222) $(4,918)
-------- -------- -------
Cash flows from investing activities:
Dividends on IMED redeemable preferred stock.............. 6,684 4,067 -
Dividends from ALARIS Medical Systems..................... - - 2,215
Proceeds from sale of IMED redeemable preferred stock..... 880 3,350 -
Net (increase) decrease in restricted cash................ (25,000) 25,000 2,332
Proceeds from sale of investments......................... 859 2,374 -
Return of capital investment.............................. - - 148
Capital contribution to ALARIS Medical Systems............ - (19,588) (1,595)
-------- -------- -------
Net cash (used in) provided by investing activities.......... (16,577) 15,203 3,100
-------- -------- -------
Cash flows from financing activities:
Proceeds from issuance of long-term debt.................. 25,000 - -
Proceeds from issuance of common stock.................... - 40,024 -
Proceeds from exercise of stock options................... - - 241
Debt repaid in merger..................................... - (24,116) -
Debt issuance costs....................................... (488) - -
Redemption of preferred stock including related dividends. - (7,844) -
Purchase of IMED common stock warrant..................... - (12,500) -
Repurchase of common stock................................ - - (1,293)
-------- -------- -------
Net cash provided by (used in) financing activities.......... 24,512 (4,436) (1,052)
-------- -------- -------
Net increase (decrease) in cash.............................. 1,192 1,545 (2,870)
Cash at beginning of year.................................... 199 1,391 2,936
-------- -------- -------
Cash at end of year.......................................... $ 1,391 $ 2,936 $ 66
-------- -------- -------
-------- -------- -------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED
FINANCIAL STATEMENTS.
S-III-3
ALARIS MEDICAL, INC. AND SUBSIDIARIES
SCHEDULE III - CONDENSED FINANCIAL INFORMATION OF ALARIS MEDICAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
NOTE 1--STATEMENT OF ACCOUNTING POLICY:
The accompanying condensed financial statements have been prepared by
ALARIS Medical pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to those rules and
regulations. It is therefore suggested that these condensed financial statements
be read in conjunction with the Consolidated Financial Statements and notes
thereto.
RECLASSIFICATIONS:
Certain prior year amounts have been reclassified to conform to the
classifications used in 1997.
NOTE 2--INVESTMENTS IN AND NET ADVANCES FROM SUBSIDIARIES:
ALARIS Medical accounts for its investments in subsidiaries using the
equity method. Under the equity method, investments are carried at cost,
adjusted for ALARIS Medical's proportionate share of their undistributed
earnings or losses.
Investments in and net advances to/(from) subsidiaries comprise the
following:
DECEMBER 31,
-----------------
1996 1997
------- -------
ALARIS Medical Systems common ownership
interest and advances..................... $53,332 $42,862
Other subsidiaries......................... 1,206 -
------- -------
$54,538 $42,862
------- -------
------- -------
NOTE 3--PATENTS:
ALARIS Medical acquired patents for $10,000 on April 2, 1990. These patents
were licensed to IMED for a royalty of $1,100 per annum. Effective June 30,
1996, ALARIS Medical made a non-cash contribution of $2,885 to IMED representing
ALARIS Medical's net carrying value of these patents.
NOTE 4--LONG-TERM DEBT:
The terms and maturities of ALARIS Medical's long-term debt are described
in Note 4 to the Consolidated Financial Statements.
S-III-4
ALARIS MEDICAL, INC. AND SUBSIDIARIES
SCHEDULE III - CONDENSED FINANCIAL INFORMATION OF ALARIS MEDICAL, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (CONTINUED)
- -------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
NOTE 5--CASH FLOW INFORMATION:
During 1995 and 1996, IMED redeemed 88 and 335 shares, respectively, of its
12% Preferred Stock (all of which was owned by ALARIS Medical) from ALARIS
Medical for $880 and $3,350, respectively. In June 1996, ALARIS Medical
contributed to IMED $8,776 representing the outstanding par value and accrued
dividends on all the remaining outstanding shares of IMED's 12% Preferred Stock.
The preferred shares were then canceled. IMED made dividend payments to ALARIS
Medical of $6,684 and $4,067 during 1995 and 1996, respectively, related to the
12% Preferred Stock.
During 1997, ALARIS Medical Systems made dividend payments of $2,215 to
ALARIS Medical.
NOTE 6--CONTINGENCIES AND LITIGATION:
Contingencies and litigation are described in Note 15 to the Consolidated
Financial Statements.
S-III-5
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ----------- -----------------------
21 List of Subsidiaries of ALARIS Medical, Inc
23 Consent of Price Waterhouse LLP.
27 Financial Data Schedule
Exhibit 27 has been omitted from this copy of ALARIS Medical, Inc.'s Annual
Report on Form 10-K for the year ended December 31, 1997.